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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
COMMISSION FILE NO.: 0-16182
AXSYS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-1962029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
910 SYLVAN AVENUE
ENGLEWOOD CLIFFS, NEW JERSEY 07632
(Address of principal executive offices) (Zip Code)
(201) 871-1500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.01 per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on March 9, 2000, $30,466,000.
Common Stock outstanding at March 9, 2000: 3,975,189 shares.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K REFERENCE
Portion of Axsys Technologies, Inc. Notice of Annual
Meeting of Stockholders and Proxy Statement. Part III, Items 10-13
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PART I
ITEM 1. BUSINESS
Axsys Technologies, Inc. ("Axsys") is a leading designer and manufacturer
of high-performance custom micro-positioning and precision optical components,
subsystems and systems for a variety of end-users in the defense, space,
high-end digital imaging and electronics capital equipment markets. Axsys also
distributes precision ball bearings for use in a variety of industrial and
commercial applications. Axsys is incorporated in Delaware, and its common stock
is traded on the NASDAQ National Market under the symbol "AXYS."
Axsys' products range from components and integrated assemblies to turnkey
systems. Axsys utilizes high precision positioning and optical technologies to
develop products that enhance the accuracy, throughput and yield of the
end-user's equipment and processes. It generally sells its products to a wide
variety of original equipment manufacturers ("OEMs") enabling these customers to
offer products which are highly precise at high throughput.
Axsys is organized into two groups - Aerospace and Defense Group ("ADG")
and Commercial Products Group ("CPG"). The ADG offers its capabilities in
magnetics, precision optics, precision machining and subsystems integration
to space and defense OEMs. The ADG designs, manufactures and sells high-end
components such as precision sensors, high-performance motors, precision
metal optics and airbearings. These products enable OEMs to improve
measurement precision, positioning performance (accuracy, speed and power)
and weight requirements in their systems.
The CPG designs, manufactures and sells components, subsystems and systems
to high-performance OEMs and end users serving the electronics capital
equipment, data storage and digital imaging markets. These products enable OEMs
to improve the accuracy, throughput and yield of their equipment and processes.
The CPG also distributes precision ball bearings, acquired from various domestic
and international sources, to OEMs and Maintenance and Repair Organization
("MRO") distributors supporting industrial and commercial markets.
MARKET OVERVIEW
Axsys' products are sold to a wide variety of customers in five primary
markets:
DEFENSE. The defense industry has historically been a large consumer
of high-performance components. Although overall defense spending has
declined over the past several years, the defense market for upgrading
existing platforms, including the development of "smart weapons," has grown
during this time period. These upgrades include state-of-the-art electronics,
enhanced night vision systems, radar and guidance systems, and missile seeker
technologies, all of which incorporate high-performance components provided
by suppliers like Axsys, such as precision metal optics, high performance
motors and sensors, and precision-machined structures.
SPACE. The commercial space market has been recently depressed due to
the delay of several major communications systems driven by the uncertainty of
mobile phone service provided via satellite. Within the commercial space market
Axsys supplies light-weight and high-performance components, such as precision
metal optics, high-performance motors, sensors, actuation devices, inertial
stabilization components and beryllium components. To some extent, sales into
this market are dependent on the timing of large satellite programs which can
result in an uneven flow of orders and sales.
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HIGH-END DIGITAL IMAGING. The high-end digital imaging market consists
of film recording systems, including pre-press and printed circuit board layout
film recorders, as well as laser projection systems. In these products, laser
light is modulated, reflected off a mirror on a rotating opto-mechanical scanner
and swept across a medium such as film to create an image. In recent years,
customers have demanded increased resolution and throughput capabilities in
these high-end systems, requiring the use of improved optics, higher speed
motors, airbearings and more sophisticated electronic controls. In 1999, this
market experienced a downturn due primarily to economic conditions in Asia as
well as customer indecisions based on next generation technology planned to be
announced at the 2000 industry trade show- Drupa to be held in May 2000 in
Germany. Axsys supplies a variety of critical components and subsystems to this
market, including high-performance motors, precision optics, high speed
airbearing scanners and imaging engines.
ELECTRONICS CAPITAL EQUIPMENT. The electronics capital equipment market
consists of equipment used to produce and test semiconductors, mass data storage
devices and flat panel displays. The electronics capital equipment market has
historically been cyclical in nature. For several years prior to 1998, the
market expanded significantly as a result of growth in the sales of
semiconductors, mass data storage drives and flat panel displays as well as the
rapid technological advances relating to their manufacturing and testing. During
the second half of 1998 and continuing through 1999, however, this market
experienced a significant downturn which began as a result of the difficult
Asian economic environment and continued through 1999 as a result of industry
overcapacity of test equipment. Axsys believes that the key factors for the
historical and future growth in demand for high-performance components and
systems in the electronics capital equipment market are: (i) the miniaturization
of products, creating the need for smaller components and precise tolerances;
(ii) faster production cycles to meet product demand; (iii) the need for higher
production yields; and (iv) increased outsourcing of the design and manufacture
of electro-mechanical and electro-optical subsystems and systems.
INDUSTRIAL AUTOMATION. The industrial automation market consists of a
wide range of industrial and commercial products, including machine tools,
motion control components and various automation equipment, as well as MRO
distributors who supply replacement parts for older equipment. Axsys' OEM and
MRO customers in these markets typically purchase precision bearings and
assemblies that must be delivered on a short lead-time basis.
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BUSINESS STRATEGY
Axsys' primary objective is to enhance its position as a leading provider
of components, subsystems and systems that increase throughput and yield to
OEMs and end-users requiring high-performance devices in their equipment and
quality assurance processes. Its business strategy includes leveraging its
component manufacturing expertise, resources and systems integration
capabilities to develop higher-level subsystems and systems by employing its
micro-positioning and precision optical technologies. Key elements of this
business strategy include the following:
INTEGRATE ITS OPERATING DIVISIONS AND SUBSIDIARIES. In December 1999,
Axsys reorganized its operating divisions and subsidiaries into two operating
groups -- Aerospace and Defense Group and Commercial Products Group -- in
order to focus more closely on the customer. The operations that were
principally selling to the space and defense industries, specifically
Speedring and the Axsys Motion Control Division were integrated to form the
ADG. The commercial oriented operations, specifically AST Bearings, Speedring
Systems and Teletrac, were integrated into the CPG. The precision metal
optics portion of Speedring Systems was moved into the Speedring facility in
Cullman, Alabama and a new large and aspheric optics facility in Orange
County, California and integrated into the ADG. Component technologies, such
as motors, optics and precision machined products used by the CPG, will
continue to be supplied by the ADG operations.
FOCUS ON OPERATING EFFICIENCIES. Axsys has embarked on a process to
implement "Lean" techniques throughout the organization. The concept of Lean is
based on eliminating waste in all aspects of the organization, measured in cycle
time, material costs, and scrap and rework. By implementing this process, Axsys
expects to dramatically reduce its design and manufacturing lead times as well
as its manufacturing costs, with a view to making it more competitive in the
marketplace and to enabling it to increase market share.
INCREASE SUBSYSTEMS AND SYSTEMS BUSINESS. Axsys intends to continue its
development of subsystems and systems by integrating its core component
technologies with its systems integration capabilities to provide customers with
high performance systems at competitive prices. For example, Axsys introduced a
turnkey head-stack assembly tester for disk drive manufacturers which integrates
technologies from its Integrated Systems facility in Santa Barbara, California
and its strategic alliance with Westlake Technology Corporation, located in
Newbury Park, California. In addition, Axsys is currently developing a fiber
optic automation machine which integrates the linear motor and precision
machining capabilities of the ADG with electronics and systems integration
capabilities of its Integrated Systems facility.
CAPITALIZE ON CROSS-SELLING OPPORTUNITIES. In early 1999, Axsys
reorganized its sales force into three distinct sales forces: Aerospace &
Defense, High-end Commercial and Bearings Distribution, with a view to
increasing sales to its existing customers and markets through its existing
distribution channels. Axsys' objective is to generate additional revenue by
cross-selling its products to existing customers as well as to increase the
level of value added it provides to its customers.
INCREASE INVESTMENT IN ENGINEERING AND RESEARCH AND DEVELOPMENT. In
order to maintain and expand on its existing technologies and capabilities,
Axsys, beginning in 2000, intends to make an investment in upgrading its
computer aided design ("CAD") capabilities to include 3-dimensional
parametric design software. In addition, it continues to invest in
sophisticated test equipment and state-of-the-art manufacturing equipment,
such as computer numerically controlled ("CNC") mills and lathes, electrical
discharge machines, diamond turning and lapping machines. In 1999 and 1998,
Axsys invested approximately $4.7 million (or 5.6% of sales) and $4.9 million
(or 5.0% of sales) on engineering, research and development, respectively.
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ENHANCE MARKET POSITION THROUGH ACQUISITIONS AND STRATEGIC ALLIANCES AND
DIVESTING OF NON-CORE BUSINESSES. Axsys has historically expanded its market
presence and capabilities through acquisitions, and it plans to continue to grow
through acquisitions.
o In April 1996, Axsys increased its capabilities in systems integration
through its acquisition of Precision Aerotech, Inc. ("PAI") and its
subsidiaries Speedring, Inc., a provider of precision machined
components made of specialty metals such as beryllium, and Speedring
Systems, Inc., a manufacturer of high-performance laser scanners and
optics.
o In October 1996, Axsys further expanded its market presence in
precision machining with its acquisition of Lockheed Martin Beryllium
Corporation ("LMBC"), a supplier of precision-machined beryllium
components.
o In May 1997, Axsys increased its presence in the electronics capital
equipment market by acquiring Telerac Inc. ("Teletrac"), a manufacturer
of laser-based precision measurement systems.
o In August 1998, Axsys entered into a strategic alliance with Westlake
Technology Corporation ("Westlake"). This strategic alliance enables
Axsys to integrate Westlake's advanced electronics into the test stands
manufactured by Teletrac for the electronics capital equipment market.
o On March 17, 2000, Axsys sold substantially all the assets of its Beau
Interconnect division ("Beau"), a non-core business to Molex
Industrial Ventures Inc., a subsidiary of Molex Incorporated, for $31.8
million, subject to adjustment, as provided in the related purchase
agreement. The purchase price, which was payable in cash, was arrived
at through arms-length negotiation. Beau Interconnect designs and
manufactures electrical interconnect devices, barrier terminal blocks
and connectors.
Although Axsys reviews and considers possible acquisitions on an ongoing basis,
no specific acquisitions are being negotiated or planned as of the date of this
filing.
TECHNOLOGIES, PRODUCTS, SOLUTIONS AND CAPABILITIES
Axsys has integrated several key technologies and acquired or developed
systems integration capabilities to enable the design and manufacture a wide
variety of high-performance precision optical and micro-positioning components,
subsystems and systems. These key technologies include:
MAGNETICS. Axsys designs, manufactures and sells high-performance motors
and precision resolvers using state-of-the-art magnetic technologies and
materials. Applications for these high-performance components include precision
semiconductor processing and inspection equipment, pick and place robotic
handlers, missile seeker systems, guidance systems and satellite actuators.
PRECISION MACHINING. Axsys' capabilities, which allow for very precise and
exacting measurements, are applied in the precision machining of various metals
for precision optics applications, airbearings, heat sinks, structural housings
and gimbals. Axsys' airbearings provide precision positioning and high speeds,
and are used in high speed scanners and weapons guidance systems. Its heat sinks
are used to dissipate heat in high-performance avionics and satellite
electronics, and its gimbals are used in various applications, including
positioning optical sensors in forward looking infrared ("FLIR") night vision
systems. Axsys also precision machines optical substrates used by Axsys and
other manufacturers in a variety of precision metal optical applications.
OPTICS. Axsys designs and manufactures a broad range of precision metal
optical components. Precision metal optics are used in applications where
performance requirements cannot be met with glass optics. The advantages of
metal include lighter weight and ease of mechanical interface with housing and
actuation devices. Precision metal optical components sold by Axsys are used in
high speed electro-mechanical scanners, weapons fire control systems, FLIR night
vision weapons systems and high-performance spaceborne instruments used on
weather, mapping and scientific satellites.
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ELECTRONICS. Axsys designs and manufactures several key electronic
components for the electronics capital equipment and high-end digital imaging
markets including laser interferometers and electronic controllers and
drives.
Its electronics components control the speed and position of electro-mechanical
systems, such as precision motors, actuators, X-Y positioning stages and laser
scanners. Laser interferometers, which are designed to permit precise linear
position sensing, are used principally in the electronics capital equipment
market. Electronic controllers coordinate the positioning and speed of
electro-mechanical systems by interfacing with other motion control components.
Drives provide power to a motor based on input from the controller in order to
achieve a designated position or to achieve a specific speed.
The following table summarizes the component products and services
manufactured by Axsys, by the technologies they incorporate:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Core Technologies
- -----------------------------------------------------------------------------------------------------------------
MAGNETICS PRECISION MACHINING PRECISION OPTICS ELECTRONICS
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
o AC Motors o Airbearing o Scanning Optics o Laser Interferometers
o Brush and Brushless DC Components - Polygon Mirrors o AC and DC motor speed
Motors: o Optical Substrates - Monogon controls
- Torque o Structural Mirrors o Custom DSP Motion
- Servo Housings o Flat Optics Controllers
- Limited Angle o Gimbals & Yokes - Head Mirrors o Motor Drives
o Resolvers o Heat Sinks - Fold Mirrors
o Synchros o Aspherics
- Telescopes
- Collimators
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
SYSTEMS INTEGRATION CAPABILITIES. Axsys has introduced products integrating
each of its core technologies and systems integration capabilities to provide
high-performance subsystems and systems to its customers. Its precision
subsystems include X-Y positioning stages and rotary positioning subsystems such
as actuators, opto-mechanical laser scanners and imaging subsystems as well as
laser tracking autofocus subsystems, each of which employs Axsys' motion control
or optics technologies. The X-Y stage positioning subsystems are used in
high-precision or high-performance applications, such as semiconductor and flat
panel display positioning subsystems for use in processing or testing. The
rotary positioning subsystems are used in applications such as night vision
systems for defense contractors and cluster tool robotics in electronics capital
equipment. The laser scanning and imaging subsystems are used by pre-press
equipment manufacturers and semiconductor inspection equipment manufacturers.
The laser autofocus, which is used to automatically focus a microscope, is sold
to OEMs which manufacture automated optical inspection machines used in the
electronics capital equipment market.
Axsys is currently developing additional integrated systems, such as an
imaging engine for digital imaging pre-press applications, and expects that
additional integration opportunities will be identified as customers continue to
outsource the development of highly engineered precision electro-mechanical and
electro-optical subsystems and systems.
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The following table illustrates how Axsys' technologies, products and
capabilities are integrated to develop subsystems and systems:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TECHNOLOGIES AND CAPABILITIES
- ----------------------------------------------------------------------------------------------------------------------------
SUBSYSTEMS
& PRECISION
SYSTEMS OPTICS MACHINING MAGNETICS ELECTRONICS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Laser Scanner o Scanning Optics o Airbearing o Brushless DC o Speed Control
Servo Motor o Motor Drive
- ----------------------------------------------------------------------------------------------------------------------------
o Scanning and o Airbearing o Brushless DC o Speed Control
Laser Imager Flat Optics Servo Motor o Motor Drive
- ----------------------------------------------------------------------------------------------------------------------------
o Brushless DC o Position Controller
Laser Autofocus Servo Motor o Motor Drive
- ----------------------------------------------------------------------------------------------------------------------------
Rotary Positioning o Brushless DC o Position Controller
Actuator Servo Motor o Motor Drive
o Resolver
- ----------------------------------------------------------------------------------------------------------------------------
o Flat Optics o Airbearing o Linear Motor o Laser Interferometer
o Position Controller
X-Y Stage o Motor Drive
- ----------------------------------------------------------------------------------------------------------------------------
o Airbearing o Brushless DC o Laser Interferometer
HGA/HSA Limited Angle o Position Controller
Testers Motor o Motor Drive
- ----------------------------------------------------------------------------------------------------------------------------
Disk Test Spindle o Airbearing o Brushless DC o Speed Control
Servo Motor o Motor Drive
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
PRECISION BALL BEARINGS. Axsys distributes a wide range of precision
ball bearings varying in size, precision tolerance, lubrication and price. It
also provides certain value-added services, such as bearing subassemblies,
bearing relubrication, white room handling of products and engineering
consultation. It has developed distribution arrangements with several foreign
bearing manufacturers which have significantly increased Axsys' market presence
and product breadth.
COMPETITION
The markets for Axsys' products are competitive. Axsys competes primarily
on the basis of its ability to design and engineer specific solutions to meet
performance specifications set by its customers, most of whom are OEMs who
purchase component parts or subsystems for inclusion in their end-products.
Product pricing and quality, customer support, experience, reputation and
financial stability are also important competitive factors.
There are a limited number of competitors in each of the markets for the
various types of precision optical and positioning components and subsystems
manufactured and sold by Axsys. These competitors, especially those in the
precision optical and positioning product lines, are typically focused on a
smaller number of product offerings than Axsys, and are often well entrenched.
Some of these competitors have substantially greater resources than Axsys. Axsys
believes, however, that the breadth of its technologies and solutions offerings
provide it with a competitive advantage over certain manufacturers that supply
only discrete components or are not vertically integrated with enabling
technologies.
There are numerous competitors in markets to which Axsys distributes
precision ball bearings. These competitors vary in size and include other
bearing manufacturers and distributors. In Axsys' opinion, its breadth and
product availability, combined with the value-added services it supplies,
provide competitive advantages.
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Axsys expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that its competitors
will not develop enhancements to, or future generations of, competitive products
that will offer superior price or performance features or that new processes or
technologies will not emerge that render its products less competitive or
obsolete. Increased competitive pressure could lead to lower prices for Axsys'
products, thereby adversely affecting its business, financial condition or
results of operations. There can be no assurance that Axsys will be able to
compete successfully in the future.
CUSTOMERS
Axsys' customers include OEMs and end-users that design or utilize
high-precision, performance and throughput equipment. Its customers are
primarily in the defense, space, high-end digital imaging, electronics capital
equipment markets and industrial automation markets.
There is no customer or group of affiliated customers for which sales
during 1999 were in the aggregate 10% or more of consolidated net sales, and, in
Axsys' opinion, there is no customer, the loss of which would have a material
adverse effect on its operations taken as a whole.
In 1999 and 1998, Axsys had aggregate sales, both military and
non-military, directly to the U.S. Government, including its agencies and
departments, of approximately $3.7 million and $2.4 million, respectively. These
sales accounted for approximately 4.3% and 2.4% of total net sales in 1999 and
1998, respectively. Approximately 24.6% of net sales in 1999 and 25.5% in 1998
were derived from subcontracts with U.S. Government contractors. The majority of
these contracts may be subject to termination at the convenience of the U.S.
Government, and certain contracts may also be subject to renegotiation.
Currently, Axsys is not aware of any proposed termination or renegotiation of
such contracts which would have a material adverse effect on its business.
Because a substantial part of Axsys' business is derived directly from
contracts with the U.S. Government, or agencies or departments thereof, or
indirectly through subcontracts with U.S. Government contractors, Axsys' results
of operations could be materially affected by changes in U.S. Government
expenditures for products using component parts which Axsys produces. However,
Axsys believes that its exposure to such risk may be lessened by the broad
number and diversity of its product applications and the strength of its
engineering capabilities.
SALES, MARKETING AND CUSTOMER SUPPORT
As of December 31, 1999, Axsys' continuing operations employed 58 sales,
marketing and customer support personnel. Historically, its sales organization
has been organized along product lines with five product-specific direct sales
organizations. Axsys recently reorganized its sales force with a view to
increasing sales through its existing distribution channels. In order to
capitalize on the existing relationships within its sales organization, Axsys
has created three integrated sales and marketing organizations, one of which
is focused on the aerospace and defense markets, one focused on the high-end
commercial markets and the third focused on bearings distribution. Axsys
believes that it can generate additional revenue by cross-selling its
existing products to existing customers as well as increasing the level of
value added it provides to its customers. There can be no assurance that
these efforts will be successful and lead to increases in its sales or that
it will recover its additional costs in implementing this strategy.
Also as of December 31, 1999, the direct sales organization included 18
direct sales field personnel, most of whom have engineering backgrounds, with
the remainder involved in inside sales, customer service, program management,
contract administration and applications engineering. Axsys believes that its
sales effort is enhanced by having engineering-trained sales personnel available
to meet with customers' engineering personnel. In addition, Axsys' application
and design engineers are used to enhance the sales process.
Axsys also sells its products through approximately 35 manufacturer's
sales representatives and agents. Although Axsys believes it has good
relationships with these sales representatives and agents, there can be no
assurance that these relationships will continue to be satisfactory or will
continue at all.
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DOMESTIC AND FOREIGN SALES
For information concerning Axsys' domestic and foreign net sales and
identifiable assets from continuing operations, see Note 9 to the Consolidated
Financial Statements.
ENGINEERING, RESEARCH AND DEVELOPMENT
Axsys seeks to develop new component products, subsystems and systems and
improve existing products in order to keep pace with customers' increasing
performance requirements. It devotes significant resources, a portion of which
is reimbursed by customers, to development programs directed at creating new
products and product enhancements, as well as developing new applications for
existing products. Because Axsys believes that its ability to compete
effectively depends in part on maintaining and enhancing its expertise in
applying new technologies and developing new products, it dedicates substantial
resources to engineering, research and development. At December 31, 1999, its
continuing operations employed 69 individuals in engineering, research and
development functions. There can be no assurance that Axsys' product development
efforts will be successful in producing products that respond to technological
changes or new products introduced by others.
Axsys' costs associated with engineering and research and development were
$4.7 million, $4.9 million and $3.8 million in 1999, 1998 and 1997,
respectively. During such periods, $3.4 million, $3.4 million and $2.9 million,
respectively, were incurred in research and development. Of the research and
development amounts, Axsys recovered from customers approximately 11.0%, 9.5%
and 15.3%, respectively. Axsys intends to direct its research and development
activities to integrating its various technologies and continuing to develop
subsystems and systems.
RAW MATERIALS; SUPPLIERS
Raw materials and purchased components are generally available from
multiple suppliers. However, beryllium, a material used extensively by the
Precision Machining operation of the ADG, is only available from Brush Wellman,
Inc. ("Brush Wellman"), the sole U.S. supplier. Historically, Axsys and, to
management's knowledge, its predecessors' beryllium operations have had an
excellent relationship with Brush Wellman and have not encountered problems in
obtaining their requirements. However, the partial or complete loss of Brush
Wellman as a supplier of beryllium, or production shortfalls or interruptions
that otherwise impair the supply of beryllium to Axsys, would have a material
adverse effect on Axsys' business, financial condition and results of
operations. If such conditions were to occur, it is uncertain whether
alternative sources could be developed. In addition, Axsys purchases a
substantial part of the ball bearings it distributes from two foreign
suppliers. While Axsys believes that it could obtain alternate sources of
supply, any interruption in the flow of products from these suppliers, or
significant increases in the cost of these products, could have an adverse
effect on its business, financial condition and results of operations.
PATENTS AND TRADEMARKS
Axsys is not dependent upon any single patent or trademark. It has a
combination of patents, trademarks and trade secrets, non-disclosure agreements
and other forms of intellectual property protection covering certain of its
proprietary technology and has patent applications pending or under evaluation.
Although it believes that its patents and trademarks may have value, Axsys
believes that its future success will depend primarily on the innovation,
technical expertise, manufacturing and marketing abilities of its personnel.
There can be no assurance as to the degree of protection offered by these
patents or as to the likelihood that patents will be issued for pending
applications. There also can be no assurance that Axsys will be able to maintain
the confidentiality of its trade secrets or that its non-disclosure agreements
will provide meaningful protection of its trade secrets, know-how or other
proprietary information in the event of any unauthorized use, misappropriation
or disclosure of such trade secrets, know-how or other proprietary information.
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Competitors in the United States and foreign countries, many of which have
substantially greater resources, may have applied for or obtained, or may in the
future apply for and obtain, patents that will prevent, limit or interfere with
Axsys' ability to make and sell some of its products. Although Axsys believes
that its products do not infringe on the patents or other proprietary rights of
third parties, there can be no assurance that other third parties will not
assert infringement claims against Axsys or that such claims will not be
successful.
ENVIRONMENTAL REGULATION
Axsys believes that it is in compliance with federal, state and local laws
and regulations governing the discharge of materials into the environment or
otherwise relating to the protection of the environment in all material
respects, and that any non-compliance with such laws will not have a material
adverse effect upon its business, financial condition or results of operations,
capital expenditures, earnings or competitive position. There can be no
assurance, however, (i) that changes in federal, state or local laws,
regulations or regulatory policy, or the discovery of unknown problems or
conditions will not in the future require substantial expenditures, or (ii) as
to the extent of Axsys' liabilities, if any, for past failures, if any, to
comply with applicable environmental laws, regulations and permits, any of which
also could have a material adverse effect on its business, financial condition
or results of operations.
Axsys has been identified as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") with respect to two third-party waste disposal sites. Although
liability under CERCLA is joint and several, meaning that liability can
exceed a PRP's PRO RATA share of cleanup costs, based on currently available
information, Axsys believes that costs associated with these sites will not
have a material adverse effect on its business, financial condition or
results of operations.
Axsys, pursuant to a remedial plan approved by the Ohio Environmental
Protection Agency ("Ohio EPA") in 1993, is continuing its process of
investigating soils and groundwater at a site formerly owned by a division of
Axsys, and has conducted certain remedial work at this site. Costs to date have
not been material. In September 1997, however, Axsys determined to pursue an
alternate closure plan related to such site that was then expected to involve
additional costs in the range of approximately $600,000 to $1.5 million. This
plan is subject to the approval of the Ohio EPA. Based on the advice of its
consultants, Axsys increased its reserves relating to this site to approximately
$600,000, with a resulting charge to discontinued operations in 1997 of
$400,000, before a tax benefit of $156,000. At December 31, 1999 the remaining
balance in this reserve was approximately $400,000. Based on the advice of its
environmental consultants, Axsys believes that the Ohio EPA is likely to allow
use of Axsys' proposed alternate plan. Axsys anticipates receiving approval of
the plan from the Ohio EPA during the first half of 2000 and will reassess the
estimated costs of remediation of the site upon such approval. There can be no
assurance, however, that the alternate plan will be approved by the Ohio EPA.
If such approval is not received, costs to Axsys would increase
substantially. In addition, even if approval is received, the costs actually
incurred may exceed the reserves established. Axsys anticipates that actual
expenditures will be incurred over a period of several years.
During 1999, Axsys sold the land and building of its previously
discontinued Sensor Systems division in St. Petersburg, Florida. Axsys has
conducted preliminary investigations of soil and groundwater at the former
facility and is currently awaiting for approval of its investigation plan from
the Florida Department of Environmental Protection ("FDEP"). Upon approval,
Axsys will conduct additional soil and groundwater investigations at the site.
Estimated costs for site remediation are speculative in that the nature and
extent of contamination at the site has not yet been fully characterized. Future
site related costs are estimated to be in the range of $0.3 million to $0.5
million. At December 31, 1999 the balance in this reserve was approximately $0.3
million.
Axsys uses or generates certain hazardous substances in its manufacturing
and engineering facilities. Axsys believes that its handling of such substances
is in material compliance with applicable local, state and federal
environmental, safety and health regulations at each operating location. Axsys
invests in proper protective equipment, process controls and specialized
training to minimize risks to employees, surrounding communities and the
environment due to the presence and handling of such hazardous substances. Axsys
periodically conducts employee physical examinations and workplace air
monitoring regarding such substances. When exposure problems or potential have
been indicated, corrective actions have been implemented and re-occurrence has
been minimal or non-existent. Axsys does not carry environmental impairment
insurance.
10
<PAGE>
RESTRUCTURING
On February 11, 2000, Axsys announced a strategic realignment of its
businesses. Specifically, Axsys adopted a plan to improve efficiency and
enhance competitiveness under two new major groups to better serve its
markets and customers. In conjunction with the strategic realignment, Axsys
expects to record a non-recurring charge to earnings in the first quarter of
2000 of approximately $5.0 million. Approximately two-thirds of the $5.0
million charge will require cash payments and the remaining one-third will be
related to asset write-offs.
The realignment plan is designed to result in the following:
o A 10% reduction in workforce.
o The removal of a layer of management.
o Relocation of certain operations and activities.
o Expected annual savings of $3.0 million.
EMPLOYEES
As of December 31, 1999, Axsys' continuing operations employed 586 persons
in the United States, including 395 in manufacturing, 58 in sales, 69 in
engineering and 64 in administration. Axsys considers its relations with its
employees to be satisfactory. There has been no significant interruption of
operations due to labor disputes.
ITEM 2. PROPERTIES
Axsys leases its executive office, located at 910 Sylvan Avenue, Englewood
Cliffs, New Jersey. The principal plants and other materially important
properties at March 13, 2000 are:
<TABLE>
<CAPTION>
TYPE OF SQUARE LEASED;
LOCATION FACILITY FOOTAGE EXPIRATION
<S> <C> <C> <C>
Cullman, AL Manufacturing, Engineering 110,000 Owned
Montville, NJ Distribution 34,400 Leased; 2009
San Diego, CA Manufacturing, Engineering 64,800 Leased; 2010
Rochester Hills, MI Manufacturing, Engineering 35,000 Leased; 2010
Santa Barbara, CA Manufacturing, Engineering 13,800 Leased; 2001
Irvine, CA Distribution 7,800 Leased; 2000
Dallas, TX Distribution 2,950 Leased; 2002
</TABLE>
Management believes that Axsys' facilities are generally sufficient to meet
its current and reasonably anticipated manufacturing, distribution and related
requirements. Management, however, periodically reviews space requirements to
ascertain whether Axsys' facilities are sufficient to meet its needs.
ITEM 3. LEGAL PROCEEDINGS
Axsys is a defendant in various lawsuits, none of which is expected to have
a material adverse effect on Axsys' business, financial position, or results of
operations. See "Business--Environmental Regulations."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the quarter ended December 31, 1999.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Axsys' common stock trades on The Nasdaq Stock Market(R) under the Symbol
"AXYS". The following table sets forth the range of high and low sales prices as
reported by The Nasdaq Stock Market(R):
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
High Low High Low
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal Years Ended December 31:
First Quarter $ 20 $ 13 5/8 $ 27 1/2 $ 17 3/8
Second Quarter 18 9 3/4 27 1/2 17 3/4
Third Quarter 16 1/4 9 7/8 21 7/8 10 9/16
Fourth Quarter 16 9 3/8 15 8 3/4
</TABLE>
On March 9, 2000, the high and low sales price were $12 1/2 and $12,
respectively.
On March 9, 2000, the approximate number of holders of record of the Common
Stock was 563.
DIVIDEND POLICY
Axsys has applied and currently intends to continue to apply its retained
and current earnings toward the development of its business and to finance its
growth. Axsys did not pay dividends on its common stock during the three years
ended December 31, 1999, and does not anticipate paying cash dividends in the
foreseeable future.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five fiscal years presented
below is derived from Axsys' audited Consolidated Financial Statements as
adjusted to reflect the discontinuance of the Beau Interconnect and Sensor
Systems business segments in 1999 and 1998, respectively. The data should be
read in conjunction with the Consolidated Financial Statements and the related
Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 (1) 1996 (2) 1995
------------- ------------ ------------ ------------ -----------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net Sales........................................... $85,418 $98,559 $99,793 $66,382 $39,890
Gross profit........................................ 21,005 28,977 30,191 18,651 11,489
(Loss) income from continuing operations before
extraordinary items (3)......................... (9,203) 6,311 3,892 738 (739)
Net (loss) income (3)............................... (7,122) 6,099 5,134 2,682 884
Preferred stock dividends........................... - - 102 847 574
Net (loss) income applicable to common
Shareholders (3)................................ (7,122) 6,099 5,032 1,835 310
Diluted net (loss) income per share from
continuing operations before extraordinary items $ (2.27) $ 1.50 $ 1.08 $ (0.04) $ (0.52)
Diluted net (loss) income per share applicable to
common shareholders............................. $ (1.76) $ 1.45 $ 1.43 $ 0.68 $ 0.12
Diluted weighted average common shares outstanding 4,048 4,212 3,513 2,688 2,511
</TABLE>
- ------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ -----------
(In thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital..................................... $31,395 $28,471 $22,869 $18,968 $ 9,237
Total assets........................................ 64,150 72,514 74,364 58,019 35,908
Long-term debt and capital lease obligations
(less current portion).......................... 1,793 3,794 6,226 21,198 9,177
Shareholders' equity................................ 43,701 52,128 47,317 19,165 14,745
</TABLE>
(1) In May 1997, Axsys acquired the stock of Teletrac. This acquisition was
accounted for under the purchase method of accounting and, accordingly,
the results of Teletrac's operations have been included in Axsys'
Consolidated Statement of Operations since the date of acquisition. See
Note 2 to the Consolidated Financial Statements.
(2) In April 1996, Axsys acquired the stock of PAI and, in October 1996,
purchased substantially all of the assets of LMBC. These acquisitions
have been accounted for under the purchase method of accounting and,
accordingly, the results of the continuing operations of PAI and LMBC
have been included in the Consolidated Statement of Operations since
their respective dates of acquisition.
(3) Includes the effects of a pre-tax special charge of $784,000 and an
impairment of assets charge of $8,993,000 in 1999.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
sales for each of the past three years in the period ended December 31, 1999.
Axsys acquired the stock of Teletrac Inc. ("Teletrac") on May 30, 1997, which is
part of the Commercial Products Group ("CPG") and has been accounted for under
the purchase method of accounting. Accordingly, the results of operations of
Teletrac have been included in the Consolidated Statement of Operations since
the date of acquisition (see Note 2 to the Consolidated Financial Statements).
On September 16, 1998 Axsys sold its Sensor Systems business division. On
March 17, 2000, Axsys sold the net assets of its Beau Interconnect division.
These divestitures have been accounted for as discontinued operations.
Accordingly, the results of the operations of Sensor Systems and Beau
Interconnect and the loss from the disposal of Sensor Systems are reflected in
discontinued operations.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
----------- ----------- --------------
Net sales:
<S> <C> <C> <C>
ADG...................................................... 44.8% 46.3% 47.0%
CPG...................................................... 55.2 53.7 53.0
----------- ----------- -----------
100.0 100.0 100.0
Cost of sales............................................ 75.4 70.6 69.9
----------- ----------- -----------
Gross profit............................................. 24.6 29.4 30.1
----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses........... 20.1 17.6 18.0
Research and development expenses...................... 3.9 3.5 2.9
Impairment of assets................................... 10.5 - -
Amortization of intangible assets...................... 0.5 0.4 0.3
----------- ----------- -----------
Operating (loss)/income.................................. (10.4) 7.9 8.9
----------- ----------- -----------
Interest expense, net.................................. 0.5 0.7 2.3
Special charge......................................... 0.9 - -
Other expense.......................................... - 0.1 -
----------- ----------- -----------
1.4 0.8 2.3
----------- ----------- -----------
(Loss)/income from continuing operations before
taxes and extraordinary items.......................... (11.8) 7.1 6.6
(Benefit)/provision for taxes.......................... (1.0) 0.7 2.7
----------- ----------- -----------
(Loss)/income from continuing operations before
extraordinary items.................................... (10.8) 6.4 3.9
Income/(loss) on discontinued operations, net of tax... 2.5 (0.2) 1.3
----------- ----------- -----------
(Loss)/income before extraordinary items................. (8.3) 6.2 5.2
Extraordinary charges, net of tax...................... - - (0.1)
----------- ----------- -----------
Net (loss)/income........................................ (8.3)% 6.2% 5.1%
=========== =========== ===========
Gross profit (as a percentage of related net sales):
ADG.................................................... 18.7% 23.7% 25.2%
CPG.................................................... 29.4 34.3 34.5
</TABLE>
14
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
NET SALES. Net sales decreased by 13.3%, or $13.1 million, from $98.6
million in 1998 to $85.4 million in 1999. In the Aerospace and Defense Group
("ADG"), sales decreased by 16.2%, or $7.4 million, from $45.7 million in 1998
to $38.3 million in 1999. The decrease was the result of lower sales to the
commercial space market, primarily due to the timing of major satellite
programs. Partially offsetting this negative variance was an increase in sales
to the defense market, primarily due to shipments under a large national missile
defense program. The CPG's sales decreased by 10.9%, or $5.7 million from $52.9
million in 1998 to $47.2 million in 1999. The decrease was primarily the result
of lower sales to the electronics capital equipment and digital imaging markets.
In the electronics capital equipment market, overall soft market conditions,
particularly in the data storage segment, continue to impact sales volume. Lower
sales to the digital imaging market were due to a combination of soft market
conditions and technical problems that delayed new product introductions and
slowed shipments of existing products. In addition, in 1999, the digital imaging
market experienced a downturn due primarily to economic conditions in Asia as
well as customer indecisions based on next generation technology planned to
be announced at the May 2000 industry trade show in Germany. Partially
offsetting some of this negative variance was an increase in sales of
precision ball bearings which were up 4.0% over 1998 primarily due to the
identification of new customer opportunities.
GROSS PROFIT. Axsys' gross profit decreased by 27.5%, or $8.0 million, from
$29.0 million in 1998 to $21.0 million in 1999. Gross profit margin decreased
from 29.4% of net sales in 1998 to 24.6% in 1999. The gross margin for the ADG
decreased from 23.7% of net sales in 1998 to 18.7% in 1999 and, for the CPG,
decreased from 34.3% of net sales in 1998 to 29.4% in 1999. The decline in the
ADG and CPG gross margins was primarily due to the spreading of fixed costs over
a lower sales volume. In addition, the decline in the CPG gross margin was also
impacted by higher costs related to a technical issue with a product.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. In absolute dollars, SG&A
expenses of $17.2 million in 1999 were substantially the same as 1998. As a
percentage of net sales, SG&A increased to 20.1% in 1999 from 17.6% in 1998 due
to the lower sales volume in 1999.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses slightly decreased by 2.8%,
or $0.1 million, from $3.4 million in 1998 to $3.3 million in 1999, primarily
due to lower spending on new product development for the electronics capital
equipment market in 1999.
IMPAIRMENT OF ASSETS. In late 1999, in connection with Axsys' annual
evaluation of its strategic direction and long-range planning, Axsys evaluated
the recoverability of its long-lived assets. Axsys recorded a charge of $7.1
million to write-down the carrying value of goodwill related to Teletrac and
$1.9 million to write-off a note from Westlake Technology Corporation
("Westlake"). (See Note 14 to the Consolidated Financial Statements).
INTEREST EXPENSE, NET. Net interest expense decreased by 42.1%, or $0.3
million, from $0.6 million in 1998 to $0.4 million in 1999. The decrease was
primarily due to a combination of lower average borrowings and interest income
recorded on a note received in the sale of Sensor Systems and a note from
Westlake. (See Notes 3 and 4 to the Consolidated Financial Statements).
SPECIAL CHARGE. Axsys recorded a pre-tax special charge of $0.8 million for
expenses related to the process of exploring the potential sale of Axsys, which
process was discontinued during the second quarter of 1999. (See Note 14 to the
Consolidated Financial Statements).
TAXES. Axsys' effective tax rate decreased from 10.3% in 1998 to an
effective tax benefit rate of 8.4% in 1999. Commencing in the second quarter of
1998, Axsys began to offset its tax provision by the reversal of a portion of
its tax valuation allowance. In 1999, Axsys reversed $0.2 million of its tax
valuation allowance against the discontinued operations of Beau Interconnect. As
of December 31, 1999, the tax valuation allowance was $0.7 million. The decrease
in the effective tax benefit rate in 1999 was primarily due to the
non-deductibility of the write down in the carrying value of goodwill related to
Teletrac, which was recorded in the fourth quarter of 1999.
15
<PAGE>
DISCONTINUED OPERATIONS. In March 2000, Axsys sold its Beau Interconnect
division and in September 1998 Axsys sold its Sensor Systems division. Results
of operations from the discontinued businesses have been reported separately
from continuing operations in all periods presented. The sale of Beau
Interconnect will result in an after-tax gain of approximately $13.0 million
to be recorded in the first quarter of 2000.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
NET SALES. Net sales decreased by 1.2%, or $1.2 million, from $99.8 million
in 1997 to $98.6 million in 1998. The ADG's sales decreased by 2.7%, or $1.3
million, from $46.9 million in 1997 to $45.7 million in 1998. The decline in
revenues was due to lower sales to the space market, partially offset by an
increase in the defense market as a result of internal growth. The decline in
the space market was primarily due to the winding down of two major satellite
programs. The CPG's sales remained flat from 1997 to 1998. The CPG's sales
increased by approximately $4.0 million as a result of having a full year of
operations from Teletrac, which was acquired in May 1997, but this was offset by
a decline in revenues from the electronics capital equipment market and softness
in the sales of precision ball bearings. The decline in sales of precision ball
bearings was due to the weakness in the electronics capital equipment market and
the manufacturing segment in general. The decline in the electronics capital
equipment market was the result of difficulties in the Asian economy and
specific weakness in the data storage and semiconductor segments of the market.
GROSS PROFIT. Axsys' gross profit decreased by 3.6%, or $1.1 million, from
$30.1 million in 1997 to $29.0 million in 1998. Gross profit margin decreased
from 30.1% of net sales in 1997 to 29.4% in 1998. The gross margin for the ADG
decreased from 25.2% of net sales in 1997 to 23.7% in 1998 and, for the CPG,
decreased from 34.5% of net sales in 1997 to 34.3% in 1998. Gross margin in the
ADG was impacted by lower sales volume related inefficiencies, increased
spending on engineering and manufacturing overhead and higher depreciation
expense. In the CPG, increased spending on engineering and manufacturing
overhead and depreciation expense was mostly offset by higher margin sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased by
3.1%, or $0.6 million, from $17.9 million in 1997 to $17.4 million in 1998. As a
percentage of net sales, SG&A decreased from 18.0% in 1997 to 17.6% in 1998. The
decrease in SG&A expenses was primarily due to lower incentive expense in 1998
partially offset by an increase in expense due to the inclusion of Teletrac for
the full year in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. R&D expenses increased by 17.4%, or $0.5
million, from $2.9 million in 1997 to $3.4 million in 1998. The increase in R&D
expenses was primarily due to higher spending on new product development for the
electronics capital equipment market and the inclusion of Teletrac for the full
year.
INTEREST EXPENSE. Interest expense decreased by 72.2%, or $1.7 million from
$2.3 million in 1997 to $0.6 million in 1998. The decrease in interest expense
was primarily due to lower average borrowings during 1998 resulting from Axsys'
use of the net proceeds (approximately $19.5 million) from its stock offering in
late October of 1997 to repay indebtedness under its senior credit facility.
TAXES. Axsys' effective tax rate decreased from 40.7% in 1997 to 10.3% in
1998. As discussed in Note 8 to the Consolidated Financial Statements, beginning
in the second quarter of 1998, Axsys offset its normal continuing operations tax
provision by the reversal of a portion of its tax valuation allowance.
DISCONTINUED OPERATIONS. In March 2000, Axsys sold its Beau Interconnect
division and in September 1998 Axsys sold its Sensor Systems division. Results
of operations from the discontinued businesses have been reported separately
from continuing operations in all periods presented. During 1998, Axsys recorded
a loss on the disposal of Sensor Systems of $2.5 million, net of a tax benefit
of $1.8 million. In the third quarter of 1997, Axsys recorded a discontinued
operation charge of $244,000, net of a tax benefit of $156,000, to increase its
environmental reserve for the remediation of a former operating site.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends decreased from $0.1
million in 1997 to none in 1998. The decrease in preferred stock dividends was
due to Axsys' exchange of preferred stock for common stock and
16
<PAGE>
subsequent redemption of remaining preferred stock during 1997 (see Note 5 to
the Consolidated Financial Statements). As a result of such redemption, there is
no preferred stock outstanding and there are no accrued and unpaid dividends.
BACKLOG
A substantial portion of Axsys' business is of a build-to-order nature
requiring various engineering, manufacturing, testing and other processes to be
performed prior to shipment. As a result, Axsys generally has a significant
backlog of orders to be shipped. The backlog of orders decreased by 6.0% or $2.7
million, from $45.4 million at December 31, 1998 to $42.7 million at December
31, 1999. This decrease is primarily in the backlog from the defense and space
markets. The decline in the backlog of orders from the defense market is
primarily due to the maturing of two large defense programs and the timing of
orders which can be uneven and comprised of multiple dates over a period of
time. The decline in the space market is due to the lack of new major space
opportunities. Axsys believes that a substantial portion of the backlog of
orders at December 31, 1999 will be shipped over the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
Axsys funds its operations primarily from cash flow generated by operations
and, to a lesser extent, from borrowings under its credit facility and through
capital lease transactions.
Net cash provided by operations for the years ended December 31, 1999, 1998
and 1997 was $3.0 million, $4.9 million and $8.2 million, respectively. The
decrease in cash provided by operations in 1999 from 1998 was primarily due to
the decrease in earnings (excluding the impairment of asset charge in 1999)
partially offset by a decrease in funding for working capital. The decrease in
funding for working capital was primarily due to a decrease in accounts
receivable due to lower sales offset in part by a decrease in the funding of
accounts payable, accrued expenses and other liabilities due to the timing of
inventory receipts and cash payments. The decrease in cash provided by
operations in 1998 from 1997 was primarily due to an increase in working capital
primarily as a result of decreases in accounts payable and accrued expenses and
other liabilities. The decrease in accounts payable was primarily due to the
timing of inventory receipts and cash payments. The decrease in accrued expenses
was primarily due to low accruals for incentive compensation.
At December 31, 1999, Axsys had approximately $0.4 million of tax credits
available to reduce future taxable income.
Axsys' working capital was $31.4 million and $28.5 million on December 31,
1999 and 1998, respectively.
Net cash used in investing activities for the years ended 1999, 1998 and
1997 was $2.3 million, $0.5 million and $10.0 million, respectively. During
1999, Axsys sold the land and building associated with its previously
discontinued Sensor Systems business for $1.0 million, before retained
liabilities. In addition, capital expenditures decreased in 1999 over 1998
primarily as a result of lower spending on new management information systems.
During 1998, Axsys increased its capital expenditures by $0.3 million over
1997 primarily as a result of investments in new management information
systems some of which was related to Year 2000 compliance issues. In 1999 and
1998, Axsys also made advances to Westlake of $0.8 million and $1.1 million,
respectively. (See Note 4 to the Consolidated Financial Statements).
Partially offsetting capital expenditures and the advance to Westlake in 1998
were net proceeds from the sale of the Sensor Systems business segment of
$3.6 million in 1998, which includes a tax benefit of $1.8 million. During
1997, Axsys acquired Teletrac for a combination of stock plus $7.3 million in
cash.
Net cash used in financing activities for the years ended 1999, 1998 and
1997 was $0.4 million, $5.2 million and $0.2 million, respectively. During 1999,
in addition to borrowings under the credit facility and payments under capital
lease obligations (see Note 6 to the Consolidated Financial Statements), Axsys
expended $1.4 million to repurchase 142,700 shares of its common stock in open
market transactions (see Note 5 to the Consolidated Financial Statements).
17
<PAGE>
Axsys is relocating its San Diego manufacturing facility to a new
location in San Diego. The new facility has been leased for a period of 10
years and the interior of the building is currently being constructed to
Axsys' specifications. Accordingly, as of December 31, 1999, Axsys is
committed to leasehold improvements of the new facility in the amount of $1.3
million. Axsys had no other material commitments for capital expenditures as
of December 31, 1999. Based on an evaluation of available lease terms and
other factors, Axsys may continue to finance a portion of its capital
expenditures through capital leases.
Axsys had an $11.0 million senior secured revolving credit facility, of
which $4.2 million was outstanding as of December 31, 1999. In conjunction with
the sale of the Beau Interconnect division on March 17, 2000, Axsys used part of
the cash proceeds to pay down the outstanding balance of the credit facility,
which was then terminated. Axsys believes that the cash proceeds from the sale
of Beau on March 17, 2000 and the cash generated from operations will be
sufficient to finance its future capital expenditures, working capital
requirements, cash expenditures related to its restructuring and the purchase of
additional company common stock for at least the next 12 months.
RESTRUCTURING
On February 11, 2000, Axsys announced a strategic realignment of its
businesses. Specifically, Axsys adopted a plan to improve efficiency and
enhance competitiveness under two new major groups to better serve its
markets and customers. In conjunction with the strategic realignment, Axsys
expects to record a non-recurring charge to earnings in the first quarter of
2000 of approximately $5.0 million. Approximately two-thirds of the $5.0
million charge will require cash payments and the remaining one-third will be
related to asset write-offs.
The realignment plan is designed to result in the following:
o A 10% reduction in workforce.
o The removal of a layer of management.
o Relocation of certain operations and activities.
o Expected annual savings of $3.0 million.
YEAR 2000 TRANSITION
Through the date of this report, Axsys did not experience any difficulties
with its computer systems as a result of the transition from 1999 to 2000. Year
2000 compliance issues had no significant impact on the financial condition of
Axsys in 1999, nor are they expected to have any effect in 2000. The cost of
Year 2000 compliance remediation from continuing operations was approximately
$1.1 million.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued in
June 1998. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal
years beginning after June 15, 2000. Management does not believe that the
implementation of the statement will have a material impact on the consolidated
financial position or consolidated results of operations of Axsys.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
This filing contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the expected benefits, including
cost savings, of Axsys' realignment plan, its ability to reduce design and
manufacturing lead times and manufacturing costs, its ability to integrate
its existing technologies and realign its direct sales organizations, its
ability to implement its strategy to develop and sell value-added systems,
its ability to increase market share, its ability to generate additional
revenue through cross-selling and to increase the level of value added it
provides to customers, the receipt and shipment of orders by Axsys, its
objective to grow through strategic acquisitions and anticipated expenditures
for environmental remediation. One can identify these forward-looking
statements by the use of the words such as "expect," "anticipate," "plan,"
"may," "will," "estimate" or other similar expressions. Discussion containing
such forward-looking statements is found in the material set forth under
"Business" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as within the filing generally. One
should understand that many factors could cause actual results to differ from
those expressed or implied in the forward-looking statements. These factors
include those discussed below as well as inaccurate assumptions. Axsys
cautions the reader, however, that
18
<PAGE>
this list of factors may not be exhaustive.
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this filing.
SUBSTANTIAL VARIABILITY OF QUARTERLY RESULTS OF OPERATIONS
Factors such as announcements of technological innovations or new products
by Axsys or its competitors, domestic and foreign general economic conditions
and the cyclical nature of the industries served by Axsys could cause
substantial variations in Axsys' operating results. The defense, space, high-end
digital imaging, electronics capital equipment and industrial automation
markets, each of which represents a significant market for Axsys' products, have
historically been subject to substantial economic fluctuations due to changing
demands for their products and services, introduction of new products and
product obsolescence. There can be no assurance that such fluctuations will not
recur and have an adverse impact on Axsys' business, financial condition or
results of operations. Axsys has experienced and expects to continue to
experience significant fluctuations in its quarterly and annual operating
results due to a variety of factors, including market acceptance of new and
enhanced versions of its products, timing and shipment of significant orders,
mix of products sold, length of sales cycles, plant openings and closings, the
timing of acquisitions or dispositions, delays in raw materials shipments, other
manufacturing delays and disruptions, completion of large projects, the level of
backlog of orders, domestic and foreign general economic conditions and
cyclicality in the markets Axsys serves. To some extent, Axsys' net sales and
operating results for a quarter will depend upon generating orders to be shipped
in the same quarter in which the order is received. The failure to receive
anticipated orders or delays in shipments near the end of a particular quarter,
due, for example, to unanticipated rescheduling or cancellations of shipments by
customers or unexpected manufacturing difficulties, may cause net sales in a
particular quarter to fall significantly below Axsys' expectations, which would
have a material adverse effect on Axsys' business, financial condition or
results of operations for such quarter. See "Business--Market Overview" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Results of Operations-Comparison of Years Ended December 31, 1999 and
December 31, 1998."
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
Axsys' success will continue to depend in substantial part upon its ability
to introduce new products that keep pace with technological developments and
evolving industry standards and to apply appropriate levels of engineering,
research and development resources necessary to keep pace with such
developments. In addition, Axsys' success will depend on how well Axsys responds
to changes in customer requirements and achieves market acceptance for its
products and capabilities. Any failure by Axsys to anticipate or respond
adequately to technological developments and customer requirements could have a
material adverse effect on Axsys' business, financial condition or results of
operations. In order to develop new products successfully, Axsys is dependent
upon close relationships with its customers and their willingness to share
proprietary information about their requirements and participate in
collaborative efforts with Axsys. There can be no assurance that Axsys'
customers will continue to provide it with timely access to such information or
that Axsys will be successful in developing and marketing new products and
services or their enhancements. In addition, there can be no assurance that the
new products and services or their enhancements, if any, developed by Axsys,
will achieve market acceptance. See "Business--Business Strategy" and
"Business--Engineering, Research and Development."
INDUSTRY CONCENTRATION; CYCLICALITY
A significant portion of Axsys' business and business development efforts
are concentrated in the defense and, to a lesser extent, electronics capital
equipment industries. Axsys' business depends, in significant part, upon the
U.S. Government's continued demand in the area of defense for high-end, high
performance components and subsystems of the type manufactured by Axsys.
Approximately 28.9% of net sales in 1999 and 27.9% of net sales in 1998 were
derived directly from contracts with the U.S. Government, or agencies or
departments thereof, or indirectly from subcontracts with U.S. Government
contractors. The majority of these Government contracts are subject to
termination and renegotiation. As a result, Axsys' business, financial condition
or results of operations may be materially affected by changes in U.S.
Government expenditures for defense.
19
<PAGE>
Additionally, Axsys currently intends to continue to develop the portion of
its business dependent upon manufacturers in the electronics capital equipment
industry which provides equipment used in the semiconductor, mass data storage
and flat panel display industries. Such business development will depend, in
part, upon capital expenditures by manufacturers of electronics capital
equipment, which in turn depend upon the current and anticipated market
demand for semiconductor, mass data storage and flat panel display devices.
The semiconductor, mass data storage and flat panel display industries have
been highly volatile and historically have experienced periods of oversupply,
resulting in significantly reduced demand for capital equipment. There can be
no assurance that this volatility will not have a material adverse effect on
Axsys' business in the electronics capital equipment industry. See
"Business--Market Overview;" "Customers" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Results of
Operations-Comparison of Years Ended December 31, 1999 and December 31, 1998."
COMPETITION
The markets for Axsys' products are competitive. Axsys competes primarily
on the basis of its ability to design and engineer its products to meet
performance specifications set by its customers, most of whom are OEMs who
purchase component parts or subsystems for inclusion in their end-products.
Product pricing and quality, customer support, experience, reputation and
financial stability are also important competitive factors.
There is a limited number of competitors in each of the markets for the
various types of precision optical and positioning components and subsystems
sold by Axsys. These competitors, especially those in the precision optical and
positioning product lines, are typically focused on a smaller number of product
offerings than Axsys, and are often well entrenched. Some of these competitors
have substantially greater resources than Axsys. There can be no assurance that
Axsys' competitors will not develop enhancements to or future generations of
competitive products that will offer superior price or performance features, or
that new processes or technologies will not emerge that render Axsys' products
less competitive or obsolete.
In addition, as a result of the substantial investment required by a
customer to integrate capital equipment into a production line, or to integrate
components and subsystems into a product design, Axsys believes that once a
customer has selected certain capital equipment or certain components or
subsystems from a particular vendor, the customer generally relies upon that
vendor to provide equipment for the specific production line or product
application and may seek to rely upon that vendor to meet other capital
equipment or component or subsystem requirements. Accordingly, Axsys may be at a
competitive disadvantage with respect to a prospective customer if that customer
utilizes a competitor's manufacturing equipment or components or subsystems.
Further, there are numerous competitors in markets to which Axsys
distributes precision ball bearings. These competitors, who vary in size,
include other ball bearings distributors as well as ball bearing manufacturers.
There can be no assurance that the bases of competition in the industries
in which Axsys competes will not shift or that Axsys will continue to compete
successfully.
RISKS OF INTERNATIONAL SALES AND PURCHASES
Axsys' international sales from continuing operations accounted for
approximately 15.0%, 15.8%, and 11.6% of Axsys' net sales for 1999, 1998 and
1997, respectively. In addition, certain of Axsys' products are sold to domestic
customers who use them in products they sell to international markets. Also,
Axsys purchases a substantial portion of its ball bearings products from two
foreign suppliers and certain other products from other foreign suppliers.
Axsys' international sales and purchases are subject to a number of risks
generally associated with international operations, including general
economic conditions, import and export duties and restrictions, currency
fluctuations, changes in regulatory requirements, tariffs and other barriers,
political and economic instability and potentially adverse tax consequences.
There can be no assurance that any of these factors will not have a material
adverse effect on Axsys' business, financial condition or results of
operations.
20
<PAGE>
MANAGEMENT OF EXPANDED OPERATIONS; ACQUISITIONS
Over the past years, Axsys has made several acquisitions of complementary
businesses which Axsys continues to integrate. This integration strategy
includes combining sales channels and customer service operations of these
companies as well as integrating the engineering and manufacturing resources to
develop value-added systems incorporating Axsys' technological capabilities.
There can be no assurance that Axsys will be successful in the integration
process.
In addition, as part of Axsys' business development strategy, Axsys plans
to pursue further acquisitions in order to expand its product offerings, add to
or enhance its base of technical or sales personnel, or provide desirable
customer relationships. Such growth could result in a significant strain on its
managerial, financial, engineering and other resources. The rate of its future
expansion, if any, in combination with the complexity of the technologies
involved in its business, may demand an unusually high level of managerial
effectiveness in anticipating, planning, coordinating and meeting its
operational needs as well as the needs of its customers. Additionally, there can
be no assurance that Axsys will be able to acquire complementary businesses on a
cost-effective basis, or integrate acquired operations into its organization
effectively, retain and motivate key personnel, or retain customers of acquired
firms. Axsys competes for attractive acquisition candidates with other companies
or investors, and such competition could have the effect of increasing the cost
of pursuing its acquisition strategy or reducing the number of attractive
candidates to be acquired. Although Axsys reviews and considers possible
acquisitions on an on-going basis, no specific acquisitions are being negotiated
or planned as of the date of this filing. See "Business--Business Strategy."
DEPENDENCE ON KEY SUPPLIERS
A significant portion of Axsys' precision machining business related to the
commercial space market depends on the adequate supply of specialty metals, such
as beryllium, at competitive prices and on reasonable terms. Axsys currently
procures all of its beryllium from Brush Wellman, the sole U.S. supplier, and
expects to continue to rely on Brush Wellman for beryllium for the foreseeable
future. Although Axsys has not experienced significant problems with this
supplier in the past, there can be no assurance that such relationship will
continue or that Axsys will continue to obtain such supplies at cost levels
that would not adversely affect gross margins. The partial or complete loss
of Brush Wellman as a supplier of beryllium, or production shortfalls or
interruptions that otherwise impair the supply of beryllium to Axsys, would
have a material adverse effect on Axsys' business, financial condition or
results of operations. It is uncertain whether alternative sources of supply
could be developed without a material disruption in Axsys' ability to provide
beryllium products to its customers.
Although Axsys has not experienced significant problems with its other
suppliers in the past, there can be no assurance that such relationships will
continue or that, in the event of a termination of its relationships with such
other suppliers, it would be able to obtain alternative sources of supply
without a material disruption in Axsys' ability to provide products to its
customers. In addition, Axsys purchases a substantial part of the ball bearings
it distributes from two foreign suppliers. Any material disruption in Axsys'
supply of products would have a material adverse effect on Axsys' business,
financial condition or results of operations. See "Business--Raw Materials;
Suppliers."
DEPENDENCE ON KEY PERSONNEL
Axsys' success depends to a significant extent on the continued services of
its key executive officers, including its Chairman of the Board and Chief
Executive Officer, and other senior management personnel. The loss of the
services of one or more of these individuals may have a material adverse effect
on Axsys' business, financial condition or results of operations. Axsys does not
maintain key man life insurance on its executive officers. In addition, since
the continued success of Axsys is largely dependent upon its ability to design,
manufacture and sell high-performance components and subsystems for the
high-performance technology market, Axsys is particularly dependent upon its
ability to identify, attract, motivate and retain qualified technical personnel,
including engineers, with the requisite educational background and industry
experience, as well as skilled precision machining personnel. Axsys' employees
may voluntarily terminate their employment with Axsys at any time, and
competition for such personnel is intense. Accordingly, there can be no
assurance that Axsys will be successful in retaining its existing personnel. The
loss of the services of a significant number of Axsys' technical or skilled
personnel, or the future inability to attract such personnel, could have a
material adverse effect on Axsys' business, financial condition or results of
operations.
21
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
Axsys' ability to compete effectively with other companies will depend, in
part, on its ability to maintain the proprietary nature of its technology. Axsys
relies upon a combination of patents, trademarks and trade secrets,
non-disclosure agreements and other forms of intellectual property protection to
safeguard certain of its proprietary technology. There can be no assurance as to
the degree of protection offered by these patents or as to the likelihood that
patents will be issued for pending applications. There also can be no assurance
that Axsys will be able to maintain the confidentiality of its trade secrets or
that its non-disclosure agreements will provide meaningful protection of Axsys'
trade secrets, know-how or other proprietary information in the event of any
unauthorized use, misappropriation or disclosure of such trade secrets, know-how
or other proprietary information.
Competitors in the United States and foreign countries, many of which have
substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or interfere with Axsys'
ability to make and sell some of its products. Although Axsys believes that its
existing products do not infringe on the patents or other proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against Axsys or that such claims will not be successful.
See "Business--Patents and Trademarks."
ENVIRONMENTAL REGULATION
Axsys is subject to a variety of federal, state and local laws, rules and
regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during its engineering, research and development and
manufacturing activities. Failure to comply with applicable environmental
requirements could result in substantial liability to Axsys, suspension or
cessation of Axsys' operations, restrictions on Axsys' ability to expand its
operations or requirements for the acquisition of additional equipment or other
significant expense, any of which could have a material adverse effect on its
business, financial condition or results of operations. In addition, there can
be no assurance (a) that changes in federal, state or local laws, regulations or
regulatory policy, or the discovery of unknown problems or conditions, will not
in the future require substantial expenditures, or (b) as to the extent of
Axsys' liabilities, if any, for past failures, if any, to comply with applicable
environmental laws, regulations and permits, any of which also could have a
material adverse effect on its business, financial condition or results of
operations.
During 1997, Axsys recorded a charge to discontinued operations of
$400,000, before a tax benefit of $156,000, relating to increases in reserves
for certain environmental costs associated with a formerly-owned property. In
addition, Axsys sold the land and building of its previously discontinued Sensor
Systems division in St. Petersburg, Florida and established a reserve of $0.3
million related to this site. The reserves associated with these sites assumes
that certain approvals will be received from state regulatory authorities.
However, there can be no assurance that such approvals will be received. If such
approvals are not received, costs would increase substantially. In addition,
even if such approvals are received, the costs actually incurred may exceed the
reserves established. See "Business--Environmental Regulation."
Axsys has made and continues to make investments in protective equipment,
process controls, manufacturing procedures and training in order to minimize the
risks to employees, surrounding communities and the environment due to the
presence and handling of hazardous materials. The failure to properly handle
such materials could lead to harmful exposure to employees or to the discharge
of certain hazardous waste materials, and, since Axsys does not carry
environmental impairment insurance, to a material adverse effect on Axsys'
business, financial condition or results of operations. There can be no
assurance that environmental problems will not develop in the future which would
have a material adverse effect on its business, financial condition or results
of operations. See "Business---Environmental Regulation."
22
<PAGE>
CONTINUED INVESTMENT REQUIRED TO MAINTAIN MANUFACTURING CAPABILITIES
Axsys has invested, and intends to continue to invest, in
state-of-the-art equipment in order to increase, expand, update or relocate its
manufacturing capabilities and facilities. Changes in technology or sales growth
beyond currently established manufacturing capabilities will require further
investment. There can be no assurance that Axsys will generate sufficient funds
from operations to finance any required investment or that other sources of
funding will be available on terms acceptable to Axsys, if at all. Furthermore,
there can be no assurance that any further expansion will not negatively impact
its business, financial condition or results of operations. See
"Business--Facilities and Manufacturing."
CONTROL OF AXSYS BY EXISTING SHAREHOLDER
The Chairman of the Board and Chief Executive Officer of Axsys owns
approximately 32% of the outstanding common stock as of December 31, 1999. As a
result, he will have the ability to exert significant influence with respect to
corporate actions, including the election of directors and certain sales or
mergers and acquisitions involving Axsys.
POSSIBLE VOLATILITY OF SHARE PRICE
The price of Axsys' common stock may be subject to significant
fluctuations. That price volatility may be attributable, at least in part, to
the limited number of shares generally available for sale in the public market.
In addition, factors such as actual or anticipated quarterly fluctuations in
financial results, changes in recommendations or earnings estimates by
securities analysts, announcements of technological innovations or new
commercial products or services and the timing of announcements of acquisitions
or dispositions by Axsys or its competitors, as well as conditions in Axsys'
markets generally, may have a significant adverse effect on the market price of
the common stock. Furthermore, the stock market historically has experienced
volatility which has particularly affected the market prices of securities of
many technology companies and which sometimes has been unrelated to the
operating performances of such companies.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
Axsys' Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), its By-Laws (the "By-Laws") and the Delaware General
Corporation Law ("DGCL") contain certain provisions which could delay or impede
the removal of incumbent directors and could make more difficult a merger,
tender offer or proxy contest involving Axsys, even if such a transaction would
be beneficial to the interests of the shareholders, or could discourage a third
party from attempting to acquire control of Axsys.
Axsys has authorized 4,000,000 shares of its preferred stock, none of which
is currently outstanding, and which could issue without further shareholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. Axsys has no current
plans to issue any preferred stock.
The By-Laws include provisions establishing advance notice procedures with
respect to shareholder proposals and director nominations, and permitting the
calling of special shareholder meetings only by the written consent of
three-quarters of the Board of Directors or the Chairman of the Board. The
Certificate of Incorporation provides that in lieu of a meeting, action may be
taken by written consent of Axsys' shareholders only by unanimous consent. These
provisions could have the effect of delaying, deterring or preventing a change
in control of Axsys, and may adversely affect the voting and other rights of
holders of common stock.
In addition, Axsys is subject to section 203 of the DGCL which, subject
to certain exceptions, restricts certain transactions and business
transactions between a corporation and a shareholder owning 15% or more of
the corporation's outstanding voting stock (an "interested shareholder") for
a period of three years from the date the shareholder becomes an interested
shareholder. These provisions may have the effect of delaying or preventing a
change of control of Axsys without action by the shareholders and, therefore,
could adversely affect the price of Axsys' common stock. In the event of a
change of control of Axsys, the vesting of outstanding options issued under
Axsys' long-term stock incentive plan may be accelerated at the discretion of
the committee administering the plan or may be required to be accelerated
under certain circumstances provided for in each incentive agreement.
ABSENCE OF DIVIDENDS ON COMMON STOCK
Axsys does not anticipate paying dividends on its common stock in the
foreseeable future.
23
<PAGE>
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Axsys' market risk sensitive instruments do not subject Axsys to material
market risk exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is included in Item 14(a) of this Report.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III is incorporated by reference to Axsys'
definitive proxy statement in connection with its 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days following the end of Axsys' fiscal year ended December 31, 1999. If such
proxy statement is not so filed, such information will be filed as an amendment
to this Form 10-K within 120 days following the end of Axsys' fiscal year ended
December 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) AND (2) AND (d) FINANCIAL STATEMENTS
See accompanying index to consolidated financial statements and schedule.
(a)(3) EXHIBITS
See accompanying index to Exhibits.
(b) REPORTS ON FORM 8-K
Report on Form 8-K filed on February 8, 2000 regarding the sale of Axsys'
Beau Interconnect division.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2000 AXSYS TECHNOLOGIES, INC.
(REGISTRANT)
By /s/ STEPHEN W. BERSHAD
STEPHEN W. BERSHAD
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated this 29th day of March, 2000.
/s/ STEPHEN W. BERSHAD Chairman of the Board of
---------------------------------- Directors and Chief Executive
STEPHEN W. BERSHAD Officer
/s/ MARK J. BONNEY President & Chief Operating Officer
--------------------------------- (Acting Chief Financial Officer)
MARK J. BONNEY
/s/ ANTHONY J. FIORELLI, Jr. Director
---------------------------------
ANTHONY J. FIORELLI, Jr.
/s/ ELIOT M. FRIED Director
---------------------------------
ELIOT M. FRIED
/s/ RICHARD V. HOWITT Director
---------------------------------
RICHARD V. HOWITT
25
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
AXSYS TECHNOLOGIES, INC.
<PAGE>
FORM 10-K -- ITEM 14(a)(1) AND (2) AND ITEM 14(d)
AXSYS TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
The following consolidated financial statements of Axsys Technologies, Inc. are included in Item 8:
<S> <C>
Report of Independent Public Accountants.........................................................................F-3
Consolidated Balance Sheets -- December 31, 1999 and 1998........................................................F-4
Consolidated Statements of Operations -- For the years ended December 31, 1999,
1998 and 1997...................................................................................................F-6
Consolidated Statements of Cash Flows -- For the years ended December 31, 1999,
1998 and 1997...................................................................................................F-7
Consolidated Statements of Shareholders' Equity -- For the years ended December 31,
1999, 1998 and 1997.............................................................................................F-8
Notes to consolidated financial statements.......................................................................F-9
The following consolidated financial statement schedule of Axsys Technologies,
Inc., is included in Item 14(d):
Schedule II -- Valuation and qualifying accounts................................................................F-21
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Axsys Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Axsys
Technologies, Inc., a Delaware corporation, and its subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Axsys Technologies,
Inc. and subsidiaries, as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements and financial statement schedule is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not 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, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
March 20, 2000
F-3
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash.......................................................................... $ 385 $ 69
Accounts receivable, net of allowance for doubtful accounts of
$503 in 1999 and $445 in 1998............................................... 11,537 14,837
Inventories, net.............................................................. 25,866 25,047
Net assets held for sale...................................................... 7,227 -
Other current assets.......................................................... 2,994 2,735
-------- --------
TOTAL CURRENT ASSETS.................................................. 48,009 42,688
NET PROPERTY, PLANT AND EQUIPMENT............................................. 11,949 10,903
EXCESS OF COST OVER NET ASSETS ACQUIRED, net of accumulated
amortization of $1,034 in 1999 and $1,394 in 1998........................... 3,883 11,412
NET ASSETS HELD FOR SALE...................................................... - 6,208
OTHER ASSETS.................................................................. 309 1,303
-------- --------
TOTAL ASSETS........................................................... $ 64,150 $ 72,514
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................................ $ 6,207 $ 7,134
Accrued expenses and other liabilities...................................... 5,282 6,246
Current portion of long-term debt and capital lease obligations............. 5,125 837
-------- --------
TOTAL CURRENT LIABILITIES........................................... 16,614 14,217
LONG-TERM DEBT AND CAPITAL LEASES, less current portion...... 1,793 3,794
OTHER LONG-TERM LIABILITIES.......................................... 2,042 2,375
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE:
authorized 30,000,000 shares, issued 4,122,767 at December 31, 1999
and December 31, 1998................................................... 41 41
CAPITAL IN EXCESS OF PAR.................................................. 39,454 40,761
RETAINED EARNINGS......................................................... 5,844 12,966
TREASURY STOCK, at cost, 152,338 shares at December 31, 1999 and
117,750 shares at December 31, 1998..................................... (1,638) (1,640)
--------- --------
TOTAL SHAREHOLDERS' EQUITY....................................... 43,701 52,128
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $ 64,150 $ 72,514
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
NET SALES ............................................................... $ 85,418 $ 98,559 $ 99,793
Cost of sales ........................................................... 64,413 69,582 69,724
Selling, general and administrative expenses ............................ 17,188 17,359 17,921
Research and development expenses ....................................... 3,350 3,447 2,937
Impairment of assets .................................................... 8,993 -- --
Amortization of intangible assets ....................................... 400 400 292
----------- ----------- -----------
OPERATING (LOSS)/INCOME ................................................. (8,926) 7,771 8,919
Interest expense, net ................................................... 376 649 2,331
Special charge .......................................................... 784 -- --
Other (income)/expense .................................................. (29) 84 25
----------- ----------- -----------
(LOSS)/INCOME FROM CONTINUING OPERATIONS BEFORE
TAXES AND EXTRAORDINARY ITEMS ......................................... (10,057) 7,038 6,563
(Benefit)/provision for income taxes .................................... (854) 727 2,671
----------- ----------- -----------
(LOSS)/INCOME FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEMS ................................................... (9,203) 6,311 3,892
Discontinued Operations:
Income from operations, net of tax expense of $866 in 1999, $336 in
1998 and $1,069 in 1997 ............................................... 2,081 2,277 1,595
Loss on disposal, net of tax benefit of $1,777 in 1998 and $156 in 1997 -- (2,489) (244)
----------- ----------- -----------
(LOSS)/INCOME BEFORE EXTRAORDINARY ITEMS ................................ (7,122) 6,099 5,243
Extraordinary charges, net of taxes of $70 in 1997 ...................... -- -- (109)
----------- ----------- -----------
NET (LOSS)/INCOME ....................................................... (7,122) 6,099 5,134
Preferred stock dividends ............................................... -- -- 102
----------- ----------- -----------
NET (LOSS)/INCOME APPLICABLE TO COMMON SHAREHOLDERS ..................... $ (7,122) $ 6,099 $ 5,032
=========== =========== ===========
BASIC (LOSS)/EARNINGS PER SHARE:
(Loss)/income from continuing operations .............................. $ (2.27) $ 1.51 $ 1.15
Discontinued operations ............................................... 0.51 (0.05) 0.41
Extraordinary item .................................................... -- -- (0.03)
----------- ----------- -----------
$ (1.76) $ 1.46 1.53
=========== =========== ===========
Weighted average common shares outstanding .............................. 4,048,330 4,182,676 3,281,092
=========== =========== ===========
DILUTED (LOSS)/EARNINGS PER SHARE:
(Loss)/income from continuing operations .............................. $ (2.27) $ 1.50 $ 1.08
Discontinued operations ............................................... 0.51 (0.05) 0.38
Extraordinary item .................................................... -- -- (0.03)
----------- ----------- -----------
Total ................................................................. $ (1.76) $ 1.45 $ 1.43
=========== =========== ===========
Weighted average common shares outstanding .............................. 4,048,330 4,211,702 3,513,302
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income ....................................................... ($ 7,122) $ 6,099 $ 5,134
Adjustments to reconcile net (loss)/income to cash provided by
operating activities:
Extraordinary items, net of taxes ................................. -- -- 109
Loss on disposal of discontinued operations, net of taxes ......... -- 2,489 244
Impairment of assets .............................................. 8,993 -- --
Deferred income taxes ............................................. (568) (1,711) --
Realization of net operating loss carryforward .................... -- -- 3,093
Depreciation and amortization ..................................... 2,992 2,895 2,420
Change in net assets of discontinued operations.................... (1,829) (350) (503)
Decrease (increase) in accounts receivable ........................ 3,300 777 (3,317)
Increase in inventories ........................................... (819) (1,214) (3,056)
Decrease in other current assets .................................. 275 190 154
(Decrease) increase in accounts payable, accrued expenses
and other liabilities ............................................. (2,004) (4,296) 4,184
Decrease in other long-term liabilities ........................... (333) (164) (409)
Other-net ......................................................... 66 222 147
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 2,951 4,937 8,200
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................. (2,433) (3,003) (2,657)
Net proceeds from sale of discontinued operations .................... 975 3,574 --
Advance to third party ............................................... (804) (1,052) --
Acquisition of business, net of cash acquired ........................ -- -- (7,335)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES ..................... (2,262) (481) (9,992)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings ............................................. 2,050 -- 7,000
Repayment of borrowings .............................................. (1,008) (3,607) (25,063)
Net proceeds from common stock offering .............................. -- -- 19,521
Purchases of Treasury Stock .......................................... (1,434) (1,664) --
Other ................................................................ 19 49 (1,639)
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES ..................... (373) (5,222) (181)
-------- -------- --------
NET INCREASE/(DECREASE) IN CASH ........................... 316 (766) (1,973)
CASH AT BEGINNING OF YEAR ............................................... 69 835 2,808
-------- -------- --------
CASH AT END OF YEAR ..................................................... $ 385 $ 69 $ 835
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AXSYS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- -------------------------
Shares Amount Shares Amount
----------------------- -------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ........ 738,881 $ 7 2,568,940 $ 26
----------------------- -------------------------
Net Income ........................ -- -- -- --
Dividends ......................... -- -- -- --
Contribution to 401(k) plan ....... -- -- 13,981 --
Preferred stock exchange .......... (538,008) (5) 403,460 4
Preferred stock redemption ........ (200,873) (2) -- --
Realization of net operating loss
carryforward .................... -- -- -- --
Common stock issued for
acquisition ..................... -- -- 53,000 --
Common stock offering ............. -- -- 1,064,809 11
Purchase of warrants .............. -- -- -- --
Other ............................. -- -- 9,000 --
----------------------- -------------------------
Balance at December 31, 1997 ........ -- -- 4,113,190 41
----------------------- -------------------------
Net Income ........................ -- -- -- --
Treasury stock acquired ........... -- -- -- --
Contribution to 401(k) plan ....... -- -- 577 --
Realization of net operating loss
carryforward .................... -- -- -- --
Other ............................. -- -- 9,000 --
----------------------- -------------------------
Balance at December 31, 1998 ........ -- -- 4,122,767 41
----------------------- -------------------------
Net Loss .......................... -- -- -- --
Treasury stock acquired ........... -- -- -- --
Contribution to 401(k) plan ....... -- -- -- --
Common stock issued for Teletrac
1997 acquisition ................ -- -- -- --
Other ............................. -- -- -- --
----------------------- -------------------------
Balance at December 31, 1999 ........ -- $ -- 4,122,767 $ 41
======================= =========================
<CAPTION>
Capital TREASURY STOCK
In Excess Retained ---------------------
Of Par Earnings Shares Amount
----------- ------------ ---------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ........ $ 17,297 $ 1,835 -- $
----------- ------------ -----------------------
Net Income ........................ -- 5,134 -- --
Dividends ......................... 102 (102) -- --
Contribution to 401(k) plan ....... 150 -- -- --
Preferred stock exchange .......... (66) -- -- --
Preferred stock redemption ........ (1,651) -- -- --
Realization of net operating loss
carryforward .................... 2,867 -- -- --
Common stock issued for
acquisition ..................... 2,166 -- -- --
Common stock offering ............. 26,386 -- -- --
Purchase of warrants .............. (6,876) -- -- --
Other ............................. 34 -- -- --
----------- ------------ -----------------------
Balance at December 31, 1997 ........ 40,409 6,867 -- --
----------- ------------ -----------------------
Net Income ........................ -- 6,099 -- --
Treasury stock acquired ........... -- -- (119,500) (1,664)
Contribution to 401(k) plan ....... 5 -- 1,750 24
Realization of net operating loss
carryforward .................... 313 -- -- --
Other ............................. 34 -- -- --
----------- ------------ -----------------------
Balance at December 31, 1998 ........ 40,761 12,966 (117,750) (1,640)
----------- ------------ -----------------------
Net Loss .......................... -- (7,122) -- --
Treasury stock acquired ........... -- -- (142,700) (1,434)
Contribution to 401(k) plan ....... 7 -- 8,419 105
Common stock issued for Teletrac
1997 acquisition ................ (1,286) -- 95,493 1,286
Other ............................. (28) -- 4,200 45
----------- ------------ -----------------------
Balance at December 31, 1999 ........ $ 39,454 $ 5,844 (152,338) ($1,638)
=========== ============ =======================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Axsys Technologies, Inc. and its wholly-owned subsidiaries (collectively the
"Company"). All material intercompany transactions and balances have been
eliminated in consolidation.
Revenue is recognized upon the shipment of product or when services are
rendered.
Inventories are priced at the lower of cost (principally first-in, first-out,
or average) or market.
Deferred financing costs are amortized ratably over the life of the
corresponding debt or commitment.
The excess of cost over net assets acquired is being amortized over periods
ranging from 30 to 35 years using the straight-line method. The Company
continually reviews goodwill to assess recoverability from future operations
using undiscounted cash flows. Impairments are recognized in operating results
when a permanent diminution in value occurs.
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided primarily by the straight-line method
using estimated lives for buildings and improvements of 20 to 25 years and for
machinery and equipment using estimated useful lives ranging from 3 to 8 years.
Certain items in the 1998 and 1997 financial statements have been reclassified
to conform to the 1999 presentation.
Basic earnings per share has been computed by dividing Net Income Applicable
to Common Shareholders by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by dividing Net Income
Applicable to Common Shareholders by the weighted average number of common
shares outstanding including the dilutive effects of stock options of none,
29,026 and 232,210 in 1999, 1998 and 1997, respectively. The dilutive effect of
stock options on the weighted average number of common shares would have been
13,451 in 1999 if it were not anti-dilutive.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - ACQUISITION AND DIVESTITURE
On May 30, 1997, the Company acquired Teletrac, Inc. ("Teletrac") for
$9,926, including the issuance of 153,000 shares of the Company's common
stock, 53,000 of which shares were issued at closing, 95,493 shares were
issued in 1999 and 4,507 of which shares will be issued pursuant to a
Stockholder Agreement entered into as of May 30, 1997 with certain selling
shareholders and employees of Teletrac. Teletrac designs and manufactures
laser-based precision measurement systems and state-of-the-art precision
linear and rotary positioning servo systems for use in the data storage
segment of the electronics capital equipment market. During the fourth
quarter of 1999, the Company recorded a $7,129 charge to write-down the
carrying value of goodwill related to Teletrac. (See Note 14)
F-9
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - ACQUISITIONS AND DIVESTITURE (CONT'D)
The acquisition of Teletrac was accounted for under the purchase method of
accounting and, accordingly, the results of operations of Teletrac have been
included in the accompanying consolidated financial statements since the date of
acquisition. The costs of the acquisition were allocated on the basis of the
fair market value of the assets acquired and liabilities assumed.
NOTE 3 - DISCONTINUED OPERATIONS
On March 17, 2000, the Company sold the net assets of its Beau Interconnect
division ("Beau") for $31.8 million in cash and will record an after-tax gain of
approximately $13.0 million in the first quarter of 2000, subject to a post
closing adjustment. Beau designs and manufactures interconnect devices, barrier
terminal blocks and connectors. Accordingly, Beau has been accounted for as a
discontinued operation and the related net assets and operating results have
been reported separately from continuing operations in all years presented.
Revenues applicable to this discontinued operation during 1999, 1998 and 1997
were $19,341, $18,022 and $17,501, respectively. The net assets of Beau at
December 31, 1999 have been included in current assets. Proceeds from the sale
were utilized to pay off the Company's credit facility of $4,200 at December 31,
1999 which liabilities have been included in current liabilities.
On September 16, 1998, the Company sold its Sensor Systems business unit
("Sensor Systems") which manufactured position sensor devices such as
potentiometers, pressure transducers and encoders primarily for defense and
industrial automation applications, for $3,030, of which $1,030 was in the form
of a five year, 10% subordinated note. Sensor Systems' land and building, which
were not sold as part of this transaction, were sold during the third quarter of
1999 for approximately their book value of $750, net of retained liabilities.
The disposal of Sensor Systems has been accounted for as a discontinued
operation and, accordingly, the related net assets and operating results have
been reported separately from continuing operations in all years presented. In
addition, during 1998 the Company has reported separately a $2,489 loss on the
sale of Sensor Systems, which is net of a $1,777 tax benefit. Revenues
applicable to this discontinued operation during 1998 and 1997 were $4,774 and
$6,522, respectively.
In September 1997, the Company was advised by its environmental consultants
that the costs associated with the remediation of a previously discontinued
operation site were estimated to be higher than originally anticipated. The
estimates to remediate this site ranged from approximately $600 to $1,500.
Actual costs may be different than these estimates. Based on this information,
the Company increased its reserve relating to this site in fiscal 1997 to
approximately $600 by recording a discontinued operation charge of $400, before
a tax benefit of $156. At December 31, 1999, the balance in this reserve was
approximately $400.
NOTE 4 - ADVANCE TO THIRD PARTY
On August 12, 1998, the Company entered into an agreement with Westlake
Technology Corporation ("Westlake") whereby the Company has the exclusive right
to market and sell Westlake's electronic and electromechanical test equipment.
In return for these exclusive rights, the Company has agreed to provide loans of
up to a maximum of $1,900 to Westlake. During the fourth quarter of 1999, the
Company recorded a $1,864 charge to write-down the carrying value of the note.
(See Note 14)
F-10
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - SHAREHOLDERS' EQUITY
COMMON STOCK -
On October 15, 1997, the Company amended its Certificate of Incorporation to
increase the authorized number of shares of Common Stock to 30,000,000.
On October 21, 1997, the Company completed an underwritten public offering of
1,064,809 shares of its common stock at a public offering price of $27.00 per
share (the "offering"). Of the approximately $26,400 of net proceeds from the
offering, approximately $6,900 was used to repurchase outstanding warrants to
purchase the Company's common stock and the remaining net proceeds to prepay a
portion of the Company's outstanding bank debt.
PREFERRED STOCK -
The Company paid quarterly dividends on its $1.20 Cumulative Exchangeable
Redeemable Preferred Stock in additional shares at an annual rate of 15% based
on the shares outstanding from August 1991 through February 22, 1996. On
February 22, 1996, the Company's right to pay dividends in additional shares of
preferred stock expired. From February 22, 1996 to June 4, 1997, the Company did
not declare or pay any dividends on the preferred stock, although they continued
to accumulate.
On February 14, 1997, the Company commenced an offer to exchange 0.75 shares
of its common stock for each outstanding share of its preferred stock. On March
17, 1997, the Exchange Offer terminated and the Company accepted for exchange
all shares of preferred stock validly tendered as of that time. Approximately
538,000 shares of preferred stock were exchanged for approximately 403,500
shares of common stock. Holders of shares of preferred stock accepted for
exchange did not receive any separate payment in respect of dividends not paid
subsequent to February 22, 1996, the last date on which dividends were paid on
the preferred stock.
On June 4, 1997, the Company redeemed all the remaining approximately 200,900
outstanding shares of its preferred stock. The redemption price was $7.70 per
share, including accrued and unpaid dividends of $1.54 per share through the
redemption date.
TREASURY STOCK -
In August 1998, the Company's Board of Directors authorized the repurchase,
from time to time, on the open market or otherwise, of up to 200,000 shares of
the Company's common stock at prevailing market prices or at negotiated prices.
During July 1999, the Company's Board of Directors authorized an increase in the
share repurchase program from an aggregate of 200,000 shares of common stock to
an aggregate of 700,000 shares. The Company plans to use the repurchased shares
for general corporate purposes, including the satisfaction of commitments under
its employee benefit plans and in connection with the acquisition of Teletrac.
As of December 31, 1999, the Company has repurchased 262,200 shares for an
aggregate purchase price of $3,098.
F-11
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Credit Facility........................... $4,200 $2,131
Capital Lease Obligations................. 2,718 2,500
------------ ------------
6,918 4,631
Less current portion...................... 5,125 837
------------ ------------
$1,793 $3,794
============ ============
</TABLE>
As of December 31, 1999, the Company had an $11,000 credit facility which was
comprised of a revolving debt commitment expiring on April 25, 2000. Borrowings
under the credit facility through December 31, 1999 bore interest at a
fluctuating rate per annum equal to the rate of interest publicly announced by
Chase Manhattan Bank, N.A. as its prime rate (the prime rate was 8.50% at
December 31, 1999), or the London Interbank Offered Rate ("LIBOR"), plus a
margin ranging from 0.75% to 1.50%. A commitment fee of 0.375% is payable on any
unused amount of the credit facility. In conjunction with the sale of Beau on
March 17, 2000 (see Note 3), the Company used part of the proceeds to pay down
the outstanding balance of the credit facility. The credit facility was
terminated upon payment of the outstanding balance.
The Company had outstanding at December 31, 1998, industrial revenue bonds in
the amount of $1,370 secured by its Gilford, NH manufacturing facility related
to Beau which was recorded as Net Assets Held for Sale. On December 1, 1999 the
bonds were redeemed in full.
The Company has financed the acquisition of certain machinery and equipment
with capital lease obligations. As of December 31, 1999, outstanding capital
lease obligations bear interest ranging from 6.3% to 13.7%.
The Company recorded extraordinary non-cash charges, net of tax benefits of
$109 in 1997 in connection with prepayments of indebtedness.
Scheduled debt maturities of long-term debt obligations are $5,125 (2000),
$694 (2001), $573 (2002), $470 (2003) and $56 (2004).
NOTE 7 - BALANCE SHEET INFORMATION
The details of certain balance sheet accounts are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Inventories:
Raw materials....................... $ 9,411 $ 8,574
Work-in-process..................... 8,245 7,605
Finished goods...................... 11,669 12,448
------- -------
29,325 28,627
Less reserves....................... 3,459 3,580
------- -------
$25,866 $25,047
======= =======
</TABLE>
F-12
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - BALANCE SHEET INFORMATION (CONT'D)
Work-in-process inventory at December 31, 1999 and 1998 is recorded net of
progress payments received from customers on uncompleted contracts of $241 and
$484, respectively.
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net property, plant and equipment:
Land............................................ $ 291 $ 291
Buildings and improvements...................... 4,271 2,833
Machinery and equipment......................... 17,180 15,026
-------- -------
21,742 18,150
Less accumulated depreciation and amortization.. 9,793 7,247
-------- -------
$ 11,949 $10,903
======== =======
Accrued expenses and other liabilities:
Compensation and related benefits............... $ 2,752 $ 2,967
Accrued taxes................................... 238 404
Other........................................... 2,292 2,875
-------- -------
$ 5,282 $ 6,246
======== =======
</TABLE>
NOTE 8 - INCOME TAXES
The provision/(benefit) for taxes on income from continuing operations before
extraordinary items consists of:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current taxes - charge in lieu of taxes and taxes:
U.S. Federal.............................................. ($519) $ 1,219 $ 2,152
State and local........................................... 65 161 519
---------- ---------- ----------
(454) 1,380 2,671
---------- ---------- ----------
Deferred taxes:
U.S. Federal............................................... (348) (640) -
State and local............................................ (52) (13) -
---------- ---------- ----------
(400) (653) -
---------- ---------- ----------
$(854) $727 $ 2,671
========== ========== ==========
</TABLE>
The reasons for the difference between the provision for taxes and the amount
computed by applying the statutory federal income tax rate to (Loss) Income from
Continuing Operations Before Taxes and Extraordinary Items are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Federal statutory rate............................................ 34% 34% 34%
Computed expected tax (benefit)/provision......................... $(3,419) $ 2,393 $2,231
Increase (decrease) in taxes resulting from:
State and local taxes, net of federal tax benefit........... (9) 379 341
Amortization of goodwill.................................... 136 136 99
Reversal of deferred tax valuation allowance................ - (2,181) -
Impairment of assets........................................ 2,424 - -
Other....................................................... 14 - -
-------- ------- ------
Actual tax (benefit)/provision.................................... $ (854) $ 727 $2,671
======== ======= ======
</TABLE>
F-13
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES (CONT'D)
Deferred income taxes reflect the net federal and state tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
During 1998, the Company determined, based upon the level of its current taxable
income, that it was more likely than not that it would realize the benefit of a
portion of its deferred tax assets which previously had been fully reserved with
a valuation allowance. Consequently, beginning in the second quarter of 1998,
the Company reversed a portion of its tax valuation allowance equal to the
amount it would have recorded as a tax provision on income from both continuing
and discontinued operations before taxes during the period. As a result, the
Company reduced its tax provision from continuing operations and increased its
net deferred tax asset by $2,181 for the year ended December 31, 1998. Excluding
the effect of the tax valuation allowance reversal, income from continuing
operations for 1998 would have been $4,130 or $0.98 per diluted share. In
addition, the Company reversed $169 and $1,244 of its valuation allowance
related to net deferred tax assets of its discontinued operations with the
corresponding tax benefit included in the results of discontinued operations
during 1999 and 1998, respectively. The Company also reversed $313 of its
valuation allowance during 1998 and credited Capital in Excess of Par
representing the realization of tax benefits originating prior to the Company's
1991 quasi-reorganization. In 1997, $2,867 of the Company's tax provision was
credited to Capital in Excess of Par representing the realization of tax
benefits to offset current tax expenses in that year.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Tax net operating loss/credit carryforwards......................... $ 385 $ 318
Inventory valuation differences..................................... 2,206 1,990
Note receivable..................................................... 728 -
Other, net.......................................................... 81 693
------------- -------------
3,400 3,001
Valuation allowance................................................. (728) (897)
------------- -------------
Net deferred taxes.................................................. $2,672 $2,104
============= =============
</TABLE>
NOTE 9 - SEGMENT DATA
The Company recently announced a strategic realignment whereby the Company's
structure is organized by market segment in two new major groups. The strategic
realignment has resulted in a change in the composition of its reportable
segments and, accordingly, the Company has restated all periods reported. The
Company classifies its businesses under two major groups, the Aerospace and
Defense Group ("ADG") and Commercial Products Group ("CPG"). The ADG offers its
capabilities in magnetics, precision optics, precision machining and subsystems
integration to space and defense original equipment manufacturers (OEMs")
enabling them to design systems that meet leading-edge performance requirements.
The ADG designs, manufactures and sells high-end components such as precision
sensors, high-performance motors, precision metal optics and airbearings. These
products enable OEMs to improve measurement precision, positioning performance
(accuracy, speed and power) and weight requirements in their systems. The CPG
designs, manufactures and sells components, subsystems and systems to
high-performance OEMs and end users serving the electronic capital equipment,
data storage and digital imaging markets. These products enable OEMs to improve
the accuracy, throughput and yield of their equipment and processes. The CPG
also distributes precision ball bearings, acquired from various domestic and
international sources, to OEMs and Maintenance and Repair Organization
distributors supporting industrial and commercial markets.
F-14
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SEGMENT DATA (CONT'D)
As discussed in Note 3, the Company sold its Beau and Sensor Systems
divisions. The disposal of these businesses has been accounted for as a
discontinued operation and, accordingly, their related operating results have
been reported separately from continuing operations. The segment data below
excludes their results.
The following tables present financial data for each of the Company's segments.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales from continuing operations:
ADG...................................................... $ 38,253 $ 45,653 $ 46,914
CPG...................................................... 47,165 52,906 52,879
------------- ------------- -------------
Total Sales...................................... $ 85,418 $ 98,559 $ 99,793
============= ============= =============
Earnings from continuing operations before amortization,
interest and taxes:
ADG....................................................... $ 1,215 $ 4,669 $ 5,694
CPG....................................................... 2,433 6,794 6,917
Impairment of assets...................................... (8,993) - -
Special charge............................................ (784) - -
Non-allocated expenses.................................... (3,928) (4,425) (6,048)
============= ============= =============
(Loss) income from continuing operations
before taxes...................................... $ (10,057) $ 7,038 $ 6,563
============= ============= =============
Capital expenditures from continuing operations:
ADG....................................................... $ 2,846 $ 2,913 $ 2,426
CPG....................................................... 797 1,424 951
Corporate................................................. 16 86 39
============= ============= =============
Total capital expenditures........................ $ 3,659 $ 4,423 $ 3,416
============= ============= =============
Depreciation and amortization from continuing operations:
ADG....................................................... $ 1,651 $ 1,736 $ 1,553
CPG....................................................... 909 730 550
Corporate................................................. 32 29 25
------------- ------------- -------------
Total depreciation................................ 2,592 2,495 2,128
Amortization of goodwill.................................. 400 400 292
------------- ------------- -------------
Total depreciation and amortization............... $ 2,992 $ 2,895 $ 2,420
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Identifiable assets:
ADG.......................................................................... $ 24,103 $ 26,156
CPG.......................................................................... 26,595 26,082
Net assets held for sale..................................................... 7,227 6,208
Non-allocated assets......................................................... 6,225 14,068
-------------- --------------
Total assets........................................................... $ 64,150 $ 72,514
============== ==============
</TABLE>
F-15
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SEGMENT DATA (CONT'D)
Included in non-allocated expenses are the following: general corporate
expense, interest expense, amortization of goodwill and other income and
expense. Identifiable assets by segment consist of those assets that are used in
the segments' operations. Non-allocated assets are comprised primarily of
goodwill and net deferred tax assets.
The following table presents sales from continuing operations by geographic
region. Substantially all of the Company's assets were located within the United
States.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
United States............................................ $ 72,582 $ 82,946 $ 88,183
Europe................................................... 8,931 9,280 7,086
Other foreign............................................ 3,905 6,333 4,524
------------- ------------- -------------
Total Sales........................................ $ 85,418 $ 98,559 $ 99,793
============= ============= =============
</TABLE>
NOTE 10 - PENSION ARRANGEMENTS
The Company has two pension plans for which benefits and participation have
been frozen. Pension benefits under these plans are generally based upon years
of service and compensation. The Company's funding policy is to contribute
amounts to these plans sufficient to meet the minimum funding requirements set
forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate from time to
time.
The following table summarizes the components of net periodic pension cost for
the defined benefit plans:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Service cost-benefits earned during the period............ $ - $ - $ -
Interest cost on projected benefit obligation............. 78 76 76
Expected return on plan assets............................ (39) (38) (30)
Recognized net actuarial loss ............................ 45 40 38
Settlement gain........................................... - (24) -
------------- ------------- -------------
Total pension expense..................................... $ 84 $ 54 $ 84
============= ============= =============
</TABLE>
Assumptions used in accounting for the defined benefit plans as of the plans'
measurement dates were:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Weighted-average discount rate............................ 7.5% 7.5% 7.5%
Expected long-term rate of return on assets............... 6.0% 6.0% 6.0%
</TABLE>
F-16
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - PENSION ARRANGEMENTS (CONT'D)
The following table sets forth the change in benefit obligation, change in
plan assets and the funded status recognized in the consolidated balance sheets
for the Company's defined benefit pension plans:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year........................................ $1,081 $1,090
Interest cost.............................................................. 78 76
Actuarial loss............................................................. 50 84
Benefits paid.............................................................. (92) (87)
Settlement................................................................. - (82)
---------------- ----------------
Benefit obligation at end of year.............................................. $1,117 $1,081
---------------- ----------------
Change in plan assets:
Fair value of plan assets at beginning of year................................. $ 647 $ 674
Actual return.............................................................. 50 54
Employer contribution...................................................... 92 88
Benefits paid.............................................................. (92) (87)
Settlement................................................................. - (82)
---------------- ----------------
Fair value of plan assets at end of year....................................... $ 697 $ 647
---------------- ----------------
Funded status.................................................................... 420 434
Unrecognized net actuarial gain.................................................. 170 164
---------------- ----------------
Accrued benefit cost at December 31.............................................. $ 590 $ 598
================ ================
</TABLE>
Unrecognized net gains and losses are amortized over the average future
service lives of participants. Plan assets are invested in a managed portfolio
consisting primarily of equity securities.
The Company also sponsors 401(k) plans under which eligible employees may
elect to contribute a percentage of their earnings. The Company has matched
employee contributions to these plans in amounts ranging from 3% up to 5% of the
employees' gross earnings over the three years ended December 31, 1999. Company
matching contributions from continuing operations were $828 in 1999, $813 in
1998 and $811 in 1997.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information from continuing operations for the years
ended December 31, 1999, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest....................................................... $ 427 $ 589 $2,249
Income tax payments............................................ 728 1,213 315
Noncash investing activities:
Equipment acquired under capital leases........................ $ 1,226 $1,420 $ 759
Common stock issued for acquisition............................ - - 2,166
Treasury stock issued for defined benefit plans................ 104 24 -
</TABLE>
F-17
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCK OPTIONS
The Company's Long-Term Stock Incentive Plan (the "Plan") was approved by
shareholders in 1991. Shareholders approved an amendment to and restatement of
the Plan in October 1997, which, among other things, increased the number of
shares of Common Stock authorized for grant from 79,400 to 400,000. As of
December 31, 1999, the Company has 11,150 shares of Common Stock available for
grant under the Plan. The Plan is administered by the Stock Incentive Plan
Committee of the Board of Directors (the "Committee"). The Committee selects
participants from among those executives and other employees of the Company and
its subsidiaries who materially contribute to the success of the Company and
determines the amounts, times, forms, terms and conditions of grants. Grants may
be in the form of options to purchase shares of Common Stock, stock appreciation
rights, restricted stock and performance units (collectively, "Stock
Incentives"). Each Stock Incentive is exercisable upon vesting.
A summary of all outstanding stock options are presented in the table below:
<TABLE>
<CAPTION>
STOCK WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------- -------------
<S> <C> <C>
Outstanding at December 31, 1997...................................... 195,100 $ 22.52
------------- -------------
Granted........................................................... 80,700 25.50
Forfeited......................................................... (18,400) 25.44
Exercised......................................................... (9,000) 3.75
------------- -------------
Outstanding at December 31, 1998...................................... 248,400 23.95
------------- -------------
Granted........................................................... 185,550 13.17
Forfeited......................................................... (63,100) 22.57
Exercised......................................................... (4,200) 4.15
------------- -------------
Outstanding at December 31, 1999...................................... 366,650 $ 18.96
============= =============
Exercisable at December 31, 1999...................................... 71,240 $ 20.26
============= =============
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------ ------------------------------
Weighted
Weighted Weighted Average Average
Range of Number of Average Remaining Exercise Number of Exercise
Exercise Prices Options Life Price Options Price
- ----------------------- ------------ ------------------- --------------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 3.75 to $ 4.15 14,400 2 Years $ 3.98 14,400 $ 3.98
$10.50 to $12.72 125,700 10 Years 11.21 - -
$15.00 to $20.01 62,600 9 Years 17.71 12,000 15.49
$25.69 to $28.26 163,950 8 Years 26.69 44,840 26.76
- -----------------------------------------------------------------------------------------------------------------------------
$ 3.75 to $28.26 366,650 8 Years $18.96 71,240 $20.26
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - STOCK OPTIONS (CONT'D)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for grants
under the Plan. Pro forma information regarding net income and net income per
share is required by SFAS No. 123 for awards granted in fiscal years beginning
after December 15, 1994 as if the Company had accounted for such awards under
the fair value method. Had compensation cost for the Company's Stock-Incentive
grants in 1999, 1998 and 1997 been determined using the fair value method, the
Company would have reported the following results:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma (loss)/income from continuing operations before
extraordinary items........................................................ $ (9,668) $5,781 $3,751
Pro forma net (loss)/income................................................ (7,587) 5,480 4,971
Pro forma basic/(loss) earnings per share:
(Loss)/income from continuing operations before extraordinary items.... (2.39) 1.38 1.11
Net (loss)/income...................................................... (1.87) 1.31 1.48
Pro forma diluted (loss)/earnings per share:
(Loss)/income from continuing operations before extraordinary items.... (2.39) 1.37 1.04
Net (loss)/income...................................................... (1.87) 1.30 1.39
</TABLE>
The fair value of each option granted in 1999, 1998 and 1997 was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: expected volatility of 65% in 1999 and 50% in 1998 and
1997; risk-free interest rate of 5.9% in 1999, 5.0% in 1998 and 5.8% in 1997;
expected lives of 6 years; and, no dividend yield. Using this model, the
weighted average fair value of options granted during 1999, 1998 and 1997 was
$8.17, $13.56 and $13.11, respectively. For pro forma purposes, the estimated
fair value of the Company's Stock Incentive awards to employees is amortized
over the options' vesting period which is generally five years. Because the SFAS
No. 123 method of accounting has not been applied to options granted prior to
January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based awards to employees have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its Stock Incentive awards to employees.
F-19
<PAGE>
AXSYS TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Future minimum payments under noncancellable operating leases (exclusive of
property expenses and net of sublease rental income), as of December 31, 1999,
are as follows:
<TABLE>
<S> <C>
2000................................................. $ 1,771
2001................................................. 1,454
2002................................................. 1,450
2003................................................. 947
2004................................................. 902
2005 and thereafter.................................. 4,771
-------------
$ 11,295
=============
</TABLE>
Rent expense under such leases, net of sublease rental income, amounted to
$1,699, $1,715 and, $1,639 in 1999, 1998 and 1997, respectively.
The Company has various lawsuits, claims, commitments and contingent
liabilities arising from the ordinary conduct of its business; however, they are
not expected to have a material adverse effect on the Company's financial
position or results of operations.
NOTE 14 - IMPAIRMENT OF ASSETS AND SPECIAL CHARGE
In late 1999, in connection with the Company's annual evaluation of its
strategic direction and long-range planning and due to indications of
impairment, the Company evaluated the recoverability of certain long-lived
assets, primarily goodwill at Teletrac and the note from Westlake. In
arriving at the fair value of these assets, which serve the data storage
market, the Company considered a number of factors including: (i) weakness in
the data storage market since the second half of 1998, (ii) structural
changes to data storage products such as the number of read-write heads in a
hard disk drive, and (iii) price pressure on the hard disk drive
manufacturers. The Company believes that the demand for test products from
our served market has been permanently reduced. In determining the amount of
the impairment, the Company compared the net book value to the estimated fair
values of those assets. Based on best estimates of discounted future cash
flows, the Company recorded a $7,129 charge to write-down the carrying value
of goodwill related to Teletrac. In addition, the Company recorded a $1,864
charge to write off the note from Westlake serving the same data storage test
equipment market.
On November 20, 1998, the Company's Chairman and CEO ("the Chairman") and
the owner at that date of approximately 31% of its common stock, submitted an
offer to purchase all of the common stock not owned by him for $15.00 per
share in cash (the "Chairman's Proposal"). Shortly thereafter, the Company's
Board of Directors formed a Special Committee to evaluate the Chairman's
Proposal. On January 11, 1999, the Company received an unsolicited offer to
purchase the Company for $20.00 per share in cash. In response to this
unsolicited offer, the Chairman withdrew his proposal, and on January 13,
1999, the Company publicly announced that the Board of Directors had
dissolved the Special Committee and had authorized the retention of
investment bankers to explore various strategic alternatives, including the
potential sale of the Company. On January 29, 1999, the Company publicly
announced that the Board of Directors had instructed its investment bankers
to explore the potential sale of Axsys. During 1999, the Company recorded a
pre-tax special charge of $784 for expenses related to a process of exploring
the potential sale of the Company. On June 15, 1999, the Company publicly
announced that its Board of Directors had determined not to pursue a sale of
the Company at that time.
F-20
<PAGE>
AXSYS TECHNOLOGIES, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
COL. A COL.B COL. C COL. D COL. E COL. F
- -------------------------------------------------------------------------------------------------------------------------
Additions
------------------------
Balance at Charged to Charge to
Beginning Costs and Other Balance at End
Classification of Period Expenses Accounts Deductions of Period
-------------- ------------ ------------ ----------- ------------- ---------------
Allowance for doubtful accounts
- -------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999: $445 $331 $ - $273 (b) $503
Year ended December 31, 1998: $204 $306 $ - $ 65 (b) $445
Year ended December 31, 1997: $251 $159 $ 4 (a) $210 (b) $204
</TABLE>
- ----------------
(a) Includes $4 in 1997 associated with the acquisition of a business.
(b) Uncollectable accounts written off, net of recoveries.
F-21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3(1) Restated Certificate of Incorporation of the Company (filed
as Exhibit 3(4) to the Company's Amendment No. 2 to
Registration Statement on Form S-1, dated October 17, 1997
(File No. 333-36027) (the "Form S-1") and incorporated
herein by reference).
3(2) By-Laws of the Company (filed as Exhibit 2 to the Form 8-A
dated August 8, 1991 and incorporated herein by reference).
4(1) Stockholder Agreement, (filed as Exhibit 4(6) to the Form
S-1 and incorporated herein by reference) dated as of May
30, 1997, by and between the Company and David Barker,
Richard Howitt, William Hurst, William Kingsbury and Barton
Norton.
10(1) Stock Purchase Agreement by and between the Company,
Teletrac, Inc. and David Barker, Richard Howitt, William
Hurst, William Kingsbury, Barton Norton, John Van Dyke and
Mary Erdahl (filed as Exhibit 2 to the Company's Form 8-K,
dated May 30, 1997 and incorporated herein by
reference).
10(2) Form of Indemnification Agreement (filed as Exhibit 10(16) to the
Company's Form 10-K for the fiscal year ended December 30, 1990 (the
"1990 Form 10-K") and incorporated herein by reference).
10(3) Severance Agreement between the Company and Kenneth F. Stern dated as of
June 10, 1996 (filed as Exhibit 10(16) to the Form S-1 and incorporated herein
by reference).
10(4) Employment Agreement between Richard Howitt and Teletrac, dated as of
May 30, 1997 (filed as Exhibit 10(18) to the Form S-1 and incorporated
herein by reference).
10(5) Non-Competition Agreement between Richard Howitt and the Company,
dated as of May 30, 1997 (filed as Exhibit 10(19) to the Form S-1 and
incorporated herein by reference).
10(6) Form of Stock Option Agreement, dated as of September 30,
1991 (filed as Exhibit 10(17) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 30, 1991 and
incorporated herein by reference).
10(7) Teletrac, Inc. Management Incentive Compensation Plan (filed as Exhibit
10(21) to the Form S-1 and incorporated herein by reference).
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10(8) Summary of Annual Incentive Plan (filed as Exhibit 10(22) to the Form S-1
and incorporated herein by reference).
10(9) Supplemental Revenue Growth Incentive Plan (filed as Exhibit 10(23) to the
Form S-1 and incorporated herein by reference).
10(10) Assumption Agreement, dated as of May 30, 1997, made by Teletrac, Inc.
(filed as Exhibit 10(24) to the Form S-1 and incorporated herein by
reference).
10(11) Axsys Technologies, Inc. Long-Term Stock Incentive Plan (filed as Exhibit C
to the Company's Proxy Statement dated September 23, 1997 and
incorporated herein by reference).
10(12) Resolution approved November 8, 1999 amending Section 2(1) of the Long Term
Stock Incentive Plan.
10(13) Expense Reimbursement Agreement dated as of November 24, 1998, between
Stephen W. Bershad and the Company (filed as Exhibit 4 to Amendment No. 3
to Schedule 13D of Stephen W. Bershad and SWB Holding Corporation
with respect to the Common Stock of the Company on
November 25, 1998 and incorporated herein by
reference).
10 (14) Severance Protection Agreement between the Company and Stephen W. Bershad
dated as of February 11, 1999 (filed as Exhibit 10(1) to the Company's
Form 10-Q, dated May 11, 1999, for the fiscal quarter ended March 31, 1999
(the "March 31, 1999 Form 10-Q") and incorporated herein by reference).
10 (15) Severance Protection Agreement between the Company and Richard V. Howitt dated
as of February 11, 1999 (filed as Exhibit 10(2) to the March 31, 1999
Form 10-Q and incorporated herein by reference).
10 (16) Severance Protection Agreement between the Company and Kenneth F. Stern dated
as of February 11, 1999 (filed as Exhibit 10(4) to the March 31, 1999 Form 10-Q
and incorporated herein by reference).
10 (17) Net lease dated August 11, 1999, by and between Speedring Systems, Inc. and
Joel Nosanchuk (filed as Exhibit 10(2) to the Company's Form 10-Q, dated
November 8, 1999, for the fiscal quarter ended September 30,
1999 (the "September 30, 1999 Form 10-Q") and incorporated herein by reference).
10 (18) Net lease dated August 11, 1999, by and between Speedring Systems, Inc. and
Joel Nosanchuk (filed as Exhibit 10(3) to the September 30, 1999 Form 10-Q and
incorporated herein by reference).
10 (19) Letter Agreement between Mark J. Bonney and the Company dated as of August 1,
1999 (filed as Exhibit 10(4) to the September 30, 1999 Form 10-Q and incorporated
herein by reference).
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10 (20) Severance Protection Agreement between the Company and Mark J. Bonney dated as
of August 30, 1999 (filed as Exhibit 10(5) to the September 30, 1999 Form 10-Q and
incorporated herein by reference).
10 (21) Net lease dated August 5, 1999, by and between Axsys Technologies, Inc. and Otay
Business Park, LLC.
10 (22) Letter Agreement between John Clark and the Company dated as of December 10,
1999.
10 (23) Asset Purchase Agreement, dated as of February 3, 2000, between the Company,
Molex Industrial Ventures Inc. and Molex Incorporated.
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP.
27(1) Financial Data Schedule.
27(2) Restated Financial Data Schedule.
</TABLE>
E-3
<PAGE>
Exhibit 10(12)
RESOLUTION AUTHORIZING AMENDMENT TO AMENDED AND
RESTATED LONG-TERM STOCK INCENTIVE PLAN
RESOLVED, that Section 2(1) of the Company's Amended and Restated
Long-Term Stock Incentive Plan be amended to read as follows:
"(1) "Fair Market Value" means the fair market value of the
Shares as determined by the Committee in its sole discretion; PROVIDED,
HOWEVER, that (A) if the Shares are listed on a national securities exchange,
or if the Shares are admitted to quotation on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or other comparable
quotation system and have been designated as a National Market System "(NMS")
security, Fair Market Value on any date shall be the closing sales price for
the Shares on such date as such price is officially quoted in the composite
tape of transactions on such exchange or as such price is reported on the
Nasdaq National Market, or, if there were no sales on such date, then the
Fair Market Value shall be the closing selling price on the last preceding
date for which such quotation exists; or (B) if the Shares are admitted to
quotation on NASDAQ and have not been designated an NMS security, Fair Market
Value on any date shall be the average of the closing bid and closing asked
prices of the Shares as such amounts are reported on the Nasdaq SmallCap
Market on such date."
RESOLVED, that the Secretary of the Company is authorized to cause the
Amended and Restated Long-Term Stock Incentive Plan, as amended above, to be
filed among the records of the Company.
<PAGE>
Exhibit 10(21)
STANDARD INDUSTRIAL/COMMERCIAL LEASE
[Multi-Tenant - Triple Net]
BETWEEN
OTAY BUSINESS PARK, LLC,
a California limited liability company
LANDORD
AND
AXSYS TECHNOLOGIES, INC.
a Delaware corporation
TENANT
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL LEASE
------------------------------------
[MULTI-TENANT - TRIPLE NET]
---------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. BASIC LEASE TERMS ........................................................ 1
2. PREMISES AND COMMON AREAS ................................................ 2
3. TERM ..................................................................... 3
4. POSSESSION ............................................................... 4
5. RENT ..................................................................... 5
6. OPERATING EXPENSES ....................................................... 5
7. SECURITY ................................................................. 6
8. USE ...................................................................... 7
9. NOTICES .................................................................. 8
10. BROKERS .................................................................. 8
11. SURRENDER; HOLDING OVER .................................................. 8
12. TAXES .................................................................... 9
13. ALTERATIONS .............................................................. 9
14. REPAIRS AND MAINTENANCE .................................................. 10
15. LIENS .................................................................... 12
16. ENTRY BY LANDLORD ........................................................ 12
17. UTILITIES AND SERVICES ................................................... 12
18. ASSUMPTION OF RISK AND INDEMNIFICATION ................................... 14
19. INSURANCE ................................................................ 14
20. DAMAGE OR DESTRUCTION .................................................... 16
21. EMINENT DOMAIN ........................................................... 18
22. DEFAULTS AND REMEDIES .................................................... 18
23. LANDLORD'S DEFAULT ....................................................... 20
24. ASSIGNMENT AND SUBLETTING ................................................ 20
25. SUBORDINATION ............................................................ 22
26. ESTOPPEL CERTIFICATE ..................................................... 23
27. EASEMENTS ................................................................ 23
28. RULES AND REGULATIONS .................................................... 23
29. MODIFICATION AND CURE RIGHTS OR LANDLORD'S MORTGAGEES AND LESSORS ........ 24
30. DEFINITION OF LANDLORD ................................................... 24
31. WAIVER ................................................................... 24
32. PARKING .................................................................. 24
33. FORCE MAJEURE ............................................................ 24
34. SIGNS .................................................................... 25
35. LIMITATIONS ON LIABILITY ................................................. 25
36. FINANCIAL STATEMENTS ..................................................... 25
37. QUIET ENJOYMENT .......................................................... 26
38. AUCTIONS ................................................................. 26
39. MISCELLANEOUS ............................................................ 26
40. EXECUTION OF LEASE ....................................................... 27
</TABLE>
EXHIBITS
- --------
Exhibit A: Site Plan
Exhibit B: Notice of Lease Term Dates and Tenant's Percentage
Exhibit C: Work Letter Agreement
Exhibit D: Definition of Operating Expenses
Exhibit E: Estoppel Certificate
Exhibit F: Rules and Regulations
i
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL LEASE
[MULTI-TENANT - TRIPLE NET]
This STANDARD INDUSTRIAL/COMMERCIAL LEASE ("Lease") is entered into as
of the 5th day of August, 1999, by and between OTAY BUSINESS PARK, LLC, a
California limited liability company ("Landlord"), and AXSYS TECHNOLOGIES, INC.,
a Delaware corporation ("Tenant").
1. BASIC LEASE TERMS. For purposes of this Lease, the following terms
have the following definitions and meanings:
(a) LANDLORD'S ADDRESS (For Notices):
Otay Business Park, LLC
c/o The Koll Company
4275 Executive Square, Suite 240
La Jolla, CA 92037
Attention: Anthony Badeaux
WITH A COPY TO:
Law Offices of William J. Harris
777 South Pacific Highway, Suite 101
Solana Beach, California 92075
Attention: William J. Harris
or such other place as Landlord may from time to time designate
by notice to Tenant.
(b) TENANT'S ADDRESS (FOR NOTICES):
PRIOR TO THE COMMENCEMENT DATE:
Axsys Technologies, Inc.
1601 Precision Park Lane
San Diego, CA 92173-1399
Attention: President
AFTER THE COMMENCEMENT DATE:
The Premises
WITH A COPY TO:
Axsys Technologies, Inc.
910 Sylvan Avenue, Suite 180
Englewood Cliffs, NJ 07632
Attn: General Counsel
WITH AN ADDITIONAL COPY TO:
The Irving Hughes Group
501 West Broadway. Suite 2020
San Diego, CA 92101
Attention: David B. Marino
(c) PERMITTED USE: All legally permissible general office,
manufacturing, distribution and related uses; subject, however, to any
limitations set forth in the CC&Rs (as defined below) and no other use without
the express written consent of Landlord, which consent Landlord shall not
unreasonably withhold.
(d) PREMISES, BUILDING, DEVELOPMENT AND INDUSTRIAL CENTER: That
certain portion of the Building (as defined below), including all improvements
therein on the date hereof or to be provided by Landlord and Tenant under the
terms of the Lease, consisting of approximately 64,840 rentable square feet, as
outlined on EXHIBIT "A" attached hereto ("Premises"). The "Building" is that
certain approximately 195,000 rentable square foot building which, together with
related parking areas and other common area improvements, is currently known as
the San Diego Distribution Center
<PAGE>
("DEVELOPMENT"). The Development is a part of that certain business park known
as Brown Field Business Park ("INDUSTRIAL CENTER").
In addition to Tenant's rights to use and occupy the Premises
as hereinafter specified, Tenant shall have non-exclusive rights to the Common
Areas (as defined in Paragraph 2(c) below) as hereinafter specified, but shall
not have any rights to the roof, exterior walls or utility raceways of the
Building or to any other buildings in the Industrial Center, except as otherwise
expressly provided herein.
(e) TENANT'S PERCENTAGE: Approximately 33.25%, based upon the
rentable square footage of the Premises as compared to the total rentable square
footage of the Building.
(f) TERM: Ten (10) Lease Years, plus two (2) options to extend
the Term for five (5) additional years each.
(g) TENANT IMPROVEMENTS: All Tenant Improvements installed or
to be installed by Tenant within the Premises to prepare the Premises for
occupancy pursuant to the terms of the Work Letter Agreement attached hereto as
EXHIBIT "C".
(h) COMMENCEMENT DATE: The earlier of (i) Tenant's occupancy of
the Premises (except in connection with Tenant's permitted early occupancy of
the Premises pursuant to Section 6.1 of EXHIBIT "C") or (ii) February 1, 2000,
subject to Paragraph 3(a) below.
(i) EXPIRATION DATE: The date which is ten (10) years after the
Commencement Date plus any partial month in which the Commencement Date occurs.
(j) MONTHLY BASE RENT: Initially $46,360.60. Commencing on the
first anniversary of the Commencement Date and on every one (1) year anniversary
thereafter (including each year of each of the Option Periods described in
Paragraph 3(b) below following the initial year of each such Option Period), the
then applicable Monthly Base Rent shall be increased by an amount equal to $.02
per rentable square foot of the Premises in excess of the Monthly Base Rent
payable during the immediately preceding period.
In the event the Commencement Date occurs on other than the first (1st)
day of a month, the amount of the first and last monthly payment of Monthly Base
Rent shall be apportioned to account for the fact that the last month of the
Initial Term shall be less than a full calendar month.
(k) SECURITY DEPOSIT: $46,360.60.
(l) BROKERS: Landlord Broker: CB Richard Ellis, Inc.
Tenant Broker: The Irving Hughes Group, Inc.
(m) INTEREST RATE: Shall mean the greater of ten percent (10%)
per annum or two percent (2%) in excess of the prime lending or reference rate
of Wells Fargo Bank N.A. or any successor bank in effect on the twenty-fifth
(25th) day of the calendar month immediately prior to the event giving rise to
the Interest Rate imposition; provided, however, the Interest Rate will in no
event exceed the maximum interest rate permitted to be charged by applicable
law.
(n) EXHIBITS: A through F, inclusive, which Exhibits are
attached to this Lease and incorporated herein by this reference.
This Paragraph 1 represents a summary of the basic terms and
definitions of this Lease. In the event of any inconsistency between the terms
contained in this Paragraph 1 and any specific provision of this Lease, the
terms of the more specific provision shall prevail.
2. PREMISES AND COMMON AREAS.
(a) PREMISES. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord the Premises as improved or to be improved with the
Tenant Improvements described in the Work Letter Agreement, a copy of which is
attached hereto as EXHIBIT "C".
(b) MUTUAL COVENANTS. Landlord and Tenant agree that the
letting and hiring of the Premises is upon and subject to the terms, covenants
and conditions contained in this Lease and each party covenants as a material
part of the consideration for this Lease to keep and perform their respective
obligations under this Lease.
(c) TENANT'S USE OF COMMON AREAS. During the Term of this
Lease, Tenant shall have the nonexclusive right to use in common with Landlord
and all persons, firms and corporations conducting business in the Development
and their respective customers, guests, licensees, invitees,
-2-
<PAGE>
subtenants, employees and agents (collectively, "Development Occupants"),
subject to the terms of this Lease, the Rules and Regulations referenced in
Paragraph 28 below and all covenants, conditions and restrictions now or
hereafter affecting the Development, the following common areas of the
Development (collectively, the "Common Areas"): the parking facilities of the
Development which serve the Building, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways, landscaped areas, and
similar areas and facilities situated within the Development and appurtenant to
the Building which are not reserved for the exclusive use of any Development
Occupants.
(d) LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of
and access to the Premises is not interfered with in an unreasonable manner,
Landlord reserves for itself and for all other owner(s) and operator(s) of the
Common Areas and the balance of the Development, the right from time to time to:
(i) make reasonable changes to the design and layout of the Development,
including, without limitation, changes to buildings, driveways, entrances,
loading and unloading areas, direction of traffic, landscaped areas and
walkways, parking spaces and parking areas; and (ii) reasonably use or close
temporarily the Common Areas, and/or other portions of the Development while
engaged in making improvements, repairs or alterations to the Building, the
Development, or any portion thereof.
3. TERM.
(a) INITIAL TERM. The term of this Lease ("Term") will be for
the period designated in Subparagraph 1(f), commencing on the Commencement Date
set forth in Paragraph 1(h), and ending on the Expiration Date set forth in
Paragraph 1(i), subject to extension as provided in Paragraph 3(b) below.
Notwithstanding the foregoing, the Commencement Date shall not be deemed to have
occurred unless and until (i) a certificate of occupancy (permanent or
temporary) or other governmental approval permitting occupancy of the Premises
has been issued for the Premises (unless the failure to obtain such approval to
occupy the Premises is due to any action or inaction of Tenant) and (ii) all
Building systems are in good working order to support the operation of the
Premises. Further notwithstanding the foregoing, if the Commencement Date falls
on any day other than the first day of a calendar month then the Term of this
Lease will be measured from the first day of the month following the month in
which the Commencement Date occurs. Each consecutive twelve (12) month period of
the Term of this Lease, commencing on the Commencement Date, will be referred to
herein as a "Lease Year". Promptly after the Commencement Date, Landlord will
deliver to Tenant the Notice of Lease Term Dates in the form attached hereto as
EXHIBIT "B", which Notice will confirm, among other things, the Commencement
Date and the date upon which the Term of this Lease shall end. The Notice will
be binding upon Tenant unless Tenant objects to the Notice in writing within
fifteen (15) days of Tenant's receipt of the Notice.
(b) OPTIONS TO EXTEND. Tenant shall have two (2) successive
options (individually, the "Extension Option" and collectively, the "Extension
Options") to extend the Term, as to not less than the entire Premises, for a
period (the "Option Period") of five (5) years each, commencing upon the date
the Term would otherwise expire, upon the same terms and conditions previously
applicable, except that (i) the Monthly Base Rent as of the commencement of the
Option Period and thereafter during the Option Period will be adjusted as
provided below, and (ii) Tenant shall have no right to receive any Allowance (as
defined below). Each Extension Option may be validly exercised only by written
notice to Landlord from Tenant not earlier than twelve (12) months and not later
than eight (8) months prior to commencement of the Option Period. The Extension
Option may be validly exercised only if Tenant is not then or at any time
thereafter until the commencement of the Option Period in default under this
Lease (after expiration of any applicable notice and cure period). If Tenant
does not exercise either Extension Option in strict accordance with the
provisions hereof, the Extension Options shall forever terminate and be of no
further force and effect. The Extension Options are personal to Tenant, may not
be exercised by any person or entity other than the original Tenant hereunder
and shall become null and void if Tenant assigns or sublets its interest in the
entire Premises to any person or entity other than a Tenant Affiliate (as
defined in Paragraph 24(c)).
(c) MONTHLY BASE RENT DURING OPTION PERIOD. The Monthly Base
Rent beginning with the first day of the Option Period shall equal the "fair
market rate" ("Fair Market Rate") for comparable office/warehouse space in
comparable buildings in the South Bay area of San Diego County ("Comparison
Area"). For purposes hereof, "Fair Market Rate" shall mean the base rent payable
to a willing landlord by a willing tenant having a similar financial
responsibility, credit rating and capitalization as Tenant then has, for like
and comparable premises, improved with tenant improvements of like and
comparable quality to those then existing in the Premises, in like and
comparable buildings located in Comparison Area and (ii) in no event shall the
initial Fair Market Rent be less than the Monthly Base Rent payable during the
period immediately preceding such adjustment plus $.02 per rentable square foot
of the Premises. In calculating Fair Market Rate appropriate consideration shall
be given to all relevant factors, including, without limitation, (i) rental
concessions and tenant improvement allowances generally being offered by
landlords of comparable properties, (ii) the age of the Building and Tenant
Improvements, (iii) rental market conditions then in existence, (iv) whether
Landlord will or will not be required to pay a real estate brokerage commission
in connection with Tenant's exercise of the Extension Option, and (v) the fact
that the Tenant will be accepting the Premises in an "As-Is" condition.
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Commencing on the first anniversary of each Option Period and on every one (1)
year anniversary thereafter during the balance of such Option Period, the Base
Rent then payable hereunder shall be increased by an amount equal to $.02 per
rentable square foot of the Premises in excess of the Base Rent payable during
the immediately preceding period. Following Tenant's valid exercise of the
Extension Option, Landlord and Tenant shall commence negotiations for a period
of forty-five (45) days to determine whether Landlord and Tenant can reach
mutual agreement as to the Fair Market Rate. If the parties are unable to reach
an agreement within such period of time as to the Fair Market Rate, then either
party (the "First Party") may at any time prior to reaching such agreement, give
notice to the other party (the "Second Party") that an appraisal of the Premises
is required for purposes of determining the Fair Market Rate. Such notice shall
designate an appraiser (the "First Appraiser"). In the event that such appraisal
is required, Landlord and Tenant shall each prepare a determination of such
party's estimate of the appropriate Fair Market Rent and each party's
determination shall be submitted to arbitration as provided below. Within ten
(10) business days after the service of the notice referred to above, the Second
Party shall give written notice to the First Party designating a second
appraiser (the "Second Appraiser"). If the Second Appraiser is not so designated
within the time above specified, then the First Appraiser shall select the
Second Appraiser within ten (10) business days after the Second Party's failure
to appoint. The First Appraiser and the Second Appraiser so designated or
appointed shall themselves appoint a third appraiser (the "Third Appraiser"). If
the First Appraiser and the Second Appraiser shall be unable to agree upon such
appointment within five (5) business days after the appointment of the Second
Appraiser, then the Third Appraiser shall be selected by Landlord and Tenant. If
Landlord and Tenant are unable to agree upon the Third Appraiser within ten (10)
business days thereafter, either the First Party or the Second Party may apply
to the Superior Court for the County in which the Building is located to appoint
the Third Appraiser. Landlord and Tenant shall each pay the cost of their own
appraiser and shall share equally the cost of the Third Appraiser (and, if
necessary, court costs to appoint such appraiser). Any appraiser designated to
serve in accordance with the provisions of this Lease shall be disinterested and
shall be an MAI appraiser and professionally qualified to appraise the Premises
with at least ten (10) years experience in appraising similar properties in the
Comparison Area. The three (3) appraisers shall within thirty (30) days of the
appointment of the Third Appraiser reach a decision as to whether the parties
shall use Landlord's or Tenant's submitted Fair Market Rate and shall notify
Landlord and Tenant thereof. The determination of such arbitrators shall be
limited solely to the issue of whether Landlord's or Tenant's submitted Fair
Market Rate for the Premises is closest to the actual Fair Market Rate for the
Premises as determined by the arbitrators, taking into account the requirements
above. The decision of the majority of the three arbitrators shall be binding
upon Landlord and Tenant. Any appraisals to be provided pursuant to this Lease
shall be submitted to Landlord and Tenant within ten (10) business days after
the last of the three appraisers has been selected. After reaching a decision,
the appraisers shall give written notice of such decision to the parties.
4. POSSESSION.
(a) DELIVERY OF POSSESSION. Landlord agrees to construct the
Landlord's Work and deliver possession of the Premises to Tenant in accordance
with the terms of this Lease and the Work Letter Agreement attached hereto as
EXHIBIT "C".
(b) CONDITION OF PREMISES. Prior to the Commencement Date and
in accordance with the Work Letter Agreement attached hereto as EXHIBIT "C",
Landlord and Tenant will jointly conduct a walk-through inspection of the
Premises and will jointly prepare a punch-list ("Punch-List") of items required
to be installed by Landlord under the Work Letter Agreement which require
finishing or correction. The Punch-List will not include any items of damage to
the Premises caused by Tenant's move-in or early entry, if permitted, which
damage will be corrected or repaired by Landlord, at Tenant's expense or, at
Landlord's election, by Tenant, at Tenant's expense. Other than the items
specified in the Punch-List, by taking possession of the Premises, Tenant will
be deemed to have accepted the Premises in its condition on the date of delivery
of possession, subject to all applicable zoning, municipal, county and state
laws, ordinances and regulations governing and regulating the use and occupancy
of the Premises and to have acknowledged that the Tenant Improvements have been
installed as required by the Work Letter Agreement and that there are no
additional items needing work or repair by Landlord. Landlord will cause all
items in the Punch-List to be repaired or corrected within thirty (30) days
following the preparation of the Punch-List or as soon as reasonably practicable
after the preparation of the Punch-List. Tenant acknowledges that neither
Landlord nor any agent of Landlord has made any representation or warranty with
respect to the Premises, the Development or any portions thereof or with respect
to the suitability of same for the conduct of Tenant's business. Notwithstanding
the foregoing, Landlord shall deliver the Premises to Tenant on the Commencement
Date clean and free of debris with all items of Landlord's Worksubstantially
completed in accordance with the terms of the Work Letter attached hereto as
EXHIBIT "C," subject to such Punch-List items. Landlord warrants to Tenant that
the roof, plumbing, fire sprinkler system, lighting, heating, ventilation and
air conditioning systems and electrical systems in the Premises (to the extent
installed by or on behalf of Landlord as part of the Landlord's Work), shall be
in good operating condition on the Commencement Date and during the initial
twelve (12) months of the Term. In the event of a noncompliance with such
warranty, Landlord shall promptly after receipt of written notice from Tenant
setting forth the nature and extent of such
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noncompliance, rectify same at Landlord's cost and expense and not as an
Operating Expense. Further, in connection with the construction of the
Landlord's Work pursuant to the Work Letter, Landlord shall obtain customary
warranties and guaranties from the contractor(s) performing such work and/or the
manufacturers of equipment installed by Landlord therein, but shall be under no
obligation to incur additional expense in order to obtain or extend such
warranties. If Tenant is required to make repairs to any component of the
Premises or any of its systems not covered by the Landlord's warranty contained
in this Section 4(b) but for which Landlord has obtained a contractor's or
manufacturer's warranty, then Landlord shall, upon request by Tenant, use its
good faith efforts to pursue its rights under such warranties for the benefit of
Tenant.
5. RENT.
(a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the
Monthly Base Rent for the Premises (subject to adjustment as hereinafter
provided) in advance on the first day of each calendar month during the Term
without prior notice or demand, except that Tenant agrees to pay the Monthly
Base Rent for the first full month of the Term directly to Landlord on or prior
to January 1, 2000. 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 will be
prorated in the proportion that the number of days this Lease is in effect
during such period bears to the number of days in such month. Except as
expressly provided herein, all rent must be paid to Landlord, without any
deduction or offset, in lawful money of the United States of America, at the
address designated by Landlord or to such other person or at such other place as
Landlord may from time to time designate in writing. Monthly Base Rent will be
adjusted during the Term of this Lease as provided in Paragraph 1(j). Landlord
and Tenant hereby stipulate that, notwithstanding anything to the contrary
contained in this Lease, the rentable square footage of the Premises and
Building are 64,840 and 195,000 rentable square feet, respectively, and shall
not be subject to recalculation or adjustment.
(b) ADDITIONAL RENT. All amounts and charges to be paid by
Tenant hereunder, including, without limitation, payments for Operating
Expenses, real property taxes, insurance and repairs, will be considered
additional rent for purposes of this Lease, and the word "rent" as used in this
Lease will include all such additional rent unless the context specifically or
clearly implies that only Monthly Base Rent is intended.
(c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or
any item of additional rent will be subject to interest and a late charge as
provided in Subparagraph 22(f) below.
6. OPERATING EXPENSES.
(a) OPERATING EXPENSES. In addition to Monthly Base Rent,
throughout the Term of this Lease, Tenant agrees to pay Landlord as additional
rent in accordance with the terms of this Paragraph 6, Tenant's Percentage of
Operating Expenses for the Development as defined in EXHIBIT "D" attached
hereto.
(b) ESTIMATE STATEMENT. Prior to the Commencement Date and on
or about March 1st of each subsequent calendar year during the Term of this
Lease or as soon thereafter as reasonably practicable, Landlord shall prepare
and deliver to Tenant a statement ("Estimate Statement") wherein Landlord will
estimate both the Operating Expenses and Tenant's Percentage of Operating
Expenses for the then current calendar year. Tenant agrees to pay Landlord, as
additional rent, one-twelfth (1/12th) of the estimated Tenant's Percentage of
Operating Expenses each month thereafter, beginning with the next installment of
rent due, until such time as Landlord issues a revised Estimate Statement or the
Estimate Statement for the succeeding calendar year; except that, concurrently
with the regular monthly rent payment next due following the receipt of each
such Estimate Statement provided that such receipt is not less than five (5)
business days before such monthly rent payment is due, Tenant agrees to pay
Landlord an amount equal to one monthly installment of the estimated Tenant's
Percentage of Operating Expenses (less any applicable Operating Expenses already
paid) multiplied by the number of months from January, in the current calendar
year, to the month of such rent payment next due, all months inclusive. If at
any time during the Term of this Lease, but not more often than quarterly,
Landlord reasonably determines that Tenant's Percentage of Operating Expenses
for the current calendar year will be greater than the amount set forth in the
then current Estimate Statement, Landlord may issue a revised Estimate Statement
and Tenant agrees to pay Landlord, within ten (10) days of receipt of the
revised Estimate Statement, the difference between the amount owed by Tenant
under such revised Estimate Statement and the amount owed by Tenant under the
original Estimate Statement for the portion of the then current calendar year
which has expired. Thereafter Tenant agrees to pay Tenant's Percentage of
Operating Expenses based on such revised Estimate Statement until Tenant
receives the next calendar year's Estimate Statement or a new revised Estimate
Statement for the current calendar year.
(c) ACTUAL STATEMENT. By April 1st of each calendar year during
the Term of this Lease or as soon thereafter as reasonably practicable, Landlord
shall prepare and deliver to Tenant a
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statement ("Actual Statement") which states the actual Operating Expenses for
the preceding calendar year. If the Actual Statement reveals that Tenant's
Percentage of the actual Operating Expenses is more than the total Additional
Rent paid by Tenant for Operating Expenses on account of the preceding calendar
year, Tenant agrees to pay Landlord the difference in a lump sum within thirty
(30) days of receipt of the Actual Statement. If the Actual Statement reveals
that Tenant's Percentage of the actual Operating Expenses is less than the
Additional Rent paid by Tenant for Operating Expenses on account of the
preceding calendar year, Landlord will credit any overpayment toward the next
monthly installment(s) of Tenant's Percentage of the Operating Expenses due
under this Lease.
(d) MISCELLANEOUS. Any delay or failure by Landlord in
delivering any Estimate Statement or Actual Statement pursuant to this Paragraph
6 will not constitute a waiver of its right to require an increase in rent nor
will it relieve Tenant of its obligations pursuant to this Paragraph 6, except
that Tenant will not be obligated to make any payments based on such Estimate
Statement or Actual Statement until ten (10) days or thirty (30) days,
respectively, after receipt of such Estimate Statement or Actual Statement. Even
though the Term has expired and Tenant has vacated the Premises, when the final
determination is made of Tenant's Percentage of the actual Operating Expenses
for the year in which this Lease terminates, Tenant agrees to promptly pay any
increase due over the estimated expenses paid and, conversely, any overpayment
made in the event said expenses decrease shall promptly be rebated by Landlord
to Tenant. Such obligations will be continuing ones which will survive the
expiration or termination of this Lease. Prior to the expiration or sooner
termination of the Lease Term and Landlord's acceptance of Tenant's surrender of
the Premises, Landlord will have the right to estimate the actual Operating
Expenses for the then current Lease Year and to collect from Tenant prior to
Tenant's surrender of the Premises, Tenant's Percentage of any excess of such
actual Operating Expenses over the estimated Operating Expenses paid by Tenant
in such Lease Year.
(e) TENANT'S AUDIT RIGHTS. Landlord agrees that it shall
maintain complete and accurate records of all costs, expenses and disbursements
paid or incurred by Landlord with respect to the Operating Expenses in
accordance with generally accepted accounting principles, consistently applied.
Such records shall be kept until two (2) years after the termination of this
Lease. At any time within twelve (12) months of Tenant's receipt of any
statement from Landlord relating to Operating Expenses, Landlord shall furnish
Tenant, following Tenant's written request therefor, invoices and other source
documents relating to Operating Expenses and Landlord shall provide in
reasonable detail the calculation of Tenant's Percentage of the Operating
Expenses. If it is determined from Tenant's audit of such Operating Expenses
that Tenant was overcharged by more than five percent (5%), such overcharge
shall entitle Tenant to credit against its next payment of Operating Expenses
the amount of the overcharge and the reasonable costs associated with the audit,
excluding travel and lodging costs (and, if such credit occurs following the
expiration of the Term, Landlord shall promptly pay the amount of such credit to
Tenant). If the audit determines that the Tenant was overcharged less than five
percent (5%), such overcharge shall entitle Tenant to credit against its next
payment of Operating Expenses the amount of the overcharge and Tenant shall pay
for all reasonable costs associated with the audit (excluding travel and lodging
costs). If the audit shall determine that Tenant was undercharged for the
Operating Expenses, Tenant shall promptly pay the amount of such undercharge to
Landlord and Tenant shall pay for all costs associated with the audit.
Notwithstanding anything to the contrary herein, any Operating Expenses
attributable to a period which falls only partially within the term of this
Lease shall be prorated between Landlord and Tenant so that Tenant shall pay
only that portion thereof which the part of such period within the Lease term
bears to the entire period.
(f) OPERATING EXPENSES CAPS. Notwithstanding anything to the
contrary contained herein, from and after the first full calendar year during
the initial Lease Term, in no event shall the Operating Expenses payable by
Tenant under this Lease increase by more than five percent (5%), excluding Real
Property Taxes and Assessments (as defined in EXHIBIT "D"), over the prior
calendar year calculated on a non-compounded basis.
7. SECURITY.
(a) SECURITY DEPOSIT. Concurrently with Tenant's execution of
this Lease, Tenant will deposit with Landlord the Security Deposit designated in
Subparagraph 1(k). The Security Deposit will be held by Landlord as security for
the full and faithful performance by Tenant of all of the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the Term
hereof. If Tenant fully and faithfully performs its obligations under this
Lease, including, without limitation, surrendering the Premises upon the
expiration or sooner termination of this Lease in compliance with Subparagraph
11(a) below, the Security Deposit or any balance thereof will be returned to
Tenant (or, at Landlord's option, to the last assignee of Tenant's interest
hereunder) within thirty (30) days following the expiration of the Lease Term or
as required under applicable law, provided that Landlord may retain the Security
Deposit until such time as any outstanding rent or additional rent amount has
been determined and paid in full. The Security Deposit is not, and may not be
construed by Tenant to constitute, rent for the last month or any portion
thereof. If Tenant defaults with respect to any provisions of this Lease
including, but not limited to, the provisions relating to the payment of rent or
additional rent, Landlord
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may (but will not be required to) use, apply or retain all or any part of the
Security Deposit for the payment of any rent or any other sum in default, or for
the payment of any other amount which Landlord shall reasonably spend or become
obligated to spend by reason of Tenant's default). If any portion of the
Security Deposit is so used or applied, Tenant agrees, within ten (10) days
after Landlord's written demand therefor, to deposit cash with Landlord in an
amount sufficient to restore the Security Deposit to its original amount and
Tenant's failure to do so shall constitute a default under this Lease. Landlord
is not required to keep Tenant's Security Deposit separate from its general
funds, and Tenant is not entitled to interest on such Security Deposit.
8. USE.
(a) TENANT'S USE OF THE PREMISES. The Premises may be used for
the use or uses set forth in Subparagraph 1(c) only, and Tenant will not use or
permit the Premises to be used for any other purpose without the prior written
consent of Landlord, which consent Landlord shall not unreasonably withhold.
(b) COMPLIANCE. At Tenant's sole cost and expense, Tenant
agrees to procure, maintain and hold available for Landlord's inspection, all
governmental licenses and permits required for the proper and lawful conduct of
Tenant's business from the Premises, if any. Tenant agrees not to use, alter or
occupy the Premises or allow the Premises to be used, altered or occupied in
violation of, and Tenant, at its sole cost and expense, agrees to use and occupy
the Premises and cause the Premises to be used and occupied in compliance, in
all material respects, with: (i) any and all laws, statutes, zoning
restrictions, ordinances, rules, regulations, orders and rulings now or
hereafter in force and any requirements of any insurer, insurance authority or
duly constituted public authority having jurisdiction over the Premises now or
hereafter in force, (ii) the requirements of the Board of Fire Underwriters and
any other similar body, (iii) the Certificate of Occupancy issued for the
Building, and (iv) any recorded covenants, conditions and restrictions and
similar regulatory agreements, if any, which affect the use, occupation or
alteration of the Premises; provided, however, that Landlord provides Tenant
with a written copy of such covenants, conditions and restrictions and similar
regulatory agreements. Tenant agrees to comply with the Rules and Regulations
referenced in Paragraph 28 below. Tenant agrees not to do or permit anything to
be done in or about the Premises which will in any manner obstruct or interfere
with the rights of other tenants or occupants of the Development, or injure or
unreasonably annoy them, or use or allow the Premises to be used for any
unlawful purpose. Tenant agrees not to cause, maintain or permit any nuisance or
waste in, on, under or about the Premises. Notwithstanding anything contained in
this Lease to the contrary, all transferable development rights related in any
way to the Development are and will remain vested in Landlord, and Tenant hereby
waives any rights thereto.
(c) HAZARDOUS MATERIALS. Except as provided below, Tenant
agrees not to cause or permit any Hazardous Materials to be brought upon,
stored, used, handled, generated, released or disposed of on, in, under or about
the Premises, the Building, the Development, the Industrial Park or any portion
thereof by Tenant, its agents, employees, subtenants, assignees, licensees,
contractors or invitees (collectively, "Tenant's Parties"), without the prior
written consent of Landlord, which consent Landlord shall not unreasonably
withhold (subject to the terms and conditions of this Lease). Upon the
expiration or earlier termination of this Lease, Tenant agrees to promptly
remove from the Premises, at its sole cost and expense, any and all Hazardous
Materials, including any equipment or systems containing Hazardous Materials
which are installed, brought upon, stored, used, generated or released upon, in,
under or about the Premises, the Building, the Development, the Industrial Park
or any portion thereof by Tenant or any of Tenant's Parties. To the fullest
extent permitted by law, Tenant agrees to promptly indemnify, protect, defend
and hold harmless Landlord and Landlord's partners, officers, directors,
employees, agents, successors and assigns (collectively, "Landlord Indemnified
Parties") from and against any and all claims, damages, judgments, suits, causes
of action, losses, liabilities, penalties, fines, expenses and costs (including,
without limitation, clean-up, removal, remediation and restoration costs, sums
paid in settlement of claims, attorneys' fees, consultant fees and expert fees
and court costs) which arise or result from the presence of Hazardous Materials
on, in, under or about the Premises, the Building or the Development or any
other portion of the Industrial Park and which are caused or permitted by Tenant
or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any
release of Hazardous Materials at the Premises, which Tenant becomes aware of
during the Term of this Lease, whether caused by Tenant or any other persons or
entities. In the event of any release of Hazardous Materials caused or permitted
by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the
obligation, to cause Tenant to immediately take all steps Landlord deems
reasonably necessary or appropriate to remediate such release and prevent any
similar future release to the reasonable satisfaction of Landlord and Landlord's
mortgagee(s). As used in this Lease, the term "Hazardous Materials" shall mean
and include any hazardous or toxic materials, substances or wastes as now or
hereafter designated under any law, statute, ordinance, rule, regulation, order
or ruling of any agency of the State, the United States Government or any local
governmental authority, including, without limitation, asbestos, petroleum,
petroleum hydrocarbons and petroleum based products, urea formaldehyde foam
insulation, polychlorinated biphenyls ("PCBs"), and Freon and other
chlorofluorocarbons. Notwithstanding the foregoing, Tenant may, without
Landlord's prior consent, but in compliance with all Applicable Laws,
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use any ordinary and customary materials reasonably required to be used by
Tenant in the normal course of Tenant's use of the Premises as permitted
hereunder provided that Tenant's handling, storage, use and disposal procedures
are in compliance with all Applicable Laws and the CC&Rs and so long as each
such use does not expose the Premises or neighboring property to any meaningful
risk of contamination or damage or expose Landlord to any liability therefor.
Landlord shall have the right upon the expiration or earlier termination of the
Term of this Lease, to cause, at Landlord's cost (except as provided below), a
duly qualified and licensed environmental consultant to conduct an environmental
audit of the Premises. The identity of the consultant and the scope and detail
of the audit shall be subject to Landlord's reasonable discretion. Landlord
shall provide Tenant with a copy of such audit or report promptly after the same
becomes available. If the audit recommends additional testing, then Tenant shall
conduct such tests at its expense. If the audit and/or tests reveal the presence
of Hazardous Materials at, on or under the Premises attributable to Tenant's
activities at the Premises, then Tenant shall reimburse Landlord for the cost of
such audit and shall remediate and mitigate the same, at its expense, as
necessary to obtain a final "no further action" letter (or equivalent) from all
governmental agencies having jurisdiction. In addition, if at any time during
the Term Tenant is required to file reports or manifests concerning its use of
Hazardous Materials at the Premises or concerning Hazardous Materials
contamination or remediation, then Tenant shall concurrently provide Landlord
with a copy of the same. Landlord represents and warrants that, as of the Date
of this Lease, to Landlord's actual knowledge, except as disclosed in writing to
Tenant, there are no Hazardous Materials located on or under the Premises, the
Building or the Development. For purposes of this Lease, "Landlord's actual
knowledge" means the actual knowledge of Charles Abdi and/or Anthony C. Badeaux,
without duty of investigation. The provisions of this subparagraph 8(c) will
survive the expiration or earlier 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 (including delivery by
overnight courier or an express mailing service) or by mail, if sent by
registered or certified mail. Notices to Tenant shall be sufficient if delivered
to Tenant after the Commencement Date at the Premises and notices to Landlord
shall be sufficient if delivered to Landlord at the address designated in
Subparagraph 1(a). Either party may specify a different address for notice
purposes by written notice to the other.
10. BROKERS. The parties acknowledge that the brokers who negotiated
this Lease are stated in Subparagraph 1(l). Landlord shall pay commissions to
such brokers pursuant to Landlord's separate agreement with such brokers. Each
party represents and warrants to the other, that, to its knowledge, no other
broker, agent or finder (a) negotiated or was instrumental in negotiating or
consummating this Lease on its behalf, and (b) is or might be entitled to a
commission or compensation in connection with this Lease. Landlord and Tenant
each agree to promptly indemnify, protect, defend and hold harmless the other
from and against any and all claims, damages, judgments, suits, causes of
action, losses, liabilities, penalties, fines, expenses and costs (including
reasonable attorneys' fees and court costs) resulting from any breach by the
indemnifying party of the foregoing representation, including, without
limitation, any claims that may be asserted by any broker, agent or finder
undisclosed by the indemnifying party. The foregoing mutual indemnity shall
survive the expiration or earlier termination of this Lease.
11. SURRENDER; HOLDING OVER.
(a) SURRENDER. The voluntary or other surrender of this Lease
by Tenant, or a mutual cancellation thereof, shall not constitute a merger, and
shall, at the option of Landlord, operate as an assignment to Landlord of any or
all subleases or subtenancies. Upon the expiration or earlier termination of
this Lease, Tenant agrees to peaceably surrender the Premises to Landlord broom
clean and in a state of good order, repair and condition, ordinary wear and tear
and casualty damage (if this Lease is terminated as a result thereof pursuant to
Paragraph 20) excepted, together with all of Tenant's personal property and
Alterations (as defined in Paragraph 13) removed from the Premises to the extent
required under Paragraph 13 and all damage caused by such removal repaired as
required by Paragraph 13. At least ninety (90) days, prior to the date Tenant is
to actually surrender the Premises to Landlord, Tenant agrees to give Landlord
notice of the exact date Tenant will surrender the Premises so that Landlord and
Tenant can schedule a walk-through of the Premises to review the condition of
the Premises and identify the Alterations and personal property which are to
remain upon the Premises and which items Tenant is to remove as well as any
repairs Tenant is to make upon surrender of the Premises as required by this
Lease. During such ninety (90) day period, Landlord may, at its option, and at
Landlord's sole cost and expense, retain the services of one or more inspectors
or consultants to inspect the Premises and all equipment and fixtures located
therein to determine if they are in the condition required for proper surrender
by Tenant. If any such inspections disclose any deficiencies in the condition of
the Premises, Tenant will promptly cause the same to be corrected in a good and
workmanlike manner at Tenant's sole cost and expense prior to the surrender
date. The delivery of keys to any employee of Landlord or to Landlord's agent or
any employee thereof alone will not be sufficient to constitute a termination of
this Lease or a surrender of the Premises.
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(b) HOLDING OVER. Tenant will not be permitted to hold over
possession of the Premises after the expiration or earlier termination of the
Term without the express written consent of Landlord, which consent Landlord may
withhold in its sole and absolute discretion. If Tenant holds over after the
expiration or earlier termination of the Term, Landlord may, at its option,
treat Tenant as a tenant at sufferance only, and such continued occupancy by
Tenant shall be subject to all of the terms, covenants and conditions of this
Lease, so far as applicable, except that the Monthly Base Rent for the first
three (3) months of any such holdover period shall be equal to one hundred
twenty-five percent (125%) of the Monthly Base Rent in effect under this Lease
immediately prior to such holdover and one hundred fifty percent (150%) of the
Monthly Base Rent in affect under this Lease from and after such three (3) month
period, prorated on a daily basis. Acceptance by Landlord of rent after such
expiration or earlier termination will 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 under this Lease
or as otherwise provided by law. If Tenant fails to surrender the Premises upon
the expiration of this Lease in accordance with the terms of this Paragraph 11
despite demand to do so by Landlord, Tenant agrees to promptly indemnify,
protect, defend and hold Landlord harmless from all claims, damages, judgments,
suits, causes of action, losses, liabilities, penalties, fines, expenses and
costs (including reasonable attorneys' fees and costs), including, without
limitation, reasonable costs and expenses incurred by Landlord in returning the
Premises to the condition in which Tenant was to surrender it and claims made by
any succeeding tenant founded on or resulting from Tenant's failure to surrender
the Premises. The provisions of this Subparagraph 11(b) will survive the
expiration or earlier termination of this Lease.
12. TAXES.
(a) PAYMENT OF TAXES. Tenant agrees to pay, as an Operating
Expense, Tenant's Percentage of all Real Property Taxes and Assessments, as
defined in EXHIBIT "D." If any such Real Property Taxes and Assessments paid by
Tenant shall cover any period of time prior to or after the expiration of the
Term thereof, Tenant's Percentage of such real property taxes is to be equitably
prorated to cover only the period of time within the tax fiscal year during
which this Lease shall be in effect, and Landlord will promptly reimburse Tenant
to the extent required.
(b) PERSONAL PROPERTY TAXES. Tenant agrees to pay prior to
delinquency all taxes assessed against and levied upon trade fixtures,
furnishings, equipment and all other personal property of Tenant contained in
the Premises or elsewhere. When possible, Tenant will cause said trade fixtures,
furnishings, equipment and all other personal property to be assessed and billed
separately from the real property of Landlord. If any of Tenant's personal
property is assessed with Landlord's real property, Tenant shall pay Landlord
the taxes attributable to Tenant within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Tenant's property but in no
event more than ten (10) days prior to delinquency.
13. ALTERATIONS. After installation of the initial Tenant Improvements
for the Premises pursuant to EXHIBIT "C", Tenant may, at its sole cost and
expense, make alterations, additions, improvements, "Utility Installations" and
decorations to the Premises (collectively, "Alterations") subject to and only
upon the following terms and conditions:
(a) PROHIBITED ALTERATIONS. Tenant may not, without Landlord's
prior written consent, which consent may be granted or denied in Landlord's sole
and absolute discretion, make any Alterations which: (i) affect any area outside
the Premises; (ii) affect the Building's structure, roof, equipment, services or
systems, or the proper functioning thereof, or Landlord's access thereto; (iii)
affect the outside appearance, character or use of the Building or the Common
Areas; (iv) in the reasonable opinion of Landlord, materially reduce the value
of the Building; or (v) will cause a material increase in density within the
Premises or violate or require a change in any occupancy certificate applicable
to the Premises. As used in this Paragraph 13, the term "Utility Installations"
means carpeting, window coverings, air lines, power panels, electrical
distribution systems, space heaters, heating, ventilation and air conditioning
systems, plumbing systems, fencing, landscaping, exterior signage, satellite or
other radio or television reception or transmitting devices, or gas lines.
(b) LANDLORD'S APPROVAL. Before proceeding with any Alterations
which are not prohibited in Subparagraph 13(a) above, Tenant must first obtain
Landlord's written approval of the plans, specifications and working drawings
for such Alterations, which approval Landlord will not unreasonably withhold or
delay; provided, however, Landlord's prior approval will not be required for any
such Alterations which are not prohibited by Subparagraph 13(a) above and which
cost less than Twenty Thousand Dollars ($20,000) as long as (i) Tenant delivers
to Landlord notice and a copy of any final plans, specifications and working
drawings for any such Alterations at least ten (10) days prior to commencement
of the work thereof, and (ii) the other conditions of this Paragraph 13 are
satisfied, including, without limitation, conforming to Landlord's reasonable
rules, regulations and insurance requirements which govern contractors.
Landlord's approval of plans, specifications and/or working drawings for
Alterations will not create any responsibility or liability on the part of
Landlord for their
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completeness, design sufficiency, or compliance with applicable permits, laws,
rules and regulations of governmental agencies or authorities.
(c) CONTRACTORS. Alterations may be made or installed only by
contractors and subcontractors which have been approved by Landlord, which
approval Landlord will not unreasonably withhold, condition or delay; provided,
however, Landlord reserves the right to require that Landlord's contractor be
given the first opportunity to bid for any Alteration work. Before proceeding
with any Alterations, Tenant agrees to provide Landlord with ten (10) days'
prior written notice and Tenant's contractors must obtain and maintain, on
behalf of Tenant and at Tenant's sole cost and expense: all necessary
governmental permits and approvals for the commencement and completion of such
Alterations. Throughout the performance of any Alterations, Tenant agrees to
obtain, or cause its contractors to obtain, workers compensation insurance and
general liability insurance in compliance with the provisions of Paragraph 19 of
this Lease.
(d) MANNER OF PERFORMANCE. All Alterations must be performed:
(i) in accordance with the approved plans, specifications and working drawings;
(ii) in a lien-free and first-class and workmanlike manner; (iii) in compliance
with all applicable permits, laws, statutes, ordinances, rules, regulations,
orders and rulings now or hereafter in effect and imposed by any governmental
agencies and authorities which assert jurisdiction; (iv) in such a manner so as
not to interfere with the occupancy of any other tenant of the Development or
Industrial Park, nor impose any additional expense upon Landlord; and (v) at
such times, in such manner, and subject to such rules and regulations as
Landlord may from time to time reasonably designate.
(e) OWNERSHIP. The Tenant Improvements and all Alterations will
become the property of Landlord and will remain upon and be surrendered with the
Premises at the end of the Term of this Lease; provided, however, Landlord
shall, by written notice delivered to Tenant concurrently with Landlord's
approval of the final working drawings for any Alterations, identify those
Alterations which Landlord will require Tenant to remove at the expiration or
earlier termination of this Lease. Landlord may also require Tenant to remove
Alterations which Landlord did not have the opportunity to approve as provided
in this Paragraph 13. If Landlord provides timely notice that it requires Tenant
to remove any Alterations, Tenant, at its sole cost and expense, agrees to
remove the identified Alterations on or before the expiration or earlier
termination of this Lease and repair any damage to the Premises caused by such
removal (or, at Landlord's option, Tenant agrees to pay to Landlord all of
Landlord's reasonable costs of such removal and repair).
(f) PLAN REVIEW. With respect to any proposed Alterations
affecting the mechanical or structural portions of the Premises or costing in
excess of One Hundred Thousand Dollars ($100,000.00), Tenant agrees to pay
Landlord, as additional rent, the reasonable costs of professional services and
costs of Landlord's third party consultants if utilized by Landlord (but not
Landlord's "in-house" personnel) for review of all plans, specifications and
working drawings for any such Alterations, within twenty (20) days after
Tenant's receipt of invoices (accompanied by reasonable "back-up" documentation)
either from Landlord or such consultants.
(g) PERSONAL PROPERTY. All articles of personal property owned
by Tenant or installed by Tenant at its expense in the Premises (including
Tenant's business and trade fixtures, furniture, movable partitions and
equipment, such as telephones, copy machines, computer terminals, refrigerators
and facsimile machines) will be and remain the property of Tenant, and must be
removed by Tenant from the Premises, at Tenant's sole cost and expense, on or
before the expiration or earlier termination of this Lease. Tenant agrees to
repair any damage caused by such removal at its cost on or before the expiration
or earlier termination of this Lease.
(h) REMOVAL OF ALTERATIONS. If Tenant fails to remove by the
expiration or earlier termination of this Lease all of its personal property, or
any Alterations identified by Landlord for removal, Landlord may (without
liability to Tenant for loss thereof) treat such personal property and/or
Alterations as abandoned and, at Tenant's sole cost and expense, and in addition
to Landlord's other rights and remedies under this Lease, at law or in equity:
(a) remove and store such items; and/or (b) upon ten (10) days' prior written
notice to Tenant, sell, discard or otherwise dispose of all or any such items at
private or public sale for such price as Landlord may obtain or by other
commercially reasonable means. Tenant shall be liable for all reasonable costs
of disposition of Tenant's abandoned property and Landlord shall have no
liability to Tenant with respect to any such abandoned property. Landlord agrees
to apply the proceeds of any sale of any such property to any amounts due to
Landlord under this Lease from Tenant (including Landlord's reasonable
attorneys' fees and other reasonable costs incurred in the removal, storage
and/or sale of such items), with any remainder to be paid to Tenant.
14. REPAIRS AND MAINTENANCE.
(a) TENANT'S OBLIGATIONS. Except for Landlord's obligations
under Paragraph 14(c) below, Tenant agrees to keep in good order, condition and
repair the Premises and every part thereof,
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(whether or not such portion of the Premises requiring repair, or the means of
repairing the same are reasonable or readily accessible to Tenant, and whether
or not the need for such repairs occurs as a result of Tenant's use, any prior
use, the elements, the age or the quality of construction of such portion of the
Premises except as set forth in Paragraph 4(b)) including, without limiting the
generality of the foregoing (but subject to Landlord's obligation to maintain
the "Structural Elements" described below), all heating, ventilation, air
conditioning, electrical and other systems exclusively serving the Premises,
electrical, lighting facilities, plumbing and equipment within the Premises,
fixtures, interior walls, ceilings, floors, doors and skylights located within
the Premises, and Tenant's signs located on the Premises. Tenant shall procure
and maintain, at Tenant's expense, maintenance contracts reasonably acceptable
to Landlord for any heating, ventilating and air conditioning systems
exclusively serving the Premises. Tenant agrees to cause any mechanics' liens or
other liens arising as a result of work performed by Tenant or at Tenant's
direction to be eliminated as provided in Paragraph 15 below. Tenant shall, at
Tenant's sole cost and expense, provide its own janitorial services to the
Premises which services shall be performed by reputable janitorial service
reasonably acceptable to Landlord.
(b) TENANT'S FAILURE TO REPAIR. If Tenant refuses or neglects
to repair and maintain the Premises properly as required hereunder to the
reasonable satisfaction of Landlord, Landlord, at any time following ten (10)
days from the date on which Landlord makes a written demand on Tenant to effect
such repair and maintenance, may enter upon the Premises and make such repairs
and/or maintenance, and upon completion thereof, Tenant agrees to pay to
Landlord as additional rent, Landlord's costs for making such repairs plus an
amount not to exceed five percent (5%) of such costs for overhead, within ten
(10) days of receipt from Landlord of a written itemized bill therefor. Any
amounts not reimbursed by Tenant within such ten (10) day period will bear
interest at the Interest Rate until paid by Tenant.
(c) LANDLORD'S OBLIGATIONS. During the entire Term (including
any Option Periods), Landlord shall, at, except as otherwise provided herein,
Landlord's sole cost and expense (and not as an Operating Expense), repair,
maintain and replace, as necessary, the following structural elements of the
Building and Premises: structural walls, foundations, concrete subflooring,
roof, underground utilities, windows and seals and all central mechanical (if
any) and electrical systems (if any) (collectively, "Structural Elements").
Except for the obligations of Landlord under this paragraph, Landlord's
obligation to maintain, as an Operating Expense, the Building and the Common
Areas of the Development, Landlord's obligations under Paragraph 20 relating to
damage or destruction of the Premises, or under Paragraph 21 relating to eminent
domain, it is intended by the parties that Landlord have no obligation of any
kind whatsoever, (i) to repair or maintain the Premises other than the
Structural Elements, all of which obligations are intended to be Tenant's
obligations, or (ii) to pay any other cost or expense whatsoever directly or
indirectly relating to the ownership, management, lease, operation or use of the
Premises. Notwithstanding the foregoing, to the extent such repairs, maintenance
or replacements are required as a result of any act, negligent, fault or
omission of Tenant or any of the Tenant Parties, Tenant shall pay to Landlord,
as Additional Rent, the actual and reasonable cost of any such maintenance,
repairs or replacements. Tenant waives the right to make repairs at Landlord's
expense under any law, statute, ordinance, rule, regulation, order or ruling
(including, without limitation, to the extent the Premises are located in
California, the provisions of California Civil Code Sections 1941 and 1942 and
any successor statutes or laws of a similar nature). Landlord shall also repair
any damage caused by the negligence or willful misconduct of Landlord or
Landlord's employees, agents or contractors.
(d) TENANT'S SELF-HELP. If Landlord fails to perform any of its
repair and maintenance obligations under Paragraph 14(c) or otherwise as
required in this Lease, and such failure materially affects Tenant's ability to
use and occupy the Premises for the purposes permitted herein, Tenant shall have
the right, but not the obligation, to perform such repairs and/or maintenance if
such failure continues for more than thirty (30) days after written notice from
Tenant to Landlord; provided, however, that if the nature of the repairs and/or
maintenance to be completed by Landlord is such that more than thirty (30) days
are required to complete such repairs and/or maintenance, Landlord shall have
such additional time as is reasonably necessary to complete such repairs and/or
maintenance so long as Landlord takes appropriate action to commence such
repairs and/or maintenance within such thirty (30) day period and thereafter
diligently pursues such repairs and/or maintenance to completion. In such event,
Landlord shall reimburse Tenant for the reasonable costs incurred by Tenant to
complete such repairs and/or maintenance within thirty (30) days after receipt
of Tenant's written demand therefor, together with copies of the paid invoices
evidencing the costs incurred by Tenant. Any repairs and/or maintenance
permitted herein shall be performed in a good workmanlike manner by licensed
contractors. If Landlord objects to the repairs and/or maintenance performed or
the expenses incurred by Tenant in performing such work, Landlord shall deliver
a written notice of Landlord's objection to Tenant within thirty (30) days after
Landlord's receipt of Tenant's invoice evidencing the expenses incurred by
Tenant. Landlord's notice shall set forth in reasonable detail Landlord's
reasons for its claim that such repairs and/or maintenance were not required or
were not Landlord's obligation in the terms of this Lease and/or the reasons for
Landlord's dispute of the expenses incurred by Tenant in performing such work.
Upon receipt of such notice, Tenant shall contact Landlord, and the parties
shall negotiate in good faith to resolve any conflicts related to work performed
and expenses incurred pursuant to this Paragraph 14(d).
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In no event, however, shall Tenant have the right to set off such sums owing
from Landlord against rent payable hereunder.
15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or
other liens to be filed against all or any part of the Premises or the
Development, nor against Tenant's leasehold interest in the Premises, by reason
of or in connection with any repairs, alterations, improvements or other work
contracted for or undertaken by Tenant or any other act or omission of Tenant or
Tenant's agents, employees, contractors, licensees or invitees. At Landlord's
request, Tenant agrees to provide Landlord with enforceable, conditional and
final lien releases (or other evidence reasonably requested by Landlord to
demonstrate protection from liens) from all persons furnishing labor and/or
materials at the Premises. Landlord will have the right at all reasonable times
to post on the Premises and record any notices of non-responsibility which it
deems necessary for protection from such liens. If any such liens are filed,
Tenant will, at its sole cost, promptly cause such liens to be released of
record or bonded so that it no longer affects title to the Premises, the
Development or Industrial Park. If Tenant fails to cause any such liens to be so
released or bonded within ten (10) days after notice of the filing thereof, such
failure will be deemed a material breach by Tenant under this Lease without the
benefit of any additional notice or cure period described in Paragraph 22 below,
and Landlord may, without waiving its rights and remedies based on such breach,
and without releasing Tenant from any of its obligations, cause such liens to be
released by any means it shall deem proper, including payment in satisfaction of
the claims giving rise to such liens. Tenant agrees to pay to Landlord within
ten (10) days after receipt of invoice from Landlord, any sum paid by Landlord
to remove such liens, together with interest at the Interest Rate from the date
of such payment by Landlord. Notwithstanding the foregoing, Tenant shall be
entitled to contest any such liens without penalty provided that Tenant's
contest of any such lien is brought in good faith and diligently prosecuted
until the same is resolved. Landlord acknowledges Tenant's right to finance and
to secure under the Uniform Commercial Code, inventory, furnishings, furniture,
equipment, machinery, and other personal property located in or at the Premises,
and Landlord agrees to execute commercially reasonable waiver forms releasing
liens in favor of any purchase money seller, landlord or lender who has financed
or may finance in the future such items. Without limiting the effectiveness of
the foregoing, provided that no default shall have occurred and be continuing,
Landlord shall, upon the request of Tenant, and at the Tenant's sole cost and
expense, execute and deliver any commercially reasonable instruments necessary
or appropriate to confirm any such grant, release, dedication, transfer,
annexation or amendment to any person or entity permitted under this paragraph
including landlord waivers with respect to any of the foregoing.
16. ENTRY BY LANDLORD. Landlord and its employees and agents will at
all times have the right to enter the Premises to inspect the same, to show the
Premises to prospective purchasers or (for the final nine (9) months of the Term
only) tenants, to post notices of nonresponsibility, and/or to repair the
Premises as permitted or required by this Lease. In exercising such entry
rights, Landlord will endeavor to minimize, as reasonably practicable, the
interference with Tenant's business, and will provide Tenant with 24-hours'
advance notice of any such entry and during such entry shall, if Tenant so
requests, be accompanied by a representative of Tenant (except in emergency
situations). 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. Landlord will at all times have and
retain a key with which to unlock all doors in the Premises, excluding Tenant's
vaults and safes. Landlord will have the right to use any and all means which
Landlord may reasonably 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, will not be construed or deemed to be a
forcible or unlawful entry into the Premises, or an eviction of Tenant from the
Premises. Landlord will not be liable to Tenant for any damages or losses for
any entry by Landlord unless caused by the gross negligence or willful
misconduct of Landlord or Landlord's employees, agents or contractors.
17. UTILITIES AND SERVICES.
(a) PAYMENT OF UTILITIES.
Tenant agrees to contract directly for and to pay for all
water, gas, heat, light, power, telephone, waste removal, sewer and other
utilities and services supplied to the Premises, together with any taxes
thereon. All utilities furnished to the Premises shall be separately metered at
Tenant's sole cost and expense. Except as provided in Paragraph 17(c) below,
Landlord will not be liable to Tenant for any failure to furnish any of the
foregoing utilities and services if such failure is caused by all or any of the
following: (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 or inaction; (iv) inability
despite the exercise of reasonable diligence to obtain electricity, water or
fuel; or (v) any other cause beyond Landlord's reasonable control. In addition,
in the event of any stoppage or interruption of services or utilities, Tenant
shall not be entitled to any abatement or reduction of rent (except as expressly
provided in Subparagraph 17(c) below and Subparagraphs 20(f) or 21(b) if such
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failure results from a damage or taking described therein), no eviction of
Tenant will result from such failure and Tenant will not be relieved from the
performance of any covenant or agreement in this Lease because of such failure.
(b) UTILITY DEREGULATION.
(i) LANDLORD CONTROLS SELECTION. Landlord has advised
Tenant that presently San Diego Gas & Electric ("Electric Service Provider") is
the utility company selected by Landlord to provide electricity service for the
Project. Notwithstanding the foregoing, if permitted by applicable law, Landlord
shall have the right at any time and from time to time during the Lease Term to
either contract for service from a different company or companies providing
electricity service (each such company shall hereinafter be referred to as an
"Alternate Service Provider") or continue to contract for service from the
Electric Service Provider. In no event shall Landlord's selection of an
Alternate Service Provider result in Tenant paying a higher cost for such
electricity than if Landlord elected to continue to contract for such service
from the Electric Service Provider.
(ii) TENANT SHALL GIVE LANDLORD ACCESS. Tenant shall
cooperate with Landlord, the Electric Service Provider, and any Alternate
Service Provider during non-business hours (except in the event of an emergency)
and, as reasonably necessary, shall allow Landlord, Electric Service Provider,
and any Alternate Service Provider reasonable access to the Building's electric
lines, feeders, risers, wiring and any other machinery within the Premises,
provided, that Landlord shall use Landlord's commercially reasonable efforts to
ensure that there shall be no interference with Tenant's use and enjoyment of
the Premises.
(iii) LANDLORD NOT RESPONSIBLE FOR INTERRUPTION OF
SERVICE. Unless caused by the gross negligence or willful misconduct of Landlord
or Landlord's employees, agents or contractors, Landlord shall in no way be
liable or responsible for any loss, damage, or expense that Tenant may sustain
or incur by reason of any change, failure, interference, disruption, or defect
in the supply or character of the electric energy furnished to the Premises, or
if the quantity or character of the electric energy supplied by the Electric
Service Provider or any Alternate Service Provider is no longer available or
suitable for Tenant's requirements, and no such change, failure, defect,
unavailability, or unsuitability shall constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any abatement or diminution
of Rent (except for abatement as specifically provided in Paragraph 17(c)
below), or relieve Tenant from any of its obligations under the Lease.
(c) ABATEMENT EVENT. An "Abatement Event" shall be defined as
an event that prevents Tenant from using the Premises or any portion thereof, as
a result of any failure by Landlord to provide essential services or access to
the Premises, where (i) Tenant does not actually use the Premises or such
portion thereof, and (ii) such event is not caused by the negligence or willful
misconduct of Tenant or any of the Tenant Parties. Tenant shall give Landlord
notice ("Abatement Notice") of any such Abatement Event, and if such Abatement
Event continues beyond the "Eligibility Period" (as that term is defined below),
then Base Rent, all Additional Rent (including Tenant's Percentage of Operating
Expenses) shall be abated entirely or reduced, as the case may be, after
expiration of the Eligibility Period for such time that Tenant continues to be
so prevented from using, and does not use 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 square
footage of the Premises leased by Tenant; provided, however, in the event that
Tenant is prevented from using, and does not use, a portion of such Premises for
a period of time in excess of the Eligibility Period, then for such time after
expiration of the Eligibility Period during which Tenant is so prevented from
effectively conducting its business therein, Base Rent, all Additional Rent
(including Tenant's Percentage of Operating Expenses) for the entire portion of
the Premises located within such Building shall be abated entirely for such time
as Tenant continues to be so prevented from using, and does not use, such
portion of the Premises located within such Building. If, however, Tenant
reoccupies any portion of the Premises located within such Building during such
period, the Base Rent, all Additional Rent (including Tenant's Percentage of
Operating Expenses) allocable to such reoccupied portion, based on the
proportion that the rentable area of such reoccupied portion of such portion of
the Premises located within such Building bears to the total rentable area of
such Building, shall be payable by Tenant from the date Tenant reoccupies such
portion of the Premises. The term "Eligibility Period" shall mean a period of
five (5) consecutive business days after Landlord's receipt of any Abatement
Notice(s). Except as provided in Articles 13 and 14, such right to abate Base
Rent, all Additional Rent (including Tenant's Percentage of Operating Expenses)
shall be Tenant's sole and exclusive remedy at law or in equity for an Abatement
Event.
(d) HVAC HOURS OF OPERATION. Tenant shall have the ability to
control, from the Premises, the hours of operation with respect to heating,
ventilation and air conditioning supplied to the Premises.
(e) TRASH ENCLOSURE. Tenant shall also have sole control of the
trash enclosure behind the Premises as shown in the attached EXHIBIT "A" and
shall have the right to convert such enclosure into a Hazardous Materials
enclosure, subject to the provisions of subparagraph 8(c) above.
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18. ASSUMPTION OF RISK AND INDEMNIFICATION.
(a) ASSUMPTION OF RISK. Tenant, as a material part of the
consideration to Landlord, hereby agrees that neither Landlord nor any Landlord
Indemnified Parties (as defined in Subparagraph 8(c) above) will be liable to
Tenant for, and Tenant expressly assumes the risk of and waives any and all
claims it may have against Landlord or any Landlord Indemnified Parties (except
for claims resulting from the negligent or willful act or omission of Landlord)
with respect to, (i) any and all damage to property or injury to persons in,
upon or about the Premises or the Development, (ii) any such damage caused by
other tenants or persons in or about the Premises, or caused by quasi-public
work, (iii) any damage to property entrusted to employees of Tenant and its
assignees and subtenants, (iv) any loss of or damage to property by theft or
otherwise, or (v) any injury or damage to persons or property resulting from any
casualty, explosion, falling plaster or other masonry or glass, steam, gas,
electricity, water or rain which may leak from any part of the Building or from
the pipes, appliances or plumbing works therein or from the roof, street or
subsurface or from any other place, or resulting from dampness. Notwithstanding
anything to the contrary contained in this Lease, neither Landlord nor any
Landlord Indemnified Parties will be liable for consequential damages arising
out of any loss of the use of the Premises or any equipment or facilities
therein by Tenant or any Tenant Parties or for interference with light or other
incorporeal hereditaments. Tenant agrees to give prompt notice to Landlord in
case of fire or accidents in the Premises, or of defects therein or in the
fixtures or equipment.
(b) INDEMNIFICATION.
(i) Tenant will be liable for, and agrees, to the
maximum extent permissible under applicable law, to promptly indemnify, protect,
defend and hold harmless Landlord and Landlord Indemnified Parties, from and
against, any and all claims, damages, judgments, suits, causes of action,
losses, liabilities, penalties, fines, expenses and costs, including reasonable
attorneys' fees and court costs (collectively, "Landlord Indemnified Claims"),
arising or resulting from (A) any act or omission of Tenant or any Tenant
Parties (as defined in Subparagraph 8(c) above); (B) the use of the Premises and
Common Areas and conduct of Tenant's business by Tenant or any Tenant Parties,
or any other activity, work or thing done, permitted or suffered by Tenant or
any Tenant Parties, in or about the Premises or elsewhere within the
Development; and/or (C) any default by Tenant of any obligations on Tenant's
part to be performed under the terms of this Lease. In case any action or
proceeding is brought against Landlord or any Landlord Indemnified Parties by
reason of any such Landlord Indemnified Claims, Tenant, upon notice from
Landlord, agrees to promptly defend the same at Tenant's sole cost and expense
by counsel approved in writing by Landlord, which approval Landlord will not
unreasonably withhold.
(ii) Landlord will be liable for, and agrees, to the
maximum extent permissible under applicable law, to promptly indemnify, protect,
defend and hold harmless Tenant and Tenant's officers, directors, employees,
agents, successors and assigns (collectively, "Tenant Indemnified Parties") from
and against any and all claims, damages, judgments, suits, causes of action,
losses, liabilities, penalties, fines, expenses and costs, including reasonable
attorneys' fees and court costs (collectively, the "Tenant Indemnified Claims")
arising or resulting from (A) any default by Landlord of any obligations on
Landlord's part to be performed under the terms of this Lease and/or (B) the
negligent acts or omissions or willful misconduct of any Landlord Indemnified
Parties. In case any action or proceeding is brought against Tenant or any
Tenant Indemnified Parties by reason of any such Tenant Indemnified Claims,
Landlord, upon notice from Tenant, agrees to promptly defend the same at
Landlord's sole cost and expense by counsel approved in writing by Tenant, which
approval Tenant will not unreasonably withhold.
(c) SURVIVAL; NO RELEASE OF INSURERS. The indemnification
obligations under Subparagraph 18(b) will survive the expiration or earlier
termination of this Lease. Landlord's and Tenant's covenants, agreements and
indemnification obligation in Subparagraphs 18(a) and 18(b) above, are not
intended to and will not relieve any insurance carrier of its obligations under
policies required to be carried by Landlord and Tenant pursuant to the
provisions of this Lease.
19. INSURANCE.
(a) TENANT'S INSURANCE. On or before the date Tenant first
commences any work of any type in the Premises pursuant to this Lease (which may
be prior to the Commencement Date), and continuing throughout the entire Term
hereof and any other period of occupancy, Tenant agrees to keep in full force
and effect, at its sole cost and expense, the following insurance:
(i) "All Risks" property insurance including at least
the following perils: fire and extended coverage, smoke damage, vandalism,
malicious mischief, and sprinkler leakage (including earthquake sprinkler
leakage) upon all property owned by Tenant, for which Tenant is legally liable,
or which is installed at Tenant's expense, and which is located in the Premises
including, without limitation, any Tenant Improvements which satisfy the
foregoing qualification and any Alterations, and all furniture, fittings,
installations, fixtures and any other personal property of Tenant, in an amount
not
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less than the full replacement cost thereof. If there is a dispute as to full
replacement cost, the reasonable and good faith decision of Landlord or any
mortgagee of Landlord will be presumptive.
(ii) One (1) year insurance coverage for business
interruption and loss of income and extra expense insuring the same perils
described in Subparagraph 19(a)(i) above, in such amounts as will reimburse
Tenant for any direct or indirect loss of earnings attributable to any such
perils including prevention of access to the Premises, Tenant's parking areas or
the Building as a result of any such perils.
(iii) Commercial General Liability Insurance or
Comprehensive General Liability Insurance (on an occurrence form) insuring
bodily injury, and property damage including the following divisions and
extensions of coverage: Premises and Operations; Owners and Contractors
protective; blanket contractual liability (including coverage for Tenant's
indemnity obligations under this Lease); products and completed operations;
liquor liability (if Tenant serves alcohol on the Premises); and fire and water
damage legal liability in an amount sufficient to cover the replacement value of
the Premises, including Tenant Improvements, that are rented under the terms of
this Lease. Such insurance must have the following minimum limits of liability:
bodily injury and property damage - $1,000,000 each occurrence and $2,000,000 in
the aggregate, provided that if liability coverage is provided by a Commercial
General Liability policy the general aggregate limit shall apply separately and
in total to this location only (per location general aggregate), and provided
further, such minimum limits of liability may be adjusted at the end of the
third Lease Year to reflect increases in coverages as reasonably recommended by
Landlord's insurance carrier as being prudent and commercially reasonable for
tenants of first class office buildings comparable to the Building.
(iv) Comprehensive Automobile Liability insuring bodily
injury and property damage arising from all owned, non-owned and hired vehicles,
if any, with minimum limits of liability of $500,000 per accident.
(v) Worker's Compensation or similar insurance as
required by the laws of the state in which the Premises are located, with at
least the following minimum limits of liability: Coverage A - statutory
benefits; Coverage B - $1,000,000 per accident and disease.
(vi) Any other form or forms of commercially reasonable
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, but only to the extent coverage
for such risks and amounts are available in the insurance market at commercially
acceptable rates. Landlord makes no representation that the limits of liability
required to be carried by Tenant under the terms of this Lease are adequate to
protect Tenant's interests and Tenant should obtain such additional insurance or
increased liability limits as Tenant deems appropriate.
(b) SUPPLEMENTAL TENANT INSURANCE REQUIREMENTS. All policies
must be in a form reasonably satisfactory to Landlord and issued by an insurer
admitted to do business in the state in which the Premises are located. All
policies must be issued by insurers with a policyholder rating of "A-" and a
financial rating of "VIII" in the most recent version of Best's Key Rating
Guide. All policies must contain a requirement to notify Landlord (and
Landlord's property manager and any mortgagees or ground landlords of Landlord
who are named as additional insureds, if any) in writing not less than thirty
(30) days prior to any material change, reduction in coverage, cancellation or
other termination thereof. Tenant agrees to deliver to Landlord, as soon as
practicable after placing the required insurance, but in any event within the
time frame specified in Subparagraph 19(a) above, certificate(s) of insurance
evidencing the existence of such insurance and Tenant's compliance with the
provisions of this Paragraph 19. Tenant also agrees to cause replacement
certificate(s) to be delivered to Landlord not less than ten (10) days prior to
the expiration of any such policy or policies. Tenant's failure to carry the
insurance specified herein will be deemed to be in material default under this
Lease without the benefit of any additional notice or cure period provided in
Subparagraph 22(a)(iii) below, and Landlord will have the right, but not the
obligation, to procure such insurance as Landlord deems necessary to protect
Landlord's interests at Tenant's expense. If Landlord obtains any insurance that
is the responsibility of Tenant under this Paragraph 19, Landlord agrees to
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 agrees to promptly reimburse Landlord for such costs as
additional rent. General Liability and Automobile Liability policies under
Subparagraphs 19(a)(iii) and (iv) must name Landlord and Landlord's property
manager (and at Landlord's request, Landlord's mortgagees and ground landlords
of which Tenant has been informed in writing) as additional insureds and must
also contain a provision that the insurance afforded by such policy is primary
insurance and any insurance carried by Landlord and Landlord's property manager
or Landlord's mortgagees or ground landlords, if any, will be excess over and
non-contributing with Tenant's insurance.
(c) BUILDING INSURANCE. Landlord shall obtain, at Tenant's sole
cost and expense, a policy or policies of insurance covering loss or damage to
the Premises, in the amount of the full
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replacement value thereof against all perils included within the classification
of fire, extended coverage, vandalism, malicious mischief, earthquake, and
special extended perils ("All Risk" as such term is used in the insurance
industry) and if required by Landlord's lender or Landlord, earthquake coverage.
This insurance shall cover the Building, including tenant improvements, heating
and cooling equipment or machinery and electrical equipment, as well as any
furniture, fixtures, equipment or other personal property owned by Landlord. A
Stipulated Value or Agreed Amount endorsement deleting the coinsurance provision
of the policy shall be procured with said insurance. Tenant will be liable for
Tenant's Share of such deductible and Tenant agrees to reimburse Landlord for
Tenant's Share of the entire cost of such premiums as an Operating Expense. The
deductible amounts for all insurance obtained by Landlord pursuant to this Lease
shall be commercially reasonable; provided, however, Tenant acknowledges that
the deductibles carried under Landlord's current insurance program (a copy of
which has been delivered to Tenant) are commercially reasonable.
(d) TENANT'S USE. 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 Premises. If Tenant's
occupancy or business in, or on, the Premises, whether or not Landlord has
consented to the same, results, in Landlord's good faith and reasonable
judgment, in any increase in premiums for the insurance periodically carried by
Landlord with respect to the Building or results in the need for Landlord to
maintain special or additional insurance, Tenant agrees to pay Landlord the
reasonable cost of any such increase in premiums or special or additional
coverage as additional rent within ten (10) days after being billed therefor by
Landlord, provided, however, Landlord shall give written notice to Tenant as
soon as reasonably possible after obtaining any such additional coverage. 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 showing the various components of such rate, will be conclusive
evidence of the several items and charges which make up such rate. Tenant agrees
to promptly comply with all reasonable requirements of the insurance authority
or any present or future insurer relating to the Premises.
(e) CANCELLATION OF LANDLORD'S POLICIES. If any of Landlord's
insurance policies are canceled or cancellation is threatened or the coverage
reduced or threatened to be reduced in any way because of the use of the
Premises or any part thereof by Tenant or any assignee or subtenant of Tenant or
by anyone Tenant permits on the Premises and, if Tenant fails to remedy the
condition giving rise to such cancellation, threatened cancellation, reduction
of coverage, threatened reduction of coverage, increase in premiums, or
threatened increase in premiums, within five (5) days after receipt of written
notice thereof, Tenant will be deemed to be in material default of this Lease
and Landlord may enter upon the Premises and attempt to remedy such condition,
and Tenant shall promptly pay Landlord the reasonable costs of such remedy as
additional rent. If Landlord is unable, or elects not to remedy such condition,
then Landlord will have all of the remedies provided for in this Lease in the
event of a default by Tenant which is not cured within the applicable cure
period.
(f) WAIVER OF SUBROGATION. Landlord and Tenant hereby mutually
waive any and all rights of recovery against one another for real or personal
property loss or damage occurring to the Premises, or any part thereof, or any
personal property therein from perils insured (or required to be insured)
against under the insurance maintained hereunder for the benefit of the
respective parties, and to the extent the proceeds of such insurance are
actually recovered, and each shall use commercially reasonable efforts to assure
that such insurance permits waiver of liability and contains a waiver of
subrogation.
20. DAMAGE OR DESTRUCTION.
(a) PARTIAL DESTRUCTION. If the Premises or Building are
damaged by fire or other casualty to an extent not exceeding twenty-five percent
(25%) of the full replacement cost thereof, and Landlord's contractor reasonably
estimates in a writing delivered to Landlord and Tenant that the damage thereto
may be repaired, reconstructed or restored to substantially its condition
immediately prior to such damage within, subject to Paragraph 33 below, one
hundred eighty (180) days from the date of such casualty, and Landlord will
receive insurance proceeds sufficient to cover the costs of such repairs,
reconstruction and restoration (including proceeds from Tenant and/or Tenant's
insurance which Tenant is required to deliver to Landlord pursuant to
Subparagraph 20(e) below to cover Tenant's obligation for the costs of repair,
reconstruction and restoration of any portion of the Tenant Improvements and any
Alterations for which Tenant is responsible under this Lease), then Landlord
agrees to commence and proceed diligently with the work of repair,
reconstruction and restoration and this Lease will continue in full force and
effect. Notwithstanding anything to the contrary contained in this Lease
(including, but not limited to, Paragraph 19 (c) above), Tenant shall only be
responsible for the first $50,000 of the deductible under any earthquake
coverage carried by Landlord with respect to the Building with Landlord
responsible for the next $50,000 of such deductible. In the event such
deductible exceeds $100,000, then, in the event of any earthquake triggering
coverage under such earthquake policy, either party may terminate this Lease by
written notice to the other effective as of the date of such earthquake unless
the other party, within ten (10) days of receipt of such notice of termination,
delivers written notice to the
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terminating party of its agreement to pay for the cost of repairing such
earthquake damage to the Building in excess of $100,000.
(b) SUBSTANTIAL DESTRUCTION. Any damage or destruction to the
Premises or the Building which Landlord is not obligated to repair pursuant to
Subparagraph 20(a) above will be deemed a substantial destruction. In the event
of a substantial destruction, Landlord may elect to either: (i) repair,
reconstruct and restore the portion of the Premises damaged by such casualty, in
which case this Lease will continue in full force and effect, subject to
Tenant's termination right contained in Subparagraph 20(d) below; or (ii)
terminate this Lease effective as of the date of such destruction.
(c) NOTICE. Under any of the conditions of Subparagraph 20(a)
or (b) above, Landlord agrees to give written notice to Tenant of its intention
to repair or terminate, as permitted in such paragraphs, within the earlier of
sixty (60) days after the occurrence of such casualty, or fifteen (15) days
after Landlord's receipt of the estimate from Landlord's contractor (the
applicable time period to be referred to herein as the "Notice Period").
(d) TENANT'S TERMINATION RIGHTS. If Landlord elects to repair,
reconstruct and restore pursuant to Subparagraph 20(b)(i) hereinabove, and if
Landlord's contractor estimates that as a result of such damage, Tenant cannot
be given use of and access to the Premises sufficient to operate its business in
all material respects in the manner operated prior to such damage within,
subject to Paragraph 33 below, one hundred eighty (180) days after the date of
such damage, then Tenant may terminate this Lease effective upon delivery of
written notice to Landlord within ten (10) days after Landlord delivers notice
to Tenant of its election to so repair, reconstruct or restore.
(e) TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any
damage or destruction of all or any part of the Premises, Tenant agrees to
immediately (i) notify Landlord thereof, and (ii) deliver to Landlord all
property insurance proceeds received by Tenant with respect to any Tenant
Improvements and any Alterations, but excluding proceeds for Tenant's furniture,
fixtures, equipment and other personal property, whether or not this Lease is
terminated as permitted in this Paragraph 20, and Tenant hereby assigns to
Landlord all rights to receive such insurance proceeds. If, for any reason
(including Tenant's failure to obtain insurance for the full replacement cost of
any Tenant Improvements and any Alterations from any and all casualties), Tenant
fails to receive insurance proceeds covering the full replacement cost of any
Tenant Improvements and any Alterations which are damaged, Tenant will be deemed
(unless such failure to receive insurance is due to the acts or omissions of
Landlord and/or Landlord's agents, employees, or contractors) to have
self-insured the replacement cost of such items, and upon any damage or
destruction thereto, Tenant agrees to immediately pay to Landlord the full
replacement cost of such items, less any insurance proceeds actually received by
Landlord from Landlord's or Tenant's insurance with respect to such items.
(f) ABATEMENT OF RENT. In the event of any damage, repair,
reconstruction and/or restoration described in this Paragraph 20, rent will be
abated or reduced, as the case may be, in proportion to the degree to which
Tenant's use of the Premises is impaired during such period of repair until such
use is restored. Except for abatement of rent as provided hereinabove, Tenant
will not be entitled to any compensation or damages for loss of, or interference
with, Tenant's business or use or access of all or any part of the Premises or
for lost profits or any other consequential damages of any kind or nature, which
result from any such damage, repair, reconstruction or restoration.
(g) INABILITY TO COMPLETE. Notwithstanding anything to the
contrary contained in this Paragraph 20, if Landlord is obligated or elects to
repair, reconstruct and/or restore the damaged portion of the Building or the
Premises pursuant to Subparagraph 20(a) or 20(b)(i) above, but is delayed from
completing such repair, reconstruction and/or restoration beyond the date which
is one hundred eighty (180) days after the date estimated by Landlord's
contractor for completion thereof by reason of any causes (other than delays
caused by Tenant, its subtenants, employees, agents or contractors) which are
beyond the reasonable control of Landlord as described in Paragraph 33, then
either Landlord or Tenant may elect to terminate this Lease upon ten (10) days'
prior written notice given to the other after the expiration of such one hundred
eighty (180) day period.
(h) DAMAGE NEAR END OF TERM. Landlord and Tenant shall each
have the right to terminate this Lease if any damage to the Premises or the
Building occurs during the last twelve (12) months of the Term of this Lease
where Landlord's contractor estimates in a writing delivered to Landlord and
Tenant that the repair, reconstruction or restoration of such damage cannot be
completed within sixty (60) days after the date of such casualty. If either
party desires to terminate this Lease under this Subparagraph (h), it shall
provide written notice to the other party of such election within ten (10) days
after receipt of Landlord's contractor's repair estimates.
(i) WAIVER OF TERMINATION RIGHT. Landlord and Tenant agree that
the foregoing provisions of this Paragraph 20 are to govern their respective
rights and obligations in the event of any damage or destruction and supersede
and are in lieu of the provisions of any applicable law, statute,
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ordinance, rule, regulation, order or ruling now or hereafter in force which
provide remedies for damage or destruction of leased premises (including,
without limitation, to the extent the Premises are located in California, the
provisions of California Civil Code Section 1932, Subsection 2, and Section
1933, Subsection 4 and any successor statute or laws of a similar nature).
(j) TERMINATION. Upon any termination of this Lease under any
of the provisions of this Paragraph 20, the parties will be released without
further obligation to the other from the date possession of the Premises is
surrendered to Landlord except for items which have accrued and are unpaid as of
the date of termination and matters which are to survive any termination of this
Lease as provided in this Lease.
21. EMINENT DOMAIN.
(a) SUBSTANTIAL TAKING. If the whole of the Premises or more
than fifty percent (50%) of the floor area of the Building or fifty percent
(50%) of the land area of the Premises which is not occupied by the Building, is
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 will have the right to terminate this Lease
effective as of the date possession is required to be surrendered to such
authority.
(b) PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking
of a portion of the Premises which does not constitute a substantial taking
under Subparagraph 21(a) above, then, neither party will have the right to
terminate this Lease and Landlord will thereafter proceed to make a functional
unit of the remaining portion of the Premises (but only to the extent Landlord
receives proceeds therefor from the condemning authority), and rent will be
abated in proportion to the floor area of the Premises which Tenant is deprived
of on account of such taking; provided, however, there will be no abatement of
rent if the only area taken is that which does not have a building located
thereon.
(c) CONDEMNATION AWARD. In connection with any taking of all or
any portion of the Premises, Landlord will be entitled to receive the entire
amount of any award which may be made or given in such taking or condemnation,
without deduction or apportionment for any estate or interest of Tenant, it
being expressly understood and agreed by Tenant that no portion of any such
award will be allowed or paid to Tenant for any so-called bonus or excess value
of this Lease, and such bonus or excess value will be the sole property of
Landlord. Tenant agrees not to assert any claim against Landlord or the taking
authority for any compensation because of such taking (including any claim for
bonus or excess value of this Lease); provided, however, if any portion of the
Premises is taken, Tenant will have the right to recover from the condemning
authority (but not from Landlord) any compensation as may be separately awarded
or recoverable by Tenant for the taking of Tenant's furniture, fixtures,
equipment and other personal property within the Premises, for Tenant's
relocation expenses, and for any loss of goodwill or other damage to Tenant's
business by reason of such taking.
(d) TEMPORARY TAKING. In the event of taking of the Premises or
any part thereof for temporary use, (i) this Lease will remain unaffected
thereby and rent will not abate, and (ii) Tenant will be entitled to receive
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
remains in force at the expiration or earlier termination of this Lease, Tenant
will then pay to Landlord a sum equal to the reasonable cost of performing
Tenant's obligations under Paragraph 11 with respect to surrender of the
Premises and upon such payment Tenant will be excused from such obligations. For
purpose of this Subparagraph 21(d), a temporary taking shall be defined as a
taking for a period of ninety (90) days or less.
22. DEFAULTS AND REMEDIES.
(a) DEFAULTS. The occurrence of any one or more of the
following events will be deemed a default by Tenant:
(i) The abandonment of the Premises by Tenant, which
for purposes of this Lease means any absence by Tenant from the Premises for
five (5) business days or longer while in default of any other provision of this
Lease.
(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 continues for a period of seven (7) days
after written notice thereof from Landlord to Tenant; provided, however, that
any such notice will be in lieu of, and not in addition to, any notice required
under applicable law (including, without limitation, to the extent the Premises
are located in California, the provisions of California Code of Civil Procedure
Section 1161 regarding unlawful detainer actions or any successor statute or law
of a similar nature).
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(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 22(a)(i) or (ii)
above, where such failure continues for a period of ten (10) business days after
written notice thereof from Landlord to Tenant. The provisions of any such
notice will be in lieu of, and not in addition to, any notice required under
applicable law (including, without limitation, to the extent the Premises are
located in California, California Code of Civil Procedure Section 1161 regarding
unlawful detainer actions and any successor statute or similar law). If the
nature of Tenant's default is such that more than ten (10) business days are
reasonably required for its cure, then Tenant will not be deemed to be in
default if Tenant, with Landlord's concurrence, commences such cure within such
five (5) business day period and thereafter diligently prosecutes such cure to
completion.
(iv) (A) The making by Tenant of any general assignment
for the benefit of creditors; (B) 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 one hundred twenty
(120) days); (C) 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 thirty
(30) days thereafter; or (D) 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 thirty (30)
days thereafter.
(b) LANDLORD'S REMEDIES; TERMINATION. In the event of any
default by Tenant, in addition to any other remedies available to Landlord at
law or in equity under applicable law (including, without limitation, to the
extent the Premises are located in California, the remedies of Civil Code
Section 1951.4 and any successor statute or similar law), Landlord will have the
immediate right and option to terminate this Lease and all rights of Tenant
hereunder. If Landlord elects to terminate this Lease then, to the extent
permitted under applicable law, 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 (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 its obligations
under this Lease or which, in the ordinary course of things, results therefrom
including, but not limited to: reasonable attorneys' fees and costs; brokers'
commissions; the costs of refurbishment, alterations, renovation and repair of
the Premises, and removal (including the repair of any damage caused by such
removal) and storage (or disposal) of Tenant's personal property, equipment,
fixtures, Alterations, the Tenant Improvements and any other items which Tenant
is required under this Lease to remove but does not remove, as well as the
unamortized value of any free rent, reduced rent, and any Tenant Improvement
Allowance or other reasonable costs or economic concessions provided, paid,
granted or incurred by Landlord pursuant to this Lease. The unamortized value of
such concessions shall be determined by taking the total value of such
concessions and multiplying such value by a fraction, the numerator of which is
the number of months of the Lease Term not yet elapsed as of the date on which
the Lease is terminated, and the denominator of which is the total number of
months of the Lease Term; provided, however, that such amount is consistent with
Landlord's accounting methods in effect at the time of such default.
As used in Subparagraphs 22(b)(i) and (ii) above, the "worth at
the time of award" is computed by allowing interest at the Interest Rate. As
used in Subparagraph 22(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) LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any
default by Tenant, in addition to any other remedies available to Landlord under
this Lease, at law or in equity, Landlord will 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 and/or disposed of at the sole cost and expense of
and for the account of Tenant in accordance with the provisions of Subparagraph
13(h) of this Lease or any other procedures permitted by applicable law. No
re-entry or taking possession of the Premises by Landlord pursuant to this
Subparagraph 22(c) will 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) LANDLORD'S REMEDIES; RE-LETTING. In the event of the
vacation or abandonment of the Premises by Tenant or in the event that Landlord
elects to re-enter the Premises or takes 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, 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
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on terms and conditions as Landlord in its sole and absolute discretion may deem
advisable with the right to make alterations and repairs to the Premises in
connection with such reletting. If Landlord elects to relet the Premises, then
rents received by Landlord from such reletting will 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 repairs to the Premises incurred in connection with
such reletting; fourth, to the payment of rent due and unpaid hereunder and the
residue, if any, will 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 agrees to pay such deficiency to Landlord
immediately upon demand therefor by Landlord. Such deficiency will be calculated
and paid monthly.
(e) LANDLORD'S REMEDIES; PERFORMANCE FOR TENANT. All covenants
and agreements to be performed by Tenant under any of the terms of this Lease
are to be performed by Tenant at Tenant's sole cost and expense and without any
abatement of rent. If Tenant fails to pay any sum of money owed to any party
other than Landlord, for which it is liable under this Lease, or if Tenant fails
to perform any other act on its part to be performed hereunder, and such failure
continues for ten (10) days after written notice thereof by Landlord, Landlord
may, without waiving or releasing Tenant from its obligations, but shall not be
obligated to, make any such payment or perform any such other act to be made or
performed by Tenant. Tenant agrees to reimburse Landlord upon demand for all
reasonable sums so paid by Landlord and all reasonably necessary incidental
costs, together with interest thereon at the Interest Rate, from the date of
such payment by Landlord until reimbursed by Tenant. This remedy shall be in
addition to any other right or remedy of Landlord set forth in this Paragraph
22.
(f) LATE PAYMENT. If Tenant fails to pay any installment of
rent within seven (7) days of when due or if Tenant fails to make any other
payment for which Tenant is obligated under this Lease within seven (7) days of
when due, such late amount will accrue interest at the Interest Rate and Tenant
agrees to pay Landlord as additional rent such interest on such amount from the
date such amount becomes due until such amount is paid. In addition, Tenant
agrees to pay to Landlord concurrently with such late payment amount, as
additional rent, a late charge equal to five percent (5%) of the amount due to
compensate Landlord for the extra costs Landlord will incur as a result of such
late payment. The parties agree that (i) it would be impractical and extremely
difficult to fix the actual damage Landlord will suffer in the event of Tenant's
late payment, (ii) such interest and late charge represents a fair and
reasonable estimate of the detriment that Landlord will suffer by reason of late
payment by Tenant, and (iii) the payment of interest and late charges are
distinct and separate in that the payment of interest is to compensate Landlord
for the use of Landlord's money by Tenant, while the payment of late charges is
to compensate Landlord for Landlord's processing, administrative and other costs
incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of
any such interest and late charge will 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. If Tenant incurs a
late charge more than three (3) times in any period of twelve (12) months during
the Lease Term, then, notwithstanding that Tenant cures the late payments for
which such late charges are imposed, Landlord will have the right to require
Tenant thereafter to pay all installments of Monthly Base Rent quarterly in
advance throughout the remainder of the Lease Term.
(g) RIGHTS AND REMEDIES CUMULATIVE. All rights, options and
remedies of Landlord contained in this Lease will be construed and held to be
cumulative, and no one of them will 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 or in equity, whether or not
stated in this Lease. Nothing in this Paragraph 22 will be deemed to limit or
otherwise affect Tenant's indemnification of Landlord pursuant to any provision
of this Lease.
23. LANDLORD'S DEFAULT. Landlord will not be in default in the
performance of any obligation required to be performed by Landlord under this
Lease unless Landlord fails to perform such obligation within thirty (30) days
after the receipt of written notice from Tenant specifying in detail Landlord's
failure to perform; provided however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for performance,
then Landlord will not be deemed in default if it commences such performance
within such thirty (30) day period and thereafter diligently pursues the same to
completion.
24. ASSIGNMENT AND SUBLETTING.
(a) RESTRICTION ON TRANSFER. Except as expressly provided in
this Paragraph 24, Tenant will not, either voluntarily or by operation of law,
assign or encumber this Lease or any interest herein or sublet the Premises or
any part thereof, or permit the use or occupancy of the Premises by any party
other than Tenant (any such assignment, encumbrance, sublease or the like, other
than a Permitted Transfer, will sometimes be referred to as a "Transfer"),
without the prior written consent of Landlord, which consent Landlord will not
unreasonably withhold, condition or delay.
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(b) CORPORATE AND PARTNERSHIP TRANSFERS. For purposes of this
Paragraph 24, if Tenant is a corporation, partnership or other entity, any
transfer, assignment, encumbrance or hypothecation of fifty percent (50%) 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, will be deemed a
Transfer and will be subject to all of the restrictions and provisions contained
in this Paragraph 24. Notwithstanding the foregoing, the immediately preceding
sentence will not apply to any transfers of stock of Tenant if Tenant is a
publicly-held corporation and such stock is transferred publicly over a
recognized security exchange or over-the-counter market and will not apply to
any transfers resulting from a private placement(s) or an initial public
offering of stock if Tenant is not a publicly-held corporation.
(c) PERMITTED CONTROLLED TRANSFERS. Notwithstanding the
provisions of this Paragraph 24 to the contrary, Tenant may assign this Lease or
sublet the Premises or any portion thereof ("Permitted Transfer"), without
Landlord's consent and without extending any sublease termination option to
Landlord, to any parent, subsidiary or affiliate corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from a merger or consolidation with Tenant, whether or not Tenant is
the surviving entity, or to any person or entity which acquires all the assets
or stock of Tenant's business as a going concern (collectively, a "Tenant
Affiliate"), provided that: (i) at least thirty (30) days prior to such
assignment or sublease, Tenant delivers to Landlord the financial statements and
other financial and background information of the assignee or subtenant
described in Subparagraph 24(d) below; (ii) if an assignment, the assignee
assumes, in full, the obligations of Tenant under this Lease (or if a sublease,
the subtenant of a portion of the Premises or Term assumes, in full, the
obligations of Tenant with respect to such portion); (iii) the financial
condition of such successor or assignee is such that the substitution of such
successor or assignee for Tenant hereunder would not reasonably be expected to
materially adversely affect Landlord's ability to refinance any debt secured by
the Development or sell the Development without a material reduction in the
value attributed to the Development in connection with such refinancing or sale;
(iv) Tenant remains fully liable under this Lease; and (v) the use of the
Premises under Paragraph 8 is consistent with the Permitted Use described in
Paragraph 1(c) above. Without limiting the generality of the foregoing, for
purposes of clause (iii) above, the financial condition of a successor or
assignee shall not be deemed to reasonably be expected to materially adversely
affect Landlord's ability to refinance any debt secured by the Development or
sell the Development if: (A) such successor or assignee has a corporate credit
rating or indebtedness rated, in either case, by a "nationally recognized
statistical rating organization" (as defined under Rule 436(g)(2) under the
Securities Act of 1933) of BBB or better if rated by Standard and Poors, or an
equivalent rating if rated by any other nationally recognized statistical rating
organization or (B) the obligations of such successor or assignee under this
Lease are guaranteed by an entity meeting the qualifications of (A) above
pursuant to a form of lease guaranty reasonably acceptable to Landlord; (C) the
net worth of such successor following such proposed assignment or sublease is
not less than $40,000,000; or (D) the obligations of such successor or assignee
under this Lease are guaranteed by an entity having a net worth of not less than
$40,000,000 without a material reduction in the value attributed to the
Development in connection with such refinancing or sale.
In the event of a Transfer which would constitute a Permitted
Transfer but for a failure to comply with the provisions of Section 24(c)(iii)
above, if Landlord elects, in its sole discretion, to terminate this Lease as a
result of such unpermitted Transfer, Tenant shall be permitted to remain in the
Premises for no more than twelve (12) months from the date Landlord gives Tenant
notice of Landlord's election to terminate the Lease provided that (A) Tenant
provides Landlord with a letter of credit in form and substance reasonably
acceptable to Landlord in an amount not less than the equivalent of nine (9)
months of the then current Monthly Base Rent and (B) Tenant otherwise is not in
default under this Lease beyond any applicable cure period.
(d) TRANSFER NOTICE. If Tenant desires to effect a Transfer,
then at least thirty (30) days prior to the date when Tenant desires the
Transfer to be effective (the "Transfer Date"), Tenant agrees to give Landlord a
notice (the "Transfer Notice"), stating the name, address and business of the
proposed assignee, subtenant or other transferee (sometimes referred to
hereinafter as "Transferee"), reasonable information concerning the character,
ownership, and financial condition of the proposed Transferee, the Transfer
Date, any ownership or commercial relationship between Tenant and the proposed
Transferee, and the consideration and all other material terms and conditions of
the proposed Transfer, all in such detail as Landlord may reasonably require. If
Landlord reasonably requests additional detail, the Transfer Notice will not be
deemed to have been received until Landlord receives such additional detail, and
Landlord may withhold consent to any Transfer until such information is provided
to it.
(e) LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's
receipt of any Transfer Notice, and any additional information requested by
Landlord concerning the proposed Transferee's financial responsibility, Landlord
will elect to do one of the following: (i) consent to the proposed Transfer; or
(ii) refuse such consent, which refusal shall be on reasonable grounds
including, without limitation, those set forth in Subparagraph 24(f) below.
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(f) REASONABLE DISAPPROVAL. Landlord and Tenant hereby
acknowledge that Landlord's disapproval of any proposed Transfer pursuant to
Subparagraph 24(e) will be deemed reasonably withheld if based upon any
reasonable factor, including, without limitation, any or all of the following
factors: (i) the proposed Transferee is a governmental entity; (ii) the portion
of the Premises to be sublet or assigned is irregular in shape with inadequate
means of ingress and egress; (iii) the use of the Premises by the Transferee (A)
is not permitted by the use provisions in Paragraph 8 hereof, (B) violates any
exclusive use granted by Landlord to another tenant in the project of which the
Premises is a part, or (C) is deemed by Landlord to present a risk of
incompatibility to the other tenants of the Development or otherwise poses an
unreasonable risk of increased liability to Landlord; (iv) the Transferee does
not have the financial capability to fulfill the obligations imposed by the
Transfer and this Lease, or (v) the Transferee poses a business or other
economic risk which Landlord reasonably deems unacceptable.
(g) ADDITIONAL CONDITIONS. A condition to Landlord's consent to
any Transfer of this Lease will be the delivery to Landlord of a true copy of
the fully executed instrument of assignment, sublease, transfer or
hypothecation, and, in the case of an assignment, the delivery to Landlord of an
agreement executed by the Transferee in form and substance reasonably
satisfactory to Landlord, whereby the Transferee 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 must provide that it is subject and subordinate to this
Lease and to all mortgages; that Landlord may enforce the provisions of the
sublease, including collection of rent; that in the event of termination of this
Lease for any reason, including 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 and after notifying Tenant in writing,
either (i) terminate the sublease, or (ii) take over all of the right, title and
interest of Tenant, as sublandlord, under such sublease, in which case such
subtenant will attorn to Landlord, but that nevertheless Landlord will 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 subtenant
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
subtenant of more than one month's rent.
(h) EXCESS RENT. If for any Transfer, Tenant receives rent or
other consideration, either initially or over the term of the Transfer, in
excess of the rent fairly allocable to the portion of the Premises which is
assigned or subleased based on square footage, Tenant agrees to pay to Landlord
as additional rent fifty percent (50%) of the excess of each such payment of
rent or other consideration received by Tenant promptly after its receipt. In
calculating excess rent or other consideration which may be payable to Landlord
under this paragraph, Tenant will be entitled to deduct commercially reasonable
third party brokerage commissions, tenant improvement allowances, free rent,
attorneys' fees and other amounts reasonably and actually expended by Tenant in
connection with such assignment or subletting if acceptable written evidence of
such expenditures is provided to Landlord.
(i) NO RELEASE. No Transfer will release Tenant of Tenant's
obligations under this Lease or alter the primary liability of Tenant to pay the
rent and to perform all other obligations to be performed by Tenant hereunder.
Landlord may require that any Transferee remit directly to Landlord on a monthly
basis, all monies due Tenant by said Transferee. However, the acceptance of rent
by Landlord from any other person will not be deemed to be a waiver by Landlord
of any provision hereof. Consent by Landlord to one Transfer will not be deemed
consent to any subsequent Transfer. In the event of default by any Transferee of
Tenant or any successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against such Transferee or successor. Landlord may consent to
subsequent assignments of this Lease or sublettings or amendments or
modifications to this Lease with assignees of Tenant, without notifying Tenant,
or any successor of Tenant, and without obtaining its or their consent thereto
and any such actions will not relieve Tenant of liability under this Lease.
(j) ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a
Transfer or requests the consent of Landlord to any Transfer (whether or not
such Transfer is consummated), then, upon demand, Tenant agrees to pay Landlord
any reasonable attorneys' and paralegal fees actually incurred by Landlord in
connection with such Transfer or request for consent not to exceed One Thousand
Dollars ($1,000.00).
25. SUBORDINATION. 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 or beneficiary with a deed of trust
encumbering the Premises, or any lessor of a ground or underlying lease with
respect to the Premises, this Lease will 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 Premises; and (ii) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed for which the Premises, or
Landlord's interest and estate in any of said items, is specified as security.
Notwithstanding the foregoing, Landlord reserves the right to subordinate any
such ground leases or underlying leases or any such liens to this Lease. If any
such ground lease or underlying lease terminates for any reason or any such
mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure
is made for any
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reason, at the election of Landlord's successor in interest, Tenant agrees to
attorn to and become the tenant of such successor in which event Tenant's right
to possession of the Premises will not be disturbed as long as Tenant is not in
default under this Lease beyond the applicable cure period. Tenant hereby waives
its rights under any law which gives or purports to give Tenant any right to
terminate or otherwise adversely affect this Lease and the obligations of Tenant
hereunder in the event of any such foreclosure proceeding or sale. Tenant
covenants and agrees to execute and deliver, upon demand by Landlord and in the
commercially reasonable form reasonably required by Landlord, any additional
documents evidencing the priority or subordination of this Lease and Tenant's
attornment agreement with respect to any such ground lease or underlying leases
or the lien of any such mortgage or deed of trust within twenty (20) days of
receipt of Landlord's written request therefor. If Tenant fails to sign and
return any such documents within twenty (20) days of receipt, Tenant will be in
default hereunder.
With respect to any existing or future first lien mortgages,
deeds of trust, or other liens entered into by and between Landlord and any such
mortgagee and/or a beneficiary of any deed of trust or other such lien granted
by Landlord, within thirty (30) days of Tenant's execution of this Lease, as a
condition precedent to Tenant's obligations under this Lease, Landlord shall
deliver to Tenant for immediate recording in the Official Records of San Diego
County notarized commercially reasonable nondisturbance agreements in writing
from all lessors under all ground leases or underlying leases from all
beneficiaries under all deeds of trust and all mortgagees under all mortgages
affecting the Building stating that so long as Tenant is not in default under
any of the terms, covenants, conditions or agreements of this Lease beyond any
applicable cure periods, this Lease and all of the terms, provisions and
conditions of this Lease, shall remain in full force and effect, and neither
this Lease, nor Tenant's rights nor Tenant's possession of the Premises will be
disturbed during the Term of this Lease or any extension thereof.
26. ESTOPPEL CERTIFICATE. Within twenty (20) days following any written
request which Landlord may make from time to time, Tenant agrees to execute and
deliver to Landlord a fully completed, factually accurate statement, in a form
substantially similar to the form of EXHIBIT "E" attached hereto or as such
commercially reasonable form as may reasonably be required by Landlord's lender,
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, 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 reasonably requested by Landlord.
Landlord and Tenant intend that any statement delivered pursuant to this
Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of the Premises or any interest therein. Tenant's failure
to deliver such statement within such time will 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. Without limiting the foregoing, if Tenant fails to deliver
any such statement within such twenty (20) day period, Landlord may deliver to
Tenant an additional request for such statement and Tenant's failure to deliver
such statement to Landlord within ten (10) days after delivery of such
additional request will constitute a default under this Lease. Tenant agrees to
indemnify and protect Landlord from and against any and all claims, damages,
losses, liabilities and expenses (including attorneys' fees and costs)
attributable to any failure by Tenant to timely deliver any such estoppel
certificate to Landlord as required by this Paragraph 26.
27. EASEMENTS. Landlord reserves to itself the right, from time to
time, to grant such easements, rights and dedications that Landlord deems
necessary or desirable, and to cause the recordation of parcel maps and
restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use or occupancy of the
Premises by Tenant. Tenant shall sign any of the aforementioned documents upon
request of Landlord and failure to do so shall constitute a material breach of
this Lease.
28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and
comply with the "Rules and Regulations," a copy of which is attached hereto and
incorporated herein by this reference as EXHIBIT "F", and all reasonable and
nondiscriminatory modifications thereof and additions thereto from time to time
put into effect by Landlord.
29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.
If, in connection with Landlord's obtaining or entering into any financing or
ground lease affecting the Premises, the lender or ground lessor requests
modifications to this Lease, Tenant, within ten (10) days after request
therefor, agrees to execute an amendment to this Lease incorporating such
modifications, provided such modifications are reasonable and do not increase
the obligations of Tenant under this Lease or adversely affect the leasehold
estate created by this Lease. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgage covering the Premises or ground
lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees
to offer such beneficiary, mortgagee or ground lessor a reasonable
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opportunity to cure the default (including with respect to any such beneficiary
or mortgagee, time to obtain possession of the Premises, subject to this Lease
and Tenant's rights hereunder, by power of sale or a judicial foreclosure, if
such should prove necessary to effect a cure).
30. DEFINITION OF LANDLORD. The term "Landlord," as used in this Lease,
so far as covenants or obligations on the part of Landlord are concerned, means
and includes only the owner or owners, at the time in question, of the fee title
of the Premises or the lessees under any ground lease, if any. In the event of
any transfer, assignment or other conveyance or transfers of any such title
(other than a transfer for security purposes only), Landlord herein named (and
in case of any subsequent transfers or conveyances, the then grantor) will be
automatically relieved from and after the date of such transfer, assignment or
conveyance of all liability as respects the performance of any covenants or
obligations on the part of Landlord contained in this Lease thereafter to be
performed, so long as (a) the transferee assumes in writing all such covenants
and obligations of Landlord arising after the date of such transfer and (b) any
funds held by the transferor in which Tenant has an interest shall be turned
over to the transferee by credit to the purchase price or otherwise. Landlord
and Landlord's transferees and assignees have the absolute right to transfer all
or any portion of their respective title and interest in the Premises, the
Building, the Development and/or this Lease without the consent of Tenant, and
such transfer or subsequent transfer will not be deemed a violation on
Landlord's part of any of the terms and conditions of this Lease. Nothing in
this paragraph shall relieve Landlord from its obligations accruing prior to the
date of transfer.
31. WAIVER. The waiver by either party of any breach of any term,
covenant or condition herein contained will not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant or condition herein
contained, nor will any custom or practice which may develop 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 performance in strict accordance
with said terms. The subsequent acceptance of rent or any other payment
hereunder by Landlord will 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 will be deemed to be other than on account
of the earliest installment of such rent or other amount due, nor will any
endorsement or statement on any check or any letter accompanying any check be
deemed an accord and satisfaction, and 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. The consent
or approval of Landlord to or of any act by Tenant requiring Landlord's consent
or approval will not be deemed to waive or render unnecessary Landlord's consent
or approval to or of any subsequent similar acts by Tenant.
32. PARKING. Tenant and Tenant's customers, suppliers, employees and
invitees ("Tenant's Authorized Users") may use during the entire Term, at no
additional cost to Tenant, the parking areas in the Common Areas which parking
areas shall contain at least three (3) parking spaces per 1,000 rentable square
feet of the Building. Except as provided below, all visitor parking will be on a
non-exclusive, in common basis with all other visitors and guests of the
Development. Tenant will not use or allow any of Tenant's Authorized Users to
use any parking 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. As part of Tenant's parking privileges, Landlord and Tenant will mutually
and reasonably agree to the location of ten (10) parking spaces for Tenant's
exclusive use. Landlord shall have the right to reasonably relocate such
exclusive spaces to a location reasonably proximate to the Premises. Tenant and
Tenant's Authorized Users shall comply with all rules and regulations regarding
parking set forth in EXHIBIT "F" attached hereto and Tenant agrees to cause its
employees, subtenants, assignees, contractors, suppliers, customers and invitees
to comply with such rules and regulations. Landlord reserves the right from time
to time to modify and/or adopt such other reasonable and non-discriminatory
rules and regulations for the parking facilities as it deems reasonably
necessary for the operation of the parking facilities.
33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in
or prevented from the performance of any act required under this Lease by reason
of strikes, lock-outs, labor troubles, inability to procure standard materials,
failure of power, restrictive governmental laws, regulations or orders or
governmental action or inaction (including failure, refusal or delay in issuing
permits, approvals and/or authorizations which is not the result of the action
or inaction of the party claiming such delay), riots, civil unrest or
insurrection, war, fire, earthquake, flood or other natural disaster, unusual
and unforeseeable delay not within Landlord's reasonable control which results
from an interruption of any public utilities (e.g., electricity, gas, water,
telephone) or other unusual and unforeseeable delay not within the reasonable
control of the party delayed in performing work or doing acts required under the
provisions of this Lease, then performance of such act will be excused for the
period of the delay and the period for the performance of any such act will be
extended for a period equivalent to the period of such delay. The provisions of
this Paragraph 33 will not operate to excuse Tenant from prompt payment of rent
or any other payments required under the provisions of this Lease.
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34. SIGNS. Subject to the requirements of this Paragraph 34, Tenant
shall be allowed, to the extent permitted under applicable laws and the CC&Rs,
to install, at Tenant's sole cost and expense, (i) Building-top signage in two
locations identifying Tenant's professional name on the exterior of the Building
and signage adjacent to Tenant's main suite entrance and (ii) signage
identifying Tenant's professional name on a monument sign for the Building,
provided Landlord elects, at Landlord's option, to construct a monument for the
Building and Tenant desires such signage. Tenant agrees to have Landlord install
and maintain Tenant's identification sign(s) in such designated location in
accordance with this Paragraph 34 at Tenant's sole cost and expense. Tenant has
no right to install Tenant identification signs in any other location in, on or
about the Premises or the Development in any interior or exterior Common Areas.
The size, design, color and other physical aspects of any and all permitted
sign(s) will be subject to (i) Landlord's written approval prior to
installation, which approval shall not be unreasonably withheld, conditioned or
delayed, (ii) the CC&Rs, and (iii) any applicable municipal or governmental
permits and approvals. Tenant will be solely responsible for all costs for
installation, maintenance, repair and removal of any Tenant identification
sign(s). If Tenant fails to remove Tenant's sign(s) upon termination of this
Lease and repair any damage caused by such removal, Landlord may do so at
Tenant's sole cost and expense. Tenant agrees to reimburse Landlord for all
reasonable costs incurred by Landlord to effect any installation, maintenance or
removal on Tenant's account, which amount will be deemed additional rent, and
may include, without limitation, all sums disbursed, incurred or deposited by
Landlord including Landlord's costs, expenses and actual attorneys' fees with
interest thereon at the Interest Rate from the date of Landlord's demand until
paid by Tenant. Any sign rights granted to Tenant under this Lease are personal
to Tenant and any Tenant Affiliate and may not be assigned, transferred or
otherwise conveyed to any assignee or subtenant of Tenant without Landlord's
prior written consent, which consent Landlord shall not unreasonably withhold.
Subject to Landlord obtaining any necessary governmental permits and approvals,
Landlord shall install, at Landlord's sole cost and expense, Building signage at
the main entry to the Development to direct trucks to the south entrance of the
Development and Tenant's visitors to the north entrance of the Development.
Further, all trucks shall be then directed to exit the Development through the
south entrance of the Development. In the event of any increase in Operating
Expenses solely related to the truck traffic of other tenants (and not normal
wear and tear) caused hereby, such costs shall be passed through to such tenants
and not to Tenant.
35. LIMITATION ON LIABILITY. In consideration of the benefits accruing
hereunder, Tenant on behalf of itself and all successors and assigns of Tenant
covenants and agrees that, in the event of any actual or alleged failure, breach
or default hereunder by Landlord: (a) tenant's recourse against Landlord for
monetary damages will be limited to Landlord's interest in the Premises
including, subject to the prior rights of any Mortgagee, Landlord's interest in
the rents of the Premises and any insurance proceeds and any proceeds of any
sale or other conveyance, including, without limitation, any condemnation award
payable to Landlord; (b) except as may be necessary to secure jurisdiction of
the partnership, no partner of Landlord shall be sued or named as a party in any
suit or action and no service of process shall be made against any partner of
Landlord; (c) no partner of Landlord shall be required to answer or otherwise
plead to any service of process; (d) no judgment will be taken against any
partner of Landlord and any judgment taken against any partner of Landlord may
be vacated and set aside at any time after the fact; (e) no writ of execution
will be levied against the assets of any partner of Landlord; (f) the
obligations under this Lease do not constitute personal obligations of the
individual partners, directors, officers or shareholders of Landlord, and Tenant
shall not seek recourse against the individual partners, directors, officers or
shareholders of Landlord or any of their personal assets for satisfaction of any
liability in respect to this Lease; and (g) these covenants and agreements are
enforceable both by Landlord and also by any partner of Landlord.
36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by
Landlord and at any time during the Term of this Lease upon twenty (20) days
prior written notice from Landlord, Tenant agrees to provide Landlord with a
Tenant's most recent audited annual financial reports (dated no earlier than
twelve (12) months from the date of such request) together with, if required by
any prospective lender or purchaser of Landlord, a then current financial
statement for Tenant; provided, however, Landlord shall use Landlord's good
faith efforts to require that any such prospective lender or purchaser keep such
financial statements confidential (except that such prospective lenders and
purchasers may disclose such information to their consultants and as may be
required by law). Such annual statements are to be prepared in accordance with
generally accepted accounting principles, except as noted in the notes thereto,
and, if such is the normal practice of Tenant, audited by an independent
certified public accountant. Any interim financial statements provided by Tenant
as may be required above shall be prepared in accordance with generally accepted
accounting principles and certified by an officer of Tenant.
37. 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 on Tenant's part to
be observed and performed under this Lease, Tenant may peaceably and quietly
have, hold and enjoy the Premises in accordance with this Lease.
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<PAGE>
38. AUCTIONS. Tenant shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without first
having obtained Landlord's prior written consent. Notwithstanding anything to
the contrary in this Lease, Landlord shall not be bound by any standard of
reasonableness in determining whether to grant such consent.
39. MISCELLANEOUS.
(a) CONFLICT OF LAWS. This Lease shall be governed by and
construed solely pursuant to the laws of the State of California, without giving
effect to choice of law principles thereunder.
(b) 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.
(c) PROFESSIONAL FEES AND COSTS. If either Landlord or Tenant
should bring suit against the other with respect to this Lease, then all
reasonable costs and expenses, including without limitation, actual professional
fees and costs such as appraisers', accountants' and attorneys' fees and costs,
incurred by the party which prevails in such action, whether by final judgment
or out of court settlement, shall be paid by the other party, which obligation
on the part of the other party shall be deemed to have accrued on the date of
the commencement of such action and shall be enforceable whether or not the
action is prosecuted to judgment. As used herein, attorneys' fees and costs
shall include, without limitation, reasonable attorneys' fees, costs and
expenses incurred in connection with any (i) post-judgment motions; (ii)
contempt proceedings; (iii) garnishment, levy, and debtor and third party
examination; (iv) discovery; and (v) bankruptcy litigation.
(d) 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.
(e) 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.
(f) PRIOR AGREEMENT; AMENDMENTS. This Lease and the exhibits
attached hereto constitute and are intended by the parties to be a final,
complete and exclusive statement of their entire agreement with respect to the
subject matter of this Lease. This Lease supersedes any and all prior and
contemporaneous agreements and understandings of any kind relating to the
subject matter of this Lease. There are no other agreements, understandings,
representations, warranties, or statements, either oral or in written form,
concerning the subject matter of this Lease. No alteration, modification,
amendment or interpretation of this Lease shall be binding on the parties unless
contained in a writing which is signed by both parties.
(g) SEPARABILITY. The provisions of this Lease shall be
considered separable such that if any provision or part of this Lease is ever
held to be invalid, void or illegal under any law or ruling, all remaining
provisions of this Lease shall remain in full force and effect to the maximum
extent permitted by law.
(h) RECORDING. Neither Landlord nor Tenant shall record this
Lease nor a short form memorandum thereof without the consent of the other.
(i) COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
(j) NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and
agrees that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees, agents and attorneys, shall not intentionally
and voluntarily disclose the terms and conditions of this Lease to any newspaper
or other publication or any other tenant or apparent prospective tenant of the
Building or other portion of the Development, or real estate agent, either
directly or indirectly, without the prior written consent of Landlord; provided,
however, that Tenant may disclose the terms to prospective subtenants or
assignees under this Lease, in its financial statements (to the extent required
by generally acceptable accounting principles) or as otherwise required by law
(including, without limitation, the Securities Act of 1933, as amended, and the
rules promulgated thereunder). Notwithstanding the foregoing, Tenant shall not
be deemed in breach of this rule if a term or condition of this Lease is made
public by any third party by reference to Tenant's financial statements or
governmental filings,
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<PAGE>
(k) NON-DISCRIMINATION. Tenant acknowledges and agrees that
there shall be no discrimination against, or segregation of, any person, group
of persons, or entity on the basis of race, color, creed, religion, age, sex,
marital status, national origin, or ancestry in the leasing, subleasing,
transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises,
or any portion thereof.
40. EXECUTION OF LEASE.
(a) JOINT AND SEVERAL OBLIGATIONS. If more than one person
executes this Lease as Tenant, their execution of this Lease will constitute
their covenant and agreement that (i) 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 (ii) the term "Tenant" as used in this Lease means and
includes 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, will 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.
(b) 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 and in good standing 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, and 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, if
requested by Landlord, 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, if requested by Landlord, and that this Lease is
binding upon Tenant in accordance with its terms.
(c) EXAMINATION OF LEASE. Submission of this instrument by
Landlord to Tenant 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.
IN WITNESS WHEREOF, the parties have caused this Lease to be duly
executed by their duly authorized representatives as of the date first above
written.
TENANT: LANDLORD:
AXSYS TECHNOLOGIES, INC., OTAY BUSINESS PARK, LLC,
a Delaware corporation a California limited liability company
By: /s/ Raymond F. Kunzmann By: THE KOLL COMPANY,
------------------------------ a California corporation,
Name Printed: Raymond F. Kunzmann its Managing Member
Title: Vice President
By: /s/ James Watson
By: /s/ David L. Concannon
------------------------------ Its: Division President
Name Printed: David L. Concannon Telephone:(949)833-3030
Title: Vice President Facsimile:(949)252-9116
*NOTE:
If Tenant is a California corporation, then one of the following alternative
requirements must be satisfied:
(A) This Lease must be signed by two (2) officers of such corporation: one
being the chairman of the board, the president or a vice president AND
the other being the secretary, an assistant secretary, the chief
financial officer or an assistant treasurer. If once (1) individual is
signing in two (2) of the foregoing capacities, that individual must
sign twice, once as one officer and again as the other officer.
(B) If there is only one (1) individual signing in two (2) capacities, or
if the two (2) signatories do not satisfy the requirements of (A)
above, then Tenant shall deliver to Landlord a certified copy of a
corporate resolution in a form reasonably acceptable to Landlord
authorizing the signatory(ies) to execute this Lease.
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<PAGE>
If Tenant is a corporation incorporated in a state other than California, then
Tenant shall deliver to Landlord a certified copy of a corporate resolution in a
form reasonably acceptable to Landlord authorizing the signatory(ies) to execute
this Lease.
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<PAGE>
EXHIBIT 10(22)
[AXSYS TECHNOLOGIES, INC. LETTERHEAD]
December 10, 1999
Mr. John Clark
733 Langdale Road
Fort Collins, Colorado 80526
Dear John:
I am pleased that you have decided to join Axsys as Vice President, Operations.
The terms of your employment will be as set forth on the attached Exhibit I
hereto. Please indicate your agreement by executing the two copies of this
letter in the space provided below and return one copy via the enclosed
envelope.
This is an exciting time in the development of Axsys. I look forward to working
with you to improve the Company's operations and support our long-term strategy
of retaining and building the Company's position as a leader in the design and
manufacture of precision measurement and positioning products.
Yours truly,
/s/ Stephen W. Bershad
Stephen W. Bershad
Chairman
Encl./
I acknowledge and accept the terms and conditions of employment referenced
above.
/s/ John Clark 12/15/99
- ----------------------------- --------------------
John Clark Date
<PAGE>
EXHIBIT I
Summary of Employment Terms
Position; Duties: Vice President, Operations of Axsys Technologies,
Inc. (the "Company"). Executive will exercise such
duties as customarily pertain to the office of Vice
President, Operations, and shall report to the
President and Chief Operating Officer. Executive's
duties will involve, among others: training in "Lean
thinking;" managing Lean initiatives; recruiting Lean
team; Information and Technology activities; and
Procurement activities. Executive acknowledges that
his duties will require significant travel, including
travel to the Company's various operating units
located throughout the United States. Executive will
initially be based in Fort Collins, Colorado and will
operate from an office located at his residence
there. Executive represents and warrants that he is
not a party to any agreement that would affect in any
way his employment by the Company.
Compensation: $160,000 per year, paid in accordance with the
Company's regular payroll practices. Executive will
be eligible for annual incentive compensation
targeted at 50% of Executive's annual base
compensation based upon achievement of objectives to
be agreed upon. Annual incentive compensation will be
payable in accordance with Company's incentive
compensation policies. To be adjusted equitably for
partial year.
Signing Bonus: The Company will also make a lump sum payment to
Executive of $25,000 as a signing bonus, to be paid
with Executive's first regularly scheduled salary
payment. If Executive voluntarily terminates his
employment with the Company within 1 year of
Executive's hire date, Executive will be required to
reimburse the Company for the entirety of the $25,000
payment. Such payment shall be due and payable in
full on the first day following Executive's final day
of employment by the Company.
Stock Options: Executive will be entitled to participate in the
Company's Amended and Restated Long-Term Stock
Incentive Plan. Executive's initial option grant (to
be granted in connection with regular annual option
grants during the first quarter of 2000) shall cover
10,000 shares of common stock at an exercise price
equal to closing stock price on date grant is
approved by the Company's Long-Term Stock Incentive
Plan Committee. Options will vest 20% on each
anniversary of grant date, beginning on first
anniversary of date of grant. Will accelerate on
change in control in accordance with provisions of
Company's existing form of stock option agreement.
Termination Without
Cause: Executive will be entitled to continuation of base
salary and welfare benefits in the event Executive is
terminated by the Company without
<PAGE>
cause for a period ending on the earlier of six
months after termination or Executive's commencement
of full-time employment with another employer.
Benefits: Executive will be entitled to benefits consistent
with other senior corporate executives of the
Company, including annual paid vacation of 3 weeks.
Start Date: January 3, 2000
<PAGE>
EXHIBIT 10(23)
ASSET PURCHASE AGREEMENT
AMONG
MOLEX INDUSTRIAL VENTURES INC.,
("PURCHASER")
MOLEX INCORPORATED,
("PARENT")
AND
AXSYS TECHNOLOGIES, INC.
("SELLER")
Dated as of February 3, 2000
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of February 3, 2000, by and among
Molex Industrial Ventures Inc., a Delaware corporation ("PURCHASER") and a
wholly-owned subsidiary of Molex Incorporated, a Delaware corporation with
offices at 2222 Wellington Court, Lisle, Illinois 60532 ("PARENT") and Axsys
Technologies, Inc., a Delaware corporation with offices at 910 Sylvan Avenue,
Suite 180, Englewood Cliffs, New Jersey 07632 ("SELLER"). Purchaser desires to
purchase and Seller desires to sell all of the operating assets used exclusively
by Seller's Beau Interconnect Division. In consideration of the foregoing and
mutual covenants, agreements and warranties herein contained, it is agreed that
Purchaser shall acquire from Seller all of the Acquired Assets (as defined
herein) and assume all of the Assumed Obligations (as defined herein) as of the
Closing Date (as defined herein) hereof upon the terms and conditions
hereinafter set forth. The parties agree as follows:
CERTAIN DEFINITIONS
Unless otherwise defined herein, terms used herein shall have the
meanings set forth below:
"AFFILIATE" of any person shall mean any corporation, proprietorship,
partnership or business entity which, directly or indirectly, owns or controls,
is under common ownership or control with, or is owned or controlled by, such
person, and any directors, officers, partners or 50% or more owners of such
person.
"AGREEMENT" shall mean this Asset Purchase Agreement, including all
Exhibits and the Disclosure Schedule hereto, as it may be amended from time to
time in accordance with its terms.
"AUTHORITY" means any governmental, regulatory or administrative body,
board, commission, agency, subdivision or authority, any court or judicial
authority, any public, private or industry regulatory authority, whether
foreign, national, Federal, state or local or otherwise, or any Person lawfully
empowered by any of the foregoing to enforce or seek compliance with any
Regulation.
<PAGE>
"BULK SALES LAWS" means the Uniform Commercial Code Bulk Transfer
provisions of any jurisdiction relating to bulk sales which are applicable to
the sale of the Acquired Assets by Seller hereunder.
"BUSINESS" means the terminal block, connector and other business and
operations of Seller conducted by the Division at the date of this Agreement
and/or the Closing Date relating to the Acquired Assets and Assumed Obligations.
"CASH" means all cash, certificates of deposit, bank deposits and other
cash equivalents, together with all accrued but unpaid interest thereon.
"CLAIM" means any claim, lawsuit, demand, suit, inquiry made, hearing,
investigation, notice of a violation, litigation, proceeding or arbitration,
whether civil, criminal, administrative or otherwise.
"CLOSING" means the consummation of the transactions contemplated
herein on the Closing Date in accordance with ARTICLE VIII hereof.
"CODE" means the United States Internal Revenue Code of 1986, as
amended.
"CONTRACT" means any agreement, contract, commitment, or other binding
arrangement or understanding, whether written or oral.
"CREDIT AGREEMENT" means the Credit Agreement, dated as of April 25,
1996 (as amended, modified or supplemented), among Seller, various of its
subsidiaries, the Banks party to the Credit Agreement and Paribas, as Agent.
"DISCLOSURE SCHEDULE" means the disclosure schedule of Seller attached
hereto.
"DIVISION" means the Seller with respect to its Beau Interconnect
Division.
"EMPLOYEES" has the meaning specified in SECTION 6.1 hereof.
"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation or retirement plan or arrangement, (b) qualified defined
contribution retirement plan or arrangement which is an Employee Pension Benefit
Plan, (c) qualified defined benefit retirement plan or arrangement which is an
Employee Pension Benefit Plan (including any Multiemployer Plan (as defined in
Section 3(37) and 40001(a)(3) of ERISA), or (d)
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<PAGE>
Employee Welfare Benefit Plan, in each case, which provides benefits to
Employees.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Section 3(1).
"ENVIRONMENTAL CLAIM" shall mean any Claim by any Person or any
Authority alleging potential Liability or obligations (including potential
Liability or obligations for or requirement to incur investigatory costs,
cleanup costs, governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) arising out of, based on or resulting
from (i) the presence, or release into the environment, of any Materials of
Environmental Concern at any location, whether or not owned or operated by
Seller, or (ii) circumstances forming the basis of any violation, or alleged
violation, or Liability under any Environmental, Health and Safety Requirement.
"ENVIRONMENTAL, HEALTH, AND SAFETY REQUIREMENTS" shall mean all
federal, state, local and foreign statutes, regulations, and ordinances
concerning public health and safety, worker health and safety, and pollution or
protection of the environment (including ambient air, surface water, ground
water, land surface or subsurface strata), including without limitation all
those relating to the presence, use, production, generation, handling,
transportation, treatment, storage, disposal, distribution, labeling, testing,
processing, discharge, release, threatened release, control, or cleanup of any
Materials of Environmental Concern as such requirements are enacted and in
effect on or prior to the Closing Date.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" means each entity which is treated as a single
employer with Seller for purposes of Code Section 414.
"EXISTING INDEBTEDNESS" means all funded indebtedness of the Division
(including both the current and long-term portions of any long-term
indebtedness), including the IRB Indebtedness and all obligations under
capitalized leases.
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<PAGE>
"FACILITY" means the buildings, structures, fixtures and improvements
comprising the headquarters and manufacturing facility of the Division situated
on the property leased by Seller under the Lease.
"FINANCIAL STATEMENTS" means the unaudited financial statements of the
Division, consisting of the balance sheet, together with related statements of
income and retained earnings and changes in cash flows, and the notes and
supplementary information thereto, certified by the chief financial officer of
Seller, as of and for each of the three years ended December 31, 1998 (the
"ANNUAL FINANCIAL STATEMENTS"), and as of for the nine-month period ended
September 30, 1999, consisting of the balance sheet at such date (the "SEPTEMBER
30 BALANCE SHEET") and, with respect to the nine-month period ended September
30, 1999, only the related statements of income for such period then ended,
copies of which are attached to the Disclosure Schedule.
"GAAP" shall mean the U.S. generally accepted accounting principles at
the time in effect, consistently applied by Seller.
"IRB INDEBTEDNESS" shall mean The Industrial Development Authority of
the State of New Hampshire Floating/Fixed Rate Industrial Facility Revenue Bonds
(V Land Corporation - 1985 Laconia Series) payable from payments made under the
Loan Agreement.
"KNOWLEDGE" of any Person (or any form of such term, such as "knows",
"known", etc.) as used in this Agreement with respect to a party's awareness of
the presence or absence of a fact, event or condition shall mean (i) the actual
knowledge of such Person after due inquiry, and in the case of Seller, the
actual knowledge after due inquiry of each officer or director of Seller, Marie
Carson, Brian Davis, Thomas Gray, Roland Keller, Anthony J. Peleckis, Gary
Robertson and Brad Wallace plus (ii) the knowledge that should be obtained by a
party conducting itself reasonably and with sound discretion in the management
of its own affairs.
"LEASE" means the Lease Agreement, dated September 15, 1987 by and
between the City of Laconia and Laconia Airport Authority, as lessors (the
"LESSORS") and Seller as Lessee.
"LEASED PROPERTY" shall mean the property leased to Seller pursuant to
the terms of the Lease.
"LIABILITY" means any liability or obligation (whether known or
unknown, whether asserted or unasserted, whether absolute or contingent,
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<PAGE>
whether accrued or unaccrued, whether liquidated or unliquidated, and whether
due or to become due), including any liability or obligation for or with respect
to Taxes.
"LIEN" means any security interest, lien, charge, mortgage, deed,
assignment, pledge, hypothecation, encumbrance, easement, restriction or
interest of another Person or any kind or nature.
"LOAN AGREEMENT" means the Loan Agreement among The Industrial
Development Authority of the State of New Hampshire and Seller, dated as of May
1, 1985, as amended.
"LOSSES" shall mean all Liabilities, losses, costs, damages, penalties
or expenses (including, without limitation, reasonable attorneys' fees and
expenses, costs of investigation and litigation, court costs and amounts paid in
settlement (to the extent paid in accordance with the provisions of ARTICLE X
hereof)).
"MATERIAL ADVERSE CHANGE" means any developments or changes which would
have a Material Adverse Effect.
"MATERIAL ADVERSE EFFECT" with respect to any Person means any material
adverse effect on the business, results of operations or financial condition of
such Person, except any such effect resulting from or arising in connection with
(A) changes in economic, financial market, regulatory or political conditions
generally or in particular markets in which the Division operates the Business
or (B) any matters disclosed in the Disclosure Schedule. When used in relation
to the Division or the Business (each of which shall be deemed to include the
Acquired Assets, the Assumed Obligations, and the Real Property,) Material
Adverse Effect shall have a correlative meaning to the meaning stated in the
preceding sentence.
"MATERIALS OF ENVIRONMENTAL CONCERN" shall mean any pollutants,
contaminants, toxic or hazardous or extremely hazardous substances, materials,
wastes, constituents, compounds, chemicals (including, without limitation,
petroleum or any by-products or fractions thereof, any form of natural gas,
lead, asbestos and asbestos-containing materials (ACM), polychlorinated
biphenyls (PCB) and PCB-containing equipment, radon and other radioactive
elements, ionizing radiation, electromagnetic field radiation and other
non-ionizing radiation, pesticides, defoliants, explosives, flammables,
corrosives and urea formaldehyde foam insulation)
- 5 -
<PAGE>
that are regulated by, or may now form the basis of Liability under, any
Environmental, Health and Safety Requirement.
"MODIFIED SEPTEMBER 30 BALANCE SHEET" has the meaning specified in
SECTION 2.2(A) hereof.
"ORDER" means any decree, order, writ, injunction, rule, judgment,
consent of or by a federal, state or foreign Authority.
"PERMITS" means any franchises, orders, registrations, certificates,
licenses, permits, variances, interim permits, permit applications, approvals or
other authorizations under any Regulation applicable to the Business or the Real
Property.
"PERSON" means any corporation, partnership, joint venture, limited
liability company, organization, entity, Authority or natural person.
"REAL PROPERTY" shall mean, collectively, the Leased Property and the
Facility.
"REGULATION" means any law, statute, regulation, ruling, rule, Order or
Permit, of, administered or enforced by or on behalf of any Authority, and the
certificate of incorporation and by-laws of Seller.
"SUBSIDIARY" means any entity with respect to which another specified
entity has the power to vote or direct the voting of sufficient securities or
interests to elect a majority of the board of directors or comparable governing
body.
"TAXES" means all taxes, charges, fees, duties, levies or other
assessments, including, without limitation, income, gross receipts, net
proceeds, ad valorem, turnover, real and personal property (tangible and
intangible), sales, use, franchise, excise, value added, license, payroll,
unemployment, environmental, customs duties, capital stock, disability, stamp,
leasing, lease, user, transfer, fuel, excess profits, occupational and interest
equalization, windfall profits, severance and employees' income withholding and
Social Security taxes imposed by the United States or any foreign country or by
any state, municipality, subdivision or instrumentality of the United States or
of any foreign country or by any other tax Authority, including all applicable
penalties and interest, and such term shall include any interest, penalties or
additions to tax attributable to such Taxes.
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<PAGE>
"TAX RETURN" means any report, return or other information required to
be supplied to a taxing authority in connection with Taxes.
ARTICLE I
PURCHASE AND SALE; ASSUMPTION
OF CERTAIN LIABILITIES
1.1. ACQUIRED ASSETS. At the Closing, subject to the terms and
conditions set forth in this Agreement, Seller agrees to sell, convey, transfer,
assign and deliver to Purchaser, and Purchaser agrees to purchase, acquire and
take assignment and delivery of, all of the assets owned by Seller (wherever
located) constituting the Business, and all of Seller's right, title and
interest therein and thereto, except for those assets specifically excluded in
SECTION 1.3 (all of the assets sold, assigned, transferred and delivered to
Purchaser hereunder are referred to collectively herein as the "ACQUIRED
ASSETS"). The Acquired Assets shall include all of Seller's right, title and
interest in and to the following assets to the extent used exclusively in
connection with the business and operations of the Business:
(a) Any and all of the machinery, equipment, installations,
furniture, patterns, dies, tools, spare parts, purchased parts, packaging goods,
consigned goods, supplies, office equipment, computer hardware or software owned
or leased by Seller and used by Seller in the operation of the Business,
maintenance equipment and supplies, materials, items of building improvements,
and all other tangible personal property of every kind and description (the
"EQUIPMENT");
(b) All of the inventories, including all raw materials, work
in process and finished goods inventories, wherever located (the "INVENTORIES");
(c) All of the lift trucks, tractors, trailers, boom trucks,
automobiles and other vehicles (the "VEHICLES");
(d) All production records, product files, technical
information, designs, drawings, laboratory notebooks, confidential information,
price lists, marketing plans and strategies, sales records, product development
techniques or plans, customer lists and files (including customer credit and
collection information), details of client or consultant contracts, operational
methods, historical and financial records and files, and other proprietary
information, together with the following papers and
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<PAGE>
records in Seller's care, custody or control or otherwise available to it; all
blueprints, building specifications and "as built" plans, all personnel and
labor relations records, all employee benefits and compensation plans and
records, all environmental control, monitoring and test records, all plant cost
records, all maintenance and production records and all plans and designs of
buildings, structures, fixtures and equipment (the "INFORMATION AND RECORDS");
(e) All United States and foreign patents, patent applications
(including the rights to any and all continuations, divisionals, reissues,
reexamination certificates and other derivative applications), patent licenses,
service names, service marks, trade names, trademarks, trade name and trademark
registrations (and applications therefor), copyrights and copyright
registrations (and applications therefor), trade secrets, inventions, processes,
designs, know-how and formulae, including all rights in respect of the name and
mark "Beau" and all derivatives thereof, and all goodwill associated with the
foregoing, rights under the foregoing, remedies against infringement of the
foregoing (including past infringement), and rights to protection of interests
in the foregoing under the laws of all jurisdictions (the "Intellectual
Property");
(f) Any assets (other than the Excluded Assets) reflected on
the September 30 Balance Sheet to the extent not disposed of in the ordinary
course of business (the "OTHER ASSETS");
(g) All goodwill;
(h) All accounts and Permits belonging to Seller relating
exclusively to the Acquired Assets or the Real Property or exclusively to the
operation by Seller of the Business;
(i) All real estate and real property interests, and all
fixtures and other improvements thereto, including the Facility;
(j) Any and all accounts receivable, trade receivables, notes
receivable and other receivables (the "ACCOUNTS RECEIVABLE");
(k) Except as provided in SECTION 1.3, all Claims, deposits,
prepayments, refunds, causes of action, choses in action, rights of recovery,
rights of set-off and rights of recoupment (excluding any such item relating to
the payment of Taxes); and
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(l) Permanent books of account of the Division (except that
Seller shall have the right to inspect and copy the same as may be reasonably
necessary after the Closing).
1.2. ASSIGNMENT OF CONTRACTS, LEASES AND OTHER ASSETS. As additional
consideration for the Acquired Assets, subject to the terms and conditions set
forth in this Agreement, Seller will assign and transfer to Purchaser, effective
as of the Closing Date, all of Seller's right, title and interest in and to, and
Purchaser will take assignment of, the following rights and interests that are
used exclusively in connection with or relate to the business and operation of
the Business (and all of the following shall be deemed included in the term
"ACQUIRED ASSETS" as used herein):
(a) All of the leases of real property (the "REAL PROPERTY
LEASES");
(b) All of the leases of equipment, machinery, installations,
vehicles and other personal property, except capitalized leases (it being
understood that the equipment and other personal property subject to such leases
are Acquired Assets for purposes of this Agreement) (the "EQUIPMENT AND OTHER
PERSONAL PROPERTY LEASES");
(c) All of the purchase orders, contracts and agreements for
the purchase of goods, materials and services, including all rights arising
under warranties and all rights to rebates, sales incentives and other payments
under oral or written agreements with suppliers and others (the "SELLER PURCHASE
ORDERS");
(d) All of the purchase orders, Contracts and agreements for
the sale of goods and services (the "CUSTOMER PURCHASE ORDERS");
(e) All of the other Contracts, policies (to the extent
relating solely to the Division or Business), indentures, instruments,
guaranties, other similar arrangements and rights thereunder relating to the
Business (the "OTHER CONTRACTS"); and
(f) All Permits.
1.3. EXCLUDED ASSETS. The following assets of Seller, as well as any
other assets of Seller not identified or described as being sold or assigned to
Purchaser in this Agreement, shall be retained by Seller and are not being sold
or assigned to Purchaser hereunder (all of the following are referred to
collectively as the "EXCLUDED ASSETS"):
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(a) Cash;
(b) The corporate charter, qualifications to conduct business
as a foreign corporation, arrangements with registered agents relating to
foreign qualifications, taxpayer and other identification numbers, corporate
minute book, seal stock register and other corporate and organizational
documents and records of Seller relating to the organization, maintenance and
existence of Seller as a corporation;
(c) Income tax records (except that Purchaser shall have the
right to inspect and copy the same as may be reasonably necessary in connection
with its own tax liability or tax liabilities arising from the transactions
contemplated hereby);
(d) Permits to the extent the same are not assignable;
(e) Rights of Seller under this Agreement (or under any other
agreement between the Seller, on the one hand, and the Purchaser or Parent, on
the other hand); and
(f) Any items relating to the payment of Taxes for periods
prior to the Closing, including refunds of Taxes paid by Seller prior to the
Closing.
1.4. ASSUMED OBLIGATIONS. Except as set forth in SECTION 1.5, Purchaser
shall, on the Closing Date, assume, and agree to pay, perform, fulfill and
discharge, all of the debts, liabilities, responsibilities and obligations of
the Business (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due), including, without limitation:
(a) All liabilities and obligations of the Business under the
agreements, contracts, leases, licenses, permits, and other arrangements
referred to in the definition of Acquired Assets;
(b) All liabilities and obligations of the Business under
outstanding product and service warranty obligations as of the Closing Date;
(c) Employment and other related obligations to the Employees
to the extent provided for in ARTICLE VI hereof; and
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(d) All liabilities and obligations of or relating to the
Business with respect to environmental matters, including without limitation
those arising under Environmental, Health, and Safety Requirements.
All of the liabilities and obligations of Seller and the Business
assumed pursuant to this SECTION 1.4 or elsewhere in this Agreement are
collectively referred to herein as the "ASSUMED OBLIGATIONS."
1.5. NO OTHER LIABILITIES ASSUMED. Anything in this Agreement to the
contrary notwithstanding, but subject to ARTICLE VI hereof (to the extent
applicable), neither Purchaser nor any of its affiliates shall assume, and shall
not be deemed to have assumed, any debt, claim, obligation or other liability of
Seller or any of its affiliates whatsoever other than as specifically set forth
in SECTION 1.4 including, but not limited to:
(a) any Liability of Seller for unpaid Taxes (deferred or
currently payable) or for income, transfer, sales, use or any other Taxes of
Seller arising as a result of the consummation of the transactions contemplated
hereby, or for any Liability of the Seller to any Authority on account of
amounts required to be withheld or collected from salaries or wages of Persons
in its employ under any income tax, social security, medicare or similar law
applicable to such Persons ("employment taxes") (other than (i) employment and
sales taxes which have been collected by Seller after the date of the September
30 Balance Sheet and prior to the Closing Date in accordance with applicable law
and are not then due and payable and (ii) unpaid real estate Taxes through the
Closing Date which are not then due and payable, in each case to the extent
reflected on the Closing Balance Sheet and which, in each case, shall be deemed
to be Assumed Obligations for purposes of this Agreement and shall be assumed
and paid by the Purchaser).
(b) Brokers or finders' fees, or other liability of Seller for
costs and expenses (including accounting and legal fees and expenses and all
fees and expenses payable to Donaldson, Lufkin & Jenrette) incurred in
connection with this Agreement or the consummation of the transactions
contemplated hereby;
(c) Liabilities or obligations of Seller under this Agreement
(or under any other agreement between Seller on the one hand and the Purchaser
on the other hand entered into on or after the date of this Agreement);
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(d) Liabilities or obligations in respect of Seller's
indebtedness for borrowed money (including principal, interest, prepayment or
other penalty or premium incurred with respect to the IRB Indebtedness and
capitalized lease obligations);
(e) any obligation of Seller to indemnify any Person by reason
of the fact that such Person was a director, officer, employee, or agent of
Seller or was serving at the request of any such entity as a partner, trustee,
director, officer, employee, or agent of another entity (whether such
indemnification is for judgments, damages, penalties, fines, costs, amounts paid
in settlement, losses, expenses or otherwise and whether such indemnification is
pursuant to any statute, charter document, bylaw, agreement or otherwise);
(f) any Liability or obligation of Seller under the Employee
Benefit Plans (other than any Liability or obligation expressly assumed by
Purchaser under ARTICLE VI hereof, but only to the extent reflected on the
Closing Balance Sheet, which shall be deemed Assumed Obligations for purposes of
this Agreement);
(g) any Liability or obligation of Seller to the officers,
directors, stockholders or Affiliates of Seller;
(h) any Liability or obligation (including any termination
Liability) of Seller with respect to any lease, contract, commitment,
understanding, or agreement not listed in SECTION 3.12 of the Disclosure
Schedule to the extent required to be disclosed by the terms of SECTION 3.12
hereof;
(i) any Liability or obligation relating to assets of Seller
other than the Acquired Assets;
(j) any Liability or obligation of Seller imposed by the
Worker Adjustment Retraining and Notification Act in connection with the notice
or failure to provide notice of a plant closing, mass layoff or termination of
employees prior to the Closing;
(k) any Liability of the Division, the Business or any of the
Acquired Assets in respect of intercompany indebtedness or intercompany accounts
payable; and
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(l) any Liability of the Division, the Business or any of the
Acquired Assets in respect of the employment discrimination matters disclosed in
SECTION 3.15 of the Disclosure Schedule.
The assumption by Purchaser of the Assumed Obligations shall not in any
way expand the rights or remedies of any third party against Purchaser or Seller
as compared to the rights and remedies which such third party would have had
against any such party had Purchaser not assumed such liabilities. Without
limiting the generality of the foregoing, the assumption by Purchaser of the
Assumed Obligations shall not create any third party beneficiary rights in favor
of any third party. Seller shall pay and discharge when due all of its
Obligations that Purchaser has not specifically agreed to assume pursuant to
SECTION 1.4 hereof.
The liabilities and obligations of Seller and the Business specified
above in this SECTION 1.5 are referred to herein as the "EXCLUDED LIABILITIES."
ARTICLE II
PURCHASE PRICE AND PAYMENT
2.1. PAYMENT OF PURCHASE PRICE. At the Closing, Purchaser agrees to pay
to Seller $31,800,000.00 for the Acquired Assets and to assume the Assumed
Obligations. Such amount shall be payable by wire transfer of immediately
available funds to an account designated by Seller. Such $31,800,000.00, as
adjusted by the Purchase Price Adjustment pursuant to SECTION 2.2 hereof, is
referred to herein as the "Purchase Price."
2.2. CLOSING BALANCE SHEET; PURCHASE PRICE ADJUSTMENT. (a) As promptly
as practicable but in any event within 60 days following the Closing Date,
Seller shall prepare, or cause to be prepared, and deliver to Purchaser an
unaudited pro forma balance sheet of the Division as of the close of business on
the day immediately preceding the Closing Date (the "CLOSING BALANCE SHEET").
There shall be attached to the Closing Balance Sheet an annex setting forth in
reasonable detail Seller's computation of the Purchase Price Adjustment (as
defined in SECTION 2.2(D)). For purposes of calculating the Purchase Price
Adjustment, Purchaser and Seller have prepared the modified September 30 Balance
Sheet attached hereto (the "Modified September 30 Balance Sheet") included in
Section 2.2(a) of the Disclosure Schedule.
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(b) The Closing Balance Sheet shall be prepared in accordance
with GAAP, as modified by the principles utilized to prepare the Modified
September 30 Balance Sheet, determined as of the close of business on the day
immediately preceding the Closing Date and applied on a consistent basis (it
being acknowledged, for the purposes of clarity, that reserves shall be created,
modified or reversed only in accordance with Seller's past policies and
practices); except that (i) no Excluded Asset (including, without limitation,
Cash) shall be included on the Closing Balance Sheet; (ii) no Excluded Liability
or reserve therefor (including, without limitation, all Existing Indebtedness
not assumed by Purchaser) shall be included on the Closing Balance Sheet; (iii)
no deferred income tax asset or income tax liability shall be included on the
Closing Balance Sheet; (iv) no income tax asset or income tax liability shall be
included on the Closing Balance Sheet; (v) no allocation of corporate expenses
shall be included on the Closing Balance Sheet; (vi) no property, plant or
equipment shall be revalued; (vii) goodwill shall not be revalued; (viii) the
allowance for doubtful accounts receivable on the Closing Balance Sheet shall be
the greater of $64,405 or 2.3% of the gross accounts receivable outstanding;
(ix) the reserve for customer product returns on the Closing Balance Sheet shall
be the greater of $43,083 or 1.5% of gross accounts receivable outstanding and
(x) no Liability or reserve therefor with respect to employee compensation or
benefit matters (including under any Employee Benefit Plan) shall be accrued or
reflected on the Closing Balance Sheet except for accruals in the ordinary
course of business consistent with past practices. The Closing Balance Sheet
shall include appropriate accruals through the Closing Date for all Assumed
Obligations.
(c) The Closing Balance Sheet delivered by Seller to Purchaser
and the computation of the Purchase Price Adjustment annexed thereto shall be
conclusive and binding upon the parties unless Purchaser, within 30 days after
the delivery to Purchaser of the Closing Balance Sheet, notifies Seller in
writing that Purchaser disputes any of the amounts set forth therein, specifying
the nature of the dispute and the basis therefor. The parties shall in good
faith attempt to resolve any dispute, in which event the Closing Balance Sheet
and the computation of the Purchase Price Adjustment, as amended to the extent
necessary to reflect the resolution of the dispute, shall be conclusive and
binding upon the parties. If the parties do not reach agreement resolving all of
the matters in dispute within 30 days after notice is given by Seller to
Purchaser pursuant to the second preceding sentence, the parties shall submit
the remaining matters in dispute to the department specializing in dispute
resolution of the New York office
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of KPMG LLP for resolution; provided, that if KPMG LLP has had a material
relationship with any of Purchaser, Parent or Seller or any of their respective
affiliates within the two years preceding the appointment or KPMG LLP refuses to
accept such appointment, the parties shall submit the remaining matters in
dispute to such other nationally recognized independent accounting firm that is
mutually agreeable to the parties, which firm shall not have had a material
relationship with any of Purchaser, Parent or Seller or their respective
affiliates within the two years preceding the appointment (such accounting firm,
the "ARBITER"), for resolution. If the parties cannot agree on the selection of
such an independent accounting firm to act as Arbiter, the parties shall request
the American Arbitration Association to appoint such a firm, and such
appointment shall be conclusive and binding upon the parties. Promptly, but no
later than 30 days after its acceptance of its appointment as Arbiter, the
Arbiter shall determine, based solely on presentations by Purchaser and Seller,
and not by independent review, only those issues in dispute and shall render a
written report as to the dispute and the resulting computation of the Closing
Balance Sheet and the Purchase Price Adjustment, if any, which shall be
conclusive and binding upon the parties. In resolving any disputed item, the
Arbiter (x) shall make its determination in accordance with the provisions of
this SECTION 2.2 and the other provisions of this Agreement to the extent
expressly relating to this SECTION 2.2 and the matters in dispute (provided
that, whether or not Purchaser has an indemnification right hereunder with
respect to any matter shall not be taken into account for purposes of the
preparation of the Closing Balance Sheet or any dispute in connection
therewith), (y) shall be bound by the provisions of paragraph (b) of this
SECTION 2.2, and (z) may not assign a value to any item greater than the
greatest value for such item claimed by either party or less than the smallest
value for such item claimed by either party. The fees, costs and expenses of the
Arbiter (i) shall be borne by Purchaser in the proportion that the aggregate
dollar amount of such disputed items so submitted that are unsuccessfully
disputed by Purchaser (as finally determined by the Arbiter) bears to the
aggregate dollar amount of such items so submitted and (ii) shall be borne by
Seller in the proportion that the aggregate dollar amount of such disputed items
so submitted that are successfully disputed by Purchaser (as finally determined
by the Arbiter) bears to the aggregate dollar amount of such items so submitted.
Parent and Purchaser, on the one hand, and Seller, on the other hand, each shall
make available to the other (upon the request of the other) their respective
work papers generated in connection with the preparation or review of the
Closing Balance Sheet.
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(d) As used herein, (i) the term "FINAL CLOSING BALANCE SHEET"
shall mean the Closing Balance Sheet which has become conclusive and binding
upon the parties pursuant to paragraph (c) of this SECTION 2.2, (ii) the term
"CLOSING BOOK VALUE" shall mean the amount obtained by subtracting the Assumed
Obligations, as set forth in the Final Closing Balance Sheet, from the Acquired
Assets, as set forth in the Final Closing Balance Sheet (which shall be the
amount corresponding to the "Division Equity" on the Modified September 30
Balance Sheet), and (iii) the term "TARGET BOOK VALUE" shall mean $8,007,877.00,
being the "Division Equity" as set forth in Modified September 30 Balance Sheet.
The difference between the Target Book Value and the Closing Book Value shall be
the "PURCHASE PRICE ADJUSTMENT." If the Target Book Value exceeds the Closing
Book Value, Seller shall pay to Purchaser an amount equal to the Purchase Price
Adjustment in accordance with the provisions of paragraph (e) of this SECTION
2.2. If the Closing Book Value exceeds the Target Book Value, Purchaser shall
pay to Seller an amount equal to the Purchase Price Adjustment in accordance
with the provisions of paragraph (e) of this SECTION 2.2.
(e) The amount of any Purchase Price Adjustment shall bear
interest at an annual rate equal to the reference rate from time to time of The
Chase Manhattan Bank N.A. from and including the Closing Date to, but not
including, the date of payment. Any amount payable as Purchase Price Adjustment
(plus interest determined pursuant to the immediately preceding sentence) shall
be paid by wire transfer of immediately available funds to an account designated
in writing by Seller or Purchaser, as applicable. Such payment shall be made on
the third business day following (i) the last day on which Purchaser may,
pursuant to the first sentence of paragraph (c) of this SECTION 2.2, notify
Seller that it disputes any of the amounts set forth in the Closing Balance
Sheet, if Purchaser shall not notify Seller of any dispute, or such earlier date
as Purchaser shall advise Seller of the absence of any dispute, or (ii) the date
mutual agreement is reached as to the amount of the Purchase Price Adjustment,
if any, in the event of a dispute that is settled by the parties without resort
to the Arbiter, or (iii) the receipt of the report of the Arbiter in the event
of a dispute which is settled by the Arbiter, as applicable.
(f) Seller shall provide Purchaser and its accountants
reasonable access to the books and records of the Division and to any other
information, including work papers of its accountants, to the extent reasonably
necessary for the Purchaser to review the Closing Balance Sheet. Purchaser shall
provide Seller and its accountants with reasonable
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access to the books, records, facilities and personnel of the Business and to
any other information, including work papers of its accountants, to the extent
reasonably necessary for Seller in connection with the preparation of the
Closing Balance Sheet and in connection with any objections to the Closing
Balance Sheet raised by Purchaser.
(g) Each of the parties hereto shall have the right to offset
amounts then owing or subject to an outstanding Claim in respect of the other
party's indemnification obligations pursuant to ARTICLE X hereof (subject in any
event to the application of any deductible or cap with respect to such
indemnification) against any amount due in respect of the Purchase Price
Adjustment. Any setoff made in respect of an outstanding Claim, however, shall
be subject to reversal in accordance with the final resolution of the relevant
outstanding Claim, and, promptly after such final resolution, the Seller shall
pay to the Purchaser, or the Purchaser shall pay to the Seller, as applicable,
an amount such that, after any effect thereto, the total payments made in
respect of the Purchase Price Adjustment properly reflect such final resolution
and the accrued interest on the amount of the setoff computed from Closing Date
at the rate provided in SECTION 2.2(E).
2.3. ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be
allocated in the manner described in SECTION 2.3 of the Disclosure Schedule, it
being understood that, on or prior to the 15th business day after the Closing
Balance Sheet is finally determined, the Parent and the Purchaser shall
establish the values applicable to the Acquired Assets in a reasonably
supportable manner consistent with Section 2.3 of the Disclosure Schedule and
provide written notice to the Seller of the values so established. Any
adjustment to the Purchase Price pursuant to SECTION 2.2 hereof or otherwise
shall be allocated in a manner consistent with SECTION 2.3 of the Disclosure
Schedule and as required by the relevant tax laws. Seller, Parent and Purchaser
further agree to file all income tax returns or reports, including, without
limitation, IRS Form 8594, for their respective taxable years in which the
Closing occurs and to reflect the allocation of Purchase Price described in this
SECTION 2.3 on any such return or report and, unless required by the relevant
tax laws, agree not to take any position inconsistent therewith before any
governmental agency charged with the collection of any Taxes or in any judicial
proceeding.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to each of Purchaser and Parent as of
the date hereof and as of the Closing Date as set forth below. The information
disclosed in any section of the Disclosure Schedule attached hereto shall be
deemed to relate solely to the section of this ARTICLE III to which such section
of the Disclosure Schedule relates and shall not be deemed made for other
sections of this ARTICLE III to which such disclosure may apply unless (1) it is
readily apparent that such information is clearly applicable to another section
of this Article III or (2) such disclosure is cross-referenced in the
Schedule(s) relating to such other section(s), and, in each such case, only to
the extent that the applicable information or risk is described.
3.1. DUE INCORPORATION, ETC. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
with all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. Seller is duly
qualified to transact business as a foreign corporation and in good standing in
the State of New Hampshire and each other state in which the nature of the
Business requires such qualification, a list of which is set forth in SECTION
3.1 of the Disclosure Schedule.
3.2. CORPORATE AUTHORITY; ENFORCEABILITY; CONFLICTS. (a) The execution,
delivery and performance by Seller of this Agreement and all agreements,
certificates and other instruments executed and delivered pursuant hereto by
Seller ("SELLER'S ANCILLARY DOCUMENTS"), and the consummation by Seller of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action on the part of Seller. Each of this Agreement and
each of Seller's Ancillary Documents has been, or will have been, duly and
validly executed and delivered by Seller, and constitutes or will constitute,
the legal, valid and binding obligation of Seller, enforceable in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws from time to
time in effect which affect creditors' rights generally, and by legal and
equitable limitations on the availability of specific remedies.
(b) Except as specified in SECTION 3.2 of the Disclosure
Schedule or as would not reasonably be expected to have a Material
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Adverse Effect on the Business or on the ability of Seller to consummate the
transactions contemplated hereby, the execution, delivery and performance of
this Agreement and all of Seller's Ancillary Documents by Seller will not:
(i) violate any Order applicable to the interest of
Seller in any of the Acquired Assets, the Assumed Obligations
or the Division;
(ii) violate any Regulation binding on Seller, any of
the Acquired Assets, the Assumed Obligations or the Division;
(iii) violate or conflict with, or result in a breach
of, or constitute a default (or an event which, with or
without notice or lapse of time or both, would constitute a
default) under, or give rise to any event creating rights of
acceleration, termination, modification or cancellation under
any material Contract to which the Division is a party, or by
which the Division or any of the Acquired Assets or the
Assumed Obligations are bound; or
(iv) result in the creation of any Lien upon the
Acquired Assets; or
(v) violate, conflict with or result in any breach of
any provision of the certificate of incorporation or bylaws
(or comparable organizational documents) of Seller;
(c) SECTION 3.2 of the Disclosure Schedule sets forth each
consent, approval, permit, act, amendment, novation or waiver of any third party
(each a "CONSENT") necessary to prevent the occurrence of a violation, conflict,
breach, default, with or without due notice or lapse of time or both, or event
creating rights of acceleration, termination, modification or cancellation by
reason of the execution, delivery and performance of this Agreement and Seller's
Ancillary Documents by Seller, except for Consents which, if not obtained, would
not, individually or in the aggregate, result in a Material Adverse Effect on
the Division, or materially adversely affect the consummation of the
transactions contemplated hereby or the conduct of the Business after the
Closing. Seller agrees to use commercially
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reasonable efforts to obtain such Consents as provided in SECTION 5.1 hereof,
provided that Seller shall obtain the consents specified in paragraphs (a) - (c)
of SECTION 3.2 of the Disclosure Schedule satisfactory in form and substance to
the Purchaser.
3.3. PERMITS; COMPLIANCE WITH LAW; CONSENTS. The Division holds all of
the Permits described in SECTION 3.3 of the Disclosure Schedule, and no other
Permits are currently necessary for the lawful operation of the Division or the
use of the Real Property, except for those the absence of which would not
reasonably be expected to have a Material Adverse Effect on the Division. Seller
is not in violation of any Regulation to which the Division, Acquired Assets or
Assumed Obligations are subject, except for such violations as would not
reasonably be expected to have a Material Adverse Effect on the Division. Except
as set forth in the Disclosure Schedule and for the applicable requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
ACT"), no notice to, filing with, authorization of, exemption by, or Consent of
any Authority is required for Seller to consummate the transactions contemplated
hereby or by the Seller's Ancillary Documents.
3.4. FINANCIAL STATEMENTS AND CONDITION. Seller has delivered to
Purchaser copies of the Financial Statements, true and correct copies of which
are attached to the Disclosure Schedule. The Financial Statements, including the
notes thereto, (i) were prepared in accordance with GAAP applied on a consistent
basis throughout the periods covered thereby, (ii) present fairly the financial
position, results of operations and changes in cash flows of the Division as of
such dates and for the periods then ended (subject, in the case of unaudited
interim Financial Statements, to normal year-end audit adjustments consistent
with prior periods), (iii) have been derived from the books and records of
account of Seller, and (iv) can be reconciled with the financial statements and
the financial records maintained and the accounting methods applied by Seller
for federal income tax purposes.
3.5. CERTAIN CHANGES. Since December 31, 1998, Seller has conducted its
business only in the ordinary and usual course and, except as set forth in
SECTION 3.5 of the Disclosure Schedule, there has been no Material Adverse
Change in the assets, properties, business, operations, prospects, customer,
supplier or employee relations, net income or condition (financial or otherwise)
of the Division taken as a whole or in the ability of Seller to perform this
Agreement, the Ancillary Documents and the transactions contemplated hereby and
thereby, and there is no event,
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condition, circumstance or prospective development which, to the Seller's
knowledge, threatens to cause such a Material Adverse Change. Without limiting
the generality of the foregoing, except as specified in SECTION 3.5 of the
Disclosure Schedule, since December 31, 1998, there has not been (i) any
Material Adverse Change with respect to the Division, (ii) any material loss or
damage (whether or not covered by insurance) to any of the Acquired Assets,
which materially affects or impairs the ability of Seller to conduct the
business of the Division, or any other event or condition of any character which
has materially and adversely affected the business or operation of the Division,
(iii) any contract or other transaction entered into by Seller relating to, or
otherwise affecting in any way, the Division or the operation thereof, other
than in the ordinary course of business, (iv) any sale or transfer of the
Acquired Assets, except items of the Inventories which have been sold in the
ordinary course of business, or any cancellation of any debts or claims of
Seller, except in the ordinary course of business consistent with past
practices, (v) any material changes in the terms of any instruments, accounts,
notes, Contracts, or other instruments that are Assumed Obligations, except in
the ordinary course of business (vi) any changes in the accounting or tax
systems, policies or practices of Seller, (vii) any material waiver by Seller of
any rights which have any value, except in the ordinary course of business
consistent with past practices or (viii) any transactions out of the ordinary
course of business with any of Seller's affiliates, (ix) any Liability or
obligation (whether directly or by way of guarantee or otherwise) incurred by
the Division other than in the ordinary course of business consistent with past
practices, or any obligation to repay prematurely any borrowed money, (x) any
material change in the credit policies or practices of the Division, (xi) any
increases in the rate or terms of compensation (including termination and
severance pay) payable or to become payable by the Division to directors,
officers or employees, or increases in the rate or terms of any bonus,
insurance, pension or other employee benefit plan, program or arrangement made
to, for or with any such directors, officers or employees, except increases
occurring in the ordinary course of business consistent with past practice or as
required by applicable law, or any new or amended employment, severance or
termination agreement with any such Person, (xii) any change to any of its
business policies, including advertising, licensing, investment, marketing,
pricing, purchasing, production, personnel, sales, returns, budget and product
acquisition policies, in each case, other than in the ordinary course of
business and where such change, singly or together with other such changes, has
not had a Material Adverse Effect on the Division, (xiii) any receipt of any
advances or prepayments on or prior to the Closing Date with
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respect to products to be delivered or services to be performed by Purchaser
after the Closing Date, (xiv) engaged in any other transaction other than in the
ordinary course of business, or (xv) agreed, in writing or orally, to do any of
the foregoing.
3.6. TITLE TO ACQUIRED ASSETS. Except for leased assets, Seller has
full, unconditional, good and marketable title to the personal property and real
property included in the Acquired Assets, free and clear of any Lien, except as
referred to SECTION 3.7 hereof and as disclosed in SECTION 3.6 of the Disclosure
Schedule and except for minor Liens, defects or other restrictions (other than
security interests) which do not, individually or in the aggregate, materially
detract from the value or materially interfere with the present use of such
property or the Leased Property (each such minor Lien, defect or other
restriction, a "PERMITTED LIEN"). All financing statements or similar
instruments filed by any party with respect to the Acquired Assets are specified
in SECTION 3.6 of the Disclosure Schedule. Except for such financing statements,
there are not any Liens, defects in title or other restrictions to which the
real or personal property included in the Acquired Assets is subject except for
Permitted Liens. At and as of the Closing, Seller will convey the Acquired
Assets to Purchaser by deeds, bill of sale, certificates of title and
instruments of assignment and transfer effective to vest in Purchaser, and
Purchaser will have, good title to all of the Acquired Assets, free and clear of
all Liens, except for Permitted Liens.
3.7. REAL PROPERTY LEASES. SECTION 3.7 of the Disclosure Schedule lists
all leases pursuant to which Seller holds any real property used in connection
with the Division. Other than the Facility, Seller does not own any real
property which is used in the operation of the Business, and no other real
property is included within the Acquired Assets. The Leased Property is leased
by Seller pursuant to the Lease, a true and correct copy of which is attached to
the Disclosure Schedule. The Lease provides that all improvements constructed on
the Leased Property, including the Facility and all fixtures, equipment,
personal property and appurtenances thereto, shall be the property of Seller and
shall be removed by Seller at the termination of the Lease unless otherwise
agreed by the Lessors. The Lease is in full force and effect and is valid,
binding and enforceable with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
similar laws from time to time in effect which affect creditors' rights
generally, and by legal and equitable limitations on the availability of
specific remedies. Except to the extent of any required Consent to the
assignment of the Lease to Purchaser, there exists no default by Seller or event
or condition which,
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with notice or lapse of time or both, would constitute a default by Seller under
the Lease. There exists no default by Lessors or, to Seller's knowledge, any
event or condition which, with notice or lapse of time or both, would constitute
a default by Lessors under the Lease. The Lease has not been amended or
modified, whether orally or in writing. Seller has not assigned the Lease or any
of its right, title or interest thereunder.
3.8. EQUIPMENT. Seller has previously provided to Purchaser its most
recent regularly generated list of all of the Equipment. The Equipment and Other
Personal Property Leases listed in SECTION 3.8 of the Disclosure Schedule
includes all leases by the Division of any item of personal property used in
connection with the business and operation of the Division. The majority of the
items of machinery, equipment and other tangible assets included among the
Acquired Assets has been in use for more than ten years and, giving due
consideration to the age of such items, is in good operating condition,
reasonable wear and tear excepted, and has been maintained and repaired on a
regular basis so as to preserve its utility and value. The equipment included in
the Acquired Assets (whether owned or leased by Seller) is adequate and
sufficient to conduct the Business as presently conducted. Except as set forth
in SECTION 3.6 of the Disclosure Schedule, Seller is not aware of (i) any
Acquired Assets which require substantial repair or replacement, (ii) any
manufacturer, supplier or servicer of any Acquired Assets which has terminated
its operations and for which there is no readily available comparable
replacement; or (iii) any other facts or circumstances which would adversely
affect Purchaser's ability to obtain repair or replacement products, parts or
services with respect to any Acquired Assets after the Closing. Seller has
delivered to Purchaser true, correct and complete copies of all Equipment and
Other Personal Property Leases.
3.9. INTELLECTUAL PROPERTY. SECTION 3.9 of the Disclosure Schedule is
an accurate and complete list of all of the United States and foreign patents,
patent applications, patent licenses, service names, service marks, trade names,
trademarks, trade name and trademark registrations (and applications therefor),
copyrights and copyright registrations (and applications therefor) used in
connection with or relating to the business and operation of the Business. All
of the Intellectual Property is owned by Seller free and clear of all
encumbrances or has been duly licensed for use by Seller except as set forth in
SECTION 3.9 of the Disclosure Schedule. Except as set forth in SECTION 3.9 of
the Disclosure Schedule, none of the Intellectual Property has been or is the
subject of any pending adverse Claim, or, to the Seller's knowledge, any
threatened Claim of infringement
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nor, to the Seller's knowledge, is there any basis for such a Claim. Except as
described in SECTION 3.9 of the Disclosure Schedule, the Division has not
received any notice contesting its right to use any Intellectual Property now
used by it in connection with the Business or the operation thereof. Except as
set forth in SECTION 3.9 of the Disclosure Schedule, Seller has not granted any
license in respect of any Intellectual Property. The Intellectual Property
rights constitute all of the proprietary rights that are used in or necessary
for the conduct of the Business as currently being conducted, and Seller is not
subject to any judgment, order, writ, injunction or decree of any Authority, or
has entered into or is a party to any contract which restricts or impairs the
use of any such Intellectual Property. Notwithstanding any limitations or
qualifications of, or exceptions to (whether in the Disclosure Schedule attached
hereto or otherwise) any other representation and warranty contained in this
Article III, (i) there are no Liabilities or obligations of Seller or its
affiliates of any kind whatsoever (whether accrued or not and whether absolute
or contingent, known or unknown or due or to become due) with respect to Claims
relating to the validity of, or the Division's ownership of or right to use, the
Intellectual Property or alleged infringement by the Division of the
intellectual property of any other Person; (ii) there is no valid basis for the
assertion of any such Liabilities or obligations, whether or not accrued and
whether or not absolute or contingent, known or unknown or due or to become due;
and (iii) there is no existing condition, situation or set of circumstances
which will result in such a Liability or obligation, except in the case of items
(i), (ii) and (iii) of this sentence, for such Liabilities or obligations which
would not have, individually or in the aggregate, a Material Adverse Effect on
the Business. Except as described in SECTION 3.9 of the Disclosure Schedule,
Seller does not pay to or receive any royalty from any Person under any of the
Intellectual Property. Assuming the execution and delivery and, where
applicable, recording of assignments in proper form, all rights of the Division
in and to the Intellectual Property will be unaffected by the transactions
contemplated by this Agreement. The Intellectual Property rights are valid and
enforceable and no relevant application, patent or registration relating thereto
has (except as indicated in SECTION 3.9 of the Disclosure Schedule) lapsed,
expired, or been abandoned or cancelled or is the subject of cancellation or
other adversarial proceeding and (except as indicated in SECTION 3.9 of the
Disclosure Schedule) all pending applications are in good standing, subject to
in each case, to such exceptions would not have, individually or in the
aggregate, a Material Adverse Effect on the Business. Seller has complied with
its contractual obligations
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relating to the protection of the Intellectual Property used pursuant to
licenses.
3.10. CUSTOMER AND SUPPLIER LISTS. (a) SECTION 3.10 of the Disclosure
Schedule contains a true and complete list of all customers and accounts of
Seller in respect of the Division which produced gross sales in excess of
$50,000 during the year ended December 31, 1998 or the nine months ended
September 30, 1999 and (b) all suppliers of the Division which furnished 1% or
more of all products or supplies furnished to the Division during the year ended
December 31, 1998 or the nine months ended September 30, 1999.
(b) During the twelve months preceding the date hereof and the
twelve months prior to the Closing Date (as applicable), Seller has not done
anything to materially adversely affect the Division's relationship with any
such customers or suppliers, and no such customer or supplier has terminated or
changed significantly its relationship with the Division. No customer or
supplier of the Division has threatened to terminate or change significantly its
relationship with the Division on or after the Closing Date, nor, to the
Seller's knowledge, will the transactions contemplated by this Agreement
adversely affect the relationship of the Division with any of its customers or
suppliers. Seller has not granted or received from any customer, supplier or any
other Person (collectively, "OTHER PARTIES") more favorable terms or conditions
with respect to the operation of the Business based on the payment of any funds
or transfer of any asset of Seller or any Related Party, directly or indirectly,
to Other Parties or employees, agents or Affiliates of Other Parties or based on
the relationship of Other Parties or employees, agents or Affiliates of Other
Parties to Seller or any Related Party. Set forth on SECTION 3.10 of the
Disclosure Schedule is a description of any credit or other sales terms provided
by Seller or Other Parties in connection with sales of products or services by
the Division. Seller has not granted any credit or other sales terms to
customers or others inconsistent with its prior practices or general industry
practice.
3.11 ABSENCE OF UNDISCLOSED LIABILITIES. Notwithstanding any
limitations or qualifications of, or exceptions to, (whether in the Disclosure
Schedule or otherwise) any other representation and warranty contained in this
ARTICLE III, there are no Liabilities, commitments or obligations of the
Division of any kind whatsoever, and, to Seller's knowledge, there is no valid
basis for the assertion of any such Liabilities, commitments or obligations,
and, to Seller's knowledge, there is no existing condition, situation or set of
circumstances which is reasonably likely to result in such
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a Liability, commitment or obligation, other than (a) liabilities and
obligations to the extent and in the amounts set forth on the September 30
Balance Sheet (none of which results from, arises out of, relates to, is in the
nature of or was caused by any breach of contract, breach of warranty, tort,
infringement or violation of law), (b) additional accruals of liabilities and
obligations incurred, in each case, in the ordinary course of business
consistent with past practices subsequent to the date of the September 30
Balance Sheet and prior to the date hereof or the Closing Date (as applicable),
provided that none of such additional accruals results from, arises out of,
relates to, is in the nature of, or was caused by any breach of contract, breach
of warranty, tort, infringement or violation of law or relates to indebtedness
for borrowed money or inter-company debt or debt owed to Affiliates, (c)
obligations in respect of the performance of Contracts, Permits or other items
containing continuing obligations specified in the Disclosure Schedule (or not
required, pursuant to the provisions of this Agreement, to be so specified),
none of which results from, arises out of, relates to, is in the nature of, or
was caused by any breach of contract, breach of warranty, tort, infringement or
violation of law or relates to indebtedness for borrowed money or inter-company
debt or debt owed to Affiliates and (d) the Excluded Liabilities.
3.12. CONTRACTS. SECTION 3.12 of the Disclosure Schedule contains a
list of all Contracts (other than purchase or sales orders made in the ordinary
course of business consistent with the past practices of the Division) as
provided below relating to the Division, the Acquired Assets and the Assumed
Obligations the performance of which will involve consideration in excess of
$25,000. Seller has delivered to Purchaser true and correct copies of each
listed document and a written description of each oral Contract so listed.
SECTION 3.12 of the Disclosure Schedule includes all the Contracts the
performance of which will involve consideration in excess of $25,000 and
includes the following types to which the Division is a party or by which it is
bound relating to the Business or the operation thereof, or to which any of the
Acquired Assets or Assumed Obligations is subject: (a) any pension, retirement,
deferred compensation, profit sharing, incentive compensation, bonus, stock
purchase, stock option, welfare, hospitalization or insurance plan or
arrangement or any vacation pay or severance pay or any other employee benefit
arrangement for its officers, employees, consultants or agents whether pursuant
to a Contract or pursuant to custom or informal understanding; (b) all Contracts
of any kind with any executive, director, or stockholder of Seller, relating to
present or future compensation or other benefits available to such person or
otherwise; (c) any contract,
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purchase order or other arrangement of any kind with any person or entity
affiliated with or controlled by (or with power to control) any officer,
director, employee or stockholder; (d) any Contract with a broker, sales agency,
advertising agency or other person engaged in sales, distributing or promotional
activities; (e) a summary schedule of all Customer Purchase Orders and Seller
Purchase Orders; (f) any commitment or arrangement pursuant to which Seller has
made or will make loans or advances, or has or will have incurred debts or
become a guarantor or surety or pledged its credit on or otherwise become
responsible with respect to any undertaking of another (except for the
negotiation or collection of negotiable instruments in transactions in the
ordinary course of business); (g) any indentures, credit agreements, loan
agreements, notes, mortgages, security agreements, leases of real property or
material leases of personal property and agreements for financing; (h) any
Contract involving a partnership, joint venture or other cooperative
undertaking, or involving any restrictions of the geographical area of
operations or scope or type of business of the Seller; (i) all Contracts with
sales representatives, distributors and dealers; (j) any power of attorney or
agency agreement or arrangement with any party pursuant to which such party is
granted the authority to act for or on behalf of the Division; (k) any property,
casualty and other forms of insurance; (l) Contracts under which the
requirements for performance extend beyond 60 days from the date of this
Agreement; (m) all bank accounts of any type of Seller; and (n) all other
contracts not made in the ordinary course of business which are to be performed
at or after the date of this Agreement.
3.13. EMPLOYEE BENEFIT PLANS. SECTION 3.13 of the Disclosure Schedule
lists each Employee Benefit Plan that the Division maintains or to which the
Division contributes.
(a) To the knowledge of Seller, each such Employee Benefit
Plan (and each related trust, insurance contract, or fund) complies in form and
in operation in all respects with the applicable requirements of ERISA and the
Code, except where the failure to comply would not reasonably be expected to
have a Material Adverse Effect on the Division.
(b) All contributions (including all employer contributions
and employee salary reduction contributions) which are due have been paid to
each such Employee Benefit Plan which is an Employee Pension Benefit Plan.
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(c) Each such Employee Benefit Plan which is an Employee
Pension Benefit Plan has received a determination letter from the Internal
Revenue Service to the effect that it meets the requirements of Code Section
401(a).
(d) Seller has delivered to Purchaser correct and complete
copies of the plan documents and summary plan descriptions relating to each such
Employee Benefit Plan.
(e) Except as set forth in Schedule 3.13, the Seller
(including any affiliate) is not as of the date hereof sponsoring, maintaining,
contributing to, incurring any obligation to contribute to or has any liability
with respect to, (i) an employee benefit plan as defined in Section 3(3) of the
ERISA or Section 414(f) of the Code that is subject to Title IV of ERISA,
Section 302 of ERISA or Section 412 of the Code or (ii) any multi-employer plan
(as defined in Sections 3(37) and 4001(a)(3) of ERISA). The Seller has not
maintained or contributed to any plan described in this SECTION 3.13(E) in the
past 6 years.
(f) With respect to any plans set forth in Schedule 3.13, each
such plan is in compliance with the requirements provided by ERISA, the Code,
and any other laws or regulations applicable to such plans. Each such plan and
its related trust intended to qualify under Sections 401(a) and 501(a) of the
Code is so qualified and nothing has occurred and no condition exists that could
cause the loss of such qualification. With respect to each such plan (i) no
prohibited transaction as defined in Section 406 of ERISA or Section 4975 of the
Code has occurred and (ii) no prohibited transaction will occur by virtue of the
consummation of the transactions contemplated by this Agreement.
3.14. CERTAIN ENVIRONMENTAL MATTERS. (a) Except as set forth in SECTION
3.14 of the Disclosure Schedule or as would not reasonably be expected to have a
Material Adverse Effect on the Division: (i) the Division is in compliance with
Environmental, Health, and Safety Requirements, which compliance includes the
possession by the Division and the Business of all permits and other
governmental authorizations required under applicable Environmental, Health and
Safety Requirements, and compliance with the terms and conditions thereof, and
(ii) Seller has not received any communication that alleges that the Division or
the Business is not or was not in compliance with any Environmental, Health and
Safety Requirement, and
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(b) SECTION 3.14 of the Disclosure Schedule sets forth all
environmental audits possessed by or reasonably available to Seller with respect
to the Leased Property and each parcel of real property which Seller previously
owned, used, leased or subleased in relation to the Division. Seller has made
available to Purchaser accurate and complete copies of such environmental
audits.
(c) Except as set forth on SECTION 3.14 of the Disclosure
Schedule, Seller has not received any communication, whether from any Authority,
Person, citizens group or otherwise, that alleges that the Division or the
Business is not or was not in compliance with any Environmental, Health and
Safety Requirement, and Seller does not have knowledge of any circumstances that
may prevent or interfere with such compliance in the future. Except as set forth
on SECTION 3.14 of the Disclosure Schedule, there is no Environmental Claim
pending or, to the Seller's knowledge, threatened against Seller in respect of
the Division.
(d) Except as set forth in SECTION 3.14 of the Disclosure
Schedule, to the Seller's knowledge, without in any way limiting the generality
of the foregoing, (i) Seller has not disposed or arranged for the disposal of
Materials of Environmental Concern at any site listed on the National Priorities
List, the Comprehensive Environmental Response, Compensation and Liability
Information System List, or any comparable state list of properties to be
investigated or remediated, (ii) there are no underground storage tanks
presently located on property owned or leased by Seller, and (iii) there is no
asbestos contained in or forming part of any building, building component,
equipment, structure or office space owned or leased by Seller, which asbestos
requires removal or replacement to comply with Environmental, Health and Safety
Requirements.
(e) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including the release, emission,
discharge, presence or disposal of any Materials of Environmental Concern, or to
the knowledge of Seller, exposures of employees or other Persons to Materials of
Environmental Concern that could form the basis of any Environmental Claim
against Seller or against any Person whose Liability for any Environmental Claim
Seller has or may have retained or assumed either contractually or by operation
of law.
(f) This SECTION 3.14 contains the sole and exclusive
representations and warranties of Seller with respect to any environmental,
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health, or safety matters, including without limitation any arising under any
Environmental, Health, and Safety Requirements.
3.15. LITIGATION. Except as disclosed in SECTION 3.15 of the Disclosure
Schedule, which contains a list and summary description of all pending and
threatened Claims known to the Seller, there are no Claims pending or, to the
Seller's knowledge, threatened, against or affecting the Division, the Business,
the Acquired Assets or the Assumed Obligations or the Leased Property, or any
officers, directors, employees of the Division or of Seller in respect of the
Division in their capacity as such, or any of the properties or businesses
thereof, or relating to the transactions contemplated by this Agreement, nor, to
the Seller's knowledge, is there any basis for any such Claim. None of Seller or
any of its businesses, assets or properties is subject to any order, writ,
judgment, award, injunction or decree of any Authority or arbitrator in respect
of the Division. No present or former employees of the Division or Business have
made or are, to the Seller's knowledge, entitled to assert any Claim against
Seller by virtue of any patent or latent employment-related health defect. There
are no pending, or to the Seller's knowledge, threatened condemnation
proceedings against any portion of the Real Property.
3.16. TAXES. (a) All Taxes with respect to the Division have been
properly determined in accordance with applicable rules and regulations and have
been paid in full on time. The Division has duly and timely filed all material
Tax Returns of every nature required to be filed by it, in every jurisdiction in
which the same may have been so required, and has paid all Taxes disclosed on
such returns. Except as set forth in SECTION 3.16 of the Disclosure Schedule,
Seller's income Tax Returns have never been audited and Seller does not have
outstanding waivers of the statute of limitations for any Taxes for any taxable
year. All deposits required by law to be made by Seller with respect to the
Division's employees' withholding taxes have been made. There are no Tax liens
on any assets of the Division, except liens for Taxes not yet due. Seller is not
a foreign person within the meaning of Section 1445(f)(3) of the Code for
purposes of withholding tax on disposition of United States real property
interests.
(b) Except as set forth on SECTION 3.16 of the Disclosure
Schedule, no claims for Taxes have been asserted against the Seller with respect
to the Division. Except as set forth in SECTION 3.16 of the Disclosure Schedule,
none of the Acquired Assets is "tax exempt use property" within the meaning of
Section 168(b) of the Code, and the Real Property Leases
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and Equipment and Other Personal Property Leases do not include any lease made
pursuant to former Section 168(f)(8) of the Code.
3.17. BROKERS. Seller has not employed any broker, finder or financial
advisor except for Donaldson, Lufkin & Jenrette Securities Corporation (the
"FINANCIAL ADVISOR") or incurred any liability for any investment banking,
brokerage, finder's or other fees or commissions in connection with the
transactions contemplated by this Agreement, except for the fees and expenses of
the Financial Advisor for investment banking services, which fees and expenses
will be paid by Seller.
3.18. ASSETS SUFFICIENT FOR CONDUCT OF BUSINESS. Except for blanket
insurance policies of Seller covering the Division and the general corporate
authority of Seller to conduct its business, the Acquired Assets (including,
with respect to assets leased or licensed by Seller as described in the
Disclosure Schedule, only Seller's leasehold or licensed interest therein)
constitute all of the assets, properties, rights and interests used by the
Division in the conduct of the Business and are sufficient for the conduct of
the Business as presently conducted and none of the Excluded Assets (other than
Cash and any non-assignable Permits) or Excluded Liabilities are necessary for
such conduct of the Business.
3.19. LABOR DISPUTES; COMPLIANCE. (a) No work stoppage or other labor
dispute in respect of the Division has occurred in the last five years or is
pending, or to Seller's knowledge, threatened. To Seller's knowledge, no facts
or circumstances exist which would provide the basis for any work stoppage or
other labor dispute.
(b) Except as set forth on SECTION 3.19 of the Disclosure
Schedule, no present or former employee or independent contractor performing
services for the Division has a Claim pending or, to the Seller's knowledge, has
threatened to make a Claim against Seller (under any Regulation of any Authority
or otherwise) in respect of such service, including any Claim for (i) overtime
pay, other than overtime pay for the current payroll period, (ii) wages,
salaries or profit sharing (excluding wages, salaries or profit sharing for the
current payroll period), (iii) vacations, time off or pay in lieu of vacation or
time off, other than vacation or time off (or pay in lieu thereof) earned in
respect of Seller's current fiscal year, (iv) any violation of any Regulation or
contract relating to minimum wages or maximum hours of work, (v) discrimination
against employees on any basis, (vi) unlawful or wrongful employment or
termination practices, (vii) unlawful retirement, termination or labor
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relations practices or breach of contract, (viii) unlawful retirement,
termination or labor relations practices or breach of contract or (ix) any
violation of occupational safety or health standards. Except as disclosed on
SECTION 3.19 of the Disclosure Schedule, there are no administrative charges,
arbitration or mediation proceedings or court complaints pending or threatened
against Seller in relation to the Division before the U.S. Equal Employment
Opportunity Commission or any state or federal court or agency or any other
entity concerning alleged employment discrimination, contract violation or any
other matters relating to the employment of labor. There is no unfair labor
practice charge or complaint pending or, to Seller's knowledge, threatened
against Seller in relation to the Division before the National Relations Board
or any similar state or local body.
(c) Except as set forth in SECTION 3.19 of the Disclosure
Schedule, the Division is and has been in compliance with all applicable
Regulations relating to the employment of labor, including employment and
employment practices, terms and conditions of employment, wages and hours, equal
opportunity, occupational health and safety, severance, termination or
discharge, collective bargaining and the payment of employee welfare and
retirement and other taxes, the Worker Adjustment Retraining and Notification
Act and the Immigration Reform and Control Act of 1986, each as amended, and is
not engaged in any unfair labor practice, except for such non-compliance as
would not reasonably be expected to have a Material Adverse Effect on the
Division. Except as set forth in SECTION 3.19 of the Disclosure Schedule,
Seller, within the six month period preceding the Closing, has not laid off,
terminated (other than for cause, retirement or voluntary departure) or reduced
the hours (other than for voluntary reduction) of any Employee.
(d) The Seller in relation to the Division is not a signatory
or party to, or otherwise bound by, a collective bargaining agreement (or any
other agreement with any labor organization) which covers employees of the
Division, and, to the Seller's knowledge, there is no activity or proceeding of
any labor organization (or representative thereof) to organize any unorganized
employees of the Division. To the Seller's knowledge, no executive, key employee
or group of employees of the Division has any plan to terminate employment with
Seller.
(e) Except as set forth on SECTION 3.19 of the Disclosure
Schedule, Seller is not a party to or bound by any Contract for the employment
of any director or employee of the Division or for the performance by any
independent contractor (including consultants and the
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like) of services for the Division. Seller has furnished to Purchaser true and
correct copies of all the documents listed on SECTION 3.19 of the Disclosure
Schedule.
3.20. BACKLOG. SECTION 3.20 of the Disclosure Schedule sets forth a
true, complete and correct list of all customer orders of the Division which
constitute backlog and the dollar amount represented by each such order ("SELLER
BACKLOG") as of the date no earlier than five days prior to the date of this
Agreement.
3.21. PRODUCT AND SERVICE WARRANTIES. (a) Except as described in
SECTION 3.21 of the Disclosure Schedule, the Division has not given or made any
warranties to third parties with respect to any products supplied or services
performed by it which may still be in effect at any time after the date hereof,
except for warranties imposed by law or which are no longer in effect. Attached
to SECTION 3.21 of the Disclosure Schedule and incorporated therein by reference
is an accurate, correct and complete copy of each form of any such warranty (or
material deviation from such form). Except as disclosed on SECTION 3.21 of the
Disclosure Schedule or as required by applicable law, there are no other
warranties, oral or written or express or implied, which remain in effect on the
Closing Date for sales by the Division or Business prior to the Closing Date.
(b) Except as set forth on SECTION 3.21 of the Disclosure Schedule,
there is no action, suit, inquiry, proceeding or investigation by or before any
Authority pending or, to the Seller's knowledge, threatened against or involving
the Division or Business relating to any product alleged to have been processed,
manufactured, serviced or sold by the Division and alleged to have been
defective, or improperly processed, manufactured or serviced, nor is there any
valid basis for any such action, proceeding or investigation. Neither Seller nor
Purchaser will be subject to any Claim, expense, Liability or obligation arising
from injury to Person or property as a result of ownership, possession or use of
any product manufactured, processed, serviced, distributed or shipped or sold by
the Division prior to the Closing Date, and, to the Seller's knowledge, there is
no fact relating to any product that may impose upon Seller or Purchaser a duty
to recall such product or a duty to warn customers or others of a defect in any
such product. There is no liability for any latent or overt design,
manufacturing or other defect in any product produced by the Division, except to
the extent reserves therefor have been provided in the September 30 Balance
Sheet or have accrued thereafter in accordance with past practices or provisions
of SECTION 2.2(B).
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3.22. CERTAIN BUSINESS RELATIONSHIPS WITH THE DIVISION. Except as
disclosed in SECTION 3.22 of the Disclosure Schedule, none of Seller or its
affiliates has been involved in any business arrangement or relationship with
the Division within the past 12 months, and none of Seller or its affiliates
owns any asset, tangible or intangible, which is used in the business of the
Division. Except as set forth on SECTION 3.22 of the Disclosure Schedule, (a)
since January 1, 1996, there have not been nor are there now any transactions
between the Division and (i) any director, officer or Affiliate of Seller, or
(ii) any relative or spouse (or relative of such spouse) of any such director,
officer or Affiliate (such Persons in (i) and (ii) being referred to herein as a
"RELATED PARTY" or collectively as the "RELATED Parties"), (b) since January 1,
1998, no Related Party has been a director or officer of, or has had any direct
or indirect interest in, any firm, corporation, association or business
enterprise which during such period has been a supplier, customer, sales agent,
licensor, licensee, lessor or lessee of the Division, or has competed with or
been engaged in any business of the kind being conducted by the Division, (c) no
Related Party has an interest in or owns, directly or indirectly, in whole or in
part, any tangible or intangible property of the Division, or that the Division
uses in the conduct of the Business, (d) no Related Party has any cause of
action or other claim whatsoever against or owes any money or other amounts to,
nor (except for wages and other amounts owing in the ordinary course of
business) is any Related Party owed any money or other amounts by, the Division,
and (e) (except in relation to employment arrangements) no Related Party is a
party to any contract, lease, agreement, arrangement or commitment used in the
operations of the Division. All indebtedness of the Division to any Related
Party, and all indebtedness of any Related Party to the Division, is set forth
on the September 30 Balance Sheet, and since the date of the September 30
Balance Sheet, except in relation to employment arrangements, the Division has
not directly or indirectly (i) created, incurred or assumed any indebtedness for
borrowed money or otherwise created any Liability to any Related Party, or (ii)
made any loans, payments or transfers of Division assets to any Related Party.
3.23. DISCLAIMER OF OTHER REPRESENTATIONS AND WARRANTIES. Except as
expressly set forth in this ARTICLE III, Seller makes no representation or
warranty, express or implied, at law or in equity, in respect of any of the
Division's assets (including, without limitation, the Acquired Assets),
liabilities or operations, including, without limitation, with respect to
merchantability or fitness for any particular purpose, and any such other
representations or warranties are hereby expressly disclaimed. Purchaser
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hereby acknowledges and agrees that, except to the extent specifically set forth
in this ARTICLE III, the Purchaser is purchasing the Acquired Assets on an
"as-is, where-is" basis. Without limiting the generality of the foregoing,
Seller makes no representation or warranty regarding any assets other than the
Acquired Assets or any liabilities other than the Assumed Obligations, and none
shall be implied at law or in equity.
3.24. NON-COMPETE AGREEMENTS. Except as set forth in SECTION 3.24 of
the Disclosure Schedule, no oral or written Contract, license or permit
restricts the ability of Seller to own, possess or use the assets of the
Division or conduct the Division's business or operations in any geographic area
or restricts in any way the full participation of Seller in the operation of the
Division.
3.25. INVENTORY. The inventories of the Division reflected on the
September 30 Balance Sheet, or acquired by Seller after the date thereof and
prior to the Closing Date (i) are of a quality useable or saleable in the
ordinary course of business, and are of a quantity sufficient (but not, in the
reasonable judgment of Seller, excessive) to enable the Division to carry on the
Business as currently conducted, (ii) are carried at amounts which reflect
valuations at the lower of cost, determined on a first-in first-out basis or
market, (iii) have been determined in accordance with GAAP, and (iv) do not
include any obsolete or defective materials or any items that were, or should
have been, at any prior time written-off or written-down by Seller and were not
so written down or off. Except for conditional stock rotation in the ordinary
course of business in a manner consistent with past practices of the Division,
the Division has, and Purchaser will have, no Liability for any refunds,
allowances or returns in respect of products sold or services provided prior to
the Closing Date or in respect of products included in the inventories of Seller
on the Closing Date and distributed, shipped or sold by or for the account of
the Purchaser after the Closing Date, except to the extent of the reserves
therefor reflected on the September 30 Balance Sheet in accordance with GAAP or
accrued thereafter in accordance with past practices the provisions of SECTION
2.2(B). All inventories disposed of subsequent to December 31, 1998 have been
disposed of only in the ordinary course of business and at prices and under
terms that are normal and consistent with past practices.
3.26. ACCOUNTS RECEIVABLE. Except as set forth in SECTION 3.26 of the
Disclosure Schedule, to the Seller's knowledge, all outstanding accounts, notes
and loans receivable reflected on the September 30 Balance Sheet or accrued by
Seller after the date thereof and prior to the Closing Date are valid claims
against account debtors for goods or services
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delivered or rendered, and subject to no defenses, offsets or counterclaims,
collectible in full within 120 days of delivery, except to the extent reserved
against on the September 30 Balance Sheet in accordance with GAAP or accrued
thereafter in accordance with past practices or the provisions of SECTION
2.2(B). Except as set forth on SECTION 3.26 of the Disclosure Schedule,
Purchaser will have no obligation pursuant to any Regulation of any Authority
(whether in bankruptcy or insolvency proceedings or otherwise) to repay, return,
refund or forfeit any receivables collected by Seller prior to the Closing Date
or any receivables reflected on the September 30 Balance Sheet which Purchaser
collects after the Closing Date. Except as set forth in SECTION 3.26 of the
Disclosure Schedule, all receivables arose in the ordinary course of business,
none of the obligors of such receivables has refused or given notice that it
refuses to pay the full amount thereof and none of the obligors of such
receivables is an Affiliate of Seller. Except as set forth in SECTION 3.26 of
the Disclosure Schedule, no receivables are subject to prior assignment, claim,
lien or security interest. Except as reflected in the September 30 Balance Sheet
or as set forth in SECTION 3.26 of the Disclosure Schedule, the Division has not
incurred any Liabilities to customers for discounts, returns, promotional
allowances or otherwise. Except as set forth in SECTION 3.26 of the Disclosure
Schedule, the Division has no Liability for any refunds, allowances or returns
in respect of products manufactured, processed, distributed, shipped or sold by
or for the account of Seller on or prior to the Closing Date, except to the
extent of the reserves therefor reflected on the September 30 Balance Sheet in
accordance with GAAP or accrued thereafter in accordance with past practices or
the provisions of SECTION 2.2(B) and except for conditional stock rotation in
the ordinary course of business.
3.27. YEAR 2000 COMPLIANCE. All computer, network or other data
processing hardware, software, systems and technology, and all computer
controlled facility components (defined as software driven technology and
embedded microchip technology, including programmable thermostats, HVAC
controllers, auxiliary elevator controllers, utility monitoring and control
systems, fire detection and suppression systems, alarms, security systems, and
any other facilities control systems utilizing microcomputer, minicomputer, or
programmable logic controllers) (collectively the "COMPUTER SYSTEMS") owned or
used by the Division are Year 2000 Compliant. The Division has not suffered, and
Seller reasonably expects that the Division will not at any time hereafter
suffer any interruption of, or interference with, its business operations or
activities by reason of the failure of any Computer Systems owned or used by the
Division or, to the Seller's knowledge, any of its suppliers or customers to be
Year 2000
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Compliant. For such purposes, "Year 2000 Compliant" means, with respect to any
Computer Systems owned or used by any Person, that such Computer Systems (a)
will correctly store, represent, and process (including sort) all dates
(including single and multi-century formulas and leap year calculations), such
that errors will not occur when the date being used is in the Year 2000, or in a
year preceding or following the Year 2000; and (b) will operate and will not
cause or result in an abnormal termination or ending.
3.28. DISCLOSURE. All documents referred to in this Agreement,
including in the Schedules or Exhibits, and the corporate minute books of Seller
to the extent relevant to the transactions contemplated by the Agreement have
been delivered or made available to Purchaser to the extent requested by
Purchaser. Such corporate minute books contain all of the minutes of meetings of
stockholders, board of directors, and any committees of the board of directors
that have been held preceding the date hereof relating to the Division and all
of the written consents to action executed in lieu thereof. None of the
representations, warranties or statements of Seller contained in this Agreement,
in the Schedules or Exhibits hereto, or in any other agreement, instrument or
document executed or delivered by or on behalf of such Person in connection with
the transactions contemplated by this Agreement contains any untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the representations, warranties or statements made
therein in light of the circumstances under which they were made, not false or
misleading. Seller acknowledges that the statements contained in this Section
shall not be deemed to limit or qualify any of the other representations or
warranties contained in this Agreement, in the Schedules or Exhibits hereto or
in any agreement delivered in connection herewith.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND PARENT
Purchaser and Parent each jointly and severally represents and warrants
to Seller as follows on the date hereof and as of the Closing Date:
4.1. DUE INCORPORATION, ETC. Each of Purchaser and Parent is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with all requisite corporate power and authority to
own, lease and operate its properties and to carry on its business as now being
conducted.
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4.2. CORPORATE AUTHORITY; ENFORCEABILITY; CONFLICTS. (a) The execution,
delivery and performance by each of Purchaser and Parent of this Agreement and
all agreements, certificates and other instruments executed and delivered
pursuant hereto by Purchaser and Parent ("PURCHASER'S ANCILLARY DOCUMENTS"), and
the consummation by Purchaser of the transactions contemplated hereby and
thereby, have been duly authorized by all necessary corporate action on the part
of each of Purchaser and Parent. Each of this Agreement and each of Purchaser's
Ancillary Documents has been, or will have been, duly and validly executed and
delivered by Purchaser and/or Parent, as the case may be, and constitutes or
will constitute, the legal, valid and binding obligation of each of Purchaser
and Parent, enforceable in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, moratorium,
reorganization or similar laws from time to time in effect which affect
creditors' rights generally, and by legal and equitable limitations on the
availability of specific remedies.
(b) Except as would not reasonably be expected to have a
material adverse effect on the ability of Purchaser or Parent to consummate the
transactions contemplated hereby, the execution, delivery and performance of
this Agreement and all of Purchaser's Ancillary Documents by each of Purchaser
and Parent will not:
(i) violate any Order applicable to Purchaser and/or
Parent, as the case may be;
(ii) violate any Regulation binding on Purchaser
and/or Parent, as the case may be; or
(iii) violate or conflict with, or result in a breach
of, or constitute a default (or an event which, with or
without notice or lapse of time or both, would constitute a
default) under, or give rise to any event creating rights of
acceleration, termination, modification or cancellation under
the Certificate of Incorporation or By-laws of Purchaser or
Parent, respectively, or under any material Contract to which
Purchaser and/or Parent, as the case may be, is a party, or by
which Purchaser and/or Parent, as the case may be, is bound.
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4.3. PERMITS; COMPLIANCE WITH LAW; CONSENTS. Except as set forth in the
Disclosure Schedule and except for the applicable requirements of the HSR Act,
no notice to, filing with, authorization of, exemption by, or Consent of any
Authority is required for Purchaser and Parent to consummate the transactions
contemplated hereby.
4.4. FINANCING. Parent will cause Purchaser to have funds available at
the Closing sufficient to consummate the transactions contemplated hereby.
4.5. BROKERS. Purchaser has not paid or become obligated to pay any fee
or commission to any broker, finder, investment banker or other intermediary in
connection with the transactions contemplated by this Agreement.
4.6. INTERIM OPERATIONS OF PURCHASER. Purchaser was formed for the sole
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
ARTICLE V
CERTAIN COVENANTS OF THE PARTIES
5.1. CONSENTS AND APPROVALS; NOVATION. (a) Each of Purchaser and
Parent, on the one hand, and Seller, on the other hand, shall give notice to,
and shall use its commercially reasonable efforts to obtain the Consents to the
performance of this Agreement and the transactions contemplated hereby required
to satisfy the conditions specified in SECTIONS 7.1(e) and (G) hereof. To the
extent that one or more of the Permits are not transferable or replacements
therefor are not obtainable on or before the Closing, but such Permits are
transferable or replacements therefor are obtainable after the Closing, Seller
shall continue to use its commercially reasonable efforts in cooperation with
Purchaser and Parent after the Closing as may be required to obtain all such
Consents to transfer, or obtain replacements for, such Permits after Closing and
shall do all things necessary to give Purchaser the benefits which would be
obtained under such Permits.
(b) On and after the Closing Date, Purchaser shall use its
commercially reasonable efforts to enter into novation agreements to remove
Seller from all primary obligations and liabilities in respect of the
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Acquired Assets, including the Contracts specified in SECTION 1.2. Seller will
prepare and mail at the Closing such notices to the other party under each of
the Contracts specified in SECTION 1.2 as are necessary or desirable or may be
reasonably requested by Purchaser, advising such other party that such Contract
has been assigned and directing such other party to send Purchaser all future
notices and correspondence relating to such Contract.
(c) Within ten business days after the date hereof, Seller, on
the one hand, and Purchaser and Parent, on the other hand, will make such
filings as may be required by the HSR Act with respect to the consummation of
the transactions contemplated by this Agreement. Thereafter, Seller, on the one
hand and Purchaser and Parent, on the other hand, will file or cause to be filed
as promptly as practicable with the United States Federal Trade Commission and
the United States Department of Justice any supplemental information which may
be required pursuant to the HSR Act. Without limiting the generality or effect
of the foregoing, Seller, on the one hand, and Purchaser and Parent, on the
other hand, will (i) use commercially reasonable efforts to comply as
expeditiously as possible with all lawful requests of Authorities for additional
information and documents pursuant to the HSR Act; (ii) not (A) extend any
waiting period under the HSR Act or (B) enter into any agreement with any
Authority not to consummate the transactions contemplated by this Agreement,
except with the prior consent of each other; and (iii) cooperate with each other
and use commercially reasonable efforts to cause the lifting or removable of any
temporary restraining order, preliminary injunction or other judicial or
administrative order which may be entered into in connection with the
transactions contemplated by this Agreement, including, without limitation, the
execution, delivery and performance by the appropriate entity of such
divestiture agreements or other actions, as the case may be, as may be necessary
to secure the expiration or termination of the applicable waiting periods under
the HSR Act or the removal, dissolution, stay or dismissal of any temporary
restraining order, preliminary injunction or other judicial or administrative
order which prevents the consummation of the transactions contemplated hereby.
(d) To the extent that the assignment by Seller of any
property, right or asset to be assigned to Purchaser pursuant to this Agreement
shall require the Consent of any other party, and such Consent shall not have
been obtained on or prior to the Closing Date, this Agreement shall not
constitute a contract to assign the same if an attempted assignment would
constitute a breach thereof or would in any way adversely affect the rights of
Seller (or Purchaser as assignee) thereunder. If any such Consent
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is required but not obtained on or prior to the Closing Date, the parties hereto
covenant and agree that in such case, the beneficial interest in or to such
property, right or asset shall in any event pass as of the Closing Date to
Purchaser hereunder; Purchaser shall assume or discharge the obligations of
Seller thereunder on a subcontract or purchase order basis or other arrangement;
and the parties hereto shall use all commercially reasonable efforts without the
payment of any penalty or fee to obtain and secure any and all Consents that may
be necessary to effect the valid sale, transfer or assignment of the same to
Purchaser without change in any of the material terms or conditions thereof,
including, without limitation, the formal assignment or novation of any of the
same, if so required.
5.2. GENERAL. From the date hereof until the Closing Date or
termination of this Agreement, each of the parties shall use commercially
reasonable efforts to take all action and to do all things necessary, proper and
advisable in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
closing conditions set forth in ARTICLE VII below). Without limiting the
generality of the foregoing, Parent shall, or shall cause Purchaser to, perform
all of Purchaser's obligations under this Agreement.
5.3. OPERATION OF BUSINESS. Except as expressly required under any
other provision of this Agreement (including SECTION 5.6), Seller shall not, and
shall cause the Division not to, engage in any practice, take any action, or
enter into any transaction which is not in the ordinary course of business of
the Division and is not consistent with past practice. Without limiting the
generality of the foregoing, Seller shall not, and shall cause the Division not
to, engage in any practice, take any action, or enter into any transaction of
the sort which, if it occurred, would result in a breach of any of the Seller's
representations and warranties contained in ARTICLE III. Except as expressly
contemplated or permitted by this Agreement or as set forth in Schedule 5.3 of
the Disclosure Schedule, the Division will not, without the prior written
consent of Purchaser: (a) incur any Liability or obligation other than in the
ordinary and usual course of business and consistent with past practice, issue
any debt securities, make, create, incur, assume or suffer to exist any Lien on
its assets, or assume, guarantee, endorse or otherwise as an accommodation
become responsible for the Liabilities of any other Person; (b) acquire (by
merger, consolidation, acquisition of stock or assets or otherwise) any
corporation, partnership or other business organization or division or
significant assets thereof or acquire, directly or indirectly, any equity
interest in any Person or incur any capital expenditures other than the capital
expenditures set forth on SCHEDULE 5.3; (c) make any change in
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financial or tax accounting methods, principles or practices or make or cause to
be made any elections on Tax returns of Seller, except as consistent with past
practices; (d) fail to maintain inventories at current levels, except for sales
in the ordinary course of business, and maintain the property and assets of the
business in good repair, order and condition; (e) fail to maintain and keep in
full force and effect all insurance on assets and property or for the benefit of
employees of the Division, all liability and other casualty insurance and all
bonds on personnel, presently carried, fail to present all claims under such
insurance policies in a proper and timely manner or breach any obligation under
such insurance policies; (f) fail to use commercially reasonable efforts to (i)
preserve intact the organization and reputation of the Division, (ii) keep all
Permits in full force and effect, (iii) keep available the services of the
present executives, employees and agents of the Division and (iv) preserve the
goodwill of suppliers, distributors, customers and others having business
relationships with the Division; (g) fail to maintain its books, accounts and
records in the usual, regular and ordinary manner on a basis consistent with
prior years; (h) directly or indirectly engage in any transaction with any
officer, director, or other insider or Affiliate which is not at arm's length;
(i) adopt or amend any Employee Benefit Plan, other than changes in employee
welfare or benefit arrangements with respect to officers and employees of the
Division made in the ordinary course consistent with past practice or required
by applicable law; (j) grant, or become obligated to grant, any increase in the
compensation of officers or employees of the Division, including any such
increase pursuant to any Employee Benefit Plan (except for increases in
compensation in the ordinary course of business consistent with past practice or
required pursuant to the terms of any Contract); (k) enter into any employment
or similar agreement or arrangement with any director or employee of the
Division or any independent contractor to provide services to the Division; and
(l) agree, in writing or otherwise, to do any of the foregoing.
5.4. PRESERVATION OF BUSINESS. The Seller shall use its commercially
reasonable efforts to keep the Business and the Acquired Assets substantially
intact, including its present operations, physical facilities, working
conditions, and relationships with lessors, licensors, suppliers, customers, and
employees.
5.5. ACCESS. From the date hereof until the Closing Date or termination
of this Agreement, Seller shall permit representatives of Purchaser or Parent to
have full access at all reasonable times, upon
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reasonable notice, and in a manner so as not to interfere with the normal
business operations of the Division, to all premises, properties, personnel,
books, records (including Tax and accounting records), contracts, and documents
of or pertaining to the Division or the Business. All such information shall be
subject to the terms and conditions of the letter agreement, dated as of
September 24, 1999, between Purchaser and Seller (the "CONFIDENTIALITY
AGREEMENT"). Seller shall fully cooperate with regard to all such inspections
(in order to conduct, among other things, interviews of individuals, visual
inspections, Phase I environmental assessments of the Facility) as Purchaser and
Parent shall reasonably require and shall cause its officers to furnish
Purchaser and Parent such financial and operating data and other information
with respect to the Business and properties of the Division as Purchaser and
Parent may from time to time reasonably request. The representations and
warranties of Seller contained herein or in any certificate or other documents
delivered to Purchaser or Parent shall not be deemed waived or otherwise
affected by any such investigation made by Purchaser or Parent or any of their
representatives.
5.6. PREPAYMENT; RELEASES. On or prior to the Closing, Seller shall
prepay the Existing Indebtedness and all obligations in respect of the Equipment
and other Personal Property Leases. Seller shall also obtain a full release of
each of the Liens (other than Permitted Liens) granted in the Acquired Assets,
including those to secure obligations in respect of (i) the IRB Indebtedness,
(ii) the Equipment and other Personal Property Leases and (iii) the Credit
Agreement, and deliver copies thereof to Purchaser.
5.7. NOTICE OF DEVELOPMENTS. Seller shall give prompt written notice to
Purchaser and Parent of any development which, to its knowledge, causes a breach
of any of their representations and warranties, covenants and agreements
hereunder. Purchaser and Parent shall give prompt written notice to Seller of
any development which, to their knowledge, causes a breach of any of their
representations and warranties, covenants and agreements hereunder. Such
disclosures shall be subject to the confidentiality provisions of SECTION 5.8
hereof.
5.8. PUBLIC ANNOUNCEMENTS; CONFIDENTIALITY. Except as may be required
by Regulation, neither Seller, on the one hand, nor Purchaser and Parent, on the
other hand, nor any of their affiliates shall issue any press release or make
any public announcement with respect to this Agreement and the transactions
contemplated hereby without the consent of Purchaser, Parent or Seller, as
applicable, which consent shall not be unreasonably withheld. Purchaser and
Parent agree to maintain the confidentiality of any
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and all confidential information furnished to Purchaser and Parent by Seller and
any of its advisors, agents or employees in connection with the transactions
contemplated hereby as provided in the Confidentiality Agreement.
5.9. COMPLIANCE WITH BULK SALES LAWS. Purchaser and Parent hereby waive
compliance by Seller with Bulk Sales Laws with respect to the transactions
contemplated hereby.
5.10. NON-COMPETITION AGREEMENT. Seller shall not, for a period
commencing on the Closing Date and terminating on the date which is three years
thereafter (i) engage in any business that competes in any market with the
Business; or (ii) induce or attempt to persuade any Person to engage in any
business competing with the Business; or (iii) solicit for employment any
employee, advisor or consultant of the Business. Seller shall not do or say
anything which is harmful to the reputation of the Business or which may lead
any person to cease to do business with the Business on substantially equivalent
terms to those previously offered or not to engage in business with the
Business.
5.11. SERVICING OF WARRANTY CLAIMS. From and after the Closing Date,
Purchaser shall, and Parent shall cause Purchaser to, process and satisfy
warranty claims presented to Purchaser by customers of the Division in respect
of products manufactured or sold prior to the Closing Date in accordance with
the prior practice of the Division.
5.12. NO SOLICITATION. Seller shall not, and shall cause its
Affiliates, officers, partners, directors, employees, representatives and
agents, not to, directly or indirectly, encourage, solicit, initiate, engage or
participate in discussions or negotiations with, or provide any information to,
any Person other than Parent, Purchaser or their Affiliates (a "THIRD PARTY") in
connection with any exchange offer, merger, consolidation, sale of substantial
or material assets, sale of securities, acquisition of beneficial ownership of
or the right to vote securities, liquidation, dissolution or similar
transactions involving the Division or the Business (such proposals,
announcements or transactions being referred to herein as "ACQUISITION
PROPOSALS"). Seller shall promptly inform each of Purchaser and Parent of any
inquiry (including the terms thereof and the identity of the Third Party making
such inquiry) which it may receive in respect of an Acquisition Proposal and
furnish to Purchaser and Parent a copy of any such written inquiry.
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5.13. COLLECTION OF ACCOUNTS. If, after the Closing Date, Seller shall
receive any payment on any receivables acquired by Purchaser hereunder or any
rebate or other amounts under agreements with suppliers or others ("REBATES"),
it shall forward such payment to Purchaser within five business days after
receipt thereof, together with any endorsement required so as to permit
Purchaser to collect such receivables or Rebates. Purchaser or its designees
shall have full power and authority to collect all receivables and Rebates
acquired by Purchaser hereunder and to endorse, in the name of Seller, any
checks or other instruments of payment received on account of payment of such
receivables or Rebates.
5.14. AFTER-ACQUIRED ASSETS. Seller shall assign, transfer and deliver
to Purchaser all assets, properties, rights and interests of whatever kind and
nature, real and personal, tangible and intangible, included within the
definition of Acquired Assets relating to the Business and received, held or
acquired by Seller from and after the Closing Date.
5.15. INTELLECTUAL PROPERTY RIGHTS. From and after the Closing Date,
Sellers and its Affiliates shall cease using the Intellectual Property rights.
5.16. SPECIFIC PERFORMANCE. Each of the parties hereto hereby
acknowledges and agrees that the other parties would be damaged irreparably in
the event that any of the material provisions of this Agreement are not
substantially performed in accordance with their specific terms or are otherwise
breached. Accordingly, each of the parties hereto hereby agrees that the other
parties shall be entitled to an injunction or injunctions to prevent breaches of
the material provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
state court of New York, Illinois or federal court located in New York or
Illinois in addition to any other remedy to which they may be entitled pursuant
hereto.
5.17 CERTAIN AGREEMENTS. Purchaser and Parent shall use commercially
reasonable efforts to enter into the agreements specified in SECTION 7.1(L) AND
7.1(M). Seller shall, as requested by Purchaser and Parent, assist Purchaser and
Parent in their respective efforts to enter into such agreements.
5.18. PERFORMANCE BY PURCHASER. Parent shall perform, or shall cause
Purchaser to perform, all of Purchaser's obligations under the Agreement.
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ARTICLE VI
EMPLOYEES AND BENEFIT PLANS
6.1. EMPLOYEES. SECTION 6.1 of the Disclosure Schedule is a true,
correct and complete list of all of Seller's employees who work at or are
employed in connection with the Division (collectively , the "Employees")
(including, without limitation, manufacturing plant, technical and sales
personnel), wherever located, indicating the current rate of pay of each such
employee as of the date hereof (including discretionary benefits and bonuses
paid during such period), the location of such employee, the date such employee
was hired and any severance pay, lump sum or other payment, compensation or
other remuneration that such Person is or would be eligible to receive, or has
received, upon termination of employment or service or as a result of any of the
transactions contemplated by this Agreement. Such Employees shall remain on the
Division's payroll records until the Closing Date (except for those Employees
terminated by Seller), and shall be paid by Seller all amounts of wages, bonuses
and other remuneration (including, without limitation, discretionary benefits
and bonuses) payable to such Employees with respect to any period ending on or
prior to the Closing Date, together with any worker's compensation claims or
amounts payable to such Employees in connection with events occurring prior to
the Closing Date (except to the extent that such amounts in respect of interim
periods prior to the Closing shall have been accrued in determining the amount
of the Purchase Price Adjustment, which amounts shall be assumed and paid by
Purchaser following the Closing and shall be deemed to be Assumed Obligations
for purposes of this Agreement). Subject to SECTION 6.3, Purchaser agrees to
offer employment with Purchaser as of the Closing Date to all Employees as of
the Closing Date on terms, conditions and benefits substantially similar in the
aggregate to those pursuant to which such Employees were employed by the
Division immediately prior to the Closing Date and to cause such terms,
conditions and benefits as apply to the Employees generally to remain not
materially less favorable in the aggregate than the terms on which such
Employees were employed by the Division immediately prior to the Closing Date
until at least the first anniversary of the Closing Date. The foregoing shall
not, however, prohibit Purchaser from terminating the employment of any such
Employee following the Closing Date for any reason.
6.2. EMPLOYEE BENEFIT PLANS. Seller presently maintains a plan intended
to satisfy the requirements of Section 401(k) of the Code (the "401(K) PLAN").
It is Seller's current intention to fully vest the 401(k) Plan
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accounts of Employees whose employment is terminated from Seller as of the
Closing Date and to provide that such Employees will be entitled to a
distribution from the 401(k) Plan under similar provisions as apply generally to
participants in the 401(k) Plan whose employment is terminated, with
distribution options to include a direct rollover to Purchaser's tax-qualified
defined contribution plan, if any. Seller represents that such distributions
will conform with the applicable requirements of Section 401(k)(10) of the Code
and that it will continue to maintain the 401(k) Plan after the Closing. Parent
currently maintains a tax-qualified defined contribution plan which accepts
qualified rollover contributions (the "Parent's 401(k) Plan"). Purchaser may, at
its discretion, and currently intends to establish a 401(k) plan specifically
for Employees (the "Purchaser's 401(k) Plan") and which, if established, will
benefit Employees and accept qualified rollover contributions to the extent
permitted by law. As soon as administratively feasible and in no case more than
90 days after the Closing Date, Employees will be permitted to participate
either in Purchaser's 401(k) Plan, or at Purchaser's discretion, in Parent's
401(k) Plan. Purchaser, Parent and Seller shall cooperate in communicating to
the Employees with respect to 401(k) Plan benefits available to the Employees
following the Closing.
6.3. PARTICIPATION IN PURCHASER'S EMPLOYEE BENEFIT PLANS. As of the
Closing Date with respect to welfare benefits, including but not limited to,
medical and dental benefits, and as soon as administratively feasible and in no
case more than 90 days after the Closing Date with respect to any other employee
benefits, Purchaser shall permit all Employees to participate in employee
benefit and welfare benefit plans substantially similar in the aggregate to
those benefit plans offered to Employees immediately prior to the Closing Date
and on terms and conditions not materially less favorable in the aggregate than
the terms and conditions applicable immediately prior to the Closing Date.
Employees shall receive prior service credit for eligibility and vesting
purposes and, with respect to Purchaser's vacation policy and policy on
severance payments, Employees will receive prior service credit for purposes of
vacation accruals and severance payments.
6.4. WELFARE BENEFITS. (a) Prior to the Closing Date, Seller has
provided benefits (other than pension benefits) to its employees and their
eligible dependents (where applicable) under certain welfare benefit plans
listed in SECTION 6.4 of the Disclosure Schedule (which plans are hereinafter
referred to as "SELLER'S WELFARE PLANS"). All benefits and coverages provided
under Seller's Welfare Plans to Employees and their eligible dependents shall
terminate as of the Closing Date except for those claims
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and expenses incurred prior to the Closing Date that are eligible for payment
under the terms of Seller's Welfare Plans, which claims and expenses shall
remain the responsibility of Seller and except for Seller's obligations, if any,
with respect to continuation coverage under Part 6 of Title I of ERISA and
Section 4980B of the Code.
(b) To the extent that any Purchaser welfare benefit plan in
which Employees participate provides medical, dental or vision benefits,
Purchaser shall cause all pre-existing condition exclusions and actively at work
requirements of such plan to be waived for such Employee and his or her covered
dependents, and Purchaser shall cause any eligible expenses incurred by such
Employee in the plan year on or before the Closing Date to be taken into account
under such plan for purposes of satisfying all deductible, coinsurance and
maximum out-of-pocket requirements applicable to such Employee and his or her
covered dependents for the applicable plan year.
(c) Purchaser shall assume Seller's obligation to pay accrued
but unused vacation and personal day pay as of the Closing Date for all
Employees who are continuing Employees to the extent reflected on the Closing
Balance Sheet, which obligations shall be Assumed Obligations for purposes of
this Agreement.
ARTICLE VII
CONDITIONS TO OBLIGATIONS
OF PURCHASER AND SELLER
7.1. CONDITIONS TO OBLIGATIONS OF PURCHASER. All obligations of
Purchaser at the Closing hereunder are subject to the fulfillment prior to and
at the Closing Date of each of the following conditions, which may be waived, in
writing, in whole or in part by Purchaser:
(a) Any waiting period under the HSR Act applicable to the
purchase of the Acquired Assets shall have terminated or expired.
(b) The representations and warranties of Seller herein shall
be true in all respects at and as of the Closing Date as if made on the Closing
Date, except that any representations or warranties made as of a specified date
shall be true in all respects as of such date, and except that for each
representation and warranty that does not contain any qualification
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with respect to materiality, such representation shall be true and correct in
all material respects as if made on the Closing Date.
(c) Seller shall have performed and complied in all material
respects with all covenants, agreements and conditions required by this
Agreement to be performed by it on or prior to the Closing Date.
(d) Seller shall have delivered to Purchaser a certificate
signed by an officer of Seller to the effect that each of the conditions
specified above in SECTION 7.1(B) and SECTION 7.1(C) is satisfied.
(e) Seller shall have obtained and delivered to Purchaser an
estoppel certificate from the Lessors in form and substance satisfactory to
Purchaser, dated the Closing Date and duly executed by the Lessors, evidencing,
among other things, the Consent of the Lessors to the assignment of the Lease.
(f) No Authority of competent jurisdiction shall have enacted,
issued, promulgated, enforced or entered any Order or Regulation which is in
effect and which would prohibit the transactions contemplated by this Agreement.
(g) All (i) action required by law or otherwise to be taken by
the Board of Directors of Seller to authorize the execution, delivery and
performance of this Agreement and the Ancillary Documents to which such Person
is a party and the transactions contemplated hereby and thereby shall have been
duly and validly taken, and (ii) licenses, Permits, Consents, waivers, approvals
and similar authorizations necessary for the consummation of the transactions
contemplated hereby and for the lawful conduct of the Business by Purchaser
following the Closing Date shall have been obtained, except where the failure to
obtain the same would not have a Material Adverse Effect on the Division or the
Business following the Closing and shall also not have a material adverse effect
on the Acquired Assets or the Assumed Obligations following the Closing;
PROVIDED that, in any event, those Consents and Permits enumerated in SECTION
7.1(G) of the Disclosure Schedule shall have been obtained.
(h) Seller shall have executed and delivered to Purchaser and
Parent assignments and bills of sale in form and substance satisfactory to
Purchaser.
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(i) Seller shall have delivered to Purchaser and Parent an
opinion of Fried, Frank, Harris, Shriver & Jacobson, legal counsel to the
Seller, dated the Closing Date, in substantially the form attached hereto.
(j) Purchaser and Parent shall have received such certificates
of Seller's officers and such other documents or agreements, in each case in
form and substance satisfactory to counsel to Parent and Purchaser, as may
reasonably be requested by Parent and Purchaser.
(k) Seller shall have repaid all Existing Indebtedness and
secured the release of all Liens other than Permitted Liens encumbering the
Acquired Assets, including those listed in SECTION 3.6 of the Disclosure
Schedule and shall have delivered such releases to Purchaser at Closing,
including, but not limited to, releases or terminations under the Uniform
Commercial Code and any other similar applicable Regulation of any financing or
similar statements filed against any such assets in all applicable jurisdictions
or Seller shall otherwise satisfy Purchaser that such Liens are no longer
effective.
(l) Purchaser and each of Anthony J. Peleckis, Brian Davies,
and Roland Keller shall have entered into employment agreements in the
applicable forms attached hereto.
(m) Seller and each of Anthony J. Peleckis, Brian Davies,
Roland Keller shall have entered into an agreement in form and substance
acceptable to Purchaser acknowledging the termination of all rights under
employee and severance agreements entered into prior to the Closing Date,
including Employment Agreements dated September 24, 1999, Severance Protection
Agreements dated February 11, 1999, letter agreements re: Benefits Payable in
Connection with Termination following a Sale of the Company dated March 23,
1999, and letter agreements re: Benefits Payable in Connection with Termination
following a Sale of Beau dated July 19, 1999; provided, however, that with
regard to the agreements dated March 23, 1999 and July 19, 1999 it shall be
sufficient that such persons acknowledge that neither Purchaser nor Parent shall
have any liability thereunder.
(n) There shall have been obtained a leasehold title insurance
policy in an amount equal to the allocated Purchase Price for the Real Property
insuring the Purchaser as holder of the tenant's interest under the Lease and
fee owner of the Facility, subject only to such title exceptions as are
reasonably acceptable in form and substance to Purchaser and
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containing such title endorsements as Purchaser may reasonably request. All
costs of procuring such insurance policy shall be the responsibility of the
Purchaser.
(o) Purchaser shall have obtained a survey of the Property,
which survey shall be sufficient to delete the survey exception from the
leasehold title insurance policy referred to in SECTION 7.1(N). The survey shall
be prepared and certified no earlier than the date 30 days prior to the Closing
Date by a New Hampshire licensed and registered professional engineer or land
surveyor. All costs of procuring such survey results shall be borne by the
Purchaser.
7.2. CONDITIONS TO OBLIGATIONS OF SELLER. All obligations of Seller at
the Closing hereunder are subject to the fulfillment prior to and at the Closing
Date of each of the following conditions, which may be waived, in writing, in
whole or in part by Seller:
(a) Any waiting period under the HSR Act applicable to the
purchase of the Acquired Assets shall have terminated or expired.
(b) The representations and warranties of each of Purchaser
and Parent herein shall be true in all respects at and as of the Closing Date as
if made on the Closing Date, except that any representation or warranty made as
of a specified date shall be true in all respects as of such date, and except
that for each representation and warranty that does not contain any
qualification with respect to materiality, such representation shall be true and
correct in all material respects as if made on the Closing Date.
(c) Each of Purchaser and Parent shall have performed and
complied in all material respects with all covenants, agreements and conditions
required by this Agreement to be performed by it on or prior to the Closing
Date.
(d) Each of Purchaser and Parent shall have delivered to
Seller a certificate signed by an officer of Purchaser and Parent, respectively,
to the effect that each of the conditions specified above in SECTION 7.2(B) and
SECTION 7.2(C) is satisfied.
(e) No Authority of competent jurisdiction shall have enacted,
issued, promulgated, enforced or entered any Order or Regulation which is in
effect and which would prohibit the transactions contemplated by this Agreement.
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(f) All action required by law or otherwise to be taken by
each of Purchaser and Parent to authorize the execution, delivery and
performance of this Agreement and the Ancillary Documents to which such Person
is a party and the transactions contemplated hereby and thereby shall have been
duly and validly taken.
(g) Purchaser shall have delivered to Seller an opinion of
Purchaser's General Counsel, dated the Closing Date, in the form attached
hereto.
(h) Seller shall have received such certificates of
Purchaser's and Parent's officers and such other documents or agreements, in
each case in form and substance satisfactory to counsel to Seller, as may
reasonably be requested by Seller.
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ARTICLE VIII
CLOSING AND CLOSING DELIVERIES
8.1. CLOSING. The Closing shall take place on or before June 30, 2000,
or as soon as practicable after the satisfaction or waiver of the conditions set
forth in ARTICLE VII, whichever is earlier. The Closing shall be held at the
offices of Fried, Frank, Harris, Shriver & Jacobson at One New York Plaza, New
York, New York 10004 at 10:00 A.M., or such other place and time as shall be
mutually agreed upon by Purchaser and Seller.
8.2. DELIVERIES BY SELLER. Prior to or at the Closing, Seller shall
deliver the following to Purchaser: (a) duly executed bills of sale, assignments
and other transfer documents consistent with the terms of this Agreement which
shall be sufficient to vest good and marketable title to the Acquired Assets in
the name of Purchaser, free and clear of any Liens, except Permitted Liens, and
with the Assignment of the Lease being in recordable form; (b) original Consents
in writing reasonably satisfactory to Purchaser from (A) each party specified in
SECTION 7.1(G) of the Disclosure Schedule, for the transfer and assignment of
any Assumed Obligations to Purchaser, and (B) any Authority whose consent and
approval is required for the consummation of the transactions contemplated
hereby; (c) duly executed Uniform Commercial Code termination statements with
respect to the financing statements specified in SECTION 3.6 of the Disclosure
Schedule; (d) the certificate specified in SECTION 7.1(D); (e) a certificate,
dated as of the Closing Date, executed on behalf of Seller by its Secretary, (i)
certifying that the resolutions, as attached to such certificate, were duly
adopted by the Board of Directors of Seller authorizing and approving the
execution of this Agreement and the consummation of the transactions
contemplated hereby and that such resolutions remain in full force and effect
and (ii) providing, as an attachment thereto, a certificate of good standing
certified of Seller by the Secretary of State of the State of Delaware as of a
date not more than 5 days prior to the Closing Date; (f) an affidavit to delete
the mechanics lien and parties in possession general exceptions to the title
insurance policy referred to in SECTION 7.1(N); and (g) any other documents
customarily required in order to issue such a title insurance policy.
8.3. DELIVERIES BY PURCHASER. Prior to or at the Closing, Purchaser
shall deliver the following to Seller: (a) the Purchase Price as provided in
SECTION 2.1; (b) duly executed instruments of assumption consistent with the
terms of this Agreement pursuant to which Purchaser shall assume and
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undertake to perform Seller's obligations in respect of the Assumed Obligations;
(c) the certificate specified in SECTION 7.2(D); and (d) certificates, dated as
of the Closing Date, executed on behalf of Purchaser and Parent by their
respective Secretaries, (i) certifying that the resolutions, as attached to such
certificate, were duly adopted by the Board of Directors of each of Purchaser
and Parent authorizing and approving the execution of this Agreement and the
consummation of the transactions contemplated hereby and that such resolutions
remain in full force and effect; and (ii) providing, as attachments thereto,
certificates of good standing of Purchaser and Parent certified by the Secretary
of State of the State of Delaware as of a date not more than 5 days prior to the
Closing Date.
ARTICLE IX
TERMINATION
9.1. TERMINATION OF AGREEMENT. This Agreement and, subject to the
provisions of this ARTICLE IX, the obligations hereunder may be terminated and
the transactions contemplated hereby abandoned as provided below:
(a) Purchaser and Parent, on the one hand, and Seller, on the
other hand, may terminate this Agreement by mutual written agreement at any time
prior to the Closing.
(b) Purchaser and Parent may terminate this Agreement by
giving written notice to Seller at any time prior to the Closing (A) in the
event Seller has breached any representation, warranty, or covenant contained in
this Agreement in any material respect, Purchaser and Parent have notified
Seller of such breach, and the breach has continued without cure for a period of
20 days after the notice of breach or (B) if the Closing shall not have occurred
on or before June 30, 2000, by reason of the failure of any condition precedent
under SECTION 7.1 hereof.
(c) Seller may terminate this Agreement by giving written
notice to Purchaser and Parent at any time prior to the Closing (A) in the event
Purchaser has breached any representation, warranty, or covenant contained in
this Agreement in any material respect, Seller has notified Purchaser of the
breach, and the breach has continued without cure for a period of 20 days after
the notice of breach or (B) if the Closing shall not
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have occurred on or before June 30, 2000, by reason of the failure of any
condition precedent under SECTION 7.2 hereof.
9.2. EFFECT OF TERMINATION. If any party terminates this Agreement
pursuant to SECTION 9.1 above, all rights and obligations of the parties
hereunder shall terminate without any Liability of any party to any other party
(except for any Liability of any party then in breach); PROVIDED, HOWEVER, that
the parties shall continue to be bound by the confidentiality provisions of
SECTION 5.8 hereof and the Confidentiality Agreement.
ARTICLE X
SURVIVAL AND REMEDIES; INDEMNIFICATION
10.1. SURVIVAL. All of the terms and conditions of this Agreement,
together with the warranties, representations, agreements and covenants
contained herein or in any instrument or document delivered or to be delivered
pursuant to this Agreement, shall survive the execution of this Agreement and
the Closing; provided, however, that (a) the agreements and covenants (other
than the indemnification provisions set forth in this ARTICLE X, which will
survive as provided below) set forth in this Agreement shall survive and
continue until all obligations set forth therein shall have been performed and
satisfied; and (b) all representations and warranties, and the agreements of
Seller and the Stockholders and Purchaser to indemnify each other set forth in
this ARTICLE X, shall survive and continue for, and all indemnification claims
with respect thereto shall be made prior to the end of fifteen months from the
Closing Date, except for (i) the representations and warranties set forth in
SECTIONS 3.13 (Employee Benefit Plans) and 3.16 (Taxes), and the indemnities and
agreements related to said Sections, which shall survive until, and all claims
with respect thereto shall be made prior to, 90 days after the expiration of the
applicable statute of limitations, (ii) representations, warranties and
indemnities set forth in SECTION 3.9 and SECTION 3.14 and the indemnities and
agreements related to said Sections, which shall survive until, and all claims
with respect thereto shall be made on or prior to, five years following the
Closing Date, (iii) representations, and related indemnities for which an
indemnification claim shall be pending as of the end of the applicable period
referred to above, in which event such indemnities shall survive with respect to
such indemnification claim until the final disposition thereof, and (iv)
representations, warranties and indemnities relating to title and/or ownership
of the Acquired Assets, which will survive indefinitely. In the event of a
breach of any of such representations, warranties,
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covenants and agreements, the party to whom such representation, warranty,
covenant or agreement has been made shall have all rights and remedies for such
breach available to it under the provisions of this Agreement, regardless of any
disclosure to, or investigation made by or on behalf of such party on or before
the Closing Date. The rights and remedies of any party based upon, arising out
of or otherwise in respect of any inaccuracy in or breach of any representation,
warranty, covenant or agreement contained in this Agreement shall in no way be
limited by the fact that the act, omission, occurrence or other state of facts
upon which any claim of any such inaccuracy or breach is based may also be the
subject matter of any other representation, warranty, covenant or agreement
contained in this Agreement as to which there is no inaccuracy or breach (it
being understood that solely for purposes of this ARTICLE X, any such
representation or warranty shall be interpreted without giving effect to the
words "Material Adverse Effect," "knowledge" (except to the extent such term
refers to threatened future actions by third parties), "materially" or
"material," or variations of such terms or qualifications or limitations or
exceptions based on such terms).
10.2. INDEMNIFICATION BY SELLER. From and after the Closing, Seller
agrees to indemnify Purchaser and each of its Affiliates, and their respective
officers, directors, employees, stockholders, representatives and agents,
against, and agrees to hold it and them harmless from, any and all Losses
(excluding any and all Losses to the extent attributable to post closing acts or
omissions of the party seeking the benefits of indemnification if such acts or
omissions were outside the ordinary course of business and were inconsistent
with industry practices and the manner in which the Business was conducted prior
to Closing) incurred or suffered by Purchaser or any of them (or any combination
thereof) related to, resulting from or arising out of any of the following: (a)
any breach of or any inaccuracy in any representation or warranty made by Seller
pursuant to this Agreement or any Seller's Ancillary Document (it being
understood that solely for purposes of this ARTICLE X, any such representation
or warranty shall be interpreted without giving effect to the words "Material
Adverse Effect," "knowledge" (except to the extent such term refers to
threatened future actions by third parties), "materially" or "material," or
qualifications or limitations or exceptions based on such terms); or variations
of such terms; (b) any breach of or failure by Seller to perform any covenant or
obligation of Seller set out in this Agreement or any Seller's Ancillary
Document; (c) any of the Excluded Assets; (d) any Excluded Liabilities; (e) any
and all claims made in good faith based upon facts alleged that, if true, would
have
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constituted any such inaccuracy, breach or failure; (f) the operation and
conduct of any business or activity of Seller other than the Business; (g) the
failure to obtain any Consent, license, permit, waiver, approval or other
similar authorization specified in SECTION 7.1(G) of the Disclosure Schedule;
and (h) the Bulk Sales Laws of any jurisdiction in connection with the
transactions contemplated by this Agreement (other than Claims by creditors with
respect to the Assumed Obligations).
10.3. INDEMNIFICATION BY PURCHASER. From and after the Closing,
Purchaser and Parent, jointly and severally, agree from and after the Closing to
indemnify Seller and each of its Affiliates, and their respective officers,
directors, employees, stockholders, representatives and agents against, and
agree to hold it and them harmless from, any and all Losses (excluding any and
all Losses to the extent attributable to post closing acts or omissions of the
party seeking the benefits of indemnification if such acts or omissions were
outside the ordinary course of business and were inconsistent with industry
practices and the manner in which the Business was conducted prior to Closing)
incurred or suffered by Seller or any of them related to, resulting from or
arising out of (a) any breach of or any inaccuracy in any representation or
warranty made by Purchaser or Parent pursuant to this Agreement or any Purchaser
Ancillary Document (it being understood that solely for purposes of this ARTICLE
X, any such representation or warranty shall be interpreted without giving
effect to the words "Material Adverse Effect," "knowledge" (except to the extent
such term refers to threatened future actions by third parties), "materially" or
"material," or qualifications or limitations or exceptions based on such terms);
and (b) any breach of or failure by Purchaser or Parent to perform any covenant
or obligation of Purchaser or Parent set out in this Agreement, including the
failure to pay, perform or discharge when due all Assumed Obligations.
10.4. CERTAIN LIMITATIONS. (a) Indemnification claims shall be reduced,
by and to the extent, (i) that an indemnitee shall realize any tax benefit as a
result of such Losses has received proceeds under insurance policies, risk
sharing pools, or similar arrangements (other than self-insurance) specifically
as a result of, and in compensation for, the subject matter of an
indemnification claim by such indemnitee, or (ii) the amount subject to
indemnification is reserved against or reflected as a liability on the Closing
Balance Sheet.
(b) Purchaser will not be entitled to indemnification pursuant
to SECTION 10.2 and Seller will not be entitled to indemnification
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pursuant to SECTION 10.3 with respect to any breach or misrepresentation of any
representation or warranty until such time as its respective aggregate right to
such indemnification exceeds $300,000 after which, Purchaser or Seller will be
entitled to such indemnification in excess of such $300,000 threshold.
(c) Solely with respect to Losses arising out of any breach of
or any inaccuracy in any representation or warranty set forth in this Agreement
(except for any breach of or inaccuracy of representations and warranties
relating to title and/or ownership of the Acquired Assets, including SECTION 3.6
hereof), and notwithstanding anything in this ARTICLE X to the contrary, (i) (A)
subject to SECTION 10.4(C)(I)(B), the aggregate amount of Losses payable by
Seller under SECTION 10.2 shall not under any circumstances exceed $4,000,000
(it being understood that the first $1,500,000 of Losses payable by Seller under
SECTION 10.2 with respect to any breach or inaccuracy in the representations and
warranties in SECTION 3.9 shall not be counted against the foregoing $4,000,000
limitation), and (B) the aggregate amount of Losses payable by Seller under
SECTION 10.2 with respect to any breach or inaccuracy in the representations and
warranties in SECTION 3.9 shall not under any circumstances exceed an amount
equal to $5,500,000 less the aggregate Losses, if any, for which Seller has
indemnified the Indemnified Parties in respect of breaches or inaccuracies in
representations or warranties which are subject solely to the $4,000,000
limitation in SECTION 10.4(C)(I)(A) and (ii) the aggregate amount of Losses
payable by Purchaser under SECTION 10.3 shall not under any circumstances exceed
$4,000,000. Purchaser and Parent, on the one hand, and Seller, on the other
hand, acknowledge and agree that (a) the foregoing limitation on the amount of
Losses payable provided for in this SECTION 10.4(C) applies only to Losses
arising out of any breach of or any inaccuracy in any representation or warranty
set forth in this Agreement and (b) the foregoing limitation on the amount of
Losses payable provided for in this SECTION 10.4(C) shall not limit Losses
payable as a result of, relating to, or arising out of (i) a party's breach of
or failure to perform any covenant or obligation set out in this Agreement, (ii)
any of the Excluded Assets, (iii) any Excluded Liabilities, or (iv) any breach
of or inaccuracy of any representations and warranties relating to title and/or
ownership of the Acquired Assets, including SECTION 3.6 hereof; (v) the
operation of any business or activity of Seller other than the Business; (vi)
the failure to obtain any Consent, license, permit, waiver, approval or other
similar authorization specified in SECTION 7.1(G) of the Disclosure Schedule;
and (vi) the Bulk Sales Laws of any jurisdiction in connection with the
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transactions contemplated by this Agreement (other than Claims by creditors with
respect to the Assumed Obligations).
(d) If, after any indemnification payment has been made in
respect of any Loss, the party receiving the indemnification payment shall
receive any recovery, whether through insurance or otherwise, of the Loss for
which an indemnification payment has been made, the indemnified party shall
promptly, but in no event later than 30 days after such recovery is made,
reimburse the indemnifying party that portion of the indemnification payment
made that relates to the recovered Loss (it being agreed, for this purpose, that
any Loss so recovered shall be applied first to the deductible amount under
SECTION 10.4(B), if and to the extent that such deductible amount was used in
calculating the indemnification payment made by the indemnifying party). To the
extent that an indemnification payment shall be made by Seller in respect of any
accounts receivable from an account debtor which is not collected by Purchaser,
then, for purposes of determining whether such account receivable has been
collected and the indemnification payment recovered, any payments made to the
Purchaser in respect of accounts receivable by such account debtor shall be
applied against the accounts receivable from such account debtor in
chronological order of their age (I.E., first, to the oldest accounts
receivable), unless the account debtor specifically designates otherwise.
(e) Seller, on the one hand, and Purchaser and Parent, on the
other hand, acknowledge and agree that the foregoing indemnification provisions
in this ARTICLE X shall be the exclusive remedy of Seller, on the one hand, and
Purchaser and Parent, on the other hand, with respect to the Division and the
transactions contemplated by this Agreement.
10.5. THIRD-PARTY CLAIMS. Except as otherwise provided in this
Agreement, the following procedures shall be applicable with respect to
indemnification pursuant to this ARTICLE X relating to or arising out of Claims,
actions or omissions by Authorities, or other third parties. Promptly after
receipt by the party seeking indemnification hereunder (hereinafter the
"INDEMNITEE") of notice of the commencement of any (a) tax audit or proceeding
for the assessment of any Tax or any other proceeding likely to result in the
imposition of a liability or obligation for Taxes or (b) any action or the
assertion of any Claim, liability or obligation by an Authority or a third party
(whether by legal process or otherwise), against which Claim, liability or
obligation a party under SECTIONS 10.2 and/or 10.3 (hereinafter the
"INDEMNITOR") is, or may be, required under this Agreement to indemnify such
indemnitee, the indemnitee will, if a claim thereon is to
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be, or may be, made against the indemnitor pursuant to this ARTICLE VIII, notify
the indemnitor in writing of the commencement or assertion thereof and give the
indemnitor a copy of such claim, process and all legal pleadings and other
written evidence thereof. The indemnitor shall have, in all instances, the right
to participate in the defense of such action with counsel of reputable standing.
The indemnitor shall have the right to assume the defense of such action unless
such action (a) may result in Orders, injunctions or other equitable remedies in
respect of the indemnitee or its business; or (b) may result in liabilities
which, taken with other then existing claims under this ARTICLE X, would not be
fully indemnified hereunder. The indemnitor shall have 10 days, after receipt of
notice of such claim, process, legal proceeding and other written notice, to
assume defense thereof. If the indemnitor does assume such defense, it will,
within such 10 days, so notify the indemnitee. If the indemnitor does not assume
such defense and so notify the indemnitee, or if the indemnitor is barred from
assuming such defense pursuant to this SECTION 10.5, then the indemnitee shall
assume such defense, subject to the participation of the indemnitor, as provided
in this SECTION 10.5, and the indemnitee's fees and expenses (including fees and
expenses of counsel) in connection with such defense will be borne by the
indemnitor. In any case, the indemnitor and indemnitee shall cooperate and
assist each other in such defense, and shall make available to the other all
records, documents and information (written or otherwise) relevant to such
defense. If the indemnitee shall be required by judgment or a settlement
agreement to pay any amount in respect of any obligation or liability against
which the indemnitor has agreed to indemnify the indemnitee under this
Agreement, the indemnitor shall promptly reimburse the indemnitee in an amount
equal to the amount of such payment plus all reasonable expenses (including
legal fees and expenses) incurred by such indemnitee in connection with such
obligation or liability, subject to this ARTICLE X. Prior to paying any claim
against which an indemnitor is, or may be, obligated under this Agreement to
indemnify an indemnitee, the indemnitee must first supply the indemnitor with a
copy of a final court judgment or decree, or evidence of assessment of Taxes or
a similar final action by a Taxing Authority, holding the indemnitee liable on
such Claim or failing such judgment or decree, must first receive the written
approval of the terms and conditions of such settlement from the indemnitor,
which approval shall not be unreasonably withheld. An indemnitor or indemnitee
shall have the authority to settle or compromise any Claim for which it has
assumed or conducted the defense pursuant to this SECTION 10.5; provided that an
indemnitor shall not settle or compromise any such Claim if such settlement or
compromise would result
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<PAGE>
in an Order, injunction or other equitable remedy materially adversely affecting
the indemnitee or its business, or would result in liabilities which, taken
together with other existing claims under this ARTICLE X, would not be fully
indemnified hereunder; in each case, without the prior written consent of the
indemnitee, which consent will not be unreasonably withheld. An indemnitee shall
have the right to employ its own counsel in any case, but the fees and expenses
of such counsel shall be at the expense of the indemnitee.
10.6. DETERMINATION OF INDEMNIFICATION AMOUNT. In the event that any
indemnitee believes that it is entitled to claim indemnification from an
indemnitor under this ARTICLE X, the indemnitee shall notify the indemnitor of
such claim, the amount or estimated amount thereof and the basis for such claim
(which will be described in reasonable detail). The indemnitor, on the one hand,
and the Person which is not the indemnitor, on the other hand, will proceed, in
good faith, and using reasonable efforts, to agree on the amount of such
indemnification claim. If they are unable to agree on the amount of such
indemnification claim within 30 days after such notice, (a) if such
indemnification claim arises out of a claim by an Authority or third party of
the type referred to in SECTION 10.5, then the amount of such indemnification
claim will be determined pursuant to a final judgment or settlement or
compromise pursuant to SECTION 10.5, or (b) if such indemnification claim does
not arise out of such a third party claim, then the indemnification claim will
be submitted to arbitration conducted pursuant to the rules and procedures of
the American Arbitration Association. The determination of the amount of any
indemnification claim pursuant to this SECTION 10.6 will be final, binding and
conclusive, and the indemnitor, upon final determination of the amount of the
indemnification claim will pay the indemnitee within 10 days of such final
determination, the full amount, in cash, of such indemnification claim, as
finally determined, and the indemnitee will be entitled to apply to any court or
Authority of competent jurisdiction to enforce such payment (the fees and
expenses of such enforcement, if necessary, to be borne by the indemnitor). In
addition, if the indemnitor does not pay in full the indemnification claim,
within 10 days, as aforesaid, the amount of the indemnification claim, as
finally determined, will be increased by 2% for each 4-week period that it is
not paid in full.
10.7. FAILURE TO GIVE TIMELY NOTICE. A failure by an indemnitee to give
timely, complete or accurate notice as provided in this Article X will not
affect the rights or obligations of any party hereunder except and only to
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<PAGE>
the extent that, as a result of such failure, any party entitled to receive such
was damages as a result of such failure to give timely notice.
10.8. TREATMENT OF INDEMNIFICATION PAYMENTS. Amounts paid to an
indemnitee as indemnification hereunder shall be treated as adjustments to the
consideration for the Business paid pursuant to this Agreement. If any Tax
authority successfully asserts that an indemnification payment is not an
adjustment to such consideration, the indemnitor shall indemnify the indemnitee
for any Tax imposed upon the Indemnitee in connection with its receipt of such
indemnification payment, including any Tax imposed on any payment pursuant to
this SECTION 10.8.
10.9. RIGHTS OF SET-OFF. If Seller becomes liable to any indemnitee for
any indemnity pursuant to this Article X, in addition to its other rights,
Purchaser shall have the right to offset any such liability against any and all
amounts otherwise due or to become due to Seller under this Agreement and any
agreement delivered pursuant hereto; provided that Purchaser complies with the
procedures set forth in this Article X.
ARTICLE XI
MISCELLANEOUS
11.1. EXPENSES. Each party hereto shall bear its own expenses with
respect to this transaction. Seller agrees to pay and be responsible for all
sales, use, stamp, transfer, service, recording, real estate and like taxes or
fees, if any, imposed by any Authority, required to be paid by any party in
connection with the transfer and assignment of the Business.
11.2. AMENDMENT. This Agreement may be amended, modified or
supplemented but only in writing signed by Purchaser and Parent, on the one
hand, and Seller, on the other hand.
11.3. NOTICES. Any notice, request, instruction or other document to be
given hereunder by a party hereto shall be in writing and shall be deemed to
have been given, (i) when received if given in person, (ii) on the date of
transmission if sent by telex, telecopy or other wire transmission (provided
that a copy of such transmission is simultaneously posted in the manner provided
in clause (iii) below) or (iii) three days after being deposited in the U.S.
mail, certified or registered mail, postage prepaid:
(A) If to Purchaser, addressed as follows:
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<PAGE>
Molex Industrial Ventures Inc.
c/o
Molex Incorporated
2222 Wellington Court
Lisle, Illinois 60532
Attention: Thomas S. Lee, Vice President of New
Ventures and Acquisitions
Louis A. Hecht, Secretary and General
Counsel
Telecopy: (630) 512-8632
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<PAGE>
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
Attention: Michael M. Froy, Esq.
Mark L. Dosier, Esq.
Telecopy: (312) 876-7934
(B) if to Parent, addressed as follows:
Molex Incorporated
2222 Wellington Court
Lisle, Illinois 60532
Attention: Thomas S. Lee, Vice President of New
Ventures and Acquisitions
Louis A. Hecht, Secretary and General
Counsel
Telecopy: (630) 512-8632
with a copy to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
233 S. Wacker Drive
Chicago, Illinois 60606
Attention: Michael M. Froy, Esq.
Mark L. Dosier, Esq.
Telecopy: (312) 876-7934
(C) If to Seller, addressed as follows:
Axsys Technologies, Inc.
910 Sylvan Avenue
Suite 180
Englewood Cliffs, New Jersey 07632
Attention: Chief Financial Officer
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<PAGE>
Facsimile: (201) 871-7750
with a copy to:
Kenneth R. Blackman, Esq.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Facsimile: (212) 859-4000
or to such other individual or address as a party hereto may designate for
itself by notice given as herein provided.
11.4. AMOUNTS IN UNITED STATES DOLLARS. For purposes of this Agreement,
all figures set out herein which are preceded by the "$" symbol shall be deemed
amounts in United States Dollars.
11.5. COUNTERPARTS. This Agreement may be executed simultaneously in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.6. GOVERNING LAW. The validity, performance and enforcement of this
Agreement and all Ancillary Documents, unless expressly provided to the
contrary, shall be governed by the laws of the State of New York, without giving
effect to any choice of law principle which would require the application of the
laws of any other jurisdiction.
11.7. ASSIGNMENT. This Agreement may not be assigned by any party
hereto without the written consent of each other party hereto, except that prior
to the Closing Date Purchaser may assign its rights and obligations hereunder to
Parent without the consent of any other Person. Purchaser may grant a security
interest in respect of its rights hereunder to its lenders, which may exercise
their rights in respect of that security interest.
11.8. NO THIRD PARTY BENEFICIARIES. This Agreement is solely for the
benefit of the parties hereto and their respective affiliates and no provision
of this Agreement (other than the provisions of ARTICLE VI and ARTICLE X) shall
be deemed to confer upon third parties any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
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<PAGE>
11.9. TAX MATTERS.
(a) Purchaser and Seller shall treat and report the
transaction contemplated by this Agreement in all respects consistently for
purposes of any federal, state or local tax, including, without limitation, the
calculation of gain, loss and basis with reference to the Purchase Price
allocation made pursuant to SECTION 2.3 hereof. The parties hereto shall not
take any actions or positions inconsistent with the obligations set forth herein
unless required by relevant tax law.
(b) Purchaser shall make available to Seller, and Seller shall
make available to Purchaser, (i) such records as any such party may require for
the preparation of any Tax Returns required to be filed by Seller or Purchaser
and (ii) such records as Seller or Purchaser may require for the defense of any
audit, examination, administrative appeal, or litigation of any Tax Return in
which Seller was included.
(c) Purchaser shall cooperate with Seller in filing any tax
returns that have been historically filed by the Division on behalf of the
Seller, including, without limitation, returns relating to withholding taxes or
other amounts collected from salaries and wages of Employees which are required
to be remitted to any Authority.
11.10. OTHER INSTRUMENTS. Upon the reasonable request of the other
party hereto, Purchaser and Seller will on and after the Closing Date execute
and deliver to the other party such other documents, releases, assignments and
other instruments as may be required to effectuate completely the transfer and
assignment to Purchaser of, and to vest fully in Purchaser title to, each of the
Acquired Assets and Assumed Obligations.
11.11. ARBITRATION. Seller, on the one hand, and Purchaser and Parent,
on the other hand, agree that any dispute between or among the parties to this
Agreement relating to or in respect of this Agreement, its negotiation,
execution, performance, subject matter, or any course of conduct or dealing or
actions under or in respect of this Agreement, shall be submitted to, and
resolved exclusively pursuant to arbitration in accordance with the commercial
arbitration rules of the American Arbitration Association. Such arbitration
shall take place in New York, New York, and shall be subject to the substantive
law of the State of New York. Decisions pursuant to such arbitration shall be
final, conclusive and binding on the parties. Upon the conclusion of
arbitration, any of Seller, Purchaser or
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<PAGE>
Parent may apply to any court having jurisdiction over such matter to enforce
the decision pursuant to such arbitration.
11.12. ENTIRE UNDERSTANDING. This Agreement and the Confidentiality
Agreement set forth the entire agreement and understanding of the parties hereto
in respect to the transactions contemplated hereby and supersede all prior
agreements, arrangements and understandings relating to the subject matter
hereof and is not intended to confer upon any other person any rights or
remedies hereunder. There have been no representations or statements, oral or
written, that have been relied on by any party hereto, except those expressly
set forth in this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered on the date first above written.
MOLEX INDUSTRIAL VENTURES INC.
By: /s/ J. JOSEPH KING
------------------------------------
Name: J. Joseph King
Title: President and Chief Operating
Officer
MOLEX INCORPORATED
By: /s/ THOMAS S. LEE
------------------------------------
Name: Thomas S. Lee
Title: Vice President New Ventures
and Acquisitions
AXSYS TECHNOLOGIES, INC.
By: /s/ STEPHEN BERSHAD
------------------------------------
Name: Stephen Bershad
Title: Chairman
- 68 -
<PAGE>
EXHIBIT 21
SUBSIDIARIES
NAME STATE OF INCORPORATION
----------------------- ----------------------
Precision Aerotech, Inc. Delaware
Speedring, Inc. Delaware
Speedring Systems, Inc. Delaware
Teletrac Inc. California
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (No. 333-43389, 33-09559 and 033-79996).
/s/ Arthur Andersen
- ----------------------
(ARTHUR ANDERSEN LLP)
New York, New York
March 25, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF AXSYS TECHNOLOGIES, INC. AS OF DECEMBER 31, 1999
AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR THEN ENDED AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 385
<SECURITIES> 0
<RECEIVABLES> 12,040
<ALLOWANCES> 503
<INVENTORY> 25,866
<CURRENT-ASSETS> 48,009
<PP&E> 21,742
<DEPRECIATION> 9,793
<TOTAL-ASSETS> 64,150
<CURRENT-LIABILITIES> 16,614
<BONDS> 1,793
0
0
<COMMON> 41
<OTHER-SE> 43,660
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<SALES> 85,418
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<TOTAL-COSTS> 64,413
<OTHER-EXPENSES> 30,355
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<INTEREST-EXPENSE> 376
<INCOME-PRETAX> (10,057)
<INCOME-TAX> (854)
<INCOME-CONTINUING> (9,203)
<DISCONTINUED> 2,081
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<CHANGES> 0
<NET-INCOME> 7,122
<EPS-BASIC> (1.76)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
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0 0
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<LOSS-PROVISION> 306 159
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<INCOME-TAX> 727 2,671
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<NET-INCOME> 6,099 5,134
<EPS-BASIC> 1.46 1.53
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</TABLE>
