<PAGE>
As filed with the Securities and Exchange Commission on June 8, 1999
Registration No. 333-72151
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Litronic Inc.
(Exact name of registrant as specified in its charter)
Delaware 3577 33-0757190
(State or other (Primary Standard (I.R.S.
jurisdiction Industrial Classification Employer Identification
of incorporation or Number) Number)
organization)
Litronic Inc.
2030 Main Street, Suite 1250
Irvine, California 92614
(949) 851-1085
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Kris Shah
Chief Executive Officer and Chairman of the Board
Litronic Inc.
2030 Main Street, Suite 1250
Irvine, California 92614
(949) 851-1085
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Arent Fox Kintner Plotkin & Kahn, Tenzer Greenblatt LLP
PLLC 405 Lexington Avenue
1050 Connecticut Avenue, N.W. New York, New York 10017
Washington, D.C. 20036-5339 Attention: Robert J. Mittman, Esq.
Attention: Gerald P. McCartin, Esq. Telephone No.: (212) 885-5000
Telephone No.: (202) 857-6090 Facsimile No.: (212) 885-5001
Facsimile No.: (202) 857-6395
---------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
---------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
dated June 8, 1999
3,700,000 shares of common stock
This is an initial public offering of the common stock of Litronic Inc. We
expect that the initial public offering price will be between $9.00 and $11.00
per share. We anticipate that our common stock will be listed on the Nasdaq
National Market under the symbol LTNX.
------------
Investing in our common stock involves risks. See "Risk Factors"
beginning on page 9.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................... $ $
Underwriting discounts and commissions.............. $ $
Proceeds, before expenses, to Litronic.............. $ $
</TABLE>
------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We have granted BlueStone Capital Partners, L.P. and Pacific Crest
Securities Inc., the representatives of the underwriters, a 45-day option to
purchase up to 555,000 additional shares of our common stock to cover any over-
allotments.
------------
BlueStone Capital Partners, L.P. Pacific Crest Securities Inc.
, 1999
<PAGE>
The inside front cover contains a graphic depicting the interface between
applications, Litronic's Maestro product, Litronic's ProFile Manager and
Litronic's Security Tokens to provide a PKI Security solution. Above the graphic
across the top of the page appears Litronic's name and the words "Internet
Security." The graphic itself is comprised of four interlocking circles. The
circle on the upper left corner contains the words "Application Open Standards
Support." The circle in the lower left corner contains the words "Maestro
Integrates Tokens with Multiple Applications." The circle in the upper right
corner contains the words "ProFile Manager PKI Lifestyle Management Solution."
The circle in the lower right corner contains the words "Security Tokens
Personalized and Portable Security." In the space where the four circles
interlock there is a smaller circle containing the words "PKI Security." Under
the graphic appears a textual description of Litronic's ProFile Manager, Maestro
and Security Tokens, which highlights features of each product. The presentation
is set forth in three columns. Above the left column appears the words "ProFile
Manager/tm/." The column contains the following phrases, each separated by a
bullet: Secure archive and recovery of user and certificate information;
Hardware key generation; Certificate authority support; Integrates with existing
database for user input; and Security token initiative. Above the second column
appears the word "Maestro." The column contains the following phrases, each
separated by a bullet: Significantly reduces developer and end-user risks;
Supports multiple APIs, operating systems and security tokens; and Concurrent
support for multiple applications. Above the third column appears the words
"Security Tokens." The column contains the following language, each separated by
a bullet: Supports multiple encryption algorithms and digital signatures;
Certificate and personal data storage; Certified random number generation; Fast
serial interface; and Tamper protection.
The inside back cover contains the names of some of Litronic's strategic
partners, along with their respective logos, appearing in two columns down the
page. To the right of each strategic partner's name appears a word describing
the nature of Litronic's relationship with each vendor. The left column contains
the following company names and descriptive words: Netscape -- Integration,
Microsoft -- Compatibility, VeriSign -- Preferred Partner, DataCard -- Joint
Marketing and Key Tronic Corporation -- Joint Marketing. The left column
contains the following company names and descriptive words: RSA Secure --
Technology License, Atmel --Joint Development, SCM Microsystems -- Hardware
Supplier, Certicom --OEM Readers and Schlumberger -- Joint Marketing. Above the
two captions across the top of the page is Litronic's name and the phrase
"Strategic Partners."
<PAGE>
PROSPECTUS SUMMARY
This is a summary of the information contained in this prospectus. To
understand this offering fully, you should read the entire prospectus,
especially the risk factors and financial statements.
As of the date of this prospectus, the stockholders of Litronic Industries,
Inc. will exchange all of their outstanding common stock for all of the
outstanding common stock of Litronic Inc. Upon the closing of this offering,
the newly reorganized Litronic Inc. will acquire all of the outstanding common
stock of Pulsar Data Systems, Inc.
In this prospectus, unless the context indicates otherwise, the term
"Litronic" refers to Litronic Inc. and its subsidiaries, after giving effect to
its reorganization with Litronic Industries, Inc., and the terms "we" or "our"
refer to Litronic Inc. and its subsidiaries after giving effect to both its
reorganization with Litronic Industries, Inc. and its acquisition of Pulsar.
The historical financials for Litronic in this prospectus have been
retroactively adjusted to reflect the reorganization. Since Litronic Inc. has
had no operations of its own, the information presented in those financials,
other than the capital structure, relates solely to Litronic Industries, Inc.
The pro forma financial data in this prospectus has been prepared to illustrate
the effect of the Pulsar acquisition and this offering on data derived from
Litronic's historical financials.
Our business
Litronic provides professional Internet data security services and develops
and markets software and microprocessor-based products needed to secure
electronic commerce business transactions and communications over the Internet
and other communications networks based on Internet protocols. To increase
sales capacity for its proprietary products and to capitalize on opportunities
in the rapidly growing Internet-based information technology security market,
Litronic is acquiring Pulsar, a network integration solutions company that
develops large-scale network solutions for commercial and government
organizations.
Our products
Our primary data security products use an advanced form of computer security
technology referred to as public key infrastructure, or PKI, which is the
standard technology for securing Internet-based commerce and communications.
Our Internet security products can be used with world-wide-web browsers,
including Netscape Communicator and Microsoft Internet Explorer, to facilitate
secure electronic commerce transactions and other data communications, such as
secure e-mail.
Strategic relationships
We have established strategic relationships with other industry leaders who
have adopted PKI as a core feature of their secure product offerings,
including:
. Netscape Communications Corporation . Microsoft Corporation
. VeriSign, Inc. . International Business Machines Corp.
. RSA Data Security, Inc. . SCM Microsystems, Inc.
. Atmel Corporation . U.S. National Security Agency
3
<PAGE>
Our customers
Our data security customers come from diverse industries, such as the
finance, healthcare, telecommunications, electronic commerce and government
industries, and include:
. Bank of America, N.A. . VeriSign, Inc.
. Lucent Technologies Inc. . Lockheed Martin Corporation
. Deloitte & Touche LLP . Netscape Communications Corporation
. U.S. Army Corps of Engineers . Schlumberger Limited
. National Security Agency . Nippon Telegraph and
Telecommunications Data Corporation
In addition, our newly acquired Pulsar client base will include over 100
federal agencies, such as the Executive Offices of the President of the United
States, the Federal Bureau of Investigation and the Federal Communications
Commission, as well as over 40 commercial, state and local customers.
Our strategy
The PKI-based Internet security market is forecasted by Datamonitor, an
independent research firm, to grow at an annual rate of 124% from 1997 to 2001.
To capitalize on expanding market opportunities in this market, we intend to
exploit:
. the substantial experience and knowledge of Litronic's existing
management team in the Internet data security, computer networking and
semi-conductor industries; and
. Pulsar's extensive expertise in the sale and implementation of large-
scale networking systems, as well as its significant market access.
----------------
Litronic Inc. was incorporated under the laws of the State of Delaware in
1997 but has conducted no operations todate. Its predecessor, Litronic
Industries, Inc., was incorporated under the laws of the State of California in
1970. Our principal executive offices are located at 2030 Main Street, Suite
1250, Irvine, California 92614, and our telephone number is (949) 851-1085. We
also maintain executive offices in Lanham, Maryland. Our website is located at
www.litronic.com. Information contained in our website is not part of this
prospectus.
4
<PAGE>
The Offering
Common stock offered................
3,700,000 shares
Common stock to be outstanding
after this offering................ 9,740,631 shares, including 2,169,938
shares to be issued in connection with
the Pulsar acquisition. This does not
include:
. 555,000 shares reserved for issuance
upon exercise of the representatives'
over-allotment option;
. 281,419 shares reserved for issuance
upon exercise of options granted under
our 1998 stock option plan;
. an aggregate of 600,000 shares reserved
for issuance upon exercise of options
granted or available for future grant
under our 1999 stock option plan; and
. 370,000 shares reserved for issuance
upon exercise of warrants to be issued
upon the closing of this offering to
BlueStone and Pacific Crest for serving
as the representatives of the
underwriters.
Use of proceeds..................... We intend to use the net proceeds of this
offering for reduction of debt, sales and
marketing, product development, vendor
settlements and working capital and
general corporate purposes.
Risk factors........................ Investing in our common stock involves a
high degree of risk and immediate and
substantial dilution.
Proposed Nasdaq National Market
symbol............................. LTNX
5
<PAGE>
Summary Financial Information--Litronic
(dollars in thousands, except per share data)
The following table presents summary financial information for Litronic for
the periods, and as of the dates, indicated. The data is derived from, and
should be read in conjunction with, the consolidated financial statements of
Litronic, including the related notes, appearing elsewhere in this prospectus.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, "Selected Financial Data--Litronic," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of Litronic and related notes included
elsewhere in this prospectus.
Statements of operations information:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Product............... $ 7,855 $ 8,627 $ 5,214 $ 1,354 $ 885
License and service... 1,541 1,539 1,041 309 156
Research and
development............ -- -- 398 -- 369
---------- ---------- ---------- ---------- ----------
Total revenue......... 9,396 10,166 6,653 1,663 1,410
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales -
product................ 4,098 3,211 2,821 667 507
Cost of sales -
license and service.... 581 643 950 176 140
Selling, general, and
administrative......... 2,052 3,487 2,631 662 871
Research and
development............ 725 1,172 1,334 341 765
---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 1,940 1,653 (1,083) (183) (873)
Interest expense, net... 19 42 418 108 109
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income taxes.... 1,921 1,611 (1,501) (291) (982)
Provision for (benefit
from) income taxes..... 29 22 (95) (51) (9)
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations.. $ 1,892 $ 1,589 $ (1,406) (240) (973)
========== ========== ========== ========== ==========
Net earnings (loss)..... $ 906 $ 15,334 $ (1,406) $ (240) $ (973)
========== ========== ========== ========== ==========
Earnings (loss) from
continuing operations
per share: basic and
diluted................ $ .49 $ .41 $ (.36) $ (.06) $ (.25)
========== ========== ========== ========== ==========
Net earnings (loss) per
share: basic and
diluted................ $ .23 $ 3.96 $ (.36) $ (.06) $ (.25)
========== ========== ========== ========== ==========
Shares used in per share
computations: basic and
diluted................ 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693
========== ========== ========== ========== ==========
Balance sheet information:
<CAPTION>
December 31,
---------------------------------- March 31,
1996 1997 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 862 $ 490 $ 898 $ 557
Working capital......... 1,662 385 758 520
Total assets............ 7,409 2,347 2,791 2,895
Short-term debt......... 545 -- 580 424
Long-term debt, less
current installments... 4,997 3,506 5,200 5,950
Total liabilities....... 7,510 5,148 6,998 8,075
Net stockholders'
deficit................ (101) (2,801) (4,207) (5,180)
</TABLE>
6
<PAGE>
Summary Financial Information--Pulsar
(dollars in thousands, except per share data)
The following table presents summary financial information for Pulsar for
the periods, and as of the dates, indicated. The data is derived from, and
should be read in conjunction with, the financial statements of Pulsar,
including the related notes, appearing elsewhere in this prospectus. The
information presented below is qualified in its entirety by, and should be read
in conjunction with, "Selected Financial Data--Pulsar," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of Pulsar and related notes included elsewhere in this
prospectus.
Statements of operations information:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- -----------------
1996 1997 1998 1998 1999
-------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Service revenue................ $ 10,253 $ 8,818 $ 3,373 $ 1,241 $ 369
Product revenue................ 155,705 142,702 77,159 16,777 9,579
-------- -------- ------- -------- -------
Total revenue.................. 165,958 151,520 80,532 18,018 9,948
-------- -------- ------- -------- -------
Cost of service revenue........ 4,870 4,115 1,553 730 155
Cost of product revenue........ 144,494 138,086 73,417 16,742 9,234
-------- -------- ------- -------- -------
Total cost of revenue.......... 149,364 142,201 74,970 17,472 9,389
-------- -------- ------- -------- -------
Gross margin................... 16,594 9,319 5,562 546 559
Selling, general, and
administrative expenses....... 13,545 17,152 11,665 2,256 1,892
-------- -------- ------- -------- -------
Operating income (loss)........ 3,049 (7,833) (6,103) (1,710) (1,333)
Interest income................ 639 457 61 200 20
Interest expense............... 3,564 3,640 2,099 706 478
-------- -------- ------- -------- -------
Net earnings (loss)............ $ 124 $(11,016) $(8,141) $ (2,216) $(1,791)
======== ======== ======= ======== =======
Net earnings (loss) per share:
basic and diluted............. $ 124 $(11,016) $(8,141) $ (2,216) $(1,791)
======== ======== ======= ======== =======
Weighted average shares
outstanding................... 1,000 1,000 1,000 1,000 1,000
======== ======== ======= ======== =======
Balance sheet information:
<CAPTION>
December 31,
-------------------------- March
1996 1997 1998 31, 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents...... $ 2,451 $ 2,236 $ 352 $ 441
Working capital (deficit)...... 1,553 (2,436) (8,168) (10,067)
Total assets................... 59,785 40,871 12,730 8,539
Short-term debt................ 41,352 28,982 14,435 11,744
Long-term debt, less current
installments.................. 53 4,203 3,241 3,085
Total liabilities.............. 52,077 42,681 22,681 20,281
Net stockholders' equity
(deficit)..................... 7,708 (1,810) (9,951) (11,742)
</TABLE>
7
<PAGE>
Summary Pro Forma Financial Information
(dollars in thousands, except per share data)
The following table presents unaudited summary pro forma financial
information for the periods, and as of the dates, indicated. This information
is based on data derived from the historical financial statements of Litronic
and Pulsar and has been prepared to illustrate the effects of the Pulsar
acquisition and this offering on that data, as if they had occurred as of
January 1, 1998, with respect to the statements of operations information, and
as of March 31, 1999, with respect to the balance sheet information. This
financial information is provided for comparative purposes only and is not
intended to reflect the results that actually would have been obtained if the
acquisition and this offering had been effected on the dates indicated. The
information presented below is qualified in its entirety by, and should be read
in conjunction with, "Pro Forma Financial Data," "Selected Financial Data--
Litronic," "Selected Financial Data--Pulsar," "Management's Discussion and
Analysis of Financial Condition and Result of Operations" and the financial
statements and related notes included elsewhere in this prospectus.
Pro forma statements of operations information:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
Product........................................... $ 82,373 $ 10,464
License and service............................... 4,414 525
Research and development.......................... 398 369
---------- ----------
Total revenue....................................... 87,185 11,358
---------- ----------
Costs and expenses:
Cost of sales - product........................... 76,238 9,741
Cost of sales - license and service............... 2,503 295
Selling, general, and administrative.............. 14,296 2,763
Research and development.......................... 1,334 765
Amortization of goodwill and other intangibles.... 2,601 651
---------- ----------
Operating loss...................................... (9,787) (2,857)
Interest expense.................................... 1,723 253
Interest income..................................... 61 20
---------- ----------
Loss from continuing operations before income
taxes.............................................. (11,449) (3,090)
Benefit from income taxes........................... -- --
---------- ----------
Loss from continuing operations..................... $ (11,449) $ (3,090)
========== ==========
Net loss............................................ $ (11,449) $ (3,090)
========== ==========
Loss per share from continuing operations: basic and
diluted............................................ $ (1.18) $ (.32)
========== ==========
Net loss per share: basic and diluted............... $ (1.18) $ (.32)
========== ==========
Shares used in per share computations: basic and
diluted............................................ 9,740,631 9,740,631
========== ==========
Pro forma balance sheet information:
<CAPTION>
March 31,
1999
------------
<S> <C>
Cash and cash equivalents........................... $16,198
Working capital..................................... 13,470
Total assets........................................ 60,075
Short-term debt..................................... 5,451
Long-term debt, less current installments........... 452
Total liabilities................................... 11,956
Net stockholders' equity............................ 48,119
</TABLE>
8
<PAGE>
RISK FACTORS
An investment in our common stock is speculative and involves a high degree
of risk. In addition to the other information in this prospectus, you should
carefully consider the following risk factors before making an investment
decision.
We have a history of losses and may incur future losses.
Even with the proceeds of this offering, we may not become profitable or
significantly increase our revenue. Litronic incurred net losses of $1.4
million for the year ended December 31, 1998 and $973,000 for the three months
ended March 31, 1999. Pulsar incurred net losses of $8.1 million for the year
ended December 31, 1998 and $1.8 million for the three months ended March 31,
1999. Additionally, Litronic and Pulsar have continued to incur losses through
the date of this prospectus. Our pro forma combined statements of operations
reflect net losses of $11.4 million for the year ended December 31, 1998 and
$3.1 million for the three months ended March 31, 1999.
Our inability to integrate, or implement our plans for, the operations of
Pulsar may adversely affect our business.
Our failure to successfully integrate, or implement our plans for, the
operations of Pulsar would significantly diminish the value of the Pulsar
acquisition and adversely affect our future operations. Moreover, integration
of the Pulsar acquisition may place strain on our managerial and financial
resources, which could, in turn, adversely affect our business. To achieve the
full benefits of the Pulsar acquisition, we will need to:
. integrate our administrative, financial and engineering resources and
coordinate our marketing and sales efforts;
. roll out our data security products to Pulsar's existing client base;
. successfully complete the implementation of Pulsar's recent shift in
product reselling focus;
. expand Pulsar's professional service offerings; and
. increase sales of Pulsar's products and professional services.
We may not be able to successfully implement any of these plans.
The goodwill and other intangibles acquired in the Pulsar acquisition may have
an adverse impact on our operating results and the market price of our common
stock.
Approximately $33.4 million, or 56%, of our pro forma combined, as adjusted,
assets as of March 31, 1999, consisted of intangible assets, including
goodwill, arising from the acquisition of Pulsar. This amount, the components
of which will be amortized over 10 to 15 years, constitutes a non-cash, non-tax
deductible expense in each amortization period that will reduce net income or
increase net loss for that period. The reduction in our net earnings or an
increase in our net loss resulting from the amortization of goodwill and other
intangibles may have an adverse impact on our operating results and the market
price of our common stock. There is also a risk that we may never realize the
value of our intangible assets.
A default under our secured credit arrangements could result in a foreclosure
of our assets by our creditors.
All of our assets are pledged as collateral to secure portions of our debt.
This means that if we default on our secured debt obligations our indebtedness
could become immediately due and payable
9
<PAGE>
and the lenders could foreclose on our assets. From time to time we have been
in violation of financial covenants under our existing credit arrangements and
have had to negotiate with our lenders for waivers or forbearance agreements
for these violations.
The terms of our loan agreements could limit our ability to implement our
business strategy.
The terms of our loan agreements with our credit providers could limit our
ability to implement our strategy. In addition to substantially prohibiting us
from incurring additional indebtedness, our loan agreements with these
creditors limit or prohibit us from:
. declaring or paying cash dividends;
. making capital distributions or other payments to stockholders;
. merging or consolidating with another corporation; or
. selling all or substantially all of our assets.
We derive a substantial portion of our revenue from a small number of customers
and, therefore, the loss of even one of these customers could significantly and
negatively impact our operating results.
We depend on a limited number of customers for a substantial portion of our
revenue and many of our contracts with our significant customers are short-term
contracts. The nonrenewal of any significant contract upon expiration, or a
substantial reduction in sales to any of our significant customers, would
adversely affect our business unless we were able to replace the revenue we
received from these customers. For the year ended December 31, 1998, Litronic
derived 81% of its revenue from three customers and Pulsar derived 22% of its
revenue from one customer. For the three months ended March 31, 1999, Litronic
derived 71% of its revenue from three customers and Pulsar derived 18% of its
revenue from one customer.
Doing business with the U.S. government entails many risks which could
adversely affect us.
Sales to U.S. government agencies accounted for 93% of our pro forma
combined revenue for the year ended December 31, 1998 and 86% of our pro forma
combined revenue for the three months ended March 31, 1999. Our sales to these
agencies are subject to risks, including:
. early termination of our contracts;
. disallowance of costs upon audit; and
. the necessity to participate in competitive bidding and proposal
processes, which is costly, time consuming and may result in unprofitable
contracts.
In addition, the government may be in a position to obtain greater rights
with respect to our intellectual property than we would grant to other
entities. Government agencies also have the power, based on financial
difficulties or investigations of its contractors, to deem contractors
unsuitable for new contract awards. Because we engage in the government
contracting business, we have been and will be subject to audits and may be
subject to investigation by governmental entities. Failure to comply with the
terms of any of our governmental contracts could result in substantial civil
and criminal fines and penalties, as well as our suspension from future
government contracts for a significant period of time, any of which could
adversely affect our business.
10
<PAGE>
If use of the Internet and other communications networks based on Internet
protocols does not continue to grow, demand for our products may not increase.
Increased demand for our products depends in large part on the continued
growth of the Internet and Internet protocol-based networks and the widespread
acceptance and use of these mediums for electronic commerce and communications.
Because electronic commerce and communications over these networks are
evolving, we cannot predict the size of the market and its sustainable growth
rate. A number of factors may affect market size and growth rate, including:
. the use of electronic commerce and communications may not increase, or
may increase more slowly than we expect;
. the Internet infrastructure and communications services to support
electronic commerce may not be able to continue to support the demands
placed on it by continued growth; and
. the growth and reliability of electronic commerce and communications
could be harmed by delays in development or adoption of new standards and
protocols to handle increased levels of activity or by increased
governmental regulation.
If PKI technology is compromised, our business would be adversely affected.
Many of our products are based on PKI technology. The security afforded by
this technology depends on the integrity of a user's private key, which depends
in part on the application of algorithms, or advanced mathematical factoring
equations. The occurrence of any of the following could result in a decline in
demand for our data security products:
. any significant advance in techniques for attacking PKI systems,
including the development of an easy factoring method or faster, more
powerful computers;
. publicity of the successful decoding of cryptographic messages or the
misappropriation of private keys; and
. government regulation limiting the use, scope or strength of PKI.
If we do not respond to rapid technological changes, our products and service
offerings could become obsolete.
If we are unable to modify existing products and develop new products that
are responsive to changing technology and standards and meet customer needs in
a timely and cost effective manner, our business could be adversely affected.
The markets we serve are characterized by rapidly changing technology, emerging
industry standards and frequent introduction of new products. The introduction
of products embodying new technologies and the emergence of new industry
standards may render our products obsolete or less marketable. The process of
developing our products and services is extremely complex and requires
significant continuing development efforts.
If we fail to establish and maintain strategic relationships, our ability to
develop and market our products would be adversely affected.
The loss of any of our existing strategic relationships, or the inability to
create new strategic relationships in the future, could adversely affect our
ability to develop and market our products. We depend upon our partners to
develop and market products and to fund and perform their obligations as
contemplated by our agreements with them. We do not control the time and
resources devoted by our partners to these activities. These relationships may
not continue or may require us to spend
11
<PAGE>
significant financial, personnel and administrative resources from time to
time. We may not have the resources available to satisfy our commitments, which
may adversely affect our strategic relationships. Further, our products and
services may compete with the products and services of our strategic partners.
This competition may adversely affect our relationships with our strategic
partners, which could adversely affect our business.
We depend on key management personnel.
Our success will depend largely on the continuing efforts of our executive
officers and senior management, especially those of Kris Shah, our chairman of
the board and chief executive officer, and William W. Davis, Sr., our president
and chief operating officer. Our business may be adversely affected if the
services of any of our key personnel become unavailable to us. We have not
entered into employment agreements with any employees other than Messrs. Shah
and Davis. Even with these agreements, there is a risk that these individuals
will not continue to serve for any particular period of time. While we have
obtained key person life insurance policies on the lives of Messrs. Shah and
Davis, each in the amount of $3.0 million, these amounts may not be sufficient
to offset the loss of their services.
There is significant competition in our industry for highly skilled employees
and our failure to attract and retain technical personnel would adversely
affect our business.
We may not be able to successfully attract or retain highly skilled
employees. Our inability to hire or retain highly qualified individuals may
impede our ability to develop, install, implement and service our software and
hardware systems, customers and potential customers or efficiently conduct our
operations, all of which may adversely affect our business. The data security
and networking solution industries are characterized by a high level of
employee mobility, and the market for highly qualified individuals in the
computer-related fields is intense. This competition means there are fewer
highly qualified employees available to hire and the costs of hiring and
retaining these individuals are high. Even if we are able to hire these
individuals, we may be unable to retain them. Furthermore, there is increasing
pressure to provide technical employees with stock options and other equity
interests, which may dilute earnings per share.
Potential product defects could subject us to claims from customers.
Products as complex as those we offer may contain undetected errors or
result in failures when first introduced or when new versions are released.
Despite our product testing efforts and testing by current and potential
customers, it is possible that errors will be found in new products or
enhancements after commencement of commercial shipments. The occurrence of
product defects or errors could result in adverse publicity, delay in product
introduction, diversion of resources to remedy defects, loss of or a delay in
market acceptance or claims by customers against us, or could cause us to incur
additional costs, any of which could adversely affect our business.
We may be exposed to potential liability for actual or perceived failure to
provide required products or services.
Because our customers rely on our products for critical security
applications, we may be exposed to potential liability claims for damage caused
to an enterprise as a result of an actual or perceived failure of our products.
An actual or perceived breach of enterprise network or data security systems of
one of our customers, regardless of whether the breach is attributable to our
products or solutions, could adversely affect our business reputation.
12
<PAGE>
Furthermore, our failure or inability to meet a customer's expectations in
the performance of our services, or to do so in the time frame required by the
customer, regardless of our responsibility for the failure, could:
. result in a claim for substantial damages against us by the customer;
. discourage customers from engaging us for these services; and
. damage our business reputation.
In addition, as a professional services provider, a portion of our business
involves employing people and placing them in the workplace of other
businesses. Therefore, we are also exposed to liability for actions taken by
our employees while on assignment.
Problems relating to the year 2000 issue could adversely affect our business.
We are in the process of surveying our major vendors regarding year 2000
compliance. Until we complete our survey we cannot fully assess the year 2000
status of any of our vendors or suppliers. The failure of our significant
vendors and customers to make their products and systems year 2000 compliant
may adversely affect the performance of our products, which may in turn
adversely affect our business. Customers or third parties might seek
indemnification or damages from us as a result of year 2000 issue-related
errors caused by or not prevented by our products or services. We cannot
predict the extent to which we might be liable for these costs, but it is
conceivable in general that year 2000 errors could result in substantial
judgments against us or other providers of information technology. If we were
to suffer an adverse judgment as a result of prior year 2000 noncompliance of
our products, it may have an adverse impact on our business.
Customers' purchasing decisions could be affected by the year 2000 issue as
they may need to expend significant resources to correct their existing
systems. This situation may result in reduced funds available to implement the
infrastructure needed to conduct trusted and secure electronic commerce and
communications over the Internet, intranets and extranets. These factors could
lead to a decline in sales of our products and services, which could, in turn,
adversely affect our business.
The extent of the potential impact of the year 2000 issue generally is not
known, and we cannot predict the likelihood that the year 2000 issue will cause
a significant disruption in the economy as a whole.
We face intense competition from a number of sources.
The markets for our products and services are intensely competitive and, as
a result, we face significant competition from a number of different sources.
We may be unable to compete successfully as many of our competitors are more
established, benefit from greater name recognition and have substantially
greater financial, technical and marketing resources than we have. In addition,
there are several smaller and start-up companies with which we compete from
time to time. We also expect that competition will increase as a result of
consolidation in the information security technology and product reseller
industries.
Third parties could obtain access to our proprietary information or
independently develop similar technologies because of the limited protection
for our intellectual property.
Our business, financial condition and operating results could be adversely
affected if we are unable to protect our intellectual property rights.
Notwithstanding the precautions we take, third
13
<PAGE>
parties may copy or obtain and use our proprietary technologies, ideas, know-
how and other proprietary information without authorization or independently
develop technologies similar or superior to our technologies. In addition, the
confidentiality and non-competition agreements between us and our employees,
distributors, and clients may not provide meaningful protection of our
proprietary technologies or other intellectual property in the event of
unauthorized use or disclosure. Policing unauthorized use of our technologies
and other intellectual property is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination
or security of software or other data transmitted. Furthermore, the laws of
other jurisdictions may afford little or no effective protection of our
intellectual property rights.
We may face claims of infringement of proprietary rights.
There is a risk that our products infringe the proprietary rights of third
parties. In addition, whether or not our products infringe on proprietary
rights of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expense in defending them.
If any claims or actions are asserted against us, we may be required to modify
our products or seek licenses for these intellectual property rights. We may
not be able to modify our products or obtain licenses on commercially
reasonable terms, in a timely manner or at all. Our failure to do so could
adversely affect our business.
Our efforts to expand international operations are subject to a number of
risks.
We are currently seeking to increase our international sales. Our inability
to maintain or to obtain federal or foreign regulatory approvals relating to
the import or export of our products on a timely basis could adversely affect
our ability to expand our international business. Additionally, our
international operations could be subject to a number of risks, any of which
could adversely affect our future international sales, including:
. increased collection risks;
. trade restrictions;
. export duties and tariffs; and
. uncertain political, regulatory and economic developments.
Our ability to produce the Forte PKIcard on a timely and cost-effective basis
depends on the availability of a computer chip from a third-party supplier,
with whom we do not expect to maintain a supply agreement.
Any inability to receive adequate supplies of Atmel Corporation's specially
designed Forte microprocessor would adversely affect our ability to complete
and sell the Forte PKIcard. We do not anticipate maintaining a supply agreement
with Atmel Corporation for the Forte microprocessor. If Atmel were unable to
deliver the Forte microprocessor for a lengthy period of time or terminated its
relationship with us, we would be unable to produce the Forte PKIcard until we
could design a replacement computer chip for the Forte microprocessor. We
anticipate this would take substantial time and resources to complete.
After this offering, a small number of stockholders, including our officers and
directors, will have the ability to control stockholder votes.
Upon the closing of this offering, Kris Shah and members of his family,
William W. Davis, Sr. and Lillian A. Davis will beneficially own, in the
aggregate, approximately 62.0% of our outstanding common stock. These
stockholders, if acting together, would have the ability to elect our directors
14
<PAGE>
and to determine the outcome of corporate actions requiring stockholder
approval, irrespective of how other stockholders may vote. This concentration
of ownership may also have the effect of delaying or preventing a change in
control.
A significant portion of the proceeds of this offering will be used to repay
indebtedness and thus will be unavailable to fund future growth.
We have allocated $16.0 million, or 50.6% of the net proceeds of this
offering to reduce outstanding indebtedness, including approximately $9.0
million of indebtedness assumed in connection with the acquisition of Pulsar,
and $1.1 million, or 3.5%, of the net proceeds to fund settlements with several
of Pulsar's trade vendors. Consequently, these funds will not be available to
fund future growth. The $16.0 million of indebtedness being repaid is
personally guaranteed by, and/or secured by pledges of assets of, Kris Shah,
William Davis or Lillian Davis. These persons will receive a benefit from the
release of these guarantees and security pledges.
There are lawsuits pending against Pulsar which could adversely affect our
business if they are resolved against Pulsar.
Lawsuits are pending against Pulsar which, if resolved against Pulsar, could
materially and adversely affect our business and financial condition. These
lawsuits claim: (a) damages of approximately $10.3 million resulting from
Pulsar's alleged breach of a contract for government contract bid preparation
services and (b) unspecified damages resulting from alleged race and age
discrimination in connection with the termination of a Pulsar employee. See
"Business--Legal Proceedings."
Our stock price could be extremely volatile.
The trading price of our common stock may be highly volatile as a result of
factors specific to us or applicable to our market and industry in general.
These factors, include:
. variations in our annual or quarterly financial results or those of our
competitors;
. changes by financial research analysts in their recommendations or
estimates of our earnings;
. conditions in the economy in general or in the information technology
service sector in particular;
. announcements of technological innovations or new products or services by
us or our competitors; and
. unfavorable publicity or changes in applicable laws and regulations, or
their judicial or administrative interpretations, affecting us or the
information technology service sectors.
In addition, the stock market has recently been subject to extreme price and
volume fluctuations. This volatility has significantly affected the market
prices of securities issued by many companies for reasons unrelated to the
operating performance of these companies. In the past, following periods of
volatility in the market price of a company's securities, some companies have
been sued by their stockholders. If we were sued, it could result in
substantial costs and a diversion of management's attention and resources,
which could adversely affect our business.
We have anti-takeover defenses that could delay or prevent an acquisition and
could adversely affect the price of our common stock.
Our certificate of incorporation and bylaws contain provisions that may
deter a takeover or a change in control or prevent an acquisition not approved
by our board of directors, or that may adversely affect the price of our common
stock. See "Description of Securities."
15
<PAGE>
The number of shares eligible for future sale and the existence of registration
rights could depress the market for our common stock.
The possibility that a substantial number of additional shares of common
stock may become tradeable in the public market following this offering may
adversely affect prevailing market prices for our common stock and could impair
our ability to raise capital through the sale of equity securities. An
aggregate of 3,870,693 of the 6,040,631 shares currently restricted from
trading in the public market will become eligible for sale 90 days following
the date of this prospectus, subject to agreements with BlueStone restricting
their sale for periods of at least six months. We cannot predict the effect, if
any, that sales of these additional securities or the availability of these
additional securities for sale will have on the market prices prevailing from
time to time. In addition, the representatives of the underwriters have also
been granted registration rights commencing one year from the date of this
prospectus providing for the registration under the Securities Act of the
securities issuable upon exercise of the representatives' warrants. The
exercise of these rights could result in substantial expense to us.
Furthermore, if the representatives exercise their registration rights, they
will be unable to make a market in our securities for up to nine days before
the initial sales of the warrants until the discontinuation of sales. If the
representatives cease making a market, the market and market prices for the
securities may be adversely affected and the holders of these securities may be
unable to sell them.
FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions and may be identified by the use of words such as
expects, anticipates, intends, and plans and other similar expressions. Our
actual results will differ from those discussed in these statements and you may
consider these differences important to your investment decision. Factors that
could contribute to these differences include those discussed in the "Risk
Factors" section and elsewhere in this prospectus. This prospectus also
contains forward-looking statements attributed to third parties relating to
their estimates regarding market growth. You should not place undue reliance on
the forward-looking statements in this prospectus, which speak only as of the
date the statement is made.
16
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of common stock in this
offering are estimated to be approximately $31.6 million or $36.7 million if
the representatives' over-allotment option is exercised in full. These amounts
assume we receive an initial public offering price of $10.00 per share, which
is the midpoint of the currently anticipated range of the initial public
offering price, and include deductions for underwriting discounts and estimated
offering expenses. We expect to use the net proceeds approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate percentage of
Anticipated use of net proceeds dollar amount net proceeds
- ------------------------------- ------------- -------------
<S> <C> <C>
Reduction of debt.................................. $16,000,000 50.6%
Sales and marketing................................ 5,000,000 15.8%
Product development................................ 5,000,000 15.8%
Vendor settlements................................. 1,100,000 3.5%
Working capital and general corporate purposes..... 4,500,000 14.3%
----------- -----
Total............................................ $31,600,000 100.0%
=========== =====
</TABLE>
Reduction of debt
We expect to use proceeds to reduce debt as follows:
. $6.6 million to repay BYL Bank Group for anticipated borrowings through
the date of this prospectus. This debt bears interest at the annual rate
of 6.6% and matures on July 31, 2000, except that it is required to be
repaid upon a change of control of our wholly-owned subsidiary, Litronic
Industries. It is guaranteed by Kris Shah, our chief executive officer
and chairman of the board, and is secured by personal assets pledged by
Mr. Shah.
. $3.6 million to repay in full notes to Wilmington Trust Company. The
Wilmington Trust Company debt bears interest at the prime rate as in
effect from time to time and matures in December 2002. The Wilmington
Trust Company debt is personally guaranteed by William W. Davis, Sr., our
president and chief operating officer, and Lillian A. Davis, a principal
stockholder, and is secured by property pledged by a family member of Mr.
Davis.
. $3.3 million to repay in full six promissory notes payable to various
vendors, which bear interest at annual rates ranging from 10% to 18% and
are due in June 1999.
. $1.4 million to IBM Global Finance Corporation to reduce the amount
outstanding under an asset-based inventory and working capital financing
agreement. The financing line bears interest at an annual rate of prime
plus 2.375% and is guaranteed by Mr. Davis and Ms. Davis and secured by
substantially all of the assets of Pulsar as well as by assets pledged by
Mr. Davis and Ms. Davis.
. $650,000 to pay IBM Global under its forbearance agreement with Pulsar
which becomes payable upon closing of this offering. The obligations
under the forbearance agreement are guaranteed by Mr. Davis and Ms. Davis
and secured by assets pledged by Mr. Davis.
. $450,000 to repay in full a line of credit from Fidelity Funding, Inc.
The Fidelity Funding, Inc. debt currently bears interest at an annual
rate of prime plus 1.5%, is due on February 28, 2000, and is personally
guaranteed by Mr. Shah.
17
<PAGE>
Sales and marketing
We expect to use the proceeds allocated to sales and marketing as follows:
. to expand our sales and marketing efforts, primarily to commercial
markets, including hiring approximately 20 additional sales and marketing
personnel;
. to open additional sales and support offices;
. to expand our Internet and other advertising efforts;
. to improve our web site; and
. to expand strategic alliances.
Product development
We expect to use the proceeds allocated to product development to pay our
estimated costs of software and product development, including compensation and
benefits payable to additional software and hardware engineers and developers.
Vendor settlements
We expect to use the proceeds allocated to vendor settlements to pay amounts
owed under litigation settlements with various Pulsar trade vendors, as well as
anticipated amounts to pay as-yet-unsettled claims filed against Pulsar by
other trade vendors.
Working capital and general corporate purposes
If our cash from operations proves to be insufficient to fund our
outstanding trade payables, including up to approximately $2.9 million of
accounts payable more than 90 days overdue, we may use a portion of the
proceeds to fund these obligations. In addition, we may use a portion of the
proceeds for potential acquisitions of technologies, product lines and
businesses and to upgrade our existing management information systems and
supporting information technology equipment. We currently have no commitments,
understandings or arrangements with respect to any future acquisitions.
If the representatives of the underwriters exercise their over-allotment
option in full, we will realize additional net proceeds of approximately $5.1
million. We would use these proceeds for working capital and general corporate
purposes. Pending the uses described above, we intend to invest the net
proceeds of this offering in U.S. government securities, certificates of
deposit or other investment grade, interest-bearing securities.
The allocations described above represent our best estimate of the
anticipated use of the offering proceeds. Our estimate is based upon our
operating plans and our assumptions about research and development progress,
general economic conditions and industry factors. If any of these factors
change, we may find it necessary or advisable to reallocate our use of
proceeds.
In addition to the proceeds of this offering, we expect to borrow under our
new $20.0 million revolving line of credit facility with Fidelity Funding, Inc.
as needed to finance our operations and working capital requirements. This
facility provides for a three-year term, subject to one-year renewals at
Fidelity's option, an annual interest rate of prime plus .625% and a pledge of
substantially all of our personal and real property as collateral.
18
<PAGE>
We believe that the net proceeds of this offering, together with anticipated
cash flow from operations, availability under our new $20.0 million credit
facility and existing cash and cash equivalents, will be sufficient to satisfy
our contemplated cash requirements for at least 12 months following the closing
of this offering, including planned capital expenditures of $1.0 million and an
anticipated increase in rent expense for our California operations of $400,000
per year following our anticipated relocation of our California headquarters.
We could be required to seek additional financing, however, if:
. our plans change due to changes in market conditions, competitive
factors, progress of our research and development efforts or new
opportunities that may become available in the future;
. our assumptions change or prove to be inaccurate; or
. the net proceeds of this offering or our cash flows prove to be
insufficient to finance our growth strategy.
DIVIDEND POLICY
Before the date of this prospectus, Litronic Industries was an S corporation
for federal and California state income tax purposes. As an S corporation,
Litronic Industries made cash distributions of approximately $18.0 million to
its stockholders during the year ended December 31, 1997. We do not anticipate
paying cash dividends. We intend to retain future earnings for the development
and expansion of our business. The declaration and payment of dividends or
other distributions is currently prohibited by the terms of financing
agreements we have with our lenders and is likely to continue to be restricted.
DILUTION
The difference between the initial public offering price per share of common
stock and the net tangible book value per share of common stock after the
offering constitutes the dilution to new investors. Our net tangible book value
per share is calculated by dividing the difference between our total tangible
assets and our total liabilities by the number of shares of our common stock
outstanding.
At March 31, 1999, the net tangible book value (deficit) of Litronic was
$(5.2 million), or $(1.34) per share. After giving retroactive effect to (a)
the Pulsar acquisition and (b) Litronic's receipt and anticipated application
of the net proceeds from the sale of the 3,700,000 shares of our common stock
in this offering, at an assumed price of $10.00 per share, Litronic's as
adjusted net tangible book value at March 31, 1999 would have been $14.7
million or $1.51 per share. This represents an immediate increase in net
tangible book value of $2.85 per share to existing stockholders and an
immediate dilution of $8.49 per share to new investors.
The following table illustrates this per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $10.00
Net tangible book value (deficit) before the offering...... $(1.34)
Increase attributable to the Pulsar acquisition and this
offering.................................................. 2.85
------
Adjusted net tangible book value after this offering........ 1.51
------
Dilution to new investors................................... $ 8.49
======
</TABLE>
19
<PAGE>
The following table summarizes, on a pro forma basis, as of March 31, 1999,
and giving retroactive effect to the Pulsar acquisition, the differences
between the number of shares of common stock purchased from us, the total
consideration paid, and the average price per share paid by existing
stockholders and new investors purchasing common stock in this offering. In
summarizing this information, we have:
. calculated the total consideration paid by existing stockholders based on
the historical value of Litronic's common stock and the fair value of the
common stock issued in connection with the Pulsar acquisition; and
. assumed an average price per share of $10.00 for new investors and for
the fair value of the common stock issued in connection with the Pulsar
acquisition.
<TABLE>
<CAPTION>
Shares Acquired Total Consideration Average
----------------- ------------------- Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 6,040,631 62.0% $33,402,000 47.4% $ 5.53
New investors................... 3,700,000 38.0 37,000,000 52.6 $10.00
--------- ----- ----------- -----
9,740,631 100.0% $70,402,000 100.0%
========= ===== =========== =====
</TABLE>
The table above assumes the representatives of the underwriters have not
exercised their over-allotment option. If this option is exercised in full, the
new investors will have paid $42.6 million, based on an assumed offering price
of $10.00 per share, for 4,255,000 shares of common stock, representing
approximately 56.0% of the total consideration for 41.3% of the total number of
shares outstanding. In making the computations in the table, we excluded:
. 281,419 shares of common stock reserved for issuance upon the exercise of
outstanding options under our 1998 stock option plan, at an exercise
price of $.70 per share;
. 600,000 shares of common stock reserved for issuance upon the exercise of
options granted or available for future grant under our 1999 stock option
plan; and
. 370,000 shares of common stock reserved for issuance upon the exercise of
warrants to be issued to the representatives of the underwriters in
connection with this offering.
20
<PAGE>
CAPITALIZATION
(dollars in thousands, except share data)
The following table presents Litronic's short-term debt and capitalization,
as of March 31, 1999, on (a) an historical basis, (b) a pro forma combined
basis to reflect the Pulsar acquisition, and (c) a pro forma combined, as
adjusted, basis to reflect the anticipated application of the proceeds of sale
of 3,700,000 shares of our common stock at an assumed price of $10.00 per
share. This table should be read in conjunction with "Use of Proceeds," "Pro
Forma Financial Data" and the financial statements, including the related
notes, appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------
Pro Forma
Pro Combined,
Forma As
Historical Combined Adjusted
---------- -------- ---------
<S> <C> <C> <C>
Short-term debt:
Financing arrangement--IBM Global.............. $ -- $ 7,201 $ 5,175
Notes payable--vendors......................... -- 3,361 61
Current installments of debt................... 424 1,606 215
------ ------- -------
Total short-term debt.......................... $ 424 $12,168 $ 5,451
====== ======= =======
Long-term debt:
Long-term debt................................. $5,950 $ 5,950 $ --
Notes payable, net of current installments..... -- 3,085 452
------ ------- -------
Total long-term debt........................... 5,950 9,035 452
------ ------- -------
Stockholders' equity:
Preferred stock, $.01 par value; authorized
5,000,000 shares; no shares issued or
outstanding (historical, pro forma combined
and pro forma combined, as adjusted).......... -- -- --
Common stock, $.01 par value: 25,000,000 shares
authorized; 3,870,693 shares issued and
outstanding (historical), 6,040,631 shares
issued and outstanding (pro forma combined),
and 9,740,631 shares issued and outstanding
(pro forma combined, as adjusted)............. 39 61 98
Additional paid-in capital..................... -- 16,458 48,021
Accumulated deficit............................ (5,219) -- --
------ ------- -------
Total stockholders' equity (deficit)........ (5,180) 16,519 48,119
------ ------- -------
Total capitalization..................... $ 770 $25,554 $48,571
====== ======= =======
</TABLE>
The above table excludes the following shares:
. 281,419 shares of common stock reserved for issuance upon exercise of
options granted under our 1998 stock option plan;
. 600,000 shares of common stock reserved for issuance upon exercise of
options granted or available for future grant under our 1999 stock option
plan; and
. 370,000 shares of common stock reserved for issuance upon exercise of the
representatives' warrants.
21
<PAGE>
SELECTED FINANCIAL DATA--LITRONIC
(dollars in thousands, except per share data)
The following table presents selected financial data as of and for each of
the years in the five-year period ended December 31, 1998, derived from the
consolidated financial statements of Litronic. The consolidated financial
statements of Litronic as of December 31, 1997 and 1998 and for each of the
years in the three-year period ended December 31, 1998 have been audited by
KPMG LLP, independent certified public accountants. The consolidated financial
statements of Litronic as of December 31, 1997 and 1998, and for each of the
years in the three-year period ended December 31, 1998, and the related report,
are included in this prospectus.
The selected data presented below for the three month periods ended March
31, 1998 and 1999, and as of March 31, 1999, are derived from the unaudited
condensed consolidated financial statements of Litronic included elsewhere in
this prospectus.
The selected data should be read in conjunction with the consolidated
financial statements of Litronic for the three-year period ended December 31,
1998, the related notes and the independent auditors' report, appearing
elsewhere in this prospectus.
Selected Statements of Operations Data:
<TABLE>
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... $ 1,447 $ 1,525 $ 7,855 $ 8,627 $ 5,214 $ 1,354 $ 885
License and service... 487 1,181 1,541 1,539 1,041 309 156
Research and develop-
ment -- -- -- -- 398 -- 369
--------- --------- --------- --------- --------- --------- ---------
Total revenue......... 1,934 2,706 9,396 10,166 6,653 1,663 1,410
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales - prod-
uct.................... 486 793 4,098 3,211 2,821 667 507
Cost of sales -
license and service.. 169 465 581 643 950 176 140
Selling, general, and
administrative....... 773 977 2,052 3,487 2,631 662 871
Research and
development.......... 226 341 725 1,172 1,334 341 765
--------- --------- --------- --------- --------- --------- ---------
Operating income
(loss)................. 280 130 1,940 1,653 (1,083) (183) (873)
Interest expense, net... 12 38 19 42 418 108 109
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations
before income taxes.... 268 92 1,921 1,611 (1,501) (291) (982)
Provision for (benefit
from) income taxes..... 4 1 29 22 (95) (51) (9)
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations.. $ 264 $ 91 $ 1,892 $ 1,589 $(1,406) $ (240) $ (973)
========= ========= ========= ========= ========= ========= =========
Net earnings (loss)..... $ 48 $ 210 $ 906 $ 15,334 $(1,406) $ (240) $ (973)
========= ========= ========= ========= ========= ========= =========
Earnings (loss) from
continuing operations
per share: basic and
diluted................ $ .07 $ .02 $ .49 $ .41 $ (.36) $ (.06) $ (.25)
========= ========= ========= ========= ========= ========= =========
Net earnings (loss) per
share: basic and dilut-
ed..................... $ .01 $ .05 $ .23 $ 3.96 $ (.36) $ (.06) $ (.25)
========= ========= ========= ========= ========= ========= =========
Shares used in per share
computations: basic and
diluted................ 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693
========= ========= ========= ========= ========= ========= =========
</TABLE>
22
<PAGE>
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
------------------------------------------ March 31,
1994 1995 1996 1997 1998 1999
------- ------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............. $ 6 $ 95 $ 862 $ 490 $ 898 $ 557
Working capital....................... 87 (372) 1,662 385 758 520
Total assets.......................... 3,827 5,476 7,409 2,347 2,791 2,895
Short-term debt....................... 421 472 545 -- 580 424
Long-term debt, less current install-
ments................................ 3,718 4,313 4,997 3,506 5,200 5,950
Total liabilities..................... 5,045 6,483 7,510 5,148 6,998 8,075
Net stockholders' deficit............. (1,218) (1,007) (101) (2,801) (4,207) (5,180)
</TABLE>
During the year ended December 31, 1997, Litronic paid a cash dividend of
$9.5 million to its shareholders. No other dividends have been paid during the
periods presented.
23
<PAGE>
SELECTED FINANCIAL DATA--PULSAR
(dollars in thousands, except per share data)
The following table presents selected financial data as of and for each of
the years in the four-year period ended December 31, 1997, derived from the
financial statements of Pulsar, which have been audited by Keller Bruner &
Company, L.L.C., independent certified public accountants. The selected
financial data as of and for the year ended December 31, 1998 is derived from
the financial statements of Pulsar which have been audited by KPMG LLP,
independent certified public accountants. The financial statements of Pulsar as
of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31, 1998, and the related reports are included elsewhere
in this prospectus.
The selected data presented below for the three month periods ended March
31, 1998 and 1999, and as of March 31, 1999, are derived from the unaudited
condensed financial statements of Pulsar included elsewhere in this prospectus.
The selected data should be read in conjunction with the financial
statements of Pulsar for the three-year period ended December 31, 1998, the
related notes and the independent auditors' reports, which contain explanatory
paragraphs that state that Pulsar's recurring losses from operations, violation
of debt covenants and net capital deficiency raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements and
the selected data do not include any adjustments that might result from the
outcome of this uncertainty.
Selected Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
----------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Service revenue......... $ * $ * $10,253 $ 8,818 $ 3,373 $ 1,241 $ 369
Product revenue......... * * 155,705 142,702 77,159 16,777 9,579
------- ------- ------- -------- ------- --------- ---------
Total revenue........... 118,739 163,991 165,958 151,520 80,532 18,018 9,948
------- ------- ------- -------- ------- --------- ---------
Cost of service reve-
nue.................... * * 4,870 4,115 1,553 730 155
Cost of product reve-
nue.................... * * 144,494 138,086 73,417 16,742 9,234
------- ------- ------- -------- ------- --------- ---------
Total cost of revenue... 104,416 146,682 149,364 142,201 74,970 17,472 9,389
------- ------- ------- -------- ------- --------- ---------
Gross margin............ 14,323 17,309 16,594 9,319 5,562 546 559
Selling, general, and
administrative
expenses............... 8,580 10,410 13,545 17,152 11,665 2,256 1,892
------- ------- ------- -------- ------- --------- ---------
Operating income
(loss)................. 5,743 6,899 3,049 (7,833) (6,103) (1,710) (1,333)
Other income............ 325 -- -- -- -- -- --
Interest income......... 276 392 639 457 61 200 20
Interest expense........ 1,377 2,412 3,564 3,640 2,099 706 478
------- ------- ------- -------- ------- --------- ---------
Net earnings (loss)..... $ 4,967 $ 4,879 $ 124 $(11,016) $(8,141) $ (2,216) $ (1,791)
======= ======= ======= ======== ======= ========= =========
Net earnings (loss) per
share:
basic and diluted...... $ 4,967 $ 4,879 $ 124 $(11,016) $(8,141) $ (2,216) $ (1,791)
======= ======= ======= ======== ======= ========= =========
Weighted average shares
outstanding............ 1,000 1,000 1,000 1,000 1,000 1,000 1,000
======= ======= ======= ======== ======= ========= =========
</TABLE>
- --------
* The breakdown of revenue and cost of revenue between services and products is
not available for the years ended December 31, 1994 and 1995 because, before
1996, Pulsar's accounting system did not track product and service revenue
separately. In 1996, Pulsar installed a new accounting system and has since
been able to break out product and service revenue.
24
<PAGE>
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
---------------------------------------- March 31,
1994 1995 1996 1997 1998 1999
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............. $ 2,895 $ 2,144 $ 2,451 $ 2,236 $ 352 $ 441
Working capital (deficit)............. 8,145 8,090 1,553 (2,436) (8,168) (10,067)
Total assets.......................... 60,820 82,930 59,785 40,871 12,730 8,539
Short-term debt....................... 35,139 61,970 41,352 28,982 14,435 11,744
Long-term debt, less current install-
ments................................ 41 84 53 4,203 3,241 3,085
Total liabilities..................... 52,070 73,862 52,077 42,681 22,681 20,281
Net stockholders' equity (deficit).... 8,750 9,068 7,708 (1,810) (9,951) (11,742)
</TABLE>
25
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data is based upon data derived from
Litronic's and Pulsar's historical consolidated financial statements and has
been prepared to illustrate the effects on this data of the Pulsar acquisition
and this offering. The unaudited pro forma statements of operations for the
year ended December 31, 1998 and the three months ended March 31, 1999 give
effect to the acquisition and the closing of this offering as if these
transactions had occurred as of January 1, 1998. The unaudited pro forma
balance sheet as of March 31, 1999 gives effect to the acquisition and this
offering as if these transactions had occurred as of March 31, 1999. The Pulsar
acquisition will become effective simultaneously with, and as a condition to,
the closing of this offering. The acquisition will be recorded using the
purchase method of accounting.
The pro forma adjustments are based upon preliminary estimates, currently
available information and assumptions that management deems appropriate. We
have assumed for the purpose of determining the purchase price of the Pulsar
acquisition that our common stock issued to the Pulsar stockholders is valued
at the initial public offering price. The preliminary estimates regarding
allocation of the purchase price are subject to uncertainties, including the
final offering price per share and final determination of the fair value of the
net assets acquired. In management's opinion, the preliminary estimates
regarding allocation of the purchase price of Pulsar are not expected to differ
materially from the final allocation. The purchase price allocation will be
finalized after the closing of the acquisition. The pro forma financial data
are not necessarily indicative of the results we would have obtained had these
events occurred at the beginning of the period, as assumed, or of our future
results as a combined entity.
26
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------------------
Pro Forma
Acquisition Offering Combined,
Adjustments Pro Forma Proceeds As
Litronic Pulsar (AA) Combined Adjustments Adjusted
--------- ------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... $ 5,214 $77,159 $ $ 82,373 $ $ 82,373
License and service... 1,041 3,373 4,414 4,414
Research and
development ......... 398 -- 398 398
--------- ------- ---------- ---------- ---------- ----------
Total revenue......... 6,653 80,532 87,185 87,185
--------- ------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales-
product.............. 2,821 73,417 76,238 76,238
Cost of sales-license and
service ............. 950 1,553 2,503 2,503
Selling, general, and
administrative....... 2,631 11,665 14,296 14,296
Research and
development ......... 1,334 -- 1,334 1,334
Amortization of
goodwill and other
intangibles.......... -- -- 2,601(BB) 2,601 2,601
--------- ------- ---------- ---------- ---------- ----------
Operating loss.......... (1,083) (6,103) (2,601) (9,787) (9,787)
Interest expense........ 418 2,099 2,517 (794)(CC) 1,723
Interest income......... -- 61 61 61
--------- ------- ---------- ---------- ---------- ----------
Loss from continuing
operations before
income taxes........... (1,501) (8,141) (2,601) (12,243) 794 (11,449)
Benefit from income
taxes.................. (95) -- 95(DD) -- --
--------- ------- ---------- ---------- ---------- ----------
Loss from continuing
operations............. $ (1,406) $(8,141) $ (2,696) $ (12,243) $ 794 $ (11,449)
========= ======= ========== ========== ========== ==========
Loss per share from
continuing operations:
basic and diluted...... $ (.36) $(8,141) $ (2.03) $ (1.18)
========= ======= ========== ==========
Shares used in per share
computations: basic and
diluted................ 3,870,693 1,000 (1,000)(EE) 6,040,631 3,700,000 (FF) 9,740,631
2,169,938 (EE)
========= ======= ========== ========== ========== ==========
</TABLE>
- --------
(AA) Includes adjustments directly attributable to the Pulsar acquisition.
(BB) Reflects the amortization of goodwill and other intangibles of $33.4
million attributable to the acquisition, amortized on a straight line
basis over 10- to 15-year periods.
(CC) Reflects the reduction of interest expense which would result from the
repayment of $16.0 million of debt as described in "Use of Proceeds."
(DD) Reflects the income tax effect of the change from an S corporation to a C
corporation.
(EE) Reflects the exchange of all of Pulsar's outstanding common stock for
2,169,938 shares of our common stock in connection with the Pulsar
acquisition.
(FF) Reflects the sale of 3,700,000 shares of our common stock in this
offering.
27
<PAGE>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------------------------------------------------
Acquisition Offering Pro Forma
Adjustments Pro Forma Proceeds Combined,
Litronic Pulsar (AA) Combined Adjustments As Adjusted
--------- ------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... $ 885 $ 9,579 $ $ 10,464 $ $ 10,464
License and service... 156 369 525 525
Research and
development.......... 369 -- 369 369
--------- ------- --------- --------- ---------- -----------
Total revenue......... 1,410 9,948 11,358 11,358
--------- ------- --------- --------- ---------- -----------
Costs and expenses:
Cost of sales-
product.............. 507 9,234 9,741 9,741
Cost of sales-license
and service.......... 140 155 295 295
Selling, general, and
administrative....... 871 1,892 2,763 2,763
Research and
development.......... 765 -- 765 765
Amortization of
goodwill and other
intangibles.......... -- -- 651 (BB) 651 651
--------- ------- --------- --------- ---------- -----------
Operating loss.......... (873) (1,333) (651) (2,857) (2,857)
Interest expense........ 109 478 587 (334)(CC) 253
Interest income......... -- 20 20 20
--------- ------- --------- --------- ---------- -----------
Loss from continuing
operations before
income taxes........... (982) (1,791) (651) (3,424) 334 (3,090)
Provision for (benefit
from) income taxes..... (9) -- 9 (DD) -- --
--------- ------- --------- --------- ---------- -----------
Loss from continuing
operations............. $ (973) $(1,791) $ (660) $ (3,424) $ 334 $ (3,090)
========= ======= ========= ========= ========== ===========
Loss per share from
continuing operations: basic
and diluted............ $ (.25) $(1,791) $ (.57) $ (.32)
========= ======= ========= ===========
Shares used in per share
computations: basic
and diluted............ 3,870,693 1,000 (1,000)(EE) 6,040,631 3,700,000(FF) 9,740,631
2,169,938 (EE)
========= ======= ========= ========= ========== ===========
</TABLE>
- --------
(AA) Includes adjustments directly attributable to the Pulsar acquisition.
(BB) Reflects the amortization of goodwill and other intangibles of $33.4
million attributable to the acquisition, amortized on a straight line
basis over 10- to 15-year periods.
(CC) Reflects the reduction of interest expense which would result from the
repayment of $16.0 million of debt as described in "Use of Proceeds."
(DD) Reflects the income tax effect of the change from an S corporation to a C
corporation.
(EE) Reflects the exchange of all of Pulsar's outstanding common stock for
2,169,938 shares of our common stock in connection with the Pulsar
acquisition.
(FF) Reflects the sale of 3,700,000 shares of our common stock in this
offering.
28
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------------------------------------
Acquisition Offering Pro Forma
Adjustments Pro Forma Proceeds Combined,
Litronic Pulsar (AA) Combined Adjustments(D) As Adjusted
-------- ------- ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 557 $ 441 $ $ 998 $15,200(C) $16,198
Accounts receivable,
net.................... 652 5,798 6,450 6,450
Inventories............. 452 890 1,342 1,342
Other current assets.... 984 -- 984 984
------ ------- ------- ------- ------- -------
Total current assets.... 2,645 7,129 9,774 15,200 24,974
Property and equipment,
net.................... 250 525 775 775
Goodwill and other
intangibles............ -- -- 33,441 (A) 33,441 33,441
Notes receivable--
related parties........ -- 543 543 543
Other assets............ -- 342 342 342
------ ------- ------- ------- ------- -------
Total assets............ $2,895 $ 8,539 $33,441 $44,875 $15,200 $60,075
====== ======= ======= ======= ======= =======
Liabilities and
Stockholders' Equity
(Deficit):
Financing arrangement--
IBM Global............. $ -- $ 7,201 $ $ 7,201 $(2,026)(C) $ 5,175
Current installments of
long-term debt......... 424 967 1,391 (1,391)(C) --
Notes payable--vendors.. -- 3,361 3,361 (3,300)(C) 61
Accounts payable........ 911 3,829 4,740 (1,100)(C) 3,640
Accrued liabilities..... 790 1,623 2,413 2,413
Notes payable to
shareholders........... -- 215 215 215
------ ------- ------- ------- ------- -------
Total current
liabilities............ 2,125 17,196 19,321 (7,817) 11,504
Long-term debt.......... 5,950 -- 5,950 (5,950)(C) --
Notes payable, net of
current maturities..... -- 3,085 3,085 (2,633)(C) 452
Stockholders' equity
(deficit):
Common stock............ 39 1 22 (A) 61 37 98
(1)(A)
Additional paid-in
capital................ -- 1,663 21,677 (A) 16,458 31,563 48,021
(1,663)(A)
(5,219)(B)
Accumulated deficit..... (5,219) (13,406) 13,406 (A) -- --
5,219 (B)
------ ------- ------- ------- ------- -------
Net stockholders' equity
(deficit).............. (5,180) (11,742) 33,441 16,519 31,600 48,119
------ ------- ------- ------- ------- -------
Total liabilities and
stockholders' equity
(deficit).............. $2,895 $ 8,539 $33,441 $44,875 $15,200 $60,075
====== ======= ======= ======= ======= =======
</TABLE>
- --------
(A) The adjustment reflects the acquisition of Pulsar under the purchase
method of accounting through the issuance of 2.17 million shares of common
stock with a fair value of $21.7 million and the assumption of net
liabilities of $11.7 million. The allocation of the purchase price to the
fair value of the assets acquired and liabilities assumed is preliminary
and will be finalized following completion of the acquisition of Pulsar.
Included in the amount allocated to goodwill and other intangibles is an
allocation of $11.1 million representing the preliminary estimate of value
of the customer base and strategic relationships.
(B) Reflects the restructuring of Litronic from an S corporation to a C
corporation with a corresponding reclassification of the $5.2 million
accumulated deficit to additional paid-in-capital.
(C) Reflects the repayment of debt including additional borrowings of $700,000
subsequent to March 31, 1999, and payment of vendor settlements from the
proceeds of this offering.
(D) Reflects the net proceeds from the sale of 3,700,000 shares of our common
stock at an assumed price of $10.00 per share.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data of Litronic and Pulsar, the pro forma financial data, and the
financial statements and related notes appearing elsewhere in this prospectus.
General
Litronic provides professional Internet data security services and develops
and markets software and microprocessor-based products needed to secure
electronic commerce and communications over the Internet and other
communications networks based on Internet protocols. Litronic's primary
technology offerings use public key infrastructure, which is the standard
technology for securing Internet-based commerce and communications.
Before 1990, Litronic was solely a provider of electronic interconnect
products to government and commercial entities. In 1990, Litronic formed its
data security division, which forms the basis of its operations today. The data
security division was engaged primarily in research and development until 1993
when it began to generate meaningful revenue. In September 1997, Litronic sold
its Intercon division, which consisted of the assets relating to its
interconnect operations, for cash to Allied Signal Inc., a non-related,
publicly-traded company. The gain on sale was $15.0 million, net of tax expense
of $241,000. In addition to the cash proceeds received, the sales agreement
provided for Litronic's right to receive a contingent purchase price. Effective
November 30, 1997, this right was distributed pro rata to the shareholders of
Litronic. Except for senior management, these operations were operated
independently from Litronic's data security operations. Litronic charged direct
costs to the division incurring them. Indirect or shared costs, such as senior
management compensation and benefits, rent, utilities and costs of tax, legal
and other advisory services, were allocated on the basis of actual usage and
head count. Litronic's historical consolidated financial statements have been
restated to reflect the sale of the Intercon division as discontinued
operations.
Upon the closing of this offering, Litronic is acquiring Pulsar, a provider
of network-based information technology consulting services to commercial
accounts and federal, state and local government agencies, in exchange for
2,169,938 shares of our common stock valued at $10.00 per share, the
anticipated initial public offering price. In addition to its consulting
services, Pulsar also has an established product reseller business, which
focuses on resales to government agencies, large corporate accounts and state
and local governments.
Results of operations--comparison of the three months ended March 31, 1998 and
1999
Litronic
Total revenue. Total revenue decreased 15% from $1.7 million during the
three months ended March 31, 1998 to $1.4 million during the three months ended
March 31, 1999. The decrease was primarily attributable to decreased sales of
the ARGUS 300 products to the U.S. Army Corps of Engineers and readers to
Lockheed Martin Corporation under the Defense Messaging System contract.
During the three months ended March 31, 1998, Litronic derived 36%, 35% and
16% of its revenue from sales to Lockheed Martin Corporation, U.S. Army Corps
of Engineers and the National Security Agency. During the three months ended
March 31, 1999, Litronic derived 39%, 27%, and
30
<PAGE>
5% of its revenue from sales to Lockheed Martin Corporation, the National
Security Agency and the U.S. Army Corps of Engineers.
Sales to federal government agencies accounted for approximately 51% and 32%
of Litronic's sales during the three months ended March 31, 1998 and 1999.
Product revenue. Product revenue decreased 35% from $1.4 million in the
three months ended March 31, 1998 to $885,000 in the three months ended March
31, 1999. This decrease is primarily attributable to reduced sales of our ARGUS
300 products to the U.S. Army Corps of Engineers as a result of the substantial
completion of the Corps of Engineers Financial Management Services, or CEFMS,
contract and reduced sales of reader/writers to Lockheed Martin Corporation
under the Defense Messaging System contract. We expect that sales of our ARGUS
300 products under the CEFMS contract will continue to diminish; however, we
expect significant additional sales of the ARGUS 300 and other products to the
U.S. Army Corps of Engineers as a result of its recently commenced program to
upgrade its information technology systems periodically. Based on our
experience with the U.S. Army Corps of Engineers, we expect to participate in
the program through sales of the ARGUS 300 and other products and expect to
generate revenue from the recently commenced program beginning in the fourth
quarter of 1999.
License and service revenue. License and service revenue decreased from
$309,000 during the three months ended March 31, 1998 to $156,000 during the
three months ended March 31, 1999. This change is primarily due to a decrease
of $246,000 in revenue from the National Security Agency Defense Messaging
System support services.
Research and development revenue. Research and development revenue for the
three months ended March 31, 1999 of $369,000 represents amounts earned under a
contract with the National Security Agency under which we are designing a
microprocessor meeting minimum specifications established by the National
Security Agency. We have contracted with others to perform aspects of this
project. All related project costs are expensed as research and development as
incurred. No other funds received for research and development projects were
recorded during any of the periods presented. Regardless of the results of the
development efforts the amounts received from the National Security Agency are
nonrefundable. The related research and development costs are not separately
identifiable. Therefore, the corresponding costs of the entire development
effort are included in research and development expenses.
Product gross margin. Product gross margins decreased as a percentage of net
product revenue from 51% during the three months ended March 31, 1998 to 43%
during the three months ended March 31, 1999. The decrease resulted primarily
from decreased sales of ARGUS data encryption products to the U.S. Army Corps
of Engineers.
License and service gross margin. License and service gross margin decreased
as a percentage of its revenue from 43% during the three months ended March 31,
1998 to 10% during the three months ended March 31, 1999. This decrease
resulted primarily from higher compensation costs associated with the reduction
of support services revenue under the Defense Messaging System contract.
31
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 32% from $662,000 during the three months
ended March 31, 1998 to $871,000 during the three months ended March 31, 1999.
As a percentage of revenue, selling, general and administrative expenses
increased from 40% during the three months ended March 31, 1998 to 62% during
the three months ended March 31, 1999. Selling, general and administrative
expenses increased primarily due to increased staffing to support business
expansion and increased professional fees.
Research and development expenses. Research and development expenses
increased 124% from $341,000 during the three months ended March 31, 1998 to
$765,000 during the three months ended March 31, 1999. The increase was
primarily attributable to increased costs associated with increased new product
development, including expenses associated with the development efforts of the
Forte microprocessor, which we are designing in conjunction with Atmel
Corporation, and increased staffing to support research and development efforts
including the Forte project. As a percentage of revenue, research and
development expenses increased from 21% during the three months ended March 31,
1998 to 54% during the three months ended March 31, 1999. The increase
reflected our continued investment in research and development of future
products and services coupled with the reduction in revenue described above.
Interest expense, net. Interest expense, net increased slightly from
$108,000 during the three months ended March 31, 1998 to $109,000 during the
three months ended March 31, 1999. The average borrowings required for
operations were comparable during the three months ended March 31, 1998 and
1999.
Income taxes. Before this offering, Litronic elected to be treated as an S
corporation under the provisions of Section 1362 of the Internal Revenue Code
of 1986 and used the accrual basis of reporting for income tax purposes.
Accordingly, Litronic did not provide for federal income taxes at the corporate
level. Litronic was subject to state taxes on earnings before taxes. The
provision for state income taxes was a credit of $51,000 and $9,000 for the
three months ended March 31, 1998 and 1999 as a result of losses from
operations.
Backlog. At March 31, 1999, Litronic had total backlog of $299,000,
including $227,000 attributable to the National Security Agency. Backlog
represents signed purchase orders received but not filled and, in the case of
the $227,000 attributable to the National Security Agency, funding of future
research and development costs. At March 31, 1998, we had total backlog of
$626,000, including $147,000 attributable to the U.S. Army Corps of Engineers
and $388,000 attributable to the National Security Agency.
Pulsar
Total revenue. Total revenue decreased 45%, from $18.0 million during the
three months ended March 31, 1998 to $9.9 million during the three months ended
March 31, 1999. During the three months ended March 31, 1998 and 1999, Pulsar
derived 16% and 18% of its revenue from sales to the U.S. Immigration and
Naturalization Service. Total revenue to federal government agencies declined
42% from $16.2 million during the three months ended March 31, 1998 to $9.4
million during the three months ended March 31, 1999. This decrease is
attributable primarily to the federal government's reallocation of budget
dollars from hardware and software procurements to resolving year 2000 issues.
32
<PAGE>
Product revenue. Product revenue declined 43% from $16.8 million during the
three months ended March 31, 1998 to $9.6 million during the three months ended
March 31, 1999. This decrease is primarily attributable to the following
factors:
. In 1997, Pulsar made a strategic decision to eliminate its high volume,
low margin Federal Systems Integration, or FSI, program activities,
which accounted for 13% of its product revenue during the three months
ended March 31, 1998 and was completely eliminated as of March 31, 1999.
Sales under the FSI program were phased out due to the diminishing
margins produced by these sales.
. Pulsar voluntarily withdrew from the Section 8(a) program in June 1997
in anticipation of its scheduled graduation from the program in November
1997. Section 8(a) contract revenue was $1.2 million during the three
months ended March 31, 1998 and was eliminated during the three months
ended March 31, 1999.
. Commercial, state and local government revenue decreased by 59%, from
$1.4 million during the three months ended March 31, 1998 to $569,000
during the three months ended March 31, 1999. This decrease is primarily
attributable to the loss of a contract with Montgomery County, Maryland,
and the closing of Pulsar's Atlanta sales office.
. Revenue from the General Services Administration, or GSA, schedule
contract and National Institutes of Health, or NIH, schedule contract
declined 25% from $12.0 million during the three months ended March 31,
1998 to $9.0 million during the three months ended March 31, 1999. This
decrease is primarily attributable to the reallocation of government
budget dollars from hardware and software procurements towards resolving
year 2000 issues.
Service revenue. Service revenue declined by 69%, from $1.2 million during
the three months ended March 31, 1998 to $369,000 during the three months ended
March 31, 1999. This decrease is primarily attributable to a reduction in
service revenue from expiring Section 8(a) contracts with the U.S. Department
of Education and the Naval Research Lab Contract.
Total gross margin. Pulsar's total gross margin increased 2%, from $546,000
during the three months ended March 31, 1998 to $559,000 during the three
months ended March 31, 1999.
Product gross margin. Pulsar's product gross margin increased to 4% during
the three months ended March 31, 1999. The increase in gross product margin was
primarily attributable to not filing for rebate income during the three months
ended March 31, 1998. Additional factors attributable to increased gross
product margins include a reduction in FSI sales, which relate to lower margin
product sales, and Pulsar's successful bidding for higher margin product
contracts, partially offset by a $125,000 write-off of expired rebates
receivable.
Service gross margin. Service gross margin increased from 41% during the
three months ended March 31, 1998 to 58% during the three months ended March
31, 1999. This increase is primarily attributable to Pulsar obtaining higher
margin contract work with Prince George's County and the loss of lower margin
contract work with the U.S. Department of Education and the Naval Research Lab
contract.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 16% from $2.3 million during the three months
ended March 31, 1998 to $1.9 million during the three months ended March 31,
1999. The decrease was primarily attributable to a reduction in administrative
and sales staffing and rent expense partially offset by one-time legal and
accounting fees of approximately $450,000 associated with the acquisition of
Pulsar by Litronic. Bad
33
<PAGE>
debt expense decreased from $75,000 during the three months ended March 31,
1998 to $40,000 during the three months ended March 31, 1999. The bad debt
expense for the three month periods ended March 31, 1998 and 1999 was related
to a reserve for the allowance for doubtful accounts against accounts
receivable.
Interest expense. Interest expense decreased 32%, from $706,000 during the
three months ended March 31, 1998 to $478,000 during the three months ended
March 31, 1999. This is primarily attributable to a significant decrease in
Pulsar's average daily borrowings during the three months ended March 31, 1998
compared to the three months ended March 31, 1999.
Interest income. Interest income decreased 90% from $200,000 during the
three months ended March 31, 1998 to $20,000 during the three months ended
March 31, 1999. The decrease is primarily attributable to the decrease in
interest recognized on the cash surrender value of life insurance policies.
Results of operations--comparison of years ended December 31, 1996, 1997 and
1998
Litronic
Total revenue. Total revenue increased 8% from $9.4 million during the year
ended December 31, 1996 to $10.2 million during the year ended December 31,
1997 and decreased 35% from 1997 to $6.7 million during the year ended December
31, 1998. The increase from 1996 to 1997 was primarily attributable to
increased sales of the ARGUS 300 products to the U.S. Army Corps of Engineers.
The decrease from 1997 to 1998 was primarily attributable to the decreased
sales of the ARGUS 300 products, as described below.
During the year ended December 31, 1996, Litronic derived 39%, 29% and 18%
of its revenue from sales to Lockheed Martin Corporation, U.S. Army Corps of
Engineers and the National Security Agency. During the year ended December 31,
1997, Litronic derived 45%, 20%, and 19% of its revenue from sales to U.S. Army
Corps of Engineers, Lockheed Martin Corporation and the National Security
Agency. During the year ended December 31, 1998, Litronic derived 44%, 20% and
17% of its revenue from sales to Lockheed Martin Corporation, the National
Security Agency and the U.S. Army Corps of Engineers. Sales to federal
government agencies accounted for approximately 84% and 81% of Litronic's sales
during the years ended December 31, 1997 and 1998.
Product revenue. Product revenue increased 10% from $7.9 million in the year
ended December 31, 1996 to $8.6 million in the year ended December 31, 1997 and
decreased 40% from 1997 to $5.2 million in the year ended December 31, 1998.
The increase from 1996 to 1997 was primarily attributable to increased sales of
our ARGUS 300 products to the U.S. Army Corps of Engineers. The decrease from
1997 to 1998 is primarily attributable to reduced sales of our ARGUS 300
products to the U.S. Army Corps of Engineers as a result of the substantial
completion of the CEFMS contract. The CEFMS contract with the U.S. Army Corps
of Engineers expired September 30, 1998. The Defense Messaging System contract
expires in November 1999, but it may be renewed by Lockheed Martin for up to
four one-year periods.
License and service revenue. License and service revenue was $1.5 million
during the years ended December 31, 1996 and 1997 and declined from 1997 by 32%
to $1.0 million for the year ended December 31, 1998. The decline from 1997 to
1998 was attributable primarily to reduced service revenue from the National
Security Agency as a result of its determination that it will no longer pay for
Litronic-provided support services for the Defense Messaging System and the
subsequent decline in support requests from users of Litronic's support
services.
34
<PAGE>
Research and development revenue. Research and development revenue for the
year ended December 31, 1998 of $398,000 represents amounts earned under a
contract with the National Security Agency under which we are designing a
microprocessor meeting minimum specifications established by the National
Security Agency. We have contracted with others to perform aspects of the
project. All related project costs are expensed as research and development as
incurred. No other funds received for research and development projects were
recorded during any of the periods presented. Regardless of the results of the
development efforts the amounts received from the National Security Agency are
nonrefundable. The related research and development costs are not separately
identifiable. Therefore, the corresponding costs of the entire development
effort are included in research and development expenses.
Product gross margin. Product gross margin increased as a percentage of net
product revenue from 48% during the year ended December 31, 1996 to 63% during
the year ended December 31, 1997 and decreased to 46% during the year ended
December 31, 1998. The increase from 1996 to 1997 resulted primarily from
increased sales of ARGUS data encryption products to the U.S. Army Corps of
Engineers. The decrease from 1997 to 1998 is primarily attributable to reduced
sales under the CEFMS contract and sales of low margin pass-through products to
the National Security Agency.
License and service gross margin. License and service gross margin decreased
as a percentage of its revenue from 62% during the year ended December 31, 1996
to 58% during the year ended December 31, 1997 and decreased from 1997 to 9%
during the year ended December 31, 1998. The decrease from 1996 to 1997 was due
to additional head count and higher per employee costs. The decrease from 1997
to 1998 resulted primarily from higher compensation costs associated with the
reduction of support services revenue under the Defense Messaging System
contract.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 70% from $2.1 million during the year ended
December 31, 1996 to $3.5 million during the year ended December 31, 1997 and
decreased 25% from 1997 to $2.6 million during the year ended December 31,
1998. As a percentage of revenue, selling, general and administrative expenses
increased from 22% during the year ended December 31, 1996 to 34% during the
year ended December 31, 1997 and increased from 1997 to 40% during the year
ended December 31, 1998. Selling, general and administrative expenses during
1997 were higher due to nonrecurring bonuses of $1.0 million paid to
shareholder employees following the sale of the Intercon division. In addition,
selling, general and administrative expenses increased as a percentage of
revenue due to increased staffing to support the anticipated expansion of
Litronic's business.
Research and development expenses. Research and development expenses
increased 62% from $725,000 during the year ended December 31, 1996 to $1.2
million during the year ended December 31, 1997 and increased 14% from 1997 to
$1.3 million during the year ended December 31, 1998. The increases from 1996
to 1998 were primarily attributable to increased costs associated with
increased new product development, including expenses associated with the
development efforts of the Forte microprocessor, which we are designing in
conjunction with Atmel Corporation to be embedded in our Forte PKIcard. As a
percentage of revenue, research and development expenses increased from 8%
during the year ended December 31, 1996 to 12% during the year ended December
31, 1997 and increased from 1997 to 20% during the year ended December 31,
1998. These increases reflected our continued investment in research and
development of future products and services coupled with the reduction in
revenue in 1998 described above.
Interest expense, net. Interest expense, net, increased by 121% from $19,000
during the year ended December 31, 1996 to $42,000 during the year ended
December 31, 1997 and increased almost tenfold from 1997 to $418,000 during the
year ended December 31, 1998. The increases in interest expense from 1996 to
1998 were attributable to increased levels of borrowings required for
operations.
35
<PAGE>
Income taxes. The provision for state income taxes was $29,000 and $22,000
for the years ended December 31, 1996 and 1997. For the year ended December 31,
1998, Litronic had a benefit of $95,000 as a result of losses from continuing
operations before income taxes of $1.5 million.
Backlog. At December 31, 1998, Litronic had total backlog of $717,000,
including $109,000 attributable to Lockheed Martin Corporation and $596,000
attributable to the National Security Agency. In the case of the $596,000
attributable to the National Security Agency, backlog represents funding of
future research and development. At December 31, 1997, we had total backlog of
$1.1 million, including $466,000 attributable to Lockheed Martin Corporation
and $578,000 attributable to the National Security Agency.
Pulsar
Total revenue. Total revenue decreased 9%, from $166.0 million during the
year ended December 31, 1996 to $151.5 million during the year ended December
31, 1997 and decreased 47% from 1997 to $80.5 million during the year ended
December 31, 1998.
During the years ended December 31, 1997 and 1998, Pulsar derived 11% and
22% of its revenue from sales to the U.S. Immigration and Naturalization
Service. Total revenue to federal government agencies decreased 8% from $139.1
million during the year ended December 31, 1996 to $128.1 million for the year
ended December 31, 1997 and declined 41% from 1997 to $75.7 million during the
year ended December 31, 1998. The decrease was attributable primarily to a
decrease in Pulsar's sales to the U.S. government under its Section 8(a)
contracts, partially offset by an increase in GSA schedule revenue and NIH
contract revenue.
Product revenue. Product revenue declined 8%, from $155.7 million during the
year ended December 31, 1996 to $142.7 million during the year ended December
31, 1997, and declined 46% from 1997 to $77.2 million during the year ended
December 31, 1998. This decrease was primarily attributable to the following
factors:
. In 1997, Pulsar made a strategic decision to eliminate its high volume,
low margin FSI program activities, which accounted for 23% of its
revenue during 1996, 24% of its revenue during 1997 and 4% of its
revenue during 1998. Sales under the FSI program were phased out during
this period due to the diminishing margins produced by these sales. FSI
revenue decreased 4% from $38.1 million in the year ended December 31,
1996 to $36.7 million in the year ended December 31, 1997 and decreased
92% from 1997 to $3.2 million in the year ended December 31, 1998.
. Pulsar voluntarily withdrew from the Section 8(a) program in June 1997
in anticipation of its scheduled graduation from the program in November
1997. Section 8(a) contract revenue decreased by 71% from $50.1 million
during the year ended December 31, 1996 to $14.3 million during the year
ended December 31, 1997 and decreased 78% to $3.1 million during the
year ended December 31, 1998.
. Commercial, state and local government revenue decreased by 8% from
$24.8 million during the year ended December 31, 1996 to $22.9 million
during the year ended December 31, 1997, primarily due to a sales staff
focus on FSI program revenues, and decreased 83% to $3.9 million during
the year ended December 31, 1998 primarily due to the loss of a contract
with Montgomery County, Maryland and the closing of Pulsar's Atlanta
sales office.
. The reductions in revenue were partially offset by an increase in GSA
schedule revenue commencing in 1996 and NIH revenue commencing in 1998.
This revenue increased 61%, from $42.7 million during the year ended
December 31, 1996 to $68.8 million during the
36
<PAGE>
year ended December 31, 1997, and declined 3% from 1997 to $67.0 million
during the year ended December 31, 1998. The overall increase in GSA and
NIH contract revenue was primarily due to Pulsar's shift in sales focus
in response to the Federal Streamline Act of 1996, which encourages all
agencies to use the GSA or the NIH vehicle to procure products and
services in support of information technology requirements instead of
traditional time-restrictive contracting methods. The decrease in GSA
revenue from 1997 to 1998 was due in part to the government's
reallocation of budget dollars from hardware and software procurements
toward resolving year 2000 issues.
Service revenue. Service revenue declined by 14%, from $10.3 million during
the year ended December 31, 1996 to $8.8 million during the year ended
December 31, 1997 and declined 62% from 1997 to $3.4 million during the year
ended December 31, 1998. The decrease from 1996 to 1997 was attributable
primarily to the completion of a contract with Samsung Electronics. The
decrease from 1997 to 1998 was attributable primarily to a reduction in
service revenue from expiring Section 8(a) contracts with the U.S. Department
of Education and the Naval Research Lab contract.
Total gross margin. Pulsar's gross margin decreased as a percentage of
revenue from 10% during the year ended December 31, 1996 to 6% during the year
ended December 31, 1997 and increased from 1997 to 7% during the year ended
December 31, 1998. The gross margin declined from $16.6 million for the year
ended December 31, 1996 to $9.3 million for the year ended December 31, 1997
and declined from 1997 to $5.6 million for the year ended December 31, 1998.
The overall decrease from 1996 to 1997 was attributable primarily to the
reduction in total revenue combined with a decrease in gross margin
percentage. The decrease from 1997 to 1998 was attributable to a reduction in
total revenue and the $1.6 million write-off of expired rebates receivable
discussed below partially offset by a reduction on the write-off of obsolete
inventory.
Product gross margin. Product gross margin declined as a percentage of
revenue from 7% during the year ended December 31, 1996 to 3% during the year
ended December 31, 1997 and increased from 1997 to 5% during the year ended
December 31, 1998. The decrease in product margin from 1996 to 1997 was
attributable to industry competition and write-off of obsolete inventory.
Consistent with Pulsar's business plan, the increase from 1997 to 1998 was
attributable primarily to reduced FSI sales, which are lower margin product,
and Pulsar's successful bidding for higher margin product contracts, partially
offset by the write-off of obsolete inventory and the write-off of expired
rebates receivable.
Pulsar wrote off approximately $1.6 million of rebate receivables against
cost of product sales during the year ended December 31, 1998. Approximately
$1.3 million of the rebate receivables was written off due to inaccurate or
incomplete filings. Although these rebates were resubmitted after their
initial incomplete or inaccurate filings, the expiration period for these
rebates had expired at the time of resubmission, resulting in the rebates
becoming uncollectible. With respect to the other $300,000 of rebate
receivables, rebates for one program were filed and two checks aggregating
approximately $300,000 were received by Pulsar from the original equipment
manufacturers, but the checks were never deposited into Pulsar's account, and
therefore became stale.
Pulsar has subsequently revised its collection procedures to provide that
all rebate checks are recorded when received and monitored pending their
deposit into Pulsar's account. If a rebate has not been collected in a timely
manner Pulsar contacts the original equipment manufacturer to resolve any
outstanding matters. This procedure is designed to ensure proper collection
and timely deposits of checks.
37
<PAGE>
In addition, Pulsar has initiated new rebate procedures to ensure that
accurate rebates are filed on a timely basis. These procedures include a
monthly tickler system showing all current rebate programs and the status of
outstanding rebates receivable. Pulsar has also implemented a new system which
automatically summarizes the rebates available based on products sold in the
current month. This summary is reviewed by personnel in the contracts
department on a product-by-product basis before the preparation of rebate
submissions. Pulsar's contracts department files the rebates, then follows up
to ensure that all rebates are collected, and immediately resolves any
discrepancies with the original equipment manufacturer sponsoring the rebate
programs. Pulsar has also reassigned responsibilities to new personnel and
instituted new review procedures including increased oversight by the vice
president of finance.
Litronic will continue to utilize the newly adopted procedures developed by
Pulsar to ensure that rebate receivables are filed accurately and collected on
a timely basis.
Pulsar was unable to separately quantify the amount of expense for
obsolescence, book to physical inventory adjustments or shrinkage for the
years ended December 31, 1996 and 1997. This was due to Pulsar's former
practice of making one year-end reconciling adjustment to the general ledger
to adjust inventory for obsolescence and shrinkage, and differences between
the physical inventory count and the general ledger inventory balance. The
total year-end adjustment was $495,000 for 1996 and $2.9 million for 1997.
Management believes that the amount of obsolete inventory during these periods
was material. These adjustments were recorded as an increase to cost of sales
during the years ended December 31, 1996 and 1997, thus decreasing gross
margin. Pulsar's historical year-end reconciliation process was used to adjust
the inventory to the physical count at each year-end.
Since January 1, 1998, Pulsar has implemented a monthly physical inventory
reconciliation and a year-end reconciliation procedure to separately account
for obsolete inventory and differences in the physical inventory and the
general ledger inventory balance. The charge for obsolete inventory during the
year ended December 31, 1998 was $344,000.
Service gross margin. Service gross margins remained unchanged at 53%
during the years ended December 31, 1996 and 1997 and increased slightly from
1997 to 54% during the year ended December 31, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 27% from $13.5 million during the year ended
December 31, 1996 to $17.2 million during the year ended December 31, 1997 and
decreased 32% from 1997 to $11.7 million during the year ended December 31,
1998. The increase from 1996 to 1997 was attributable primarily to bad debt
expense associated with accounts receivable and notes receivable. The decrease
from 1997 to 1998 reflects a reduction in the total amount of bad debt expense
and a reduction in administrative and sales staffing. Selling, general and
administrative expenses increased as a percentage of revenue from 8% during
the year ended December 31, 1996 to 11% during the year ended December 31,
1997 and increased from 1997 to 14% during the year ended December 31, 1998.
Bad debt expense and measures designed to reduce bad debts. Bad debt write-
offs increased from $403,000 during the year ended December 31, 1996 to $4.6
million during the year ended December 31, 1997 and decreased from 1997 to
$1.8 million during the year ended December 31, 1998. Bad debt expense in 1997
was primarily attributable to extending credit to commercial clients who did
not meet their obligations in the amount of $3.9 million and commercial loans
outside of the normal course of business that were deemed uncollectible in the
amount of $702,000. Bad debt
38
<PAGE>
expense in 1998 was incurred from commercial clients who did not meet their
obligations. Additionally, Pulsar has implemented procedures to reduce the
exposure to commercial bad debts, including:
. performing thorough credit reviews on all new and existing non-
government customers, including verifying references and analyzing
customer's Dun and Bradstreet reports before extending credit; and
. changing its customer profile by significantly reducing FSI reseller
clients from the federal government to Fortune 500 clients, thus
reducing credit risk.
Notes receivable--related parties. Pulsar had previously assigned two notes
receivable from third parties to a related party in the aggregate principal
amount of $623,000. These notes receivable were assigned back to Pulsar in
December 1997. The notes and accrued interest were determined to be
uncollectible after pursuing legal action to collect and written off as bad
debt expense in the year ended December 31, 1997.
The provision for notes receivable-related parties of $655,000 for the year
ended December 31, 1998 relates to a note due from a company owned by a
relative of the shareholders of Pulsar. Under the terms of the note, payment on
the note is not due until commercial real estate owned by the related party is
sold. The related party has advised us that it does not intend to sell the
property, and the value of the property is not in excess of the mortgage. In
addition, any proceeds derived from the sale of the property would be applied
against the mortgage before repayment of the note. During 1998 the related
party experienced financial difficulties as a result of its commercial real
estate operations. Based upon the related party's cash flows and decline in its
financial condition, Pulsar determined that the note had become impaired. The
amount of the impairment was determined in accordance with Statement of
Financial Accounting Standards No. 114, and the note was fully reserved as of
December 31, 1998.
Cost cutting measures designed to reduce selling, general and administrative
expenses. In an effort to reduce selling, general and administrative expenses
in future periods, Pulsar has taken significant cost cutting measures,
including:
. automating administrative job functions through business process
reengineering and other reductions, thus reducing head count by 2
executives and 30 administrative personnel compensated on an hourly
basis from January 30, 1998 to May 1, 1999; and
. relocating to less expensive office space beginning October 1, 1998,
thus decreasing monthly rent expense from $46,000 to $11,000.
Expenses paid during the year ended December 31, 1998 to achieve these cost
reductions included $24,000 in severance fees and $750,000 in lease termination
fees. There were no related expenses accrued for the year ended December 31,
1998 or the three months ended March 31, 1999 or related expenses paid during
the three months ended March 31, 1999.
Interest expense. Interest expense increased by 2%, from $3.6 million during
the year ended December 31, 1996 to $3.6 million during the year ended December
31, 1997, and decreased by 42% from 1997 to $2.1 million during the year ended
December 31, 1998. Pulsar's average daily borrowings decreased during 1996, but
additional interest expense was recognized due to a new agreement Pulsar
entered into with its creditor, IBM Global. Interest expense decreased in 1998
due to a significant decrease in borrowings.
Interest income. Interest income decreased by 28%, from $639,000 during the
year ended December 31, 1996 to $457,000 during the year ended December 31,
1997 and decreased by 87% to $61,000 during the year ended December 31, 1998.
These decreased were attributable primarily to a
39
<PAGE>
reduction in the outstanding notes receivable balances. Also, during 1998,
Pulsar did not recognize interest income on the related party notes receivable.
Liquidity and capital resources
On a pro forma combined, as adjusted, basis, we had working capital of $13.5
million as of March 31, 1999.
We have entered into an agreement with Fidelity Funding permitting us to
borrow under a new $20.0 million secured revolving line of credit facility
commencing upon the closing of this offering. The agreement provides for:
. a three-year term, subject to one-year renewals at the lender's option;
. an annual interest rate of prime plus .625%;
. a pledge of substantially all of our personal and real property as
collateral; and
. a cap on our borrowings equal to 85% of our eligible accounts receivable
plus the lesser of (a) 50% of the value of our eligible on-hand
inventory or (b) $1.0 million.
We believe that the net proceeds of this offering, together with
availability under our new $20.0 million revolving line of credit and existing
cash and cash equivalents, will be sufficient to satisfy our contemplated cash
requirements for at least 12 months following the closing of this offering,
including planned capital expenditures of approximately $1.0 million and an
anticipated increase in rent expense for our California operation of $400,000
per year following our anticipated relocation of our California headquarters.
We could be required to seek additional financing if:
. our plans change due to changes in market conditions, competitive
factors, progress of our research and development efforts or new
opportunities that may become available in the future;
. our assumptions change or prove to be inaccurate; or
. the net proceeds of this offering or our cash flows prove to be
insufficient to finance our growth strategy.
Litronic
Historically, Litronic's cash requirements have been financed through a
combination of cash flow from operations, except in the year ended December 31,
1998, bank financing and loans from its principal shareholders and affiliates.
Some of Litronic's borrowings contain covenants and restrictions, including
maintenance of minimum tangible net worth and working capital, and they
prohibit the payment of dividends. Litronic was in compliance with or had
received waivers for these covenants as of December 31, 1998 and March 31,
1999.
During the three months ended March 31, 1999, cash used in operations for
Litronic was $866,000, primarily due to a net loss of $973,000 and an increase
in other current assets of $599,000. These were partially offset by a decrease
in accounts receivable of $88,000 due to improved collections in 1999 and an
increase in accounts payable of $455,000.
During the three months ended March 31, 1999, cash provided by financing
activities was $594,000, consisting primarily of borrowings of $1.1 million
under the revolving note payable to a bank and $750,000 under the long-term
notes payable, partially offset by repayments of $1.3 million under the
revolving note payable to a bank.
Litronic's capital expenditures, including computer equipment, test
equipment and furniture and fixtures, were $69,000 during the three months
ended March 31, 1999. Litronic's capital expenditures were funded through cash
generated from operations and through its secured revolving credit line and
borrowing from its principal shareholders.
40
<PAGE>
As of June 3, 1999, Litronic had an aggregate of $6.6 million outstanding
under various promissory notes to BYL Bank Group at a fixed annual interest
rate of 6.6%. These notes are due upon the earlier of July 31, 2000 or a change
of control of Litronic Industries and are personally guaranteed by Kris Shah
and secured by personal assets pledged by Mr. Shah. We intend to use proceeds
from this offering to repay the indebtedness under these notes.
In addition, we intend to use proceeds from this offering to repay in full
the outstanding balance under Litronic's $2.5 million line of credit facility
with Fidelity Funding Inc. in the approximate amount of $450,000. This facility
expires in February 2000 and is personally guaranteed by Mr. Shah.
Pulsar
Pulsar's capital requirements have been and will continue to be significant.
To date, its cash requirements have exceeded its cash flow from operations.
Pulsar historically has satisfied cash requirements through borrowings.
Pulsar's financial statements include an explanatory paragraph in the
independent auditors' report that states that Pulsar's losses from operations,
violation of debt covenants and net capital deficiency raise substantial doubt
about Pulsar's ability to continue as a going concern. The debt covenants
violated by Pulsar were contained in its inventory and working capital
financing agreement with IBM Global and in a series of subsequent forbearance
agreements. These covenants required Pulsar to maintain at various times
financial ratios of annualized revenue to working capital, net profit after tax
to revenue and total liabilities to tangible net worth. Pulsar has received a
forbearance from IBM Global through the closing of this offering and expects to
repay IBM Global in full following the closing of this offering.
Total cash provided for the three months ended March 31, 1999 was $89,000.
Pulsar's cash provided from operations for the three months ended March 31,
1999 was $2.9 million. This primarily resulted from collections of accounts
receivable of $4.2 million, and an increase in accrued liabilities of $551,000,
offset by a net loss of $1.8 million. The increase in accrued liabilities was
primarily attributable to accrued professional fees associated with the
acquisition of Pulsar by Litronic. Cash used in financing activities resulted
primarily from repayments of our line of credit for $2.2 million and repayments
of vendor notes payable for $587,000.
Total cash used for the year ended December 31, 1998 was $1.9 million.
Pulsar's cash provided from operations for the year ended December 31, 1998,
was $18.4 million. This primarily resulted from collections of accounts
receivable of $17.7 million, reduction of inventory of $1.6 million and an
increase in accounts payable of $2.6 million, offset by a net loss of $8.1
million, including non-cash provision for doubtful accounts and notes
receivable of $3.4 million. Inventory decreased as a result of a change in
business practices from carrying inventory to anticipate customer requests to a
just-in-time method of inventory.
Cash used in financing activities for the year ended December 31, 1998, was
$21.4 million, resulting primarily from $18.7 million in payments made to
decrease indebtedness outstanding under its financing arrangement with IBM
Global, a portion of which was funded by borrowings of $1.5 million against the
cash surrender value of life insurance policies.
Pulsar's capital expenditures, including computer equipment, warehouse
equipment, and furniture and fixtures, were $58,000 for the year ended December
31, 1998. Proceeds from loans from cash surrender value of life insurance net
of premium payments and increase in cash surrender value of policy were $1.2
million.
During the year ended December 31, 1998 and the three months ended March 31,
1999, Pulsar repaid a total of approximately $1.0 million outstanding under its
term loan from Wilmington Trust
41
<PAGE>
Company which bears interest at the prime rate in effect from time to time and
matures in December 2002. On May 5, 1999, this loan was reduced by an
additional $543,000, leaving a balance due of approximately $3.5 million. This
debt is personally guaranteed by William W. Davis, Sr. and Lillian A. Davis and
is secured by property pledged by a family member of Mr. Davis. We intend to
use proceeds from this offering to repay the balance of this indebtedness in
full.
During the year ended December 31, 1998 and the three months ended March 31,
1999, Pulsar also converted $5.9 million in accounts payable to notes payable
including $5.1 million due to negotiated agreements with vendors and $785,000
as a result of lawsuits settled with structured payments. As of March 31, 1999,
$3.0 million of these notes payable remained outstanding. We intend to use
proceeds from this offering to repay this balance.
Following is information regarding lawsuits filed against Pulsar other than
the lawsuits filed by G2 Resources, Inc., Rudolph Menna and A&T Marketing,
Inc., which are described on page 68. During the year ended December 31, 1998,
two lawsuits were filed against Pulsar by trade vendors claiming approximately
$739,000, plus interest, attorney's fees and costs. These lawsuits were settled
as structured payments in the aggregate amount of approximately $785,000 and
the obligations were classified as notes payable. Payments applied against
these notes payable during the year ended December 31, 1998 totalled
approximately $315,000, which included approximately $15,000 of interest
expense. During the first quarter ended March 31, 1999, nine lawsuits were
filed against Pulsar by trade vendors and a local government agency claiming
approximately $875,000, plus interest, attorney's fees and costs. As of
March 31, 1999, these lawsuits were settled for an aggregate amount of
approximately $929,000, including approximately $60,000 of interest, attorney's
fees and costs, and the obligations were classified as accounts payable.
Payments applied against these accounts payable during the quarter ended March
31, 1999 totalled approximately $41,000, which included approximately $2,000 of
interest expense. During the quarter ended March 31, 1999, payments applied
against the notes payable relating to the two lawsuits filed and settled in
1998 totalled approximately $278,000, which included approximately $8,000 of
interest expense. From March 31, 1999, to June 3, 1999, four other lawsuits
were filed against Pulsar by trade vendors claiming approximately $215,000,
plus interest, attorney's fees and costs. One of these lawsuits has been
settled for approximately $134,000. Lawsuits comprised of claims totaling
$82,000 remain unsettled. As of June 3, 1999, Pulsar owes approximately
$947,000 on the claims that have been settled and are classified as notes
payable or accounts payable, due during 1999. We have allocated $1.1 million of
the net proceeds of this offering to pay the amounts due under these
settlements as well as anticipated amounts to pay the as-yet-unsettled claims.
Additionally, Pulsar has approximately $2.9 million of accounts payable
balances which are more than 90 days overdue as of June 3, 1999. We expect to
use cash from operations to fund these obligations to the extent we are not
able to negotiate extended payment arrangements. If these funds prove
insufficient, we may use a portion of the proceeds from this offering allocated
to working capital to satisfy these obligations.
Pulsar funded its operations during the year ended December 31, 1998 through
its financing agreement with IBM Global. Under this agreement, Pulsar purchases
hardware and software from authorized suppliers and finances the purchases
through IBM Global. The agreement provided for an initial credit line up to $18
million, which has been increased and decreased over time through amendments to
the forbearance agreement, based on Pulsar's hardware and software procurement
requirements financed through the line of credit, and as a result of defaults
that have occurred related to the forbearance agreements. As of March 31, 1999,
the maximum amount available under the line of credit was $9.0 million, which
was reduced to $8.0 million as of April 30, 1999. As of March 31, 1999, $7.2
million was outstanding under the line. The line of credit allows Pulsar to
finance up to 85% of its eligible accounts receivable and 100% of the value of
its on-hand inventory. The credit
42
<PAGE>
line is secured by substantially all assets of Pulsar and is personally
guaranteed by, and secured by $1.4 million of the personal assets of, Mr. Davis
and Ms. Davis. We intend to use $1.4 million of the proceeds from this offering
to reduce amounts outstanding under this credit line.
IBM Global has agreed to forbear Pulsar's violations of financial covenants
in the IBM Global financing agreement in exchange for Pulsar's agreement to pay
to IBM Global, on or before October 1999, either (a) warrants to purchase for a
nominal amount a fully diluted 4% ownership interest in Pulsar or (b) the
lesser of:
. $650,000,
. 4% of the sale price upon the sale of all or substantially all of
Pulsar's assets, or
. a pro rata share of $650,000 upon the sale of less than substantially
all of Pulsar's assets.
We intend to satisfy this obligation to IBM Global by paying $650,000 to it
upon the closing of this offering.
Pro forma information and future trends
Following this offering, we intend to roll out our enterprise-wide data
security products to Pulsar's significant existing client base. We believe that
Pulsar's custom-designed secure personal computers, or PCs, will provide us
with another type of data security product offering, broadening the scope of
our offerings and enabling us to provide our customers with a comprehensive
data security solution. Our strategy also involves continuing Pulsar's recent
shift in product reselling focus to higher margin products, expanding Pulsar's
professional service offerings and increasing sales of Pulsar's products and
professional services to commercial customers and state and local governments.
We also intend to leverage Pulsar's direct sales force, distribution channels
and partners to expand our marketing of our Internet data security products.
Revenue
During the year ended December 31, 1998 and three months ended March 31,
1999, sales of Internet data security products, including NetSign, Pro File
Manager and CryptOS, accounted for 6% and 8% of our revenue on a pro forma
combined basis.
We are currently experiencing increased demand for our Internet data
security products, including NetSign, ProFile Manager and CryptOS, from
commercial customers. Our recently released Internet-related products such as
NetSign, NetSign Pro, CipherServer, and developer toolkits such as CryptOS SDK,
have also experienced favorable market acceptance. We expect to continue to
experience significant increases in sales of these products as a result of the
expected continued growth in electronic commerce and communications over the
Internet and our plan to roll out our data security products to Pulsar's
existing and significant client base.
During the year ended December 31, 1998 and three months ended March 31,
1999, on a pro forma combined basis, product reselling accounted for 89% and
84% of our revenue and license and service revenue accounted for 5% of our
revenue in both periods. Research and development revenue accounted for .5 %
and 3% of our revenue on a pro forma combined basis for the year ended December
31, 1998 and the three months ended March 31, 1999. Research and development
revenue represents amounts earned under a contract with the National Security
Agency under which we are designing a microprocessor meeting minimim
specifications established by the National Security Agency. As we expand our
professional service offerings and grow our sales of Internet data security
products, we expect license and service revenue to increase as a percentage of
revenue and product reselling to account for a decreasing portion of our
revenue.
43
<PAGE>
On a pro forma combined basis, only one of our customers, the U.S.
Immigration and Naturalization Service, has accounted for 10% or more of our
revenue, accounting for 21% of combined revenue during the year ended December
31, 1998 and 16% of combined revenue during the three months ended March 31,
1999. Sales to U.S. government agencies accounted for approximately 93% of our
pro forma combined revenue for the year ended December 31, 1998 and 86% during
the three months ended March 31, 1999.
Gross margin
During the year ended December 31, 1998 and three months ended March 31,
1999, Litronic's data security products had a gross margin of 46% and 43% and
Pulsar's product reselling activities had a gross margin of 5% and 4%. Pulsar
recently shifted its product reselling focus toward higher margin computer and
network security products, including intrusion detection software and
firewalls, which are custom designed configurations installed into a network to
prevent unauthorized access from outside the network. We intend to continue to
focus our product reselling efforts toward these products. As a result, we
expect product reselling gross margin to increase as a percentage of
corresponding revenue. Our license and service revenue has a relatively high
gross margin, with a gross margin of 43% for the year ended December 31, 1998
and 44% for the three months ended March 31, 1999 on a pro forma combined
basis. Because we expect our higher gross margin sources of revenue to increase
as a percentage of revenue and our gross margin from product reselling to
increase, we expect our gross margin to increase as a percentage of total
revenue.
Cost cutting measures
Pulsar has taken several cost cutting measures since the beginning of 1998
which have significantly reduced the expenses associated with selling, general
and administrative activities, including an overall reduction of staff from 75
persons at December 31, 1997 to 44 persons at April 1, 1999, enhanced credit
procedures and reduced rent expense. In addition, as a combined entity, we
expect to consolidate Litronic's Washington, D.C. area offices into Pulsar's
offices in Lanham, Maryland.
Focused marketing efforts
We have recently begun to focus our marketing efforts on commercial
customers. The commercial markets for PKI security products are expected to be
intensely competitive. In addition, as we intensify our focus on the commercial
markets and expand the marketing of our Internet data security products, we
anticipate increasing expenditures for sales and marketing, particularly
expenses associated with
.opening additional marketing channel support offices;
.adding commercial sales personnel to focus on sales to commercial markets;
and
.continually introducing and refining products in response to market
demands.
Our sales and marketing expenses are generally incurred in advance of
associated revenue and we expect these expenses to increase both as a
percentage of revenue as well as in amount. These measures could adversely
affect our operating income.
As a result of the cost cutting measures and focused marketing efforts
described above we expect a net reduction in selling, general and
administrative expenses.
Research and development
In an effort to increase our research and development activities, we have
allocated $5.0 million of the net proceeds of this offering to research and
development activities for the next 12 months.
44
<PAGE>
We expect expenses related to research and development to increase
significantly as a consequence of our increased focus on these activities.
Intangible assets
The Pulsar acquisition will result in a significant increase in our
intangible assets. Approximately $33.4 million, or 56%, of our pro forma
combined, as adjusted, assets as of March 31, 1999, consisted of intangible
assets arising from the acquisition. This amount represents goodwill and other
intangibles, which will be amortized over 10- to 15-year periods and represents
the excess of the aggregate purchase price paid in connection with the
acquisition over the fair value of net assets acquired. The amount of goodwill
and other intangibles amortized in a particular period constitutes a non-cash
expense, which is not tax deductible, that reduces our net earnings or
increases our net loss.
Year 2000 issues
An issue affecting us and others is the inability of many computer systems
and applications to process the year 2000 date change, the date 9/9/99 and the
leap year 2000. Many currently installed computer systems and software
applications are coded to accept only two digit entries in the date code field.
These date code fields will need to accept entries to distinguish 21st century
dates from 20th century dates. The inability to recognize or properly treat the
year 2000 issue may cause Litronic's systems and applications to process
critical financial and operational information incorrectly.
We have established a committee to determine the extent to which we may be
vulnerable to the year 2000 issue. The committee is responsible for the ongoing
assessment, renovation of, testing, and certification of all business-critical
infrastructure systems and applications software. In the process of its
evaluation of the year 2000 issue, the committee has developed potential
business disruption scenarios and is developing a contingency plan, which we
anticipate will be completed by July 1999. The costs incurred to date related
to the year 2000 issue have related primarily to time spent by employees in
year 2000 compliance matters and have not been significant. We do not believe
future costs will be significant. The following is a description of how we have
categorized and are addressing the year 2000 issue.
Internal systems
We have evaluated our internal computer systems in an effort to determine
the actions, if any, necessary to make them year 2000 compliant. Our evaluation
has involved testing our systems to ensure that they are year 2000 compliant.
Based on its present review of our systems, the committee has determined that
we do not have a high risk of computer-related internal systems problems from
the year 2000 issue.
Embedded systems
We also recognize that there are risks with respect to embedded systems that
are not necessarily part of our information technology systems but contain
microprocessor chips which may not function properly with the change of date to
the year 2000. The majority of the embedded systems on which we rely in our
day-to-day operations are owned and managed by the lessors of the buildings in
which our offices are located, or by agents of these lessors. We have received
letters from our lessors and, as applicable, their agents indicating the year
2000 compliance of the embedded systems. Based upon these responses we do not
believe there are any year 2000 compliance issues with our embedded systems.
Because we believe that our information technology and embedded systems will
be substantially year 2000 compliant in advance of the year 2000 date change,
we have no contingency plan to address non-compliance. We expect that, as we
complete testing of information technology and
45
<PAGE>
embedded systems, we will develop contingency plans if we determine that any
business critical systems will not be year 2000 compliant.
Outside vendors and customers
Disruptions with respect to the computer systems of vendors or customers,
which are outside our control, could impair our ability to obtain services or
conduct business with our customers. Disruptions of our utilities or
telecommunications systems could have a material adverse effect upon our
financial condition and results of operations. We believe that no other
providers are material to our business. Disruptions of customers' computer
systems could interfere with customers' ability to make timely payments on
accounts, could disrupt our customers' ability to manage the installation
process of our products, which could adversely affect our ability to reach our
milestones, and thus to recognize revenue, and could disrupt other
administrative activities.
The committee has sent year 2000 issue questionnaires to our significant
vendors, suppliers and customers. Although the responses we have received do
not indicate any significant year 2000 issues, we do not have any assurances
that all of our significant vendors, suppliers and customers will take the
necessary steps to ensure that their respective systems will be protected
against the year 2000 issue or that even if such steps are taken, they will be
successful. As we continue to assess the risk of our significant vendors',
customers' and suppliers' systems, we will develop and implement, if necessary,
curative plans and contingency plans to address any year 2000 compliance
issues.
Our products
We have determined that our products, to the extent that underlying hardware
platforms, operating systems and databases will accommodate the year 2000 date
change, are year 2000 compliant and will accommodate the year 2000 date change.
We anticipate that virtually all of our customers and potential customers
will be required to evaluate their information technology systems with respect
to the year 2000 date change and that some of our customers and potential
customers may incur material costs in connection with this evaluation and any
necessary repairs and replacements. Customers and potential customers may be
required to devote material portions of their information technology budgets to
these evaluations, repairs and replacements, which could materially reduce
their other information technology purchases in 1999, including their purchases
of Litronic's products, particularly as the year 2000 date change draws closer.
We do not have any information as to the degree to which this issue will affect
our customers or potential customers.
Summary
There can be no assurance that any year 2000 issue-related precautions with
respect to our internal information technology systems, embedded systems or our
products will eliminate the numerous and varied risks associated with the year
2000 date change. Further, there is a risk that we will be adversely affected
by the year 2000 issue or related difficulties encountered by vendors or
customers or by any downturn in information technology purchases or in the
economy in general as the year 2000 date change draws nearer. Any of these
risks could adversely affect our business.
Management believes that the most likely worst case scenario related to the
year 2000 issues that we may experience would be either an inability to obtain
inventory components from suppliers or delays in receiving orders or payments
from customers due to year 2000 problems experienced by these third parties.
These events, if experienced, could have a material adverse effect on our
business, results of operations, financial condition and liquidity.
46
<PAGE>
Fluctuations in quarterly operating results
Our quarterly operating results may fluctuate significantly as result of a
variety of factors, many of which are outside our control. These factors
include:
. the length of our customer commitments;
. patterns of information technology spending by customers;
. the timing, size, mix and customer acceptance of our product and service
product offerings and those of our competitors;
. the timing and magnitude of required capital expenditures;
. the need to use outside contractors to complete some assignments; and
. general economic conditions.
In addition, the sales and implementation cycles associated with our product
sales and network design and implementation activities can, as a result, be
lengthy, potentially lasting from 45 to 90 days. Evaluating customers' data
security needs and designing and implementing custom networks typically
requires significant expenditure of time, capital and other resources.
Customers' purchasing decisions for our products and systems may be subject to
delay due to many factors not within our control, such as the significant
expense of many data security products and network systems, customers' internal
budgeting process, year 2000 concerns and the other procedures customers may
require for the approval of large purchases. Further, the implementation
process is subject to delays resulting from administrative concerns associated
with incorporating new technologies into existing networks, deployment of a new
network system and data migration to the new system.
As a result, comparisons of quarterly results may not be meaningful and
should not be relied upon, nor will they necessarily reflect on future
performance. Fluctuations in quarterly operating results may adversely affect
the trading price of our common stock if our operating results are below the
expectations of public market analysts and investors.
New accounting standards
In June 1998, the Financial Accounting Standards Board issued Statement 133,
Accounting for Derivative Instruments and Hedging Activities. The new statement
established accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for
internal use, and is effective for fiscal years beginning after December 15,
1998.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs, and requires these costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998.
In December 1998, the AICPA issued SOP 98-9. SOP 98-9 amends paragraphs of
SOP 97-2 to require recognition of revenue using the residual method under some
circumstances, and is effective for fiscal years beginning after March 15,
1999.
The adoption of these new standards is not expected to have a material
impact on our consolidated financial statements.
47
<PAGE>
INDUSTRY INFORMATION
Internet data security industry
The Internet data security market
Consumers, government agencies and corporations are increasingly relying
upon the Internet and Internet protocol-based networks to conduct electronic
commerce and communications. International Data Corporation estimates that the
number of Internet users will grow from 97 million in 1998 to 320 million in
2002, with electronic commerce growing from $32 billion to $426 billion over
the same period. The increasing proliferation of, and reliance upon, shared
electronic data has caused data security to become a paramount concern of
businesses, government, educational institutions and consumers.
Demand for information security products is forecast by Datamonitor, an
independent research firm, to increase from $1.6 billion in 1997 to almost $7
billion by 2001, an annual growth rate of 44%. In addition, Datamonitor
forecasts the Internet-security PKI segment to be the fastest growing segment
of this market, increasing from $75 million in 1997 to approximately $1.9
billion by 2001, an annual growth rate of 124%. The market for encryption
technology is estimated by Datamonitor to be the second fastest growing segment
of the market increasing from $168 million in 1997 to more than $1 billion in
2001.
We believe our data security products provide the solution for entities and
consumers seeking to provide protection for their proprietary data.
Increasing need for Internet data security
In addition to protecting against unauthorized access to proprietary
information, data security affects an enterprise's ability to conduct
electronic commerce. Companies such as Amazon.com, Inc., Bank of America, Cisco
Systems, Inc., Dell Computer Corp., eBay and E*Trade Group, Inc. have enjoyed
dramatic growth in their online customer base and revenue as consumers execute
an increasing number of transactions over the Internet. The Internet's ease of
use, 24-hour availability, speed of delivery, global reach and ability to
simplify product and vendor comparisons are fueling this growth. However,
consumer concerns about the trustworthiness and security of the Internet have
been one of the main impediments to even faster growth of electronic commerce
and other communications. Hacking tools, such as password guessing and address
spoofing programs, are freely available on the Internet and bulletin board
systems. Merchants and consumers need assurances that consumers making
electronic purchases are correctly identified and confirmed and that the
confidentiality of information such as credit card and bank account numbers are
maintained.
We believe that continued expansion of electronic commerce will require the
implementation of improved PKI security measures which will irrefutably verify
the identity of a party over the Internet and ensure that the information being
transmitted between that party and the other party is kept private. We also
believe the security required to fuel this continued expansion of electronic
commerce and communication will be provided through the continued advancement
in PKI mathematical formulas referred to as algorithms. Algorithms enable
digital document signing and encryption of proprietary data.
As enterprises place an increasing reliance on electronic commerce and
communication, the need to protect confidential data from unauthorized
intrusion has become paramount. According to the Computer Security Institute,
78% of respondents to its 1998 CSI/FBI Computer Crime and Security
48
<PAGE>
Survey reported that they are connected to the Internet, but 39% of the
respondents did not have a first line of defense against unauthorized intrusion
into their networks. Unauthorized use of computer systems within the previous
12 months was reported by 64% of these respondents, representing a 16% increase
from the prior year.
The consequences of unauthorized access, which is often undetected, can
range from theft of proprietary information or other assets to the alteration
or destruction of stored data. The Computer Security Institute survey reports
that approximately 72% of respondent companies experienced a financial loss
related to information security and disaster recovery in the past two years.
According to estimates by the Federal Bureau of Investigation, U.S. companies
experience estimated losses of $5 to $10 billion per year as a result of
unauthorized access to information and data. The Yankee Group, an independent
research firm, estimates that network security breaches cost corporations in
the U.S. over $5.0 billion per year in business losses, including productivity,
customer confidence and competitive advantage.
Requirements for end-to-end data security
Today's client operating systems and Internet protocol-based networks lack
basic security and key Internet security features such as data privacy and
integrity, identification, authentication and auditing.
End-to-end data security concerns can be addressed by a variety of means.
Traditionally, enterprises relied heavily on passwords to restrict access to
proprietary information and materials. However, because of the risk of loss or
theft, more advanced protective measures have been developed to include
combinations of passwords and tokens with message encryption and personal
identification devices. Regardless of the form of the data security device, the
level of security provided is evaluated based on a set of fundamental
principles, which include the following:
. Identification and authentication. Verifies the identity of the
authorized users to prevent unauthorized access to proprietary
information and resources.
. Confidentiality. Involves the encryption of data transmissions so that
only the intended recipient can access the information to ensure
privacy.
. Data integrity. Ensures that data is not compromised or manipulated.
. Non-repudiation. Prevents the sender of data transmissions from
disclaiming, or repudiating, authorship so that the sender cannot deny
the occurrence of the transaction.
. Audit control. Retraces information access and facilities use over a
particular time period at a systems administration level so an
enterprise can monitor and record authorized and unauthorized user
activity.
. Secured system administration. Maintains and controls corporate
intranets centrally through file encryption, password maintenance, audit
control, certificate and cryptographic key management and device
accessibility control.
The process of implementing Internet and Internet protocol-based network
solutions requires specialized skills lacking in most corporate information
technology departments. We provide the technology, products and services
necessary for most companies to implement or manage their data security
infrastructure.
Cryptographic technologies
Cryptography is the process of encoding and decoding electronic messages
using mathematical algorithms, or ciphers, to enable the confidential
transmission of electronic messages to authorized
49
<PAGE>
persons. Digital cryptography is performed using a combination of symmetric
ciphers and asymmetric ciphers to achieve each of the basic data security
elements of identification and authentication, confidentiality, integrity and
non-repudiation. Symmetric ciphers are commonly referred to as symmetric-key or
secret-key cryptography and asymmetric ciphers are commonly referred to as
asymmetric-key or public-key cryptography.
Both symmetric-key and asymmetric-key cryptography use an encrypting and a
decrypting key. The decrypting key is user's unique number that is input to the
mathematical algorithm, or the cipher, used to encrypt or decrypt the message.
In symmetric-key cryptography, the encrypting key and the decrypting key, which
is secret, are identical. Thus, to transmit a message, a secure key exchange
must be performed so that the key can be shared with the recipient of the
message. In asymmetric-key cryptography, the encrypting key, a public key, and
the decrypting key, a secret key, are different and thus the public key can be
distributed to authorized recipients without risk of security breach. Because
asymmetric cryptography allows for wide distribution of the encrypting key, it
permits secure communication among a large group of people without requiring
manual distribution of the key. Additionally, asymmetric-key cryptography
relies on the generation of digital certificates which can be used to provide
the user authentication, data integrity and non-repudiation elements of the
information security system. However, public-key cryptography requires the use
of extremely complicated ciphers, so that encryption of large messages is
relatively slow when compared to encryption using secret-key cryptography.
Thus, asymmetric-key cryptography is commonly used to protect symmetric keys
and symmetric-key cryptography is commonly used for bulk encryption.
Identification and authentication
Authentication of a user's identity is generally accomplished by passwords.
Because passwords are vulnerable to decoding or observation and subsequent use
by unauthorized persons, they are less secure than if used with tokens. Tokens
are small devices ranging from simple credit card-like objects, rings,
proximity cards and plastic keys to more advanced secure tokens, including
smartcards, PKI cards and PCMCIA cards. For greater protection, two-factor
identification and authentication is implemented by combining tokens with a
password or personal identification number to verify authentication of the
user. For added security, three factor authentication which consists of token,
password and biometric comparisons, can be implemented.
PKI cards are credit card-sized semiconductor plastic cards that contain an
embedded microprocessor, memory, a secure operating system and the user's
secret key, password and digital certificates. PKI cards have significant
advantages because of their ability to perform basic cryptographic functions on
the card itself rather than on the computer, thus reducing the risk that a
breach of security on the computer will lead to the unauthorized release of
proprietary information. Through the use of PKI cards, e-mail messages,
purchase orders, credit card numbers, videoclips, data inquiries and other
confidential transmissions are secured as they are sent and therefore can be
opened only by the intended recipient.
PCMCIA cards are parallel computer peripherals similar in size to a credit
card, though thicker, which contain multiple microprocessor chips. PCMCIA cards
have greater storage capacity, higher data exchange rate and greater processing
power than conventional smartcards and therefore are capable of performing
advanced cryptographic functions that cannot be performed on a conventional
smartcard. These advanced functions allow for use of more powerful algorithms
and thus provide for a greater overall level of security through the use of
PCMCIA cards.
50
<PAGE>
We are currently leading a joint effort with Atmel Corporation under a
contract with the National Security Agency to develop Forte, an ultra fast 32-
bit microprocessor. We are embedding the Forte chip into our new Forte PKIcard,
which we expect will be the world's fastest and most cryptographically advanced
PKI card. We expect that Forte will provide PCMCIA level performance at a price
competitive with advanced smartcards. Further, Forte is being designed to be
International Standards Organization compliant and therefore able to be used in
conventional reader/writers.
PKI digital certificates
The basic element of PKI, a cutting-edge development in the information
security field, is the digital certificate. Digital certificate technology
provides a highly advanced form of authentication and secure key exchange. PKI
digital certificates are specially prepared software files through which the
sender can digitally sign a message with a unique identification code. The
recipient of the message can authenticate the identity of the sender and verify
the integrity of the data through the use of a trusted third party known as a
certificate authority by obtaining the sender's public key from the certificate
digitally signed by the certificate authority. Furthermore, the uniqueness of
the certificates provides for non-repudiation, which prevents the sender from
denying that it sent the message and which is not available with less
sophisticated techniques. With the development of secure-token technology,
digital certificates can now be incorporated into smartcards, PKI cards and
PCMCIA cards to provide an information security system that provides two-factor
identification and authentication or three-factor identification and
authentication with the incorporation of biometric technology.
Biometric technology utilizes fingerprints or other unique characteristics
of an individual to serve as a digital identification. The use of digital
certificates is expanding rapidly across the Internet. In fact, several states
now consider digital signatures contractually binding and there is a growing
acceptance within the federal government to effectuate transactions through the
use of digital certificates.
Systems integration and networking solutions industry
In recent years, there has been an increasing demand for open system
approaches designed to create interoperability among commercial off-the-shelf
computer software and hardware products manufactured by different suppliers. In
addition, excessive development costs and the rapid pace of technological
change have led both governmental and commercial customers to demand more
flexible systems created by adapting readily-available commercial off-the-shelf
software and hardware.
The emergence of the rapidly developing Internet protocol-based network
technologies in the 1990s has further fueled the demand for network computer
systems. Although information technologies, secure data transmissions, and data
encryption have long been in use in the military intelligence arena, recent
technological advancements in computer hardware and software have now made
these applications economically viable for use by private companies. This has
given rise to the need for specialized expertise in the areas of local and wide
area network design and installation, network management and operation and
network security, using new and complex information technology hardware and
software products. Typically, the design and implementation of these systems in
both commercial enterprises and government agencies also involves the resale of
the hardware and software required for the system to the customer.
51
<PAGE>
BUSINESS
Overview
Litronic provides professional Internet data security services and develops
and markets software and microprocessor-based products needed to secure
electronic commerce and communications over the Internet and other
communications networks based on Internet protocols. Litronic's primary
technology offerings utilize PKI, which is the standard technology for securing
Internet-based commerce and communications. PKI helps ensure the integrity and
privacy of information being transmitted and verifies the identity,
authenticity and authority of the sender and the recipient of that information.
To increase sales capacity for its proprietary products and to capitalize on
opportunities in the rapidly growing Internet security market, simultaneously
with the closing of this offering, Litronic is acquiring Pulsar, a network
integration solutions company that specializes in deploying large-scale network
solutions to organizations in the commercial and government sectors.
Strategy
We believe that significant market opportunities exist due to the increasing
prevalence of electronic communication resulting from advancements in Internet
and electronic commerce technologies. These opportunities are expected to
create a primary need for PKI. Thus, we intend to pursue a strategy of growth
which is designed to capitalize on the market opportunities and the competitive
advantages we believe will result from the Pulsar acquisition. Key elements of
our business strategy include:
. Increasing Internet market penetration. We intend to capitalize on
Pulsar's existing and significant client base and sales and marketing
infrastructure to broaden and accelerate the market penetration of our
comprehensive data security product offerings. In our experience, large
commercial accounts frequently seek to secure total integrated network
security solutions from a limited number of suppliers. We intend to
utilize our brand recognition in the Internet protocol-based network
security market and Pulsar's network implementation expertise and
integration capabilities to support our efforts to gain greater market
penetration.
. Increasing marketing opportunities. The creation of a larger marketing
and service organization, a higher market profile and greater financial
strength is expected to generate greater opportunities for marketing our
products in the U.S. and internationally.
. Maintaining technological leadership in Internet protocol-based network
security. Through our industry-recognized research and development
capabilities, we intend to upgrade and enhance our existing security
products and develop new products to meet the expanding market's
continually evolving requirements, technologies and standards. Enhanced
versions of ProFile Manager and Maestro are expected to be released in
the third quarter of 1999. We believe that our research and development
capabilities and the combined expertise of our technical staff position
us to respond quickly and effectively to technological change, increased
competition and market demands.
. Expanding professional Internet protocol-based network security
services. We intend to provide our customers with a full range security
services, including security policy assessments and evaluations, custom
software development, integration and maintenance for the Internet and
other Internet protocol based communications network.
. Expanding and leveraging strategic alliances. We intend to maintain and
leverage existing strategic alliances and develop new strategic
alliances with vendors with
52
<PAGE>
complementary technologies, products and services to maximize sales and
market development opportunities.
. Strategic acquisitions. To the extent opportunities arise, we will seek
to acquire other technologies, product lines and businesses which
complement our products.
. Increasing sales per customer. We will seek to increase average sales
per customer based on our enhanced ability to offer system integration
services in addition to our suite of data security products.
. Minimizing risk of sales and service delays. The unavailability of
skilled professionals in the information technology and Internet
security solution outsourcing and integration sectors has in the past
caused companies with advanced proprietary technologies to experience
sales and service delays. By bringing together our research and
development staff and Pulsar's existing sales and technical personnel
and procedures, we aim to minimize the risk of these delays.
. Increasing international sales. We will seek to generate additional
sales in foreign markets by establishing a network of international
distributors and value-added resellers. The U.S. government has recently
relaxed the export restrictions for our ProFile Manager, NetSign and
other high-level encryption products. These products may now be exported
without a license to most countries for use by banks, online merchants,
healthcare, insurance organizations and overseas subsidiaries of U.S.
companies. To capitalize on these opportunities, we are in the process
of building or have built relationships with distributors and resellers
with computer security expertise in these market sectors:
. we have appointed distributors in Japan and Spain;
. we are negotiating with potential distributors and resellers in
Europe, Africa and Asia; and
. we intend to appoint a director of international sales who will be
responsible for the management of our international distributor
network.
In addition, we expect to experience the following benefits as a result of
our acquisition of Pulsar:
. Experience of management, key personnel and consultants. We believe the
added depth, breadth and experience of Pulsar's management team, key
employees and consultants enhances our ability to successfully implement
our business strategy.
. Comprehensive data security products and services offering. We believe
we can satisfy the comprehensive requirements of enterprises through the
combination of our open-architecture, open-platform, open-token and
algorithm-independent technologies and products and Pulsar's networking
solution services. We believe the combination of Pulsar's service
operations and Litronic's product offerings will distinguish us from
other PKI information technology solution providers by enabling us to
provide comprehensive information security systems rather than
addressing only selected aspects of customers' data security needs.
. Solutions addressing the key elements of Internet data security. Unlike
other integrators that rely on reselling of products produced by other
vendors to respond to the needs of an enterprise, we develop,
manufacture and market many of the applications, software, cryptographic
libraries, readers/writers and tokens that are required to create
comprehensive
53
<PAGE>
token-based PKI security solutions that address the key data security
elements of: identification and authentication; confidentiality; data
integrity; non-repudiation; audit control; and system administration.
Additionally, because our applications are open standards, we can integrate
products and services of other vendors into our products to enhance our
solutions capability.
Internet data security products
General
Our Internet data security products provide the highest level of
commercially-available security for secure e-mail, secure file transport, file
protection, remote access, authentication and authorization in an open multi-
platform standards-based framework. The foundation of our Internet data
security products is our extensive cryptographic library and device drivers
supporting numerous different operating system platforms and token management
systems which enable users to seamlessly integrate token-based security
enhancements into existing networking environments or into newly designed and
implemented networks. Our products can also be used by software developers to
add token-based information security to applications such as browsers,
firewalls, e-mail systems, database management systems and other client/server
applications.
Our data security products are designed with an open architecture, so they
can operate independently of:
. algorithms--our security products are designed to use different suites
of algorithms depending upon the application requirements, for example,
military or banking and finance.
. platforms--our security products may be used with many different
computer types and operating systems, for example, Windows, UNIX, and
MacIntosh.
. applications--our security products may be used with various software
applications, for example, e-mail, e-commerce, database systems or word
processors.
. tokens--our security products function with various types of tokens, for
example, software tokens, smartcards and PC cards.
As a result of this open architecture, these products are compatible with
virtually all commonly used network hardware. Algorithm independence allows our
products to be tailored to numerous encryption algorithms through software
selection. As a result, our libraries, drivers and security devices are
compatible with a variety of encryption algorithms, and popular software
applications and operating systems. We develop and embed these cryptographic
technologies in a multitude of devices and tokens, including smartcards, PKI
cards, PCMCIA cards, embedded industry standard architecture, or ISA, and
peripheral component interconnect, or PCI, bus cards. We are also working with
other companies to implement use of PCMCIA cards, PKI cards and smartcards to
support biometric technologies such as fingerprint and voice recognition. These
products provide the added protection of a security token utilizing public-key
cryptography, key exchange techniques and electronic signatures on most popular
operating systems and hardware platforms. In addition, our technologies permit
functions to be scaled as performance and pricing requirements dictate.
Internet application software
NetSign and NetSign PRO. These products are software adapters that integrate
smartcards and digital certificate technology to enhance security in software
systems designed to provide electronic commerce, e-mail, Internet access, file
access and world-wide-web browsers such as Netscape
54
<PAGE>
Communicator and Microsoft Explorer. NetSign and NetSign PRO software products
are bundled with a smartcard reader/writer and smartcards. NetSign PRO has the
added security feature of file encryption capabilities and other security
utilities.
ProFile Manager. ProFile Manager is a complete, stand-alone, PKI lifecycle
management solution. ProFile Manager provides for token-based security systems
management from initialization to secure archive and recovery. For the recovery
of token-based information, ProFile Manager provides an optional integration
with a secured database of private keys and other user identification
information and the use of third-party certificate authorities. ProFile Manager
integrates with NetSign, NetSign PRO and other token-enabled products to
provide a complete solution for an enterprise's security needs, including
secure Internet access, digitally signed and encrypted e-mail, desk-top file
encryption and secure remote network access.
Internet cryptographic API developer toolkits
CryptOS SDK and CryptOS SDK+. CryptOS SDK products are cryptographic APIs
that allow application developers to use off-the-shelf or custom application
software to integrate smartcard technology into existing systems, thus adding
hardware-strength security to software-only systems. CryptOS SDK is bundled
with a smartcard reader/writer and smartcards. CryptOS SDK+ has additional
tools for Java programming.
Maestro. Maestro, a product we have only recently introduced to the market,
is a multi-protocol cryptographic library that enables software developers to
incorporate secure token-based, symmetric- and asymmetric-key cryptography into
their application software. Maestro is a multi/concurrent access, cross-
platform system that supports multiple types of tokens such as smartcards,
PCMCIA cards and cryptographic algorithms. Coupled with token reader/writers,
Maestro supports devices over commonly used interfaces, including keyboard,
serial, small computer system interface, or SCSI, parallel port and universal
serial bus. Maestro currently supports two commonly used cryptographic
interface protocols. We are developing additional protocol adapters to expand
the functionality of Maestro. Maestro is compatible with Windows 95, 98 and NT
operating systems as well as all popular UNIX platforms.
Security tokens
ISO smartcards. We offer a family of off-the-shelf International Standards
Organization, or ISO, standard smartcards ranging from storage-only cards to
cards containing cryptographic capabilities.
Moniker, PC-cryptocard. We also offer Moniker, a Fortezza standard PCMCIA
card. The Fortezza standard PCMCIA cards are commonly used by the Department of
Defense, as well as by other governmental and commercial entities.
Forte PKIcard. We are in the process of developing a next generation PKI
card, the Forte PKIcard, in cooperation with Atmel Corporation. Forte is an
ultra fast 32-bit microprocessor which is being designed with a high speed
universal serial bus interface in addition to the ISO interface. Forte is also
to be designed with a larger storage capacity and processing speed than
existing smartcards. The Forte PKIcard is expected to be manufactured in the
U.S. and we anticipate shipments to begin in late 1999.
55
<PAGE>
Other tokens. Because our products are open-architecture, open-platform,
open-token, algorithm and API-independent, we offer third-party tokens, such as
PCMCIA cards, smartcards, rings, proximity cards and plastic keys and other
commercially available tokens, for use with our reader/writers and application
software.
Token reader/writers
A token reader/writer is a hardware component that electronically reads the
content of a smartcard, PCMCIA card, or PKI card. We manufacture several
different types of reader/writers. Following is a brief description of their
features.
Serial and keyboard port smartcard and PKI card reader/writers. We sell our
reader/writers as a security product component or bundled with other products
such as ProFile Manager, NetSign and/or CryptOS SDK to provide token-based data
security solutions.
We manufacture and sell compact, hand-held smartcard reader/writers that
interface through the RS-232 serial port of a PC or workstation. The Series 215
and 220 reader/writers are compatible with Windows 95, 98, NT and UNIX and
MacIntosh operating systems. The Series 220 reader/writer can optionally be
connected through the keyboard port which provides the added security of a
protected personal identification number, or PIN, path. With a protected PIN
path, the password authentication is intercepted by the reader/writer thus
preventing a hacker from implanting an unauthorized program in the PC to
intercept the password. We offer a Series 230 reader/writer which is integrated
into a keyboard, and also offer a Series 410 reader/writer which connects to a
computer through its PCMCIA slot.
ARGUS 300. The ARGUS 300 consists of a tamper-resistant ISA board and
external reader/writer and is connected to the keyboard. The ARGUS 300
incorporates DES encryption technologies and offers additional security
features such as boot protection, electronic commerce security and protected
PIN path directly through the board rather than through an external device that
might be tampered with by an unauthorized user. The ARGUS 300 is validated for
electronic signature by the National Institute of Standards and Technology, or
NIST, the U.S. Treasury Department and General Accounting Office.
PCMCIA client reader/writer. We offer a series of single-and dual-socket
PCMCIA card reader/writers for both internal and external application, that
interface via various ports such as SCSI, ISA bus, PCI bus, universal serial
bus and parallel port. These reader/writers incorporate our proprietary device
drivers which provide the interface between the reader/writer and its
application software such as Maestro and third-party application software.
CipherServer. We offer a reader/writer that contains sockets for up to eight
PCMCIA cards, is used on the enterprise's server side and incorporates the
device drivers and other technologies of our other PCMCIA readers. CipherServer
interfaces with the host server to enable the host server to provide
rapid/simultaneous processing of cryptographic functions received from numerous
clients.
Other custom-designed security products
Secure PCs
Pulsar has developed and we intend to offer a family of secure, year 2000
compliant, servers which are based on a two-state workstation technology that
operate in either the secured state or the public state. A transition between
the two states causes all temporary data in the volatile memory to
56
<PAGE>
be fully erased. This process precludes an unauthorized subsequent user from
accessing the classified information that would otherwise be resident in the
system's memory.
Managed firewall and virtual private networks solutions
Through our Pulsar operations, we will offer secure architecture based
firewall and virtual private networks gateway technology using intrusion
detection software for high data capacity and scalable security solutions.
These software and hardware systems provide for multi-user remote
administration, and integrated management of multiple security policies and
firewalls.
Network security and management tools
Our network security and management tools are a scalable, comprehensive
collection of network security and management solutions assembled into an
integrated security suite of hardware and software. The tools include a multi-
tiered approach to virus protection covering the client, server and Internet
gateway through a combination of encryption, firewall and virtual private
networks technologies. These tools protect networking systems against attacks,
and compromise and loss, while maintaining the integrity of business functions
and data. These products ensure full network performance with a proactive
approach by fixing problems, planning growth and optimizing functionality and
reliability.
Professional data security services
Through our Pulsar operations, we will offer comprehensive networking
solutions with a particular emphasis on designing, developing, implementing,
supporting and maintaining networks that provide for a high level of data
security. Pulsar develops and implements complete turn-key networks or enhances
or expands existing networks, as the customer requires.
These services include:
. strategic consulting, including site risk and requirements analysis and
design;
. custom design and development;
. project management;
. construction, installation and implementation;
. on-site or remote system support, maintenance and repair; and
. on-site system management.
Pulsar approaches the design and development of solutions for customers by
evaluating their existing infrastructure, architecture and technologies to
optimize the performance of their existing system and augment their systems as
necessary to meet their changing requirements. Project responsibilities
typically require the integration of access control, intrusion detection and
biometric validation.
Because of Pulsar's expertise in designing and implementing systems
providing for robust security, our solutions will address the networking and
data security needs of our customers, including:
. Internet access and security;
. secured intranet/extranet capabilities;
. enterprise security procedures and administration;
. secured critical private network and remote dial-in network
capabilities;
57
<PAGE>
. secured distributive applications;
. open-systems migration of data;
. information security communication services; and
. artificial intelligence technologies.
Pulsar provides network solutions through the implementation of the latest
technologies, including high speed baseband and broadband media, fiber optics,
hard wired connect systems, and wireless and satellite transmission systems.
Pulsar also provides information technology outsourcing services for customers,
including ongoing management of network systems. Pulsar delivers professional
services on either fixed-price delivery or time-based delivery modes through
its data security group, which provides consulting and integration services,
and its enterprise information group, which provides network design,
implementation and management, legacy systems migration, and systems
configuration and evaluation.
Our newly acquired Pulsar staff has specific expertise in the following
areas of networking systems:
. Internet enterprise network consulting: As computer networks become more
complex the assistance of knowledgeable network professionals is
critical for maximum performance. We believe our network consulting
staff will be able to help organizations realize their business goals
and objectives.
. Network management: Today's network managers must cope with a maze of
network protocols, configuration options and computing platforms. We
believe our network management staff will be able to support information
systems departments in their effort to manage these diverse networking
platforms by assisting with the training, configuration and
implementation of network management systems and products.
. Remote computing: As companies increasingly decentralize their business
functions, they must consider connectivity options for remote users. We
believe our remote computing team will be able to effectively deliver
the most cost-effective and reliable methods to allow users access to
corporate systems. Whether a business requires dial-in dial-out
capability or Internet access, we believe we will be able to provide a
complete solution that incorporates training and implementation.
Product reselling
Historically, a substantial portion of Pulsar's product resale revenues was
derived from sales of low-end, low-margin computer and network security
products. Pulsar has, however, increasingly been shifting its focus in the
reseller market, primarily in the government information technology segment, to
sales of high-end, high-margin specialized computer and network security
products and customized configurations of these products.
Examples of these high-end, high-margin computer and network security
products include:
. Intrusion detection software--used to detect unauthorized access, and
identify the source of the access, within a network. These products
include Net Ranger and PIX.
. Firewalls--custom designed software and hardware configurations
installed into a network to prevent unauthorized access from outside the
network. Pulsar offers high-end firewall
58
<PAGE>
solutions from leading vendors, including Lucent Technologies, Inc.,
Network Associates, Inc., Cyberguard Corporation, Cisco Systems, Inc.,
and Bay Networks, Inc.
. Network hardware components--servers, routers, hubs and switches
configured to the customer's networking requirements. Pulsar offers
components manufactured by leading vendors, including Cisco Systems,
Inc., Bay Networks, Inc., Hewlett-Packard Company, Bell Computers,
International Business Machines Corp., Lucent Technologies, Inc. and Sun
MicroSystems, Inc.
. Anti-virus software--high-end software programs installed at server
level to prevent viruses from entering the network, and client-level
software programs to prevent virus corruption to client-server
applications.
. Virtual private networks--a secure point-to-point connection over the
Internet through which encrypted messages can be transmitted to protect
communications between remote locations.
. Data security products--access control products, including third-party
APIs, device drivers, token reader/writers and tokens, and, following
this offering, those of Litronic.
We believe that focusing on these high-end, high-margin products will lead
to higher rates of customer retention. This is because of the complex nature
of the product configurations, which results in customers' making purchasing
decisions based on factors other than simply the lowest price. Further,
because the products are highly customized, we will not be required to make
substantial investments in inventory.
After the offering, we will, where appropriate, also include our own data
security products within our product configuration solutions.
Customers
Our customers represent a wide range of commercial enterprises, including
financial, telecommunications, healthcare and information service companies,
airlines, automobile manufacturers, as well as federal, state, local and
foreign government agencies. We believe significant cross-marketing
opportunities exist with the integration of Pulsar's customer base of over 100
federal agencies and over 40 commercial and state and local government
customers.
Following the Pulsar acquisition, our combined customer base will include:
. Netscape Communications . Federal National Mortgage
Corporation Association
. Walt Disney Company . S.W.I.F.T.
. Nippon Telephone and . Executive Offices of the
Telecommunications Data President of the United States
Corporation . U.S. Army Corps of Engineers
. American Express Company . Lockheed Martin Corporation
. Bank of America, N.A. . Booz Allen & Hamilton Inc.
. National Security Agency . Schlumberger Limited
. Federal Communications Commission . Federal Bureau of
. Deloitte & Touche LLP Investigation
. Lucent Technologies, Inc.
Customer service and support
We believe that customer service and support is critical to retaining
existing customers and attracting prospective customers. Our combined customer
service and support staff consists of 16
59
<PAGE>
persons, including engineers and technical support personnel, and works closely
with customers and prospective customers to provide comprehensive service and
support for our products and systems.
We provide enhanced customer support by maintaining a toll-free customer
service line and a two-tier support system. The first tier consists of help
desk support personnel responding to phone and mail requests for service and
accessing customer information and a problem database for solutions. For more
sophisticated problems, second tier support is provided by systems technical
support staff.
Sales and marketing
We market our products and services through the Internet, our direct sales
forces, third-party distribution channels, including systems-integrators,
value-added resellers and original equipment manufacturers, strategic alliances
and international distributors. We intend to devote significant resources to
marketing and business development activities to expand our business to
additional distribution channels.
Direct marketing effort
As of May 1, 1999, on a combined basis, we employed a direct sales and
marketing force of 31 individuals located in offices in California, the
Washington, D.C. area and Atlanta, Georgia to market our products and services
to industry and vertical market segments, including e-commerce, financial,
telecommunications, healthcare and information services companies and federal,
state, local and foreign government agencies. Our sales force is responsible
for soliciting prospective customers and providing technical advice and support
with respect to our products and services. Additionally, we use telemarketing
efforts to target commercial accounts and federal government agencies. We seek
to achieve greater vertical market penetration by using direct sales personnel
with significant market expertise, as well as consultants with established
relationships in the commercial marketplace.
Following the closing of this offering, we intend to expand our direct sales
force to increase the number of representatives located in our California,
Georgia and Washington, D.C. offices. We may also open direct sales force
offices in other locations as we determine our clients' needs and our market
opportunities.
Indirect marketing effort
An important component of our sales strategy is the development of indirect
sales channels such as systems integrators, value-added network service
providers and original equipment manufacturers. Currently, we use these
indirect sales channels to augment the efforts of our direct sales forces.
We also use the services of third-party consultants with established
relationships and contacts with prospective customers to which we would not
otherwise have access. As part of our expansion strategy, we will seek to
develop relationships with additional third-party sales channels.
Strategic alliances
We plan to increase our vertical market penetration by continuing to develop
strategic alliances with other companies in the data security and network
integration industries. We have developed significant strategic alliances with
companies in an effort to:
. incorporate our products into third-parties' products;
60
<PAGE>
. jointly develop products and services;
. conduct joint research and development efforts;
. jointly conduct proposals and presentations for products and services and
reseller arrangements.
These alliances assist us in expanding our marketing and technical capabilities
and are intended to increase the distribution and market acceptance of our
Internet, intranet and extranet security products and services.
We believe that strategic alliances allow us to cost-effectively integrate
third-party products into our product offerings to provide our clients with
customized information technology solutions. Our strategic alliances currently
include the following:
. Netscape and Microsoft--we provide enhanced e-mail security features to
their browser programs through integration of our NetSign product lines.
. VeriSign--we have a marketing agreement with VeriSign and act as
VeriSign's recommended PKI card partner.
. Atmel Corporation and the National Security Agency--we have an alliance
with Atmel Corporation and the National Security Agency in which we are
jointly developing Forte, an advanced microprocessor, which we are
embedding in our next generation PKI cards, the Forte PKIcard.
. Keytronic--We and Keytronic sell versions of NetSign bundled with the
Keytronic keyboard, which currently incorporate an integrated PKI
card/smartcard reader and will incorporate our Forte PKIcard reader.
. RSA Data Security--we have a distribution license agreement with RSA
which allows us to incorporate RSA technology into our products.
. Datacard--Datacard serves as an official distributor of our PKI card
products and integrates our NetSign and ProFile Manager and CryptOS
products into our PKI card printers.
. SCM Microsystems, Inc.--we engage in cooperative marketing and selling
of SCM hardware produced with our software.
Additionally, Pulsar has formed alliances with a number of equipment
manufacturers to generate leads for its technology product sales, including
Lucent Technologies, Inc., Photon Vision Systems LLC, Northern Computers, Inc.,
Hewlett-Packard Company and International Business Machines Corp. We expect
these alliances to generate qualified leads for our sales force to contact and
close.
Sales to the government information technology market
The government information technology market is generally characterized by
highly-structured procurement rules and procedures, large contracts, a
relatively long sales cycle, significant barriers to entry and low collection
risks. In response to these characteristics and requirements, a number of
avenues, such as GSA schedule contracts, blanket purchase agreements and
bidding procedures, have been developed to access this market.
The GSA, which is the central procurement agency for the U.S. government,
negotiates schedule contracts. Government agencies and other authorized
purchasers, although not required to do so, may purchase goods and professional
services under GSA schedule contracts at predetermined price ceilings, terms
and conditions. GSA schedule contracts are awarded on the basis of a number of
factors, the most important of which are compliance with applicable government
regulations and the
61
<PAGE>
prices of the products to be sold. A blanket purchase agreement, or BPA, is a
simplified but non-mandatory, fixed-price, indefinite delivery-indefinite
quantity, contract for the government to purchase products, at pre-negotiated
terms and conditions. Purchases made under BPAs are often paid for with a
government-issued credit card. Federal government agencies are authorized to
enter into BPAs with GSA schedule holders. The GSA-authorized BPAs incorporate
many terms and conditions of GSA schedule contracts, often at lower prices than
available on the GSA schedules.
A significant portion of the purchases of computer products and services by
the federal government is made under contracts or purchase orders awarded
through formal competitive bids and negotiated procurements. Substantially all
of these bids are awarded on the basis of a number of factors, including the
best value to the government, which, depending on the bid, can be a combination
of price, technical expertise, past performance on other government contracts.
Major procurements can exceed millions of dollars in total revenue for a
reseller, span many years, and provide a purchasing vehicle for many agencies.
In addition, networking products are purchased by the federal government
through open-market procurements. These procurements are separate and apart
from GSA schedules, and include simplified acquisition procedures, requests for
quotes, invitations for bids and requests for proposals. Most purchases in the
state and local government market are made through individual competitive
procurements. State and local procurements typically require formal responses
and the posting of bid bonds or performance bonds to ensure complete and proper
service by a prospective bidder. Each state maintains a separate code of
procurement regulations that must be understood and complied with by entities
selling products to the state.
We are on most government bid lists relevant to our product offerings and
respond with proposals to hundreds of bid solicitations each year. In addition,
our marketing employees actively prepare bids for federal, state and local
government agencies for open market procurements. After the closing of this
offering, we intend to expand our bid proposal unit to compete and capture
additional projects submitted for proposal.
Advertising
Our marketing efforts include maintaining a web site, Internet advertising,
including links with other web sites, direct mail, public relations, events,
sales tools, broadcast messaging, telemarketing and corporate marketing
materials. We believe that our future business activity depends in part on our
marketing and sales through the Internet. Our website describes our business,
products and services. We are currently integrating Pulsar's website material
and upgrading our site to allow for automated on-line purchases.
Our public relation efforts are designed to target the appropriate press
coverage and consist of press kits, targeted media lists and press releases.
These efforts are designed to complement our sales and marketing efforts.
Trade shows and presentations
We attend and exhibit our products and services at trade shows in the U.S.
and internationally each year in an effort to increase our market exposure. We
intend to continue to attend trade shows as well as to make joint presentations
with strategic partners to prospective customers relating to products and
services.
62
<PAGE>
Suppliers
Some of the components incorporated into our Internet data security products
are produced by other vendors. We also integrate third-party products and
components into the networks we design and develop for our customers. To
maintain quality control and enhance working relationships, we generally rely
on multiple vendors for these products. However, some of these products are
produced or sold only by a single supplier, thus presenting a risk that they
may not be available on commercially reasonable terms in the future or at all.
While we believe that alternative sources of supply could be obtained, our
inability to develop alternative sources if, and as required, in the future
could result in delays or reductions in product shipments that could adversely
affect our business.
Research and development
We conduct extensive research and development efforts which focus on the
development of cryptographic PKI software and hardware products that can be
readily integrated and adapted to the expanding requirements of the Internet,
intranets and extranets. After the closing of this offering, we expect to
devote substantial additional research and development resources to enhance our
data security product line.
Our current research and development efforts include:
. Expanding Maestro to offer additional application program interfaces,
including Microsoft's CAPI--a cryptographic API--for Windows 95/98 and
Windows NT; further, expanding the suite of tokens supported by Maestro;
. Expanding the capabilities of ProFile Manager to provide certificate
exchange features with additional third-party certificate authorities
and increased capability for the PKI enterprise manager;
. Developing Forte, an advanced 32-bit microprocessor, commonly referred
to as a RISC processor, which we are embedding in our Forte PKIcard. We
expect the Forte PKIcard will be an ISO standard smartcard with greater
flexibility and a higher degree of processing power than existing PKI
cards, due in part to the inclusion of a universal serial bus interface
on-board the microprocessor chip. Given that Forte is an advanced
security chip that will provide advanced security features, we expect to
be able to embed it in a variety of devices, including PC mother boards;
. Developing series of universal serial bus interface reader/writers;
. Developing technologies to incorporate biometric technologies into
Litronic PKI products to provide further advanced identification and
authentication protection;
. Expanding the security features of applications programs such as NetSign
and NetSign PRO; and
. Developing a version of the ARGUS 300 for the PCI bus while retaining
its validation by the NIST. The ARGUS 300 is currently an ISA bus
security product that has been validated by the NIST for a security
level approved for digital signature operations. Newer computer designs
now have the PCI architecture. The PCI version of the ARGUS 300 is being
designed to enable the NIST to extend the certification to the new PCI
design without a complete new laboratory validation process.
The process of developing our products and services is extremely complex and
requires significant continuing development efforts. There is a risk that we
will not successfully develop and market new products or product enhancements
that respond to technological change and evolving industry standards and
customer requirements in a timely manner.
63
<PAGE>
As of May 1, 1999, our research and development staff consisted of 29
employees, of whom 26 were engineers. Approximately 90% of these engineers were
engaged principally in the development of software, including cryptographic
libraries and device drivers. Our retention rate for our research and
development staff over the past three years is 80%. We believe that our ability
to attract and retain qualified development personnel is essential to the
continued success of our development programs. The market for these personnel
is highly competitive and our development activities could be adversely
affected if we are unsuccessful in attracting and retaining skilled technical
personnel.
During the years ended December 31, 1996, 1997 and 1998, our net expenses
for research and development were $725,000, $1.2 million and $1.3 million. We
have allocated $5.0 million of the proceeds of this offering for research and
development activities.
Competition
We compete in numerous markets, including;
. Internet and intranet electronic security;
. access control;
. token authentication;
. smartcard-based security applications;
. electronic commerce applications;
. systems integration;
. product reselling; and
. government information technology markets.
The markets for our products and services are intensely competitive and are
characterized by rapidly changing technology and industry standards, evolving
user needs and the frequent introduction of new products. We believe that the
principal factors affecting competition in our markets include:
. product functionality;
. performance;
. flexibility and features;
. use of open standards technology;
. quality of service and support;
. company reputation; and
. price.
We face significant competition from a number of different sources. Many of
our competitors are more established, benefit from greater name recognition and
have substantially greater financial, technical and marketing resources than we
have. One of our significant competitors is Microsoft Corporation, which has
recently announced its intention to begin making smartcards. Some of our other
significant data security competitors include:
. International Business Machines Corp.
. Motorola, Inc.
. RSA Data Security, Inc.
. Network Associates, Inc.
. Secure Computing Corporation
. Rainbow Technologies, Inc.
64
<PAGE>
Some of our competitors for systems integration and product reselling
include:
. BTG, Inc.
. Inacom Corporation
. Government Technology Services, Inc.
In addition there are several smaller or start-up companies with which we
compete from time to time. We also expect that competition will increase as a
result of consolidation in the information security technology and product
reseller industries. We may be unable to compete successfully in the future
with our competitors, which may adversely affect our business.
Intellectual property
We depend substantially on our proprietary information and technologies. We
rely on a combination of trademark, patent, copyright and trade secret laws,
employee and third-party non-disclosure agreements, technical measures and
other methods to protect our software products and other proprietary
technologies and know-how. We also rely on standardized license agreements that
are not signed by the end user to license our products and, therefore, may not
always be unenforceable.
We currently have one patent issued by the U.S. Patent and Trademark Office,
one patent application allowed by and three patent applications pending with
the U.S. Patent and Trademark Office that cover aspects of data security
technology. Prosecution of these patent applications and any other patent
applications that we may subsequently determine to file may require the
expenditure of substantial resources. The issuance of a patent from the filing
of a patent application is a lengthy process. Our technology may become
obsolete while our applications for patents are pending. Further, any pending
or future patent may not be granted, and any future patents may be challenged,
invalidated or circumvented and the scope of any patents may be reduced. The
rights granted to us through our patents may not provide us with any
advantages. We have not pursued any patent protection outside the U.S. for any
technology; however, we intend to seek international and further United States
patents on our technology.
Our technical measures and non-disclosure agreements may not be adequate to
prevent misappropriation or provide any meaningful protection for our
proprietary technology in the event of misappropriation. Further, others may
independently develop substantially equivalent or superior technologies or
duplicate any technology we develop, or our technology may infringe on the
patents, copyrights or other intellectual property rights owned by others.
We may also be at risk when we enter into transactions in countries where
intellectual property laws are not well developed or are poorly enforced. Legal
protection of our rights may be ineffective in foreign markets, and technology
manufactured or sold abroad may not be protectable in jurisdictions in
circumstances where protection is ordinarily available in the U.S.
We believe that, due to the rapid pace of technological innovation for
network security products, our ability to establish, and if established,
maintain a position of technological leadership in the industry, is dependent
more upon the skills of our development personnel than upon legal protections
afforded our existing or future technology.
Because our products are designed with an open architecture and are
algorithm-independent, they can be utilized with a variety of encryption
algorithms. Some algorithms are in the public domain and can be incorporated
into our products at no charge. To the extent that a customer desires to
incorporate a proprietary algorithm into a security solution, we or the
customer must obtain a license from the algorithm owner. Depending on the
algorithm and its owner, the license fee may be a flat fee, a per unit royalty
or a combination of the two.
65
<PAGE>
We are developing Forte under a task order issued under a contract with
National Security Agency. The contract incorporates the Department of Defense's
standard licenses for technical data and computer software, commonly known as
the data rights clauses. Data rights clauses are only applicable to data or
software actually delivered to the federal government under a contract. If the
data rights clauses were applicable to our agreement with the National Security
Agency to develop Forte, one of the data rights licenses, commonly called a
government purpose rights license, would permit the federal government to
create second sources of supply of the Forte technical data and source code for
itself without paying us royalties. The government purpose license clause would
not authorize the federal government to create competitors to us in the
commercial market. We do not believe the data rights clauses generally, or the
government purpose license specifically, apply to Forte because our contract
with the National Security Agency does not provide for the delivery of Forte to
the federal government. The task order provides that the National Security
Agency will obtain detailed design information about Forte.
We own or have rights to trademarks and trade names that we use in
conjunction with the sale and licensing of our products. The following
trademarks mentioned in this prospectus are our registered trademarks: Cyper
Server and CryptOS. We also own the trade names Litronic, Pulsar, Pulsar Data
and Pulsar Data Systems, Inc. We have applied for the trademarks Pro File
Manager, Netsign, Netsign Pro, Forte PKIcard and Maestro. All other trademarks
or trade names referred to in this prospectus are the property of their owners.
Government regulation
Because we sell our products internationally, we must comply with federal
laws regulating the export of, and applicable foreign government laws
regulating the import of, our products. The U.S. government has recently
relaxed the export restrictions for our NetSign and ProFile Manager products.
However, the federal government may rescind these approvals at any time. Under
current regulations these products can be exported without a license to most
countries for use by banks, healthcare, insurance organizations and overseas
subsidiaries of U.S. companies.
Additionally, we may apply for export approval, on a specific criteria
basis, for our future products. Government export regulation for security
products is less stringent for products designed for banking and finance, e-
commerce, health, insurance and for use by U.S. subsidiaries. We may not
receive approval to export any future products on a timely basis, on the basis
we request or at all. As a result of government regulation of our products, we
may be at a disadvantage in competing for international sales compared to
foreign companies that are not subject to these restrictions.
Employees
As of May 1, 1999, Litronic employed 70 people, of which 65 were full-time
and five were part-time employees, including 40 in product management,
research, development and support, two in professional services, 14 in field
operations including sales, marketing and customer management, and 14 in
finance, human resources, business development, legal and administration. As of
May 1, 1999, Pulsar employed 60 people, including four in product management,
17 in professional services, 17 in field operations including sales, marketing
and customer management, and 22 in finance, human resources, business
development, legal and administration. After the closing of this offering, we
expect to integrate Pulsar's workforce.
Our employees are not represented by labor unions. We do not expect that any
of our employees will be represented by any labor unions after the closing of
this offering. We consider our relations with our employees to be good.
66
<PAGE>
Facilities
After the closing of this offering, we will be headquartered in Irvine,
California where we currently lease approximately 12,000 square feet of office
space for our executive offices with a lease expiring in September 2001 and
approximately 1,800 square feet of space in a production and warehouse facility
and which has a lease expiring in June 1999. We are currently negotiating and
expect to enter into a lease for a new headquarters facility in California of
approximately 40,000 square feet. This would replace our current headquarters
which we would attempt to sublet. We expect our new facility would have an
annual rent of approximately $600,000 and a lease term ranging from seven to
ten years. In addition, after the closing of this offering, we will conduct a
significant portion of our operations at Pulsar's offices in our 12,700 square
foot Lanham, Maryland facility, which we use as office space for our executive
offices and as warehouse space, under a lease that expires in 2003.
Legal proceedings
We are involved from time to time in routine litigation that arises in the
ordinary course of business. We are not currently involved in any litigation
which we believe will have a material impact on our results of operations,
financial condition or liquidity, other than the following:
In the course of its business, Pulsar has been extended credit from several
trade vendors for the purchase of supplies, equipment, merchandise and
services. Pulsar's accounts for several of these trade vendors have been past
due for a significant amount of time. As a result, several of these trade
vendors have filed lawsuits against Pulsar seeking to collect the amounts owed
by Pulsar. In addition, a local government agency has filed a claim for back
taxes owed by Pulsar. Following is a summary of these lawsuits:
<TABLE>
<CAPTION>
Name of Plaintiff Date Filed Court
- ------------------------- ---------------------- -----------------------------
<S> <C> <C>
Performance Engineering October 26, 1998 Circuit Court of Fairfax
Corporation County, Virginia
Lynn Runnels January 15, 1999 General District Court of
Loudoun County, Virginia
Signal Corporation February 11, 1999 U.S. District Court,
District of Maryland
AST Research, Inc. February 26, 1999 Superior Court of Orange
County, California
Prince George's County, March 11, 1999 Circuit Court for Prince
Maryland George's County, Maryland
Weisman and Associates, March 15, 1999 Circuit Court for Prince
Inc. George's County, Maryland
Softmart, Inc. March 22, 1999 Chester County Court of
Common Pleas, Pennsylvania
Gates/Arrow Distributing, August 14, 1998 Circuit Court for Prince
Inc. George's County, Maryland
Continuous Graphics, Inc. February 22, 1999 District Court for Baltimore
County, Maryland
Sales and Marketing March 2, 1999 Circuit Court for Prince
Assistance Corp. (filed but not served) George's County, Maryland
Stackig, Inc. March 19, 1999 Circuit Court of Fairfax
County, Virginia
Octave Systems, Inc. March 30, 1999 Superior Court of Santa Clara
County, California
</TABLE>
67
<PAGE>
<TABLE>
<S> <C> <C>
Systems Solutions Technology, Inc. April 12, 1999 Circuit Court for Prince
George's County, Maryland
Piliero, Mazza and Pargament May, 1999 Circuit Court for Prince
George's County, Maryland
Office Movers, Inc. April 23, 1999 Circuit Court for Prince
George's County, Maryland
</TABLE>
The aggregate amount claimed under these lawsuits was approximately $1.8
million, plus interest, attorney's fees and costs. Pulsar has entered into
settlements including stipulated judgments covering some of the lawsuits. As of
June 3, 1999, Pulsar has paid approximately $900,000 under those settlements.
As of June 3, 1999, the aggregate amount Pulsar owes on claims that have been
filed and settled is approximately $947,000. The aggregate amount of claims,
excluding interest, attorney's fees and costs, that have been filed but not
settled is approximately $82,000.
We intend to use the net proceeds from this offering to resolve and pay
these claims and settlements. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On January 16, 1998, G2 Resources Inc. filed a complaint against Pulsar in
the Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida. G2
claims that Pulsar breached a contract under which G2 agreed to provide
services related to the monitoring of government contracts available for bid
and the preparation and submission of bids on behalf of Pulsar. The contract
provides that Pulsar pay G2 $500,000 in 30 monthly installments of $16,666 and
an additional fee of 2% of the gross dollar amount generated by awards. In its
complaint, G2 alleged that Pulsar failed to make payments under the contract
and claimed damages in excess of $525,000 plus interest, costs and attorneys
fees. In the course of discovery G2 asserted that its losses/costs arising out
of its claim amount to approximately $10.3 million. Pulsar has asserted that G2
failed to perform the services required under the contract and Pulsar filed a
claim for compensatory damages, interest and attorneys fees against G2.
Classical Financial Services, LLC intervened in the case. Classical claims that
G2 assigned its accounts receivable to Classical under a financing program and
that Pulsar breached its obligations to Classical by failing to make payments
under the contract with G2. Pulsar has asserted defenses to Classical's claim.
Pulsar believes that the claims of G2 and Classical against Pulsar are without
merit and intends to continue to vigorously defend against the claims. If G2 or
Classical were to prevail in this lawsuit, our business and financial condition
could be materially adversely affected.
On July 11, 1997, Rudolph Menna filed a complaint against Pulsar and William
W. Davis, Sr. in the U.S. District Court for Northern District of Georgia,
Atlanta Division. Mr. Menna alleges that he was wrongfully terminated as a
Pulsar employee and that Pulsar and Mr. Davis unlawfully discriminated against
him on the basis of race and age. Mr. Menna's complaint seeks an unspecified
amount of damages including back pay, front pay, benefits, compensatory and
punitive damages, interest and attorneys fees. Pulsar and Mr. Davis have filed
an answer denying the material allegations in the complaint. Pulsar and Mr.
Davis believe that Mr. Menna's lawsuit is without merit and intend to continue
to vigorously defend against it. If Mr. Menna were to prevail in the suit our
business and financial condition could be materially adversely affected.
On April 19, 1999, A&T Marketing Inc. filed a complaint against Pulsar in
the Circuit Court for Prince George's County, Maryland. A&T claims that Pulsar
owes A&T $262,000 plus interest and costs, for software that A&T sold Pulsar in
1998. Pulsar believes it has defenses to A&T's claim and that A&T's claim is
without merit. Pulsar intends to vigorously defend against the claim.
68
<PAGE>
MANAGEMENT
Executive officers, directors and key employees
The following table contains information concerning our directors, director
nominees, officers, persons who have agreed to serve as executive officers upon
the closing of this offering and other key employees, and their respective ages
as of April 1, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Kris Shah............. 59 Chairman of the Board and Chief Executive Officer
William W. Davis, Sr.. 48 President, Chief Operating Officer and Director
Thomas W. Seykora..... 55 Chief Financial Officer
Robert J. Brich....... 55 Vice President, Government Marketing and Sales
Robert J. Gray........ 62 Vice President, Product Development
William S. Holmes..... 52 Vice President, Commercial Marketing and Sales
Mark Gembicki......... 33 Director Nominee
Matthew Medeiros...... 42 Director Nominee
</TABLE>
Kris Shah is our chairman of the board and chief executive officer. Mr. Shah
has been Litronic's president and chief executive officer since he founded the
company in 1970. Mr. Shah's career has involved every major aspect of circuit
design and chip packaging technology, including research and development,
manufacturing, engineering, marketing and strategic planning. Before forming
Litronic, Mr. Shah held management level positions at Hughes Aircraft Co.,
Fiberite Inc. and Bell Industries, Inc. Mr. Shah earned his B.S. and M.S.
degrees in mechanical engineering from the University of Southern California in
1962 and 1964.
William W. Davis, Sr. is our president and chief operating officer. Mr.
Davis served as Pulsar's president and chief executive officer since he founded
the company in 1982. Mr. Davis sits on the advisory boards of IBM, Ingram Micro
and Pinacor Corporation. Over the past 16 years, Mr. Davis grew Pulsar into a
diversified technology company, specializing in providing network-based
information technology services and customized products to Fortune 1000 and
government accounts. Before founding Pulsar, Mr. Davis held various management
positions with several Fortune 1000 companies, including DuPont, Chevron and
Occidental Petroleum Corporation. He is the recipient of numerous industry
awards, including awards for outstanding leadership and performance from the
Government Computer News from 1994 to 1997, Lockheed Martin Corporation and
various industry associations. Mr. Davis earned his B.S. in agronomy from
Southern University in 1972 and completed advanced executive management
programs at Dartmouth University in 1994 and the University of Miami in 1995.
Thomas W. Seykora is our chief financial officer. Mr. Seykora joined
Litronic in July 1995 as its chief financial officer. Before joining Litronic,
Mr. Seykora was an independent management consultant to companies and financial
institutions from 1986 to July 1995. From 1982 to 1986, he served as chief
financial officer and senior vice president-finance and operations for Curley
Bates Co., a closely held distribution company. Before that, Mr. Seykora worked
for KPMG LLP, then known as Peat, Marwick, Mitchell & Co., most recently as an
audit manager. Mr. Seykora also served as an officer, achieving the rank of
captain, in the U.S. Marine Corps. He received a B.A. degree in accounting from
Minnesota State University.
69
<PAGE>
Robert J. Brich has agreed to serve as our vice president, government
marketing and sales, upon closing of this offering. Mr. Brich will be
responsible for the development, management and performance of Litronic's
networking and data security solutions and services. Mr. Brich has served as
executive vice president of technical services of Pulsar since September 1998.
From January 1998 to September 1998, Mr. Brich served as president of Infotex
Ltd., a developer of data security products. From September 1997 to December
1997, Mr. Brich served as director of business development for SFA, Inc., an
engineering services company. Mr. Brich served as executive vice president of
Management Systems Applications, Inc., a worldwide information and electronic
security provider, from June 1994 to September 1997. Mr. Brich served as senior
vice president of SEACOR, an engineering consulting firm from January 1990 to
June 1994. Mr. Brich retired as a commander in the U.S. Navy after 22 years of
service. Mr. Brich serves as chairman of the board of directors for the
Tidewater Center for Technology Access, a community charitable organization.
Mr. Brich holds a B.S. in education from East Stroudsburg University, an M.S.
from the Naval War College and an MBA from Marymount College. He also attended
strategic management curriculums at Wharton School of Business. Mr. Brich is
currently a Ph.D. candidate in business and education at Old Dominion
University.
Robert J. Gray has agreed to serve as our vice president, product
development upon the closing of this offering. Mr. Gray joined Litronic in May
1990. Mr. Gray served as president of Cyphernet, Inc., a division of Codercard,
Inc., a data security company, from January 1985 to May 1990. Mr. Gray has also
served as president of Genisco Computers Corp., a leading manufacturer of
computer graphics and imaging hardware for the computer aided design, image
processing and simulation markets. After obtaining his education in
meteorology, oceanography and computer sciences from various military schools
including the Naval Postgraduate School in Monterey, California, Mr. Gray
served as an officer in the U.S. Navy for 22 years, specializing in meteorology
and computer sciences. During his Naval career, Mr. Gray completed numerous
assignments within the Department of Defense, the National Security Agency and
the Naval Security Service.
William S. Holmes has agreed to serve as our vice president, commercial
marketing and sales, upon closing of this offering. Mr. Holmes has over thirty
years experience in the computer industry. Mr. Holmes joined Litronic in
October 1998 as vice president, marketing and sales. From September 1996 to
September 1998, Mr. Holmes served as vice president, sales and marketing for
Gigatron Software Corporation, a private information management company. From
April 1996 to September 1996, Mr. Holmes served as consultant to Novaquest
Infosystems Inc., a computer reseller. From October 1985 to April 1996, Mr.
Holmes served as vice president, managing director of California Software
Products, Inc. From June 1984 to October 1985, Mr. Holmes served as sales
manager of Data Logic Ltd., a subsidiary of Raytheon Corporation. From February
1971 to June 1984, Mr. Holmes served in project management for International
Computer Limited in England and South Africa. Mr. Holmes attended Watford
College of Technology in England.
Mark Gembicki has agreed to serve as one of our directors commencing as of
June , 1999. Mr. Gembicki is currently chairman and chief technology officer
of WarRoom Research Inc., an Annapolis, Maryland-based company Mr. Gembicki
founded in August 1995. WarRoom Research provides Internet-based technologies
and processes that enable organizations to effectively manage their enterprise-
wide knowledge for corporate advantage. Mr. Gembicki acted as an advisor to the
U.S. government from August 1993 to August 1995, consulting on topics focusing
on computer security applications and cybercrime investigations. Mr. Gembicki
has worked for, or advised, the U.S. government in computer security and
related fields for seventeen years. Mr.
70
<PAGE>
Gembicki is a co-author of The WarRoom Guide to Competitive Intelligence, which
provides analysis and information on business intelligence and information
security. Mr. Gembicki is cited in over 250 publications as well as television
and radio programs. In January 1999, Mr. Gembicki was the recipient of
Computerworld's Top 20 Visionaires for the Next Decade award.
Matthew Medeiros has agreed to serve as one of our directors commencing as
of June , 1999. Since February 1998, Mr. Medeiros has served as chairman and
chief executive officer of Phillips Flat Display Systems. Before joining
Phillips, Mr. Medeiros served as vice president and general manager for the
optical polymers group, and as vice president of business development for the
electronic materials division, of Allied Signal Inc. from January 1996 to
February 1998. Mr. Medeiros served as an executive officer of Radius, Inc.,
including as its vice president and general manager, MacIntosh systems, and as
its vice president operations and information systems, from March 1993 to
January 1996. Mr. Medeiros also previously served in executive positions with
Radius, Inc., NeXT Computer and Apple Computer, Inc. in which positions he
developed an extensive background in personal computer manufacturing,
operations and materials management. Mr. Medeiros received his B.S. in business
administration, management science and finance from the University of San
Francisco.
Board of directors
Our board of directors consists of three classes of directors. Class I, II
and III directors serve until our 2000, 2001 and 2002 annual meeting of
stockholders. After these initial terms, directors serve until the third annual
meeting of stockholders following their election or until a successor is duly
elected and qualified. Executive officers are elected by the board of directors
to serve until their successors are elected and qualified. Mr. Gembicki will
serve as a Class I director, Mr. Medeiros will serve as a Class II director,
and Messrs. Shah and Davis will serve as Class III directors.
We have agreed that for a period of three years from June , 1999, at
BlueStone's request, we will nominate and use our best efforts to elect two
designees of BlueStone as directors of our company or, at BlueStone's option,
as non-voting advisors to our board of directors. Our officers, directors and
stockholders have agreed to vote their common stock in favor of BlueStone's
designees. BlueStone has not yet exercised its designation right.
Directors compensation
Except for grants of stock options, directors will not receive any cash
compensation for their services as board members although they will be
reimbursed for expenses in attending board and committee meetings.
Committees of the board of directors
The board of directors will establish a compensation committee and an audit
committee to serve commencing as of June , 1999. The initial members of each
of the committees will be Messrs. Medeiros and Gembicki. The compensation
committee will be responsible for receiving and making recommendations to the
board on all compensation and hiring issues relating to officers and senior
staff members and administering the 1999 stock option plan. The audit committee
will be responsible for making recommendations to the board regarding the
selection of our independent accountants, consulting with our independent
accountants and financial and accounting staff and reviewing and reporting to
the board on the scope of audit procedures, accounting practices and internal
accounting and financial controls.
71
<PAGE>
Executive compensation
The following table lists the total compensation paid or accrued for the
year ended December 31, 1998 for our chief executive officer, who was the only
executive officer whose compensation was over $100,000 during the fiscal year
ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---- ----------------------------------------------
Salary
Name and Principal Position Year ($) Bonus ($) All Other Compensation
- --------------------------- ---- ------------ ---------------------------------
<S> <C> <C> <C> <C>
Kris Shah................... 1998 $ 231,998 -- (See below)
Chief Executive Officer and
Chairman of the Board
</TABLE>
Mr. Shah also received other fringe benefits from Litronic in his capacity
as chief executive officer and chairman of the board; however, those benefits
were less than $50,000 during the year ended December 31, 1998.
We anticipate that during the fiscal year ending December 31, 1999 the only
executive officers that will earn $100,000 or more will be Messrs. Shah, Davis
and Gray.
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------------- ---------------------------
(b) (c)
Number of % Of Total
Securities Options/SARS (d)
Underlying Granted to Exercise (e)
Options/ Employees in or Base Expiration (f) (g)
Name SARs Granted(#) Fiscal Year Price ($/SH) Date 5% ($) 10% ($)
- ---- --------------- ------------ ------------ ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Robert Gray............. 77,419 27.5% $0.70 None $ 34,082 $86,370
Thomas Seykora.......... 11,613 4.1% 0.70 12/31/03 5,112 12,956
</TABLE>
Option/SARs Grants in Last Fiscal Year
No other executive officer whose name appears in the table under
"Management-Executive officers, directors and key employees" received stock
options or stock appreciation rights in the year ended December 31, 1998.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at FY-End(#) at FY-End($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Gray................. 77,419 -- $410,321 --
Thomas Seykora.............. 2,323 9,310 $ 12,312 $49,343
</TABLE>
The value of the options described above is based upon the difference
between the exercise price per share and the estimated fair market value per
share at December 31, 1998, as determined by the board of directors, multiplied
by the number of shares subject to the options.
72
<PAGE>
Employment agreements
General
Kris Shah and William Davis have each entered into a two-year employment
agreement with Litronic, effective as of June , 1999. The agreement provides
that after the initial term it will automatically renew for successive one year
terms unless it is terminated by us or by the employee through written notice
given to the other party 90 days before the expiration of the then current
term. The agreements provide that Messrs. Shah and Davis will each receive an
annual salary of $175,000 for the 12-month period following the date of this
prospectus. Their salaries may be adjusted by our compensation committee. Each
of Messrs. Shah and Davis are also entitled to receive annual bonus awards of
$100,000 if we have earnings of $2.5 million or more and an additional $37,500
for each additional $1.0 million of earnings in excess of $2.5 million.
In making the calculation for the bonuses we will measure earnings before
interest and taxes and will add back the amortization of goodwill and other
intangibles resulting from the Pulsar acquisition.
Termination of employment
Each employment agreement provides that, in addition to being terminated
through the notice features described above, employment may be terminated as
follows:
. by the employee if the employee has good reason to terminate the
agreement. Good reason exists if:
. the employee is relieved of his position as, or is not reappointed
as, an officer of our company;
. the employee's title, office or responsibilities change
substantially;
. the employee's base salary is reduced to an amount that is less than
$175,000 or by more than 10%;
. we fail to maintain our employee benefit plan;
. we sell or transfer our company and fail to obtain the successor's
assumption of the employment agreement; or
. we fail to comply with a material term of the employment agreement
and fail to cure our default after appropriate notice.
. by us if we determine that due cause for termination exists. Due
cause exists if we find that the employee:
. intentionally misapplied our money or property;
. committed an act of dishonesty that harmed our company;
. was convicted of a felony or a crime involving moral turpitude;
. has used a controlled substance, including alcohol, which affects
his ability to perform his job duties; or
. breached the terms of the employee agreement.
. Additionally, we can terminate the agreement upon the employee's:
. death;
73
<PAGE>
. disability for more than 180 days after we give 30 days notice of
our intention to terminate the agreement; or
. retirement.
Finally, we can terminate the employment agreement for any other reason, at
any time, but we will be deemed to have constructively terminated the agreement
and will be liable to pay the employee the severance payment described below.
Payment upon termination
We may be obligated to make payments to the employee upon termination of
employment depending on the circumstances surrounding the termination.
Following is a description of situations in which we may or may not be
obligated to make severance payments:
. If the employment agreement is terminated by the employee after giving
notice, by us for cause or by the employee in breach of the agreement,
we will not be obligated to pay any compensation after the termination
date, except:
. employee benefits;
. unpaid base salary the employee has earned which we have not yet
paid; and
. vested stock options.
. If the employment agreement is terminated by the employee for good
reason or by us through a constructive termination, we will be obligated
to pay the employee:
. his annual salary through the latter of the end of the employment
agreement term or a period of two years;
. a pro rata bonus for the fiscal year in which the termination
occurs;
. continuing medical and life employee benefits for six months after
the termination; and
. vested stock options.
Confidentiality and noncompete clauses
Each of the employment agreements also contains noncompete, confidentiality
and nondisclosure clauses designed to protect our intellectual property.
Additionally, each agreement contains a provision designed to preclude the
employee from claiming rights to any products or technologies he developed
while in our employ or for a two-year period following his termination.
Stock option plans
1998 stock option plan
Our 1998 stock option plan was established to provide directors, officers
and employees with an opportunity to invest in us and to advance our interest
and our stockholders' interests by enabling us to attract and retain qualified
personnel. Under the plan our board of directors has authority to grant
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986 to our employees and non-qualified stock options to our
employees, officers and directors or to some other individuals as the board
determined. Generally, the board of directors has discretion to amend, suspend
or terminate the plan from time to time. Administration of the plan may be
delegated to a committee appointed by the board of directors. The option period
and
74
<PAGE>
provisions for exercise of each option granted are determined by the committee
at the time of each the grant. Unless it is terminated earlier, the plan
terminates on April 1, 2008.
Options to purchase an aggregate of 281,419 shares of common stock have been
granted under the 1998 stock option plan at an exercise price of $.70 per
share. Of these, options to purchase 142,927 shares are vested as of the date
of this prospectus. Of these options,
. options to purchase 77,419 shares have been granted to Mr. Gray, all of
which have vested;
. options to purchase 11,613 shares have been granted to Mr. Seykora, of
which options to purchase 2,323 shares have vested and the remaining
9,073 options will vest at a rate of 2,323 shares per year;
. options to purchase 11,613 shares have been granted to William Holmes,
of which 1,742 have vested and the remaining 9,871 shares will vest at a
rate of 2,323 per year.
No additional options will be granted under the 1998 stock option plan.
1999 stock option plan
Our 1999 stock option plan is intended to provide directors, officers and
employees with an opportunity to invest in us and to advance our interest and
our stockholders' interests by enabling us to attract and retain qualified
personnel. Under the plan our board of directors has authority to grant
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986 to our employees and non-qualified stock options to our
employees, officers and directors or to some other individuals as the board may
determine. Generally, the board of directors has discretion to amend, suspend
or terminate the plan from time to time. Administration of the plan may be
delegated to a committee appointed by the board of directors. The option period
and provisions for exercise of each option granted shall be determined by the
committee at the time of the grant. A total of 600,000 shares of common stock
have been reserved for issuance in the aggregate under the plan. Unless it is
terminated earlier, the plan will terminate on March 31, 2009. Options or other
awards that are granted under the plan but which expire unexercised are
available for future grants.
Options to purchase an aggregate of 50,800 shares of common stock have been
granted under the 1999 stock option plan at an exercise price equal to the
initial public offering price. None of these options are vested as of the date
of this prospectus. Of these options,
. options to purchase 10,000 shares have been granted to Thomas Seykora,
of which options to purchase 2,000 shares will vest as of the date that
is one year from the date of this prospectus and the remaining 8,000
options will vest at a rate of 2,000 shares per year;
. options to purchase 7,500 shares have been granted to Mark Gembicki, of
which options to purchase 1,500 shares will vest as of the date that is
one year from the date of this prospectus and the remaining 6,000
options will vest at a rate of 1,500 shares per year;
. options to purchase 7,500 shares have been granted to Matthew Medeiros,
of which options to purchase 1,500 shares will vest as of the date that
is one year from the date of this prospectus and the remaining 6,000
options will vest at a rate of 1,500 shares per year.
In addition, options to purchase 9,000 shares will be granted to Robert
Brich at the date of the Pulsar acquisition, of which options to purchase 1,800
shares will vest as of the date that is one year from the date of the Pulsar
acquisition and the remaining 7,200 options will vest at a rate of 1,800 shares
per year;
75
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents, as of the date of this prospectus, information
we know regarding the beneficial ownership of our common stock by (a) each
person or entity known to us to own beneficially more than 5% of the common
stock, (b) each director, (c) each director nominee, (d) each named executive
officer, and (e) all directors and executive officers as a group. In presenting
this information, we have:
. given effect to the Pulsar acquisition;
. assumed that there are 6,040,631 shares outstanding as of the date of
this prospectus and 9,740,631 shares outstanding immediately after the
consummation of this offering.
The address of each person in the table below is the address of Litronic.
<TABLE>
<CAPTION>
Percentage of Outstanding
Number of Shares Beneficially Owned
Shares -------------------------
Name and Address of Beneficially Before After
Beneficial Owner Owned Offering Offering
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Kris Shah.................... 3,220,479 53.3% 33.1%
William W. Davis, Sr......... 1,084,969 18.0% 11.1%
Lillian Davis................ 1,084,969 18.0% 11.1%
Ramesh R. Shah
Patricia L. Shah............ 463,657 7.7% 4.8%
Robert J. Gray............... 77,419 1.3% .8%
Matthew Medeiros............. 0 0% 0%
Mark Gembicki................ 0 0% 0%
All directors and executive
officers as a group (8
persons).................... 4,367,019 71.3% 44.4%
</TABLE>
In calculating the information in this table, we relied on the following
assumptions:
. all the persons named in the table have sole voting and investment power
over all shares they beneficially own, subject to community property
laws, where applicable;
. a person or entity is considered the beneficial owner of securities that
it can acquire through the exercise of options within 60 days from the
date of this prospectus;
. In calculating each beneficial owner's percentage ownership we assumed
that only options held by that person that are exercisable within 60
days from the date of this prospectus have been exercised.
The shares beneficially owned by Kris Shah include: (a) 435,301 shares held
by the Chandra L. Shah Trust, of which Mr. Shah is the trustee, (b) 435,301
shares held by the Leena Shah Trust, of which Mr. Shah is the trustee and (c)
2,349,877 shares held by the Kris and Geraldine Shah Family Trust, of which Mr.
Shah and his wife are the trustees and beneficiaries.
The shares beneficially owned by Ramesh R. Shah and Patricia L. Shah are
held by the Ramesh R. Shah and Patricia L. Shah Living Trust, of which Ramesh
R. Shah and Patricia L. Shah are trustees and beneficiaries. Ramesh Shah is the
brother of Kris Shah and Patricia Shah is the sister-in-law of Kris Shah.
The shares beneficially owned by Mr. Gray are shares issuable upon exercise
of his currently exercisable options.
76
<PAGE>
The shares beneficially owned by all directors and executive officers as a
group include 80,904 shares issuable upon exercise of currently exercisable
options and exclude 103,846 shares issuable upon exercise of options which
become exercisable at various times commencing December 31, 1999. The inclusion
of shares in this table as beneficially owned is not an admission of beneficial
ownership.
RELATED PARTY TRANSACTIONS
The Pulsar acquisition
Litronic entered into a stock acquisition agreement with Pulsar and William
W. Davis, Sr., our president and chief operating officer, and Lillian Davis,
the former stockholders of Pulsar. The agreement provides that Mr. Davis and
Ms. Davis will exchange all of their stock for an aggregate of 2,169,938 shares
of our common stock simultaneously with the closing of this offering. The
shares of our common stock that Mr. Davis and Ms. Davis will receive are valued
at approximately $21.7 million, based on an assumed initial public offering
price of $10.00 per share. As a result of the Pulsar acquisition, Pulsar will
become a wholly-owned subsidiary of Litronic and William Davis and Lillian
Davis will become principal stockholders of Litronic.
Other transactions with related parties
We had obligations aggregating approximately $211,000 to Kris Shah, our
chief executive officer and chairman of the board, for accrued compensation at
December 31, 1994. On January 2, 1995, this obligation was converted into an
unsecured note, bearing interest at an annual rate of 8%, which was due on
December 31, 1998. On October 29, 1997, the aggregate principal and interest
amounting to approximately $252,000 due on the note was repaid.
In 1996 and 1997, in the ordinary course of business, we have financed
equipment for our operations in the aggregate amount of approximately $1.5
million. These obligations were personally guaranteed by Kris Shah, and were
satisfied in full during 1997.
In June 1995, Davis Holding, Inc., a privately held corporation owned
entirely by the son of William W. Davis, Sr., purchased a building in Atlanta,
Georgia. This purchase was financed through loans to Davis Holding, Inc. from
Wilmington Trust Company in the amount of $2.4 million.
Between July 1995 and June 1996, Pulsar made a series of eight loans
aggregating $2.8 million to Davis Holding, Inc. These loans bear interest at
annual rates varying from 7.5% to 10.0% and are due on demand. Two of these
loans were in the form of assignment of notes receivable to Pulsar from third
parties in the aggregate principal amount of $623,000, which were assigned back
to Pulsar in December 1997. The notes were written off as bad debt expense in
the year ended December 31, 1997.
In October 1995, Davis Holding, Inc. and Mr. Davis' son purchased Palmer III
Limited Partnership. At the time of the purchase, the principal asset of Palmer
was a building in Lanham, Maryland. This purchase was financed through a loan
to Davis Holding, Inc. from Wilmington Trust Company in the amount of $2.8
million which was guaranteed by Pulsar and personally guaranteed by William W.
Davis, Sr. and Lillian Davis. Following the acquisition of the building, Davis
Holding, Inc. leased a portion of the Lanham, Maryland building to Pulsar at
fair market rate rents. Payments of rent under the lease were $1,042,000,
$955,500 and $409,500 during the years ended December 31, 1996, 1997 and 1998.
A portion of the rent expense incurred under the related party
77
<PAGE>
lease was used to offset the notes receivable balance of the related party. The
amount of rent expense used to offset the notes receivables from Davis Holding,
Inc. for the years ended December 31, 1997 and 1998 was $182,000 and $344,000.
In addition, principal and interest under the notes were reduced by $750,000 as
payment of a fee for terminating the lease as of September 30, 1998. As of
January 1, 1999, the approximately $1.3 million outstanding under these loans
was converted into a $543,000 promissory note and a $804,000 promissory note,
each bearing interest at an annual rate of interest of 7.5%, payable monthly,
and maturing upon the sales of the Lanham, Maryland and Atlanta, Georgia
properties. On April 30, 1999, Davis Holding, Inc. sold the Lanham property.
The proceeds from the sale of the building went into an escrow account with
Wilmington Trust Company. On May 5, 1999, Wilmington Trust offset the Davis
Holding, Inc. note of $543,000, plus interest of $4,000 against the outstanding
Pulsar loan balance with Wilmington Trust Company. A determination was made on
the remaining $804,000 note that there were not sufficient assets within Davis
Holding, Inc. to repay the outstanding notes payable in the future. Therefore,
the remaining receivable was completely reserved as of December 31, 1998.
In May 1996, Pulsar entered into a line of credit with Wilmington Trust
Company which was personally guaranteed by William W. Davis, Sr., and Lillian
Davis. Under the line of credit, Pulsar could borrow up to the lesser of its
accounts receivable or $22.0 million secured by a pledge of eligible accounts
receivable, inventory, machinery and equipment. Interest on the outstanding
line of credit accrues at a variable rate of interest. In October 1997, the
line of credit was converted to a term loan of $5.2 million which is guaranteed
by William W. Davis, Sr., Lillian Davis, Palmer III Limited Partnership and
Davis Holding, Inc., and is secured by an indemnity mortgage and security deed
from Palmer III Limited Partnership on its Lanham, Maryland property and a
security deed from Davis Holding, Inc. on its Atlanta, Georgia property.
We had an unsecured revolving line of credit up to $1.0 million from Kris
Shah which accrued interest at an annual rate of 8%. All unpaid principal and
interest under this line was repaid during 1996. During the year ended December
31, 1996, $30,000 of the interest under this line was paid to Mr. Shah. The
line of credit expired on January 31, 1997 and was not renewed.
In June 1996, we entered into a one-year loan and security agreement with
Fidelity Funding, Inc., which was personally guaranteed by Kris Shah. Under the
agreement, Fidelity extended a variable rate credit line of up to $5.95
million, of which $1.0 million was collateralized by fixed assets, $2.2 million
was collateralized by real estate, $2.5 million was collateralized by accounts
receivable and inventory and $250,000 in the form of a standby line of credit.
In September 1997, we sold the building securing the $2.2 million real estate
line and repaid the line. In March 1998, the $2.5 million revolving credit
facility was extended to February 2000. As of March 31, 1999, $424,000 was
outstanding under this facility. We intend to repay the outstanding
indebtedness under this credit facility out of the proceeds from this offering.
This will release Mr. Shah's guarantee.
In December 1996, we entered into a line of credit at a fixed annual rate of
interest of 6.6% with the Bank of Yorba Linda for up to $1.0 million, which was
personally guaranteed by Kris Shah and his wife, Geraldine Shah, and secured by
a pledge of their personal assets. This line was repaid in June 1997.
In January 1997, we formed KRDS, Inc. as a wholly owned subsidiary in
connection with the acquisition of real estate. In connection with the
formation of KRDS, Inc. we made a capital contribution in the amount of $8.5
million to KRDS, Inc. Following the acquisition, KRDS leased to us at market a
portion of the property acquired to use in our former Intercon division. In
December 1997, we made a cash distribution of $9.5 million to our stockholders.
Subsequently, as discussed below, we distributed the capital stock and net
assets of KRDS to our stockholders. As a result of the
78
<PAGE>
KRDS distribution, we removed the property and the corresponding mortgage and
related liabilities from our consolidated balance sheet. Following the
distribution, we borrowed $2.9 million from KRDS which was evidenced by an
unsecured promissory note. In February 1998, we borrowed an additional $600,000
from KRDS which borrowing was evidenced by an unsecured promissory note. Each
of these notes bore interest at an annual rate of 10% and were paid in full in
September 1998 with the proceeds of our loan from BYL Bank Group.
In October 1997, Pulsar entered into an inventory and working capital
financing agreement with IBM Global which provides that Pulsar can finance
purchases of products through IBM Global. As amended on February 2, 1999, the
agreement provides for a credit line up to the lesser of $8 million, a
specified percentage of Pulsar's eligible accounts receivable or a specified
percentage of Pulsar's on-hand inventory. The credit line is secured by
substantially all of Pulsar's assets and personal assets of William W. Davis,
Sr. and is personally guaranteed by Mr. Davis and Lillian Davis. We intend to
repay a portion of the indebtedness outstanding under this financing agreement
using proceeds from this offering.
During the year ended December 31, 1997 we made pro rata distributions to
our stockholders of: (a) $9.5 million in cash, (b) the rights to the contingent
payment relating to the sale of our Intercon division, (c) the rights to a
gross-up payment for expected tax liability resulting from the gain on the sale
of our Intercon division and (d) the capital stock and net assets of KRDS
consisting of $8.5 million of cash.
From January 1, 1998 through June 3, 1999, we executed promissory notes
aggregating $6.6 million in favor of BYL Bank Group at a fixed annual rate of
interest of 6.6%. The notes are personally guaranteed by Kris Shah and secured
by a pledge of personal assets of Mr. Shah. We intend to use a portion of the
proceeds of this offering to repay the indebtedness under this loan, at which
time Mr. Shah's guarantee and the assets pledged by Mr. Shah will be released.
Mr. Davis loaned to Pulsar $120,000 on November 23, 1998 and $95,000 on
January 5, 1999. These loans bear interest at the annual rate of 6% beginning
April 1, 1999.
In May 1999, we entered into a three-year loan and security agreement with
Fidelity Funding, Inc. relating to a new $20 million line of credit facility
secured by substantially all of our personal and real property. The facility
has an annual interest rate of prime plus .625% and provides for a cap on our
borrowings equal to 85% of our eligible accounts receivable plus the lesser of
50% of the value of our eligible on-hand inventory or $1.0 million. Messrs.
Shah and Davis have guaranteed the validity of representations and warranties
made, and the absence of fraud, in connection with the agreement and have
agreed to indemnify Fidelity with respect to disputes concerning accounts
receivable securing the facility.
DESCRIPTION OF SECURITIES
Upon the closing of the offering, our authorized capital stock will consist
of 25,000,000 shares of common stock, $.01 par value per share and 5,000,000
shares of preferred stock, $.01 par value per share. As of the date of this
prospectus, there are 3,870,693 shares of our common stock held of record by
five stockholders, and, after giving effect to the Pulsar acquisition, there
will be 6,040,631 shares of our common stock outstanding held of record by
seven stockholders.
Common stock
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Therefore, holders of a
79
<PAGE>
majority of the shares of common stock may elect all of the directors standing
for election. Holders of common stock are entitled to receive any dividends
that are declared by the board of directors. Upon our liquidation, dissolution
or winding up, and after payment of all debts and other liabilities, holders of
our common stock are entitled to receive our remaining net assets. Holders of
common stock have no preemptive, subscription or redemption rights. The
outstanding shares of common stock are, and the shares we are offering in this
offering will be when issued and paid for, fully paid and non-assessable.
Preferred stock
Our certificate of incorporation authorizes our board of directors to issue
up to 5,000,000 shares of preferred stock with a par value of $.01 per share.
The board may issue the stock in one or more series and may determine the
price, rights, including voting rights, preferences, privileges and
restrictions of each series of preferred stock, without any vote or action by
our stockholders. The board may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of the common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a change in control and may adversely affect the market price of the
common stock and the voting and other rights of the holders of common stock. As
of the date of this prospectus, no shares of preferred stock have been issued.
Registration rights
We have entered into a registration rights agreement with our stockholders
which grants our stockholders the right to include their shares in any
registration of our common stock in an underwritten offering that occurs after
this offering. All of the stockholders have agreed not to exercise this right
for two years following the closing of this offering, without the prior written
consent of BlueStone. We have also granted the representatives of the
underwriters registration rights with respect to their warrants to purchase up
to 370,000 shares of our common stock.
Anti-takeover provisions
Delaware General Corporation Law
Section 203 of the Delaware General Corporation Law generally prohibits us
from engaging in a merger, asset sale and other transaction with an interested
stockholder that results in a financial benefit to the interested stockholder
for a three-year period from the date the person became an interested
stockholder unless (a) before that date, our board of directors approved either
the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (b) upon completion of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of our voting stock outstanding at
the time the transaction commenced, excluding select shares, or (c) on or after
that date, the business combination is approved by our board of directors and
by the affirmative vote of at least 66% of our outstanding voting stock which
is not owned by the interested stockholder. Generally, an interested
stockholder is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of our voting stock.
Our certificate of incorporation does not exclude Litronic from the
restrictions imposed under Section 203 of the Delaware General Corporation Law.
We expect the provisions of Section 203 of the Delaware General Corporation Law
may encourage companies interested in acquiring us to negotiate in advance with
the board, since the stockholder approval requirement would be avoided if
80
<PAGE>
a majority of the directors then in office approve, before the time the
stockholder becomes an interested stockholder, either the business combination
or the transaction which results in the stockholder becoming an interested
stockholder.
Under Delaware General Corporation Law the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend our certificate
of incorporation or bylaws.
Charter and bylaw provisions
Our certificate of incorporation and bylaws divide the board into three
classes as nearly equal in size as possible with staggered three-year terms.
The classification of the board could make it more difficult for a third party
to acquire, or discourage a third party from acquiring, control of us. In
addition, our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders at an annual meeting or a special
meeting may be taken only if it is properly brought before the meeting, and may
not be taken by written action instead of a meeting. Our bylaws provide that
special stockholders' meetings may be called only by the board, the president,
or by one or more stockholders holding shares in the aggregate entitled to cast
not less than 10% of the votes at that meeting.
Delaware law and charter and bylaw provisions limiting liability of officers
and directors
Our certificate of incorporation contains provisions limiting the liability
of our directors. Specifically, the provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in cases involving
wrongful acts, such as the breach of a director's duty of loyalty, or acts or
omissions which involve intentional misconduct or a knowing violation of law.
Further, our certificate of incorporation contains provisions to indemnify our
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law. We believe these provisions will assist us in attracting and
retaining qualified individuals to serve as directors.
Transfer agent and registrar
The transfer agent and registrar for the common stock is American Stock
Transfer Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
An aggregate of 3,870,693 of the 6,040,631 shares currently restricted from
trading in the public market will become eligible for sale 90 days following
the date of this prospectus, subject to agreements with BlueStone restricting
their sale for periods of at least six months. We cannot predict the effect, if
any, that sales of these additional securities or the availability of these
additional securities for sale will have on the market prices prevailing from
time to time. In addition, the representatives have been granted registration
rights commencing one year from the date of this prospectus providing for the
registration under the Securities Act of the securities issuable upon exercise
of the representatives' warrants. The exercise of these rights could result in
substantial expense to us. Furthermore, if the representatives exercise their
registration rights, they will be unable to make a market in our securities for
up to nine days before the initial sales of the warrants until the
discontinuation of sales. If the representatives cease making a market, the
market and market prices for the securities may be adversely affected and the
holders of these securities may be unable to sell them.
Upon completion of this offering, we will have outstanding an aggregate of
9,740,631 shares of our common stock, assuming no exercise of the
representatives' over-allotment option and no exercise of outstanding options.
Of these shares, all of the shares sold in this offering will be freely
81
<PAGE>
tradable without restriction or further registration under the Securities Act,
unless these shares are purchased by our affiliates. The remaining 6,040,631
shares of common stock held by existing stockholders are restricted securities
under Rule 144 under the Securities Act. Restricted securities may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 under the Securities Act.
Contractual restrictions on resales
All of our officers, directors and stockholders have agreed not to transfer
or dispose of, directly or indirectly, any of their shares of our common
stock, or any securities convertible into or, exchangeable or exercisable for
shares of our common stock, for a period of 24 months from the date of this
prospectus. Transfers or dispositions may be made sooner than 24 months as
follows:
. BlueStone may waive the restrictions on transfer or sale at any time
more than six months after the date of this prospectus; or
. beginning twelve months after the date of this prospectus, owners
subject to the restrictions may transfer or dispose of their common
stock, without BlueStone's permission, if aggregate sales by them in any
90-day period are not more than the greater of:
. one percent of our common stock outstanding at the time of the sale;
or
. the average weekly trading volume of our common stock during the
four calendar weeks preceding the holder's sale.
All of our optionholders who are not directors, officers or stockholders
have agreed not to transfer or dispose of, directly or indirectly, any of
their shares of common stock issued upon the exercise of their options for a
period of 12 months from the date of this prospectus. Beginning 12 months
after the date of this prospectus, existing optionholders may transfer or
dispose of all of their common stock then issuable upon exercise of their
options, which are registered under a Form S-8 registration statement.
Subject to these contractual restrictions and to the provisions of Rule
144, 3,870,693 shares of common stock will be available for sale in the public
market commencing six months after the date of this prospectus, and an
additional 2,169,938 shares of common stock will be available for sale in the
public market commencing twelve months after the date of this prospectus.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of those shares that does not exceed the greater
of:
. one percent of the number of common shares then outstanding, which will
equal approximately 97,400 shares immediately after this offering; or
. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for the sale.
Sales under Rule 144 are also subject to restrictions on the manner of sale
and require notice to the Securities and Exchange Commission of the sale.
Sales under Rule 144 are also restricted based on the availability of public
information about us.
82
<PAGE>
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, 144(k) shares may be sold immediately upon the
completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases securities, including
options, from us before the date of this prospectus through our stock option
plans or through some other written agreement is eligible to resell those
shares, including shares issued upon the exercise of options, 90 days after the
effective date of this offering in reliance on Rule 144, but without compliance
with the holding period, information and volume restrictions contained in Rule
144.
UNDERWRITING
BlueStone Capital Partners, L.P. and Pacific Crest Securities Inc. are
acting as representatives of the several underwriters named below. The
underwriters have agreed, severally and not jointly, subject to the terms and
conditions contained in the underwriting agreement relating to this offering,
to purchase the 3,700,000 shares of our common stock. The number of shares of
common stock that each underwriter has agreed to purchase appears opposite its
name below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
BlueStone Capital Partners, L.P.............................
Pacific Crest Securities Inc................................
---------
Total..................................................... 3,700,000
=========
</TABLE>
Other than shares offered through the over-allotment option, the
underwriters are committed to purchase and pay for all of the shares of common
stock offered by this prospectus, if any shares are purchased. The obligations
of the underwriters under the underwriting agreement are subject to approval of
legal matters by counsel and to various other conditions.
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the public offering price listed on
the cover page of this prospectus. The underwriters may allow to dealers who
are members of the National Association of Securities Dealers, Inc.
concessions, not in excess of $. per share, of which not in excess of $. per
share may be reallowed to other dealers who are members of the NASD.
We have granted to the representatives an option, exercisable not later than
45 days after the date of this prospectus, to purchase up to 555,000 additional
shares of our common stock at the public offering price appearing on the cover
page of this prospectus, less underwriting discounts and commissions. The
representatives may exercise this option only to cover over-allotments, if any,
made in connection with the sale of the shares of common stock offered by this
prospectus. If the representatives exercise the over-allotment in full, the
total price to public would be $ , the
83
<PAGE>
total underwriting discounts and commissions would be $ and the total
proceeds paid to us, before payment of the expenses of this offering, would be
$ . We estimate the expenses of this offering, including those payable to or
on behalf of the representatives and/or the underwriters described below, to be
$2.8 million.
We have agreed to reimburse the representatives for their accountable out-
of-pocket expenses incurred in connection with this offering, up to a maximum
amount equal to 1% of the gross proceeds derived from the sale of the shares
offered by this prospectus, including shares sold, if any, as a result of the
exercise of all or part of the representatives' over-allotment option. We have
also agreed to pay all expenses in connection with qualifying the shares
offered under the laws of the states designated by the representatives,
including fees and expenses of counsel retained for this purpose by the
representatives.
At the closing of this offering, we will sell to the representatives and
their designees, for an aggregate of $370, warrants to purchase up to 370,000
shares of our common stock. The representatives' warrants will be exercisable
at any time, in whole or in part, during the four-year period commencing one
year from the date of this prospectus, at an exercise price of $ per share,
which is 165% of the public offering price per share. The representatives'
warrants also provide that if we issue to all of our stockholders any rights,
warrants or options to subscribe for our securities, the holders of any
unexercised representatives' warrants then would be entitled to receive the
number of these rights, warrants or options which they would have been entitled
to receive if they held the number of shares of common stock then issuable upon
exercise of their warrants. The representatives' warrants may not be sold,
transferred, assigned, pledged or hypothecated during the one-year period
following the date of this prospectus, except to the officers and partners of
the representatives or the underwriters or members of the selling group. During
the exercise period, the holders of the representatives' warrants will have the
opportunity to profit from a rise in the market price of the common stock,
which will dilute the interests of our stockholders. We expect that the
representatives' warrants will be exercised when we would, in all likelihood,
be able to obtain any capital we need on terms more favorable than those
provided by the representatives' warrants. Any profit realized by the
representatives on the sale of their warrants or the underlying shares of
common stock may be deemed additional underwriting compensation. The
representatives' warrants contain a cashless exercise provision. We have agreed
that, upon the request of the holders of a majority of the representatives'
warrants, we will at our own expense, on one occasion during the exercise
period, register the shares of common stock underlying the representatives'
warrants under the Securities Act. We have also agreed to include all shares of
common stock underlying the warrants in any appropriate registration statement
which we file under the Securities Act during the seven years following the
date of this prospectus. We have also agreed to indemnify holders of the common
stock underlying the warrants against civil liabilities arising from a
registration statement covering these shares.
In connection with the acquisition of Pulsar, BlueStone has served as our
financial advisor and will receive a fee of $500,000 for these services upon
closing of this offering.
All of our officers, directors and securityholders have agreed not to sell,
offer for sale, transfer, pledge or dispose of any of their shares of our
common stock, or securities convertible, exchangeable or exercisable for shares
of our common stock, for a period of 24 months from the date of this
prospectus, provided that, after the first six months of this period, this
restriction can be waived by BlueStone, in its sole discretion, and provided
further that, after the first 12 months of this period, sales may be made,
without BlueStone's consent, as long as the number of shares or share
84
<PAGE>
equivalents sold by any of these holders does not exceed, during any 90-day
period, the greater of (a) 1% of the then outstanding shares of our common
stock and (b) the average weekly trading volume of our common stock during the
four calendar weeks preceding the holder's sale.
The representatives have informed us that they do not expect sales of the
securities offered to discretionary accounts to exceed 3% of the shares
offered by this prospectus.
We have agreed to indemnify the underwriters against civil liabilities,
including liabilities under the Securities Act.
Before this offering there has been no public market for our common stock.
Accordingly, the initial public offering price of the common stock will be
determined by negotiation between us and the representatives and may not
necessarily be related to our asset value, net worth or other established
criteria of value. Factors to be considered in determining the price include
our financial condition and prospects, an assessment of our management, market
prices of similar securities of comparable publicly-traded companies,
financial and operating information of companies engaged in activities similar
to our activities and the general condition of the securities market.
In connection with this offering, the underwriters may engage in passive
market making transactions in the shares on Nasdaq in accordance with Rule 103
of Regulation M promulgated under the Exchange Act.
In connection with this offering, the underwriters may purchase and sell
the common stock in the open market. These transactions may include over-
allotment and stabilizing transactions. Stabilizing transactions consist of
bids or purchases for the purpose of preventing or retarding a decline in the
market price of the common stock. The underwriters may also place bids or
purchase shares to reduce a short position created in connection with the
offering. Short positions are created by persons who sell shares which they do
not own in anticipation of purchasing shares at a lower price in the market to
deliver in connection with the earlier sale. Short positions tend to place
downward pressure on the market price of a stock. In addition, the
representatives and/or the underwriters may impose a penalty bid by reclaiming
the selling concession to be paid to an underwriter or selected dealer when
the securities sold by the underwriter or selected dealer are purchased to
reduce a short position created in connection with this offering. These
activities may stabilize or maintain the market price of the common stock,
which may be higher than the price that might have prevailed in the open
market without these activities, and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on Nasdaq or the
over-the-counter market.
LEGAL MATTERS
The validity of the shares of our common stock offered by this prospectus
will be passed upon for us by Arent Fox Kintner Plotkin & Kahn, PLLC,
Washington, D.C. Tenzer Greenblatt LLP, New York, New York has served as
counsel to the underwriters in connection with this offering.
EXPERTS
The consolidated financial statements of Litronic Inc. as of December 31,
1997 and 1998, and for each of the years in the three-year period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
85
<PAGE>
The financial statements of Pulsar Data Systems, Inc. as of and for the year
ended December 31, 1998 have been included herein and in the registration
statement in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG LLP covering the
December 31, 1998 financial statements contains an explanatory paragraph that
states Pulsar Data Systems, Inc.'s losses from operations and working capital
deficiency raise substantial doubt about the entity's ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
The financial statements and schedules of Pulsar Data Systems, Inc. as of
December 31, 1997, and for each of the years in the two-year period ended
December 31, 1997, have been included in this prospectus and in the
registration statement in reliance upon the report of Keller Bruner & Company,
L.L.C., independent certified public accountants, appearing elsewhere in this
prospectus, and upon the authority of Keller Bruner & Company, L.L.C. as
experts in accounting and auditing. The report of Keller Bruner & Company,
L.L.C. covering the December 31, 1997 financial statements contains an
explanatory paragraph that states that Pulsar's recurring losses from
operations and net capital deficiency raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
WHERE YOU CAN FIND MORE INFORMATION
We intend to furnish to our stockholders annual reports containing audited
consolidated financial statements examined by an independent accounting firm
and quarterly reports for the first three quarters of each fiscal year
containing interim unaudited consolidated financial information.
We have filed with the Securities and Exchange Commission a registration
statement, including this prospectus and exhibits, on Form S-1 under the
Securities Act for the common stock offered by this prospectus. This prospectus
does not contain all of the information contained in the registration
statement. References in this prospectus to any contract, agreement or other
document are not necessarily complete. For a more complete description of any
of these contracts, agreements or other documents, you should refer to the
registration statement and the exhibits attached to the registration statement,
which may be obtained for a fee from the Securities and Exchange Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or
at its regional offices located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Also, we have filed electronic versions of this
registration statement, including its exhibits and this prospectus, with the
Securities and Exchange Commission through its electronic data gathering,
analysis, and retrieval system. The Securities and Exchange Commission
maintains a worldwide web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission.
86
<PAGE>
LITRONIC INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998, and March
31, 1999 (unaudited) and March 31, 1999 Pro Forma (unaudited)............ F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).............................................................. F-4
Consolidated Statements of Shareholders' Deficit for the years ended
December 31, 1996, 1997 and 1998, and the three months ended March 31,
1999 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
(WHEN THE REORGANIZATION AS DESCRIBED IN NOTE 1 OF THE ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A
POSITION TO RENDER THE FOLLOWING OPINION.)
/s/ KPMG LLP
The Board of Directors
Litronic Inc.:
We have audited the accompanying consolidated financial statements of
Litronic Inc. and subsidiary as of December 31, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998 as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Litronic
Inc. and subsidiary as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Orange County, California
February 26, 1999
F-2
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31 March 31
--------------- -----------------------
1999
1997 1998 1999 Pro Forma
------- ------ ----------- -----------
(Unaudited) (Unaudited)
(Note 1)
<S> <C> <C> <C> <C>
ASSETS (NOTE 5)
Cash and cash equivalents............. $ 490 898 557 557
Accounts receivable (note 8).......... 996 740 652 652
Inventories (note 3).................. 405 533 452 452
Other current assets.................. 136 385 984 984
------- ------ ------ ------
Total current assets............ 2,027 2,556 2,645 2,645
Property and equipment, net (note 4).. 320 235 250 250
------- ------ ------ ------
$ 2,347 2,791 2,895 2,895
======= ====== ====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current installments of long-term debt
(note 5)............................. $ -- 580 424 424
Accounts payable...................... 415 456 911 911
Accrued liabilities (note 6).......... 1,227 762 790 790
------- ------ ------ ------
Total current liabilities....... 1,642 1,798 2,125 2,125
Long-term debt, less current
installments (note 5)................ 606 5,200 5,950 5,950
Notes payable to related parties (note
7)................................... 2,900 -- -- --
------- ------ ------ ------
Total liabilities............... 5,148 6,998 8,075 8,075
Shareholders' deficiency (note 10):
Preferred stock, $0.01 par value.
Authorized 5,000,000 shares; no
shares issued or outstanding..... -- -- -- --
Common stock, $0.01 par value.
Authorized 25,000,000 shares;
issued and outstanding 3,870,693
shares........................... 39 39 39 39
Additional paid-in capital.......... -- -- -- (5,219)
Accumulated deficit................. (2,840) (4,246) (5,219) --
------- ------ ------ ------
Net shareholders' deficit............. (2,801) (4,207) (5,180) (5,180)
------- ------ ------ ------
Commitments and contingencies (note 9)
$ 2,347 2,791 2,895 2,895
======= ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Product (note 8)....... $ 7,855 8,627 5,214 1,354 885
License and service
(note 8).............. 1,541 1,539 1,041 309 156
Research and
development........... -- -- 398 -- 369
--------- --------- --------- --------- ---------
Total revenue....... 9,396 10,166 6,653 1,663 1,410
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales -
product............... 4,098 3,211 2,821 667 507
Cost of sales - license
and service .......... 581 643 950 176 140
Selling, general and
administrative ....... 2,052 3,487 2,631 662 871
Research and
development .......... 725 1,172 1,334 341 765
--------- --------- --------- --------- ---------
Operating income
(loss)............. 1,940 1,653 (1,083) (183) (873)
Interest expense, net
(notes 5 and 7)........ 19 42 418 108 109
--------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations
before income taxes.... 1,921 1,611 (1,501) (291) (982)
Provision for (benefit
from) income taxes..... 29 22 (95) (51) (9)
--------- --------- --------- --------- ---------
Earnings (loss) from
continuing operations.. 1,892 1,589 (1,406) (240) (973)
Discontinued operations
(note 2):
Loss from discontinued
operations, net of
applicable income tax
benefit of $13 in
1996 and $23 in
1997................. (986) (1,278) -- -- --
Gain on disposal of
discontinued
operations, net of
income tax expense of
$241................. -- 15,023 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss)..... $ 906 15,334 (1,406) (240) (973)
========= ========= ========= ========= =========
Pro forma net earnings
(loss) (unaudited):
Historical earnings
(loss) from
continuing operations
before income taxes.. $ 1,921 1,611 (1,501) (291) (982)
Pro forma provision
for (benefit from)
income taxes......... 672 547 (510) (99) (333)
--------- --------- --------- --------- ---------
Pro forma earnings
(loss) from
continuing
operations........... 1,249 1,064 (991) (192) (649)
Discontinued
operations, net of
applicable pro forma
income tax effect.... (599) 8,377 -- -- --
--------- --------- --------- --------- ---------
Pro forma net earnings
(loss)............... $ 650 9,441 (991) (192) (649)
========= ========= ========= ========= =========
Earnings (loss) from
continuing operations
per share--basic and
diluted................ $ .49 .41 (.36) (.06) (.25)
Discontinued operations,
net of applicable
income tax effect, per
share--basic and
diluted................ (.26) 3.55 -- -- --
--------- --------- --------- --------- ---------
Net earnings (loss) per
share--basic and
diluted................ $ .23 3.96 (.36) (.06) (.25)
========= ========= ========= ========= =========
Pro forma earnings
(loss) from continuing
operations per share--
basic and diluted...... $ .32 .28 (.26) (.05) (.17)
Discontinued operations,
net of applicable pro
forma income tax
effect, per share--
basic and diluted...... (.15) 2.16 -- -- --
--------- --------- --------- --------- ---------
Pro forma net earnings
(loss) per share--basic
and diluted............ $ .17 2.44 (.26) (.05) (.17)
========= ========= ========= ========= =========
Shares used in per share
computations--basic and
diluted................ 3,870,693 3,870,693 3,870,693 3,870,693 3,870,693
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Common Stock Net
------------- Accumulated Shareholders'
Shares Amount Deficit Deficit
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995............ 3,871 $ 39 (1,046) (1,007)
Net earnings.......................... -- -- 906 906
----- ---- ------ ------
Balance, December 31, 1996............ 3,871 39 (140) (101)
Net earnings.......................... -- -- 15,334 15,334
Cash dividends to shareholders (note
7)................................... -- -- (9,534) (9,534)
Distribution of KRDS, Inc. stock to
shareholders (note 7)................ -- -- (8,500) (8,500)
----- ---- ------ ------
Balance, December 31, 1997............ 3,871 39 (2,840) (2,801)
Net loss.............................. -- -- (1,406) (1,406)
----- ---- ------ ------
Balance, December 31, 1998............ 3,871 39 (4,246) (4,207)
Net loss (unaudited).................. -- -- (973) (973)
----- ---- ------ ------
Balance, March 31, 1999 (unaudited)... 3,871 $ 39 (5,219) (5,180)
===== ==== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, March 31,
------------------------- --------------
1996 1997 1998 1998 1999
-------- ------- ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss)................ $ 906 15,334 (1,406) (240) (973)
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization...... 61 129 203 54 54
Gains on disposal of discontinued
operations, net of tax............ -- (15,023) -- -- --
Cash payments related to
discontinued operations........... 942 152 -- -- --
Changes in assets and liabilities:
Accounts receivable............... (896) 1,048 256 (442) 88
Inventories....................... (586) 715 (128) 23 81
Other current assets.............. (126) 13 (249) 93 (599)
Accounts payable.................. (305) (418) 41 (71) 455
Accrued liabilities............... 574 92 (465) (441) 28
-------- ------- ------ ------ ------
Net cash provided by (used in)
operating activities............ 570 2,042 (1,748) (1,024) (866)
-------- ------- ------ ------ ------
Cash flows from investing
activities:
Purchases of property and
equipment......................... (560) (4,919) (118) (30) (69)
Proceeds from disposal of
discontinued operations........... -- 20,567 -- -- --
-------- ------- ------ ------ ------
Net cash provided by (used in)
investing activities............ (560) 15,648 (118) (30) (69)
-------- ------- ------ ------ ------
Cash flows from financing
activities:
Discontinued operations financing
activities........................ -- (698) -- -- --
Proceeds from revolving note
payable to bank................... 11,049 18,649 6,496 1,100 1,142
Proceeds from related party
revolving line of credit.......... 190 -- -- -- --
Proceeds from related party note
payable........................... -- 2,900 600 600 --
Proceeds from long-term debt....... 4,645 3,038 5,200 -- 750
Principal payments on revolving
notes payable to bank............. (11,122) (18,445) -- -- --
Repayment of related party
revolving line of credit.......... (944) -- -- -- --
Repayment of related party note
payable........................... -- (248) (3,500) -- --
Principal payments on long-term
debt.............................. (3,061) (5,224) (6,522) (931) (1,298)
Cash dividends to shareholders...... -- (9,534) -- -- --
Cash distribution to shareholders... -- (8,500) -- -- --
-------- ------- ------ ------ ------
Net cash provided by (used in)
financing activities............ 757 (18,062) 2,274 769 594
-------- ------- ------ ------ ------
Net increase (decrease) in cash.. 767 (372) 408 (285) (341)
-------- ------- ------ ------ ------
Cash and cash equivalents at
beginning of year.................. 95 862 490 490 898
-------- ------- ------ ------ ------
Cash and cash equivalents at end of
year............................... $ 862 490 898 205 557
======== ======= ====== ====== ======
Supplemental disclosures of cash
flow information:
Cash paid during the year for:
Interest........................... $ 589 119 418 31 103
Income taxes....................... 1 204 -- -- 2
======== ======= ====== ====== ======
Supplemental disclosure of noncash
investing and financing activities:
Liabilities transferred in
connection with sale of Intercon
division (note 2)................. $ -- (366) -- -- --
Mortgage transferred in connection
with distribution of KRDS, Inc.
(note 7).......................... -- (3,038) -- -- --
======== ======= ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998
(in thousands, except per share data)
(1) General Information and Summary of Significant Accounting Policies
General
Litronic Inc. (through a reorganization with Litronic Industries, Inc., as
described further below) (the Company) designs and produces high grade
information security solutions. In addition, the Company also provides
engineering and other services to various government agencies on a time and
material basis. Through its Intercon division (Intercon), which was
discontinued during 1997 (see note 2), Litronic Industries, Inc. provided
state-of-the-art electronic interconnect products for both government and
commercial entities.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1999, and the consolidated statements of operations, shareholders'
deficiency and cash flows for the three months ended March 31, 1998 and 1999.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Proposed Public Offering and Reorganization
During 1998, Litronic Industries, Inc. engaged attorneys and investment
bankers to assist in the effectuation of an initial public offering of common
stock of Litronic Inc., a newly formed corporation with no operations (the
"Offering"). Litronic Industries, Inc. has also initiated certain events (the
"Reorganization") in connection with the Offering which will result in it
becoming a wholly-owned subsidiary of Litronic Inc. as of the effective date of
the Offering. The Reorganization will be accomplished through a stock-for-stock
exchange between Litronic Inc. and Litronic Industries, Inc. and will be
accounted for as an "as if pooling of interests" for entities under common
control. The Company has also entered into a stock acquisition agreement with
Pulsar Data Systems, Inc. to be effected simultaneously with the Offering. This
acquisition is contingent upon the successful completion of the Offering.
All of the outstanding shares of Litronic Industries, Inc. will be exchanged
for 3,870,693 shares of the Company's common stock. Consequently, upon the
effective date of the Offering and the related Reorganization, the consolidated
group will include the operations of Litronic Inc. and its wholly-owned
subsidiary, Litronic Industries, Inc.
Basis of Financial Statement Presentation
The consolidated financial statements and related notes presented herein
have been retroactively adjusted to reflect the Reorganization. The capital
structure presented in these financial statements is that of Litronic Inc., but
all other information presented relates to the historical and pro forma
operations of Litronic Industries, Inc., as Litronic Inc. had no operations
during the periods presented and will have no operations until the consummation
of the Reorganization. All references herein to "the Company" refer to Litronic
Inc. as consolidated with Litronic Industries, Inc.
Pro Forma Presentation
Concurrently with the Reorganization, Litronic Industries, Inc. will
terminate its Subchapter S corporation status and will become subject to
federal and state income taxes. The accompanying pro forma consolidated balance
sheet reflects this change from an S corporation to a C corporation. The
accompanying pro forma
F-7
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consolidated financial statements of operations include a pro forma
presentation to reflect a provision for income taxes in accordance with
Statement of Financial Accounting Standards No. (Statement) 109, "Accounting
for Income Taxes." Statement 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Measurement of deferred income
tax is based on enacted tax laws including tax rates, with the measurement of
deferred income tax assets being reduced by available tax benefits not expected
to be realized. The Company has not recorded any deferred tax assets in the
accompanying unaudited consolidated pro forma balance sheet as management
believes it is not more likely than not that the Company will realize the
benefit of such deferred tax assets.
Unaudited pro forma earnings (loss) for the years ended December 31, 1996,
1997 and 1998, and for the three months ended March 31, 1998 and 1999, reflect
a provision for (benefit from) income taxes as if the Company had been subject
to federal and state income taxes at an estimated effective tax rate of
approximately 34%.
Pro Forma Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement 128,
"Earnings Per Share." Statement 128 provides for the calculation of basic and
diluted earnings per share. Basic earnings per share includes no dilution and
is computed by dividing earnings (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity. Such shares are not included when there is
a loss as the effect would be anti-dilutive.
Principles of Consolidation
The consolidated financial statements include the accounts of Litronic Inc.,
its wholly-owned subsidiary Litronic Industries, Inc. and, in 1997, Litronic
Industries, Inc.'s wholly owned subsidiary, KRDS, Inc., which was formed as a
corporation on January 30, 1997. All significant intercompany balances and
transactions have been eliminated in consolidation. On December 31, 1997, the
Company distributed KRDS, Inc. to the Company's primary shareholders (note 7).
Revenue Recognition
Revenue from product sales, including embedded software, is recognized upon
shipment unless contract terms call for a later date, net of an allowance to
cover estimated warranty costs. Customers do not have the right of return
except for product defects, and product sales are not contingent upon customer
testing, approval and/or acceptance. The costs of providing postcontract
customer support are not significant. Revenue under service and development
contracts is recorded as services are rendered. The Company's revenue
recognition policies are in compliance with the American Institute of Certified
Public Accountants Statement of Position 97-2, Software Revenue Recognition.
Revenue under research arrangements with government agencies is recorded as
revenue as services are rendered or products are shipped.
Included in research and development revenue for the year ended December 31,
1998 and the three months ended March 31, 1999 is $398 and $369 (unaudited),
respectively, related to a contract with the National Security Agency (NSA).
The Company is designing a microprocessor meeting certain minimum
specifications under a contract with the NSA. The Company has contracted with
others to perform certain aspects of the project. All related project costs are
expensed as research and development as incurred. No other funds received for
research and development projects were recorded during any of the periods
presented. The amounts received from the NSA are not refundable regardless of
the results of the development efforts. The related research and development
costs are not separately identifiable, therefore the corresponding costs of the
entire development effort are included in research and development expenses.
F-8
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value).
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is computed on a straight-line basis over the estimated useful lives
of 2 to 7 years.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Business Segments
As of January 1, 1998, the Company adopted Statement 131, "Disclosure about
Segments of an Enterprise and Related Information," which requires entities to
report financial and descriptive information about its reportable operating
segments. The Company historically operated in two business segments,
information security solutions and electronic interconnect products. On
September 30, 1997, the Company sold its Intercon division, which produced
electronic interconnect products. Accordingly, the Intercon division operations
have been accounted for as discontinued operations (note 2). The Company's
remaining operations pertain only to its information security solutions
segment.
Accounting for Stock Options
The Company applies the provisions of Statement 123, "Accounting for Stock-
Based Compensation," which requires entities to recognize as expense over the
vesting period the fair value as of the date of grant of all stock based
awards. Alternatively, Statement 123 allows entities to apply the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, and to provide pro forma net income
and pro forma net income per share disclosures for employee stock option grants
made in 1996 and future years as if the fair-value-based method defined in
Statement 123 had been applied. The Company has elected to apply the provisions
of APB Opinion No. 25, under which compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price, and provide the pro forma disclosure provisions of
Statement 123 in its annual financial statements (see note 10).
Fair Value of Financial Instruments
The Company applies the provisions of Statement 107, "Disclosures about Fair
Value of Financial Instruments." Statement 107 requires all entities to
disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is practicable
to estimate fair value. Statement 107 defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. As of December 31, 1997 and 1998
and March 31, 1999 (unaudited), management believes the fair value of all
financial instruments approximated carrying value.
Income Taxes
The Company has elected to be taxed as an S corporation under the provisions
of Section 1362 of the Internal Revenue Code and uses the accrual basis of
reporting for income tax purposes. Accordingly, the
F-9
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company has not provided for Federal income taxes since the liability is that
of the shareholders. The Company is subject to state income taxes on earnings
before taxes. The provision (benefit) for state income taxes was $29 for
continuing operations and $(13) for discontinued operations for the year ended
December 31, 1996. The provision (benefit) for state income taxes was $22 for
continuing operations, $(23) for discontinued operations, and $241 for the gain
on disposal of discontinued operations for the year ended December 31, 1997.
The benefit for state income taxes was $95 for continuing operations for the
year ended December 31, 1998. The provision (benefit) for state income taxes
was ($51) and ($9) for continuing operations for the three months ended March
31, 1998 and 1999, respectively (unaudited).
Comprehensive Income
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however, the adoption
of Statement 130 had no impact on the Company's consolidated financial
statements as the Company had no transactions that would be considered other
comprehensive income.
Estimates
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the dates of
the balance sheets and revenues and expenses for the periods. Actual results
could differ from those estimates.
New Accounting Standards
In December 1998, the AICPA issued Statement of Position (SOP) 98-9. SOP 98-
9 amends certain paragraphs of SOP 97-2 to require recognition of revenue using
the "residual method" under certain circumstances. The "residual method"
established by SOP 98-9 is effective for fiscal years beginning after March 15,
1999. The Company believes the adoption of SOP 98-9 will not have a significant
impact on its financial position or results of operations.
(2) Discontinued Operations
The Company sold its Intercon division on September 30, 1997 for cash to
AlliedSignal Inc., a non-related publicly-traded company. The gain on sale was
$15,023, net of tax expense of $241. The results of the Intercon division have
been classified as discontinued operations in the accompanying consolidated
financial statements. For the year ended December 31, 1996, Intercon revenues
were $8,175. Intercon's 1997 revenues through the sale date were $7,653.
In addition to the cash proceeds received upon the close of the transaction,
the agreement provided for the right to receive a contingent purchase price not
to exceed $45,400 as well as a "gross-up" payment based upon the approximate
expected tax benefit related to the assets transferred. Effective November 30,
1997, this right was distributed pro rata to the Company's shareholders.
On December 31, 1997, the Company spun-off its subsidiary, KRDS, Inc., to
the Company's shareholders. The results of KRDS, Inc. have been classified as
discontinued operations in the accompanying consolidated financial statements.
For the year ended December 31, 1997, KRDS, Inc.'s revenues were $380.
F-10
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Inventories
A summary of inventories follows:
<TABLE>
<CAPTION>
December 31,
------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Raw materials...................................... $ 230 $ 239 $278
Work-in-process.................................... 45 25 65
Finished goods..................................... 130 269 109
------ ------ ----
$ 405 $ 533 $452
====== ====== ====
</TABLE>
(4) Property and Equipment
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998 March 31, 1999
------ ------ ---------------
(unaudited)
<S> <C> <C> <C>
Machinery and equipment...................... $ 68 $ 68 $ 68
Furniture and fixtures....................... 458 576 645
------ ------ ----
526 644 713
Less accumulated depreciation and
amortization................................ 206 409 463
------ ------ ----
$ 320 $ 235 $250
====== ====== ====
</TABLE>
(5) Long-Term Debt
A summary of long-term debt follows:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998 March 31, 1999
------------- ---------------
(unaudited)
<S> <C> <C> <C>
Notes payable to bank secured by
substantially all assets of the Company and
personal assets of, and a guarantee by, the
Company's president and
majority shareholder, bearing interest at
6.6% payable monthly, maturing July 31,
2000........................................ $ -- $5,200 $5,950
Revolving note payable to bank (the Revolver)
bearing interest at prime plus 1.5% (9.75%
at December 31, 1998) payable in monthly
interest-only payments through maturity on
July 31, 2000; secured by substantially all
assets of the Company and by personal assets
of, and a guarantee by, the Company's
president and majority shareholder;
renewable at the bank's option for
additional one-year periods................. 606 580 424
----- ------- ------
606 5,780 6,374
Less current installments.................... -- 580 424
----- ------- ------
606 5,200 5,950
===== ======= ======
</TABLE>
F-11
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principal maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
<S> <C> <C>
1999........................................ $ 580 $ 424
2000........................................ 5,200 5,950
2001 and thereafter......................... -- --
------ ------
$5,780 $6,374
====== ======
</TABLE>
The Revolver contains certain covenants and restrictions, including
maintenance of certain financial ratios and a restriction on future borrowings.
As of December 31, 1998 and March 31, 1999 (unaudited), the Company was not in
compliance with certain of these covenants, and has received a waiver of these
covenants until April 1, 1999. In addition, the Revolver was amended through
the earlier of the closing of the Offering or May 31, 1999.
As of December 31, 1998 and March 31, 1999, the Company had available
borrowings of $1,920 and $2,076 (unaudited), respectively, under the Revolver.
(6) Accrued Liabilities
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
December 31,
------------
1997 1998 March 31, 1999
------- ---- ---------------
(unaudited)
<S> <C> <C> <C>
Professional fees.............................. $ 395 $ 350 $390
Deferred revenue............................... 165 107 55
Accrued vacation............................... 145 127 149
Accrued compensation........................... 346 93 143
Other.......................................... 176 85 53
------- ----- ----
$ 1,227 $ 762 $790
======= ===== ====
</TABLE>
(7) Related Party Transactions
At December 31, 1994, the Company had an obligation of $248 to two of the
Company's executive officers for accrued compensation. On January 2, 1995, such
obligation was converted to two unsecured notes payable bearing interest at 8%,
which were due and payable on December 31, 1998. On October 29, 1997, the
principal and interest amounting to $305 due on the notes was repaid. The
Company incurred interest expense on these notes aggregating $20 and $18 in
1996 and 1997, respectively.
The Company had an unsecured revolving line of credit with the Company's
president and majority shareholder, which permitted borrowings of up to $1,000.
All unpaid principal and accrued interest at 8% per annum were due and payable
on January 31, 1997. The Company incurred interest expense under this line of
credit aggregating $30 in 1996. All outstanding borrowings and accrued interest
under this line of credit were repaid during 1996. The line was not renewed
when it expired on January 31, 1997.
The primary shareholders of Litronic Industries, Inc. formed KRDS, Inc., for
the sole purpose of purchasing real estate property. The majority of the
property acquired was leased to the Intercon division and
F-12
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the acquirer of the Intercon division has subsequently executed a continuing
lease arrangement with KRDS, Inc. KRDS's only operations consisted of a
mortgage obligation, interest, depreciation and rental income from the Company
related to the real estate property. The operations of KRDS, Inc. were
consolidated with the operations of Litronic Industries, Inc. through December
31, 1997, when concurrent with the sale of the Intercon division, the Company
distributed KRDS, Inc. to the Company's shareholders. As the operations of
KRDS, Inc. were related to the Intercon operations, the 1997 net income for
KRDS, Inc. of $2 (after intercompany eliminations) is included in the loss from
discontinued operations in the accompanying consolidated statement of
operations.
As a result of the sale of the Intercon division on September 30, 1997, the
Company distributed $9,534 in cash dividends and distributed the common stock
of KRDS, Inc., to the shareholders of Litronic on a pro rata basis in 1997. The
net assets of KRDS, Inc. consisted of $8,500 in cash at the time of the
distribution.
On December 31, 1997, the Company entered into two unsecured notes payable
with KRDS, Inc., it is which the Company was extended $900 and $2,000 in
working capital funds and a total of $2,900 was outstanding under these related
party notes at December 31, 1997. In February 1998, the Company entered into a
third unsecured note payable with KRDS, Inc., under which the Company was
extended $600 in working capital funds. Interest was at 10% for each of the
unsecured notes payable and each of these unsecured notes and accrued interest
were paid in full during 1998. The Company incurred $252 of interest expense on
these notes in 1998.
(8) Concentration of Credit Risk and Significant Customers
Financial instruments that potentially subject the Company to concentration
of credit risk are trade receivables. Credit risk on trade receivables is
limited as a result of the Company's customer base and their dispersion across
different industries and geographic regions. As of December 31, 1997 and 1998,
accounts receivable included $447 and $308, respectively, due from the U.S.
Government and related agencies.
The Company had sales to three customers which represented 39%, 29% and 18%
of 1996 total revenue, respectively. The Company had sales to three customers
which represented 45%, 20% and 19% of 1997 total revenue, respectively. The
Company had sales to three customers which represented 44%, 17% and 20% of 1998
total revenues, respectively. The Company had sales to two customers which
represented 39% (unaudited) and 27% (unaudited), respectively, of total revenue
for the three months ended March 31, 1999. No other customers accounted for
more than 10% of net revenues in 1996, 1997 or 1998. Trade accounts receivable
aggregated $709, $493 and $388 (unaudited) from the aforementioned major
customers as of December 31, 1997 and 1998, and March 31, 1999, respectively.
(9) Commitments and Contingencies
The Company leases office space under noncancelable operating leases. The
terms of the leases range up to four years. The following summarizes the future
minimum lease payments under all noncancelable operating lease obligations:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
1999.................................................................. $290
2000.................................................................. 243
2001.................................................................. 162
----
$695
====
</TABLE>
F-13
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rental expense under noncancelable operating leases was $206, $215 and $310
for the years ended December 31, 1996, 1997 and 1998.
As the Company provides engineering and other services to various government
agencies, it is subject to retrospective audits which may result in adjustments
to amounts recognized as revenues, and the Company may be subject to
investigation by governmental entities. Failure to comply with the terms of any
governmental contracts could result in civil and criminal fines and penalties,
as well as suspension from future government contracts. The Company is not
aware of any adjustments, fines or penalties which could have a material
adverse effect on its financial position or results of operations.
(10) Stock Option Plans
Under the Company's Employee Stock Option Plan (the Plan), which was
established in April 1998, the exercise price of options granted will not be
less than the fair market value of the related common stock at the date of
grant. The total number of shares of common stock available for grant under the
Plan is 600. All stock options granted have 10 year terms. Unless otherwise
provided by the Board of Directors or a committee of the Board administering
the Plan, each option granted under the Plan vested on December 31, 1998 as to
10-15%, plus an additional 2.5% for each year of service with the Company, and
20% each December 31 thereafter until fully vested.
Following is a summary of stock option transactions:
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise Price
Shares Per Share
------ --------------
<S> <C> <C>
Options outstanding at December 31, 1997............... -- $--
Granted................................................ 285 0.70
Cancelled.............................................. 4 0.70
---
Options outstanding at December 31, 1998............... 281 0.70
===
</TABLE>
As of December 31, 1998, the number of options exercisable was 143.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for its stock options in the consolidated financial statements.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under Statement 123, the Company's net loss
would have been increased to the pro forma amount indicated below.
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Net loss as reported............................................ $(1,406)
Assumed stock compensation cost................................. 16
-------
Pro forma net loss.............................................. $(1,422)
=======
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: risk-
free interest rate of 5%; dividend yield of 0.0%; average expected lives of 6
years; and volatility of 0%. The weighted-average fair value per option granted
in 1998 was
F-14
<PAGE>
LITRONIC INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$0.70. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely-tradable,
fully-transferable options without vesting restrictions, which significantly
differ from the Company's stock option plans. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated fair value on the
grant date.
(11) Employee Retirement Savings Plan
Effective January 1, 1998, the Company established a retirement plan, which
is intended to qualify under Section 401(k) of the Internal Revenue Code. Under
the plan, eligible employees are able to contribute up to 20% of their
compensation not to exceed the maximum IRS deferral amount. The Company may
also match employee contributions at its discretion. During 1998, the Company
made contributions of $40 to this plan.
F-15
<PAGE>
PULSAR DATA SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports......................................... F-17-F-18
Balance sheets........................................................ F-19
Statements of operations.............................................. F-20
Statements of stockholders' equity (deficit).......................... F-21
Statements of cash flows.............................................. F-22
Notes to financial statements......................................... F-23
Schedule II--Valuation and qualifying accounts........................ S-1
</TABLE>
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pulsar Data Systems, Inc.
We have audited the accompanying balance sheet of Pulsar Data Systems, Inc.
as of December 31, 1998 and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year then ended. In connection with our
audit of the financial statements, we also have audited the financial statement
schedule for the year ended December 31, 1998 as listed in the accompanying
index. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pulsar Data Systems, Inc.
as of December 31, 1998, and the results of its operations and its cash flow
for the year ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements take as
a whole, presents fairly, in all materials respects, the information set forth
therein.
The accompanying financial statements and financial statement schedule have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 14 to the financial statements, the Company has suffered a
net loss of $8,141,000 in 1998 and has a net capital deficiency of $9,951,000
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 14.
The financial statements and financial statement schedule do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
McLean, Virginia
March 31, 1999
except for the third
paragraph of Note 5
which is as of
May 5, 1999 and
Note 16 which is as
of June 3, 1999
F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Pulsar Data Systems, Inc.
Lanham, Maryland
We have audited the accompanying balance sheet of Pulsar Data Systems, Inc.
as of December 31, 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the two
year period ended December 31, 1997 and the financial statement schedule for
each of the years in the two year period ended December 31, 1997. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pulsar Data Systems, Inc.
as of December 31, 1997, and the results of its operations and its cash flows
for each of the years in the two year period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also in our opinion
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects, the information set forth therein.
The accompanying financial statements and financial statement schedule have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 14 to the financial statements, the Company incurred a net
loss of approximately $11,016,000 during the year ended December 31, 1997 and
has a net capital deficiency of approximately $1,810,000 at December 31, 1997.
In addition, as of December 31, 1997, the Company is in violation of its
financing agreement debt covenants. These factors, among others, as discussed
in Note 14 to the financial statements, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements and
financial statement schedule do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ Keller Bruner & Company, L.L.C.
Bethesda, Maryland
April 27, 1998
F-18
<PAGE>
PULSAR DATA SYSTEMS, INC.
BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........................ $ 2,236 $ 352 $ 441
Accounts receivable.............................. 31,213 10,145 5,798
Inventory........................................ 2,348 775 890
Other current assets............................. 245 -- --
------- ------- --------
Total current assets......................... 36,042 11,272 7,129
------- ------- --------
Property and equipment........................... 1,100 581 525
Notes receivable--related parties................ 2,218 543 543
Cash surrender value of life insurance........... 1,416 216 224
Deposits and other assets........................ 95 118 118
------- ------- --------
4,829 1,458 1,410
------- ------- --------
$40,871 $12,730 $ 8,539
======= ======= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Financing arrangement--IBM....................... $28,067 $ 9,403 $ 7,201
Current installments of long-term debt........... 915 964 967
Notes payable--vendors........................... -- 3,948 3,361
Accounts payable................................. 7,267 3,933 3,829
Accrued liabilities.............................. 2,229 1,072 1,623
Notes payable to shareholder..................... -- 120 215
------- ------- --------
Total current liabilities.................... 38,478 19,440 17,196
Notes payable, net of current maturities......... 4,203 3,241 3,085
------- ------- --------
Total liabilities............................ 42,681 22,681 20,281
------- ------- --------
Commitments and Contingencies
Stockholders' Deficit
Common stock; par value $1; authorized, issued
and outstanding 1,000 shares.................. 1 1 1
Additional paid-in capital..................... 1,663 1,663 1,663
Accumulated deficit............................ (3,474) (11,615) (13,406)
------- ------- --------
Net stockholders' deficit.................... (1,810) (9,951) (11,742)
------- ------- --------
$40,871 $12,730 $ 8,539
======= ======= ========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE>
PULSAR DATA SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
--------------------------- ----------------
1996 1997 1998 1998 1999
-------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues....................... $165,958 $151,520 $80,532 $18,018 $ 9,948
Cost of revenues............... 149,364 142,201 74,970 17,472 9,389
-------- -------- ------- ------- -------
Gross margin............... 16,594 9,319 5,562 546 559
Selling, general and adminis-
trative expenses.............. 13,545 17,152 11,665 2,256 1,892
-------- -------- ------- ------- -------
Operating income (loss).... 3,049 (7,833) (6,103) (1,710) (1,333)
-------- -------- ------- ------- -------
Other income (expense)
Interest expense............. (3,564) (3,640) (2,099) (706) (478)
Interest income.............. 639 457 61 200 20
-------- -------- ------- ------- -------
(2,925) (3,183) (2,038) (506) (458)
-------- -------- ------- ------- -------
Net earnings (loss)........ $ 124 $(11,016) $(8,141) $(2,216) $(1,791)
======== ======== ======= ======= =======
Earnings (loss) per share: ba-
sic and diluted............... $ 124 $(11,016) $(8,141) $(2,216) $(1,791)
======== ======== ======= ======= =======
Weighted average shares out-
standing...................... 1,000 1,000 1,000 1,000 1,000
======== ======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-20
<PAGE>
PULSAR DATA SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated
------------- Paid In Earnings
Shares Amount Capital (Deficit) Total
------ ------ ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996.... 1 $ 1 $ 21 $ 9,045 $ 9,067
Net earnings.............. -- -- -- 124 124
Distributions to
stockholders............. -- -- -- (1,483) (1,483)
--- --- ------ -------- --------
Balance, December 31, 1996.. 1 1 21 7,686 7,708
Additional paid-in capital
contributed by
stockholders............. -- -- 291 -- 291
Forgiveness of
stockholder's deferred
compensation............. -- -- 1,351 -- 1,351
Net loss.................. -- -- -- (11,016) (11,016)
Distributions to
stockholders............. -- -- -- (144) (144)
--- --- ------ -------- --------
Balance, December 31, 1997.. 1 1 1,663 (3,474) (1,810)
Net loss.................. -- -- -- (8,141) (8,141)
--- --- ------ -------- --------
Balance, December 31, 1998.. 1 1 1,663 (11,615) (9,951)
Net loss (unaudited)...... -- -- -- (1,791) (1,791)
--- --- ------ -------- --------
Balance, March 31, 1999
(unaudited)................ 1 $ 1 $1,663 $(13,406) $(11,742)
=== === ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
PULSAR DATA SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net earnings (loss)............. $ 124 $(11,016) $(8,141) $(2,216) $(1,791)
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating
activities:
Depreciation and amortization... 467 585 415 103 61
Loss on disposal of assets...... 63 -- 162 -- --
Deferred compensation........... 364 -- -- -- --
Provisions for doubtful accounts
and notes receivable........... 403 4,621 3,370 75 164
Provision for notes receivable-
related parties................ -- 682 655 -- --
Deferred rent................... (28) -- -- -- --
Changes in assets and
liabilities:
Accounts receivable............ 11,743 10,236 17,698 13,050 4,183
Inventories.................... 11,789 1,312 1,573 555 (115)
Other assets................... 33 (11) 222 (80) --
Deferred governmental agency
contract costs................ 1,833 817 -- -- --
Accounts payable............... (2,184) 2,761 2,550 (615) (104)
Accrued liabilities............ 310 842 (137) (813) 551
Customer deposit............... 2,098 (2,098) -- -- --
Deferred governmental agency
contract revenue.............. (1,697) (1,327) -- -- --
------- -------- ------- ------- -------
Net cash provided by operating
activities...................... 25,318 7,404 18,367 10,059 2,949
------- -------- ------- ------- -------
Cash Flows from Investing
Activities:
Increase in cash surrender value
of life insurance.............. (355) (65) (294) (140) (8)
Net collections (issuance) of
notes receivable............... 392 (291) -- -- --
Net collections (issuance) of
notes receivable -- related
parties........................ (1,975) 1,175 -- 60 --
Proceeds from loans on cash
surrender value of life
insurance...................... -- -- 1,494 -- --
Purchase of equipment........... (942) (364) (58) (36) (5)
------- -------- ------- ------- -------
Net cash provided by (used in)
investing activities............ (2,880) 455 1,142 (116) (13)
------- -------- ------- ------- -------
Cash Flows from Financing
Activities:
Net repayments on line of
credit......................... (7,600) (2,000) -- -- --
Net repayments on financing
arrangement -- IBM............. (13,023) (6,058) (18,664) (11,090) (2,202)
Proceeds from notes payable to
stockholder.................... -- -- 120 -- 95
Repayments of long term
borrowing...................... (25) (163) (913) (215) (153)
Repayment of vendors notes
payable........................ -- -- (1,936) -- (587)
Additional paid-in capital from
stockholders................... -- 291 -- -- --
Distributions to stockholders... (1,483) (144) -- -- --
------- -------- ------- ------- -------
Net cash used in financing
activities...................... (22,131) (8,074) (21,393) (11,305) (2,847)
------- -------- ------- ------- -------
Net increase (decrease) in cash.. 307 (215) (1,884) (1,362) 89
Cash and cash equivalents at
beginning of period............. 2,144 2,451 2,236 2,236 352
------- -------- ------- ------- -------
Cash and cash equivalents at end
of period....................... $ 2,451 $ 2,236 $ 352 $ 874 $ 441
======= ======== ======= ======= =======
Supplemental Schedule of Non-cash
Investing and Financing
Activities:
Conversion of line of credit to
term note payable.............. $ -- $ 5,200 $ -- $ -- $ --
======= ======== ======= ======= =======
Forgiveness of deferred
compensation recorded as
capital contribution........... $ -- $ 1,351 $ -- $ -- $ --
======= ======== ======= ======= =======
Conversion of accounts payable
to vendors notes payable....... $ -- $ -- $ 5,884 $ -- $ --
======= ======== ======= ======= =======
Distribution of assets and
related notes to stockholders.. $ -- $ -- $ 28 $ -- $ --
======= ======== ======= ======= =======
Rent expense offset against
related party notes
receivable..................... $ -- $ 182 $ 1,094 $ 71 $ --
======= ======== ======= ======= =======
Accrued interest on related
party notes receivable......... $ 89 $ 175 $ 95 $ 37 $ --
======= ======== ======= ======= =======
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest........................ $ 3,649 $ 2,812 $ 2,502 $ 1,177 $ 362
======= ======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Pulsar Data Systems, Inc. (the Company) was incorporated
in 1984 under the laws of the State of Delaware. The Company is engaged
primarily in the sale of computer hardware, software, peripheral equipment, and
support services to governmental agencies and commercial enterprises throughout
the United States. The Company was certified by the Small Business
Administration under Section 8(a) of the Small Business Act and was therefore
eligible to enter into contracts with agencies of the Federal Government on a
limited competitive basis. The Company voluntarily withdrew from the 8(a)
program in June 1997 in anticipation of graduation.
A summary of the Company's significant accounting policies follows:
Revenue and cost recognition: Revenue is primarily derived from short-term
firm-fixed price delivery order type contracts. Revenue from these contracts is
recognized upon transfer of title, generally upon delivery. The Company also
has time and material contracts. Revenue from time and material contracts is
recognized on the basis of man-hours provided plus other reimbursable contract
costs incurred during the period.
Deferred governmental agency contract costs and revenue: Deferred costs and
revenue from contracts with governmental agencies represent costs incurred and
accounts receivable billed as of year end, for which an acceptance period has
not expired. The agencies involved have negotiated acceptance periods from
seven to thirty days from delivery of the product. General and administrative
expenses related to other costs that were deferred were included as a component
of deferred costs. All equipment subject to the acceptance period at December
31, 1996 was subsequently accepted by the government. Substantially all
contracts with acceptance periods terminated during the year ended December 31,
1997.
Cash and cash equivalents: For the purpose of reporting cash flows, the
Company considers all highly-liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Inventory: Inventory consists primarily of purchased computer hardware,
purchased software and peripheral equipment. Inventory is stated at the lower
of cost or market using the first-in, first-out (FIFO) method. Cost consists of
the direct cost of purchased inventory.
Property and equipment: Property and equipment are stated at cost.
Depreciation and amortization is computed using straight-line and accelerated
methods over the estimated useful lives of the related assets.
Income taxes: The Company has elected to be treated as an "S" corporation
under Subchapter "S" of the Internal Revenue Code. Consequently, the Company is
not liable for Federal and state income taxes except to the extent that the
Company operates in state jurisdictions that do not recognize "S" corporations.
For the income related to activity in these states, the Company has provided
for the resulting income taxes. Otherwise the stockholders are liable
individually for income taxes on the Company's income.
Financial credit risk: The Company's accounts receivable are derived
primarily from contracts with governmental agencies and commercial enterprises.
All accounts receivable are made on an unsecured basis.
Additionally, the Company maintains its cash in bank deposit accounts, which
at times may exceed Federally insured limits. The Company has not experienced
any losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash.
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 revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-23
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Earnings (loss) per share: The computations of basic and diluted earnings
(loss) per common share are based upon the weighted average number of common
shares outstanding during the year. There were no potentially dilutive
securities for any period presented.
Unaudited condensed interim information: The accompanying unaudited
condensed financial statements contain all adjustments, which are normal
recurring accruals, necessary to present fairly the financial position as of
March 31, 1999 and the statements of operations, stockholders' equity
(deficit) and cash flows for the three months ended March 31, 1998 and 1999.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Note 2. Accounts Receivable
Accounts receivable consist of the following as of December 31, 1997 and
1998 and March 31, 1999:
<TABLE>
<CAPTION>
December 31,
---------------- March 31,
1997 1998 1999
------- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
8(a) government receivables.................. $ 2,095 $ -- $ --
Government receivables....................... 16,483 9,135 5,517
Commercial receivables....................... 10,902 1,382 342
Recoverable costs and accrued profit on
progress completed-not billed............... 497 -- --
Other receivables............................ 2,489 628 272
------- ------- ------
32,466 11,145 6,131
Less allowance for doubtful accounts......... (1,253) (1,000) (333)
------- ------- ------
$31,213 $10,145 $5,798
======= ======= ======
</TABLE>
Note 3. Property and Equipment
Property and equipment consist of the following as of December 31, 1997 and
1998 and March 31, 1999:
<TABLE>
<CAPTION>
Estimated December 31,
Useful Life ---------------- March 31,
(in years) 1997 1998 1999
----------- ------- ------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C>
Furniture and fixtures........... 7 $ 628 $ 407 $ 407
Office equipment................. 5-7 511 508 508
Computer equipment............... 5 706 756 761
Software......................... 5 545 553 553
Vehicles......................... 5 273 17 17
Leasehold improvements........... 7 162 78 78
Warehouse equipment.............. 5-7 23 26 26
------- ------- -------
2,848 2,345 2,350
Less accumulated depreciation and
amortization.................... (1,748) (1,764) (1,825)
------- ------- -------
$ 1,100 $ 581 $ 525
======= ======= =======
</TABLE>
F-24
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 4. Deferred Compensation and Life Insurance
Through December 31, 1996 the Company had a deferred compensation agreement
with its President, which was funded through Company-owned life insurance
policies. The cash surrender value of these policies as of December 31, 1997
and 1998 and March 31, 1999, was $1,416,000, $216,000 and $224,000 (unaudited),
respectively.
On December 31, 1997, the deferred compensation liability of $1,351,000 was
forgiven by the President of the Company, and the liability was removed from
the Company's balance sheet and included as a contribution to additional paid-
in capital. In April 1998, the Company borrowed $1,494,000 against the cash
surrender value of the life insurance policies to reduce amounts owed under the
financing arrangement with IBM.
Note 5. Notes Receivable--Related Parties
Between July 1995 and June 1996, the Company made a series of eight loans
aggregating $2.8 million to a related party. These loans bear interest at
annual rates varying from 7.5% to 10.0% and were due on demand. Two of these
loans were in the form of assignment of notes receivable to the Company from
third parties in the aggregate principal amount of $623,000, which were
assigned back to Pulsar in December 1997. At that time these notes were deemed
uncollectible and written off to bad debt expense. The outstanding balance of
these notes as of December 31, 1997 was $2,218,000.
In October 1995, a related party purchased the building to be occupied by
the Company. This purchase was financed through a loan to the related party
from a lending institution in the amount of $2.8 million, which was guaranteed
by the Company and personally guaranteed by the shareholders of the Company.
Following the acquisition of the building, the related party leased a portion
of the property to the Company at fair market rents. Payments of rent under the
lease were $1,042,000, $955,500 and $409,500 during the years ended December
31, 1996, 1997 and 1998, respectively. A portion of the rent expense incurred
under the related party lease was used to offset the related party notes
receivable balance. The amount of rent expense used to offset the notes
receivable and interest receivable from the related party for the years ended
December 31, 1996, 1997 and 1998 was $0, $182,000 and $344,000, respectively.
In addition, the principal amount under the notes was reduced by $750,000 as
payment of a fee for terminating the lease as of September 30, 1998. As of
January 1, 1999, outstanding loans of $1,347,000 were converted into two
promissory notes of $543,000 and $804,000, bearing interest at the rate of 7.5%
per annum, payable monthly, and maturing upon the sales of each individual
property. During 1998, the related party experienced financial difficulties as
a result of its commercial real estate operations. Based upon the related
party's cash flows and decline in its financial condition the Company
determined that one of the notes had become impaired and recorded a bad debt
expense of $655,000 and reversed $149,000 of interest income recorded on the
note in 1998. Payment on the note is not due until the property is sold. The
related party has advised the Company that it does not intend to sell the
property and the value of the property is not in excess of the mortgage. In
addition, any proceeds derived from the sale of the property would be applied
against the mortgage before repayment of the note.
On April 1, 1999, the related party defaulted on both notes by not making
the scheduled interest payments in accordance with the note agreements. As of
April 30, 1999, the related party sold one of the properties. The note for
$543,000 was repaid on May 5, 1999 through the reduction of the note payable-
financial institution. In connection with the payment of a portion of the note
payable-financial institution, the financial institution released the Company
from its guarantee obligation on the related party's remaining liabilities
(unaudited).
Pulsar issued a note receivable to a shareholder accruing interest at 5% per
annum due on demand in the amount of $1,175,000 in 1996. The note was repaid in
full in 1997.
F-25
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 6. Line of Credit
In May 1996, the Company obtained a line of credit from a financial
institution. Under the line of credit, the Company may borrow up to the lessor
of eligible receivables or $22,000,000. Interest accrued on the outstanding
balance at a variable rate consistent with the bank's national commercial rate.
The line is collateralized by all eligible accounts receivable, inventory,
machinery, and equipment. In October 1997, the line of credit was converted to
a term loan of $5,200,000. (See Note 8)
Note 7. Financing Arrangement--IBM
The Company entered into an Inventory and Working Capital Financing
Agreement, with IBM Global Finance Corporation (IBM) whereby the Company
purchases hardware and software from authorized suppliers and finances the
purchases through IBM. The agreement provides for a credit line up to
$35,000,000, which allows the Company to borrow up to 85% of the Company's
eligible accounts receivable, and up to 100% of the Company's on-hand
inventory. The credit line is secured by substantially all assets of the
Company and is personally guaranteed by the Company's stockholders.
At December 31, 1997, the interest rate on the line of credit was prime plus
1.75% or 2.00% depending on the nature of the borrowings. The effective
interest rate at that date was 10.25% or 10.5%. Effective February 1, 1998, the
financing agreement interest rate was increased to prime plus 2.375%. The
effective interest rate at December 31, 1998 and March 31, 1999 (unaudited) was
10.125%. For any amount that the outstanding advances exceed the formula
borrowing base, interest was accrued at the rate of prime plus 6.5%.
The agreement provides for certain financial covenants to be met by the
Company. At December 31, 1998 the Company was in violation of these covenants.
In August 1997, the Company was in violation of the related debt covenants
and entered into a forbearance agreement with IBM. Subsequently the Company
violated the forbearance agreement and received several amendments to the
agreement. Pursuant to amendments of the forbearance agreement the Company is
currently obligated to pay, at the Company's option, the lesser of: (i)
warrants representing 4% of the Company on a fully diluted to basis, or (ii)
pay $650,000, or (iii) pay a pro rata portion of the $650,000 is less than
substantially all of the assets are sold. As the Company intends to pay
$650,000, the Company has accrued this amount as of December 31, 1997. In
further consideration of the forbearance agreement and the related amendments,
the Company was obligated to pay $50,000 or issue warrants representing 0.5% of
the Company on a fully diluted basis, per month from February through May,
1998. The Company has paid an aggregate of $200,000 which has been recorded as
additional interest expense in 1998. These payments were made in lieu of the
issuance of warrants to IBM.
An October 1998 amendment to the forbearance agreement decreased the credit
line to $18,000,000 for the period through January 6, 1999, at which time the
line was further reduced to $15,000,000. The financing arrangement has a
termination date of October 30, 1999.
A February 1999 amendment to the forbearance agreement decreased the credit
line to $8,000,000 until further amended. A March 1999 amendment to the
forbearance agreement increased the credit line to $9,000,000 for the period
through April 30, 1999, at which time the line was reduced to $8,000,000. The
forbearance agreement expires on the date of the anticipated acquisition and
initial public offering (Note 14).
F-26
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 8. Notes Payable
Long-term debt consists of the following notes payable as of December 31,
1997 and 1998 and March 31, 1999:
<TABLE>
<CAPTION>
December 31,
-------------- March 31,
1997 1998 1999
------ ------ -----------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Note payable--financing company; secured by an
automobile with a cost of $71,000; bears
interest at an effective rate of 13.183%;
liquidated by monthly principal and interest
payments of $1,000. On December 31, 1998 the
note and related automobile were transferred
to the shareholders of the Company............ $ 17 $ -- $ --
Note payable--financing company; secured by an
automobile with a cost of $85,000; bears
interest at an effective rate of 10.460%;
liquidated by monthly principal and interest
payments of $2,000. On December 31, 1998, the
note and related automobile were transferred
to the shareholders of the Company............ 39 -- --
Note payable--financial institution;
collateralized by inventory, accounts
receivable, machinery and equipment, the
assets of a related party and the president of
the Company; bears interest at the financial
institution's prime lending rate; 8.5% at
December 31, 1997, 7.75% at December 31, 1998
and March 31, 1999 (unaudited) liquidated by
monthly principal and interest payments of
$104,000; due to mature December 2002......... 5,062 4,205 4,052
------ ------ ------
$5,118 $4,205 $4,052
Less current maturities........................ (915) (964) (967)
------ ------ ------
$4,203 $3,241 $3,085
====== ====== ======
</TABLE>
Maturities on the notes payable as of December 31, 1998 due in future years
are as follows:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
------------------------ --------------
<S> <C>
1999........................................................ $ 964
2000........................................................ 1,041
2001........................................................ 1,125
2002........................................................ 1,075
------
$4,205
======
</TABLE>
Note 9. Notes Payable--Vendors
Notes payable--vendors consist of notes payable to nine vendors which were
entered into in August to December 1998 for a total of $5,884,000. The notes
accrue interest at rates ranging from 10% to 18%, and are due in full during
1999. The balance at March 31, 1999 was approximately $3,361,000 (unaudited).
As of March 31, 1999, the Company had defaulted on substantially all of these
notes.
F-27
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 10. Revenue and Cost of Revenue
The breakout of service and product revenue and cost of revenue are as
follows for the years ended December 31, 1996, 1997, and 1998, and the three
months ended March 31, 1998 and 1999:
<TABLE>
<CAPTION>
Year ended December 31, March 31,
------------------------- ------------------
1996 1997 1998 1998 1999
-------- -------- ------- ------- ------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Service revenue............... $ 10,253 $ 8,818 $ 3,373 $ 1,241 $ 369
Product revenue............... 155,705 142,702 77,159 16,777 9,579
-------- -------- ------- ------- ------
Total revenue............... $165,958 $151,520 $80,532 $18,018 $9,948
======== ======== ======= ======= ======
Cost of revenue
Cost of service revenue....... $ 4,870 $ 4,115 $ 1,553 $ 730 $ 155
Cost of product revenue....... 144,494 138,086 73,417 16,742 9,234
-------- -------- ------- ------- ------
Total cost of revenue....... $149,364 $142,201 $74,970 $17,472 $9,389
======== ======== ======= ======= ======
</TABLE>
Note 11. Leasing Arrangements
In January 1996, the Company entered into a lease with a related party for
office space, which was due to expire in December 2000. In September 1998 this
lease was terminated and the Company paid a $750,000 termination fee to the
related party. The fee was offset against notes receivable owed from the
related party. Deposits and other assets includes a deposit to be refunded from
the related party of approximately $87,000. The Company has leased other office
and warehouse space under separate lease agreements expiring through September
2003. Rent expense was $1,690,000, $811,000, $1,252,000 and $51,000 (unaudited)
for the years ended December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1999, respectively. Lease payments for the year ended December
31, 1998 were offset against interest receivable and notes receivable from the
related party (see Note 5).
Future minimum rental payments required under these leasing arrangements as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
------------------------ --------------
<S> <C>
1999....................................................... $144
2000....................................................... 125
2001....................................................... 112
2002....................................................... 115
2003....................................................... 88
----
$584
====
</TABLE>
Note 12. Employee Retirement Plan
The Company has adopted a retirement plan under Section 401(k) of the
Internal Revenue Code. The plan provides benefits to all employees who meet
certain age and service eligibility requirements. Under the terms of the plan,
the Company will match 50% of the first 6% of an employee's elective
contribution. Company contributions for the years ended December 31, 1996, 1997
and 1998 were $71,000, $66,000, and $28,000, respectively. The contribution for
the three months ended March 31, 1999 was $5,000 (unaudited).
Note 13. Major Customers
During the years ended December 31, 1996, 1997, and 1998 and the three
months ended March 31, 1999, 84%, 85%, 94% and 94% (unaudited), respectively,
of the Company's revenue was derived from contracts with
F-28
<PAGE>
PULSAR DATA SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
the Federal Government. The receivable balance for these contracts at December
31, 1997 and 1998 and March 31, 1999 was $24,618,000, $9,950,000 and $5,567,000
(unaudited), respectively.
Note 14. Going Concern
As shown in the accompanying financial statements, the Company incurred a
net operating loss of $11,016,000 and $8,141,000 for the years ended December
31, 1997, and 1998, respectively, and has a net capital deficiency of
$1,810,000 and $9,951,000 at December 31, 1997 and 1998, respectively. At
December 31, 1998, the Company is in violation of the financial covenants
related to its financing agreement. These factors create a substantial doubt
about the Company's ability to continue as a going concern. The Company is in
negotiations to be acquired by another company. The combined company is in the
process of preparing an initial public offering. The ability of the Company to
continue as a going concern is dependent upon the success of the pending
acquisition and initial public offering. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Note 15. Contingent Liabilities
The Company had cost reimbursable type contracts with the Federal
Government. Consequently, the Company is reimbursed based upon their direct
expenses attributable to the contract, plus a percentage based upon overhead,
material handling, and general and administrative expenses. The overhead,
material handling, and general and administrative rates are estimates.
Accordingly, if the actual rates as determined by the Defense Contract Audit
Agency are below the Company's estimates, a refund for the difference would be
due to the Federal Government. It is management's opinion that no material
liability will result from any cognizant audit agency audits.
During the year ended December 31, 1998, two lawsuits were filed against the
Company by trade vendors claiming approximately $739,000, plus interest,
attorney's fees and costs. These lawsuits were settled as structured payments
in the aggregate amount of approximately $785,000 and the obligations were
classified as notes payable. Payments applied against these notes payable
during the year ended December 31, 1998 totaled approximately $315,000, which
included approximately $15,000 of interest expense. During the quarter ended
March 31, 1999, nine lawsuits were filed against the Company by trade vendors
and a local government agency claiming approximately $875,000, plus interest,
attorney's fees and costs. As of March 31, 1999, these lawsuits were settled
for an aggregate amount of approximately $929,000, including approximately
$60,000 of interest, attorney's fees and costs, and the obligations were
classified as accounts payable. Payments applied against these accounts payable
during the quarter ended March 31, 1999 totaled approximately $41,000, which
included approximately $2,000 of interest expense. During the quarter ended
March 31, 1999, payments applied against the notes payable relating to the two
lawsuits filed and settled in 1998 totalled approximately $278,000, which
included approximately $8,000 of interest expense.
The Company has been named as a defendant in a lawsuit which claims breach
of contract under which the Company was required to pay $500,000 over a thirty
month period plus a commission on contracts awarded as a result of the
contract. The plaintiff claims damages in an amount in excess of $10 million.
Based upon discussions with counsel, the Company believes that the case is
without merit and intends to vigorously defend against the claim; however, the
outcome of this matter cannot currently be determined. No amounts have been
accrued in the financial statements relating to this matter.
F-29
<PAGE>
The Company is also involved in various routine legal actions arising in the
normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that any potential
liability, arising from these claims against the Company not covered by
insurance would be minimal.
As of March 31, 1999, the Company had not yet filed the Form 5500 Annual
Return/Report for 1997 for its Employee Retirement Plan. The Form 5500 along
with an audit report was due October 15, 1998. The Company may be assessed
penalties by both the Department of Labor and the Internal Revenue Service for
its late filing. The Company has reserved $50,000 which represents the
Company's estimate of the maximum amount of penalties that could be assessed.
Note 16. Subsequent Events
On April 19, 1999 a lawsuit was filed against the Company which claims that
the Company owes $262,000 plus interest and costs, for software sold to the
Company in 1998. The Company believes it has defenses against this claim and
that the claim is without merit, however the outcome of this matter cannot
currently be determined. No amounts have been accrued in the financial
statements relating to this matter.
In April and May 1999 three additional trade vendors filed lawsuits claiming
approximately $201,000. One of the suits was settled for $134,000 with payment
due on or before June 15, 1999. The remaining lawsuits have not been settled.
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or any other person to give
any information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information. This prospectus does not offer
to sell or buy any shares in any jurisdiction where it is unlawful.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 19
Dilution................................................................. 19
Capitalization........................................................... 21
Selected Financial Data--Litronic........................................ 22
Selected Financial Data--Pulsar.......................................... 24
Pro Forma Financial Data................................................. 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Industry Information..................................................... 48
Business................................................................. 52
Management............................................................... 69
Principal Stockholders................................................... 76
Related Party Transactions............................................... 77
Description of Securities................................................ 79
Shares Eligible for Future Sale.......................................... 81
Underwriting............................................................. 83
Legal Matters............................................................ 85
Experts.................................................................. 85
Where You Can Find More Information...................................... 86
Index to Consolidated Financial Statements
--Litronic Inc. ....................................................... F-1
Index to Financial Statements--Pulsar Data Systems, Inc. ................ F-16
</TABLE>
Until , 1999, all dealers that effect transactions in the registered
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,700,000 SHARES
[Logo of Litronic, Inc.]
COMMON STOCK
----------------
PROSPECTUS
----------------
Bluestone Capital Partners, L.P.
Pacific Crest Securities Inc.
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is a statement of expenses incurred by Registrant in
connection with the issuance and distribution of the securities being
registered hereunder, other than underwriting discounts and expenses. All
amounts are estimated except the Securities and Exchange Commission
registration fee, the National Association of Securities Dealers, Inc. filing
fee and the NASDAQ/NMS quotation fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 13,012
National Association of Securities Dealers, Inc. filing fee...... 5,181
NASDAQ/NMS quotation fee......................................... 75,625
Printing and engraving expenses.................................. 225,000
Legal fees and expenses.......................................... 835,000
Accounting fees and expenses..................................... 675,000
Transfer Agent and Registrar fees and expenses................... 4,000
Blue Sky fees and expenses (including legal fees)................ 10,000
Miscellaneous.................................................... 57,182
----------
Total.......................................................... $1,900,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director, officer, employee or agent of the
corporation or is or was serving at its request in such capacity in another
corporation or business association, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 107(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to
the corporation or its shareholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(c) under Section 174 of the Delaware General Corporation Law, or (d) for any
transaction from which the director derived an improper personal benefit.
II-1
<PAGE>
Article V of the Registrant's Amended and Restated Certificate of
Incorporation provides for the elimination of personal liability for a director
for breach of fiduciary duty as permitted by 102(b)(7) of the Delaware General
Corporation Law. Article VI of the Registrant's Amended and Restated By-Laws
provide that the Registrant shall indemnify its directors, officers and
employees to the full extent permitted by Section 145 of the Delaware General
Corporation Law.
The Underwriting Agreement (filed as Exhibit 1 hereto) provides for
indemnification by the Underwriters of the Registrant and its directors,
officers and controlling persons for certain liabilities arising under the
Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities
In February 1999 Registrant issued 100 shares of its common stock to Kris
Shah, its promoter, in connection with the organization of the Registrant and
this offering for $100. On the date of this prospectus, Registrant issued
3,870,593 shares of common stock to the shareholders of Litronic Industries,
Inc. in exchange for all the outstanding capital stock of Litronic Industries,
Inc.
The issuance of the securities in the transactions described above were
deemed to be exempt from registration under the Securities Act in reliance on
(a) Section 4(2) of the Securities Act and Regulation D promulgated thereunder
as a transaction by an issuer not involving any public offering.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1 Form of Underwriting Agreement among the Registrant and the
Underwriter*
2 Stock Acquisition Agreement and Reorganization Agreement*
3.1 Certificate of Incorporation, as amended on February 5, 1999*
3.2 By-Laws of the Registrant*
3.3 Form of Amended and Restated Certificate of Incorporation*
4.1 Registration Rights Agreement*
4.2 Warrant Agreement*
4.3 Stock Certificate*
5 Form of Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC re
validity*
10.01 Employment Agreement with Kris Shah*
10.02 Employment Agreement with William Davis*
10.03 Promissory Note from Dril-Tron, Inc. (Litronic Industries, Inc.)
To Kris Shah dated December 12, 1994 in the principal amount of
$210,822*
10.04 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated June 23, 1995*
10.05 Business Loan Agreement between Pulsar Data Systems, Inc. and
Wilmington Trust Company dated July 24, 1995*
10.06 Commercial Security Agreement between Pulsar Data Systems, Inc.
and Wilmington Trust Company dated July 24, 1995*
10.07 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated October 23, 1995*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.08 Purchase Order between Loral Federal Systems Company and Litronic
Industries, Inc. dated November 17, 1995*
10.09 Loan and Security Agreement between Litronic Industries, Inc. and
Fidelity Funding of California, Inc. dated June 27, 1996*
10.10 First Amendment to Loan and Security Agreement between Litronic
Industries Inc. and Fidelity Funding, Inc. dated June 27, 1997*
10.11 Award Contract between Maryland Procurement Office and Litronic
Industries, Inc. dated June 27, 1997*
10.12 Forbearance Agreement between Pulsar Data Systems, Inc. and IBM
Credit Corporation dated August 8, 1997*
10.13 Letter Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated October 10, 1997*
10.14 Sublease Agreement between Litronic Industries, Inc. and E. I. du
Pont de Nemours and Company dated October 20, 1997+
10.15 Inventory Working Capital and Finance Agreement between Pulsar
Data Systems, Inc. and IBM Credit Corporation dated October 30,
1997*
10.16 Lease and Service Agreement between Alliance Business Centers and
Litronic Industries, Inc. dated January 6, 1999*
10.17 Lease Agreement between Airport Industrial Complex and Litronic
Industries, Inc. dated December 4, 1997*
10.18 Promissory Note from Litronic Industries, Inc. to KRDS, Inc. dated
December 31, 1997 in the principal amount of $900,000*
10.19 Revolving Promissory Note from Litronic Industries, Inc. to KRDS,
Inc. dated December 31, 1997 in the principal amount of
$2,900,000*
10.20 Revolving Promissory Note from Litronic Industries, Inc. to KRDS,
Inc. dated December 31, 1997 in the principal amount of
$2,000,000*
10.21 Letter Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated February 4, 1998*
10.22 Revolving Promissory Note from Litronic Industries, Inc. to KRDS,
Inc. dated February 24, 1998 in the principal amount of $600,000*
10.23 Second Amendment to Loan and Security Agreement between Litronic
Industries, Inc. and Fidelity Funding, Inc. dated March 1, 1998*
10.24 Litronic Industries, Inc. Stock Option Plan dated April 1, 1998*
10.25 Litronic Industries, Inc. Stock Option Plan dated February 9,
1999*
10.26 Modification dated February 3, 1999 of Original GSA Contract GS-
35F-4232D dated May 3, 1996*
10.27 Deed of Lease Agreement between Pulsar Data Systems, Inc. and
Massachusetts Mutual Life Insurance Company dated August 11, 1998*
10.28 Forbearance Agreement between Pulsar Data Systems, Inc. and IBM
Credit Corporation dated August 31, 1998*
10.29 Business Loan Agreement between Litronic Industries, Inc. and BYL
Bank Group dated September 29, 1998*
10.30 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated September 29, 1998 in the principal amount of $3,800,000*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.31 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated September 29, 1998 in the principal amount of $1,400,000*
10.32 Amendment to Forbearance Agreement between Pulsar Data Systems,
Inc. and IBM Credit Corporation dated October 8, 1998*
10.33 Promissory Note from Davis Holding Company to Pulsar Data Systems,
Inc. dated January 1, 1999 in the principal amount of $804,342.08*
10.34 Promissory Note from Davis Holding Company to Pulsar Data Systems,
Inc. dated January 1, 1999 in the principal amount of $543,017.40*
10.35 Letter Agreement between Pulsar Data Systems, Inc. and Wilmington
Trust Company dated June 20, 1997*
10.36 Third Amendment to Loan and Security Agreement dated March 31,
1999*
10.37 Dallas Semiconductor Standard Consulting Agreement dated February
2, 1999 between Litronic and Dallas Semiconductor Corporation*
10.38 Basic Ordering Agreement dated April 16, 1998 between the United
States of America and Litronic*
10.39 Nonexclusive Distributor Agreement dated April 27, 1999 among
Litronic and Itochu Techno-Science Corporation and Itochu
Corporation+
10.40 Equipment Purchase, Software License and Maintenance Agreement
dated April 20, 1999 between Bank of America and Litronic*
10.41 Nonexclusive reseller agreement dated as of April 1, 1999 between
Litronic and South African Certification Agency*
10.42 Loan and Security Agreement dated as of May 10, 1999 between
Litronic and Fidelity Funding, Inc.*
10.43 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated May 13, 1999 in the principal amount of $750,000.*
10.44 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated March 10, 1999 in the principal amount of $750,000.*
10.45 Amendment to Forbearance Agreement between Pulsar Data Systems,
Inc. and IBM Credit Corporation dated March 8, 1999.
10.46 Amendment to Forbearance Agreement between Pulsar Data Systems,
Inc. and IBM Credit Corporation dated June 4, 1999.
23.1 Form of Consent of KPMG LLP+
23.2 Form of Consent of KPMG LLP+
23.3 Form of Consent of Keller Bruner & Company, LLC+
27 Financial Data Schedule*
99.1 Consent of Mark Gembicki*
99.2 Consent of Matthew Medeiros*
</TABLE>
(b)Financial Statement Schedules.
The following financial statement schedules are filed herewith:
Report of Independent Public Accountants
Schedule II--Valuation and qualifying accounts
Other schedules have been omitted because of the absence of conditions under
which they are required or because the required information is included in the
financial statements or notes thereto.
- --------
* Previously filed.
+ Supercedes previously filed exhibit.
II-4
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, hereunto duly authorized, in the State of
California on the 8th day of June, 1999.
Litronic Inc.
/s/ Kris Shah
By: _________________________________
Kris Shah Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Kris Shah Director, Chairman
- ------------------------------------- of the Board and June 8, 1999
Kris Shah Chief Executive
Officer
* Chief Financial
- ------------------------------------- Officer and June 8, 1999
Thomas W. Seykora principal
accounting officer
* Director, President
- ------------------------------------- and Chief Operating June 8, 1999
William W. Davis, Sr. Officer
/s/ Kris Shah
* By: _______________________________
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1 Form of Underwriting Agreement among the Registrant and the
Underwriters*
2 Stock Acquisition Agreement and Reorganization Agreement*
3.1 Certificate of Incorporation, as amended on February 5, 1999*
3.2 By-Laws of the Registrant*
3.3 Form of Amended and Restated Certificate of Incorporation*
4.1 Registration Rights Agreement*
4.2 Warrant Agreement*
4.3 Stock Certificate*
5 Form of Opinion of Arent Fox Kintner Plotkin & Kahn, PLLC re
validity*
10.01 Employment Agreement with Kris Shah*
10.02 Employment Agreement with William Davis*
10.03 Promissory Note from Dril-Tron, Inc. (Litronic Industries, Inc.)
To Kris Shah dated December 12, 1994 in the principal amount of
$210,822*
10.04 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated June 23, 1995*
10.05 Business Loan Agreement between Pulsar Data Systems, Inc. and
Wilmington Trust Company dated July 24, 1995*
10.06 Commercial Security Agreement between Pulsar Data Systems, Inc.
and Wilmington Trust Company dated July 24, 1995*
10.07 Commercial Guaranty from Pulsar Data Systems, Inc. to Wilmington
Trust Company dated October 23, 1995*
10.08 Purchase Order between Loral Federal Systems Company and Litronic
Industries, Inc. dated November 17, 1995*
10.09 Loan and Security Agreement between Litronic Industries, Inc. and
Fidelity Funding of California, Inc. dated June 27, 1996*
10.10 First Amendment to Loan and Security Agreement between Litronic
Industries Inc. and Fidelity Funding, Inc. dated June 27, 1997*
10.11 Award Contract between Maryland Procurement Office and Litronic
Industries, Inc. dated June 27, 1997*
10.12 Forbearance Agreement between Pulsar Data Systems, Inc. and IBM
Credit Corporation dated August 8, 1997*
10.13 Letter Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated October 10, 1997*
10.14 Sublease Agreement between Litronic Industries, Inc. and E. I. du
Pont de Nemours and Company dated October 20, 1997+
10.15 Inventory Working Capital and Finance Agreement between Pulsar
Data Systems, Inc. and IBM Credit Corporation dated October 30,
1997*
10.16 Lease and Service Agreement between Alliance Business Centers and
Litronic Industries, Inc. dated January 6, 1999*
10.17 Lease Agreement between Airport Industrial Complex and Litronic
Industries, Inc. dated December 4, 1997*
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.18 Promissory Note from Litronic Industries, Inc. to KRDS, Inc. dated
December 31, 1997 in the principal amount of $900,000*
10.19 Revolving Promissory Note from Litronic Industries, Inc. to KRDS,
Inc. dated December 31, 1997 in the principal amount of
$2,900,000*
10.20 Revolving Promissory Note from Litronic Industries, Inc. to KRDS,
Inc. dated December 31, 1997 in the principal amount of
$2,000,000*
10.21 Letter Agreement between Pulsar Data Systems, Inc. and IBM Credit
Corporation dated February 4, 1998*
10.22 Revolving Promissory Note from Litronic Industries, Inc. to KRDS,
Inc. dated February 24, 1998 in the principal amount of $600,000*
10.23 Second Amendment to Loan and Security Agreement between Litronic
Industries, Inc. and Fidelity Funding, Inc. dated March 1, 1998*
10.24 Litronic Industries, Inc. Stock Option Plan dated April 1, 1998*
10.25 Litronic Industries, Inc. Stock Option Plan dated February 9,
1999*
10.26 Modification dated February 3, 1999 of Original GSA Contract GS-
35F-4232D dated May 3, 1996*
10.27 Deed of Lease Agreement between Pulsar Data Systems, Inc. and
Massachusetts Mutual Life Insurance Company dated August 11, 1998*
10.28 Forbearance Agreement between Pulsar Data Systems, Inc. and IBM
Credit Corporation dated August 31, 1998*
10.29 Business Loan Agreement between Litronic Industries, Inc. and BYL
Bank Group dated September 29, 1998*
10.30 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated September 29, 1998 in the principal amount of $3,800,000*
10.31 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated September 29, 1998 in the principal amount of $1,400,000*
10.32 Amendment to Forbearance Agreement between Pulsar Data Systems,
Inc. and IBM Credit Corporation dated October 8, 1998*
10.33 Promissory Note from Davis Holding Company to Pulsar Data Systems,
Inc. dated January 1, 1999 in the principal amount of $804,342.08*
10.34 Promissory Note from Davis Holding Company to Pulsar Data Systems,
Inc. dated January 1, 1999 in the principal amount of $543,017.40*
10.35 Letter Agreement between Pulsar Data Systems, Inc. and Wilmington
Trust Company dated June 20, 1997*
10.36 Third Amendment to Loan and Security Agreement dated March 31,
1999*
10.37 Dallas Semiconductor Standard Consulting Agreement dated February
2, 1999 between Litronic and Dallas Semiconductor Corporation*
10.38 Basic Ordering Agreement dated April 16, 1998 between the United
States of America and Litronic*
10.39 Nonexclusive Distributor Agreement dated April 27, 1999 among
Litronic and Itochu Techno-Science Corporation and Itochu
Corporation+
10.40 Equipment Purchase, Software License and Maintenance Agreement
dated April 20, 1999 between Bank of America and Litronic*
10.41 Nonexclusive reseller agreement dated as of April 1, 1999 between
Litronic and South African Certification Agency*
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.42 Loan and Security Agreement dated as of May 10, 1999 between
Litronic and Fidelity Funding Inc.*
10.43 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated May 13, 1999 in the principal amount of $750,000.*
10.44 Promissory Note from Litronic Industries, Inc. to BYL Bank Group
dated March 10, 1999 in the principal amount of $750,000.*
10.45 Amendment to Forbearance Agreement between Pulsar Data Systems,
Inc. and IBM Credit Corporation dated March 8, 1999
10.46 Amendment to Forbearance Agreement between Pulsar Data Systems,
Inc. and IBM Credit Corporation dated June 4, 1999
23.1 Form of Consent of KPMG LLP+
23.2 Form of Consent of KPMG LLP+
23.3 Form of Consent of Keller Bruner & Company, LLC+
27 Financial Data Schedule*
99.1 Consent of Mark Gembicki*
99.2 Consent of Matthew Medeiros*
</TABLE>
- --------
* Previously filed.
+ Supercedes previously filed exhibit.
3
<PAGE>
EXHIBIT 10.14
SUBLEASE
NOTE: This Sublease document is being used as a Sub-sublease document.
Therefore, the terms "sublease", "sublessor" and "sublessee" will often be used
as "sub-sublease", "sub-sublessor" and sub-sublessee", respectively.
1. PARTIES.
This Sublease, dated October 20, 1997, is made between E.I. du Pont de Nemours
and Company, a Delaware corporation (Sublessor"), and Lintronic Industries, a
California corporation ("Sublessee").
2. MASTER LEASE.
Sublessor is the Sub-lessee under a written lease dated February 21, 1991,
wherein Koll Tower Four Associates, a California limited partnership ("Lessor")
leased to Lessee Hadson Power Systems, a Delaware corporation, the real property
located in the City of Irvine, County of Orange, State of California, described
as portions of that certain 16-story office building located at 2030 Main
Street, Irvine, California, as identified in the Master Lease as the "Premises"
("Master Premises"). Said lease has been amended by the following amendments
that certain Sublease dated April 7, 1995 by and between Hadson Power Systems
("Hadson")*, a Delaware corporation and E.I. du Pont de Nemours and Company (as
existing "Sublessor"); said lease and amendments are herein collectively
referred to as the "Master Lease" and are attached hereto as Exhibit "A".
*Hadson Systems is now LG & E Energy Systems, Inc., a Kentucky Corporation
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set forth in
this Sublease the following portions of the Master Premises ("Premises"):
approximately 11.912 rentable square feet as identified as Exhibit One to the
sublease and further identified as 2030 SE Main Street, Suite 1250, Irvine,
California.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents that the Master Lease has not been amended or
modified except as expressly set forth herein, that Sublessor is not now, and as
of the commencement of the Term hereof will not be, in default or breach of any
of the provisions of the Master Lease, and that Sublessor has no knowledge of
any claim by Lessor that Sublessor is in default or breach of any of the
provisions of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on November 1, 1997 ("Commencement
Date"), or when Lessor consents to this Sublease (if such consent is required
under the Master Lease), whichever shall last occur, and end on September 17,
2001 ("Termination Date"), unless otherwise sooner terminated in accordance with
the provisions of this Sublease. In the event the Term commences on a date other
than the Commencement Date, Sublessor and Sublessee shall execute a memorandum
setting forth the actual date of the commencement of the Term.
<PAGE>
Possession of the Premises ("Possession") shall be delivered to Sublessee on the
commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor shall not be
subject to any liability for such failure, the Termination Date shall not be
extended by the delay, and the validity of this Sublease shall not be impaired,
but rent shall abate until delivery of Possession. Notwithstanding the
foregoing, if Sublessor has not delivered Possession to Sublessee within thirty
(30) days after the Commencement Date, then at any time thereafter and before
delivery of Possession, sublessee may give written notice to Sublessor of
Sublessee's intention to cancel this Sublease. Said notice shall set forth an
effective date for such cancellation which shall be at least ten (10) days after
delivery of said notice to Sublessor. If Sublessor delivers Possession to
Sublessee on or before such effective date, this Sublease shall remain in full
force and effect. If Sublessor fails to deliver Possession to Sublessee on or
before such effective date, this Sublease shall be cancelled, in which case all
consideration previously paid by Sublessee to Sublessor on account of this
Sublease shall be returned to Sublessee, this Sublease shall thereafter be of no
further force and effect, and Sublessor shall have no further liability to
Sublessee on account of such delay or cancellation. If Sublessor permits
Sublessee to take Possession prior to the commencement of the Term, such early
Possession shall not advance the Termination Date and shall be subject to the
provisions of this Sublease, including without limitation the payment of rent.
6. RENT.
6.1. Minimum Rent. Sublessee shall pay to Sublessor as minimum rent, without
deduction, setoff, notice, or demand, at E.I. du Pont de Nemours, Attn:
Corporate Real Estate, 1007 Market Street, D12048A, Wilmington, DE 19898, or at
such other place as Sublessor shall designate from time to time by notice to
Sublessee, the sum of See Addendum One Dollars ($_________) per month, in
advance on the first day of each month of the Term. Sublessee shall pay to
Sublessor upon execution of this Sublease the sum of Twenty Thousand Two Hundred
Fifty and 40/100ths Dollars ($20,250.40) as rent for the first month. If the
Term begins or ends on a day other than the first or last day of a month, the
rent for the partial months shall be prorated on a per diem basis. Additional
provisions: See attached Addendum One
6.2. Operating Costs. If the Master Lease requires Sublessor to pay to Lessor
all or portion of the expenses of operating the building and/or project of which
the Premises are a part ("Operating Costs"), including but not limited to taxes,
utilities, or insurance, then Sublessee shall pay to Sublessor as additional
rent seventy and 24/100ths percent (70.24%) of the amounts payable by Sublessor
for Operating Costs incurred during the Term. Such [illegible text] shall be
payable as and [illegible text] Operating Costs are payable by Sublessor to
Lessor if the Master Lease provides for the payment by Sublessor of Operating
Costs on the basis of an estimate thereof, then as and when adjustments when
estimated and actual Operating Costs are made under the Master Lease, the
obligations of Sublessor and Sublessee hereunder shall be adjusted in a like
manner, and if any such adjustment shall occur after the expiration of
2
<PAGE>
earlier termination of the term, then the obligations of Sublessor and Sublessee
under this Section 6.2 shall survive such expiration or termination. Sublessor
shall, upon request by Sublessee, furnish Sublessee with copies of all
statements submitted by Lessor of actual or estimated Operating Costs during the
Term.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease the sum
of Twenty Thousand Two Hundred Fifty and 40/100ths Dollars ($20,250.40) as
security for Sublessee's faithful performance of Sublessee's obligations
hereunder ("Security Deposit"). If Sublessee fails to pay rent or other charges
when due under this Sublease, or fails to perform any of its other obligations
hereunder, Sublessor may use or apply all or any portion of the Security Deposit
for the payment of any rent or other amount then due hereunder and unpaid, for
the payment of any other sum for which Sublessor may become obligated by reason
of Sublessee's default or breach, or for any loss or damage sustained by
Sublessor as a result of Sublessee's default or breach. If Sublessor so uses any
portion of the Security Deposit, Sublessee shall, within ten (10) days after
written demand by Sublessor, restore the Security Deposit to the full amount
originally deposited, and Sublessee's failure to do so shall constitute a
default under this Sublease. Sublessor shall not be required to keep the
Security Deposit separate from its general accounts, and shall have no
obligation or liability for payment of interest on the Security Deposit. In the
event Sublessor assigns its interest in this Sublease, Sublessor shall deliver
to its assignee so much of the Security Deposit as is then held by Sublessor.
Within ten (10) days after the Term has expired, or Sublessee has vacated the
Premises, or any final adjustment pursuant to Subsection 6.2 hereof has been
made, whichever shall last occur, and provided Sublessee is not then in default
of any of its obligations hereunder, the Security Deposit, or so much thereof as
had not theretofore been applied by Sublessor, shall be returned to Sublessee or
to the last assignee, if any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for sales, consulting and related
general office functions, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any part of
the Premises without the prior written consent of Sublessor (and the consent of
Lessor, if such is required under the terms of the Master Lease).
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are incorporated into
and made a part of this Sublease as if Sublessor were the lessor thereunder,
Sublessee the lessee thereunder, and the Premises the Master Premises, except
for the following:
See attached Addendum One to the Sublease
Sublessee assumes and agrees to perform the lessee's obligations under the
Master Lease during the Term to the extent that such obligations are applicable
to the Premises, except that the
3
<PAGE>
obligation to pay rent to Lessor under the Master Lease shall be considered
performed by Sublessee to the extent and in the amount rent is paid to Sublessor
in accordance with Section 6 of this Sublease. Sublessee shall not commit or
suffer any act or omission that will violate any of the provisions of the Master
Lease. Sublessor shall exercise due diligence in attempting to cause Lessor to
perform its obligations under the Master Lease for the benefit of Sublessee. If
the Master Lease terminates, this Sublease shall terminate and the parties shall
be relieved of any further liability or obligation under this Sublease, provided
however, that if the Master Lease terminates as a result of a default or breach
by Sublessor or Sublessee under this Sublease and/or the Master Lease, then the
defaulting party shall be liable to the nondefaulting party for the damage
suffered as a result of such termination. Notwithstanding the foregoing, if the
Master Lease gives Sublessor any right to terminate the Master Lease in the
event of the partial or total damage, destruction, or condemnation of the Master
Premises or the building or project of which the Master Premises are a part, the
exercise of such right by Sublessor shall not constitute a default or breach
hereunder.
11. ATTORNEYS' FEES
If Sublessor, Sublessee, or Broker shall commence an action against the other
arising out of or in connection with this Sublease, the prevailing party shall
be entitled to recover its costs of suit and reasonable attorney's fees.
12. AGENCY DISCLOSURE.
Sublessor and Sublessee each warrant that they have dealt with no other real
estate broker in connection with this transaction except: CB COMMERCIAL REAL
ESTATE GROUP, INC., who represents Sublessor and Sublessee. In the event that CB
COMMERCIAL REAL ESTATE GROUP, INC. represents both Sublessor and Sublessee,
Sublessor and Sublessee hereby confirm that they were timely advised of the dual
representation and they consent to the same, and that they do not expect said
broker to disclose to either of them the confidential information of the other
party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such consent
is required under the terms of the Master Lease), Sublessor shall pay Broker a
real estate brokerage commission in accordance with Sublessor's contract with
Broker for the subleasing of the Premises, if any, and otherwise in the amount
of (Per separate agreement) Dollars ($_________) for services rendered in
effecting this Sublease. Broker is hereby made a third party beneficiary of
this Sublease for the purpose of enforcing its right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to be given
by either party on the other hereunder shall be in writing. All notices and
demands by the Sublessor shall be sent by United States Mail, postage prepaid,
addressed to the Sublessee at the Premises, and to the address hereinbelow, or
to such other place as Sublessee may from time to time designate in a notice to
the Sublessor. All notices and demands by the Sublessee to Sublessor shall be
sent by
4
<PAGE>
United States Mail, postage prepaid, addressed to the Sublessor at the address
set forth herein, and to such other person or place as the Sublessor may from
time to time designate in a notice to the Sublessee.
To Sublessor: E.I. du Pont de Nemours and Company, Corporate Real Estate,
D12048A, 1007 Market Street, Wilmington, Delaware 19898.
To Sublessee: Lintronic Industries, 2030 SE Main Street, Suite 1250, Irvine,
CA 92714.
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY LESSOR
WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS REQUIRED UNDER THE
TERMS OF THE MASTER LEASE.
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state and local
laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
Sublessor: E.I. du Pont de Nemours and Sublessee: Lintronic Industries, a
Company, a Delaware California corporation
corporation
By:___________________________________ By: /S/ KRIS SHAH
---------------------------------
Title: _______________________________ Title: President
-----------------------------
Date: ________________________________ Date: Oct. 24, 1997
------------------------------
LESSOR'S AND LESSEE'S CONSENT TO SUBLEASE
The undersigned ("Lessor"), lessor under the Master Lease and the undersigned
Lessee hereby consents to the foregoing Sublease without waiver of any
restriction in the Master Lease concerning further assignment or subletting.
Lessor certifies that, as of the date of Lessor's execution hereof, Sublessor is
not in default or breach of any of the provisions of the Master Lease, and that
the Master Lease has not been amended or modified except as expressly set forth
in the foregoing Sublease.
Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.
5
<PAGE>
a California limited partnership a Kentucky corporation
By: __________________________________ By: _________________________________
Title: ________________________________ Title: ______________________________
CONSULT YOUR ADVISORS -- This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
6
<PAGE>
Exhibit 10.14
EXHIBIT ONE
[Description of twelfth floor of
building with shaded area and
non-shaded area. Non-shaded area
is labeled as "subject property."
The words "Exhibit One" appear
at the bottom of the page]
<PAGE>
ADDENDUM ONE TO THAT CERTAIN SUBLEASE DATED OCTOBER 20, 1997
BY AND BETWEEN E.I. DU PONT DE NEMOURS AND COMPANY ("DU PONT")
AND LINTRONIC INDUSTRIES ("LINTRONIC")
FOR THE PREMISES LOCATED AT
2030 MAIN STREET, SUITE 1250, IRVINE, CALIFORNIA
BASE RENT: Months Rate/Rentable S.F. Monthly Total
1-46 $1.70 Fully Serviced $20,250.40
TENANT IMPROVEMENTS: Landlord shall clean the premises and shampoo the carpet.
Otherwise, Tenant must accept the premises in its "as is"
condition. Any proposed modifications to the suite must
have the written approval of Sublessor and Lessor, and
shall be at Sublessee's expense.
PARKING: Du Pont shall make available a maximum of forty-eight
(48) in-common unreserved parking spaces to Lintronic at
a monthly charge of $30.00 per space per month. Lintronic
shall lease a minimum of thirty (30) of these parking
spaces for the sublease term. Lintronic shall pay a one-
time charge of $10.00 for each parking card issued.
HAZARDOUS MATERIALS: Du Pont has no knowledge of any toxic or hazardous
materials within the proposed sublease premises. Du Pont
will not provide any warranties or guarantees or be
responsible for any remedies as a result of the presence
of any toxic or hazardous materials.
INDEMNITY: Lintronic shall indemnify and hold Du Pont safe and
harmless from and against any and all loss, costs,
damages, claims, actions or liability on account of the
death of or injury to any person or persons, or the
damage to or destruction of any property or pollution
arising from or growing out of Lintronic's use and
occupancy of the subleased premises, unless caused in
whole or in part by the willful misconduct or sole
negligence of Du Pont or Lessor.
OPERATING EXPENSES: Lintronic shall have a 1998 base year. Lintronic shall
pay for increases in operating expenses in excess of the
1998 base year, which shall be calculated to reflect 95%
occupancy and in accordance with Section 6.2 of the
Sublease document.
8
<PAGE>
EARLY OCCUPANCY: Lintronic shall not commence to pay base rent or operating
expenses other than after-hours heating, ventilation and
air conditioning until November 18, 1997 regardless of
Lintronic's actual occupancy date. Lintronic will be
responsible for parking charges during its early occupancy.
In the event Lintronic cannot occupy the Premises prior to
November 17, 1997, and the delay in occupancy is through no
fault of Lintronic, then rent shall commence one (1)
business day after all approvals have been obtained from
all parties to this Sublease.
FURNITURE: Du Pont shall allow Tenant to utilize the private office,
conference room, reception area and modular furniture
systems in place within the premises as of October 20, 1997
hereinafter referred to as Furniture. By signing below,
Lintronic acknowledges that it has inspected and accepts
the Furniture with respect to quantity and quality. As a
condition of utilizing said Furniture, Lintronic and Du
Pont shall comply with the following:
a. Lintronic shall deposit $30,000 as a non-refundable
deposit towards the purchase of the Furniture.
b. Lintronic's deposit will be retained by Du Pont until
the expiration of the sublease term and then applied
together with a rental credit of $595.60 per month ($.05
per rentable square foot per month) towards the purchase
price for a total rental credit of $27,397.60.
c. Du Pont will convey title to the Furniture to
Lintronic for $1.00 at the end of the sublease term. Title
shall be conveyed by a bill of sale prepared by Du Pont.
d. Any default of the sublease terms or conditions will
result in Lintronic's forfeiture of both the deposit and
rental credit paid by Lintronic.
RIGHT TO ASSIGN
SUBLEASE: Lintronic's rights to sublease or assign all or any portion
of the Premises to any other entity or person per the terms
of the Master Lease and subject to the approval of Lessor,
Lessee and Sublessor.
SIGNAGE: No exterior signage is available from Lessor. All directory
and suite signage shall be obtained through the Master
Lessor and shall be at Lintronic's cost.
9
<PAGE>
Sublessor: E.I. du Pont de Nemours and Sublessee: Lintronic Industries, a
Company, a Delaware California corporation
corporation
By: /S/ AUTHORIZED SIGNATORY By: /S/ KRIS SHAH
------------------------------------ --------------------------------
Title: Manager, Corporate Real Estate Title: President
-------------------------------- -----------------------------
By: /S/ NANCY J. McDANIEL By:________________________________
------------------------------------
Title: Properties Manager Title:_____________________________
--------------------------------
Date: 10/28/97 Date: Oct. 24, 1997
---------------------------------- ------------------------------
Lessor: Koll Tower Four Associates, Lessee: LG & E Energy Systems, Inc.
a California limited a Kentucky corporation
partnership
By: Koll Management Services, Inc., By: a Delaware Corporation As Agent
------------------------------------ --------------------------------
Title: ________________________________ Title: ____________________________
By: /S/ AUTHORIZED SIGNATORY BY:________________________________
------------------------------------
Title: Portfolio Manager Title:_____________________________
---------------------------------
Date: 11/7/97 Date:______________________________
----------------------------------
10
<PAGE>
1st Mo. 20,250.40/mo.
Sec Dep 20,250.40
Furniture Dep 30,000.00
Total 70,500,80
E.I. Du Pont de Nemours & Co.
11
<PAGE>
LITRONIC INDUSTRIES, INC.
GENERAL ACCOUNT
2950 RED HILL AVE PH 714-545-6649
COSTA MESA, CA 92626
BANK OF YORBA LINDA
COSTA MESA, CALIFORNIA 92626
90-3789-1222
24667
024667
PAY **SEVENTY THOUSAND FIVE HUNDRED DOLLARS & 80 CENTS**
TO THE ORDER OF
E.I. DUPONT DE NEMOURS & COMPANY
DATE 10/24/97
AMOUNT $70,500.80
/S/ Kris Shah
/S/ Nancy R. Mckenna
LITRONIC INDUSTRIES, INC.
24667
024667
DATE
10/24/97
INVOICE NO.
COMMENT
AMOUNT
70,500.80
DISCOUNT
NET AMOUNT
$70,500.80
12
<PAGE>
CHECK: 024667
10/24/97
E.I. DUPONT DE NEMOURS & CO.
TOTAL: $70,500.80
13
<PAGE>
AMENDMENT NO. 1 TO OFFICE BUILDING SUB-SUBLEASE
This Amendment No. 1 to the Office Building Sub-sublease (the "Amendment") is
made as of this 24 day of November 1997 by and between E. I. du Pont de Nemours
and Company, a Delaware corporation ("Sublessor") and Lintronic Industries, a
California Corporation ("Sublessee").
Sublessor and Sublessee are parties to that certain Office Building Sub-sublease
dated October 20, 1997 (the "Sub-sublease") pursuant to which Sublessor sub-
subleases to Sublessee that certain space identified as 11,912 rentable square
feet in 2030 Main Street, Suite 1250, Irvine, California.
Sublessor and Sublessee agree to amend the Sub-sublease as follows:
1. Rent Commencement Date: Rent shall start November 24, 1997 and will
continue through September 17, 2001.
Except as herein provided, all other terms and conditions of the Sub-sublease
shall be in full force and effect.
Sublessor: Sublessee:
E.I. duPont de Nemours and Company, Lintronic Industries,
a Delaware corporation a California corporation
By:________________________________ By: /s/ Kris Shah
-------------------------------------
Title:_____________________________ Title: President
----------------------------------
Date:______________________________ Date: Dec. 1, 97
-----------------------------------
14
<PAGE>
EXHIBIT A
OFFICE BUILDING LEASE
BETWEEN
KOLL TOWER FOUR ASSOCIATES,
A CALIFORNIA LIMITED PARTNERSHIP
LANDLORD
AND
HADSON POWER SYSTEMS,
A DELAWARE CORPORATION
TENANT
<PAGE>
OFFICE BUILDING LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. TERMS AND DEFINITIONS ....................................... 1
2. PREMISES AND COMMON AREAS LEASED ............................ 3
3. TERM ........................................................ 7
4. POSSESSION .................................................. 7
5. ANNUAL BASIC RENT ........................................... 8
6. RENT ADJUSTMENT ............................................. 11
7. SECURITY DEPOSIT ............................................ 22
8. USE ......................................................... 23
9. NOTICES ..................................................... 25
10. BROKERS ..................................................... 26
11. HOLDING OVER ................................................ 26
12. TAXES ON TENANT'S PROPERTY .................................. 26
13. CONDITION OF PREMISES ....................................... 27
14. ALTERATIONS ................................................. 28
15. REPAIRS ..................................................... 30
16. LIENS ....................................................... 31
17. ENTRY BY LANDLORD ........................................... 31
18. UTILITIES AND SERVICES ...................................... 32
19. BANKRUPTCY .................................................. 33
20. EXONERATION ................................................. 34
21. INDEMNIFICATION ............................................. 35
22. INSURANCE ................................................... 36
23. DAMAGE OR DESTRUCTION ....................................... 40
24. EMINENT DOMAIN .............................................. 44
25. DEFAULTS AND REMEDIES ....................................... 45
26. ASSIGNMENT AND SUBLETTING ................................... 48
27. SUBORDINATION ............................................... 52
28. ESTOPPEL CERTIFICATE ........................................ 54
29. LANDLORD ESTOPPEL CERTIFICATE ............................... 55
30. RULES AND REGULATIONS ....................................... 55
31. CONFLICT OF LAWS ............................................ 55
32. SUCCESSORS AND ASSIGNS ...................................... 55
33. SURRENDER OF PREMISES ....................................... 55
34. PROFESSIONAL FEES ........................................... 56
35. PERFORMANCE BY TENANT ....................................... 56
36. MORTGAGEE PROTECTION ........................................ 57
37. DEFINITION OF LANDLORD ...................................... 57
38. WAIVER ...................................................... 57
39. IDENTIFICATION OF TENANT .................................... 58
40. PARKING ..................................................... 58
41. FORCE MAJEURE ............................................... 61
42. TERMS AND HEADINGS .......................................... 61
43. EXAMINATION OF LEASE ........................................ 61
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
44. TIME ........................................................ 61
45. PRIOR AGREEMENT; AMENDMENTS ................................. 61
46. SEPARABILITY ................................................ 62
47. RECORDING ................................................... 62
48. LIMITATION ON LIABILITY ..................................... 62
49. MODIFICATION FOR LENDER ..................................... 63
50. FINANCIAL STATEMENTS ........................................ 63
51. QUIET ENJOYMENT ............................................. 63
52. TENANT AS CORPORATION OR PARTNERSHIP ........................ 63
53. MOVING EXPENSES ............................................. 63
54. ATHLETIC CLUE MEMBERSHIP .................................... 64
55. OPTION TO EXTEND TERM ....................................... 64
56. EXPANSION OPTION ............................................ 67
57. FIRST RIGHT TO LEASE ELEVENTH FLOOR ......................... 68
58. LANDLORD'S RIGHT TO TERMINATE ............................... 69
59. REFURBISHMENT ALLOWANCE ..................................... 74
60. LEASE REFURBISHMENT AGREEMENT ............................... 75
61. ACCESS TO PREMISES .......................................... 75
62. SIGNAGE ..................................................... 75
63. [Intentionally Omitted] ..................................... 77
64. ABATEMENT OF RENT WHEN TENANT IS PREVENTED
FROM USING PREMISES ....................................... 77
65. GUARANTEE ................................................... 77
SIGNATURE PAGES ..................................................... 78
</TABLE>
EXHIBITS:
A-I Outline of Floor Plan of Premises
A-II Parking Facilities
A-III Site Plan
A-IV Common Areas
B Work Letter Agreement
C Notice of Lease Term Dates and Tenant's Percentage
D Standards for Utilities and Services
E Tenant Estoppel Certificate
F Rules and Regulations
G Agreement Regarding Existing Lease Obligations
H Guaranty of Lease
I Expansion Space
-ii-
<PAGE>
OFFICE BUILDING LEASE
THIS OFFICE BUILDING LEASE ("Lease") is made as of the 21st day of
February, 1991, by and between KOLL TOWER FOUR ASSOCIATES, a California limited
partnership ("Landlord"), and HADSON POWER SYSTEMS, a Delaware corporation
("Tenant").
1. TERMS AND DEFINITIONS. For the purposes of this Lease, the following
terms shall have the following definitions and meanings:
(a) Landlord: Koll Tower Four Associates, a California limited
partnership
(b) Landlord's Asset Management Office address (For Rent and Notices)
The Koll Company
4343 Von Karman Avenue
Newport Beach, California 92660
Attention: Division Manager
With a copy to:
KCIN FOUR, L.P., a California Limited
Partnership
c/o The Koll Company
4343 Von Karman Avenue
Newport Beach, California 92660
(c) Tenant: Hadson Power Systems, a Delaware corporation
(d) Tenant's address:
(i) Prior to Tenant's occupancy:
Hadson Power Systems
16845 Von Karman Avenue
Irvine, California 92714
Attention: President
(ii) On and After Tenant's occupancy:
<PAGE>
Hadson Power Systems
2030 Main Street
Suites 1200-1500,
Irvine, California 92714
Attention: President
(g) Premises: Those certain premises defined in Subparagraph 2(a)
below.
(h) Development: The parcel or parcels of real property defined in
Subparagraph 2(a) below.
(i) Premises Area: Approximately _________ subject to final
determination in accordance with Subparagraph 2(c) below.
(l) Tenant Improvement Allowance: _________ Usable Square Foot of the
Premises (as determined in accordance with Subparagraph 2(c) below).
(m) Tenant Improvements: All work performed by Landlord to prepare the
Premises for occupancy pursuant to the Work Letter Agreement described in
Subparagraph 2(a) below.
(o) Annual Basic Rent and Monthly Basic Rent: __________________
subject to adjustment pursuant to Paragraph 5(b) below.
-2-
<PAGE>
(q) Tenant's Percentage: Tenant's percentage of the Building on a
Rentable Square Foot basis, which initially is _____________________,
subject to final determination in accordance with Subparagraph 2(c) below.
(y) Use: General Office Use.
(w) Building Area: Approximately Three Hundred Forty-Six Thousand Six
Hundred Eighty Four (346,684) Rentable Square Feet, subject to final
determination in accordance with Subparagraph 2(c) below.
2. PREMISES AND COMMON AREAS LEASED.
-3-
<PAGE>
By taking possession of the Premises for the purpose of conducting its
business therein, Tenant accepts the Tenant Improvements as completed or as
substantially completed, and in the latter case, Landlord's and Tenant's
construction representatives shall compile a list of incomplete and/or
corrective items, and Landlord shall complete and/or correct such items within
thirty (30) days following completion of such list; provided, however, in the
event that a longer period of time is reasonably required for the completion and
correction of any such item, Landlord shall proceed with due diligence to
complete and/or correct such item as soon as reasonably possible. Tenant
acknowledges that the Site Plan is conceptual only with respect to those
portions of the Development which have not yet been constructed, and that
Landlord shall have no obligation to construct or complete any additional
buildings or improvements to the Common Areas (as hereinafter defined) or in any
way further develop or improve the Development.
(b) The parties hereto agree that said "letting and hiring is upon and
subject to the terms, covenants and conditions herein set forth and Tenant and
Landlord covenant as a material part of the consideration for this Lease to keep
and perform each and all of said terms, covenants and conditions by it to be
kept and performed and that this Lease is made upon the condition of such
performance.
(c) The Rentable Square Feet and Usable Square Feet of the Premises and the
Rentable Square Feet of the Building shall be determined in accordance with the
standards set forth in ANSI Z65.l-1980, as promulgated by the Building Owners
and Managers Association ("BOMA Standard"), subject to the following
modifications with respect to the determination of the Rentable Square Feet of
the Premises: (i) the rentable area of the premises shall include Tenant's
Percentage of the total square feet contained in the lobby area on the ground
floor of the Building and the other areas of the Building used as Building
Common Areas or for Building services including, without limitation, any fire
control room, telephone room, mail room, service elevator areas, mechanical
rooms on the ground floor and any connecting service corridor, management
office, and security office, and (ii) the rentable area of each floor of the
Building shall be computed using the average Rentable/Usable Ratio (as defined
in the BOMA Standard) for the Building. For purposes of establishing the initial
Tenant's Percentage, Operating Expenses Allowance, Annual Basic Rent, Tenant
Improvement Allowance, and parking privileges, all as shown in ______________-
of this Lease, the approximate Rentable Square Feet of the
-4-
<PAGE>
Premises is deemed to be as set forth in ________________ the approximate
Rentable Square Feet of the Building is deemed to be as set forth in
Subparagraph 1(w), and the approximate Usable Square Feet of the Premises is
deemed to be ________________. Prior to the Commencement Date,
__________________________, Landlord, at Landlord's expense, shall provide
Tenant with a certification from Stevenson Systems, Inc. (or another entity
reasonably acceptable to Tenant), of the Rentable Square Feet and Usable Square
Feet of the Premises and the Rentable Square Feet of the Building, calculated in
accordance with the provisions of this Subparagraph 2(c). Within thirty (30)
days after the Commencement Date, Tenant shall have the right, at Tenant's sole
cost and expense, to cause its architect to confirm the rentable area of the
Premises and the Building, and the usable area of the Premises as set forth in
such certification. In no event shall any adjustments be made to any such
rentable or usable area calculations for the Premises or the Building set forth
in such certification unless with respect to the particular rentable or usable
area calculation for the Premises or the Building, the calculation made by
Stevenson Systems, Inc. (or other entity described above) is in error by more
than two percent (2%) of the actual correct measurement. Upon final
determination of the rentable and usable areas of the Premises and the rentable
area of the Building, as specified above, appropriate adjustments to reflect
such measurements shall be made to Tenant's Percentage, Operating Expense
Allowance, Annual Basic Rent, Tenant Improvement Allowance, parking privileges
and other applicable provisions of the Lease based upon such measurements.
(d) Tenant shall have the nonexclusive right to use in common with other
tenants in the Building and the Development and subject to the Rules and
Regulations referred to in Paragraph 30 below and all covenants, conditions and
restrictions affecting the Development, the following areas appurtenant to the
Premises:
(i) The Building's common entrances, lobbies, restrooms, elevators,
stairways and accessways, loading docks, ramps, drives and platforms and
any passageways and serviceways thereto, and the common pipes, conduits,
wires and appurtenant equipment serving the Premises (collectively,
"Building Common Areas");
(ii) Loading and unloading areas, trash areas, parking areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas and
similar areas and facilities situated within the Development (collectively,
"Common Areas"); and
-5-
<PAGE>
(iii) The Parking Facilities.
The current Common Areas are depicted on Exhibit "A-IV" attached to this Lease,
and incorporated herein by this reference.
(e) Landlord reserves for itself and for the owner(s) and operator(s) of
the Common Areas, the Parking Facilities and the remaining portions of the
Development, the right from time to time without unreasonable interference with
Tenant's use or access to the Premises, and without any material increase in
Tenant's obligations or costs under the Lease including but not limited to, any
increase in Operating Expenses:
(i) To install, use, maintain, repair and replace pipes, ducts,
conduits, wires and appurtenant meters and equipment for service to other
parts of the Building above the ceiling surfaces, below the floor surfaces,
within the walls and in the central core areas, and to relocate any pipes,
ducts, conduits, wires and appurtenant meters and equipment included in the
Premises which are located in the Premises or located elsewhere outside the
Premises, and to expand the Building and/or the Parking Facilities;
(ii) To make changes to the Building Common Areas, the Common Areas
and/or the Parking Facilities, including, without limitation, changes in
the location, size, shape and number of driveways, entrances, parking
spaces or parking areas (but, except as otherwise provided in Paragraph 40
below, without reducing the number of parking privileges to which Tenant is
entitled hereunder), loading and unloading areas, ingress, egress,
direction of traffic, landscaped areas and walkways;
(iii) To close temporarily any of the Building Common Areas, the
Common Areas and/or the Parking Facilities for maintenance purposes so long
as reasonable access to the Premises and the parking privileges to which
Tenant is entitled pursuant to Paragraph 40 below, remains available;
(iv) To designate other land outside the boundaries of the Building
or the Development to be a part of the Common Areas;
(v) To add additional buildings and improvements to the Common
Areas;
-6-
<PAGE>
(vi) To use the Building Common Areas, the Common Areas and/or the
Parking Facilities while engaged in making additional improvements, repairs
or alterations to the Building, the Parking Facilities, the Development, or
any portion thereof; and
(vii) To do and perform such other acts and make such other changes
in, to or with respect to the Building Common Areas, the Common Areas, the
Building, the Parking Facilities or the Development as Landlord and/or the
owner(s) and/or operator(s) of the Common Areas, the Parking Facilities and
the remaining portions of the Development may, in the exercise of sound
business judgment, deem to be appropriate.
3. TERM. The Term of this Lease shall be for the period designated in
__________, commencing on the Commencement Date, and ending on the last day of
the calendar month in which the expiration of such period occurs, unless the
Term hereby demised shall be sooner terminated as hereinafter provided. Each
consecutive twelve (12) month period of the Term of this Lease, commencing on
the Commencement Date and including the last twelve (12) month period of the
Term of this Lease or portion thereof (if the expiration of the Term of this
Lease occurs prior to the expiration of such last twelve (12) month period),
shall be referred to herein as a "Lease Year". The Commencement Date, the date
upon which the Term of this Lease shall end, the Rentable Square Feet within the
Premises and the Building and Tenant's Percentage shall be specified in
Landlord's Notice of Lease Term Dates and Tenant's Percentage ("Notice"), in the
form of Exhibit "C" which is attached hereto and is incorporated herein by this
reference, and shall be served upon Tenant as provided in Paragraph 9, after
Landlord delivers or tenders possession of the Premises to Tenant. The Notice
shall be binding upon Tenant unless Tenant objects to the Notice in writing,
served upon Landlord as provided for in Paragraph 9 hereof, within ten (10)
business days of Tenant's receipt of the Notice.
4. POSSESSION. Subject to the terms of Paragraph 8 of the Work Letter
Agreement and Tenant Delays, __________________, Tenant agrees that, if Landlord
is unable to substantially complete (as defined in Paragraph 8 of EXHIBIT "B")
the Tenant Improvements by that date specified in the Work Schedule (as such
term is defined in the Work Letter Agreement), this Lease shall not be void or
voidable, nor shall Landlord be liable to Tenant for any loss or damage
resulting therefrom, nor shall the expiration date of the above Term be in any
way extended, but in such event Tenant shall not be liable for any rent until
the Commencement Date. Subject to ___________ Paragraph 8 of
-7-
<PAGE>
Exhibit "B", if Landlord completes construction of the Tenant Improvements prior
to the date scheduled in the Work Schedule, Landlord shall deliver Possession of
the Premises to Tenant Upon such completion and the Term of this Lease shall
thereupon commence. On or before thirty (30) days prior to Landlord's projected
date for substantial completion of the Premises Landlord shall provide Tenant
with written notice of such projected substantial completion date. Landlord
shall thereafter provide Tenant with reasonable good faith notice of any changes
in such projected substantial completion date.
5. ANNUAL BASIC RENT.
(a) Tenant agrees to pay Landlord as Annual Basic Rent for the
Premises the Annual Basic Rent ___________ (subject to adjustment as
hereinafter provided) in twelve (12) equal monthly installments, each in
advance on the first day of each calendar month during the Term, except
that one (1) full installment of Monthly Basic Rent at the rate of ________
per Rentable Square Foot of the Premises shall be paid upon the execution
of this Lease, with such Monthly Basic Rent to be applied as provided in
Subparagraph 5(c) below. If the Term of this Lease commences or ends on a
day other than the first day of a calendar month, then the rent for such
period shall be prorated in the proportion that the number of days this
Lease is in effect during such period bears to the actual number of days in
such calendar month. In addition to the Annual Basic Rent, Tenant agrees to
pay as additional rent the amount of rent adjustments and other charges
required by this Lease. All rent shall be paid to Landlord, without prior
demand and without any deduction or offset (except as otherwise provided in
Paragraph 64 and Exhibit "G"), in lawful money of the United States of
America, at the address of ________________________ or to such other person
or at such other place as Landlord may from time to time designate in
writing. Further, all charges to be paid by Tenant hereunder, including,
without limitation, payments for Operating Expenses, insurance, repairs and
parking, shall be considered additional rent for purposes of this Lease,
and the word rent" in this Lease shall include such additional rent unless
the context specifically or clearly implies that only Annual Basic Rent is
referenced.
-8-
<PAGE>
(d) Late Charges. In the event Tenant fails to pay any installment of
rent when due or in the event Tenant fails to make any other payment for
which Tenant is obligated under this Lease when due, such late amount shall
accrue interest and Tenant shall pay Landlord as additional rent such
interest on such amount at the lesser of the Prime Rate (as defined below)
plus two (2) percentage points or the maximum rate permitted by law (the
"Interest Rate") from the date such amount became due until such amount is
paid. "Prime Rate" shall mean the prime or reference rate announced by Bank
of America, N.T.&S.A., from time to time, or in the event such institution
no longer makes commercial loans in Southern California, the then
prevailing prime or reference rate announced by the three (3) largest banks
(in terms of assets) in the United States. In addition, on any third (3rd)
and subsequent occasion during a particular Lease Year which Landlord
notifies Tenant in writing of a late payment of rent under this Lease,
Tenant shall pay to Landlord, as additional rent, concurrently with such
late payment amount, or promptly upon receipt of such third (3rd) or
subsequent notice, whichever is later, a late charge equal to four percent
(4%) of the amount due to compensate Landlord for the extra costs incurred
as a result of such late payment. Unless Landlord notifies Tenant in
writing, within thirty (30) days following the due date of a payment, that
Landlord is imposing such late charge, then Landlord shall waive the right
to impose such late charge. The parties agree that such interest and late
charge represent a fair and reasonable estimate of the detriment that
Landlord will suffer by reason of late payment by Tenant. Acceptance of any
such interest and late charge shall not constitute a waiver of the Tenant's
default with respect to the overdue amount, or prevent Landlord from
exercising any of the other rights and remedies available to Landlord.
-10-
<PAGE>
6. RENT ADJUSTMENT.
(a) For the purposes of this Subparagraph 6(a), the following terms are
defined as follows:
Tenant's Percentage: Tenant's Percentage shall mean that portion of the
total rentable area of the Building leased by Tenant as set forth as a
percentage in Subparagraph 1(q) above, subject to adjustment in accordance with
Subparagraph 2(c) above.
Operating Expenses: Operating Expenses shall consist of all direct costs of
operation, management, maintenance and repair of the Building, including without
limitation, the Building Common Areas, the Parking Facilities, and the Common
Areas, including any expansions to the Parking Facilities and/or the Common
Areas by Landlord or by the owner(s) and/or the operator(s) of the Parking
Facilities and/or the Common Areas in accordance with the provisions of this
Lease, as determined by standard accounting practices, calculated assuming the
Building is ninety-five percent (95%) occupied and fully assessed for real
property tax purposes (without exemption or abatement) as a completed Building,
ready for occupancy (including tenant improvements), including the following
costs by way of illustration, but not limitation: any and all assessments
Landlord must pay for the Building or the Parking Facilities pursuant to any
covenants, conditions or restrictions, reciprocal easement agreements,
tenancy-in-common agreements or similar restrictions and agreements affecting
the Building, the Parking Facilities or the Development; real property taxes
with respect to the Building, Parking Facilities and Common Areas (as defined
hereinbelow); water and sewer charges; accounting, legal and other consulting
fees directly related to the operation of the Building, Common Areas or Parking
Facilities; the net cost and expense of insurance for which Landlord and/or the
owner(s) and/or the operator(s) of the Parking Facilities and/or the Common
Areas is (are) responsible hereunder or which Landlord and/or the owner(s)
and/or the operator(s) of the Parking Facilities and/or the Common Areas or any
first mortgagee with a lien affecting the Premises, Building, Parking Facilities
and/or Common Area reasonably deems necessary; utilities; janitorial services;
security; labor; utilities surcharges, or any other costs levied, assessed or
imposed by, or at the direction of, or resulting from statutes or regulations or
interpretations thereof, promulgated by any federal, state, regional, municipal
or local government authority in connection with
-11-
<PAGE>
the use or occupancy, of the Building, the Premises, the Common Areas or the
Parking Facilities serving the Premises or the Development; the cost (amortized
over such reasonable period as Landlord shall determine together with interest
at the Interest Rate) of any capital improvements made to the Building, the
Parking Facilities or the Common Areas by Landlord or by the owner(s) and/or the
operator(s) of the Parking Facilities and/or the Common Areas or replacement of
any building equipment needed to operate the Building, the Parking Facilities or
the Common Areas at the same quality levels as prior to the improvement or
replacement or as mandated by revisions or governmental interpretations of any
applicable building codes or other applicable governmental laws, orders,
regulations or ordinances; costs incurred in the management of the Building, the
Common Areas and the Parking Facilities, if any (including supplies,
commercially reasonable on site management office rent, wages and salaries of
employees used in the management, operation and maintenance of the Building, the
Parking Facilities, and the Common Areas, and payroll taxes and similar
governmental charges with respect thereto, a fee for the management of the
Building and, any commercially reasonable management or administration fee
respecting the Common Areas or Parking Facilities assessed against or allocated
to the Building pursuant to the CC&R's or Parking CC&R's or any amendment,
modification, supplement or replacement thereof or thereto which does not
increase Tenant's rental obligations hereunder; air conditioning; waste
disposal; heating; ventilating; elevator repair and maintenance; supplies;
materials; equipment; tools; repair and maintenance of the structural portions
of the Building and the Parking Facilities, including the plumbing, heating,
ventilating, air conditioning and electrical systems installed or furnished by
Landlord; maintenance costs, including utilities and payroll expenses, rent of
personal property used in maintenance, and all other upkeep of the Building, the
Parking Facilities, and the Common Areas; costs and expenses of gardening and
landscaping; maintenance of signs (other than signs identifying Tenant (the
expenses for which shall be directly paid by Tenant), other tenants, or Landlord
(as opposed to the Building or Development)); personal property taxes levied on
or attributable to personal property used in connection with the entire
Building, including the Parking Facilities and Common Areas; reasonable audit or
verification fees; and the costs and expenses of repairs, resurfacing,
repairing, maintenance, painting, lighting, cleaning, refuse removal, security
and similar items, including appropriate reserves; and any other operation,
management, maintenance and repair costs respecting the Common Areas or Parking
Facilities assessed against or allocated to the Building pursuant to the CC&R's
or Parking CC&R's, or any amendments, modifications,
-12-
<PAGE>
supplements or replacements thereto or thereof, or any other covenants,
conditions and restrictions later placed on the Development, to the extent that
any such amendments, modifications, supplements, replacements, or subsequent
covenants, conditions and restrictions do not increase Tenant's rental
obligations hereunder. Operating Expenses shall not include depreciation on the
Building, the Parking Facilities or equipment therein, Landlord's executive
salaries or real estate brokers' commissions.
For purposes of this Lease, the "CC&R's" shall mean that certain Amended
and Restated Declaration of Establishment of Covenants, Conditions and
Restrictions and Grant of Easements for Koll Center Irvine North, dated January
29, 1987, by and among The Koll-Columbia Venture, Holiday Inns, Inc., Embassy
Suites Division, Columbia Savings and Loan Association, Liberty Service
Corporation, KCIN ONE, and KCIN TWO, and recorded in the Official Records of
Orange County, California on February 9, 1987 as Instrument No. 89-096801. For
purposes of this Lease, the "Parking CC&R's" shall mean that certain Declaration
Establishing Easements, Covenants and Restrictions for KCIN Parking Facilities
dated February, 1989, by The Koll-Columbia Venture, a California general
partnership, and recorded in the Official Records of Orange County, California
on February 23, 1989, as Instrument No. 89-096802, and re-recorded on October 9,
1959.
As used herein, the term "real property taxes" shall include any form of
assessment, license fee, license tax, business license fee, commercial rent tax,
levy, charge, penalty, tax or similar imposition, imposed by any authority
having the direct power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
or special assessment district thereof, as against any legal or equitable
interest in the Building, Premises, Common Areas or Parking Facilities, for the
period in question, including, but not limited to, the following:
(i) any tax on Landlord's "right" to other income from the Premises
or as against Landlord's business of leasing the Building or the Premises;
(ii) any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge
previously included within the definition of real estate tax, including but
not limited to, any assessments, taxes, fees, levies and charges that may
be imposed by governmental agencies for such services as fire protection,
street, sidewalk and
-13-
<PAGE>
road maintenance, refuse removal and for other governmental services
formerly provided without charge to property owners or occupants. It is the
intention of Tenant and Landlord that all such new and increased
assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease;
(iii) any assessment, tax, fee, levy or charge allocable to or
measured by the area of the Premises or the Building or the rent payable
hereunder or pursuant to other leases in the Building, including, without
limitation, any gross income tax or excise tax levied by the State, city or
federal government, or any political subdivision thereof, with respect to
the receipt of such rent, or upon or with respect to the possession,
leasing, operating, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Building or the Premises, or any portion
thereof; provided, however, that no such tax shall be treated as a "real
property tax" unless the revenues generated by such tax are used
exclusively for city, county or other local purposes, as opposed to state
or federal purposes, and unless such tax is assessed only to the address of
the Building (or all other buildings similarly situated) and not to
Landlord generally without regard to its ownership of the Building;
(iv) any assessment, tax, fee, levy or charge upon this transaction
or any document to which Tenant is a party creating or transferring an
interest or an estate in the Premises, or based upon a reassessment of the
Development or any portion thereof, due to a change in ownership or
transfer of all or part of Landlord's interest in this Lease, the
Development, or any portion thereof.
Notwithstanding any provision of this Subparagraph 6(a) expressed or
implied to the contrary, "real property taxes" shall not include Landlord's
federal or state income, franchise, inheritance or estate taxes.
Notwithstanding any provision of this Subparagraph 6(a) to the contrary,
during the initial Term of the Lease only, "real property taxes" shall not
include any increase in real property taxes attributable to an assessment or
reassessment of the Building, Development, or any portion thereof due to (i) the
first Third Party Change in Ownership (as defined below) during the initial Term
with respect to such reassessed portion of the Building or Development, or (ii)
an Existing Owner Change in Ownership (as defined below)
-14-
<PAGE>
during the initial Term with respect to such reassessed portion of the Building
or Development which Existing Owner Change in Ownership occurs prior to the
first Third Party Change in Ownership with respect to such reassessed portion
of the Building or Development. The exclusion from real property taxes set forth
in the immediately preceding sentence shall not apply to any increase in real
property taxes attributable to a change in ownership (as defined in Rule 462 of
the Rules of the State Board of Equalization) ("Change in Ownership") of any
portion of the Building or Development which has previously been the subject of
a reassessment based upon a Third Party Change in Ownership. In addition, any
exclusion from real property taxes set forth in this paragraph shall not be
applicable during any extension of the initial 122 month Term of this Lease. An
"Existing Owner Change in Ownership" shall mean any Change in Ownership which
constitutes a transfer of legal or beneficial ownership of such applicable
portion of the Building or Development only among those persons or entities
which hold legal or beneficial (i.e., through ownership interests in other
entities) ownership in such applicable portion of the Building or Development as
of the date of this Lease. A "Third Party Change in Ownership" shall mean any
Change in Ownership other than an Existing Owner Change in Ownership.
Landlord and Tenant agree that in determining Operating Expenses, only the
Building's Share (as defined below) of the Operating Expenses attributable to
the Common Areas shall be included in Operating Expenses hereunder. The
"Building Share" shall mean that portion of the operating expenses of the Common
Areas which is allocated to the Building pursuant to the CC&R's or Parking
CC&R's, or any amendment, modifications, supplements or replacements thereto or
thereof, to the extent such amendments, modifications, supplements or
replacements do not increase Tenant's rental obligations hereunder.
Landlord and Tenant acknowledge that since the Building is part of a
larger, integrated Development, in many instances a pure segregation between
costs of operation of the Building and the remaining portions of the Development
may not be available. Consequently, except for Operating Expenses attributable
to the Common Areas which shall be allocated to the Building as provided in the
immediately preceding paragraph, in those instances in which a pure segregation
between costs of operation of the Building and other portions of the Development
is not available, a fair and equitable allocation of such costs shall be made
among the various buildings in the Development.
-15-
<PAGE>
Operating Expenses shall be "net" only and for that purpose shall be deemed
reduced by the amounts of any insurance reimbursement, other reimbursement,
recoupment, payment, discount, credit, reduction, allowance or the like received
by Landlord from any source whatsoever in connection with such Operating
Expenses.
Notwithstanding anything to the contrary contained in this Paragraph 6(a)
the following shall be excluded from the definition of Operating Expenses:
(i) repairs or other work occasioned by fire, windstorm or other
insured casualty (except that deductibles paid pursuant to any insurance
shall be included as Operating Expenses) or by the exercise of eminent
domain, to the extent Landlord is reimbursed by insurance or by the
condemning authority, or would have been so reimbursed if Landlord had
maintained in force the insurance required to be carried by Landlord under
the provisions of the Lease;
(ii) leasing commissions, attorneys' and other professional fees,
costs and disbursements and other expenses incurred in connection with
procuring new tenants and/or negotiations or disputes with present or
prospective tenants or other occupants of the Building or the Development;
(iii) costs incurred in renovating or otherwise improving or
decorating, painting or redecorating space leased to tenants or occupied by
occupants of the Building;
(iv) Landlord's cost of electricity or other services that are sold
to tenants for which Landlord is entitled to reimbursement, other than
through the payment of rent or a tenant's prorata share of Operating
Expenses;
(v) depreciation, amortization and interest payments, except as
provided herein and except on materials, tools, supplies and vendor-type
equipment purchased by Landlord to enable Landlord to supply services
Landlord might otherwise contract for with a third party where such
depreciation, amortization and interest payments would otherwise have been
included in the charge for such third party's services, all as determined
in accordance with generally accepted accounting principles, consistently
applied, and when depreciation or amortization is permitted or required.
-16-
<PAGE>
the item shall be amortized over its reasonably anticipated useful life
with interest at the Interest Rate;
(vi) costs of a capital nature, including, but not limited to,
capital improvements, capital replacements, capital repairs, capital
equipment and capital tools, determined in accordance with generally
accepted accounting principles, consistently applied, except for any such
capital costs which (i) reduce other Operating Expenses, amortized over the
useful life of the asset, including interest at the Interest Rate, but only
to the extent of the reduction of other Operating Expenses, (ii) are
required under any governmental law or regulation that was not applicable
to the Building at the time the Building was constructed, amortized over
the useful life of the asset, with interest at the Interest Rate, or (iii)
constitute costs of a capital nature, including, without limitation,
capital improvements, capital repairs, capital equipment and capital tools,
in an aggregate amount not to exceed Twenty Thousand Dollars ($20,000.00)
during any calendar year;
(vii) expenses in connection with services or other benefits offered
or provided to other tenants in the Building, but not to Tenant;
(viii) costs incurred due to or in connection with a violation by
Landlord or any tenant of the terms and conditions of any lease of space in
the Building;
(ix) overhead and profit increment paid to a subsidiary, affiliate
or other entity related to Landlord for services to the extent the same
exceed competitive costs (taking into account the quality of service
provided in maintaining a Class-A office building) of such services were
they not so rendered by a subsidiary, affiliate or other Landlord-related
entity;
(x) interest on ____ or amortization payments on any mortgage or
mortgages, and rental under any ground or underlying lease or leases,
including without limitation, costs incurred in obtaining or refinancing
any such financing;
(xi) Landlord's general overhead not related to the operation of the
Development;
(xii) all costs and expenses for which Tenant or other tenants
directly reimburse Landlord other than as part of rent or Operating
Expenses;
-17-
<PAGE>
(xiii) costs incurred in advertising and promotional activities for
the Building and Development;
(xiv) fines or penalties, and interest accrued thereon, incurred as
a result of late payments by Landlord to governmental authorities;
(xv) management fees for the operation of the Building or Parking
Facilities to the extent such fees exceed four percent (4%) of actual gross
revenue; "gross revenue" shall mean the actual gross rent, operating
expense escalations and parking revenues received by Landlord, grossed-up
to reflect a ninety-five percent (95%) occupancy rate for the Building in
the event that the Building occupancy rate is less than ninety-five (95%);
provided, however, this clause (xv) shall not apply to any management or
administrative fee applicable to the Common Areas and assessed or imposed
against the Building pursuant to the CC&R's;
(xvi) acquisition costs of the sculptures, paintings, or other
objects of art, except that Operating Expenses shall include maintenance of
such items;
(xvii) wages, salaries or other compensation paid to any executive
employees above the grade of building manager;
(xviii) rentals and other related expenses, if any, incurred in
leasing air conditioning systems, elevators or other equipment ordinarily
considered to be of a capital nature;
(xix) any compensation paid to clerks, attendants, or other persons
in commercial concessions operated by Landlord, except as it directly
relates to the operation of the Development or the Parking Facilities;
(xx) capital expenditures required by Landlord's failure to comply
with laws enacted on or before the date the Building's temporary
Certificate of Occupancy is validly issued, with respect to the
construction of the base building work, or enacted on or before the
issuance of an occupancy permit for Tenant's occupancy of the Premises,
with respect to the construction of the Tenant Improvements; and
-18-
<PAGE>
(xxi) insurance premiums for earthquake coverage, unless earthquake
coverage is carried by Landlord during the period of determination of the
Operating Expense Allowance.
Landlord shall not be permitted to "double recover" any operating Expenses
(i.e., recover more than 100% of Operating Expenses) from the tenants of the
Building.
(b) If Tenant's Percentage of the Operating Expenses paid or incurred by
Landlord for any calendar year exceeds the Operating Expense Allowance, then
Tenant shall pay such excess as additional rent. For each calendar year during
the Term of the Lease, or portion thereof, Tenant shall pay Landlord's estimate
of the amount by which Tenant's Percentage of Operating Expenses for that year
shall exceed the Operating Expense Allowance, which estimate may be changed by
Landlord on not more than two (2) occasions during any calendar year. On or
before each April 1 following the calendar year in which the Term commences, or
as soon thereafter as reasonably practicable, Landlord shall deliver to Tenant
its estimate of the amount by which Tenant's Percentage of Operating Expenses is
projected to exceed the Operating Expense Allowance. Such estimate shall be
determined by Landlord in good faith, using reasonable business judgment, and
shall take into consideration any limitation on Controllable Costs set forth in
Subparagraph 6(d). Landlord's initial estimated amount each year shall be
divided into twelve (12) equal monthly installments. Commencing with the second
(2nd) Lease Year, Tenant shall pay to Landlord, concurrently with the regular
monthly rent payment next due following the receipt of the estimate for the
remaining calendar year of such second (2nd) Lease year, an amount equal to one
monthly installment multiplied by the number of months from the first (1st)
anniversary of the Commencement Date to the month of such payment, both months
inclusive. Subsequent installments shall be payable concurrently with the
regular monthly rent payments for the balance of that calendar year and shall
continue until the next calendar year's or any revised estimate is rendered. If
during any year Landlord revises its previous estimate, any such revision shall
be applied prospectively only; provided, however, that such prospective
application shall not prevent Landlord from recovering from Tenant, upon
delivery of its statement of actual Operating Expenses for the previous year,
the amount, if any, by which Tenants Percentage Share of actual Operating
Expenses exceeds Landlord's estimates
-19-
<PAGE>
thereof, as described below. If, in any calendar year, Tenant's Percentage of
actual Operating Expenses is less than the estimate for that year, then upon
receipt of Landlord's statement, any overpayment made by Tenant on the monthly
installment basis shall be credited towards the next monthly rent falling due
(or, at Tenant's request, repaid to Tenant) and the estimated monthly
installments of the amount by which Tenant's Percentage of Operating Expenses
exceeds the Operating Expense Allowance shall be adjusted to reflect such lower
Operating Expenses for the most recent calendar year. Similarly, if Tenant's
Percentage of the actual Operating Expenses for any calendar year is greater
than that previously estimated by Landlord for such year, Tenant shall pay the
amount of such difference to Landlord on the regular monthly rent payment date
next following Tenant's receipt of Landlord's statement of actual Operating
Expenses.
(c) Even though the Term has expired and Tenant has vacated the Premises,
when the final determination is made of Tenant's Percentage of Operating
Expenses for the year in which this Lease terminates, Tenant shall immediately
pay any increase due over the estimated expenses paid and, conversely, any
overpayment made in the event said expenses decrease shall be immediately
rebated by Landlord to Tenant.
(d) Commencing with the first (1st) anniversary of the Commencement Date
and continuing thereafter to and including the sixtieth (60th) month of the Term
of the Lease, the portion of Operating Expenses which constitute "Controllable
Costs" (as defined below) shall not increase over such four (4) year period at
an average rate in excess of five percent (5%) per annum. During the period from
months sixty-one (61) through ninety (90) of the Term of the Lease, Controllable
Costs shall not increase beyond the "Secondary Cap". The "Secondary Cap" shall
mean an average rate per annum equal to the greater of (i) five percent (5%) per
annum, or (ii) the average annual cost of living increase between the first
(1st) month and the sixtieth (60th) month of the Term of this Lease (which shall
be determined by comparing the Consumer Price Index - Urban Wage Earners and
Clerical Workers - Los Angeles-Anaheim-Riverside, California, Base 1982-84
("CPI") compiled by the U.S. Department of Labor, Bureau of Labor Statistics,
for month one (1) with the CPI for month sixty (60), and dividing any such total
increase by five (5)). During the period from months ninety-one (91) through
one-hundred twenty-two (122) of the Term of the Lease, Controllable Costs shall
not increase beyond the "Final Cap". The "Final Cap" shall mean an average rate
per annum of the greater of (x) the Secondary Cap, or (y) the average annual CPI
increase between the sixty-first (61st) month through the ninetieth (90th) month
-20-
<PAGE>
of the Term of the Lease. The rate specified in clause (y) shall be computed by
comparing the CPI for month sixty-one (61) of the Term with the CPI for month
ninety (90) of the Term and dividing any such total increase by 2.5. For
purposes of illustration, if the total CPI increase from the first (1st) month
of the Term to the sixtieth (60th) month of the Term is thirty-five percent
(35%), then the Secondary Cap shall be seven percent (7%). Similarly, if the
total CPI increase from the sixty-first (61st) to the ninetieth (90th) month of
the Term is twenty percent (20%), the Final Cap shall be eight percent (8%).
"Controllable Costs" shall mean all Operating Expenses which can increase or
decrease at the independent and sole discretion of Landlord, as opposed to
increases or decreases which are industry-wide or are caused by third parties or
over which Landlord has no independent control. By way of illustration but not
limitation, Operating Expenses over which Landlord has no independent and sole
discretion include any Operating Expenses paid to a public utility, insurer and
taxing authority for utilities, insurance, real property taxes, and costs of
operating, maintaining and repairing the Building, Common Areas and Parking
Facilities at the level of a Qualified Building (as defined in Paragraph 55) as
required by this Lease, as contrasted with the cost of operating, maintaining
and repairing the Building, Common Areas and Parking Facilities at a level below
that of a Qualified Building. If the parties disagree upon whether a specific
Operating Expense is a Controllable Cost, such disagreement shall be submitted
to arbitration in accordance with the provisions of the American Arbitration
Association. Landlord agrees that approximately every two (2) years Landlord
shall rebid the janitorial, security, landscape and parking service contracts
for the Building.
(e) In the event Tenant shall dispute the amount set forth in Landlord's
statement of actual Operating Expenses for the previous year (or the statement
setting forth the Operating Expense Allowance), Tenant shall have the right not
later than ninety (90) days following receipt of such statement to notify
Landlord in writing that Tenant intends to examine Landlord's books and records
with respect to both the calendar year described in such statement and the
calendar year immediately preceding the calendar year described in such
statement, and, if Tenant elects, shall also have the right within such ninety
(90) day period to notify Landlord in writing that Tenant intends to cause
Landlord's books and records with respect to such two (2) calendar years
described above to be audited by a certified public accountant mutually
acceptable to Landlord and Tenant. Any such examination or audit shall be
performed at Landlord's offices during normal business hours and shall be
completed within ninety (90) days following Tenant's notice
-21-
<PAGE>
described above. The amounts payable under Subparagraph 6(b) by Landlord to
Tenant or by Tenant to Landlord, as the case may be, shall be appropriately
adjusted on the basis of such audit. If such audit discloses an overstatement by
Landlord of Operating Expenses for the particular calendar year(s) which is the
subject of the audit in excess of five percent (5%) of the aggregate actual
Operating Expenses for such year(s), the cost of such audit shall be borne by
Landlord; otherwise, the cost of such audit shall be borne by Tenant. Tenant
shall have no right to audit the Operating Expenses unless Tenant complies with
the time limitations regarding notice and completion of such audit set forth in
this Subparagraph 6(e) and if Tenant shall fail to comply with such time
limitations, Landlord's actual statement of Operating Expenses respecting any
time period as to which Tenant's audit rights have lapsed shall be conclusively
binding upon Landlord and Tenant.
-22-
<PAGE>
8. USE.
(a) Tenant's Use of the Premises. Tenant shall use the Premises for the
uses set forth in Subparagraph 1(v) above, and shall not use or permit the
Premises to be used for any other purpose without the prior written consent of
Landlord. Nothing contained herein shall be deemed to give Tenant any exclusive
right to such use in the Building, the Parking Facilities (other than Tenant's
right to use its reserved parking spaces pursuant to Paragraph 40) or any
portion of the Development.
(b) Compliance.
(i) Tenant shall not use or occupy the Premises in violation of law or
of the Certificate of Occupancy issued for the Building, and shall, upon
written notice from Landlord, discontinue any use of the Premises which is
declared by any governmental authority having jurisdiction to be a
violation of law or of said Certificate of Occupancy. The Certificate of
Occupancy shall not prevent Tenant from using the Premises for general
office purposes. Tenant shall comply with any direction of any governmental
authority having jurisdiction which shall, by reason of the nature of
Tenant's use or occupancy of the Premises, impose any duty upon Tenant or
Landlord with respect to the Premises or with respect to the use or
occupation thereof. Tenant shall comply with all rules, orders, regulations
and requirements of the Pacific Fire Rating Bureau or any other
organization performing a similar function; provided, however, Landlord
agrees that the provisions of this sentence shall not interfere with
Tenant's occupancy of the Premises for general office use. Tenant shall
promptly, upon demand, reimburse Landlord for any additional premium
charged for such policy by reason of Tenant's failure to comply with the
provisions of this Paragraph. Tenant shall not do or permit anything to be
done in or about the Premises
-23-
<PAGE>
which will in any way obstruct or interfere with the rights of other
tenants or occupants of the Building, the Parking Facilities or the
Development, or injure them, or use or allow the Premises to be used for
any unlawful purpose, nor shall Tenant cause, maintain or permit any
nuisance in, on or about the Premises. Tenant shall comply with all
restrictive covenants and obligations created by private contracts which
affect the use and operation of the Premises, the Building, the Parking
Facilities, the Common Areas or the Development. Landlord agrees that,
subject to any such private contracts or provisions thereof as are required
by applicable law, any such private contracts entered into after the date
of this Lease shall be nondiscriminatory and shall not unreasonably
interfere with Tenant's use of or access to the Premises or materially
increase Tenant's obligations under the Lease. Tenant shall not commit or
suffer to be committed any waste in or upon the Premises and shall keep the
Premises in first class repair and appearance. Landlord reserves the right
to prescribe the weight and position of all files, safes and heavy
equipment which Tenant desires to place in the Premises so as to properly
distribute the weight thereof in accordance with the structural
requirements of the Building. Further, Tenant's business machines and
mechanical equipment which cause vibration or noise that may be transmitted
to the Building structure or to any other space in the Building shall be so
installed, maintained and used by Tenant as to eliminate such vibration or
noise. Tenant shall be responsible for all structural engineering required
to determine structural load.
(ii) Tenant shall not cause or permit any hazardous, toxic or
radioactive materials, including those materials identified in Sections
66680 through 66685 of Title 22 of the California Administrative Code,
Division 4, Chapter 30, as amended from time to time ("Hazardous
Materials"), to be brought upon, kept or used in or about the Premises, the
Building, the Parking Facilities or the Common Areas by Tenant, its agents,
employees, contractors or invitees, unless such Hazardous Materials (in
incidental quantities) are necessary or useful to Tenant's business and
will be used, kept and stored in a manner that complies with all laws
regulating any such Hazardous Materials, and provided that Tenant first
obtains the written consent of Landlord and the owner(s) and/or operator(s)
of the Parking Facilities and Common Areas, and provided further that
Tenant indemnifies Landlord, and the owner(s) and operator(s) of the
Parking Facilities and
-24-
<PAGE>
Common Areas from any and all liability with respect to such Hazardous
Materials as more particularly described below. If Tenant breaches the
covenants and obligations set forth herein or, if the presence of Hazardous
Materials on, in or about the Premises, the Building, the Parking
Facilities, the Common Areas or any other portion of the Development caused
or permitted by Tenant, its agents, employees, contractors or invitees,
results in contamination of the Premises, the Building, the Parking
Facilities, the Common Areas or any other portion of the Development or, if
contamination of the Premises, the Building, the Parking Facilities, the
Common Areas or any other portion of the Development by Hazardous Materials
otherwise occurs for which Tenant is legally liable to Landlord, the
owner(s) or operator(s) of the Parking Facilities and/or the Common Areas,
whether jointly or severally, for damage resulting therefrom, then Tenant
shall indemnify, defend and hold Landlord and the owner(s) and operator(s)
of the Parking Facilities and the Common Areas free and harmless from and
against any and all claims, judgments, damages, penalties, fines, costs,
liabilities and losses (including, without limitation, diminution in the
value of the Premises, the Parking Facilities and/or the Common Areas,
damages for the loss or restriction on use of rentable or useable space or
of any amenity of the Premises, the Building, the Common Areas or any other
portion of the Development, and sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees) which arise during or
after the Lease Term as a result of such contamination. This
indemnification by Tenant of Landlord, the owner(s) and operator(s) of the
Parking Facilities and the Common Areas, includes without limitation, any
and all costs incurred in connection with any investigation of site
conditions or any clean up, remedial, removal or restoration work required
by any federal, state or local governmental agency or political subdivision
because of the presence of such Hazardous Material in, on or about the
Premises, the Building, the Parking Facilities, the Common Areas or the
soil or ground water on or under the Development.
(iii) The provisions of this Paragraph 8 shall survive the termination
of this Lease.
9. NOTICES. Any notice required or permitted to be given hereunder must be
in writing and may be given by personal delivery or by mail, and if given by
mail shall be deemed sufficiently given if sent by registered or certified mail
addressed if to Tenant, at the address set forth in ______________________ if
such notice is sent prior to Tenant taking
-25-
<PAGE>
occupancy of the Premises, or to the Premises, if such notice is sent on or
after Tenant taking occupancy of the Premises, or if to Landlord, at each of the
addresses ________________________________________. Either party may specify a
different address for notice purposes by written notice to the other, except
that on or after Tenant taking occupancy of the Premises, the Landlord may in
any event use the Premises as Tenant's address for notice purposes.
10. BROKERS. Landlord and Tenant each warrant to the other party that it
has had no dealings with any real estate broker or agent in connection with the
negotiation of this Lease, except for those certain brokers whose names are set
forth in ___________ whose commission shall be payable by Landlord, and that
it knows of no other real estate broker or agent who is or might be entitled to
a commission in connection with this Lease. If either party has dealt with any
other person or real estate broker with respect to leasing or renting space in
the Building, such party shall be solely responsible for the payment of any fee
due said person or firm and shall hold the other party free and harmless against
any liability in respect thereto, including attorneys' fees and costs.
11. HOLDING OVER. If Tenant holds over after the expiration or earlier
termination of the Term hereof with the express written consent of Landlord,
Tenant shall become a Tenant at sufferance only, at a rent rate equal to one
hundred fifty percent (150%) of the rent in effect upon the date of such
expiration (subject to adjustment as provided in Paragraphs 5 and 6 hereof and
prorated on a daily basis), and otherwise subject to the terms, covenants and
conditions herein specified, so far as applicable. Acceptance by Landlord of
rent after such expiration or earlier termination shall not result in a renewal
of this Lease. The foregoing provisions of this Paragraph 11 are in addition to
and do not affect Landlord's right of re-entry or any rights of Landlord
hereunder or as otherwise provided by law. If Tenant fails to surrender the
Premises upon the expiration of this Lease despite demand to do so by Landlord,
Tenant shall indemnify and hold Landlord harmless from all loss or liability,
including without limitation, any claim made by any succeeding tenant founded on
or resulting from such failure to surrender and any attorneys' fees and costs.
12. TAXES ON TENANT'S PROPERTY.
(a) Tenant shall be liable for and shall pay, at least ten (10) days
before delinquency, all taxes levied against any personal property or trade
fixtures placed by Tenant in or about the Premises. If any such taxes on
Tenant's personal property or trade fixtures are levied against Landlord or
Landlord's property or if the assessed value of the Premises is increased
by the inclusion therein
-26-
<PAGE>
of a value placed upon such personal property or trade fixtures of Tenant
and if Landlord, after written notice to Tenant, pays the taxes based upon
such increased assessment, which Landlord shall have the right to do
regardless of the validity thereof, but only under proper protest if
requested by Tenant, Tenant shall, upon demand, repay to Landlord the taxes
so levied against Landlord, or the portion of such taxes resulting from
such increase in the assessment.
(b) If the Tenant Improvements in the Premises, whether installed,
and/or paid for by Landlord or Tenant and whether or not affixed to the
real property so as to become a part thereof, are assessed for real
property tax purposes at a valuation higher than the valuation at which
tenant improvements conforming to Landlord's "Building Standard" for other
space in the Building are assessed, then the real property taxes and
assessments levied against the Building by reason of such excess assessed
valuation shall be deemed to be taxes levied against personal property of
Tenant and shall be governed by the provisions of Paragraph 12(a) above. If
the records of the County Assessor are available and sufficiently detailed
to serve as a basis for determining whether the Tenant Improvements are
assessed at a higher valuation than "Building Standard" improvements, such
records shall be binding on both Landlord and Tenant. If the records of the
County Assessor are not available or sufficiently detailed to serve as a
basis for making said determination, the actual cost of construction shall
be used. Notwithstanding any contrary provision of this Subparagraph 12(b),
the provisions of this Subparagraph 12(b) shall be applicable only to the
extent the cost of the Tenant Improvements initially installed in the
Premises, or any alterations made thereto by or on behalf of Tenant during
the Term exceeds Thirty Dollars ($30.00) per Usable Square Foot of the
Premises.
13. CONDITION OF PREMISES. Tenant acknowledges that neither Landlord nor
any agent of Landlord has made any representation or warranty with respect to
the Premises, the Building, the Parking Facilities or any other portion of the
Development or with respect to the suitability of same for the conduct of
Tenant's business. The taking of possession of the Premises by Tenant shall
conclusively establish that the Premises, the Building and the Parking
Facilities were in satisfactory condition at such time, subject to the approved
punch-list items, and latent defects, which Landlord shall promptly repair.
Landlord agrees to enforce all applicable warranty obligations of contractors
and materialmen in connection with the construction of the Building and
Premises. Without limiting the foregoing, Tenant's execution of the Notice
attached hereto as Exhibit "C" shall constitute a specific acknowledgment
-27-
<PAGE>
and acceptance of the various start-up inconveniences that may be associated
with the use of the Building, the Parking Facilities, the Common Areas and other
portions of the Development such as certain construction obstacles including
scaffolding, delays in use of freight elevator service, certain elevators not
being available to Tenant, the passage of work crews using elevators, uneven air
conditioning services and other typical conditions incident to recently
constructed office buildings; provided, however, that such inconveniences shall
not materially interfere with Tenant's use of or access to the Premises.
14. ALTERATIONS.
(a) Tenant shall make no alterations, additions or improvements in or
to the Premises without Landlord's prior written consent, which consent
shall not be unreasonably withheld or delayed, and then only by contractors
or mechanics reasonably approved by Landlord, which approval shall not be
unreasonably delayed. Tenant shall submit to Landlord plans and
specifications for any proposed alterations, additions or improvements to
the Premises, and may not make such alterations, additions or improvements
until Landlord has approved of such plans and specifications. Tenant shall
construct such alterations, additions or improvements in accordance with
the plans and specifications approved by Landlord, and shall not amend or
modify such plans and specifications without Landlord's prior written
consent, which consent shall not be unreasonably withheld or delayed. If
the proposed change requires the consent or approval of any lessor of a
superior lease, or the holder of a mortgage encumbering the Premises, such
consent or approval must be secured prior to the construction of such
alteration, addition or improvement. Tenant agrees that there shall be no
construction of partitions or other obstructions which might interfere with
Landlord's free access to mechanical installations or service facilities of
the Building or interfere with the moving of Landlord's equipment to or
from the enclosures containing said installations or facilities. All such
work shall be done at such times and in such manner as Landlord may from
time to time designate. Tenant covenants and agrees that all work done by
Tenant shall be performed in full compliance with all laws, rules, orders,
ordinances, regulations and requirements of all governmental agencies,
offices and boards having jurisdiction, and in full compliance with the
rules, regulations and requirements of the Pacific Fire Rating Bureau, and
of any similar body. Before commencing any work, Tenant shall give Landlord
at least ten (10) days written notice of the proposed commencement of such
work and shall, if reasonably required by Landlord based upon the
reputation and financial capability of the contractor and the nature
of
-28-
<PAGE>
the work to be performed (including Landlord's particular reasons
therefor), secure at Tenant's own post and expense, a completion and lien
indemnity bond reasonably satisfactory to Landlord for said work. Tenant
further covenants and agrees that any mechanic's lien filed against the
Premises or against the Building for work claimed to have been done for, or
materials' claimed to have been furnished to Tenant, will be discharged by
Tenant, by bond or otherwise, within twenty (20) days after the filing
thereof, at the cost and expense of Tenant, except that Tenant shall not be
obligated to so discharge such lien prior to ten (10) days following
Tenant's receipt of notice of the existence thereof. As long as Tenant
properly discharges the lien by bond or otherwise, as provided above,
Tenant shall have the right to contest such lien in accordance with
applicable law. All alterations, additions or improvements upon the
Premises made by either party, including (without limiting the generality
of the foregoing) all wallcovering, built-in cabinet work, paneling and
the like, shall, unless Landlord elects otherwise, become the property of
Landlord, and shall remain upon, and be surrendered with the Premises, as a
part thereof, at the end of the Term hereof, except that Landlord may, by
written notice to Tenant at the time Landlord consents to such alteration,
or within twenty (20) days after receipt of notice thereof, if no consent
is required, require Tenant to remove at the end of the Term, all
partitions, counters, railings and the like installed by Tenant, and Tenant
shall repair all damage resulting from such removal or, at Landlord's
option, shall pay to Landlord all costs arising from such removal.
Notwithstanding any contrary provision of this Subparagraph 14(a),
Landlord's prior consent shall not be required for any nonstructural
alteration to the Premises, the cost of which does not exceed Thirty
Thousand Dollars ($30,000.00), as long as such alteration does not affect
the structural integrity of the Building, does not adversely affect the
Building systems and is not visible from the exterior of the Premises;
provided, however, all other provisions of this Subparagraph 14(a) shall be
applicable to any such alteration, including, but not limited to Tenant's
obligation to provide Landlord with prior written notice of any such
alteration, along with the plans and specifications related thereto, if
appropriate.
(b) All articles of personal property and all business and trade
fixtures, machinery and equipment, furniture and movable partitions owned
by Tenant or installed by Tenant at its expense in the Premises shall be
and remain the property of Tenant and may be removed by Tenant at any time
during the Lease Term when Tenant is not in default hereunder, or within
fifteen (15) days following the end of such Lease Term. If Tenant shall
fail to remove all of its
-29-
<PAGE>
effects from the Premises within fifteen (15) days after termination of
this Lease for any cause whatsoever, Landlord may, at its option, remove
the same in any manner that Landlord shall choose, and store said effects
without liability to Tenant for loss thereof. In such event, Tenant agrees
to pay Landlord upon demand any and all expenses incurred in such removal,
including court costs and attorneys' fees and storage charges on such
effects, for any length of time that the same shall be in Landlord's
possession. Landlord may, at its option, without notice, sell said effects,
or any of the same, at private sale and without legal process, for such
price as Landlord may obtain and apply the proceeds of such sale upon any
amounts due under this Lease from Tenant to Landlord and upon the expense
incident to the removal and sale of said effects.
15. REPAIRS.
(a) By entry hereunder, Tenant accepts the Premises as being in good
and sanitary order, condition and repair. Tenant shall keep, maintain and
preserve the Premises in first class condition and repair and free from any
Hazardous Materials, and shall, when and if needed, at Tenant's sole cost
and expense, but subject to the provisions of Subparagraph 15(b) below,
make all repairs to the Premises and every part thereof. Tenant's
obligation to keep, maintain, preserve and repair the Premises shall
specifically extend to the cleanup and removal of all Hazardous Materials
occurring in, on or about the Premises, the Building, the Parking
Facilities or any other portion of the Development, caused or permitted by
Tenant, its agents, employees, contractors or invitees. Tenant shall, upon
the expiration or sooner termination of the Term hereof, surrender the
Premises to Landlord in the same condition as when received, free of any
Hazardous Materials, usual and ordinary wear and tear and casualty
excepted. Landlord shall have no obligation to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof. The parties
hereto affirm that Landlord has made no representations to Tenant
respecting the condition of the Premises, the Building, the Parking
Facilities or the Common Areas except as specifically herein set forth.
(b) Anything contained in Paragraph 15(a) above to the contrary
notwithstanding, Landlord shall repair and maintain or cause to be repaired
and maintained, in a first class condition the structural portions of the
Building and the Parking Facilities, and the plumbing, heating,
ventilating, air conditioning, elevator and electrical systems installed or
furnished by Landlord, unless such maintenance and repairs are attributable
to items installed
-30-
<PAGE>
in Tenant's Premises which are above standard interior improvements (such
as, for example, custom lighting, kitchen or restroom facilities
constructed within Tenant's Premises) or, are caused in part or in whole by
the act, neglect or omission of any duty by Tenant, its agents, servants,
employees or invitees, in which case Tenant shall pay to Landlord, as
additional rent, the reasonable cost of such maintenance and repairs.
Landlord shall not be liable for any failure to make any such repairs or to
perform any maintenance unless such failure shall persist for an
unreasonable time after written notice of the need of such repairs or
maintenance is given to Landlord by Tenant. Except as provided in
Paragraphs 23 and 64 hereof, there shall be no abatement of rent and no
liability of Landlord by reason of any injury to or interference with
Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or in or
to fixtures, appurtenances and equipment therein. Tenant waives the right
to make repairs at Landlord's expense under any law, statute or ordinance
now or hereafter in effect. Landlord agrees that all necessary repairs to
items located in the Premises which do not serve the Premises but
exclusively serve other tenants' premises shall be made after normal
business hours, so as to minimize interference with Tenant's use and
occupancy of the Premises.
16. LIENS. Tenant shall not permit to be filed against the Building or any
portion of the Development nor against Tenant's leasehold interest in the
Premises, any mechanics', materialmen's or other liens, including, without
limitation, any state, federal or local "super-fund" or Hazardous Material
cleanup lien imposed as a result of the presence of Hazardous Materials in, on
or about the Premises, the Building or any other portion of the Development.
Landlord shall have the right at all reasonable times to post and keep posted on
the Premises any notices which it deems necessary for protection from such
liens. If any such liens are filed, Landlord may, without waiving its rights and
remedies based on such breach of Tenant and without releasing Tenant from any of
its obligations, cause such liens to be released by any means it shall deem
proper, including payments in satisfaction of the claim giving rise to such
lien. Tenant shall pay to Landlord at once, upon notice by Landlord, any sum
paid by Landlord to remove such liens, together with interest at the maximum
rate per annum permitted by law from the date of such payment by Landlord.
17. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times
have the right to enter the Premises upon not less than twenty-four (24) hours
prior notice, except in the case of an emergency, to inspect the same, to supply
janitor service and any other service to be provided by Landlord to
-31-
<PAGE>
Tenant hereunder, to show the Premises to prospective purchasers or tenants, to
post notices of nonresponsibility, to alter, improve or repair the Premises or
any other portion of the Building and/or the Parking Facilities, all without
being deemed guilty of any eviction of Tenant and, except as otherwise provided
in Paragraph 64, without abatement of rent. Landlord may, in order to carry out
such purposes, erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, provided that the
business of Tenant shall be interfered with as little as is reasonably
practicable. Tenant hereby waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss in, upon and about the
Premises. Landlord shall at all times have and retain a key with which to unlock
all doors in the Premises, excluding Tenant's vaults, safes and other security
areas. Landlord shall have the right to use any and all means which Landlord may
deem proper to open said doors in an emergency in order to obtain entry to the
Premises. Any entry to the Premises obtained by Landlord by any of said means,
or otherwise, shall not be construed or deemed to be a forcible or unlawful
entry into the Premises, or an eviction of Tenant from the Premises or any
portion thereof, and any damages caused on account thereof shall be paid by
Tenant. It is understood and agreed that no provision of this Lease shall be
construed as obligating Landlord to perform any repairs, alterations or
decorations except as otherwise expressly agreed herein by Landlord. Except in
the event of an emergency, Tenant shall have the right to have one of its
personnel accompany Landlord on any entry by Landlord to the Premises.
Landlord's absolute right of entry to the Premises to show the Premises to
prospective tenants shall be limited to the last year of the Term; provided,
that at all other times Tenant shall use its commercially reasonable efforts to
cooperate with Landlord's reasonable requests to display the Premises to
prospective tenants.
18. UTILITIES AND SERVICES. Landlord agrees to furnish or cause to be
furnished to the Premises the utilities and services described in the Standards
for Utilities and Services, attached hereto as Exhibit "D", subject to the
conditions and in accordance with the standards set forth therein. Landlord's
failure to furnish any of the foregoing items when such failure is caused by (i)
accident, breakage or repairs; (ii) strikes, lockouts or other labor disturbance
or labor dispute of any character; (iii) governmental regulation, moratorium or
other governmental action; (iv) inability despite the exercise of reasonable
diligence to obtain electricity, water or fuel; or by (v) any other cause beyond
Landlords reasonable control, shall not result in any liability to Landlord. In
addition, subject to the provisions, of Paragraph 64, Tenant shall not be
entitled to
-32-
<PAGE>
any abatement or reduction of rent by reason of such failure, no eviction of
Tenant shall result from such failure and Tenant shall not be relieved from the
performance of any covenant or agreement in this Lease because of such failure.
In the event of any failure, stoppage or interruption thereof, Landlord shall
diligently attempt to resume service promptly. If Tenant requires or utilizes
more water than reasonably required for normal drinking and lavatory purposes,
as specified in Paragraph 4 of Exhibit "D", or utilizes more electricity than
the standard electrical consumption specified in Paragraph 3 of Exhibit "D",
Landlord may at its option require Tenant to pay, as additional rent, the cost,
as fairly determined by Landlord, incurred by such extraordinary usage. In
addition, if Tenant utilizes excess water or electricity as described above, and
continues such excess use after written notice thereof by Landlord, then upon an
additional prior written notice to Tenant Landlord may install separate meter(s)
for the Premises, at Tenant's sole expense, and Tenant thereafter shall pay all
charges of the utility providing service and Landlord shall make an appropriate
adjustment to Tenant's Operating Expenses calculation to account for the fact
Tenant is directly paying such metered charges, provided Tenant shall remain
obligated to pay its proportionate share of Operating Expenses subject to such
adjustment.
19. BANKRUPTCY. If Tenant shall file a petition in bankruptcy under any
provision of the Bankruptcy Code as then in effect, or if Tenant shall be
adjudicated a bankrupt in involuntary bankruptcy proceedings and such
adjudication shall not have been vacated within ninety (90) days from the date
thereof, or if a receiver or trustee of Tenant's property shall be appointed and
the order appointing such receiver or trustee shall not be set aside or vacated
within ninety (90) days after the entry thereof, or if Tenant shall assign
Tenant's estate or effects for the benefit of creditors, or if this Lease shall,
by operation of law or otherwise, pass to any person or persons other than
Tenant, then in any such event Landlord may terminate this Lease, if Landlord so
elects, with or without notice of such election and with or without entry or
action by Landlord. In such case, notwithstanding any other provisions of this
Lease, Landlord, in addition to any and all rights and remedies allowed by law
or equity, shall, upon such termination, be entitled to recover damages in the
amount provided in Paragraph 25(b) hereof. Neither Tenant nor any person
claiming through or under Tenant or by virtue of any statute or order of any
court shall be entitled to possession of the Premises but shall surrender the
Premises to Landlord. Nothing contained herein shall limit or prejudice the
right of Landlord to recover damages by reason of any such termination equal to
the maximum allowed by any statute or rule of law in effect at the time when,
and governing the
-33-
<PAGE>
proceedings in which, such damages are to be proved; whether or not such amount
is greater, equal to or less than the amount of damages recoverable under the
provisions of this Paragraph 19.
20. EXONERATION.
(a) Except as set forth in Subparagraphs 20(c) and 21(a) below, due
to the gross negligence or willful misconduct of Landlord or its agents,
employees or invitees, Landlord shall not be liable to Tenant for any loss
or damage to Tenant's personal property in the Premises (or outside the
Premises to the extent insured by Tenant and not insured by Landlord with
insurance paid for as part of Operating Expenses) caused by theft, fire,
act of God, acts of the public enemy, riot, strike, insurrection, war,
court order, requisition or order of governmental body or authority or for
any damage or inconvenience which may arise through repair or alteration of
any part of the Building or Development or failure to make any such repair
except as expressly otherwise provided in Subparagraph 20(c) and elsewhere
herein. Tenant shall not be liable to Landlord for any loss or damage to
property caused by theft, fire, act of God, acts of the public enemy, riot,
strike, insurrection, war, court order, requisition or order of
governmental body or authority or for any damage or destruction which is
covered by insurance obtained, or would have been covered by insurance
required to be obtained, by Landlord as part of Operating Expenses. Neither
Landlord nor Tenant shall be liable for consequential damages.
(b) Tenant shall indemnify Landlord and hold Landlord harmless of and
from any and all loss, cost, damage, injury or expense arising out of or
related to claims of injury to or death of persons occurring or resulting
directly or indirectly from Tenant's use or occupancy of the Premises or
activities of Tenant in or about the Premises or Development, such
indemnity to include, but without limitation, the obligation to provide all
costs of defense against any such claims; provided, however, that the
foregoing indemnity shall not be applicable to claims arising by reason of
the negligence or willful misconduct of Landlord, its agents, employees or
invitees unless covered by insurance required to be carried by Tenant under
the terms of the Lease.
(c) Landlord shall indemnify Tenant and hold Tenant harmless of and
from any and all loss, cost, damage, injury or expense arising out of or
related to claims or injury to or death of persons, or damage to property
occurring or resulting directly or indirectly from the use or operation of
the Building, Parking Facilities, or the Common
-34-
<PAGE>
Areas by Landlord or the owner or operator thereof (or activities of
Landlord which occur outside the Premises, but within the Development),
such indemnity to include, but without limitation, the obligation to
provide all costs of defense against any such claim.
21. INDEMNIFICATION.
(a) Notwithstanding the provisions of Paragraphs 20 to the contrary,
because Landlord is required to maintain insurance on the Building and the
Tenant Improvements and all alterations, additions or improvements to the
Premises and Tenant compensates Landlord for such insurance as part of
Tenant's Percentage of Operating Expenses, and to the extent of the
existence of waivers of subrogation set forth in Paragraph 22(f) of this
Lease, Landlord hereby indemnifies and holds Tenant harmless from any loss,
cost, liability, damage or expense (including, but not limited to,
penalties, fines and reasonable, actual attorneys' fees and costs) to any
person or property inside or outside of the Premises to the extent such
loss, costs, liability, damage or expenses are covered by such insurance
obtained by Landlord (or which would have been covered by insurance
required to be obtained by Landlord hereunder had Landlord complied with
its obligation to so maintain insurance in accordance with this Lease),
even if resulting from the negligent acts or omissions of Tenant or those
of its agents, contractors, servants, employees or licensees. Similarly,
since Tenant must carry insurance pursuant to Paragraph 22(a) of this Lease
to cover its personal property within the Premises but excluding the Tenant
Improvements and all alterations, additions or improvements to the
Premises, then, to the extent of the waivers of subrogation set forth in
Paragraph 22(f) of this Lease, Tenant hereby indemnifies and holds Landlord
harmless from any loss, cost, liability, damage or expense (including, but
not limited to, penalties, fines and reasonable, actual attorneys' fees and
costs) to any personal property within the Premises or the Development, to
the extent such loss, costs, liability, damage or expenses are covered by
such insurance obtained by Tenant (or would have been covered by insurance
required to be maintained by Tenant hereunder had Tenant complied with its
obligation to so maintain insurance in accordance with this Lease), even if
resulting from the negligent acts or omissions of Landlord or those of its
agents, contractors, servants, employees or licensees.
(b) Notwithstanding the provisions of Paragraph 20 to the contrary,
Tenant shall not be required to indemnify and hold Landlord harmless from
any loss, cost, liability, damage or expense, including, but not limited
to, penalties,
-35-
<PAGE>
fines and actual attorneys' fees and costs (collectively, "Claims"), to any
person, property or entity resulting from the acts, omissions or the
willful misconduct of Landlord or its agents, contractors, servants,
employees or licensees or other owners or operators of the Parking
Facilities or Common Areas, in connection with the use or operation of the
Building, parking Facilities, or Common Areas by Landlord or the owners or
operators thereof (except for damage to Tenant's personal property,
fixtures, furniture and equipment in the Premises, to the extent that
Tenant is required to obtain the requisite insurance coverage, and to the
extent that the waiver of subrogation applies), and Landlord hereby so
indemnifies and saves Tenant harmless from any such Claims. However,
Tenant's agreement to indemnity and hold Landlord harmless pursuant to
Paragraph 20, the exclusion from Tenant's indemnity set forth above, and
the agreement by Landlord to indemnify and hold Tenant harmless set forth
above are not intended to, and shall not, except to the extent to which the
waiver of subrogation provision applies, relieve any insurance carrier of
its obligations under policies required to be carried by Landlord or
Tenant, respectively, pursuant to the provisions of this Lease to the
extent that such policies cover the results of such acts or conduct. The
parties hereby agree that if either party fails to carry required
insurance, such failure shall automatically be deemed to be the covenant
and agreement by such party to self-insure said required coverage, with
full waiver of subrogation in favor of the other party. The parties further
agree that to the extent any damage or repair obligation of Tenant is
covered by insurance obtained by Landlord or would have been covered by
insurance had Landlord maintained the insurance required to be maintained
by Landlord under this Lease as part of the Operating Expenses, but is not
covered by insurance obtained by Tenant, then Tenant shall be relieved of
its indemnity obligation up to the amount of the insurance proceeds which
Landlord shall actually receive (or would have received had Landlord
maintained insurance as aforesaid)
22. INSURANCE.
(a) Tenant shall, during the Term hereof and any other period of
occupancy, at its sole cost and expense, keep in full force and effect the
following insurance:
(i) Standard form property insurance insuring against the perils
of fire, extended coverage, vandalism, malicious mischief, special
extended coverage ("All-Risk") and sprinkler leakage. This insurance
policy shall be upon all property owned by Tenant, for which Tenant is
legally liable or that was installed at
-36-
<PAGE>
Tenant's expense, and which is located in the Building including,
without limitation, furniture, fittings, installations, fixtures
(other than Tenant Improvements installed by Landlord), and any other
personal property, in an amount not less than one hundred percent
(100%) of the full replacement cost thereof. In the event that there
shall be a dispute as to the amount which comprises full replacement
cost, the decision of Landlord or any mortgagees of Landlord shall be
conclusive. Such policy shall name Landlord and any mortgagees of
Landlord as insured parties, as their respective interests may appear.
(ii) Commercial Liability Insurance insuring Tenant against any
liability arising out of the lease, use, occupancy or maintenance of
the Premises and all areas appurtenant thereto. Such insurance shall
be in the amount of $5,000,000 Combined Single Limit for injury to, or
death of one or more persons in an occurrence, and for damage to
tangible property (including loss of use) in an occurrence, with such
liability amount to be adjusted from year to year to reflect increases
in the Consumer Price Index. The policy shall include coverage against
personal injury, bodily injury (including wrongful death), broad form
property damage, operations hazard, Owner's protective coverage,
contractual liability, liquor liability (if Tenant serves alcohol on
the Premises), products and completed operations liability, and
owned/non-owned auto liability, and shall (1) name Landlord as an
additional insured, (2) contain a cross liability provision and (3)
contain a provision that the insurance provided the Landlord hereunder
shall be primary and non-contributing with any other insurance
available to the Landlord.
(iii) Worker's Compensation and Employer's Liability insurance
(as required by state law).
(iv) To the extent not included in Tenant's insurance carried in
satisfaction of clause (i) above or otherwise covered by blanket
coverage, boiler and machinery insurance including, but not limited
to, steam pipes, pressure pipes, condensation return pipes and other
pressure vessels and HVAC equipment with limits per accident of not
less than the replacement cost of all of Tenant's leasehold
improvements and of all of Tenant's boilers, pressure valves, HVAC
equipment and miscellaneous electrical and mechanical equipment on the
Premises.
-37-
<PAGE>
(v) Business interruption insurance which shall cover any direct
or indirect loss of earnings attributable to perils insured against in
Subparagraph 22(a)(i) above; provided, however, Tenant shall have the
right to self-insure the coverage described in this clause (v). In
the event Tenant elects to self-insure such coverage, such
self-insured coverage shall be deemed to include all the provisions of
this paragraph 22 which would have been required to be applicable to
such coverage if Tenant had obtained such coverage from a third party,
including full waiver of subrogation.
(vi) If commonly required from time to time by the landlords of
the Qualified Buildings, any other form or forms of insurance as
Tenant or Landlord or any mortgagees of Landlord may reasonably
require from time to time in form, in amounts and for insurance risks
against which a prudent tenant would protect itself.
(b) All policies shall be written in a form satisfactory to Landlord
and shall be taken out with insurance companies holding a rating typically
required by the landlords of the Qualified Buildings. Within ten (10) days
prior to Tenant's entry into the Premises for Tenant's Fixturing Work (as
defined in Paragraph 9 of Exhibit "B"), but in any event not later than ten
(10) days prior to the Commencement Date, Tenant shall deliver to Landlord
copies of policies or certificates evidencing the existence of the amounts
and forms of coverage satisfactory to Landlord. No such policy shall be
cancellable or reducible in coverage except after thirty (30) days prior
written notice to Landlord. Tenant shall, within ten (10) days prior to the
expiration of such policies, furnish Landlord with renewals or "binders"
thereof, or Landlord may order such insurance and charge the cost thereof
to Tenant as additional rent. If Landlord obtains any insurance that is the
responsibility of Tenant under this Paragraph 22, Landlord shall deliver to
Tenant a written statement setting forth the cost of any such insurance and
showing in reasonable detail the manner in which it has been computed and
Tenant shall promptly remit said amount to Landlord. Tenant shall be
permitted to satisfy any insurance coverage required hereunder, or any
portion thereof, with blanket coverage as long as such coverage satisfies
all the requirements of this Lease and Landlord's rights with respect
thereto are not affected thereby.
(c) During the Term of this Lease, Landlord shall insure the Building
and the Parking Facilities (to the extent Landlord is the owner thereof)
(excluding any property which
-38-
<PAGE>
Tenant is obligated to insure under Subparagraphs 22(a) and (b) hereof)
against damage with All-Risk insurance and public liability insurance, all
in such amounts and with such deductibles as commonly carried by other
landlords of the Qualified Buildings. Landlord may, but shall not be
obligated to, obtain and carry any other commercially reasonable form or
forms of insurance as it or Landlord's mortgagees may determine advisable.
Notwithstanding any contribution by Tenant to the cost of insurance
premiums, as provided herein, Tenant acknowledges that it has no right to
receive any proceeds from any insurance policies carried by Landlord. For
the purpose of the waiver of subrogation provisions set forth in
Subparagraph 22(f) below, Landlord shall be deemed to have carried the
insurance required under this Subparagraph 22(c) in an amount equal to full
replacement value, with a commercially reasonable deductible.
(d) Tenant will not keep, use, sell or offer for sale in or upon the
Premises any article which may be prohibited by any insurance policy
periodically in force covering the Building, the Parking Facilities or the
Development. If Tenant's occupancy or business in, or on, the Premises,
whether or not Landlord has consented to the same, results in any increase
in premiums for the insurance periodically carried by Landlord with respect
to the Building or the Parking Facilities, Tenant shall pay any such
increase in premiums as additional rent within ten (10) days after being
billed therefor by Landlord. In determining whether increased premiums are
a result of Tenant's use of the Premises, a schedule issued by the
organization computing the insurance rate on the Building, the Parking
Facilities or the Tenant Improvements showing the various components of
such rate, shall be conclusive evidence of the several items and charges
which make up such rate. Notwithstanding any contrary provision of this
Subparagraph 22(d), Landlord's insurance policies shall not prevent Tenant
from using the Premises for general office purposes, nor shall Tenant be
required to directly pay any increased premiums under this Subparagraph
22(d) due to Tenant's use of the Premises for general office use. Tenant
shall promptly comply with all reasonable requirements of the insurance
authority or any present or future insurer relating to the Premises.
(e) If any of Landlord's insurance policies shall be cancelled or
cancellation shall be threatened or the coverage thereunder reduced or
threatened to be reduced in any way because of the use of the Premises or
any pact thereof by Tenant or any assignee or subtenant of Tenant or by
anyone Tenant permits on the Premises, Tenant shall remedy the condition
giving rise to such cancellation, threatened cancellation, reduction of
coverage, threatened reduction of
-39-
<PAGE>
coverage, increase in premiums, or threatened increase in premiums on or
before the later of (i) ten (10) days prior to the effective date of such
cancellation, coverage reduction or premium increase, or (ii) forty-eight
(48) hours after notice thereof from Landlord. If Tenant fails to remedy
such condition within the above time period, Landlord may (x) enter upon
the Premises and attempt to remedy such condition, and Tenant shall
promptly pay the cost thereof to Landlord as additional rent, or (y) in the
event that such insurance carrier has notified Landlord in writing of its
intention to cancel or reduce its coverage, terminate the Lease. Subject to
the provisions of Paragraphs 20 and 21, Landlord shall not be liable for
any damage or injury caused to any property of Tenant or of others located
on the Premises resulting from such entry. If Landlord is unable, or elects
not to remedy such condition, then Landlord shall have all of the remedies
provided for in this Lease in the event of a default by Tenant.
Notwithstanding the foregoing provisions of this Subparagraph 22(e), if
Tenant fails to remedy as aforesaid, Tenant shall be in default of its
obligation hereunder and Landlord shall have no obligation to remedy such
default.
(f) All policies of insurance required hereunder shall include a
clause or endorsement denying the insurer any rights of subrogation against
the other party to the extent rights have been waived by the insured before
the occurrence of injury or loss. Landlord and Tenant waive any rights of
recovery against the other for injury or loss due to hazards covered by
policies of insurance containing such a waiver of subrogation clause or
endorsement to the extent of the injury or loss covered thereby.
23. DAMAGE OR DESTRUCTION.
(a) In the event the Building and/or the Premises is damaged by fire
or other perils covered by Landlord's insurance, Landlord shall:
(i) In the event of damage or destruction to the Building to an
extent exceeding twenty-five percent (25%) of the full insurable value
of the Building, or damage or destruction to the Premises to an extent
exceeding thirty-three percent (33%) of the full insurable value of
the Premises, as applicable, at Landlord's option, as soon as
reasonably possible thereafter, commence repair, reconstruction and
restoration of the Building and/or the Premises and prosecute the same
diligently to completion, in which event this Lease shall remain in
full force and effect; or within ninety (90) days after such damage,
elect not
-40-
<PAGE>
to so repair, reconstruct or restore the Building and/or the Premises,
in which event this Lease shall terminate; provided, however, in the
event of a casualty which includes material damage or destruction to
portions of the Building outside of the Premises, Landlord shall not
be entitled to selectively terminate this Lease unless Landlord also
elects to terminate the leases of all tenants similarly situated,
other than Wells Fargo or any other tenants in the Building whose
lease may not permit such a termination, but such restriction on
Landlord's termination of the Lease shall not result in Landlord's
expending more for the repair and/or reconstruction of such damage
than the proceeds from Landlord's insurance required hereunder plus
permitted deductibles. In either event, Landlord shall give Tenant
written notice of its intention within said ninety (90) day period. In
the event Landlord elects not to restore the Building and/or the
Premises, this Lease shall be deemed to have terminated as of the date
of such total destruction.
(ii) In the event of a partial destruction which constitutes
neither damage to the Building to an extent exceeding twenty-five
percent (25%) of the full insurable value of the Building, nor damage
to the Premises to an extent exceeding thirty-three percent (33%) of
the full insurable value of the Premises, and if the damage is such
that the Building and the Premises may be repaired, reconstructed or
restored within a period of six (6) months from the date of the
happening of such casualty, as determined by an independent qualified
third party and if Landlord will receive (or if Landlord would have
carried the insurance required hereunder, would have received)
insurance proceeds sufficient to cover the cost of such repairs, less
the deductibles described in Paragraph 22(c), commence and proceed
diligently with the work of repair, reconstruction and restoration and
this Lease shall continue in full force and effect. If such work of
repair, reconstruction and restoration shall require a period longer
than six (6) months or exceeds the applicable percentage of full
insurable value set forth above, or if said insurance proceeds
(determined assuming Landlord carried the insurance coverage required
hereunder) will not be sufficient to cover the cost of such repairs,
less the deductible described in Paragraph 22(c), then Landlord either
may elect to so repair, reconstruct or restore and the Lease shall
continue in full force and effect or Landlord may elect not to repair,
reconstruct or restore and the Lease shall then terminate; provided,
however, in the event of
-41-
<PAGE>
a casualty which includes material damage or destruction to portions
of the Building outside of the Premises, Landlord shall not be
entitled to selectively terminate this Lease unless Landlord also
elects to terminate the leases of all tenants similarly situated,
other than Wells Fargo or any other tenant in the Building whose lease
may not permit such a termination, but such restriction on termination
of the Lease shall not result in Landlord's expending more for the
repair and/or reconstruction of such damage than the proceeds from
Landlord's insurance required hereunder, plus permitted deductibles;
provided, further, in the event that Landlord elects not to repair the
damage or destruction and to terminate the Lease solely on the basis
of an inadequacy of insurance proceeds as provided above, then Tenant
shall have the right, by written notice to Landlord within twenty (20)
days following Landlord's termination notice, to nullify Landlord's
termination notice by agreeing to pay for the amount by which the cost
of repair or restoration (less deductibles described in Paragraph
22(c)) exceeds Landlord's insurance proceeds (calculated assuming
Landlord had maintained the required insurance hereunder). The
projected cost to be paid by Tenant shall be deposited into escrow
prior to the commencement of repair or reconstruction work. Under any
of the conditions of this Subparagraph 23(a)(ii), Landlord shall give
written notice to Tenant of its intention within said ninety (90) day
period. In the event Landlord elects not to restore the Building
and/or the Premises, this Lease shall be deemed to have terminated as
of the date of such partial destruction.
(b) Upon any termination of this Lease under any of the provisions of
this Paragraph 23, the parties shall be released without, further
obligation to the other from the date possession of the Premises is
surrendered to Landlord except for items which have heretofor accrued and
are then unpaid.
(c) In the event of repair, reconstruction or restoration by Landlord
of the Premises, Building or Parking Facilities as herein provided, the
rent payable under this lease shall be abated proportionately with the
degree to which Tenant's use of the Premises is impaired during the period
of such repair, reconstruction or restoration. Tenant shall not be entitled
to any compensation or damages for loss in the use of the whole or any part
of the Premises and/or any inconvenience or annoyance occasioned by such
damage, repair, reconstruction or restoration.
-42-
<PAGE>
(d) Notwithstanding anything to the contrary contained in this
Paragraph 23, if all or any part of the Premises or Building is damaged or
destroyed, and if Landlord is unable, within ninety (90) days following
such damage or destruction, to provide Tenant with a certificate from
Landlord's general contractor stating that Tenant will be given reasonable
use of, and access to, a fully-repaired and restored Premises within one
(1) year of the damage or destruction, Tenant may terminate this Lease upon
ten (10) days' written notice to Landlord, given at any time within thirty
(30) days following the earlier of (i) the end of such ninety (90) day
period or (ii) the date upon which Landlord notifies Tenant that Landlord
does not intend to or is not able to deliver the above-described
certificate to Tenant.
(e) In the event that the Parking Facilities are damaged or destroyed
due to casualty, and if Landlord is unable, within thirty (30) days
following such damage or destruction, to provide Tenant with a good faith,
reasonable assurance that Tenant can be given reasonable use of, and access
to, its parking privileges in the Parking Facilities specified herein, or
use of and access to substitute parking within the Development within a
reasonable walking distance to the Building (or temporary parking as
provided below), on or before the later of (i) sixty (60) days after such
damage or destruction or, (ii) if the Building has been damaged or
destroyed, concurrent with Landlord's restoration of the Building, then
Tenant shall have the right to terminate this Lease upon ten (10) days'
written notice to Landlord, given at any time within sixty (60) days after
the date of the casualty. Tenant agrees that Landlord shall have the right
during any reasonable repair or reconstruction period to temporarily
relocate Tenant's parking privileges to a parking facility served by a
Landlord provided shuttle. During any period during which Tenant is denied
access to its parking privileges in the Parking Facilities due to damage or
destruction to the Parking Facilities and Landlord does not provide
replacement parking as provided herein, a prorata portion of Tenant's
parking charges herein shall abate based upon the proportion of such
parking privileges which Landlord fails to replace. In the event that the
Parking Facilities are damaged or destroyed and due to Landlord's election
not to repair the Parking Facilities Tenant's parking privileges are
permanently relocated as provided herein, Tenant's parking charges shall be
subject to equitable reduction in the event that the quality and/or
location of Tenant's new parking facilities are not commensurate with the
Parking Facilities.
(f) If Landlord is obligated to or elects to repair or restore as
herein provided, Landlord shall be
-43-
<PAGE>
obligated to make repair or restoration only of those portions of the
Building and the Premises which were originally provided at Landlord's
expense, and the repair and restoration of items not provided at Landlord's
expense shall be the obligation of Tenant.
(g) Notwithstanding anything to the contrary contained in this
Paragraph 23, either Landlord or Tenant shall have the right to terminate
this Lease in the event of damage or destruction to the Premises which
occurs during the last twelve (12) months of the Term of this Lease or any
extension hereof, if such damage or destruction cannot reasonably be
repaired within sixty (60) days after the date thereof.
(h) The provisions of California Civil Code Section 1932, Subsection
2, and Section 1933, Subsection 4, and any other similarly enacted statute
or court decision relating to the abatement or termination of a lease upon
destruction of the leased premises, are hereby waived by Tenant; and the
provisions of this Paragraph shall govern in case of such destruction.
24. EMINENT DOMAIN.
(a) In case all of the Premises, Building or Parking Facilities or
such part thereof as shall substantially interfere with Tenants access to
or intended use and occupancy of the Premises, shall be taken for any
public or quasi-public purpose by any lawful power or authority by exercise
of the right of appropriation, condemnation or eminent domain, or sold to
prevent such taking, either party shall have the right to terminate this
Lease effective as of the date possession is required to be surrendered to
said authority; provided, however, Tenant shall not have the right to
terminate this Lease due to a taking of the Parking Facilities, as long as
Landlord shall replace that portion of Tenant's parking privileges affected
by such taking with other parking facilities within a reasonable distance
from the Premises. Tenant shall not assert any claim against Landlord or,
except as otherwise provided below, the taking authority, for any
compensation because of such taking, and Landlord shall be entitled to
receive the entire amount of any award; provided, however, Tenant shall be
entitled to fifty percent (50%) of any portion of the award attributable to
the bonus value of Tenant's leasehold estate. In the event the amount of
property or the type of estate taken shall not substantially interfere with
the conduct of Tenant's business, Landlord shall be entitled to the entire
amount of the award without deduction for any estate or interest of Tenant,
Landlord
-44-
<PAGE>
shall restore the Premises to substantially their same condition prior to
such partial taking, and a proportionate allowance shall be made to Tenant
for the rent corresponding to the time during which, and to the part of the
Premises of which, Tenant shall be so deprived on account of such taking
and restoration. Nothing contained in this Subparagraph shall be deemed to
give Landlord any interest in any award made to Tenant for the taking of
personal property and fixtures belonging to Tenant, Tenant's goodwill or
moving expenses incurred in connection with the relocation of Tenant's
business. In the event that Landlord permanently relocates Tenant's parking
due to a taking of the Parking Facilities, Tenant's parking charges shall
be subject to equitable reduction in the event that the quality and/or
location of Tenant's new parking facilities are not commensurate with the
Parking Facilities.
(b) In the event of taking of the Premises or any part thereof for
temporary use, (i) this Lease shall be and remain unaffected thereby and
rent shall not abate, and (ii) Tenant shall be entitled to receive for
itself such portion or portions of any award made for such use with respect
to the period of the taking which is within the Term, provided that if such
taking shall remain in force at the expiration or earlier termination of
this Lease, Tenant shall then pay to Landlord a sum equal to the reasonable
cost of performing Tenant's obligations under Paragraph 15 with respect to
surrender of the Premises and upon such payment shall be excused from such
obligations. For purpose of this Subparagraph 24(b), a temporary taking
shall be defined as a taking for a period of 270 days or less.
25. DEFAULTS AND REMEDIES.
(a) The occurrence of any one or more of the following events shall
constitute a default hereunder by Tenant:
(i) The abandonment of the Premises by Tenant as defined in
California Civil Code Section 1951.3.
(ii) The failure by Tenant to make any payment of rent or
additional rent or any other payment required to be made by Tenant
hereunder, as and when due, where such failure shall continue for a
period of five (5) days after written notice thereof from Landlord to
Tenant; provided, however, that any such notice shall be in lieu of,
and not in addition to, any notice required under California Code of
Civil Procedure Section 1161 regarding unlawful detainer actions or
any similar successor statute.
-45-
<PAGE>
(iii) The failure by Tenant to observe or perform any of the
express or implied covenants or provisions of this Lease to be
observed or performed by Tenant, other than as specified in
Subparagraph 25(a)(i) or (ii) above, where such failure shall continue
for a period of thirty (30) days after written notice thereof from
Landlord to Tenant. Any such notice shall be in lieu of, and not in
addition to, any notice required under California Code of Civil
Procedure Section 1161 regarding unlawful detainer actions or any
similar successor statute. If the nature of Tenant's default 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 shall
commence such cure within said thirty (30) day period and thereafter
diligently prosecute such cure to completion.
(iv) (1) The making by Tenant of any general assignment for the
benefit of creditors; (2) the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or a petition for
reorganization or arrangement under any law relating to bankruptcy
(unless, in the case of a petition filed against Tenant the same is
dismissed within ninety (90) days); (3) 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 ninety (90) days; or (4)
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 ninety (90)
days.
(b) In the event of any such default by Tenant, in addition to any
other remedies available to Landlord at law or in equity, including,
without limitation, the remedies of Civil Code Section 1951.4 and any
successor statute, Landlord shall have the immediate option to terminate
this Lease and all rights of Tenant hereunder. In the event that Landlord
shall elect to so terminate this Lease then Landlord may recover from
Tenant:
(i) The worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus
(ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rent loss that Tenant proves
could have been reasonably avoided; plus
-46-
<PAGE>
(iii) the worth at the time of award of the amount by which the
unpaid rent for the balance of the Term after the time of award
exceeds the amount of such rent loss that Tenant proves could be
reasonably avoided; plus
(iv) any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease or which in the ordinary course
of things would be likely to result therefrom.
As used in Subparagraphs 25(b)(i) and (ii) above, the "worth at the
time of award" is computed by allowing interest at the maximum rate
permitted by law. As used in Subparagraph 25(b)(iii) above, the "worth at
the time of award" is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus
one percent (1%).
(c) In the event of any such default by Tenant, Landlord shall also
have the right, with or without terminating this Lease, to re-enter the
Premises and remove all persons and property from the Premises; such
property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Tenant. No re-entry or taking possession
of the Premises by Landlord pursuant to this Paragraph 25(c) shall be
construed as an election to terminate this Lease unless a written notice of
such intention is given to Tenant or unless the termination thereof is
decreed by a court of competent jurisdiction.
(d) In the event of the vacation or abandonment of the Premises by
Tenant or in the event that Landlord shall elect to re-enter as provided
above or shall take possession of the Premises pursuant to legal proceeding
or pursuant to any notice provided by law, then if Landlord does not elect
to terminate this Lease as provided above, Landlord may from time to time,
without terminating this Lease, either recover all rent as it becomes due
or relet the Premises or any part thereof for the Term of this Lease on
terms and conditions as Landlord in its sole discretion may deem advisable
with the right to make alterations and repairs to the Premises.
In the event that Landlord shall elect to so relet, then rents
received by Landlord from such reletting shall be applied: first, to the
payment of any indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any cost of such reletting: third, to
the payment of the cost of any alterations and repairs to the Premises;
fourth, to the payment of rent due and unpaid hereunder and
-47-
<PAGE>
the residue, if any, shall be held by Landlord and applied to payment of
future rent as the same may become due and payable hereunder. Should that
portion of such rents received from such reletting during any month, which
is applied to the payment of rent hereunder, be less than the rent payable
during that month by Tenant hereunder, then Tenant shall pay such
deficiency to Landlord immediately upon demand therefor by Landlord. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by
Landlord in such reletting or in making such alterations and repairs not
covered by the rents received from such reletting.
(e) All rights, options and remedies of Landlord contained in this
Lease shall be construed and held to be cumulative, and no one of them
shall be exclusive of the other, and Landlord shall have the right to
pursue any one or all of such remedies or any other remedy or relief which
may be provided by law, whether or not stated in this Lease. No waiver of
any default of Tenant hereunder shall be implied from any acceptance by
Landlord of any rent or other payments due hereunder or any omission by
Landlord to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect defaults other
than as specified in said waiver. The consent or approval of Landlord to or
of any act by Tenant requiring Landlord's consent or approval shall not be
deemed to waive or render unnecessary Landlord's consent or approval to or
of any subsequent similar acts by Tenant.
26. ASSIGNMENT AND SUBLETTING.
(a) Tenant shall not voluntarily or by operation of law, assign,
encumber or transfer its interest in this Lease or in the Premises or
sublease all or any part of the Premises, or allow any other person or
entity to occupy or use all or any part of the Premises, without first
obtaining Landlord's prior written consent, which consent Landlord shall
not unreasonably withhold or delay. Any assignment, encumbrance or sublease
without Landlord's prior written consent shall be voidable at Landlord's
election and shall constitute a default.
(b) For purposes hereof, if Tenant is a corporation (other than a
publicly-held corporation), partnership or other entity, any transfer,
assignment, encumbrance or hypothecation of forty-nine percent (49%) or
more (individually or in the aggregate) of any stock or other ownership
interest in such entity, and/or any transfer, assignment, hypothecation or
encumbrance of any controlling ownership or voting interest in such entity,
shall be deemed
-48-
<PAGE>
an assignment of this Lease and shall be subject to all of the restrictions
and provisions contained in this Paragraph 26; provided, however, no sale
of all of Tenant's stock reasonably approved by Landlordshall be subject to
the provisions of this Paragraph 26. No consent to an assignment,
encumbrance or sublease shall constitute a further waiver of the provisions
of this Paragraph 26.
(c) In the event Tenant desires to assign, hypothecate or otherwise
transfer this Lease or sublet the Premises, then at least thirty days prior
to the date when Tenant desires the assignment or sublease to be effective
(the "Assignment Date"), Tenant shall give Landlord a notice (the
"Assignment Notice"), which shall set forth the name, address and business
of the proposed assignee or sublessee, information (including references)
concerning the character, ownership, and financial condition of the
proposed assignee or sublessee, the Assignment Date, any ownership or
commercial relationship between Tenant and the proposed assignee or
sublessee, and the consideration and all, other material terms and
conditions of the proposed assignment or sublease, all in such detail as
Landlord shall reasonably require. If Landlord reasonably requests
additional detail, the Assignment Notice shall not be deemed to have been
received until Landlord receives such additional detail, and Landlord may
withhold consent to any assignment or sublease until such information is
provided to it.
(d) Within thirty (30) days of Landlord's receipt of such Assignment
Notice, and additional information requested by Landlord concerning the
proposed assignee's or sublessee's financial responsibility, Landlord shall
elect to either consent to such proposed assignment, encumbrance or
sublease or refuse such consent, which refusal shall be on reasonable
grounds. In addition, a condition to Landlord's consent to any assignment,
transfer or hypothecation of this Lease shall be the delivery to Landlord
of a true copy of the fully executed instrument of assignment, transfer or
hypothecation, and the delivery to Landlord of an agreement executed by the
assignee in form and substance satisfactory to Landlord and expressly
enforceable by Landlord, whereby the assignee assumes and agrees to be
bound by all of the terms and provisions of this Lease and to perform all
of the obligations of Tenant hereunder. As a condition to Landlord's
consent to any sublease, such sublease shall provide that it is subject and
subordinate to this Lease and to all mortgages; that Landlord may enforce
the provisions the sublease, including collection of rent; that in the
event of termination of this Lease for any reason, including
-49-
<PAGE>
without limitation a voluntary surrender by tenant, or in the event of any
reentry or repossession of the Premises by Landlord, Landlord may, at its
option, either (i) terminate the sublease or (ii) take over all of the
right, title and interest of Tenant, as sublessor, under such sublease, in
which case such sublessee shall attorn to Landlord, but that nevertheless
Landlord shall not (1) be liable for any previous act or omission of Tenant
under such sublease, (2) be subject to any defense or offset previously
accrued in favor of the sublessee against Tenant, or (3) be bound by any
previous modification of any sublease made without Landlord's written
consent, or by any previous prepayment by sublessee of more than one
month's rent.
(e) Landlord shall be deemed reasonable in withholding its consent
based upon any of the following factors: (i) the financial net worth of the
proposed assignee or sublessee is not equal to or greater than Tenant's
financial net worth as of the date of this Lease as increased by the
increase in the CPI, if any, between the date of this Lease and the date of
the assignment or sublease; (ii) the intended use of the Premises by the
proposed assignee or sublessee is incompatible with other uses in the
Building; (iii) the intended use of the Premises by the proposed assignee
or sublessee will require more than insignificant alteration of the
Premises; or (iv) the intended use of the Premises by the proposed assignee
or sublessee will constitute a violation of this Lease or any governmental
law, rule, ordinance or regulation governing the Premises or the Building
or would involve the storage, use or keeping of Hazardous Materials in, on
or about the Premises, the Building, the Parking Facilities, the Common
Areas or any other portion of the Development.
(f) In the event that Landlord shall consent to an assignment or
sublease under the provisions of this Paragraph 26, Tenant shall pay
Landlord's processing costs and attorneys' fees incurred in giving such
consent. If Landlord shall consent to any assignment of this Lease, Tenant
shall pay to Landlord, as additional rent, fifty percent (50%) of all sums
and other consideration payable to and for the benefit of Tenant by the
assignee on account of the assignment ("Assignment Transfer profits"), as
and when such sums and other consideration are due and payable by the
assignee to or for the benefit of Tenant (or, if Landlord so requires, and
without any release of Tenant's liability for the same, Tenant shall
instruct the assignee to pay such sums and other consideration directly to
Landlord). If for any proposed sublease Tenant receives rent or other
consideration, either initially or over the Term of the sublease, in excess
of the rent called for hereunder or, in
-50-
<PAGE>
case of the sublease of a portion of the Premises, in excess of such rent
fairly allocable to such portion, after appropriate adjustments to assure
that all other payments called for hereunder are taken into account, Tenant
shall pay to Landlord as additional rent hereunder fifty percent (50%) of
the excess of each such payment of rent or other consideration received by
Tenant (the "Sublease Transfer Profits") promptly after its receipt.
Notwithstanding any contrary provision of this Subparagraph 26(f), in
determining Assignment Transfer Profits or Sublease Transfer Profits,
Tenant shall be entitled to deduct advertising costs, brokerage
commissions, improvement allowances and/or retrofit costs, legal fees, and
space planning fees incurred by Tenant in assigning the Lease or subleasing
the Premises. Landlord's waiver or consent to any assignment or subletting
shall not relieve Tenant or any assignee or sublessee from any obligation
under this Lease whether or not accrued. Occupancy of all or part of the
Premises by parent or subsidiary companies of Tenant shall not be deemed an
assignment or subletting.
-51-
<PAGE>
(h) Notwithstanding any provision of this paragraph 26 to the
contrary, Tenant shall have the right upon prior written notice to
Landlord, to sublease all or any portion of the Premises to (i) an entity
resulting from a merger or a consolidation with Tenant or any organization
purchasing substantially all of Tenant's assets, (ii) any entity succeeding
to substantially all of the business and assets of Tenant, or (iii) any
corporation which controls, is controlled by or is under common control
with, Tenant ((i), (ii) and (iii) hereafter referred to as "Affiliate
Subtenant(s)"), without first obtaining Landlord's consent; provided,
however, Tenant shall remain responsible for the performance of the Lease;
and provided, further, Tenant shall give Landlord prior notice of any such
sublease. Landlord shall not have the right to receive from Tenant any
portion of the Transfer Profits on a sublease or an assignment to an
Affiliate Subtenant, nor shall the provisions of Subparagraph 26(g) above
be applicable to any such sublease. No sublease to an Affiliate Subtenant
shall relieve Tenant from any obligation under this Lease.
27. SUBORDINATION.
(a) Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, and at the election of
Landlord or any mortgagee with a lien on the Building or the Development or
any ground lessor with respect to the Building or the Development, this
Lease shall be subject and subordinate at all times to:
(i) all ground leases or underlying leases which may now exist
or hereafter be executed affecting the Building, the Development, or
the land upon which the Building and the Development are situated, or
both; and
(ii) the lien of any mortgage or deed of trust which may now
exist or hereafter be executed in any amount for which the Building,
the Development, the land upon which the Building and the Development
are situated, ground leases or underlying leases, or Landlord's
interest or estate in any of said items is specified as security.
Notwithstanding the foregoing, Landlord shall have the right to subordinate
or cause to be subordinated any such ground leases or underlying leases or
any such liens to this Lease.
-52-
<PAGE>
In the event that any ground lease or underlying lease terminates for any
reason or any mortgage or deed of trust is foreclosed or a conveyance in
lieu of foreclosure is made for any reason, Tenant shall, notwithstanding
any subordination, attorn to and become the Tenant of the successor-in-
interest to Landlord, at the option of such successor-in-interest. Tenant
covenants and agrees to execute and deliver, upon demand by Landlord and in
a commercially reasonable form, any additional documents evidencing the
priority or subordination of this Lease with respect to any such ground
leases or underlying leases or the lien of any such mortgage or deed of
trust. Should Tenant fail to sign and return any such documents within ten
(10) business days of written request, Tenant shall be in default and
Landlord shall have the right to send Tenant a notice, entitled "Lease
Termination Notice", notifying Tenant that Landlord intends to terminate
the Lease unless Tenant signs and returns the requested document within ten
(10) business days following the date of such Lease Termination Notice. If
Landlord delivers such Lease Termination Notice and Tenant fails to sign
and return such requested document within such additional ten (10) business
day period, Landlord shall thereafter have the right to terminate the Lease
by notice to Tenant at any time within thirty (30) days following the date
of the Lease Termination Notice. No such termination of the Lease by
Landlord shall relieve the Tenant of any liability for a default by Tenant
under this Lease. Notwithstanding any contrary provision of Subparagraph
25(a), Tenant's failure to sign and deliver the documents required
hereunder within ten (10) business days after the Lease Termination Notice
shall constitute an event of default under the provisions of Subparagraph
25(a) of the Lease, without any additional opportunity to cure.
(b) Landlord agrees that prior to the commencement of the Term of the
Lease it will provide Tenant with commercially reasonable non-disturbance
agreements in favor of Tenant from any ground lessors, mortgage holders or
lien holders then in existence, which shall be in recordable form and which
may, at Tenant's election and expense, be recorded. Landlord also agrees to
provide Tenant with commercially reasonable non-disturbance agreements in
favor of Tenant from any ground lessors, mortgage holders or lien holders
of Landlord who later come into existence at any time during the Term of
this Lease, in consideration of, and as a condition to, Tenant's agreement
to be bound by the provisions of Subparagraph 27(a) above. Tenant hereby
waives the provisions of any current or future statute, rule or law which
may give or purport to give Tenant any right to elect to terminate or
otherwise adversely affect this Lease and the obligations of Tenant
hereunder in the event of any foreclosure proceeding or sale, and agrees
that this Lease
-53-
<PAGE>
shall not be affected in any way whatsoever by any such foreclosure
proceeding or sale, except that this sentence shall not affect Landlord's
obligation to provide commercially reasonable non-disturbance agreements to
Tenant.
28. ESTOPPEL CERTIFICATE.
(a) Within ten (10) business days following any written request which
Landlord may make from time to time, Tenant shall execute and deliver to
Landlord a statement, in a form substantially similar to the form of
Exhibit "E" attached hereto, certifying: (i) the date of commencement of
this Lease; (ii) the fact that this Lease is unmodified and in full force
and effect (or, if there have been modifications hereto, that this Lease is
in full force and effect, and stating the date and nature of such
modifications); (iii) the date to which the rent and other sums payable
under this Lease have been paid; (iv) that there are no current defaults
under this Lease by either Landlord or Tenant except as specified in
Tenant's statement; and (v) such other matters requested by Landlord.
Landlord and Tenant intend that any statement delivered pursuant to this
Paragraph 28 may be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or any interest therein.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon. Tenant (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that
there are no uncured defaults in Landlord's performance, and (iii) that not
more than one (1) month's rent has been paid in advance. Tenant's failure
to deliver said statement to Landlord within ten (10) working days of
receipt shall constitute a default under this Lease and Landlord shall have
the right to send Tenant a notice, entitled "Lease Termination Notice",
notifying Tenant that Landlord intends to terminate the Lease unless Tenant
delivers said statement to Landlord within ten (10) business days following
the date of such Lease Termination Notice. If Landlord delivers such Lease
Termination Notice and Tenant fails to deliver said statement to Landlord
within such ten (10) business day period, Landlord shall thereafter have
the right to terminate the Lease by notice to Tenant at any time within
thirty (30) days following the date of the Lease Termination Notice. No
such termination of the Lease by Landlord shall relieve the Tenant of any
liability for a default by Tenant under this Lease. Notwithstanding any
contrary provision of Subparagraph 25(a), Tenant's failure to deliver said
statement within ten (10) business days after the Lease Termination Notice
shall
-54-
<PAGE>
constitute an event of default under the provisions of Subparagraph 25(a)
of the Lease without any additional opportunity to cure.
29. LANDLORD ESTOPPEL CERTIFICATE. Landlord shall, within ten (10) business
days following written notice by Tenant from time to time, execute and deliver
to Tenant a statement in writing prepared by Tenant and edited by Landlord as
appropriate, certifying that this Lease is unmodified and in full force and
effect (or if there have been modifications hereto, that this Lease is in full
force and effect as modified, and stating the date and nature of such
modifications), the dates to which Tenant has paid rent, adjustments to rent,
and other charges in advance, if any, stating whether or not to the actual
knowledge of Landlord, Tenant is in default in the performance of any covenant,
agreement or condition contained in this Lease, and if so, specifying each such
default of which Landlord may have knowledge, or containing any other
information or certifications which reasonably may be requested by Tenant, any
proposed assignee or sublessee of Tenant or any proposed lender of Tenant. Any
such statement delivered pursuant to this Paragraph 29 may be relied upon by any
proposed assignee or sublessee or any proposed lender of Tenant. Landlord's
failure to deliver such statement within such time period shall be conclusive
upon Landlord (i) that this Lease is in full force and effect without
modification except as represented by Tenant, and (ii) there are no uncured
defaults in Tenant's performance.
30. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with
the "Rules and Regulations," a copy of which is attached hereto and marked
Exhibit "F", and all reasonable and nondiscriminatory modifications thereof and
additions thereto from time to time put into effect by Landlord, as long as such
additions and modifications do not materially increase Tenant's obligations
hereunder or materially adversely affect its use or occupancy of the Premises.
Landlord shall not be responsible to Tenant for the violation or non-performance
by any other tenant or occupant of the Building of any of said Rules and
Regulations.
31. CONFLICT OF LAWS. This Lease shall be governed by and construed
pursuant to the laws of the State of California.
32. SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Lease, all
of the covenants, conditions and provisions of this Lease shall be binding upon
and shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
33. SURRENDER OF PREMISES. The voluntary or other surrender of this Lease
by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of
-55-
<PAGE>
Landlord, operate as an assignment to it of any or all subleases or
subtenancies. Upon the expiration or termination of this Lease, Tenant shall
peaceably surrender the Premises and all alterations and additions thereto,
broom clean the Premises, leave the Premises in good order, repair and
condition, free from any and all Hazardous Materials, reasonable wear and tear
excepted, and comply with the provisions of Paragraph 15. The delivery of keys
to any employee of Landlord or to Landlord's agent or any employee thereof shall
not be sufficient to constitute a termination of this Lease or a surrender of
the Premises.
35. PERFORMANCE BY TENANT. All covenants and agreements to be performed by
Tenant under any of the terms of this Lease shall be performed by Tenant at
Tenant's sole cost and expense and without any abatement of rent. If (i) Tenant
shall, prior to delinquency, fail to pay any sum of money owed to any party
other than Landlord, for which it is liable hereunder, and such failure shall
continue for ten (10) days after notice thereof by Landlord, or (ii) if Tenant
shall fail to perform any other act on its part to be performed hereunder, and
such failure shall continue for thirty (30) days after notice thereof by
Landlord (or such longer reasonable cure period if more than thirty (30) days
are reasonably required for such cure and Tenant commences cure within such
thirty (30) day period and diligently prosecutes such cure to completion),
Landlord may upon notice to Tenant, without waiving or releasing Tenant from
obligations of Tenant, but shall not be obligated to, make any such payment or
perform any such other act to be made or performed by Tenant. All sums so paid
by Landlord and all necessary incidental costs together with interest thereon at
the maximum rate permissible by law, from the date of such payment by Landlord,
shall be payable to Landlord on demand. Tenant covenants to pay any such sums,
and Landlord shall have (in addition to any other right or remedy of Landlord)
all rights and remedies in the event of the non-payment thereof by Tenant as
are set forth in Paragraph 25.
-56-
<PAGE>
38. WAIVER. The waiver by either party of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition herein
contained, nor shall any custom or practice which may grow up between the
parties in the administration of the terms hereof be deemed a waiver of or in
any way affect the right of either party to insist upon the performance by the
other party in strict accordance with said terms. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent. No acceptance by Landlord of a lesser sum than the basic rent and
additional rent or other sum then due shall be deemed to be other than on
account of the earliest installment of such rent or other amount due, nor shall
any endorsement or statement on any check or any letter accompanying any check
be deemed an accord and satisfaction, and
-57-
<PAGE>
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of Such installment or other amount or pursue any other
remedy provided in this Lease.
39. IDENTIFICATION OF TENANT. If more than one person executes this Lease
as Tenant, (a) each of them is jointly and severally liable for the keeping,
observing and performing of all of the terms, covenants, conditions, provisions
and agreements of this Lease to be kept, observed and performed by Tenant, and
(b) the term "Tenant" as used in this Lease shall mean and include each of them
jointly and severally. The act of or notice from, or notice or refund to, or the
signature of any one or more of them, with respect to the tenancy of this Lease,
including, but not limited to, any renewal, extension, expiration, termination
or modification of this Lease, shall be binding upon each and all of the persons
executing this Lease as Tenant with the same force and effect as if each and all
of them had so acted or so given or received such notice or refund or so signed.
40. PARKING. Tenant's parking rights and obligations shall be subject to
the following terms and conditions:
(a) Visitor Parking. So long as this Lease is in effect, Tenant's
visitors and guests shall be entitled to use those specific parking areas
which are designated for short term visitor parking and which are located
within the surface parking area(s), if any, and/or within the parking
structure(s) which serve the Building. Visitor parking shall be made
available at a charge to all visitors and guests, with the rate being
established by Landlord in its discretion from time to time. Tenant, at its
sole cost and expense, may elect to validate such parking for its visitors
and guests. All such visitor parking shall be on a non-exclusive, in-
common basis with all other visitors and guests of the Development.
Notwithstanding any contrary provision of this Lease, in the event that the
number of Tenant's visitors utilizing the Parking Facilities consistently
exceeds fifty (50) visitors per day, Landlord shall have the right from
time to time to reduce Tenant's maximum number of unreserved monthly
parking privileges to accommodate such excessive visitor usage.
(b) Unreserved Employee Parking. So long as this Lease is in effect,
Landlord hereby agrees to lease to Tenant up to _______________ unreserved
employee parking privileges; provided, however, that Tenant stall at all
tines be obligated to lease a minimum of ________________ of such
unreserved employee parking privileges (the "Minimum Parking Requirement");
provided, however, the Minimum Parking Requirement shall be subject to
reduction to reflect governmentally mandated reductions in the number of
vehicles
-58-
<PAGE>
which Tenant and its employees are permitted to utilize for access to the
Premises. Tenant shall notify Landlord from time to time of the exact
number of unreserved privileges which Tenant desires to lease. Subject to
the rental abatement provisions set forth in Paragraph 5(c) above, as
consideration for the use of such unreserved employee parking privileges
Tenant shall pay to Landlord during the initial Term of the Lease, as
additional rent under the Lease, _____________________ per month for each
such unreserved employee parking privilege. Tenant shall pay Landlord the
additional rent for such unreserved employee parking privileges monthly,
concurrently with each monthly payment of Monthly Basic Rent. All
unreserved employee parking spaces shall be made available to Tenant, its
employees and all other tenants and employees of the Development entitled
to use such parking facilities, on a non-exclusive, in-common basis.
(c) Reserved Parking. So long as this Lease is in effect, Landlord
here leases to Tenant and Tenant hereby lease from Landlord _____________
reserved parking spaces. Subject to the rental abatement provisions set
forth in Paragraph 5(c) above, as consideration for the use of such
reserved parking spaces Tenant shall pay to Landlord the additional rent
under the Lease. Tenant shall pay Landlord the additional rent for such
reserved parking spaces monthly, concurrently with each monthly payment of
Monthly Basic Rent.
(d) Use of Unreserved and Reserved Parking Spaces. With respect to
reserved parking, Tenant shall use only the parking space(s) specifically
designated by Landlord for use by Tenant. With respect to unreserved
employee parking, Tenant shall not use any spaces which have been
specifically assigned by Landlord to other tenants or occupants or for
other uses such as visitor parking or which have been designated by any
governmental entity as being restricted to certain uses. Tenant shall be
obligated to lease the reserved and unreserved parking spaces specified
herein throughout the Term of the Lease and shall not be entitled to any
additional reserved or unreserved parking privileges applicable to the
Premises for the remainder of the Term of the Lease; provided, however, if
at any tine Tenant desires to increase or reduce the number of reserved or
unreserved parking spaces it leases under the terms of this Lease, Tenant
shall notify Landlord in writing of such desire and Landlord shall have the
right, in its sole and
-59-
<PAGE>
absolute discretion, to either (a) approve such requested increase in the
number of parking spaces allocated to Tenant (with an appropriate increase
to the additional rent payable by Tenant for such additional spaces based
on the then prevailing parking rates), (b) approve such requested decrease
in the number of parking spaces allocated to Tenant (with an appropriate,
reduction in the additional rent payable by Tenant to Landlord for such
eliminated parking spaces based on the then prevailing parking rates), or
(c) disapprove such requested increase or decrease in the number of parking
spaces leased to Tenant. Promptly following receipt of Tenant's written
request, Landlord shall provide Tenant with written notice of its decision
including a statement of any adjustments to the additional rent payable by
Landlord to Tenant for parking under the Lease, if applicable.
(e) General Provisions. Except as otherwise set forth in this
Paragraph 40, Landlord reserves the right to set and increase monthly fees
and/or daily and hourly rates for parking privileges from time to time
during the Term of the Lease. Landlord may assign any unreserved and
unassigned parking spaces and/or make all or any portion of such spaces
reserved, if Landlord reasonably determines that it is necessary for
orderly and efficient parking. Failure to pay for the lease of any
particular parking spaces may be treated by Landlord as a failure to pay
rent as required under the Lease, and, in addition to all other remedies
available to Landlord under the Lease, at law or in equity, Landlord may
elect to recapture such parking spaces for the balance of the Term of this
Lease if Tenant does not cure such failure to pay within the applicable
cure period set forth in the Default section of this Lease. Tenant's
parking rights and privileges described herein are personal to Tenant and
may not be assigned or otherwise transferred, or otherwise conveyed,
without Landlord's prior written consent, which consent Landlord may
withhold in its sole and absolute discretion. In any event, under no
circumstances may Tenant's parking rights and privileges be transferred,
assigned or otherwise conveyed separate and apart from Tenant's interest in
the Lease. The use by Tenant, its employees and invitees of the parking
described herein shall be subject to the terms and conditions of the
Parking Rules and Regulations set forth in Exhibit "F" attached to the
Lease and by this reference incorporated herein. Notwithstanding any
contrary provision of this Lease, in the event necessitated by damage or
destruction, condemnation, or governmental authority. Landlord reserves the
right to change the location of the Parking Facilities and/or the location
of Tenant's parking privileges therein to another location in the
Development with reasonable access to, and within a reasonable walking
-60-
<PAGE>
distance from, the Building (or on a temporary basis during any reasonable
period of repair or restoration, to a location served by a shuttle), as
long as such change is applied on a nondiscriminatory basis to Tenant in
relation to the other tenants in the Building. In the event that such
parking relocation is permanent, Tenant's parking charges shall be subject
to an equitable reduction in the event that the quality and/or location of
Tenant's new parking facilities are not commensurate with the Parking
Facilities.
41. FORCE MAJEURE. Neither party shall have any liability whatsoever to the
other party on account of (a) the inability to fulfill, or delay in fulfilling,
any obligations under this Lease by reason of strike, other labor trouble,
governmental preemption or priorities or other controls in connection with a
national or other public emergency, or shortages of fuel, supplies or labor
resulting therefrom, or any other cause, whether similar or dissimilar to the
above, beyond the reasonable control of the performing party; or (b) any failure
or defect in the supply, quantity or character of electricity or water furnished
to the Premises, by reason of any requirement, act or omission of the public
utility or others furnishing the Building with electricity or water, or for any
other reason, whether similar or dissimilar to the above, beyond the performing
party's reasonable control. If this Lease specifies a time period for
performance of an obligation, that time period shall be extended by the period
of any delay in such performance caused by any of the events of force majeure
described above. Notwithstanding any contrary provision of this Paragraph 41,
the provisions of this Paragraph 41 shall not be applicable to the monetary
obligations of either party hereunder.
42. TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein
shall include the plural as well as the singular. Words used in any gender
include other genders. The paragraph headings of this Lease are not a part of
this Lease and shall have no effect upon the construction or interpretation of
any part hereof.
43. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for lease,
and it is not effective as a lease or otherwise until execution by and delivery
to both Landlord and Tenant.
44. TIME. Time is of the essence with respect to the performance of every
provision of this Lease in which time of performance is a factor.
45. PRIOR AGREEMENT; AMENDMENTS. This Lease contains all of the agreements
of the parties hereto with respect to any matter covered or mentioned in this
Lease, and no prior agreement
-61-
<PAGE>
or understanding pertaining to any such matter shall be effective for any
purpose. No provisions of this Lease may be amended or added to except by an
agreement in writing signed by the parties hereto or their respective
successors-in-interest.
46. SEPARABILITY. Any provision of this Lease which shall prove to be
invalid, void or illegal in no way affects, impairs or invalidates any other
provision hereof, and such other provisions shall remain in full force and
effect.
47. RECORDING. Neither Landlord nor Tenant shall record this Lease nor a
short form memorandum thereof without the consent of the other.
48. LIMITATION ON LIABILITY. In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in the
event of any actual or alleged failure, breach or default hereunder by Landlord:
(a) The sole and exclusive remedy shall be against the Landlord's
interest in the Building (including the right to attach rents in accordance
with applicable law);
-62-
<PAGE>
49. MODIFICATION FOR LENDER. If, in connection with obtaining construction,
interim or permanent financing for the Building the lender shall request
reasonable modifications in this Lease as a condition to such financing, Tenant
will not unreasonably withhold, delay or defer its consent thereto, provided
that such modifications do not increase the obligations of Tenant hereunder or
materially adversely affect the leasehold interest hereby created or Tenant's
rights hereunder.
50. FINANCIAL STATEMENTS. At any time during the Term of this Lease, Tenant
shall upon ten (10) days prior written notice from Landlord not more often than
twice in any calendar year, provide Landlord with a current financial statement
and financial statements of the two (2) years prior to the current financial
statement year for Tenant. Such statement shall be prepared in accordance with
generally accepted accounting principles and, if such is the normal practice of
Tenant, shall be audited by an independent certified public accountant.
51. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon
Tenant paying the rent required under this Lease and paying all other charges
and performing all of the covenants and provisions aforesaid on Tenant's part to
be observed and performed under this Lease, Tenant shall and may peaceably and
quietly have, hold and enjoy the Premises in accordance with this Lease.
52. TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this Lease as
a corporation or partnership, then Tenant and the persons executing this Lease
on behalf of Tenant represent and warrant that such entity is duly qualified to
do business in California and that the individuals executing this Lease on
Tenant's behalf are duly authorized to execute and deliver this Lease on its
behalf, in the case of a corporation, in accordance with a duly adopted
resolution of the board of directors of Tenant, a copy of which is to be
delivered to Landlord on execution hereof, and in accordance with the by-laws of
Tenant, and in the case of a partnership, in accordance with the partnership
agreement and the most current amendments thereto, if any, copies of which are
to be delivered to Landlord on execution hereof, and that this Lease is binding
upon Tenant in accordance with its terms.
-63-
<PAGE>
PAGES 64-74 OF TILE
LEASE ARE NOT
APPLICABLE TO THE
SUBLEASE
<PAGE>
61. ACCESS TO PREMISES. Tenant shall have access to the Premises
twenty-four (24) hours per day, seven (7) days per week, fifty-two (52) weeks
per year (after-hours access to be in compliance with reasonable security
procedures established by Landlord).
62. SIGNAGE. Tenant shall be entitled to an eyebrow identity sign on the
exterior face of the Building. Such exterior sign shall identify only the
original Tenant or an
-75-
<PAGE>
Affiliate Subtenant. The exact location, size, materials, graphics and lighting
(if any) with respect to such signage shall be consistent and compatible with
any covenants, conditions and restrictions affecting the Building and/or
Development, all applicable laws, regulations and ordinances of the City of
Irvine or any other applicable governmental body, and the sign criteria for the
Development, and shall also be subject to Landlord's reasonable approval. As
soon as reasonably possible after the execution of this Lease, Landlord shall
notify Tenant in writing of the alternative locations for Tenant's signage on
the exterior face of the Building. During the thirty (30) day period following
Landlord's notice Tenant shall have the right to select which of such
alternative signage locations Tenant desires to utilize. Prior to the earlier of
Tenant's selection of its signage location or the end of such thirty (30) day
period, Landlord shall not offer any other non-retail tenant in the Building
exterior signage rights at a specific location without Tenant's prior written
consent. In addition, without the prior written consent of Tenant, during any
period during which Tenant retains its exterior signage rights described in this
Paragraph 62, Landlord shall not hereafter permit another non-retail tenant in
the Building to install signage (excluding existing Wells Fargo signage) on the
exterior face of the Building other than at those alternative signage locations
offered to Tenant which Tenant did not select for the location of its sign.
Landlord shall be responsible for the costs associated with the initial
installation of such exterior signage. Tenant shall be responsible for all
maintenance and utility costs with respect to such exterior sign. At the
termination of this Lease or at any other time when Tenant no longer is entitled
to its signage hereunder, Landlord shall have the right, but not the obligation,
at Landlord's sole cost and expense, to remove such exterior sign.
Notwithstanding any contrary provision of this Paragraph 62, Tenant's exterior
signage rights granted herein shall cease and be of no further force or effect
if at any time during the Term the original Tenant and Affiliate Subtenants fail
to physically occupy at least fifty percent (50%) of the rentable area of the
Premises. Tenant shall, at Tenant's sole cost and expense, be permitted to
install appropriate signage on the walls of the elevator lobbies of the four
floors of the Building under lease by Tenant, and on the entrance doors to its
Premises. The exact location, size, materials, graphics and lighting (if any)
with respect to such interior signage shall be subject to Landlord's reasonable
approval. At the termination of this Lease, Tenant shall be responsible for the
cost of removal of all such interior signage and the cost of repairing any
damage to the Building caused by such removal. Except as otherwise provided in
this Paragraph 62 or as provided in Paragraph 4 of Exhibit "F" regarding the
Building directory, Tenant shall have no right to install or maintain Tenant
identification signs in any other location in, on or about the Premises or the
Development and
-76-
<PAGE>
shall not display or erect any other signs, displays or other advertising
materials that are visible from the exterior of the Building. The signage rights
granted to Tenant pursuant to this Paragraph 62 shall be personal to the
original Tenant and Affiliate Subtenants and may not be exercised or be
assigned, voluntarily or involuntarily, by or to any entity other than the
original Tenant or an Affiliate Subtenant.
63. [Intentionally Omitted.]
64. ABATEMENT OF RENT WHEN TENANT IS PREVENTED FROM USING PREMISES. In the
event that Tenant is prevented from using and does not use the Premises or any
portion thereof, for five (5) consecutive business days ("Eligibility Period"),
as a result of any damage or destruction (subject to the provisions of Paragraph
23) to the Premises or Building, any failure of Landlord to provide services,
utilities or access to the Premises, any failure of Landlord to provide access
to the parking described in this Lease or any Landlord repairs or other
construction work preventing Tenant's access to or use of the Premises, then
Tenant's Basic Rent, parking charges, and Operating Expense escalation charges
shall be abated or reduced, as the case may be, during the period during which
Tenant continues to be so prevented from using the Premises, or a portion
thereof, in the proportion that the rentable area of the portion of the Premises
that Tenant is prevented from using, and does not use, bears to the total
rentable area of the Premises. However, in the event that Tenant is prevented
from conducting, and does not conduct its business in any portion of the
Premises for a period of time exceeding the Eligibility Period, and the
remaining portion of the Premises is not sufficient to allow Tenant to conduct
its business therein, and if Tenant does not conduct its business from such
remaining portion, then during the period during which Tenant is so prevented
from conducting its business therein, the Rent (including parking charges, and
Operating Expenses escalation charges) for the entire Premises shall be abated;
provided, however, if Tenant reoccupies and conducts its business from any
portion of the Premises during such period, the rent allocable to such
reoccupied portion, based on the proportion that the rentable area of such
reoccupied portion bears to the total rentable area of the Premises, shall be
payable by Tenant from the date such business operations commence.
-77-
<PAGE>
EXHIBIT 10.39
NON-EXCLUSIVE
DISTRIBUTOR AGREEMENT
THIS LITRONIC NON-EXCLUSIVE DISTRIBUTOR AGREEMENT ("Agreement"), is entered
into as of the EFFECTIVE DATE set forth below by and between LITRONIC, Inc., a
California (U.S.A) corporation ("LITRONIC"), having its principal place of
business at 2030 Main, Suite 1250, Irvine, California 92614, U.S.A. and the
DISTRIBUTOR identified below.
This Agreement consists of the following Term Sheet, the Standard Terms and
Conditions and the Exhibits attached hereto.
TERM SHEET
1. EFFECTIVE DATE: ________________________
2. DISTRIBUTOR:
ITOCHU TECHNO-SCIENCE Corporation ("CTC")
Street Address: 11-5, Fujimi 1-Chome, Chiyoda-Ku, TOKYO, 102-0071 JAPAN
Telephone: +81-3-5526-1737 Facsimile: +81-3-5226-1729
ITOCHU CORPORATION ("ITC"; together with CTC, collectively, DISTRIBUTOR)
Street Address: 5-1, Kita-Aoyama 2-chome, Minato-ku, TOKYO, 107-77 JAPAN
Telephone : +81-3-3497-2419 Facsimile : +81-3-3497-4181
3. CONTACT PERSON: Kazuya Ishikawa ("CTC")
Title: Group Leader, Project Promoting Group, Electronic Commerce
Promotion Dept.
Contact Person's Telephone: +81-3-5526-1737
Contact Person's E-mail address: [email protected]
4. START DATE OF AGREEMENT: __________________________
5. END DATE OF AGREEMENT: December 31, 1999
<PAGE>
6. TERRITORY: JAPAN
7. PREPAYMENT: $160,000.00 ____________________
8. ANNUAL TARGET: $500,000.00
9. PRODUCT SCHEDULE AND DISCOUNT:
<TABLE>
<CAPTION>
Included in Product Minimum Discount
Schedule order
quantity
- ---------------------------------------------------------------------------------
Minimum
quantity
to 999
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Yes MULTIFLEX SMARTCARD 100 30%
Yes CRYPTOFLEX SMARTCARD 4K 100 30%
Yes CRYPTOFLEX SMARTCARD 8K 100 30%
Yes 210 READER 100 30%
Yes 215 READER 100 30%
Yes 410 READER 100 30%
Yes NETSIGN W/210 READER EXPORT 100 40%
Yes NETSIGN W/215 READER EXPORT 100 40%
Yes NETSIGN W/410 READER EXPORT 100 40%
Yes NETSIGN PRO W/210 READER EXPORT 100 40%
Yes NETSIGN PRO W/215 READER EXPORT 100 40%
Yes NETSIGN PRO W/410 READER EXPORT 100 40%
Yes PROFILE MANAGER EDK 1 40%
Yes PROFILE MANAGER EDK PLUS 1 40%
Yes PROFILE MANAGER 1 40%
Yes PROFILE MANAGER MAINTENANCE* 1 40%
Yes NETSIGN SUPPORT* N/A N/A
</TABLE>
*LITRONIC DOES NOT PROVIDE TECHNICAL SUPPORT TO CUSTOMERS OF DISTRIBUTOR.
LITRONIC SUPPORTS DISTRIBUTOR BY E-MAIL AND/OR TELEPHONE.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
<TABLE>
<S> <C>
LITRONIC, INC. ITOCHU TECHNO-SCIENCE
CORPORATION
By: By:
Name: Name:
Title: Title:
Date: Date:
ITOCHU CORPORATION
By: _____________________________
Name: ___________________________
Title : _________________________
Date : __________________________
</TABLE>
<PAGE>
STANDARD TERMS AND CONDITIONS
1. DEFINITIONS
Capitalized terms used and not otherwise defined in this Agreement or the
Exhibits hereto shall have the meanings shown below:
1.1 "Intellectual Property" means all of the following owned by a party: (i)
trademarks and service marks (registered and unregistered) and trade names, and
goodwill associated therewith; (ii) patents, patentable inventions, computer
programs, and software; (iii) databases; (iv) trade secrets and the right to
limit the use or disclosure thereof; (v) copyrights in all works, including
software programs; and (vi) domain names. The rights owned by a party in its
Intellectual Property shall be defined, collectively, as "Intellectual Property
Rights."
1.2 "Product(s)" shall mean those LITRONIC products that have been explicitly
included in this Agreement and specified on the term sheet. LITRONIC shall have
the right to withdraw any Product(s) from this Agreement upon ninety (90) days
advance written notice. Products shall also include modifications,
enhancements, corrections, or upgrades to the Products to be furnished by
LITRONIC to DISTRIBUTOR hereunder.
1.3 "Discount" shall mean the discount applicable to Unit Price for a product
as specified in the then current Reseller/Distributor Price List. The now
current Reseller/Distributor Price List is attached to this Agreement as
Exhibit A. All Reseller/Distributor Price Lists are incorporated in this
Agreement by this reference.
1.4 "Distributor" means trade dealers only, that is companies which sell
only to Resellers. The term "Distributor" does not include companies which sell
to end-users or purchase products for their own use.
1.5 "End-User" shall mean a customer or prospective customer of DISTRIBUTOR
that purchases a Product for its internal use.
1.6 "Reseller" means retail dealers only, that is companies which sell only to
end-users. The term "Reseller" does not include companies which sell to
distributors or purchase products for their own use.
1.7 "Territory" shall mean the distribution territory set forth on the Term
Sheet attached hereto.
1.8 "Trademarks" shall mean LITRONIC's registered and unregistered
trademarks, trade names and other commercial symbols, including but not limited
to those set forth in Exhibit B.
2. APPOINTMENT AS DISTRIBUTOR
2.1 Appointment. Subject to the terms and conditions of this Agreement,
-----------
LITRONIC hereby appoints DISTRIBUTOR, and DISTRIBUTOR hereby accepts such
appointment, as a non-exclusive Distributor and a non-exclusive Reseller for the
Products in the Territory. In connection with such appointment, to the extent
permitted by the laws of the Territory, LITRONIC grants DISTRIBUTOR a non-
exclusive and non-transferable right to promote, market, sub-license and solicit
orders in the Territory from Resellers and end-users for the Products and
services described in the Term Sheet.
<PAGE>
2.2 Authorization. DISTRIBUTOR may represent itself as a distributor for the
-------------
Products. DISTRIBUTOR shall not represent that it is otherwise affiliated with
LITRONIC. DISTRIBUTOR is authorized to represent to Resellers and end-users for
the Products only such facts about LITRONIC and the Products as LITRONIC posts
on its Web site or as are contained in other published advertising and
promotional materials.
2.3 Independent Contractors. The relationship of LITRONIC and DISTRIBUTOR is
-----------------------
that of independent contractors. Neither DISTRIBUTOR nor DISTRIBUTOR's
employees, consultants, contractors or agents are agents, employees, partners or
joint venturers of LITRONIC, nor do they have any authority to bind LITRONIC by
contract or otherwise to any obligation. They will not represent to the
contrary, either expressly, implicitly, by appearance or otherwise.
2.4 End-User License Agreement. DISTRIBUTOR shall (i) prepare an end-user
- --- --------------------------
license agreement (the "End-User License Agreement") in Japanese language which
shall contain similar terms and restrictions and provide the same protection to
LITRONIC as those set forth in the LITRONIC`s standard end-user license
agreement which is attached hereto as Exhibit D, and (ii) enter into the End-
User License Agreement with each end-user for the software Products sub-licensed
by DISTRIBUTOR. DISTRIBUTOR shall provide an English version of its End-User
License Agreement which Litronic shall have the right to approve prior to use by
DISTRIBUTOR.
3. MARKETING LITRONIC PRODUCTS
3.1 Program Orientation. Within the first sixty (60) days after the Effective
-------------------
Date, DISTRIBUTOR will cause certain employees to obtain the training outlined
in Exhibit C attached hereto. To the extent such training requires that
DISTRIBUTOR's personnel travel, DISTRIBUTOR shall bear the travel and lodging
expenses of such personnel.
3.2 Sales Collateral. LITRONIC shall provide DISTRIBUTOR with a reasonable
----------------
number of copies of the sales collateral related to each Product as are
specified in Term Sheet. DISTRIBUTOR will be responsible for creation of all
collateral materials relating to the TERRITORY. DISTRIBUTOR shall bear the
costs for all such materials required to satisfactorily market and sell the
Products, including any translation costs. A copyright for such materials
translated by DISTRIBUTOR shall be possessed by DISTRIBUTOR and assigned to
LITRONIC at the time of termination or expiration of this Agreement as set forth
in Section 8.1 below.
3.3 DISTRIBUTOR Efforts. During the term of this Agreement, DISTRIBUTOR shall
-------------------
use its commercially reasonable efforts to market and promote the Products to
Resellers and end-users for the Products in the Territory. Without limiting the
generality of the foregoing, DISTRIBUTOR shall undertake the specific marketing
activities for each Product, which are set forth in the Term Sheet.
3.4 Product Resale. DISTRIBUTOR shall resell the Products only to Resellers
--------------
for resale to end users and, directly, to End-Users for the Products.
3.5 Market Area. LITRONIC shall be the sole and final arbiter of any question
-----------
whether a specific Reseller is within the Territory.
3.6 Prepayment. Within thirty (30) days after the Effective Date,
DISTRIBUTOR shall pay to LITRONIC an up-front fee (the "Up-Front Fee") for the
Products in the amount of One Hundred Sixty Thousand United States Dollars (USD
160,000) as specified on Section 7 of the term sheet above.
<PAGE>
DISTRIBUTOR shall have the right to apply all of the Up-Front Fee as a credit
against all future fees for the Products payable by DISTRIBUTOR pursuant to
Section 5 (PURCHASE AND PAYMENT TERM) below, and for the future fees for the
Products to be paid by DISTRIBUTOR as an end-user for the Products.
3.7 Annual Target. LITRONIC and DISTRIBUTOR have established annual target
-------------
purchase quota for the Products during the period commencing from the Effective
Date and ending on December 31, 1999 as set forth in Section 8 of the term sheet
above (the "Target Purchase Quota"), and CTC shall use its commercially
reasonable efforts to meet the Target Purchase Quota. Notwithstanding anything
contained herein to the contrary and for avoidance of doubts, the parties
acknowledge and agree that the Target Purchase Quota shall not be construed as
creating any legally binding obligation of DISTRIBUTOR to purchase those amounts
of the Products.
3.8 DISTRIBUTOR Personnel. DISTRIBUTOR will train and maintain a sufficient
---------------------
number of capable technical and sales personnel, minimum of one full-time
employee, having the knowledge and training necessary to: (i) inform potential
Resellers and End Users properly concerning the features and capabilities of the
Products and, if necessary, competitive products; (ii) service and support the
Products in accordance with DISTRIBUTOR's obligations under this Agreement; and
(iii) otherwise carry out the obligations and responsibilities of DISTRIBUTOR
under this agreement.
3.9 Technical Expertise. DISTRIBUTOR warrants that its staff will be
-------------------
conversant with the technology contained in the Products and similar
technologies in general, and will develop sufficient knowledge of the industry
and products competitive with the Products (including specifications, features
and benefits) so as to be able to explain in detail to its potential Resellers
and End Users the differences between the Products and competitive products.
3.10 DISTRIBUTOR Covenants. DISTRIBUTOR will: (i) conduct business in a manner
---------------------
that reflects favorable at all times on the Products and the good name, good
will and reputation of LITRONIC; (ii) avoid deceptive, misleading or unethical
practices that are or might be detrimental to LITRONIC, the Products and
services or the public; (iii) make no false or misleading representations with
regard to LITRONIC, or the Products; (iv) not publish or employ, or cooperate in
the publication or employment of, any misleading or deceptive advertising
material with regard to LITRONIC or the Products; and (v) make no
representation, warranties or guarantees to potential Resellers or End Users or
to the trade with respect to the specifications, features or capabilities of the
Products that are inconsistent with the literature distributed by LITRONIC.
3.11 Costs and Expenses. Except as expressly provided herein or agreed to in
------------------
writing by LITRONIC and DISTRIBUTOR, DISTRIBUTOR will pay all costs and expenses
incurred in the performance of DISTRIBUTOR's obligations under this Agreement.
3.12 Marketing Activities. DISTRIBUTOR shall develop and execute a marketing
--------------------
plan sufficient to fulfill its obligations under this Agreement. To the extent
LITRONIC offers and this is agreed to by DISTRIBUTOR in advance, DISTRIBUTOR
agrees to participate with LITRONIC in joint marketing activities with respect
to certain Products.
3.13 Compliance with Laws. DISTRIBUTOR will comply with all applicable
--------------------
international, national, state, regional and local laws and regulations in
performing its duties hereunder and in any of its dealings with respect to the
Products.
<PAGE>
3.14 Governmental Approval. If any approval with respect to this Agreement, or
---------------------
the notification or registration hereof, will be required at any time during the
term of this Agreement, with respect to giving legal effect to this Agreement in
any jurisdiction in which DISTRIBUTOR is operating, or with respect to
compliance with exchange regulations or other requirements so as to assure the
right of remittance from abroad of U.S. Dollars, DISTRIBUTOR will immediately
take whatever steps may be necessary in this respect, and any charges incurred
in connection therewith will be for the account of DISTRIBUTOR. DISTRIBUTOR
will keep LITRONIC currently informed of its efforts in this connection.
LITRONIC will be under no obligation to ship any Products or other materials to
DISTRIBUTOR hereunder until DISTRIBUTOR has provided LITRONIC with satisfactory
evidence that such approval, notification or registration is not required or
that it has been obtained.
4. TECHNICAL SUPPORT
4.1 Reseller Support. DISTRIBUTOR shall provide all technical support relating
----------------
to its own products and services, and to the Products as described in the TERM
SHEET, directly to its Resellers and End-Users for the Products. DISTRIBUTOR
shall provide LITRONIC with a telephone number for LITRONIC to contact
DISTRIBUTOR directly for DISTRIBUTOR's support under this Section 4. If
LITRONIC receives such an inquiry, LITRONIC shall provide the inquiring party
with the telephone number of DISTRIBUTOR, and DISTRIBUTOR shall be responsible
for providing support to such party.
4.2 DISTRIBUTOR Support. LITRONIC shall provide DISTRIBUTOR with the technical
-------------------
support services for each Product as set forth in the TERM SHEET.
4.3 Maintenance Contract. Litronic shall provide DISTRIBUTOR with product
--------------------
updates and upgrades to new releases of the same products for software products
with a current maintenance contract. Litronic will provide technical support to
DISTRIBUTOR and DISTRIBUTOR will provide technical support to end-user."
5. PURCHASE AND PAYMENT TERMS
5.1 Forecasts, Purchase and Sale. DISTRIBUTOR shall submit quarterly non-
binding forecasts of its requirements for Products to LITRONIC at least forty-
five (45) days in advance of each calendar quarter. DISTRIBUTOR will, at its
sole discretion, maintain reasonable stock levels for the Products. LITRONIC
agrees to sell to DISTRIBUTOR those Products order by DISTRIBUTOR at the prices
set forth in Reseller/Distributor Price List described in Exhibit A attached
hereto reduced by the discount percentage set forth in Section 9 of the term
sheet above and under the conditions specified in this Agreement during the term
of this Agreement. Product orders will be placed by DISTRIBUTOR's issuance of a
purchase order. The terms and conditions of this Agreement shall supersede the
terms and conditions of any purchase order issued by DISTRIBUTOR (or any order
acknowledgements and invoices issued by LITRONIC). Any additional or
conflicting purchase order terms and conditions (and order acknowledgment and
invoice terms and conditions) shall be deemed null and void and shall be of no
force or effect.
5.2 Payments for LITRONIC Products. DISTRIBUTOR shall be responsible for
------------------------------
invoicing Resellers (and end users) and collecting invoiced amounts from
Resellers (and end users) for all Products licensed, sold or otherwise
distributed on the basis of orders solicited by DISTRIBUTOR. For the Products
licensed, sold or otherwise distributed based upon orders solicited by
DISTRIBUTOR, DISTRIBUTOR will pay LITRONIC the amounts set forth in the
applicable Reseller/Distributor Price List described in
<PAGE>
Exhibit A attached hereto reduced by the discount percentage set forth in
Section 9 of the term sheet above, in the manner and at the time set forth in
Section 5.4 (Terms of Payment) below. DISTRIBUTOR's payments shall not be
affected by Resellers payments or non- payment for the Products ordered.
5.3 Price Changes. LITRONIC's prices for the Products as of the date of this
-------------
Agreement are set forth in the applicable Reseller/Distributor Price List
attached hereto as Exhibit A. LITRONIC reserves the right to change the prices
for any LITRONIC Product or any other product or service at any time. Price
decreases shall take effect immediately upon announcement. In the event of a
price increase, LITRONIC shall provide DISTRIBUTOR with sixty (60) days' advance
notice. Such changes shall not require DISTRIBUTOR's approval. In the event of
any price increase, LITRONIC shall be bound to honor any orders placed at the
prices in effect prior to price increase (which effective date shall be the 61st
day following LITRONIC's written notice described in this Section 5.3).
Notwithstanding any increase in LITRONIC's price, if DISTRIBUTOR shall deliver
to LITRONIC a copy of the quotation furnished to its potential customer(s) no
later than five (5) business days after the receipt of notice for the price
increase and LITRONIC has received firm order from such customer(s) within
ninety (90) days after the effective date of such price increase, ex-price shall
apply to such orders. DISTRIBUTOR shall determine its own market prices for the
Products and for other products and services it sells, licenses or otherwise
distributes or makes available.
5.4 Terms of Payment. Amounts due LITRONIC hereunder shall be wire transferred
to LITRONIC's designated bank account by DISTRIBUTOR Invoices shall be due and
payable on or before the sixtieth (60th) day after the date of invoice issued by
LITRONIC for the full amount owed for the ordered and delivered Products. A late
payment penalty on any amounts not paid when due shall be assessed at the rate
of one and one-half percent (1 1/2%) per thirty (30) days or the maximum rate
permitted by law, whichever is less. Such late payment penalty shall accrue
beginning on the sixty-first (61st) day after the day the invoice was issued.
All payments to LITRONIC shall be made directly to the bank nominated by
LITRONIC in United States Dollars, free of any currency control or other
restrictions to LITRONIC and with all transfer charges paid by the DISTRIBUTOR.
5.5 Taxes. Except for the withholding income tax described below in this
-----
Section 5.5, DISTRIBUTOR shall pay, indemnify and hold LITRONIC harmless from
(i) any sales, use, excise, import or export, value-added, or similar tax or
duty, and any other tax or duty not based on LITRONIC's income, and (ii) all
government permit fees, customs fees and similar fees which LITRONIC may incur
with respect to this Agreement. Such taxes, fees and duties paid by DISTRIBUTOR
shall not be considered a part of, a deduction from, or an offset against,
payments due to LITRONIC hereunder. LITRONIC acknowledges and agrees that the
payment for the software Products pursuant to this Agreement by DISTRIBUTOR to
LITRONIC shall be subject to the withholding income tax based on (i) Sections
161-7-2, 178, 179-1, and 212 of Income Tax Laws of Japan, and (ii) Article 14 of
the Tax Convention between U.S.A. and Japan (the "USA/Japan Tax Convention").
DISTRIBUTOR shall (i) withhold such tax from the payment to LITRONIC, (ii) pay
such tax to the Japanese tax authority on behalf of LITRONIC, and (iii) transmit
to LITRONIC an official tax receipt issued by the Japanese tax authority after
such tax payment. LITRONIC shall execute and deliver to DISTRIBUTOR an
appropriate application form and DISTRIBUTOR shall execute such application form
and file it with a competent tax office in Japan in order to reduce an
applicable tax rate of withholding income tax in accordance with the USA/Japan
Tax Convention.
5.6 Audit Rights. LITRONIC shall have the right, at its sole cost and expense,
------------
to have an independent certified public accountant conduct during normal
business hours and not more frequently
<PAGE>
than annually, an audit of the appropriate records of DISTRIBUTOR to verify the
volume of Products licensed or otherwise distributed by DISTRIBUTOR and
DISTRIBUTOR's calculation of amounts payable to LITRONIC therefor in the case
where the applicable Distributor Price List specifies that DISTRIBUTOR is
required to report amounts payable with respect to the Products. If the amounts
accrued are different than those reported, DISTRIBUTOR will be invoiced or
credited for the difference, as applicable. Any additional amounts, along with
the late payment penalty assessed in accordance with Section 5.4, shall be
payable within thirty (30) days of such invoice. If the deficiency in the
amounts paid by DISTRIBUTOR is greater than five percent (5%) of the amounts
reported by DISTRIBUTOR for any reporting period, DISTRIBUTOR will pay the
reasonable expenses associated with such audit, in addition to the deficiency.
5.7 Itochu Technology, Inc. (ITI USA"). DISTRIBUTOR hereby engages ITI USA, a
Delaware corporation with its office currently located at 3100 Patrick Henry
Drive, Santa Clara, CA 95054 or any successor entity to act as an order
processing agent acting for and on behalf of DISTRIBUTOR with its authority
including, without limitation, to receive shipment, place orders and effect
payments from, with and to LITRONIC, respectively, on behalf of DISTRIBUTOR.
DISTRIBUTOR shall be responsible to LITRONIC for any act or omission of ITI USA
regarding its activities contemplated herein.
6. CONFIDENTIALITY
6.1 Confidential Information. The parties acknowledge that in their
------------------------
performance of their duties hereunder either party may communicate to the other
(or its designees) certain confidential and proprietary information, including
without limitation information concerning DISTRIBUTOR's products and services,
LITRONIC's products and services, and the know-how, technology, techniques, or
business or marketing plans related thereto (collectively, the "Confidential
Information") all of which are confidential and proprietary to, and trade
secrets of, the disclosing party. Confidential Information does not include
information that: (i) is public knowledge at the time of disclosure by the
disclosing party; (ii) becomes public knowledge or known to the receiving party
after disclosure by the disclosing party other than by breach of the receiving
party's obligations under this Section 6 or by breach of a third party's
confidentiality obligations; (iii) was known by the receiving party prior to
disclosure by the disclosing party other than by breach of a third party's
confidentiality obligations; (iv) is independently developed by the receiving
party, or (v) is required to be disclosed pursuant to any statutory or
regulatory provision or court order.
6.2 Protection of Confidential Information. As a condition to the receipt of
--------------------------------------
the Confidential Information from the disclosing party, the receiving party
shall: (i) not disclose in any manner, directly or indirectly, to any third
party any portion of the disclosing party's Confidential Information; (ii) not
use the disclosing party's Confidential Information in any fashion except to
perform its duties hereunder or with the disclosing party's express prior
written consent; (iii) disclose the disclosing party's Confidential Information,
in whole or in part, only to employees and agents who need to have access
thereto for the receiving party's internal business purposes; (iv) take all
necessary steps to ensure that its employees and agents are informed of and
comply with the confidentiality restrictions contained in this Agreement; and
(v) take all necessary precautions to protect the confidentiality of the
Confidential Information received hereunder and exercise at least the same
degree of care in safeguarding the Confidential Information as it would with its
own confidential information, and in no event shall apply less than a reasonable
standard of care to prevent disclosure. The receiving party shall promptly
notify the disclosing party of any unauthorized disclosure or use of the
Confidential Information arising under this Agreement. The receiving party
shall cooperate and assist the disclosing party in preventing or remedying any
such unauthorized use or disclosure.
<PAGE>
6.3 Injunctive Relief. Both parties acknowledge that the restrictions
-----------------
contained in this Section 6 are reasonable and necessary to protect their
legitimate interests and that any violation of these restrictions will cause
irreparable damage to the other party. Each party agrees that damages are not
an adequate remedy for any such violation and that the other party will be
entitled to injunctive relief against each violation.
7. TRADEMARK RIGHTS
7.1 License. LITRONIC grants DISTRIBUTOR the nonexclusive right and license to
-------
use LITRONIC's Trademarks during the term of this Agreement solely in
conjunction with the marketing, promotion and resale of the Products. LITRONIC
grants no rights in the Trademarks or in any other trademark, trade name,
service mark, business name or goodwill of LITRONIC except as licensed hereunder
or by separate written agreement of the parties. DISTRIBUTOR agrees that it
will not at any time during or after this Agreement assert or claim any interest
in or do anything that may adversely affect the validity of any Trademark or any
other trademark, trade name or product designation belonging to or licensed to
LITRONIC (including, without limitation registering or attempting to register
any Trademark or any such other trademark, trade name or product designation).
7.2 No Confusing Use. During the term of this Agreement, DISTRIBUTOR agrees
----------------
not to use any trademark, trade name or product name confusingly similar to a
trademark, trade name or product name of LITRONIC, as expressly licensed in
Section 7.1.
7.3 Marking Requirements. DISTRIBUTOR agrees to (i) use the appropriate
--------------------
trademark, logo, product descriptor and trademark symbol (either "TM" or "(R)"
or local equivalents), (ii) clearly indicate LITRONIC's ownership of the
Trademarks whenever the Trademarks are first mentioned in any document, and
(iii) comply with the other usage requirements set forth in LITRONIC's Trademark
and Logo Usage Guide provided to DISTRIBUTOR from time to time.
7.4 No Continuing Rights. Upon expiration or termination of this Agreement,
--------------------
DISTRIBUTOR will immediately cease all display, advertising and use of all of
the Trademarks and will not thereafter use, advertise or display any trademark,
trade name or product designation which is, or any part of which is, similar to
or confusing with any Trademark or with any trademark, trade name or product
designation associated with LITRONIC or any Product.
8. INTELLECTUAL PROPERTY RIGHTS
8.1 Ownership. Other than the express licenses granted by this Agreement,
---------
LITRONIC grants no right or license to DISTRIBUTOR by implication, estoppel or
otherwise to the Products or any Intellectual Property Rights of LITRONIC. Each
party shall retain all ownership rights, title, and interest in and to its own
products and services (including in the case of LITRONIC, in the Products) and
all intellectual property rights therein, subject only to the rights and
licenses specifically granted herein. To the extent that DISTRIBUTOR translates,
or causes to be translated, any of LITRONIC's marketing materials, user manuals
or other documentation, DISTRIBUTOR agrees to assign all copyrights in such
translations to LITRONIC at the time of termination or expiration of this
Agreement.
8.2 Obtaining Rights. LITRONIC (and not DISTRIBUTOR) shall have the sole
----------------
right, but not the obligation, to pursue copyright, patent and trademark
protection, in its sole discretion, for the Products and any Intellectual
Property Rights incorporated therein. DISTRIBUTOR will provide reasonable
<PAGE>
assistance to LITRONIC in pursuing such protection, including without limitation
executing and delivering to LITRONIC such instruments as may be required to
register or perfect LITRONIC's interests in any Intellectual Property Rights and
any assignments thereof.
8.3 Pursuit of Infringers. DISTRIBUTOR shall notify LITRONIC of infringements
---------------------
of LITRONIC's Intellectual Property Rights of which DISTRIBUTOR becomes aware.
DISTRIBUTOR shall reasonably assist LITRONIC, at no cost to DISTRIBUTOR, in
pursuing LITRONIC's legal rights against any such infringers. LITRONIC, at its
sole discretion, shall determine whether to pursue any particular case of
infringement.
8.4 Proprietary Markings and Copyright Notices. DISTRIBUTOR shall not remove
------------------------------------------
or destroy any proprietary, confidentiality, trademark, service mark, or
copyright markings or notices placed upon or contained in any materials or
documentation received from LITRONIC in connection with this Agreement.
9. INDEMNITIES
9.1 DISTRIBUTOR Indemnity. DISTRIBUTOR's indemnity obligations under Section
---------------------
9.3 shall apply to any claim, suit or proceeding by a third party against
LITRONIC and any of its directors, officers, agents, employees, contractors,
parent companies, affiliates, and/or subsidiaries (collectively, the "LITRONIC
Parties") based on or arising out of (i) the misconduct or omissions of
DISTRIBUTOR in connection with (A) its performance or failure to perform any
other obligations in this Agreement or any agreement with an Reseller or End-
User of the Products, and (B) any other product or service provided by
DISTRIBUTOR to Resellers or End-User of the Products; and (ii) any unauthorized
representation or any misrepresentation of fact to any third party with respect
to one or more of the LITRONIC Parties or the LITRONIC Products made by
DISTRIBUTOR or any director, officer, agent, or employee of DISTRIBUTOR.
9.2 LITRONIC Indemnity. LITRONIC's indemnity obligations under Section 9.3
------------------
shall apply to any claim, suit or proceeding by a third party against
DISTRIBUTOR and any of its directors, officers, agents, employees, contractors,
parent companies, affiliates, and/or subsidiaries (collectively, the
"DISTRIBUTOR Parties") based on or arising out of (i) the misconduct or
omissions of LITRONIC in connection with (A) its performance or failure to
perform the obligations in this Agreement, and (B) any Products provided to
DISTRIBUTOR under this Agreement; (ii) any unauthorized representation or any
misrepresentation of fact to any third party with respect to one or more of
DISTRIBUTOR Parties made by LITRONIC or any director, officer, agent, or
employee of LITRONIC, or (iii) any third party claims of patent or copyright
infringement or trade secret misappropriation to the extent such claims arise
directly from the LITRONIC proprietary components of the Product.
9.3 Notices and Indemnities. Subject to the limitations set forth herein, each
-----------------------
party (the "Indemnifying Party"), at its own expense, shall (a) defend, or at
its option settle, any claim, suit, or proceeding against the other party (the
"Indemnified Party") for which it has an indemnification obligation under this
Agreement and (b) pay any final judgment entered or settlement (including
attorneys' fee) against the Indemnified Party in any such suit or proceeding
defended by the Indemnifying Party. An Indemnifying Party shall not take any
action to settle or defend any such claim, suit, or proceeding that would in any
manner impose obligations (monetary or otherwise) on an Indemnified Party
without the Indemnified Party's written consent. An Indemnified Party shall
have the right to participate in the defense of any claim with its own counsel
and shall be responsible for all costs associated therewith. An Indemnifying
Party shall have the right to control and direct the investigation,
<PAGE>
preparation, defense, and settlement of the claim, and the Indemnified Party
shall reasonably cooperate with the Indemnifying Party in the defense of such
claim at the Indemnifying Party's expense. In addition, an Indemnified Party
shall give the Indemnifying Party prompt written notice of any claim, suit, or
proceeding for which the Indemnifying Party has an indemnification obligation
under this Agreement. In the event such notice is not promptly given, the
Indemnifying Party's obligation hereunder shall not include any additional
expenses or damages to the extent attributable to such failure or delay of
notice.
9.4 Injunction. If claim for infringement described in Section 9.2 above has
----------
occurred or in LITRONIC's opinion is likely to occur, LITRONIC shall, at its
option and expense, either (i) procure for DISTRIBUTOR the right to continue a)
using and/or distributing the Products, or b) using the Trademarks or (ii) to
replace or modify the same so that it becomes non-infringing to the extent that
functions of the Products is maintained. If neither of the foregoing is
reasonably available, LITRONIC shall refund to DISTRIBUTOR the price thereof
less a reasonable amount for use, damage and obsolescence.
10. LIMITED WARRANTY
10.1 Limited Warranty. LITRONIC warrants to DISTRIBUTOR that the hardware
----------------
Products is free from defects in materials and workmanship for a period of (i)
fifteen (15) months from the date of shipment from LITRONIC to DISTRIBUTOR or
(ii) one (1) year from the date of installation of the Products at end-user's
site, whichever comes first ("the Warranty Period"). LITRONIC warrants to
DISTRIBUTOR that the delivered software Products will materially conform to the
functional specifications set forth in the manuals. Should a Product fail to
comply with this Limited Warranty at any time during the Warranty Period, the
purchaser's sole and exclusive remedy is for LITRONIC, at its option, to either
repair or replace the Product as described below, provided that in LITRONIC's
sole determination the part or Product has not been abused, misused, repaired or
modified. All Products will be serviced and returned via air at no charge to
DISTRIBUTOR. In the event LITRONIC is unable to repair or replace the Product
within a reasonable period of time, DISTRIBUTOR's sole and exclusive remedy is
to receive reimbursement of the amount DISTRIBUTOR actually paid for the
Product.
10.2 Returns. All returns under this Limited Warranty require a Return
-------
Merchandise Authorization number (RMA #) provided by LITRONIC Customer Service.
Products which require Limited Warranty service during the Warranty Period must
be delivered to LITRONIC at the address listed below. The RMA # should be
prominently displayed on the outside of the shipping container. Replacement
parts or complete products will be furnished on an exchange basis only.
Replaced parts or products become the property of LITRONIC.
Returns Department, Litronic, Inc.
17895 Sky Park Circle, Suite A, Irvine, CA 92614
Tel (949) 851-1085, E-mail: [email protected]
10.3 Shipping. DISTRIBUTOR agrees to pay shipping charges to LITRONIC or
--------
directly to the carrier, insure the Product or assume the risk of loss or damage
-
which may occur in transit, and to use a shipping container equivalent to the
original packaging. If any labor, repair or parts replacement is required
because of accident, negligence, misuse, theft, vandalism, fire, water or other
peril, or because of conditions outside of specifications, including, but not
limited to, electric power, temperature, humidity, or dust; or by moving,
repair, relocation, or alteration not performed by LITRONIC, or by any other
cause other than normal use, this Limited Warranty shall be void and shall not
apply.
<PAGE>
10.4 Duty and Sales Tax. DISTRIBUTOR agrees to pay any applicable duties sales
------------------
taxes or similar charges. LITRONIC Products are supplied to the DISTRIBUTOR FOB,
-
Irvine, California, USA. As used herein, the term "FOB" shall be construed in
accordance with California Commercial Code Section 2-319.
10.5 Applicability. This Limited Warranty shall not be applicable to the
-------------
extent that any provision of this Limited Warranty is prohibited by or contrary
to, any international, federal, state or local law or regulation which cannot be
preempted. This Limited Warranty gives the purchaser specific legal rights, but
the purchaser may have different or additional legal rights, depending on the
jurisdiction in which the purchaser is located.
10.6 Year 2000 Compliance. Subject to the limitations set forth in Section
- ---- --------------------
11.2 herein, LITRONIC represents and warrants that the Products accurately
process date/time data (including, but not limited to, calculating, comparing,
and sequencing) from, into, and between the twentieth and twenty-first
centuries, and the years 1999 and 2000 and leap year calculations by using four
digit year format, and that such processing shall not require user to invoke
special procedures, subject to the condition that other information technology,
used in combination with the Products, properly exchanges date/time data with
it. Notwithstanding anything contained herein to the contrary, the remedies
available to DISTRIBUTOR under this warranty shall include repair or replacement
of any Product whose non-compliance is discovered and made known to LITRONIC in
writing within ninety (90) days after discovery. Nothing in this warranty shall
be construed to limit any rights or remedies DISTRIBUTOR may otherwise have
under this Agreement with respect to defects other than Year 2000 performance.
11. DISCLAIMER OF WARRANTIES; LIMITATION OF LIABILITY
11.1 Disclaimer. EXCEPT FOR (I) THE EXPRESS LIMITED WARRANTY PROVIDED IN THIS
----------
AGREEMENT, AND (II) YEAR 2000 COMPLIANCE DESCRIBED IN SECTION 10.6 ABOVE AND AS
LIMITED BY SECTION 11.2 HEREIN, LITRONIC'S PRODUCTS AND SERVICES ARE PROVIDED
"AS IS" WITHOUT ANY WARRANTY WHATSOEVER. LITRONIC DISCLAIMS ALL WARRANTIES,
EXPRESS, IMPLIED, OR STATUTORY, TO DISTRIBUTOR AS TO ANY MATTER WHATSOEVER,
INCLUDING ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE AND NON-INFRINGEMENT OF THIRD PARTY RIGHTS. NO ORAL OR WRITTEN
INFORMATION OR ADVICE GIVEN BY LITRONIC OR ITS EMPLOYEES OR REPRESENTATIVES
SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF LITRONIC'S
OBLIGATIONS.
11.2 Limitation of Liability. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY
-----------------------
OR TO ANY OTHER THIRD PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL,
INCIDENTAL, RELIANCE, OR EXEMPLARY DAMAGES ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE LITRONIC PRODUCTS, WHETHER FORESEEABLE OR UNFORESEEABLE, AND
WHETHER BASED ON BREACH OF ANY EXPRESS OR IMPLIED WARRANTY, BREACH OF CONTRACT,
MISREPRESENTATION, GROSS NEGLIGENCE, STRICT LIABILITY IN TORT, OR OTHER CAUSE
OF ACTION (INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOSS OF DATA, GOODWILL,
PROFITS, INVESTMENTS, USE OF MONEY, OR USE OF FACILITIES; INTERRUPTION IN USE OR
AVAILABILITY OF DATA; STOPPAGE OF OTHER WORK OR IMPAIRMENT OF OTHER ASSETS; OR
LABOR CLAIMS), EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. UNDER NO CIRCUMSTANCES SHALL LITRONIC'S TOTAL LIABILITY TO DISTRIBUTOR
OR
<PAGE>
ANY THIRD PARTY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE AMOUNT
PAID BY DISTRIBUTOR UNDER THIS AGREEMENT TO A MAXIMUM OF ONE MILLION DOLLARS
($1,000,000.00), REGARDLESS OF WHETHER AN ACTION OR CLAIM IS BASED ON WARRANTY,
CONTRACT, TORT OR OTHERWISE. NO ACTION MAY BE BROUGHT BY A PARTY AGAINST THE
OTHER PARTY BEYOND TWO (2) YEARS AFTER THE CAUSE OF ACTION HAS ARISEN OR SHOULD
HAVE ARISEN.
12. FORCE MAJEURE
In no event shall either party be responsible for delays in delivery or
performance when the same are the result of any cause beyond such party's
control.
13. TERM AND TERMINATION
13.1 Term and Termination. The term of this Agreement shall commence on the
start date of the Agreement as set forth in Section 4 of the term sheet above
and, unless earlier terminated pursuant to the terms of this Agreement, will
continue until December 31, 1999. This Agreement shall be automatically extended
on a year to year basis unless either party shall give written notice of non-
renewal to the other party not less than sixty (60) days prior to the expiration
of the then current term. The parties agree that the Limitation of Liability
provision of Section 11.2 shall apply to any termination of this Agreement by
either party. DISTRIBUTOR waives any right it may have to receive any
compensation or reparations on termination or expiration of this Agreement or
any rights hereunder under the law of any jurisdiction, other than as expressly
provided in this Agreement. Neither party shall be liable to the other party in
the event of termination, expiration or failure to agree upon an extension of
the term of this Agreement for compensation, reimbursement or damages on account
of loss of prospective profits, or anticipated sales, or on account of
expenditures, investments, leases or commitments in connection with the business
or goodwill of the other party.
13.2 Termination for Default. Either party may terminate this Agreement at any
-----------------------
time on written notice to the other in the event of a material default by the
other party and a failure to cure such default within a period of thirty (30)
days following receipt of written notice specifying that a default has occurred.
13.3 Insolvency. Either party may terminate this Agreement at any time upon
----------
(i) the institution of any proceedings by or against the other party seeking
relief, reorganization or arrangement under any laws relating to insolvency,
which proceedings are not dismissed within sixty (60) days; (ii) the assignment
for the benefit of creditors, or the appointment of a receiver, liquidator or
trustee, of the other party's property or assets; or (iii) the liquidation,
dissolution or winding up of the other party's business.
13.4 Effect of Termination. Upon the expiration or termination of this
---------------------
Agreement, DISTRIBUTOR shall cease using, marketing, promoting and soliciting
orders for the Products. DISTRIBUTOR will discontinue the use of all
Trademarks. Upon the expiration or termination of this Agreement, LITRONIC will
provide support to End-Users of the Products referred by DISTRIBUTOR. Any
expiration or termination of this Agreement shall not discharge any obligation
to make payments which have accrued or are owing as of the effective date of
such expiration or termination or which accrue after expiration or termination
for LITRONIC Products shipped or invoiced upon orders placed before such
expiration or termination. Termination or expiration of this Agreement shall not
terminate or cancel any sublicense to the software Products granted by
DISTRIBUTOR to the End-User of the Products hereunder prior to the termination
or expiration of this Agreement.
<PAGE>
13.5 Return of Confidential Information. Upon expiration or termination of
----------------------------------
this Agreement for any reason, each party shall return the other party's
Confidential Information to it, or, with the prior written consent of the other
party, shall destroy the other party's Confidential Information. Each party
shall certify to the other in writing within thirty (30) days of expiration or
termination that such party has returned or destroyed all of such Confidential
Information.
13.6 Survival of Terms. Expiration or termination of this Agreement shall not
-----------------
relieve either party of any obligations that accrue prior to the date of such
expiration or termination. The provisions of Sections 3.11, 3.14, 5, 6, 7, 8, 9,
10, 11, 13.1, 13.4, 13.5, 13.6, 14.1, 14.6, 14.8 and 14.9 of this Agreement
shall survive the expiration or termination of this Agreement for any reason;
provided, however, that Section 6 shall survive for five (5) years thereafter .
14. MISCELLANEOUS PROVISIONS
14.1 Governing Law, Waiver of Jury Trial and Arbitration. This Agreement shall
---------------------------------------------------
be governed by and construed in accordance with the laws of the State of
California, U.S.A. (irrespective of its choice of law principles). The parties
agree that the United Nations Convention on Contracts for the International Sale
of Goods shall not apply to this Agreement. The parties hereby waive any right
to jury trial with respect to any action brought in connection with this
Agreement. Any and all disputes arising directly or indirectly out of or
relating in any way to this Agreement which can not be satisfactorily resolved
by the parties shall be submitted to binding arbitration pursuant to the Rules
then in effect of the American Arbitration Association for any petition brought
by LITRONIC, or of Conciliation and Arbitration of the International Chamber of
Commerce (Paris) for any petition brought by DISTRIBUTOR. Arbitration shall be
held in the city and country where the petitioner resides. The arbitrator(s)
shall decide the matters submitted to them based upon the evidences presented
and the terms of this Agreement and arbitrator(s) shall issue a written award
which shall state the basis of the award and include findings of fact and
conclusions of law. The award of the arbitration shall be final, non-appealable
and binding upon the parties and their respective successors and permitted
assigns. Judgment upon the award may be entered in any court having the
jurisdiction thereof.
14.2 Binding upon Successors and Assigns. Except as otherwise provided herein,
-----------------------------------
this Agreement shall be binding upon, and inure to the benefit of, the
successors, representatives and assigns of the parties hereto. This Agreement
shall not be assignable by DISTRIBUTOR by operation of law (including as a
result of a merger or a transfer of a controlling interest in DISTRIBUTOR's
voting securities) or otherwise without the prior written authorization of
LITRONIC, which shall not be unreasonably withheld. Any such purported
assignment shall be void and of no effect and shall permit LITRONIC to terminate
this Agreement.
14.3 Severability. If any provision of this Agreement shall be invalid or
------------
unenforceable, the remainder of this Agreement shall be interpreted so as best
to reasonably effect the intent of the parties hereto. IT IS EXPRESSLY
UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT WHICH
PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF
DAMAGES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER
PROVISION AND TO BE ENFORCED AS SUCH.
14.4 Entire Agreement. This Agreement, and the Exhibits and Distributor Price
----------------
Lists attached hereto constitute the entire understanding and agreement of the
parties with respect to the subject matter hereof
<PAGE>
and supersede all prior and contemporaneous negotiations, representations,
agreements or understandings between the parties.
14.5 Amendment and Waivers. Except as otherwise expressly provided in this
---------------------
Agreement, any term or provision of this Agreement may be amended, and the
observance of any term of this Agreement may be waived, only by a writing signed
by the party to be bound.
14.6 Attorneys' Fees. Should suit be brought to enforce or interpret any part
---------------
of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and costs.
14.7 Notices. Any notice, demand, or request with respect to this Agreement
-------
shall be in writing and shall be effective only if it is delivered by a courier
service that confirms delivery in writing, or mailed, certified or registered
mail, postage prepaid, return receipt requested, and in each case addressed to
the parties at the addresses set forth in paragraph 1, and in the case of
LITRONIC, to the attention of the President and Chief Executive Officer, and in
the case of DISTRIBUTOR to the Contact Person as identified on the Term Sheet.
Such communications shall be effective when they are received. Any party may
change its address for such communications by giving notice thereof to the other
party in conformity with this Section.
14.8 Foreign Reshipment Liability. THIS AGREEMENT IS EXPRESSLY MADE SUBJECT TO
----------------------------
ANY LAWS, REGULATIONS, ORDERS OR OTHER RESTRICTIONS ON THE EXPORT FROM THE
UNITED STATES OF AMERICA OF TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT
SUCH SOFTWARE WHICH MAY BE IMPOSED FROM TIME TO TIME BY THE U.S. GOVERNMENT.
NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY,
DISTRIBUTOR AGREES THAT IT WILL NOT EXPORT OR RE-EXPORT, DIRECTLY OR INDIRECTLY,
ANY TECHNICAL INFORMATION, SOFTWARE OR INFORMATION ABOUT SUCH SOFTWARE TO ANY
COUNTRY FOR WHICH SUCH GOVERNMENT OR ANY AGENCY THEREOF REQUIRES AN EXPORT
LICENSE OR OTHER GOVERNMENTAL APPROVAL AT THE TIME OF EXPORT OR RE-EXPORT
WITHOUT FIRST OBTAINING SUCH LICENSE OR APPROVAL.
14.9 Publicity. Neither party will disclose to third parties, other than its
---------
agents and representatives on a need-to-know basis, the terms of this Agreement
or any exhibits hereto without the prior written consent of the other party,
except (i) either party may disclose such terms to the extent required by law;
(ii) either party may disclose the existence of this Agreement, (iii) either
party may disclose such terms to the extent necessary in connection with the due
diligence review of such party by potential business partners, investors or
acquirers, or investment bankers, to such persons and to their employees,
agents, attorneys and auditors; and (iv) either party shall have the right to
disclose that DISTRIBUTOR is a distributor of the Products.
14.10 No Waiver. Failure by either party to enforce any provision of this
---------
Agreement will not be deemed a waiver of future enforcement of that or any other
provision. No waiver of any provision of this Agreement shall be effective
unless in writing and signed by the authorized representative of a party against
whom the waiver is sought to be enforced. No failure or delay by either party
in exercising any right, power or remedy under this Agreement shall operate as a
waiver of the right, power or remedy.
14.11 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed an original, but which collectively
will constitute one and the same instrument.
<PAGE>
14.12 Due Authorization. DISTRIBUTOR hereby represents and warrants to
-----------------
LITRONIC that the individual executing this Agreement on behalf of DISTRIBUTOR
is duly authorized to execute this Agreement on behalf of DISTRIBUTOR and to
bind DISTRIBUTOR hereby.
14.13 Choice of Language. The original of this Agreement has been written in
------------------
English. DISTRIBUTOR waives any right it may have under the law of any
jurisdiction to have this Agreement written in the language of such jurisdiction
or any other language.
14.14 Headings. All Section headings are provided for the convenience or
--------
references only and shall not be construed otherwise.
## End of Terms and Conditions ##
<PAGE>
EXHIBIT A
RESELLER/DISTRIBUTOR PRICE LIST
The following price list is attached:
RESELLER/DISTRIBUTOR PRICE LIST (January 1, 1999
(Products validated for Japanese market)
(Attached)
<PAGE>
EXHIBIT A
COMMERCIAL IN CONFIDENCE
RESELLER/DISTRIBUTOR
[LITRONIC LOGO APPEARS HERE] PRICE LIST (February 1, 1999)
1. SMART CARDS
<TABLE>
<CAPTION>
Requires Export
Product Part Number License Unit Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ME2000 SMARTCARD $ 15
* MUST SPECIFY
. DOS Logo 050-1100-DOS
. Litronic Logo 050-1100-LIT
. Army Corp of Engineers Logo 050-1100-AC
- --------------------------------------------------------------------------------------------------------
8K MULTIFLEX SMARTCARD $ 23
* MUST SPECIFY
. NO Logo 010-1107
. Litronic Logo 050-1107-LIT
. NetSign Logo 050-1107-NS2.0
* DEFAULT is Litronic Logo
- --------------------------------------------------------------------------------------------------------
4K CRYPTOFLEX SMARTCARD $ 24
* MUST SPECIFY
. NO Logo 010-1103
. Litronic Logo 050-1103-LIT
. NetSign Logo 050-1103-NS2.0
* DEFAULT is Litronic Logo
- --------------------------------------------------------------------------------------------------------
8K CRYPTOFLEX SMARTCARD $ 31
Available 3/99
* MUST SPECIFY
. NO Logo 010-1110
. Litronic Logo 050-1110-LIT
. NetSign Logo 050-1110-NS2.0
* DEFAULT is Litronic Logo
- --------------------------------------------------------------------------------------------------------
1000 MONIKER FORTEZZA CRYPTO CARD 050-1042 Yes $153
. PC-CARD Type II
. Windows, DOS, Mac or UNIX compatible
. Fortezza certified
. FIPS 140-1 Level 2 compliance
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 1 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
2. READERS
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
210 READER (For MAC & UNIX) $ 79
. Includes
. Serial connector
. Power supply
* MUST SPECIFY
. For MAC or 050-1014-M
. UNIX or 050-1014-U
- --------------------------------------------------------------------------------------------------------
210 READER (For Windows) $ 59
. Includes
. Serial connector
. DIN through-keyboard power
* MUST SPECIFY
. PC mini DIN (PS/2) or 050-1014-N
. PC maxi DIN AT 050-1014-X
. PC export (mini & maxi DIN) 050-1014
* DEFAULT is PC, mini DIN
- --------------------------------------------------------------------------------------------------------
215 READER (For Windows) $ 85
. Plug and play for Windows
. Includes
. Serial connector
. DIN through-keyboard power
* MUST SPECIFY
. PC mini DIN (PS/2) or 050-0215-N
. PC maxi DIN AT 050-0215-X
. PC export (mini & maxi DIN) 050-0215
* DEFAULT is PC, mini DIN
- --------------------------------------------------------------------------------------------------------
300 SECURITY ADAPTER WITH READER 050-1038 Yes $395
. Requires
. ISA PC Interface
. FIPS 140-1 Level 3 compliance
- --------------------------------------------------------------------------------------------------------
CABLE ONLY FOR 300 READER $ 12
* MUST SPECIFY
. PC mini DIN (PS/2) or 040-5002
. PC maxi DIN AT 040-5001
- --------------------------------------------------------------------------------------------------------
410 READER 050-1011-1 $107
. PC-CARD Type II
. Requires
. DOS or Windows 9X /NT
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 2 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
2. READERS - CONTINUED
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ARGUS 2000 READER 050-1012-1 $ 99
. Requires
. ISA PC interface
. Supports two (2) Type I/II or one Type III PC
Card(s)
. Mounted internally (3.5" or 5.25" bay)
- --------------------------------------------------------------------------------------------------------
ARGUS 2102 READER 050-1020-2 $ 330
. Requires
. SCSI PC Interface
. Supports two (2) Type I/II or one Type III PC
Card(s)
- --------------------------------------------------------------------------------------------------------
ARGUS 2108 CIPHERSERVER 050-2108 $2,650
. Desktop or 19" RETMA rack mount SCSI
. Supports eight (8) Type I/II PC Cards
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 3 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
3. NETSIGN FOR MAC & UNIX
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
1 The 210 reader is available with other
connectors
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NETSIGN FOR MAC (REL 1) 050-1014-3M No, but the US $59
. Includes browser does
. 1024 bitCryptoflex smart card
. Verisign Digital ID (class 1)
. Requires
. MAC OS 8
. Netscape Communicator (US Version)
* MUST ADD
. 210 Reader for MAC (050-1014-1M)
- --------------------------------------------------------------------------------------------------------
NETSIGN FOR UNIX (REL 1) 050-1014-3U No, but the US $59
. Includes browser does
. 1024 bitCryptoflex smart card
. Verisign Digital ID (class 1)
. Requires
. 210 Reader for UNIX (050-1014-1U)
. Solaris 2.4 or above on SPARC
. Netscape Communicator (US Version)
* MUST ADD
. 210 Reader for UNIX (050-1014-1U)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 4 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
4. NETSIGN FOR WINDOWS
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
1 The 210/215 reader is available with other
connectors
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NETSIGN FOR WINDOWS (REL 2.0) 050-1310-D No, but the US $59
. Includes browsers do
. 1024 bit Cryptoflex smart card
. Verisign Digital ID (class 1)
. Requires
. Windows 95/NT
. Netscape Communicator (US Version)OR
. Microsoft Internet Explorer (US Version)
* MUST ADD
. 210 Reader (050-1014-N) 1 OR
. 215 Reader (050-0215-N) 1 OR
. 410 Reader (050-1011-1)
- --------------------------------------------------------------------------------------------------------
NETSIGN FOR WINDOWS (REL 2.0) - EXPORT $59
. Includes
. 512 bit Multiflex smart card (Netscape) OR
. Cryptoflex smart card (Microsoft)
. Verisign Digital ID (class 1)
. Requires
. Windows 95/NT
. Netscape Communicator OR
. Microsoft Internet Explorer
* MUST SPECIFY
. For Netscape Communicator OR
. Microsoft IE 050-1310-NE
DEFAULT is Netscape Communicator 050-1310-IE
* MUST ADD
. 210 Reader (050-1014-N) 1 OR
. 215 Reader (050-0215-N) 1 OR
. 410 Reader (050-1011-1)
- --------------------------------------------------------------------------------------------------------
NETSIGN REL 1 to 2.0 UPDATE 050-1310-DU No, but the US $20
. Additional smart card(s) NOT included. browsers do
- --------------------------------------------------------------------------------------------------------
NETSIGN REL 1 to 2.0 UPDATE - EXPORT 050-1310-EU $44
. Includes
. Cryptoflex smart card for Microsoft IE
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 5 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
5. NETSIGN PRO FOR WINDOWS
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
1 The 210 reader is available with other
connectors
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NETSIGN PRO FOR WINDOWS (REL 2.0) 050-1310-P Yes $79
Available 2/99
. Includes
. 1024-bit Cryptoflex smart card
. Point 'n Crypt
. SecureDial
. SecureStart (NT Only)
. Requires
. Windows 9X/NT
. Netscape Communicator (US Version) OR
. Microsoft Internet Explorer (US Version)
* MUST ADD
. 210 Reader (050-1014-N) 1 OR
. 215 Reader (050-0215-N) 1 OR
. 410 Reader (050-1011-1)
- --------------------------------------------------------------------------------------------------------
NETSIGN PRO FOR WINDOWS (REL 2.0) EXPORT $79
Available 2/99
. Includes
. 512 bit Multiflex smart card (Netscape) or
. Cryptoflex smart card (Microsoft)
. Point 'n Crypt
. SecureDial
. SecureStart (NT Only)
. Requires
. Windows 9X/NT
. Netscape Communicator OR
. Microsoft Internet Explorer
* MUST SPECIFY
. For Netscape Communicator OR
. Microsoft IE 050-1310-NEP
DEFAULT is Netscape Communicator 050-1310-IEP
* MUST ADD
. 210 Reader (050-1014-N) 1 OR
. 215 Reader (050-0215-N) 1 OR
. 410 Reader (050-1011-1)
- --------------------------------------------------------------------------------------------------------
NETSIGN PRO REL 1 to 2.0 UPDATE 050-1310-DPU No, but the US $20
Available 2/99 browsers do
. Additional smart card(s) NOT included.
- --------------------------------------------------------------------------------------------------------
NETSIGN PRO REL 1 to 2.0 UPDATE - EXPORT 050-1310-EPU $44
Available 2/99
. Includes
. Cryptoflex smart card for Microsoft IE
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 6 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
7. PROFILE MANAGER
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROFILE MANAGER 500 Users 050-1304-500 Yes $ 11,000
. ProFile Manager software
. 2*210 Readers
. Argus 2000 PCMCIA reader
. Chrysalis Luna2 PCMCIA token
. 13*1024-bit Cryptoflex smartcard
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER 1,000 Users 050-1304-1000 Yes $ 16,500
. As for 500 Users
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER 2,500 Users 050-1304-2500 Yes $ 29,150
. As for 500 Users
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER 5,000 Users 050-1304-5000 Yes $ 43,450
. As for 500 Users
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER 10,000 Users 050-1304-10000 Yes $ 65,450
. As for 500 Users
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER 25,000 Users 050-1304-25000 Yes $112,200
. As for 500 Users
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER 50,000 Users 050-1304-50000 Yes $168,300
. As for 500 Users
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER 100,000 Users 050-1304-100000 Yes $253,000
. As for 500 Users
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER - UPGRADE 050-1304-1UG Price
difference
plus 15%
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER MAINTENANCE 050-1304-M 17.5% per annum
. Includes
. New product releases
. Expert to expert technical support
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER EVALUATION 050-1304-E Yes $ 550
. Includes
. ProFile Manager evaluation software
. 50 precalulated keys instead of the luna token
. 2*210 Reader
. 13*1024-bit Cryptoflex smartcard
. 30 days expert to expert support
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER EVALUATION UPGRADE 050-1304-EUG Yes List price
(Ordered within 90 days of start of evaluation) less $500
. Includes
. Latest release of Profile Manager
. Argus 2000 PCMCIA reader
. Chrysalis Luna2 PCMCIA token
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 7 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
8. PROFILE MANAGER EXTENSION DEVELOPERS KITS
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
1 If a different 210 reader is required it must
be specified
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROFILE MANAGER EXTENSION DEVELOPERS KIT 050-1014-5W $ 1375
. Supports
. C and C++ programming interfaces
. Windows 95, NT and MAC platforms
. UNIX (Solaris)
. Includes
. 2* 210 Reader (050-1014-1N)
. 2* 4K Cryptoflex Smartcard (050-1103-LIT)
. 2* 8K Multiflex Smartcard (050-1107-LIT)
. 90 days expert to expert support
. Requires
. Profile Manager (Full Product)
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER EXTENSION DEVELOPERS KIT PLUS 050-1014-5PW $4,395
(with templates)
. Supports
. C, C++, Java and Active X programming
interfaces
. Windows 95, NT and MAC platforms
. UNIX (Solaris)
. Includes
. 2* 210 Reader (050-1014-1N)
. 2* 410 Reader (050-1011-1)
. 5* 4K Cryptoflex Smartcard (050-1103-LIT)
. 5* 8K Multiflex Smartcard (050-1107-LIT)
. Java template for secure client/server
application
. Source code for communication protocols
. 90 days expert to expert support
. Requires
. Profile Manager (Full Product)
- --------------------------------------------------------------------------------------------------------
PROFILE MANAGER EXTENSION DEVELOPERS KIT OR 050-1015-5WM $1000 per annum
DEVELOPERS KIT PLUS -- MAINTENANCE
. Includes
. New product releases
. Expert to expert technical support
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 8 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
9. PROFESSIONAL SERVICES
<TABLE>
<CAPTION>
Product Part Number Requires Export Unit Price
License
2 Working day is a maximum of 8 hours
Minimum of one day
- --------------------------------------------------------------------------------------------------------
<S> <C>
ENGINEER ON-SITE $2,000 per day2
* Travel, accommodation and expenses are
additional charges.
- --------------------------------------------------------------------------------------------------------
ENGINEER AT LITRONIC $135 per hour
- --------------------------------------------------------------------------------------------------------
</TABLE>
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 9 of 10 (06/04/99)
<PAGE>
COMMERCIAL IN CONFIDENCE
Reseller Discount
Hardware and Hardware/Software combination,
Minimum order quantities:
<TABLE>
<CAPTION>
Product Minimum order
- ----------------------------------------------------------------------------
<S> <C>
ME2000 SMARTCARD 100
- ----------------------------------------------------------------------------
MULTIFLEX SMARTCARD 100
- ----------------------------------------------------------------------------
CRYPTOFLEX SMARTCARD -- 4K 100
- ----------------------------------------------------------------------------
CRYPTOFLEX SMARTCARD -- 8K 100
- ----------------------------------------------------------------------------
1000 MONIKER PC CARD 50
- ----------------------------------------------------------------------------
210 READER 100
- ----------------------------------------------------------------------------
300 SECURITY ADAPTER W/READER 100
- ----------------------------------------------------------------------------
410 READER 100
- ----------------------------------------------------------------------------
2000 READER 100
- ----------------------------------------------------------------------------
2102 READER 50
- ----------------------------------------------------------------------------
2108 CIPHERSERVER 10
- ----------------------------------------------------------------------------
2202 READER 50
- ----------------------------------------------------------------------------
</TABLE>
Must be for identical items
Must be ordered, shipped and paid for as a single order
<TABLE>
<CAPTION>
Number of units Discount from list price
- -----------------------------------------------------------------------------
<S> <C>
Minimum quantity to 999 25.0%
- -----------------------------------------------------------------------------
1,000 and above 35.0%
- -----------------------------------------------------------------------------
</TABLE>
Software
Minimum order quantities:
<TABLE>
<CAPTION>
Product Minimum
order
- ----------------------------------------------------------------------------
<S> <C>
NETSIGN 100
- ----------------------------------------------------------------------------
NETSIGN - EXPORT 100
- ----------------------------------------------------------------------------
NETSIGN PRO 100
- ----------------------------------------------------------------------------
NETSIGN PRO - EXPORT 100
- ----------------------------------------------------------------------------
PROFILE MANAGER 1
- ----------------------------------------------------------------------------
PROFILE MANAGER EXTENSION DEVELOPER KIT 1
- ----------------------------------------------------------------------------
PROFILE MANAGER EXTENSION DEVELOPER KIT PLUS 1
- ----------------------------------------------------------------------------
</TABLE>
Discount from list price (any quantity) 40%
Prices are FOB Irvine, CA, do not include shipping or insurance and are subject
to change without notice.
Page 10 of 10 (06/04/99)
<PAGE>
EXHIBIT B
LITRONIC TRADEMARKS
The (TM) and (R) symbols should be printed on all major headings and the first
time the product is mentioned on any web page text or document. Thereafter, the
product does not need to contain the symbols.
Pending USA, Canada, European Community, Switzerland, Japan, Singapore
<TABLE>
<S> <C> <C>
o NetSign/TM/
o ProFile Manager/TM/
Pending USA
o Active Cryptos/TM/ PKImanager/TM/
o NetSigner/TM/ PKIos/TM/
o NetSign PRO/TM/ PKIpilot/TM/
o Because Your Business Is No One Else's/TM/ PKItoken/TM/
o California Crypto Cafe/TM/ PKIagent/TM/
o SecureDial/TM/ PKIbutton/TM/
o SecureStart/TM/ PKIcard/TM/
o Forte/TM/ PKIkey/TM/
o JCryptOS/TM/ PKIlib/TM/
o Security BusWare/TM/
o Maestro/TM/
o SpyGuy (design)/TM/
o NetSignee/TM/
Registered USA
o Advanced CryptOS/R/
o CipherServer/R/
o SecureSmart/R/
o CryptOS/R/
o SpyGuy/R/
</TABLE>
<PAGE>
EXHIBIT C
TRAINING REQUIREMENT
1 Engineer to visit Litronic for Profile Manager and NetSign training.
Travel, lodging, meals and miscellaneous expenses relating to such training to
be at Distributor's sole expense.
<PAGE>
EXHIBIT D
End-User License Agreement
LITRONIC AND DISTRIBUTOR VERSIONS
(To be attached)
<PAGE>
Exhibit D
[LITRONIC LOGO APPEARS HERE]
Litronic ProfileManager Software License Agreement
Thank you for purchasing Litronic's ProfileManager Software, ("the Software").
Please read the following terms and conditions before opening this package.
Opening this package indicates your acceptance of these terms and conditions of
the software license agreement. If you do not agree with the terms and
conditions of this agreement, you should promptly return this package unopened
within thirty (30) days of your purchase to your place of purchase for a full
refund. No refund will be made for packages that have been opened.
Litronic provides this program and hereby licenses its limited use to you,
subject to the terms and conditions hereof. You assume responsibility for the
selection of the Software to achieve your intended results, and for the
installation, use and results obtained from the Software.
1. LICENSE. Subject to your compliance with the terms and conditions hereof:
. Litronic grants to Licensee a limited, non-exclusive, non-transferable
license to use, solely for Licensee's internal use in the Software
Licensee's working environment.
. Licensee is allowed to use the Software on only one (1) computer. If you
want to use the Software on more than one computer, you are required to
purchase additional copies of the Software from your dealer or Litronic.
. Licensee is allowed to make one copy of the Software for backup
purposes; the backup copy must contain the complete program name,
copyright and trademark notices. Backup copies are for your backup use
only and cannot be assigned or transferred to another person or used on
another computer.
2. RESTRICTIONS. You may not sell, rent, lease, loan, transfer, sublicense,
distribute, copy electronically or otherwise transmit any copy or part of the
Software, except as required for backup purposes.
3. NO REVERSE COMPILATION. You may not modify, translate, disassemble, reverse
assemble, decompile or create derivative works of the Software or any copy in
whole or in part. The Software shall not be reverse-engineered.
4. NO OTHER RIGHTS. Except as stated herein, this Agreement does not grant you
any rights to patents, copyrights, trade secrets, trade names, trademarks
(whether registered or unregistered) or any other rights, franchises with
respect to the Software and its documentation.
5. TERM. This license is effective until terminated. Licensee may terminate
this agreement at any time by destroying the Software, together with all backup
copies. Litronic may terminate this License immediately if Licensee fails to
comply with any of the terms and conditions of this Agreement. Licensee agrees
upon such termination to immediately destroy the Software, its documentation and
any and all copies thereof.
<PAGE>
6. TRANSFER. Licensee may not transfer, sublicense or assign this license or
this program. Any attempt otherwise to sublicense, assign or transfer any of the
rights, duties or obligations hereunder are void.
7. EXPORT LAW ASSURANCES. Licensee agrees that neither the Software nor any
direct product thereof will be transferred or re-exported, directly or
indirectly, into any country prohibited by the U.S. Export Administration Act
and the regulations thereunder or will be used for any purpose prohibited by the
Act.
8. WARRANTY DISCLAIMER. This Software is provided "as is" without warranty of
any kind, either expressed or implied, including but not limited to the implied
warranties of merchantibility and fitness for any particular purpose. The
entire risk as to the quality and performance of the Software and its
documentation is with the Licensee.
9. LIMITATIONS OF REMEDIES. In no event will Litronic be liable to Licensee for
any damages, including any loss of profits, loss of data, or other incidental or
consequential damages arising out of the use or inability to use this Software
even if Litronic has been advised of the possibility of such damages, or for any
claim by any other party.
10. GENERAL. This Agreement will be governed by the laws of the state of
California. If any provisions of this Agreement shall be held by any court of
competent jurisdiction to be contrary to law, that provision will be enforced to
the maximum extent permissible, and the remaining provisions of this Agreement
will remain in full force and effect.
11. EFFECTIVENESS. This agreement is effective upon the earlier of (1) your
signature below or (2) your use of the Software.
Should you have any questions concerning this Agreement, please contact Litronic
in writing at: Litronic Inc., 2030 Main Street, Suite 1250, Irvine, CA 92614.
By opening this package Licensee acknowledges that Licensee has read this
Agreement, understands it and agrees to be bound by its terms and conditions.
Licensee further agrees that it is the complete and exclusive statement of the
Agreement between Licensee and Litronic and that the Agreement supersedes any
proposal or prior agreement, oral or written, and any other communications
between Licensee and Litronic relating to the subject matter of this Agreement.
Please expressly indicate your acceptance and compliance with the above terms by
signing this document and returning it to Litronic by fax to (714) 851-8588.
Failure to submit an executed copy of this agreement will not relieve Licensee
of Licensee's obligations to comply with the terms and conditions hereof.
___________________________________________
Name
___________________________________________
Title
___________________________________________
Signature
<PAGE>
___________________________________________
Date
___________________________________________
Company
___________________________________________
___________________________________________
___________________________________________
Address
___________________________________________
Telephone
___________________________________________
Fax
___________________________________________
E-Mail
<PAGE>
[LITRONIC LOGO APPEARS HERE]
Litronic, Inc.
2030 Main Suite 1250
Irvine CA 92614
USA
Phone - 949-851-1085
Fax - 949-851-1085
Email - litronic.com
Thank you for purchasing Litronic ProfileManager Software
This is a confirmation letter defining the terms of Licensee's license for
purchased Software. This license is valid for the number of Users and for the
defined Company and Site(s) set forth below.
Licensee's use of the Litronic Software is contingent upon Licensee's compliance
with terms and conditions of the license on the attached License Agreement.
Grant Date _____________________________
Grant Number _____________________________
Number of Base Units _____________________________
Number of Users _____________________________
Company _____________________________
Defined site(s) _____________________________
_____________________________
_____________________________
<PAGE>
LITRONIC, INC.
ELECTRONIC LICENSE AGREEMENT
FOR NETSIGN
IMPORTANT! The Software you seek to install is licensed only on the condition
that you (referred to as "YOU") agree with LITRONIC, INC. to the terms and
conditions set forth below. PLEASE CAREFULLY READ THE TERMS OF THIS SOFTWARE
LICENSE AGREEMENT.
IF YOU AGREE TO BE BOUND BY THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE
BOX AT THE BOTTOM OF THIS DOCUMENT LABELED "OK" AT WHICH TIME THE INSTALLTION
WILL CONTINUE.
IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE BOX
AT THE BOTTOM OF THIS DOCUMENT LABELED "NO" AT WHICH POINT YOU WILL BE ASKED IF
YOU WANT TO ABORT THIS INSTALLATION. THE INSTALLATION CANNOT CONTINUE WITHOUT
THE ACCEPTANCE OF THIS DOCUMENT.
USE OF THE SOFTWARE INDICATES THAT YOU ACCEPT THE TERMS AND CONDITIONS OF THIS
AGREEMENT.
This Agreement has three parts. Part I applies if You have a free, evaluation
license to the accompanying NetSign software (hereinafter "Software"). Part II
applies if you have purchased a license to the Software. Part III applies to
both situations and is incorporated by reference into both Parts I and II.
As used in this Agreement, "Litronic" shall mean Litronic, Inc., Irvine,
California; and "Licensor" shall mean (i) if You have acquired a third party
product or service and such product or service included the Software, then such
third party shall be the Licensor; (ii) otherwise, Litronic shall be the
Licensor.
PART I -- TERMS APPLICABLE WHEN LICENSE FEES NOT (YET) PAID (LIMITED TO
EVALUATION).
License Grant. Litronic grants to one (1) User (as defined below) a limited,
non-exclusive, non-transferable license to use the Software free of charge
solely for the purpose of evaluating whether to purchase an on going license to
the Software for a period of thirty (30) days from the date the Software is
first received ("Evaluation Period") and for no other purpose. The "User" is the
Licensee, if Licensee is an individual, or a current employee of Licensee, if
Licensee is a corporation or similar business or commercial entity. Subject to
the limitations of this Agreement, the User may only use the Software on (i) any
central processing unit ("CPU"), workstation or portable which is owned or
controlled by Licensee and (ii) any CPU, workstation or portable owned by the
User. During the Evaluation Period, the User is not entitled to hard-copy
documentation, support or telephone assistance.
Term; Termination. This License is effective only for the thirty (30) day
Evaluation Period and shall automatically terminate at the end of that period
without further notice. Licensee may terminate this License at any time by
notifying Litronic, and destroying all copies of the Software in the possession
of the Licensee. This License will terminate immediately without notice from
Litronic if You fail to comply with any provision of this License. Upon
termination
<PAGE>
of this Agreement, for whatever reason, Licensee must destroy all copies of the
Software in its possession.
DISCLAIMER OF WARRANTIES. THE SOFTWARE IS PROVIDED ON AN "AS IS" BASIS, WITHOUT
WARRANTY OF ANY KIND. LITRONIC SPECIFICALLY DISCLAIMS ALL EXPRESS AND IMPLIED
WARRANTIES, INCLUDING BUT NOT LIMITED TO, ANY WARRANTIES THAT THE SOFTWARE IS
FREE OF DEFECTS, THE IMPLIED WARRANTY OF MERCHANTABILITY, FIT FOR A PARTICULAR
PURPOSE OF NON-INFRINGING. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF
THE SOFTWARE IS BORNE BY YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE IN ANY
RESPECT, YOU, AND NOT LITRONIC OR ITS SUPPLIERS, ASSUME THE ENTIRE COST OF ANY
SERVICE AND REPAIR. IN ADDITION, THE SECURITY MECHANISMS IMPLEMENTED BY THE
SOFTWARE HAVE INHERENT LIMITATIONS, AND YOU MUST DETERMINE THAT THE SOFTWARE
SUFFICIENTLY MEETS YOUR REQUIREMENTS. THIS DISCLAIMER OF WARRANTIES CONSTITUTES
AN ESSENTIAL PART OF THIS AGREEMENT. NO USE OF THE SOFTWARE WITHOUT PAYMENT OF
THE REQUIRED LICENSE FEE TO LICENSOR IS AUTHORIZED HEREUNDER EXCEPT UNDER THIS
DISCLAIMER.
PART II -- TERMS APPLICABLE WHEN LICENSE FEES PAID
License Grant. You may:
* Use the Software on a single computer;
* Use the Software on a second computer so long as only one (1) copy is used at
a time;
* Use the Software on a network, provided that a licensed copy of the Software
has been acquired for each person permitted to access the Software through the
network;
* Make one (1) copy the Software for archival purposes , provided such copy
contains all proprietary notices included with the original copy of the
Software; and
* If you have purchased a Right to Copy license for multiple copies of the
Software, make the number of copies of Software (but not the documentation)
stated on the packing slip or invoice, provided any copy must contain all of the
original Software's proprietary notices. The number of copies on the invoice is
the total number of copies that may be made for all platforms. Additional copies
of Documentation may be purchased from Licensor.
You may not:
* Permit others to use the Software, except as provided above;
* Permit concurrent use of the Software;
* Rent, lease, loan, grant a security interest in, sublicense or assign this
license or the Software, or otherwise transfer rights to the Software; or
* Remove any proprietary notices or labels on the Software.
<PAGE>
Term; Termination. This license is effective until terminated. You may terminate
this License at any time by notifying Litronic and by destroying all copies of
the Software and Documentation in Your possession. This License will terminate
immediately without notice from Litronic if You fail to comply with any
provisions of this Agreement. Upon any termination of this Agreement, for any
reason, You agree to immediately destroy all copies of the Software and
Documentation in Your possession.
Limited Warranty. (a) Litronic warrants that for a period of ninety (90) days
from the date the Software purchased the Software, if operated as directed, will
substantially achieve the functionality described in the Documentation. Litronic
does not warrant, however, that Your use of the Software will be uninterrupted
or that the operation of the Software will be error-free or secure. In addition,
the security mechanisms implemented by the Software have inherent limitations,
and You must determine that the Software sufficiently meets your requirements.
(b) Litronic's sole liability and Your exclusive remedy for any breach of this
warranty shall be, in Litronic's sole discretion: (i) to replace Your copy of
the Software; or (ii) to advise You how to achieve substantially the same
functionality with the Software as described in the Documentation through a
procedure different from that set forth in the Documentation; or (iii) if the
above remedies are impracticable, to refund to You any license fee You paid for
the Software.
(c) Repaired, corrected, or replaced Software and Documentation shall be covered
by this limited warranty for the period remaining under the warranty on the
original copy of the Software, or if longer, for thirty (30) days after the date
(a) of delivery to you of repaired or replace Software, or (b) Litronic advised
You how to operate the Software so as to achieve substantially the same
functionality described in the Documentation.
(d) Only if you inform Litronic of your problem with the Software during the
applicable warranty period and provide evidence of the date you purchased the
Software will Litronic be obligated to honor this warranty. Litronic will use
reasonable commercial efforts to repair, replace, advise, or, for individual
consumers, refund pursuant to the foregoing warranty within thirty (30) days of
being so notified.
(e) If any modifications are made to the Software by You during the warranty
period; if the media is subject to accident, abuse, or improper use; or if you
violate terms of this Agreement, then this warranty shall immediately terminate.
Moreover, this warranty shall not apply if the Software is used on or in
conjunction with hardware and software other than the unmodified version of
hardware and software with which the Software was designed to be used as
described in the Documentation.
THIS IS A LIMITED WARRANTY, AND IS THE ONLY WARRANTY MADE BY LICENSOR OR ITS
SUPPLIERS. EXCEPT AS SPECIFICALLY SET FORTH IMMEDIATELY ABOVE, LICENSOR
SPECIFICALLY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT
LIMITED TO, ANY WARRANTIES THAT THE SOFTWARE IS FREE OF DEFECTS, AND THE IMPLIED
WARRANTIES OF MERCHANTABILITY, FIT FOR A PARTICULAR PURPOSE, AND NON-INFRINGING.
THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS BORNE BY
YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE IN ANY RESPECT, YOU, AND NOT LITRONIC
OR ITS SUPPLIERS, ASSUME THE ENTIRE COST OF ANY SERVICE AND REPAIR. IN ADDITION,
THE SECURITY
<PAGE>
MECHANISMS IMPLEMENTED BY THE SOFTWARE HAVE INHERENT LIMITATIONS, AND YOU MUST
DETERMINE THAT THE SOFTWARE SUFFICIENTLY MEETS YOUR REQUIREMENTS. THIS
DISCLAIMER OF WARRANTIES CONSTITUTES AN ESSENTIAL PART OF THIS AGREEMENT. NO USE
OF THE SOFTWARE WITHOUT PAYMENT OF THE REQUIRED LICENSE FEE TO LICENSOR IS
AUTHORIZED EXCEPT SUBJECT TO THIS DISCLAIMER.
PART III -- TERMS APPLICABLE TO ALL LICENSE GRANTS
Title; Ownership. (a) At all times, Litronic and/or its suppliers retain all
right, title and interest in and to the Software. The Software, including its
structure, sequence, organization and code are valuable trade secrets of
Litronic and its suppliers. The Software is protected by United States copyright
law and International copyright treaty provisions. Except as stated herein, this
Agreement does not grant you any rights to any patents, copyrights, trade
secrets, trade names, trademarks (whether registered or unregistered) or any
other intellectual property rights in respect to the Software.
(b) NetSign, the Litronic Logo, and Litronic are trademarks of Litronic, Inc.
You may use the trademarks only insofar as required to comply with accepted
trademark practice, including identification of the trademark owner's name. Such
use of any trademark does not grant You any rights in and to that trademark.
No Reverse Compilation. You may not modify, translate, disassemble, reverse
assemble, decompile or create derivative works of the Software in whole or in
part. The Software shall not be reverse engineered such that other (non-
Litronic) readers can be used. Any source code provided is not to be modified
without the express written consent of Litronic. Litronic readers shall not be
reverse engineered such that the Software can be used with a clone of Litronic
readers or other smartcard readers.
LIMITATION OF LIABILITIES. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY,
WHETHER TORT, CONTRACT, OR OTHERWISE, SHALL LICENSOR OR ITS LICENSORS OR
RESELLERS BE LIABLE TO YOU OR ANY THIRD PERSON FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, PUNITIVE, EXEMPLARY, OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER
INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, LOSS OF DATA, LOST
PROFITS, WORK STOPPAGE, COMPUTER FAILURE OR MALFUNCTIONS, OR ANY AND ALL OTHER
COMMERCIAL DAMAGES OR LOSSES. IN NO EVENT WILL LICENSOR BE LIABLE FOR ANY
DAMAGES IN EXCESS OF THE AMOUNT LICENSOR RECEIVED FROM YOU FOR A LICENSE TO THE
SOFTWARE, EVEN IF LICENSOR SHALL HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH
DAMAGES, OR OF ANY CLAIM BY ANY THIRD PARTY. THIS LIMITATION OF LIABILITY SHALL
NOT APPLY TO LIABILITY FOR DEATH OR PERSONAL INJURY RESULTING FROM LITRONIC'S
GROSS NEGLIGENCE OR INTENTIONAL ACTS TO THE EXTENT APPLICABLE LAW PROHIBITS SUCH
LIMITATION. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF
INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THIS EXCLUSION AND LIMITATION MAY NOT
APPLY TO YOU.
High-Risk Activities. The Software is not fault-tolerant and is not designed,
manufactured or
<PAGE>
intended for use or resale as on-line control equipment in hazardous
environments requiring fail-safe performance, such as in the operation of
nuclear facilities, aircraft navigation or communication systems, air traffic
control, direct life support machines, or weapon systems, in which the failure
of the Software could lead directly to death, personal injury, or severe
physical or environmental damage, and Licensor expressly disclaims any express
or implied warranty of fitness for such uses.
Export Law Assurances. You agree that neither the Software, the underlying
information or technology, nor any direct product thereof, may be downloaded or
otherwise exported or reexported (i) into (or to a national or resident of)
Cuba, Iraq, Libya, the countries of the former Yugoslavia, North Korea, Iran,
Syria or any other country to which the U.S. has embargoed goods; or (ii) to
anyone on the U.S. Treasury Department's List of Specially Designated Nationals
or the U.S. Commerce Department's Table of Denial Orders. You further represent
and warrant that You are not located in, under the control of, or a national or
resident of any such country or on any such list.
U.S. Government Restricted Rights. The Software is provided with RESTRICTED
RIGHTS. The use, duplication, or disclosure by the Government is subject to
restrictions as set forth in subdivision (c)(1)(ii) of The Rights in Technical
Data and Computer Software clause at 52.227-7013. The contractor/ manufacturer
of this Software is LITRONIC, INC., 2030 MAIN STREET, SUITE 1250, IRVINE,
CALIFORNIA 92614.
Confidential Information.
(a) You hereby agree that You will keep confidential any information or data
("Confidential Information") obtained from Licensor in connection with this
Agreement and shall not divulge the same to any third parties, except for: (i)
Information which, at the time of disclosure, had been previously made public;
(ii) Information which is made public after disclosure to You, unless such
disclosure is a breach of this or any other agreement; (iii) Information which,
prior to disclosure to You, was already in Your possession; or (iv) Information
which, subsequent to disclosure, was obtained by You from a third party who was
lawfully in possession of such information and was not in violation of any
contractual, legal or fiduciary obligation to Litronic or any Litronic's
supplier.
(b) All Confidential Information shall remain the sole property of Litronic. You
shall have no implied licenses or other rights in the Confidential Information
not specifically granted herein. You shall not disclose the Confidential
Information to anyone other than employees and contractors with a demonstrable
need to know, who have a binding, written, confidentiality obligation to You to
protect such Confidential Information against unauthorized disclosure or use.
You shall take all reasonable precautions to prevent unauthorized use or
disclosure of the Confidential Information.
(c) You acknowledge that any unauthorized use or disclosure of the Confidential
Information would cause irreparable harm to Litronic.
(d) Upon termination of this Agreement, You shall destroy all Confidential
Information immediately.
(e) These provisions shall survive for a period of three (3) years from the date
of termination of this Agreement.
No Waiver or Assignment. No delay or failure to take action under this License
will constitute a waiver unless expressly waived in writing, signed by a duly
authorized representative of Litronic, and no single waiver will constitute a
continuing or subsequent waiver. This License may not be assigned, sublicensed
or otherwise transferred by Licensee, by operation of law or otherwise.
<PAGE>
Entire Agreement. This License constitutes the entire agreement between the
parties with respect to the use of the Software, and supersedes all prior or
contemporaneous understandings or agreements, written or oral, regarding such
subject matter. Any additional or different terms or conditions proposed by You
are hereby rejected and shall be of no force and effect unless expressly agreed
to in writing by Litronic. No amendment to or modification of this License will
be binding unless in writing and signed by a duly authorized representative of
Litronic.
General Provisions. This Agreement will be governed by the laws of the State of
California, as applied to agreements entered into and to be performed entirely
within California between California residents. The application of the United
Nations Convention for Contracts for the International Sale of Goods is hereby
expressly excluded. If any provisions of this Agreement shall be held by any
court of competent jurisdiction to be contrary to law, that provision will be
enforced to the maximum extent permissible, and the remaining provisions of this
Agreement will remain in full force and effect.
Should you have any questions concerning this Agreement, please contact us by
email: [email protected]
LITRONIC, INC.
ELECTRONIC LICENSE AGREEMENT
FOR NETSIGN PRO
IMPORTANT! The Software you seek to install is licensed only on the condition
that you (referred to as "YOU") agree with LITRONIC, INC. to the terms and
conditions set forth below. PLEASE CAREFULLY READ THE TERMS OF THIS SOFTWARE
LICENSE AGREEMENT.
IF YOU AGREE TO BE BOUND BY THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE
BOX AT THE BOTTOM OF THIS DOCUMENT LABELED "ACCEPT" AT WHICH TIME THE
INSTALLTION WILL CONTINUE.
IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE BOX
AT THE BOTTOM OF THIS DOCUMENT LABELED "DECLINE" AT WHICH POINT YOU WILL BE
ASKED IF YOU WANT TO ABORT THIS INSTALLATION. THE INSTALLATION CANNOT CONTINUE
WITHOUT THE ACCEPTANCE OF THIS DOCUMENT.
USE OF THE SOFTWARE INDICATES THAT YOU ACCEPT THE TERMS AND CONDITIONS OF THIS
AGREEMENT.
This Agreement has three parts. Part I applies if You have a free, evaluation
license to the accompanying NetSign PRO software (hereinafter "Software"). Part
II applies if you have purchased a license to the Software. Part III applies to
both situations and is incorporated by reference into both Parts I and II.
As used in this Agreement, "Litronic" shall mean Litronic, Inc., Irvine,
California; and "Licensor" shall mean (i) if You have acquired a third party
product or service and such product or service included the Software, then such
third party shall be the Licensor; (ii) otherwise, Litronic shall be the
Licensor.
<PAGE>
PART I -- TERMS APPLICABLE WHEN LICENSE FEES NOT (YET) PAID (LIMITED TO
EVALUATION).
License Grant. Litronic grants to one (1) User (as defined below) a limited,
non-exclusive, non-transferable license to use the Software free of charge
solely for the purpose of evaluating whether to purchase an on going license to
the Software for a period of thirty (30) days from the date the Software is
first received ("Evaluation Period") and for no other purpose. The "User" is the
Licensee, if Licensee is an individual, or a current employee of Licensee, if
Licensee is a corporation or similar business or commercial entity. Subject to
the limitations of this Agreement, the User may only use the Software on (i) any
central processing unit ("CPU"), workstation or portable which is owned or
controlled by Licensee and (ii) any CPU, workstation or portable owned by the
User. During the Evaluation Period, the User is not entitled to hard-copy
documentation, support or telephone assistance.
Term; Termination. This License is effective only for the thirty (30) day
Evaluation Period and shall automatically terminate at the end of that period
without further notice. Licensee may terminate this License at any time by
notifying Litronic, and destroying all copies of the Software in the possession
of the Licensee. This License will terminate immediately without notice from
Litronic if You fail to comply with any provision of this License. Upon
termination of this Agreement, for whatever reason, Licensee must destroy all
copies of the Software in its possession.
DISCLAIMER OF WARRANTIES. THE SOFTWARE IS PROVIDED ON AN "AS IS" BASIS, WITHOUT
WARRANTY OF ANY KIND. LITRONIC SPECIFICALLY DISCLAIMS ALL EXPRESS AND IMPLIED
WARRANTIES, INCLUDING BUT NOT LIMITED TO, ANY WARRANTIES THAT THE SOFTWARE IS
FREE OF DEFECTS, THE IMPLIED WARRANTY OF MERCHANTABILITY, FIT FOR A PARTICULAR
PURPOSE OF NON-INFRINGING. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF
THE SOFTWARE IS BORNE BY YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE IN ANY
RESPECT, YOU, AND NOT LITRONIC OR ITS SUPPLIERS, ASSUME THE ENTIRE COST OF ANY
SERVICE AND REPAIR. IN ADDITION, THE SECURITY MECHANISMS IMPLEMENTED BY THE
SOFTWARE HAVE INHERENT LIMITATIONS, AND YOU MUST DETERMINE THAT THE SOFTWARE
SUFFICIENTLY MEETS YOUR REQUIREMENTS. THIS DISCLAIMER OF WARRANTIES CONSTITUTES
AN ESSENTIAL PART OF THIS AGREEMENT. NO USE OF THE SOFTWARE WITHOUT PAYMENT OF
THE REQUIRED LICENSE FEE TO LICENSOR IS AUTHORIZED HEREUNDER EXCEPT UNDER THIS
DISCLAIMER.
PART II -- TERMS APPLICABLE WHEN LICENSE FEES PAID
License Grant. You may:
* Use the Software on a single computer;
* Use the Software on a second computer so long as only one (1) copy is used at
a time;
* Use the Software on a network, provided that a licensed copy of the Software
has been acquired for each person permitted to access the Software through the
network;
<PAGE>
* Make one (1) copy the Software for archival purposes , provided such copy
contains all proprietary notices included with the original copy of the
Software; and
* If you have purchased a Right to Copy license for multiple copies of the
Software, make the number of copies of Software (but not the documentation)
stated on the packing slip or invoice, provided any copy must contain all of the
original Software's proprietary notices. The number of copies on the invoice is
the total number of copies that may be made for all platforms. Additional copies
of Documentation may be purchased from Licensor.
You may not:
* Permit others to use the Software, except as provided above;
* Permit concurrent use of the Software;
* Rent, lease, loan, grant a security interest in, sublicense or assign this
license or the Software, or otherwise transfer rights to the Software; or
* Remove any proprietary notices or labels on the Software.
Term; Termination. This license is effective until terminated. You may terminate
this License at any time by notifying Litronic and by destroying all copies of
the Software and Documentation in Your possession. This License will terminate
immediately without notice from Litronic if You fail to comply with any
provisions of this Agreement. Upon any termination of this Agreement, for any
reason, You agree to immediately destroy all copies of the Software and
Documentation in Your possession.
Limited Warranty. (a) Litronic warrants that for a period of ninety (90) days
from the date the Software purchased the Software, if operated as directed, will
substantially achieve the functionality described in the Documentation. Litronic
does not warrant, however, that Your use of the Software will be uninterrupted
or that the operation of the Software will be error-free or secure. In addition,
the security mechanisms implemented by the Software have inherent limitations,
and You must determine that the Software sufficiently meets your requirements.
(b) Litronic's sole liability and Your exclusive remedy for any breach of this
warranty shall be, in Litronic's sole discretion: (i) to replace Your copy of
the Software; or (ii) to advise You how to achieve substantially the same
functionality with the Software as described in the Documentation through a
procedure different from that set forth in the Documentation; or (iii) if the
above remedies are impracticable, to refund to You any license fee You paid for
the Software.
(c) Repaired, corrected, or replaced Software and Documentation shall be covered
by this limited warranty for the period remaining under the warranty on the
original copy of the Software, or if longer, for thirty (30) days after the date
(a) of delivery to you of repaired or replace Software, or (b) Litronic advised
You how to operate the Software so as to achieve substantially the same
functionality described in the Documentation.
(d) Only if you inform Litronic of your problem with the Software during the
applicable warranty period and provide evidence of the date you purchased the
Software will Litronic be obligated to honor this warranty. Litronic will use
reasonable commercial efforts to repair, replace, advise, or, for individual
consumers, refund pursuant to the foregoing warranty within thirty (30) days of
being so notified.
(e) If any modifications are made to the Software by You during the warranty
period; if the media is subject to accident, abuse, or improper use; or if you
violate terms of this Agreement, then this warranty shall immediately terminate.
Moreover, this warranty shall not
<PAGE>
apply if the Software is used on or in conjunction with hardware and software
other than the unmodified version of hardware and software with which the
Software was designed to be used as described in the Documentation.
THIS IS A LIMITED WARRANTY, AND IS THE ONLY WARRANTY MADE BY LICENSOR OR ITS
SUPPLIERS. EXCEPT AS SPECIFICALLY SET FORTH IMMEDIATELY ABOVE, LICENSOR
SPECIFICALLY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT
LIMITED TO, ANY WARRANTIES THAT THE SOFTWARE IS FREE OF DEFECTS, AND THE IMPLIED
WARRANTIES OF MERCHANTABILITY, FIT FOR A PARTICULAR PURPOSE, AND NON-INFRINGING.
THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS BORNE BY
YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE IN ANY RESPECT, YOU, AND NOT LITRONIC
OR ITS SUPPLIERS, ASSUME THE ENTIRE COST OF ANY SERVICE AND REPAIR. IN ADDITION,
THE SECURITY MECHANISMS IMPLEMENTED BY THE SOFTWARE HAVE INHERENT LIMITATIONS,
AND YOU MUST DETERMINE THAT THE SOFTWARE SUFFICIENTLY MEETS YOUR REQUIREMENTS.
THIS DISCLAIMER OF WARRANTIES CONSTITUTES AN ESSENTIAL PART OF THIS AGREEMENT.
NO USE OF THE SOFTWARE WITHOUT PAYMENT OF THE REQUIRED LICENSE FEE TO LICENSOR
IS AUTHORIZED EXCEPT SUBJECT TO THIS DISCLAIMER.
PART III -- TERMS APPLICABLE TO ALL LICENSE GRANTS
Title; Ownership. (a) At all times, Litronic and/or its suppliers retain all
right, title and interest in and to the Software. The Software, including its
structure, sequence, organization and code are valuable trade secrets of
Litronic and its suppliers. The Software is protected by United States copyright
law and International copyright treaty provisions. Except as stated herein, this
Agreement does not grant you any rights to any patents, copyrights, trade
secrets, trade names, trademarks (whether registered or unregistered) or any
other intellectual property rights in respect to the Software.
(b) NetSign PRO, the Litronic Logo, and Litronic are trademarks of Litronic,
Inc. You may use the trademarks only insofar as required to comply with accepted
trademark practice, including identification of the trademark owner's name. Such
use of any trademark does not grant You any rights in and to that trademark.
No Reverse Compilation. You may not modify, translate, disassemble, reverse
assemble, decompile or create derivative works of the Software in whole or in
part. The Software shall not be reverse engineered such that other (non-
Litronic) readers can be used. Any source code provided is not to be modified
without the express written consent of Litronic. Litronic readers shall not be
reverse engineered such that the Software can be used with a clone of Litronic
readers or other smartcard readers.
LIMITATION OF LIABILITIES. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY,
WHETHER TORT, CONTRACT, OR OTHERWISE, SHALL LICENSOR OR ITS LICENSORS OR
RESELLERS BE LIABLE TO YOU OR ANY THIRD PERSON FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, PUNITIVE, EXEMPLARY, OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER
INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, LOSS OF
<PAGE>
DATA, LOST PROFITS, WORK STOPPAGE, COMPUTER FAILURE OR MALFUNCTIONS, OR ANY AND
ALL OTHER COMMERCIAL DAMAGES OR LOSSES. IN NO EVENT WILL LICENSOR BE LIABLE FOR
ANY DAMAGES IN EXCESS OF THE AMOUNT LICENSOR RECEIVED FROM YOU FOR A LICENSE TO
THE SOFTWARE, EVEN IF LICENSOR SHALL HAVE BEEN INFORMED OF THE POSSIBILITY OF
SUCH DAMAGES, OR OF ANY CLAIM BY ANY THIRD PARTY. THIS LIMITATION OF LIABILITY
SHALL NOT APPLY TO LIABILITY FOR DEATH OR PERSONAL INJURY RESULTING FROM
LITRONIC'S GROSS NEGLIGENCE OR INTENTIONAL ACTS TO THE EXTENT APPLICABLE LAW
PROHIBITS SUCH LIMITATION. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR
LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THIS EXCLUSION AND
LIMITATION MAY NOT APPLY TO YOU.
High-Risk Activities. The Software is not fault-tolerant and is not designed,
manufactured or intended for use or resale as on-line control equipment in
hazardous environments requiring fail-safe performance, such as in the operation
of nuclear facilities, aircraft navigation or communication systems, air traffic
control, direct life support machines, or weapon systems, in which the failure
of the Software could lead directly to death, personal injury, or severe
physical or environmental damage, and Licensor expressly disclaims any express
or implied warranty of fitness for such uses.
Export Law Assurances. You agree that neither the Software, the underlying
information or technology, nor any direct product thereof, may be downloaded or
otherwise exported or reexported (i) into (or to a national or resident of)
Cuba, Iraq, Libya, the countries of the former Yugoslavia, North Korea, Iran,
Syria or any other country to which the U.S. has embargoed goods; or (ii) to
anyone on the U.S. Treasury Department's List of Specially Designated Nationals
or the U.S. Commerce Department's Table of Denial Orders. You further represent
and warrant that You are not located in, under the control of, or a national or
resident of any such country or on any such list.
U.S. Government Restricted Rights. The Software is provided with RESTRICTED
RIGHTS. The use, duplication, or disclosure by the Government is subject to
restrictions as set forth in subdivision (c)(1)(ii) of The Rights in Technical
Data and Computer Software clause at 52.227-7013. The contractor/ manufacturer
of this Software is LITRONIC, INC., 2030 MAIN STREET, SUITE 1250, IRVINE,
CALIFORNIA 92614.
Confidential Information.
(a) You hereby agree that You will keep confidential any information or data
("Confidential Information") obtained from Licensor in connection with this
Agreement and shall not divulge the same to any third parties, except for: (i)
Information which, at the time of disclosure, had been previously made public;
(ii) Information which is made public after disclosure to You, unless such
disclosure is a breach of this or any other agreement; (iii) Information which,
prior to disclosure to You, was already in Your possession; or (iv) Information
which, subsequent to disclosure, was obtained by You from a third party who was
lawfully in possession of such information and was not in violation of any
contractual, legal or fiduciary obligation to Litronic or any Litronic's
supplier.
(b) All Confidential Information shall remain the sole property of Litronic. You
shall have no implied licenses or other rights in the Confidential Information
not specifically granted herein. You shall not disclose the Confidential
Information to anyone other than employees and contractors with a demonstrable
need to know, who have a binding, written, confidentiality
<PAGE>
obligation to You to protect such Confidential Information against unauthorized
disclosure or use. You shall take all reasonable precautions to prevent
unauthorized use or disclosure of the Confidential Information.
(c) You acknowledge that any unauthorized use or disclosure of the Confidential
Information would cause irreparable harm to Litronic.
(d) Upon termination of this Agreement, You shall destroy all Confidential
Information immediately.
(e) These provisions shall survive for a period of three (3) years from the date
of termination of this Agreement.
No Waiver or Assignment. No delay or failure to take action under this License
will constitute a waiver unless expressly waived in writing, signed by a duly
authorized representative of Litronic, and no single waiver will constitute a
continuing or subsequent waiver. This License may not be assigned, sublicensed
or otherwise transferred by Licensee, by operation of law or otherwise.
Entire Agreement. This License constitutes the entire agreement between the
parties with respect to the use of the Software, and supersedes all prior or
contemporaneous understandings or agreements, written or oral, regarding such
subject matter. Any additional or different terms or conditions proposed by You
are hereby rejected and shall be of no force and effect unless expressly agreed
to in writing by Litronic. No amendment to or modification of this License will
be binding unless in writing and signed by a duly authorized representative of
Litronic.
General Provisions. This Agreement will be governed by the laws of the State of
California, as applied to agreements entered into and to be performed entirely
within California between California residents. The application of the United
Nations Convention for Contracts for the International Sale of Goods is hereby
expressly excluded. If any provisions of this Agreement shall be held by any
court of competent jurisdiction to be contrary to law, that provision will be
enforced to the maximum extent permissible, and the remaining provisions of this
Agreement will remain in full force and effect.
Should you have any questions concerning this Agreement, please contact us by
email: [email protected]
LITRONIC, INC.
ELECTRONIC LICENSE AGREEMENT
FOR NETSIGN
IMPORTANT! The Software you seek to install is licensed only on the condition
that you (referred to as "YOU") agree with LITRONIC, INC. to the terms and
conditions set forth below. PLEASE CAREFULLY READ THE TERMS OF THIS SOFTWARE
LICENSE AGREEMENT.
IF YOU AGREE TO BE BOUND BY THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE
BOX AT THE BOTTOM OF THIS DOCUMENT LABELED "ACCEPT" AT WHICH TIME THE
INSTALLTION WILL CONTINUE.
<PAGE>
IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT, YOU SHOULD CLICK ON THE BOX
AT THE BOTTOM OF THIS DOCUMENT LABELED "DECLINE" AT WHICH POINT YOU WILL BE
ASKED IF YOU WANT TO ABORT THIS INSTALLATION. THE INSTALLATION CANNOT CONTINUE
WITHOUT THE ACCEPTANCE OF THIS DOCUMENT.
USE OF THE SOFTWARE INDICATES THAT YOU ACCEPT THE TERMS AND CONDITIONS OF THIS
AGREEMENT.
This Agreement has three parts. Part I applies if You have a free, evaluation
license to the accompanying NetSign software (hereinafter "Software"). Part II
applies if you have purchased a license to the Software. Part III applies to
both situations and is incorporated by reference into both Parts I and II.
As used in this Agreement, "Litronic" shall mean Litronic, Inc., Irvine,
California; and "Licensor" shall mean (i) if You have acquired a third party
product or service and such product or service included the Software, then such
third party shall be the Licensor; (ii) otherwise, Litronic shall be the
Licensor.
PART I -- TERMS APPLICABLE WHEN LICENSE FEES NOT (YET) PAID (LIMITED TO
EVALUATION).
License Grant. Litronic grants to one (1) User (as defined below) a limited,
non-exclusive, non-transferable license to use the Software free of charge
solely for the purpose of evaluating whether to purchase an on going license to
the Software for a period of thirty (30) days from the date the Software is
first received ("Evaluation Period") and for no other purpose. The "User" is the
Licensee, if Licensee is an individual, or a current employee of Licensee, if
Licensee is a corporation or similar business or commercial entity. Subject to
the limitations of this Agreement, the User may only use the Software on (i) any
central processing unit ("CPU"), workstation or portable which is owned or
controlled by Licensee and (ii) any CPU, workstation or portable owned by the
User. During the Evaluation Period, the User is not entitled to hard-copy
documentation, support or telephone assistance.
Term; Termination. This License is effective only for the thirty (30) day
Evaluation Period and shall automatically terminate at the end of that period
without further notice. Licensee may terminate this License at any time by
notifying Litronic, and destroying all copies of the Software in the possession
of the Licensee. This License will terminate immediately without notice from
Litronic if You fail to comply with any provision of this License. Upon
termination of this Agreement, for whatever reason, Licensee must destroy all
copies of the Software in its possession.
DISCLAIMER OF WARRANTIES. THE SOFTWARE IS PROVIDED ON AN "AS IS" BASIS, WITHOUT
WARRANTY OF ANY KIND. LITRONIC SPECIFICALLY DISCLAIMS ALL EXPRESS AND IMPLIED
WARRANTIES, INCLUDING BUT NOT LIMITED TO, ANY WARRANTIES THAT THE SOFTWARE IS
FREE OF DEFECTS, THE IMPLIED WARRANTY OF MERCHANTABILITY, FIT FOR A PARTICULAR
PURPOSE OF NON-INFRINGING. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF
THE SOFTWARE IS BORNE BY YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE IN ANY
RESPECT, YOU, AND NOT LITRONIC OR ITS SUPPLIERS, ASSUME THE ENTIRE COST OF ANY
SERVICE AND REPAIR. IN ADDITION, THE SECURITY MECHANISMS IMPLEMENTED BY THE
SOFTWARE HAVE INHERENT
<PAGE>
LIMITATIONS, AND YOU MUST DETERMINE THAT THE SOFTWARE SUFFICIENTLY MEETS YOUR
REQUIREMENTS. THIS DISCLAIMER OF WARRANTIES CONSTITUTES AN ESSENTIAL PART OF
THIS AGREEMENT. NO USE OF THE SOFTWARE WITHOUT PAYMENT OF THE REQUIRED LICENSE
FEE TO LICENSOR IS AUTHORIZED HEREUNDER EXCEPT UNDER THIS DISCLAIMER.
PART II -- TERMS APPLICABLE WHEN LICENSE FEES PAID
License Grant. You may:
* Use the Software on a single computer;
* Use the Software on a second computer so long as only one (1) copy is used at
a time;
* Use the Software on a network, provided that a licensed copy of the Software
has been acquired for each person permitted to access the Software through the
network;
* Make one (1) copy the Software for archival purposes , provided such copy
contains all proprietary notices included with the original copy of the
Software; and
* If you have purchased a Right to Copy license for multiple copies of the
Software, make the number of copies of Software (but not the documentation)
stated on the packing slip or invoice, provided any copy must contain all of the
original Software's proprietary notices. The number of copies on the invoice is
the total number of copies that may be made for all platforms. Additional copies
of Documentation may be purchased from Licensor.
You may not:
* Permit others to use the Software, except as provided above;
* Permit concurrent use of the Software;
* Rent, lease, loan, grant a security interest in, sublicense or assign this
license or the Software, or otherwise transfer rights to the Software; or
* Remove any proprietary notices or labels on the Software.
Term; Termination. This license is effective until terminated. You may terminate
this License at any time by notifying Litronic and by destroying all copies of
the Software and Documentation in Your possession. This License will terminate
immediately without notice from Litronic if You fail to comply with any
provisions of this Agreement. Upon any termination of this Agreement, for any
reason, You agree to immediately destroy all copies of the Software and
Documentation in Your possession.
Limited Warranty. (a) Litronic warrants that for a period of ninety (90) days
from the date the Software purchased the Software, if operated as directed, will
substantially achieve the functionality described in the Documentation. Litronic
does not warrant, however, that Your use of the Software will be uninterrupted
or that the operation of the Software will be error-free or secure. In addition,
the security mechanisms implemented by the Software have inherent limitations,
and You must determine that the Software sufficiently meets your requirements.
(b) Litronic's sole liability and Your exclusive remedy for any breach of this
warranty shall be, in Litronic's sole discretion: (i) to replace Your copy of
the Software; or (ii) to advise You how to achieve substantially the same
functionality with the Software as described in the
<PAGE>
Documentation through a procedure different from that set forth in the
Documentation; or (iii) if the above remedies are impracticable, to refund to
You any license fee You paid for the Software.
(c) Repaired, corrected, or replaced Software and Documentation shall be covered
by this limited warranty for the period remaining under the warranty on the
original copy of the Software, or if longer, for thirty (30) days after the date
(a) of delivery to you of repaired or replace Software, or (b) Litronic advised
You how to operate the Software so as to achieve substantially the same
functionality described in the Documentation.
(d) Only if you inform Litronic of your problem with the Software during the
applicable warranty period and provide evidence of the date you purchased the
Software will Litronic be obligated to honor this warranty. Litronic will use
reasonable commercial efforts to repair, replace, advise, or, for individual
consumers, refund pursuant to the foregoing warranty within thirty (30) days of
being so notified.
(e) If any modifications are made to the Software by You during the warranty
period; if the media is subject to accident, abuse, or improper use; or if you
violate terms of this Agreement, then this warranty shall immediately terminate.
Moreover, this warranty shall not apply if the Software is used on or in
conjunction with hardware and software other than the unmodified version of
hardware and software with which the Software was designed to be used as
described in the Documentation.
THIS IS A LIMITED WARRANTY, AND IS THE ONLY WARRANTY MADE BY LICENSOR OR ITS
SUPPLIERS. EXCEPT AS SPECIFICALLY SET FORTH IMMEDIATELY ABOVE, LICENSOR
SPECIFICALLY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT
LIMITED TO, ANY WARRANTIES THAT THE SOFTWARE IS FREE OF DEFECTS, AND THE IMPLIED
WARRANTIES OF MERCHANTABILITY, FIT FOR A PARTICULAR PURPOSE, AND NON-INFRINGING.
THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE SOFTWARE IS BORNE BY
YOU. SHOULD THE SOFTWARE PROVE DEFECTIVE IN ANY RESPECT, YOU, AND NOT LITRONIC
OR ITS SUPPLIERS, ASSUME THE ENTIRE COST OF ANY SERVICE AND REPAIR. IN ADDITION,
THE SECURITY MECHANISMS IMPLEMENTED BY THE SOFTWARE HAVE INHERENT LIMITATIONS,
AND YOU MUST DETERMINE THAT THE SOFTWARE SUFFICIENTLY MEETS YOUR REQUIREMENTS.
THIS DISCLAIMER OF WARRANTIES CONSTITUTES AN ESSENTIAL PART OF THIS AGREEMENT.
NO USE OF THE SOFTWARE WITHOUT PAYMENT OF THE REQUIRED LICENSE FEE TO LICENSOR
IS AUTHORIZED EXCEPT SUBJECT TO THIS DISCLAIMER.
PART III -- TERMS APPLICABLE TO ALL LICENSE GRANTS
Title; Ownership. (a) At all times, Litronic and/or its suppliers retain all
right, title and interest in and to the Software. The Software, including its
structure, sequence, organization and code are valuable trade secrets of
Litronic and its suppliers. The Software is protected by United States copyright
law and International copyright treaty provisions. Except as stated herein, this
Agreement does not grant you any rights to any patents, copyrights, trade
secrets, trade names, trademarks (whether registered or unregistered) or any
other intellectual property rights in respect to the Software.
(b) NetSign, the Litronic Logo, and Litronic are trademarks of Litronic, Inc.
You may use the
<PAGE>
trademarks only insofar as required to comply with accepted trademark practice,
including identification of the trademark owner's name. Such use of any
trademark does not grant You any rights in and to that trademark.
No Reverse Compilation. You may not modify, translate, disassemble, reverse
assemble, decompile or create derivative works of the Software in whole or in
part. The Software shall not be reverse engineered such that other (non-
Litronic) readers can be used. Any source code provided is not to be modified
without the express written consent of Litronic. Litronic readers shall not be
reverse engineered such that the Software can be used with a clone of Litronic
readers or other smartcard readers.
LIMITATION OF LIABILITIES. UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY,
WHETHER TORT, CONTRACT, OR OTHERWISE, SHALL LICENSOR OR ITS LICENSORS OR
RESELLERS BE LIABLE TO YOU OR ANY THIRD PERSON FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, PUNITIVE, EXEMPLARY, OR CONSEQUENTIAL DAMAGES OF ANY CHARACTER
INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF GOODWILL, LOSS OF DATA, LOST
PROFITS, WORK STOPPAGE, COMPUTER FAILURE OR MALFUNCTIONS, OR ANY AND ALL OTHER
COMMERCIAL DAMAGES OR LOSSES. IN NO EVENT WILL LICENSOR BE LIABLE FOR ANY
DAMAGES IN EXCESS OF THE AMOUNT LICENSOR RECEIVED FROM YOU FOR A LICENSE TO THE
SOFTWARE, EVEN IF LICENSOR SHALL HAVE BEEN INFORMED OF THE POSSIBILITY OF SUCH
DAMAGES, OR OF ANY CLAIM BY ANY THIRD PARTY. THIS LIMITATION OF LIABILITY SHALL
NOT APPLY TO LIABILITY FOR DEATH OR PERSONAL INJURY RESULTING FROM LITRONIC'S
GROSS NEGLIGENCE OR INTENTIONAL ACTS TO THE EXTENT APPLICABLE LAW PROHIBITS SUCH
LIMITATION. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF
INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THIS EXCLUSION AND LIMITATION MAY NOT
APPLY TO YOU.
High-Risk Activities. The Software is not fault-tolerant and is not designed,
manufactured or intended for use or resale as on-line control equipment in
hazardous environments requiring fail-safe performance, such as in the operation
of nuclear facilities, aircraft navigation or communication systems, air traffic
control, direct life support machines, or weapon systems, in which the failure
of the Software could lead directly to death, personal injury, or severe
physical or environmental damage, and Licensor expressly disclaims any express
or implied warranty of fitness for such uses.
Export Law Assurances. You agree that neither the Software, the underlying
information or technology, nor any direct product thereof, may be downloaded or
otherwise exported or reexported (i) into (or to a national or resident of)
Cuba, Iraq, Libya, the countries of the former Yugoslavia, North Korea, Iran,
Syria or any other country to which the U.S. has embargoed goods; or (ii) to
anyone on the U.S. Treasury Department's List of Specially Designated Nationals
or the U.S. Commerce Department's Table of Denial Orders. You further represent
and warrant that You are not located in, under the control of, or a national or
resident of any such country or on any such list.
U.S. Government Restricted Rights. The Software is provided with RESTRICTED
RIGHTS. The use, duplication, or disclosure by the Government is subject to
restrictions as set forth in subdivision (c)(1)(ii) of The Rights in Technical
Data and Computer Software clause at
<PAGE>
52.227-7013. The contractor/ manufacturer of this Software is LITRONIC, INC.,
2030 MAIN STREET, SUITE 1250, IRVINE, CALIFORNIA 92614.
Confidential Information.
(a) You hereby agree that You will keep confidential any information or data
("Confidential Information") obtained from Licensor in connection with this
Agreement and shall not divulge the same to any third parties, except for: (i)
Information which, at the time of disclosure, had been previously made public;
(ii) Information which is made public after disclosure to You, unless such
disclosure is a breach of this or any other agreement; (iii) Information which,
prior to disclosure to You, was already in Your possession; or (iv) Information
which, subsequent to disclosure, was obtained by You from a third party who was
lawfully in possession of such information and was not in violation of any
contractual, legal or fiduciary obligation to Litronic or any Litronic's
supplier.
(b) All Confidential Information shall remain the sole property of Litronic. You
shall have no implied licenses or other rights in the Confidential Information
not specifically granted herein. You shall not disclose the Confidential
Information to anyone other than employees and contractors with a demonstrable
need to know, who have a binding, written, confidentiality obligation to You to
protect such Confidential Information against unauthorized disclosure or use.
You shall take all reasonable precautions to prevent unauthorized use or
disclosure of the Confidential Information.
(c) You acknowledge that any unauthorized use or disclosure of the Confidential
Information would cause irreparable harm to Litronic.
(d) Upon termination of this Agreement, You shall destroy all Confidential
Information immediately.
(e) These provisions shall survive for a period of three (3) years from the date
of termination of this Agreement.
No Waiver or Assignment. No delay or failure to take action under this License
will constitute a waiver unless expressly waived in writing, signed by a duly
authorized representative of Litronic, and no single waiver will constitute a
continuing or subsequent waiver. This License may not be assigned, sublicensed
or otherwise transferred by Licensee, by operation of law or otherwise.
Entire Agreement. This License constitutes the entire agreement between the
parties with respect to the use of the Software, and supersedes all prior or
contemporaneous understandings or agreements, written or oral, regarding such
subject matter. Any additional or different terms or conditions proposed by You
are hereby rejected and shall be of no force and effect unless expressly agreed
to in writing by Litronic. No amendment to or modification of this License will
be binding unless in writing and signed by a duly authorized representative of
Litronic.
General Provisions. This Agreement will be governed by the laws of the State of
California, as applied to agreements entered into and to be performed entirely
within California between California residents. The application of the United
Nations Convention for Contracts for the International Sale of Goods is hereby
expressly excluded. If any provisions of this Agreement shall be held by any
court of competent jurisdiction to be contrary to law, that provision will be
enforced to the maximum extent permissible, and the remaining provisions of this
Agreement will remain in full force and effect.
Should you have any questions concerning this Agreement, please contact us by
email: [email protected]
<PAGE>
EXHIBIT 10.45
[IBM
IBM Credit Corporation
P.O. Box 105061
Atlanta, GA 30348-9990]
March 8, 1999
Pulsar Data Systems, Inc.
4390 Parliament Place, Suite R
Lanham, MD 20706
Attention: Mr. William W. Davis, Sr., President/CEO
Dear Mr. Davis:
The purpose of this letter ("Letter") is to memorialize the agreement
reached during the March 2, 1999 telephone conference between representatives of
Pulsar Data Systems, Inc. ("Pulsar") and IBM Credit Corporation ("IBM Credit").
Pulsar is, as described in subparagraph (c) below, in default (1) under the
Inventory and Working Capital Financing Agreement between Pulsar and IBM Credit
dated October 30, 1997, as amended from time to time (the "Financing
Agreement"), (2) under the conditions to forbearance set forth in the
Forbearance Agreement between Pulsar and IBM Credit darted as of August 31, 1998
as amended from time to time (the "Forbearance Agreement").
Pulsar has indicated that it has significant immediate cash requirements
and that the expected cash infusion resulting from the pending initial public
offering ("IPO") will not occur in a timely enough fashion to meet those
requirements.
At Pulsar's request, IBM Credit has agreed to make certain financial
accommodations based upon the terms and conditions contained herein.
IBM Credit and Pulsar agree that:
(a) Pulsar acknowledges that Pulsar failed to perform certain of its agreements
required to be performed by January 18, 1999 under a letter agreement
("Letter Agreement") dated December 16, 1998 among IBM Credit, Pulsar and
William W. Davis, Sr. and Lillian Davis as guarantor of Pulsar's
obligations to IBM Credit.
(b) IBM Credit's agreement under subparagraph (f) of the Letter Agreement to
defer the requirement to further reduce the collateral value of the
Nonstandard Collateral (as defined in the Letter Agreement) monthly,
therefore, terminated on January 18, 1999.
<PAGE>
Pulsar Data Systems, Inc. -2- March 8, 1999
(c) Pulsar acknowledges that as a result of the foregoing Pulsar is under
collateralized by approximately $278,000 pursuant to the agreements between
IBM Credit and Pulsar, and such undercollateralization constitutes a
default under the Financing Agreement and the Forbearance Agreement.
(d) IBM Credit will allow Pulsar to include, as Eligible Accounts at a value of
85% of the amount of the invoice, all invoices identified on the attached
Pulsar report titled "PULSAR OVER 120 REPORT AS OF 2/24/98 COLLECTIBLE
VERSUS [SIC] NON-COLLECTIBLE" (the "120 Report") which Pulsar provided to
IBM Credit on February 26, 1999 provided, that (i) Pulsar hereby
-------- ----
represents and warrants that the date above is a typographical error and
that the date of the 120 Report should read 2/24/99, and (ii) any such
invoices which IBM Credit deems to be not Eligible Accounts as a result of
its verification with the respective Accounts debtors will be, upon
notification by IBM credit to Pulsar, immediately reclassified as
ineligible accounts for purposes of determining the Borrowing Base.
(e) IBM Credit will allow Pulsar to include the value of the Merrill Lynch
accounts assigned to IBM Credit (the "Merrill Nonstandard Collateral") as a
component of the total value of the Nonstandard Collateral (as defined in
the Letter Agreement). Effective with this Letter, the value of the
Merrill Nonstandard Collateral will be $597,000.00 which, when added to the
collateral value allowed by IBM Credit for the personal residence with
respect to which IBM Credit has been granted an interest (the "Real Estate
Nonstandard Collateral"), will immediately increase the total value of the
Nonstandard Collateral to $1,397,000.000 and as such amount may be adjusted
according to subparagraph (i) below. The Merrill Nonstandard Collateral
will be adjusted each calendar month to equal the market value of the
Merrill Nonstandard Collateral as of the last day of the previous calendar
month, as reported by Merrill Lynch to Pulsar. Pulsar will provide such
Merrill Lynch report to IBM Credit by no later than the seventh Business
Day of each calendar month. If a Shortfall Amount results from such
adjustment, Pulsar shall immediately pay such Shortfall Amount to IBM
Credit.
(f) IBM Credit will temporarily increase Pulsar's credit line under the
Financing Agreement to $9,000,000.00 from $8,000,000.00 (such increase, the
"Temporary Increase") as of March 2, 1999 provided, that, such Temporary
-------- ----
Increase will expire on April 30, 1999, and on April 30, 1999 such credit
line will return to $8,000,000.00.
(g) IBM Credit will defer the requirement to reduce the collateral value of the
Nonstandard Collateral by $100,000.00 per month until the earlier of (i)
the occurrence of any failure by Pulsar to perform any of its agreements
under this Letter, (ii) the occurrence of a further default under the
Financing Agreement or the Forbearance Agreement (iii) the occurrence of
any failure by Pulsar to perform any of its agreements under the Letter
Agreement (other than those failures described in IBM Credit's letter to
Pulsar dated February 2, 1999), (iv) the date any cash equity infusion is
realized by Pulsar as a result of an initial public offering, and (v) June
1, 1999.
<PAGE>
Pulsar Data Systems, Inc. -3- March 8, 1999
(h) IBM Credit will defer until June 1, 1999 the payments required on March 1,
1999, April 1, 1999 and May 1, 1999 under the Promissory Note dated October
30, 1998 made by Pulsar in favor of IBM Credit and IBM Credit agrees to
reverse such March 1, 1999 payment already made by Pulsar and credit
Pulsar's outstanding balance under the Financing Agreement by such amount.
(i) William W. Davis will obtain an independent appraisal, satisfactory to IBM
Credit, of the value (the "Appraised Value") of the personal residence with
respect to which IBM Credit has been granted an interest and, upon IBM
Credit's receipt and review of such appraisal, (i) IBM Credit will adjust
the Real Estate Nonstandard Collateral to the lesser of (a) the Appraised
Value less any prior liens on such personal residence and (b) $1,100,000.00
and (ii) the total value of the Nonstandard Collateral will be adjusted
accordingly.
(j) IBM Credit does not waive any default, but agrees to forebear from
exercising remedies available to it in connection with the default referred
to in subparagraph (c) above and to make the accommodations set forth
herein until the earlier of (i) the occurrence of any failure by Pulsar to
perform any of its agreements under this Letter, (ii) the occurrence of a
further default under the Financing Agreement or the Forbearance Agreement
(iii) the occurrence of any failure by Pulsar to perform any of its
agreements under the Letter Agreement (other than those failures described
in IBM Credit's letter to Pulsar dated February 2, 1999 and for which
action has already been taken by IBM Credit), (iv) the date any cash
infusion is realized by Pulsar as a result of an IPO and (v) June 1, 1999.
Pulsar, William W. Davis, Sr. and Lillian Davis each severally waives the
benefit of any statute of limitations that might otherwise bar the recovery
of any amount due IBM Credit from any one of them in connection with this
subparagraph (j).
Nothing in this Letter or any of the other negotiations or actions
undertaken pursuant to this Letter, shall constitute a waiver or modification of
any of IBM Credit's rights and remedies against Pulsar or William W. Davis, Sr.,
and Lillian Davis agree that the terms of the Financing Agreement, the
Forbearance Agreement, the Letter Agreement, the letter agreement dated February
2, 1999 among IBM Credit, Pulsar, William W. Davis, Sr. and Lillian Davis, and
any guaranty in connection therewith continue in full force and effect and will
be strictly adhered to on and after the date hereof except as expressly set
forth in this Letter. William W. Davis and Lillian Davis restate and reaffirm
the validity and legality of each Guaranty. Each party to this letter agreement
agrees and acknowledges that such party is entering into this Letter agreement
freely and voluntarily with the advice of legal counsel of such party's own
choosing.
<PAGE>
Pulsar Data Systems, Inc. -4- March 8, 1999
Capitalized terms used herein but not defined herein will have the meanings
set forth in the Financing Agreement.
Sincerely,
/s/ R. M. Faile
R. M. Faile
Account Executive
ACKNOWLEDGED and AGREED to:
By:
-----------------------------------------------------------
Name: William W. Davis, Sr. as Guarantor and as President and CEO
of Pulsar Data Systems, Inc.
Date:
____________________________________
By:
-----------------------------------------------------------
Name: Lillian Davis, as Guarantor of Pulsar Data Systems, Inc.
Date:
____________________________________
<PAGE>
PULSAR OVER 120 REPORT
AS OF 2/24/98
COLLECTIBLE VERSUS [SIC]
NON-COLLECTIBLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
CUSTOMER CUSTOMER INVOICE INVOICE INVOICE EXPECTED CUSTOMER CONTACT NAME
NAME NUMBER NUMBER DATE AMOUNT PAY DATE AND PHONE NUMBER
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
UNIVERSITY OF DC 72UDC008 11036628 22-Sep-98 $ 185.77 15-Mar-99 Robin King 202-274-5613
- -----------------------------------------------------------------------------------------------------------------------
US BANKRUPTCY COURT 57USBC12 11038780 24-Sep-98 $ 4,576.56 05-Mar-99 Ida Reza 213-894-3231
- -----------------------------------------------------------------------------------------------------------------------
AZIMUTH, INC. 67AZ1201 11037409 15-Oct-98 $ 4.912.74 MID 3/99 Tina Conoway 304-292-3700
- -----------------------------------------------------------------------------------------------------------------------
BOEING INFOR.SYSTEMS 53BOEING ALL ALL DATES $ 28,198.90 05-Mar-99 Robin Cross 703-821-6344
INVOICES
- -----------------------------------------------------------------------------------------------------------------------
US POSTAL SERVICE 46USPS68 1103684 22-Oct-98 $ 39,840.00 - 4-Mar-99 Beth Nicholas 919-501-9072
-----------
- -----------------------------------------------------------------------------------------------------------------------
HOUSTON ASYLUM 46HA0267 11037739 27-Oct-98 $ 58,434.00 05-Mar-99 Rebecca Ross 281-774-4827
OFFICE -----------
- -----------------------------------------------------------------------------------------------------------------------
GSA 46GSA890 11036829 21-Sep-98 $ 8,218.02 01-Mar-99 Debra Samprey 817-978-7524
- -----------------------------------------------------------------------------------------------------------------------
FDIC 46FDIC00 11037676 23-Oct-98 $109,465.86 26-Feb-99 Tom Harris 202-942-3112
-----------
- -----------------------------------------------------------------------------------------------------------------------
DEPT OF EDUCATION 46DOE202 11038922 29-Sep-98 22,570.08 05-Mar-99 Mike Holloway 202-401-2700
- -----------------------------------------------------------------------------------------------------------------------
DEPT. OF EDUCATION 46DOE202 11037523 20-Oct-98 $ 313.32 05-Mar-99 Mike Holloway 202-401-2700
- -----------------------------------------------------------------------------------------------------------------------
DFAS DAYTON, OH 46DFA8472 11037474 19-ct-98 $ 4,849.00 25-Feb-98 Anyone 781-377-8045 Paid 2/24/99
- -----------------------------------------------------------------------------------------------------------------------
GSA 46BPA001 110366628 21-Sep-98 $ 7,190.94 26-Feb-99 Shelly Martinez 817-978-0107
- -----------------------------------------------------------------------------------------------------------------------
GSA 46BPA001 110366627 21-Sep-98 $ 18,298.07 26-fEB-99 Shelly Martinez 817-978-0107
- -----------------------------------------------------------------------------------------------------------------------
NAT'L INST. OF HEALTH 4ONIH336 11037184 07-Oct-98 $ 224.88 15-Mar-99 Ms. Rogers 256-885-5893
- -----------------------------------------------------------------------------------------------------------------------
NAT'L INST. OF HEALTH 40NIH336 11037488 16-Oct-98 $ 14,973.12 15-Mar-99 Laura Dance 202-762-1072
- -----------------------------------------------------------------------------------------------------------------------
NAT'L INST. Of HEALTH 40NIH336 11037614 10-Oct-98 $ 1,899.61 15-Mar-99 Laura Dance 202-762-1072
- -----------------------------------------------------------------------------------------------------------------------
NAT'L INST. OF HEALTH 40NIH336 110375366 10-Oct-98 $ 3,307.36 15-Mar-99 Laura Dance 202-782-1072
- -----------------------------------------------------------------------------------------------------------------------
NAT'L INST. OF HEALTH 40NIH336 11037588 21-Oct-98 $ 2,888.566 15-Mar-99 Anyone 301-496-6088
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAT'L INST. OF HEALTH 40NIH3366 11037591 21-Oct-98 $ 1,300.00 15-Masr-99 Rita Willett 214-742-8387 ext. 7002
- -----------------------------------------------------------------------------------------------------------------------
NAT'L INST. OF HEALTH 40NIH336 11037584 21-Oct-98 $ 247.76 15-Mar-99 Laura Dance 202-782-1072
- -----------------------------------------------------------------------------------------------------------------------
US CORP. OF ENGINEER 11DOA179 110345504 16-Jun-98 $ 2,208.00 22-Mar-99 Col. Judith Rozette 253-968-5929
- -----------------------------------------------------------------------------------------------------------------------
US CORP. OF ENGINEER 11DOA173 11037046 30-Sep-98 $ 53,936.30 22-Mar-98 Col. Judith Rozette 253-968-5929
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11033830 13-May-98 $ 300.00 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNT SCHOOLS 72000120 11034973 08-Jul-98 $ 1,564.61 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11035162 15-Jul-98 $ 760.00 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11035517 31-Jul-98 $ 6,341.36 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11035776 17-Aug-98 $ 164.00 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11036085 31-Aug-98 $ 249.00 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11038086 31-Aug-98 $ 298.00 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11036252 08-Sep-98 $ 466.69 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11036636 22-Sep-98 $ 602.22 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11036736 23-Sep-98 $ 526.65 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11036939 30-Sep-98 $ 2,021.42 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11037014 30-Sep-98 $ 729.79 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11037629 30-Sep-98 $ 280.61 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11037454 16-Oct-98 $ 448.20 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
PG COUNTY SCHOOLS 72000120 11037526 20-Oct-98 $ 124.66 MD 3/99 Cathy Bond 301-952-6167
- -----------------------------------------------------------------------------------------------------------------------
VA MEDICAL 46220025 11037531 20-Oct-98 $ 8,669.52 22-Mar-99 Denise 926-372-2272
- -----------------------------------------------------------------------------------------------------------------------
FEDERAL BUREAU OF 46000700 11035008 09-Jul-98 $ 27.00 05-Mar-99 Robin Joyner 202-307-1287
PRISONS
- -----------------------------------------------------------------------------------------------------------------------
STATE DEPT. 466000510 11037422 15-Oct-98 $ 158.00 18-Mar-99 Evette Norman 703-875-6494
- -----------------------------------------------------------------------------------------------------------------------
EEOC 46000510 11037839 22-Oct-98 $ 1,305.00 19-Mar-99 Angela Lewis 202-663-4242
- -----------------------------------------------------------------------------------------------------------------------
INS 46000175 11034617 22-Jun-99 $ 8,865.75 15-Mar-99 Sandra Smith 202-616-7859
- -----------------------------------------------------------------------------------------------------------------------
INS 46000175 11034986 08-Jul-98 $ 7,795.00 15-Mar-99 Sandra Smith 202-616-7659
- -----------------------------------------------------------------------------------------------------------------------
INS 46000175 11037860 22-Oct-98 $ 12,313.00 15-Mar-99 Sandra Smith 202-616-7659
- -----------------------------------------------------------------------------------------------------------------------
INS 46000175 11037701 23-Oct-98 $ 38,847.00 15-Mar-99 Sandra Smith 202-616-7659
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $476,198.07
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.46
June 4, 1999
Pulsar Data Systems, Inc.
4390 Parliament Place, Suite R
Lanham, MD 20706
Attention: Mr. William W. Davis, Sr., President/CEO
Dear Mr. Davis:
Reference is made to a proposed transaction pursuant to which William W. Davis,
Sr. and Lillian A. Davis (the "Pulsar Shareholders"), the owners of all of the
outstanding shares of capital stock of Pulsar (the "Pulsar Shares") desire to
exchange all of the Pulsar Shares for a minority of the issued and outstanding
shares of Litronic Inc., a Delaware corporation ("Litronic"),resulting in Pulsar
becoming a wholly owned subsidiary of Litronic (the "Transaction"). The
Transaction would be consummated following the acquisition by Litronic of all of
the issued and outstanding shares of capital stock of Litronic Industries, Inc.
a California corporation, and contemporaneously with the initial public offering
of Litronic's common stock.
Pulsar is, as described in subparagraph (c) below, in default (1) under the
Inventory and Working Capital Financing Agreement between Pulsar and IBM Credit
dated October 30, 1997, as amended from time to time (the "Financing
Agreement"), (2) under the conditions to forbearance set forth in the
Forbearance Agreement between Pulsar and IBM Credit dated as of August 31, 1998
as amended from time to time ( the "Forbearance Agreement").
At Pulsar's request, IBM Credit has agreed to make certain financial
accommodations based upon the terms and conditions contained herein.
IBM Credit and Pulsar agree that:
(a) Pulsar acknowledges that Pulsar failed to perform certain of its agreements
required to be performed by January 18, 1999 under a letter agreement
("Letter Agreement A") dated December 16, 1998 among IBM Credit, Pulsar and
William W. Davis, Sr. and Lillian Davis as guarantor of Pulsar's
obligations to IBM Credit and under a subsequent letter agreement ("Letter
Agreement B") dated dated March 8, 1999 among the same parties
(collectively the "Letter Agreements").
(b) IBM Credit's agreement under the Letter Agreements to defer the requirement
to further reduce the collateral value of the Nonstandard Collateral (as
defined in Letter Agreement A) monthly, therefore, terminated on June 1,
1999.
(c) Pulsar acknowledges that as a result of the foregoing Pulsar is under
collateralized by approximately $1,246,000.00 pursuant to the agreements
between IBM Credit and Pulsar, and such undercollateralization constitutes
a default under the Financing Agreement and the Forbearance Agreement.
(d) IBM Credit will allow Pulsar to include the value for the Merrill Lynch
accounts assigned to IBM Credit ("the "Merrill Nonstandard Collateral") as
a component of the total value of the Nonstandard Collateral (as defined in
the Letter Agreement). Effective with this Letter, the value of the
Merrill Nonstandard Collateral will be $598,800.00 which, when added to the
collateral value allowed by IBM Credit for the personal residence with
respect to which IBM Credit has been granted an interest (the "Real Estate
Nonstandard Collateral"), will immediately increase the total value of the
Nonstandard Collateral to $1,398,800.00. The Merrill Nonstandard Collateral
will be adjusted each calendar month to equal the market value of the
Merrill Nonstandard Collateral as of the last day of the previous calendar
month, as
<PAGE>
Pulsar Data Systems, Inc. -2- June 4, 1999
reported by Merrill Lynch to Pulsar. Pulsar will provide such Merrill Lynch
report to IBM Credit by no later than the seventh Business Day of each
calendar month. If a Shortfall Amount results from such adjustment, Pulsar
shall immediately pay such Shortfall Amount to IBM Credit.
(e) IBM Credit will defer the requirement to reduce the collateral value of
the Nonstandard Collateral by $100,000.00 per month until the earlier of
(i) the occurrence of any failure by Pulsar to perform any of its
agreements under this Letter, (ii) the occurrence of a further default
under the Financing Agreement or the Forbearance Agreement (iii) the
occurrence of any failure by Pulsar to perform any of its agreements under
the Letter Agreements (other than those failures described in IBM Credit's
letter to Pulsar dated February 2, 1999), (iv) the date Pulsar, William W.
Davis, Sr. or Lillian Davis determine that the Transaction will not be
consummated and (v) June 21, 1999.
(f) IBM Credit will defer until June 21, 1999 the payments required on February
1, 1999, March 1, 1999, April 1, 1999, May 1, 1999 and June 1, 1999 under
the Promissory Note dated October 30, 1998 made by Pulsar in favor of IBM
Credit.
(g) IBM Credit does not waive any default, but agrees to forebear from
exercising remedies available to it in connection with the default referred
to in subparagraph (c) above and to make the accommodations set forth
herein until the earlier of (i) the occurrence of any failure by Pulsar to
perform any of its agreements under this Letter, (ii) the occurrence of a
further default under the Financing Agreement or the Forbearance Agreement
(iii) the occurrence of any failure by Pulsar to perform any of its
agreements under the Letter Agreements (other than those failures described
in IBM Credit's letter to Pulsar dated February 2, 1999 and for which
action has already been taken by IBM Credit), (iv) the date Pulsar, William
W. Davis, Sr. or Lillian Davis determine that the Transaction will not be
consummated and (v) June 21, 1999.
(h) Pulsar, William W. Davis, Sr. and Lillian Davis each severally waives the
benefit of any statute of limitations that might otherwise bar the recovery
of any amount due IBM Credit from any one of them in connection with this
subparagraph (h).
Nothing in this Letter or any of the other negotiations or actions undertaken
pursuant to this Letter, shall constitute a waiver or modification of any of IBM
Credit's rights and remedies against Pulsar or William W. Davis, Sr. or Lillian
Davis. Notwithstanding any prior mutual temporary disregard of any of the terms
of the Financing Agreement, the Forbearance Agreement, the Letter Agreement or
any other agreement, Pulsar, William W. Davis, Sr., and Lillian Davis agree that
the terms of the Financing Agreement, the Forbearance Agreement, the Letter
Agreements, the letter agreement dated February 2, 1999 among IBM Credit,
Pulsar, William W. Davis, Sr. and Lillian Davis, and any guaranty in connection
therewith continue in full force and effect and will be strictly adhered to on
and after the date hereof except as expressly set forth in this Letter. William
W. Davis and Lillian Davis restate and reaffirm the validity and legality of
each Guaranty. Each party to this Letter agreement agrees and acknowledges that
such party is entering into this Letter agreement freely and voluntarily with
the advice of legal counsel of such party's own choosing.
Capitalized terms used herein but not defined herein will have the meanings set
forth in the Financing Agreement.
Sincerely,
John L. Anderson
Region Loan Manager
ACKNOWLEDGED and AGREED to:
By: ____________________________________________________
Name: William W. Davis, Sr. as Guarantor and as President and CEO
of Pulsar Data Systems, Inc.
Date: ____________________________
By: ____________________________________________________
Name: Lillian Davis, as Guarantor and Secretary of Pulsar Data Systems, Inc.
Date: ____________________________
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
(When the Reorganization as described in note 1 of the consolidated financial
statements referenced below has been consummated, we will be in a position to
provide the following consent)
/s/ KPMG LLP
The Board of Directors
Litronic Inc.:
We consent to the use of our report dated February 26, 1999, related to the
consolidated balance sheets of Litronic Inc. and subsidiary as of December 31,
1997 and 1998 and the consolidated statements of operations, shareholders'
deficiency and cash flows for each of the years in the three year period ended
December 31, 1998 and to the reference to our firm under the headings "Selected
Financial Data-Litronic" and "Experts" in the prospectus.
Orange County, California
June 7, 1999
<PAGE>
EXHIBIT 23.2
The Board of Directors
Pulsar Data Systems, Inc.
Our report dated March 31, 1999, except for Note 5 which is as of May 5, 1999
and Note 16 which is as of June 3, 1999, contains an explanatory paragraph that
states that the Company has suffered losses from operations and has a net
working capital deficit, which raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Financial Data Pulsar" and "Experts" in the
prospectus.
/s/ KPMG LLP
McLean, Virginia
June 8, 1999
<PAGE>
EXHIBIT 23.3
To The Board of Directors
Pulsar Data Systems, Inc.
Lanham, Maryland
The audits referred to in our report dated April 27, 1998, which contains an
explanatory paragraph that states that the Company incurred a loss, has a net
capital deficiency and was in violation of certain debt convenants, among
other factors, raise substantial doubt about the Company's ability to continue
as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II, Valuation
and Qualifying Accounts and Reserves is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ Keller Bruner & Company, L.L.C.
Bethesda, Maryland
June 7, 1999
