UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Commission File
Ended March 31, 1998 Number 0-7445
DATRON SYSTEMS INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 95-2582922
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(State of Incorporation) (I.R.S. Employer Ident. No.)
304 Enterprise Street, Escondido, California 92029-1297
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (760) 747-3734
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No __.
Indicate by check mark if disclosure of delinquent filings 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 )
The aggregate market value of the voting stock (which consists solely
of shares of Common Stock) held by non-affiliates of the registrant as
of June 19, 1998 was $19.5 million, based on the closing price on that
date on the Nasdaq Stock Market.
The number of shares outstanding of each of the registrant's classes
of common stock as of June 19, 1998 was: Common Stock, par value
$0.01 -- 2,679,284 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of registrant's Annual Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended, in connection with the Annual Meeting of
Stockholders of the registrant to be held August 5, 1998 are
incorporated by reference into Part III of this report.
2. Registrant's Annual Report of its Employee Stock Purchase Plan
for the fiscal year ended March 31, 1998 is incorporated by
reference into Exhibit 99.1.
3. Items contained in the above-referenced documents that are not
specifically incorporated by reference are not included in this
report.
<PAGE>
DATRON SYSTEMS INCORPORATED
FORM 10-K
FISCAL YEAR 1998
TABLE OF CONTENTS
PART I 1
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security
Holders 8
PART II 9
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations 9
Item 8. Financial Statements And Supplemental
Data 9
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 9
PART III 10
Item 10. Directors and Executive Officers of the
Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management 10
Item 13. Certain Relationships and Related
Transactions 10
PART IV 11
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 11
<PAGE> 1
PART I
Item 1. Business.
Company Overview
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide specialized satellite communication products and
systems and high quality radio communication products and services to
worldwide private and governmental markets and to several United
States Government customers, including the Department of Defense
("DoD"). The Company was founded in 1969 and became an independent
publicly held corporation in 1985.
The Company operates its business through two subsidiaries. In
October 1985, the Company acquired its wholly owned subsidiary, Datron
World Communications Inc., formerly known as Trans World
Communications, Inc. ("DWC"). DWC conducts the Company's
Communication Products and Services business. In June 1990, the
Company acquired its wholly owned subsidiary, Datron/Transco Inc.,
formerly known as Transco Communications Inc. ("D/T"). D/T conducts
the Company's Antenna and Imaging Systems business. In September
1993, the Company formed a wholly owned subsidiary, Datron
Telecommunications International Inc., to provide private
international telecommunication systems. Datron Telecommunications
was merged into DWC on March 31, 1995. The Company discontinued its
private international telecommunications business in fiscal 1996.
In March 1996, D/T consolidated its image processing division in San
Jose, California, which was acquired in August 1994, with its remote
sensing earth station business in Simi Valley, California. In
connection with that consolidation, the Company recorded a
restructuring charge of $1,421,000 ($855,000, or $0.32 per share,
after taxes).
Investment Considerations
This report contains certain forward-looking statements that may be
used in evaluating the opportunities and risks associated with future
Company performance. However, actual results could differ materially
from those described in the forward-looking statements due to, among
other things, the following factors:
Dependence on Sales to Foreign Customers
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Sales to foreign customers accounted for 55%, 49% and 58% of
consolidated sales in fiscal 1998, 1997 and 1996, respectively. Sales
of Communication Products and Services have been even more highly
concentrated with foreign customers: 88%, 94% and 93% in fiscal 1998,
1997 and 1996, respectively. Sales to foreign customers often involve
risk because of political and economic uncertainties in many foreign
countries, which can result in funding delays or inability of those
customers to obtain financing for anticipated purchases of Company
products. As a result, it is often more difficult to predict order
bookings from foreign customers than it is from domestic customers.
In addition, foreign political unrest, war and economic downturns
could have a significant negative impact on future Company sales and
income.
Reliance on Large Orders from a Small Number of Customers
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A substantial percentage of sales may be heavily concentrated with a
small number of customers. Within the Communication Products and
Services business segment, the same single customer accounted for 24%,
30% and 39% of that segment's sales in fiscal 1998, 1997 and 1996,
respectively. Although sales in the Antenna and Imaging Systems
business segment have not been so heavily concentrated with one
customer, it is common for a small number of customers to each account
for approximately 5% to 15% of that segment's sales each year.
Because it is unusual to receive large orders from the same customer
in successive years, it is necessary to find new customers each year
to replace the previous year's sales. There can be no assurance that
the Company will be able to do so in the future. In addition,
reliance on large orders can result in financial performance varying
widely from quarter-to-quarter, and also carries contract cancellation
risk that can more adversely affect Company performance than it would
if the Company depended on small orders from a large number of
customers.
<PAGE> 2
Timely Development and Customer Acceptance of New Products
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The Company's products are subject to obsolescence. To prevent this
from occurring, the Company has an ongoing new product development
program to keep the technologies employed in its products current and
to introduce new products that meet changing market requirements.
Lack of timely development of new technologies and new products, or
lack of acceptance of new products by the Company's customers could
have a negative impact on future sales and income.
Fixed Price Development Contracts
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The Company often accepts fixed-price contracts that require custom
engineering, custom software or the development of new features and
capabilities. Such contracts usually include the sale of standard
products and components, but not always. Although engineering cost
estimates are prepared as a basis for quoting such contracts, there
can be no assurance the Company will be able to develop the required
features, capabilities or software within established cost budgets.
Should development costs exceed established budgets, the result could
have a material adverse effect on earnings.
New Consumer Product and Market
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In November 1995, the Company introduced its first consumer product, a
mobile direct broadcast satellite ("DBS") television reception system
for recreational vehicles, buses and long-haul trucks. This product
represents a departure from the Company's historical business that has
focused on large contracts, relatively small numbers of deliverables
and customers that are primarily government agencies or large
corporations. Several additional DBS antenna products have
subsequently been introduced, including a marine product line and
antenna systems for large business jets and commercial jets. A
production line has been established to meet expected demand for these
products. In fiscal 1997, the Company determined its method of using
exclusive national distributors to sell these products was not
effective, and spent the latter part of that year unwinding the
distribution agreements, clearing the distribution pipeline and
establishing a factory direct to dealer distribution system. The
Company does not have previous experience in building or selling a
consumer product. Although it believes it can produce DBS products in
required quantities, there can be no assurance it will be able to do
so. Also, although the Company believes its new methods of
distribution will improve sales, there can be no assurance they will
or that consumer demand for its DBS products will be as large as the
Company anticipates.
Competitors
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The Company has competitors for all the products and services it
offers. The level of competition varies by product line and ranges
from many competitors for its radio products to a few competitors for
its tracking antenna products. The Company could be adversely
affected by competitors' development of new or different products that
may provide or be perceived as providing greater value than the
Company's products. The Company may or may not be successful in
developing competing products. Many of the Company's competitors and
potential competitors have substantially greater resources than the
Company and may be more successful in developing, producing and
marketing their products. In such case, the Company may experience
substantial competition, which could have a material adverse effect on
the Company's business.
<PAGE> 3
Declining Sales for the U.S. Department of Defense
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In fiscal 1993, the Company restructured its operations in response to
declining DoD spending. Sales for the DoD have declined from $31.9
million in fiscal 1993 to $12.1 million in fiscal 1998, primarily due
to completion of long-term DoD contracts that have not been replaced
with new orders. The Company believes sales for the DoD may continue
to decline in the future, although at a less severe rate than in
recent years. However, those sales are still expected to represent a
significant portion of the Company's consolidated sales. There can be
no assurance that new DoD orders will be received or that the orders
received will be sufficient to meet the Company's sales objectives.
General
The Company operates in two business segments: Antenna and Imaging
Systems, which are supplied by D/T, and Communication Products and
Services, which are supplied by DWC.
Antenna and Imaging Systems
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This segment designs and manufactures satellite communication
terminals, telemetry tracking and control systems, servo control
products and high-quality microwave antennas. In fiscal 1994, because
of a continuing decline in defense business, the Company began
pursuing additional markets for its products. The primary such market
has been remote sensing satellite earth stations, and the Company now
provides earth station hardware, software and image processing systems
to that market. In fiscal 1996, the Company introduced a mobile
satellite television reception system for recreational vehicles, buses
and long-haul trucks. That system was the Company's first consumer
product.
The business of this segment was adversely affected in fiscal 1996 by
the cancellation of an $8.8 million remote sensing system order and by
lower than anticipated order bookings and sales of remote sensing
systems. It was these events that led to the consolidation of the
remote sensing business in the fourth fiscal quarter ended March 31,
1996.
In fiscal 1998, low gross margins in this business segment resulting
from cost overruns primarily due to inadequate engineering were
responsible for a $2.5 million operating loss. Because of this
problem, several new managers and engineers were hired, and the
subsidiary president was replaced.
Descriptions of the major product areas follow:
Satellite Communication ("SATCOM") Terminals. The Company is a
supplier of satellite communication antenna systems and subsystems
used to receive defense-related data and data transmitted through
satellites of other government and commercial organizations. The
stabilizing and automatic tracking capabilities of its antenna systems
make them particularly well suited for use on ships, motor vehicles
and other mobile platforms. Over the past two decades, the Company
has been a prime contractor and a subcontractor for shipboard SATCOM
antenna systems used by the U.S. Navy. More recently, the Company has
been developing airborne SATCOM antenna systems for the U.S. Air
Force.
The United States military has developed a SATCOM system known as
MILSTAR. The Company has been a subcontractor of Raytheon in the
Navy's segment of the MILSTAR program known as NESP. Under the
subcontract, the Company developed a pedestal for shipboard antennas
that supports and positions the antenna in response to external
commands. This program was substantially concluded in fiscal 1997.
<PAGE> 4
Telemetry Tracking and Control ("TT&C") Systems. TT&C systems monitor
and control vehicles such as satellites, missiles and aircraft. They
receive radio telemetry signals containing vehicle status information,
engage in automatic tracking of the vehicle so contact is maintained
and transmit command signals so vehicle control can be established and
maintained.
Servo Control Products. The Company's involvement with SATCOM and
TT&C markets has required a high capability in radio frequency
electronics, antenna engineering, servo controls and large precision
mechanical systems. The Company has developed a line of pedestals and
rotators, servo power amplifiers and positioning control units that
are often used as building blocks for specific customer requirements.
Microwave Products. The Company designs and manufactures broad
bandwidth microwave antennas for the aerospace industry that are used
on high performance aircraft, missiles and space launch vehicles.
Remote Sensing Satellite ("RSS") Systems. The RSS systems market is a
subset of the broader earth observation market. It involves using
several types of satellites containing optical and radar sensors in
conjunction with specific earth acquisition and data processing
equipment to produce images. The images are in the form of hard copy
and/or digital data that allow the user to study changes on the
earth's surface or environment. Applications include locating
minerals, updating maps, forecasting weather, monitoring crops,
studying the environment, monitoring earth resources and gathering
economic or military intelligence.
The Company has supplied antennas for RSS purposes for several years.
In fiscal 1994, the Company began to focus more attention and
resources on the RSS systems market. As part of this strategy, the
Company formed a joint venture with International Imaging Systems,
Inc. ("I2S"), a privately-held company in Milpitas, California, to
provide complete RSS systems for the international marketplace. I2S's
expertise was in the fields of digital image processing and
photogrammetry. The Company acquired I2S in fiscal 1995 and now
offers its customers complete RSS earth stations, including image
processing capability. In fiscal 1998, RSS sales accounted for 33% of
the Antenna and Imaging Systems' sales compared with 35% of its sales
in fiscal 1997.
Mobile DBS Television Systems. The Company introduced its first DBS
antenna product in fiscal 1996. That product allows a recreational
vehicle owner or trucker to receive DBS television from a parked
vehicle at the touch of a button by automatically locating the
satellite. During fiscal 1997, the Company introduced several
additional DBS antenna products including systems for boats at anchor,
boats underway, RVs and trucks on the open road, and satellite
telephone service through a dual frequency feed that operates
simultaneously with the television system. Also during fiscal 1997,
the Company was first to demonstrate live DBS television on a
commercial airliner, and in fiscal 1998, was first to obtain Federal
Aviation Administration certification of an airborne DBS system
designed for large business jets.
Customers and Marketing
Sales of Antenna and Imaging Systems' products and services have
historically been concentrated with the DoD, which accounted for 31%
of this segment's fiscal 1998 sales and 47% of its fiscal 1997 sales.
Marketing and sales activities for its DoD customers and other non-
defense governmental agencies are conducted by internal sales and
engineering personnel. Most customers for the RSS systems business
are foreign government space and communications agencies. Marketing
and sales activities for those products are conducted through
independent sales representatives in Europe, South America and Asia.
Introduction of mobile DBS television systems required the
establishment of new distribution methods to sell these consumer
products. The Company's initial approach of using exclusive national
distributors was not effective and the Company is now selling its DBS
products direct to dealers and original equipment manufacturers, as
well as through select non exclusive distributors and agents. Company
employees provide sales and marketing support and installation
training for the dealers.
<PAGE> 5
Manufacturing, Assembly and Sources of Supply
Products for the Company's Antenna and Imaging Systems segment are
designed, manufactured and assembled at facilities in Simi Valley,
California. The Company purchases certain components and subsystems
from subcontractors and vendors. Some of these items are standard off-
the-shelf components and others are fabricated to Company
specifications. The Company also fabricates electronic assemblies
from purchased electronic components and circuit boards. A production
line for DBS antenna products was established in fiscal 1996 and
expanded in fiscal 1997.
The Company is rarely dependent on a single source of supply for
materials, parts or components. However, once a subcontractor is
selected to provide components built to Company specifications, the
Company is often dependent on that subcontractor. Failure of the
subcontractor to perform could jeopardize the ability of the Company
to meet its required delivery schedules.
Communication Products and Services
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This business segment designs, manufactures and distributes high
frequency ("HF") radios and accessories for over-the-horizon radio
communications and very high frequency ("VHF") radios and accessories
for line-of-sight communications. The Company's HF radios operate in
the frequency range of 1.6 to 30 megahertz, where radio waves
generated from the transmitter reflect off the ionosphere back to the
point of receipt on earth. The Company's VHF radio products, which
operate in the frequency range of 30 to 88 megahertz, provide users
high-quality transmission for line-of-sight communications.
In addition to its standard radios, the Company offers frequency
hopping and encryption options to its VHF product line and automatic
link establishment options to its HF product line. Frequency hopping
is a technique that prevents interruption or interception of radio
signals by changing, at very high speeds, the frequency at which they
are transmitted. This technology utilizes advanced synchronized
mechanisms that ensure all radios in a network are synchronized and
frequency hop at the same time. Automatic link establishment, when
used in HF radio equipment, automatically determines the best
available frequencies on which to communicate.
The Company offers a wide range of accessory products to complement
the HF and VHF product lines. These accessory products include
antennas and antenna tuners, power sources, amplifiers, remote control
systems, modems, data communications equipment and audio accessories.
A substantial percentage of sales of Communication Products and
Services are often concentrated with a small number of customers. In
fiscal 1998, two Asian customers accounted for 24% and 10% of this
segment's sales and a South American customer accounted for 12% of its
sales. In fiscal 1997, the same two Asian customers accounted for 30%
and 24% of this segment's sales. And, in fiscal 1996, one of the same
Asian customers accounted for 39% of this segment's sales. Because it
is unusual to receive large orders from the same customer in
successive years, it is often necessary to find new customers each
year to replace the previous year's sales. To minimize the impact
fluctuating sales may have on the Company's operations, temporary
employees are used whenever possible.
The Federal Communications Commission granted the Company a license to
carry international telephone traffic in May 1993 and the Company
began carrying international telephone traffic to customers in Ukraine
and Latvia in September 1993 and to a customer in Russia during fiscal
1995. Also in fiscal 1995, the Company established an uplink facility
in California to carry satellite paging traffic for customers in the
United States. However, in fiscal 1996, the Company determined that
significantly larger resources would be required to compete
successfully in these markets and that competition would likely drive
margins to an unacceptably low level. Consequently, the Company
withdrew from these markets during fiscal 1996.
<PAGE> 6
Customers and Marketing
Sales to foreign customers accounted for 88% of this segment's fiscal
1998 sales and 94% of the segment's fiscal 1997 sales. Most of its
international customers are agencies of foreign governments that
perform civil defense, paramilitary and military operations, and
foreign governmental agencies that perform civilian tasks unrelated to
military operations, such as civil aviation agencies, drug
interdiction agencies, embassies and disaster relief organizations.
Domestic customers are primarily various agencies of the United States
Government, including the Drug Enforcement Administration and
Department of State.
The Company's products are sold in over 80 countries by a network of
independent sales and service representatives, most of whom are non-
exclusive sales agents of the Company. These representatives provide
both pre-sale and post-sale support. Many of them operate service
facilities that offer both warranty and long-term maintenance of the
Company's equipment. Sales are usually denominated in U.S. Dollars.
In addition to direct sales, the Company sometimes sells its radio
products to international suppliers of complementary equipment. It
also sometimes licenses the local manufacturing of its equipment to
customers in certain countries. The latter practice is usually
followed where local regulations discourage the importation of
complete units.
Manufacturing, Assembly and Sources of Supply
Communication products are designed and manufactured at facilities in
Escondido, California. Company engineers work closely with
manufacturing and marketing personnel to improve existing designs and
to introduce new products that meet the ever changing demands of the
marketplace. A new family of tactical VHF radios was introduced in
fiscal 1998 and a new family of handheld radios was introduced in
fiscal 1997. The Company purchases certain electronic components,
circuit boards and fabricated metal parts, and painting and silk
screening services. Other than when it licenses overseas
manufacturing for a particular local market, the Company performs most
other manufacturing functions necessary for the production of its
products.
The Company is rarely dependent on any single source of supply for the
manufacture of its communication products. Although only one supplier
may be used for certain parts, the Company believes that multiple
sources are usually available.
Backlog
Order backlog at March 31 was as follows:
1998 1997
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Antenna and Imaging Systems $19,949,000 $13,086,000
Communication Products and Services 5,494,000 4,862,000
----------- -----------
Total $25,443,000 $17,948,000
=========== ===========
The 52% increase in Antenna and Imaging Systems backlog at March 31,
1998 compared with March 31, 1997 was primarily due to higher bookings
of remote sensing systems and antennas for the DoD and other non-
defense governmental customers.
The 13% increase in Communication Products and services backlog at
March 31, 1998 compared with March 31, 1997 was due to improved order
bookings in the third and fourth quarters of fiscal 1998.
<PAGE> 7
Competition
The Company competes in each of its business segments with several
companies. Depending on the specific product, these companies may be
similar in size to the Company or may be large diversified companies
which at times may also be customers of the Company. The Company
believes its major competitive advantages are the quality of its
products, their cost effective designs, timeliness of delivery, ease
of use and easy serviceability.
Patents, Trademarks, Copyrights and Licenses
The Company has applied for several patents related to its DBS
products. However, the Company believes that patents are not a
significant factor in the Company's business and that the success of
the Company depends primarily on the technical competence and
managerial and marketing ability of the Company's personnel.
DATRON(R) and design, TRANSWORLD(R), I2S(R), PRI2SM(R), OPEN 2000(R),
DBS-2000(R), DBS-3000(R), DBS-4000(R) and VI2STA(R) are registered
trademarks of the Company.
The Company has obtained licenses for the VHF frequency hopping
technology and for the automatic link establishment technology used in
the Company's VHF and HF radio products, respectively.
Employees
The Company employed approximately 319 employees at the end of fiscal
1998 compared with approximately 309 employees at the end of fiscal
1997. The 3% increase in employment during fiscal 1998 was primarily
due to a similar increase in sales for fiscal 1998.
None of the Company's employees are covered by a collective bargaining
agreement and the Company considers its employee relations to be good.
Financial Information
Additional financial information concerning segment, geographic and
major customers is included in Note 10 of the Notes to Consolidated
Financial Statements. See Part II, Item 8.
Item 2. Properties.
DWC leases approximately 63,000 square feet of office, engineering and
manufacturing space in Escondido, California. The lease term expires
on January 31, 1999 with two renewal options of five years each. DWC
and the Company's corporate headquarters operate from that facility.
In March 1998, the Company signed a new ten-year lease for a 70,000
square foot production and office facility located in Vista,
California. That lease commences February 1, 1999 and contains a
renewal option of five years. The Vista facility will replace the
Escondido facility.
D/T owns a 110,000 square foot office, engineering and manufacturing
building located on a nine-acre site in Simi Valley, California. D/T
conducts operations from that facility.
D/T leases 139,000 square feet of office, engineering and
manufacturing space in Camarillo, California. The term of the lease
is seven years expiring June 28, 1998. In June 1993, the Company
moved from that facility as part of the consolidation of D/T. The
Company has sublet 108,100 square feet of the facility to three
subtenants whose subleases expire on June 28, 1998. D/T also leases a
20,000 square foot office, engineering and manufacturing facility in
San Jose, California. That lease term expires March 31, 1999. The
Company has sublet that facility to a subtenant whose sublease expires
March 31, 1999.
<PAGE> 8
Information with respect to obligations for lease rentals is included
in Note 9 of the Notes to Consolidated Financial Statements. See Part
II, Item 8. The Company considers its properties to be suitable and
adequate for its present needs. The facilities in Escondido and Simi
Valley are being fully utilized. The facility in Camarillo is not
needed and a portion of it has been sublet. The facility in San Jose
is not needed and has been sublet.
Item 3. Legal Proceedings.
The Company is not involved in any litigation that is expected to have
a material effect on the Company's business or consolidated financial
position.
In August 1992, Trans World Communications, Inc. ("Trans World"), a
wholly owned subsidiary of the Company and which was renamed Datron
World Communications Inc. on March 31, 1995, was named as defendant in
a lawsuit filed by ATACS Corporation ("ATACS") and AIRTACS Corporation
("AIRTACS") relating to a contract to provide radio communication
shelters. ATACS and AIRTACS contend that Trans World entered into an
agreement to team with them on the contract and then wrongfully failed
to use them as subcontractors. They seek damages in excess of
$2,000,000. In a May 28, 1997 ruling, the court found Trans World in
breach of a teaming agreement but was not able to determine what
damages, if any, were incurred by ATACS and AIRTACS. The court
ordered both parties to submit supplemental findings to support their
positions regarding damages. On September 3, 1997, the court awarded
ATACS and AIRTACS one dollar ($1.00) in damages. ATACS and AIRTACS
have appealed the court's decision. The Company has taken a cross
appeal with respect to the issue of whether the Company was in breach
of any teaming agreement. The Company believes final resolution of
this matter will not materially affect the consolidated financial
position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Registrant
David A. Derby, 56, has been President and Chief Executive Officer of
the Company since May 1982, and Chairman of the Board since April
1998.
William L. Stephan, 52, has been Vice President, Chief Financial
Officer and Treasurer of the Company since November 1993.
Executive officers are elected by and serve at the discretion of the
Board of Directors. There are no family relationships among directors
or executive officers of the Company.
<PAGE> 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Information required by Item 5 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Common Stock Activity" on the inside back cover of the Annual Report,
that portion of which is attached hereto as Exhibit 13.
Item 6. Selected Financial Data.
Information required by Item 6 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Datron Systems Incorporated Selected Financial Data" on the inside
front cover of the Annual Report, that portion of which is attached
hereto as Exhibit 13.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Information required by Item 7 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 6 through 9 of the Annual Report, that
portion of which is attached hereto as Exhibit 13.
Item 8. Financial Statements and Supplementary Data.
Information required by Item 8 of Form 10-K is incorporated herein by
reference from the consolidated financial statements of the Company at
March 31, 1998 and 1997 and for each of the three years in the period
ended March 31, 1998 and the Independent Auditors' Report appearing on
pages 10 through 24 of the Annual Report, that portion of which is
attached hereto as Exhibit 13.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
During the two most recent fiscal years ended March 31, 1998, there
has not been a change in accountants or a reported disagreement with
accountants on any matter of accounting principles or practices or
financial statement disclosure.
<PAGE> 10
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information required by Item 10 of Form 10-K with respect to directors
is incorporated herein by reference from the information contained in
the section captioned "Nomination and Election of Directors" in the
Company's Notice of Annual Meeting of Stockholders to be Held
Wednesday, August 5, 1998 at 11:00 A.M. and Proxy Statement ("Proxy
Statement"), a copy of which is to be filed as Exhibit 22 within 120
days of the end of the Registrant's fiscal year.
Information required by Item 10 of Form 10-K with respect to executive
officers is set forth in Part I of this report under the section
captioned "Executive Officers of the Registrant," pursuant to
instruction 3 to paragraph (b) of Item 401 of Regulation S-K.
Item 11. Executive Compensation.
Information required by Item 11 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Executive Compensation" in the Proxy Statement, a copy of which is to
be filed as Exhibit 22 within 120 days of the end of the Registrant's
fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information required by Item 12 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement, a copy of which is to be filed as Exhibit 22
within 120 days of the end of the Registrant's fiscal year.
Item 13. Certain Relationships and Related Transactions.
Information required by Item 13 of Form 10-K is incorporated herein by
reference from the information contained in the section captioned
"Executive Compensation" in the Proxy Statement, a copy of which is to
be filed as Exhibit 22 within 120 days of the end of the Registrant's
fiscal year.
<PAGE> 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.
(a) The following documents are filed as part of this report:
Page in 1998
Annual Report
------------
(1) Financial Statements:
Consolidated Balance Sheets at March 31, 1998 and 1997 10
Consolidated Statements of Operations for the Years Ended
March 31, 1998, 1997 and 1996 11
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 1998, 1997 and 1996 12-13
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996 14
Notes to Consolidated Financial Statements 15-23
Independent Auditors' Report 24
(2) Financial Statement Schedules: Page
----
Independent Auditors' Report on Financial Statement
Schedule S-1
Schedule II. Valuation and Qualifying Accounts S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits. The following exhibits are filed as part of this
report:
Exhibit
Number Description
- ------ -----------
3.1 Certificate of Incorporation.<F1>
3.2 Bylaws.<F1>
4.15 Stockholder Rights Agreement dated August 21, 1990.<F7>
4.16 First Amendment to Stockholder Rights Agreement dated as
of October 29, 1993.<F8>
<PAGE> 12
10.5 1988 Key Employee Stock Purchase Plan.<F2>
10.8 Employment Agreement between the Registrant and David A.
Derby. <F3>
10.10 Employment Agreement between the Registrant and Richard
W. Pershing.<F3>
10.31 Lease of Trans World Communications, Inc. facilities at
298, 302 and 304 Enterprise Street, Escondido, California.<F4>
10.32 Sublease of Transco Products, Inc. facilities at 1001
Flynn Rd., Camarillo, California.<F5>
10.33 Guaranty of Sublease for Transco Products, Inc.
facilities.<F5>
10.34 Consent and Nondisturbance Agreement.<F5>
10.36 Amended and Restated 1985 Stock Option Plan.<F6>
10.37 First Amendment to Trans World Communications, Inc. Lease
Agreement dated January 15, 1993.<F9>
10.38 Contribution and Assumption Agreement between Datron
Systems Incorporated and Datron/Transco Inc. dated June 30,
1993.<F9>
10.39 Datron Systems Incorporated Profit Sharing and Savings
Plan (Amended and Restated as of March 1, 1994).<F9>
10.40 Trans World Communications, Inc. 401(k) Plan, as amended
effective April 1, 1994.<F9>
10.46 1995 Stock Option Plan.<F10>
10.47 Second Amendment to Trans World Communications, Inc.
Lease Agreement dated February 8, 1995.<F10>
10.48 Agreement and Plan of Merger between Datron
Telecommunications International Inc. and Trans World
Communications, Inc. dated as of March 14, 1995.<F10>
10.53 Datron Systems Incorporated Supplemental Executive Profit
Sharing Plan (Effective as of April 1, 1994).<F11>
10.54 Third Amendment to Trans World Communications, Inc. Lease
Agreement dated May 1, 1995.<F11>
10.57 First Amendment of the Datron Systems Incorporated Profit
Sharing and Savings Plan (Amended and Restated as of March 1,
1994).<F12>
10.58 Datron Systems Incorporated Employee Stock Purchase Plan
(Adopted Effective July 1, 1997).<F12>
10.59 Amended and Restated Credit Agreement and Note between
the Registrant and Union Bank of California dated August 8,
1997.<F13>
<PAGE> 13
10.60 Waiver and First Amendment to Amended and Restated Credit
Agreement and Note between Registrant and Union Bank of
California dated February 10, 1998.
10.61 Datron World Communications Inc. Lease Agreement dated as
of February 13, 1998.
10.62 Fourth Amendment to Trans World Communications, Inc.
Lease Agreement dated March 1, 1998.
10.63 First Amendment to Employment Agreement between the
Registrant and Richard W. Pershing dated as of April 1, 1998.
10.64 Waiver and Second Amendment to Amended and Restated
Credit Agreement and Note between Registrant and Union Bank of
California dated April 30, 1998.
13 Certain portions of Registrant's Annual Report to
Stockholders for the fiscal year ended March 31, 1998 containing
information required by Part I and Part II of this report.
21 Subsidiaries.
22 Proxy Statement, Notice of Annual Meeting of Stockholders
to be Held Wednesday, August 5, 1998 at 11:00 A.M. and Form of
Proxy (to be deemed filed only to the extent required by the
instructions to exhibits for reports on Form 10-K) to be filed
within 120 days of the end of the Registrant's fiscal year.
23 Independent Auditors' Consent - Deloitte and Touche.
24 Power of Attorney (on signature page 16)
27.1 Financial Data Schedule for Twelve Months Ended March 31,
1998.
27.2 Restated Financial Data Schedule for the Year Ended March
31, 1996.
27.3 Restated Financial Data Schedule for the Nine Months
Ended December 31, 1995.
27.4 Restated Financial Data Schedule for the Six Months Ended
September 30, 1995.
99.1 Annual Report of the Datron Systems Incorporated Employee
Stock Purchase Plan
- ---------------------------------------
[FN]
<F1> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registration Statement on Form 8-B of the
Registrant on November 13, 1987.
<F2> Incorporated by this reference to the Registration Statement on
Form S-8 of the Registrant filed March 22, 1988.
<F3> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1988.
<F4> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1989.
<F5> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's report on Form 8-K dated July
13, 1990.
<F6> Incorporated by this reference to the Registration Statement on
Form S-8 of the Registrant filed April 16, 1993.
<PAGE> 14
<F7> Incorporated by this reference to Exhibit I to the Registrant's
Registration Statement on Form 8-A filed November 5, 1990.
<F8> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1993.
<F9> Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1994.
<F10>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995.
<F11>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1996.
<F12>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Annual Report on Form 10-K for
the fiscal year ended March 31, 1997.
<F13>Incorporated by this reference to the Exhibit bearing the same
number filed with the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
</FN>
Supplemental Information
- ------------------------
Copies of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held August 5, 1998 and copies of the form of proxy
to be used for such Annual Meeting will be furnished to the Securities
and Exchange Commission prior to the time they will be distributed to
Stockholders.
<PAGE> 15
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.
Date: June 25, 1998 DATRON SYSTEMS INCORPORATED
By: /s/ DAVID A. DERBY
David A. Derby
Chairman of the Board,
President, Chief Executive
Officer and Director
<PAGE> 16
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints David A. Derby and William L. Stephan, jointly
and severally, as his true and lawful attorney-in-fact, each with full
power of substitution and re-substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact, jointly and severally, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, jointly and severally, or
their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
Chairman of the Board,
President, Chief Executive
By:/s/DAVID A. DERBY Officer and Director
David A. Derby (Principal Executive Officer)June 25, 1998
Vice President, Chief
Financial Officer (Principal
By:/s/WILLIAM L. STEPHAN Financial and Accounting
William L. Stephan Officer) June 25, 1998
By:/s/KENT P. AINSWORTH Director June 15, 1998
Kent P. Ainsworth
By:/s/MICHAEL F. BIGHAM Director June 15, 1998
Michael F. Bigham
By:/s/ADRIAN C. CASSIDY Director June 15, 1998
Adrian C. Cassidy
By:/s/JOHN R. COPPLE Director June 24, 1998
John R. Copple
By:/s/WILLIAM A. PRESTON Director June 17, 1998
William A. Preston
By:/s/PETER F. SCOTT Director June 15, 1998
Peter F. Scott
By:/s/ROBERT D. SHERER Director June 15, 1998
Robert D. Sherer
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
Board of Directors
Datron Systems Incorporated
Escondido, California
We have audited the accompanying consolidated financial statements of
Datron Systems Incorporated (the Company) as of March 31, 1998 and
1997, and for each of the three years in the period ended March 31,
1998, and have issued our report thereon dated May 8, 1998; such
financial statements and report are included in your 1998 Annual
Report to Stockholders and are incorporated herein by reference. Our
audits also included the financial statement schedule of the Company
listed in Item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Diego, California
May 8, 1998
<TABLE>
<PAGE> S-2
DATRON SYSTEMS INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
<CAPTION>
Balance at Balance at
Beginning End
Description of Year Additions Write-offs of Year
----------- --------- --------- ---------- ----------
Year ended March 31, 1996
- -------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts $247,000 $98,000 $98,000 $247,000
Allowance for inventory
obsolescence 724,000 45,000 60,000 709,000
Allowance for warranties 749,000 754,000 488,000 1,015,000
---------- -------- -------- ----------
$1,720,000 $897,000 $646,000 $1,971,000
========== ======== ======== ==========
Year ended March 31, 1997
- -------------------------
Allowance for doubtful
accounts $247,000 $136,000 $157,000 $226,000
Allowance for inventory
obsolescence 709,000 735,000 94,000 1,350,000
Allowance for warranties 1,015,000 632,000 940,000 707,000
---------- ---------- ---------- ----------
$1,971,000 $1,503,000 $1,191,000 $2,283,000
========== ========== ========== ==========
Year ended March 31, 1998
- -------------------------
Allowance for doubtful
accounts $226,000 $166,000 $202,000 $190,000
Allowance for inventory
obsolescence 1,350,000 477,000 $171,000 1,656,000
Allowance for warranties 707,000 829,000 603,000 933,000
---------- ---------- -------- ----------
$2,283,000 $1,472,000 $976,000 $2,779,000
========== ========== ======== ==========
</TABLE>
EXHIBIT 10.60
WAIVER AND FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT
AGREEMENT AND NOTE
THIS WAIVER AND FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT
AGREEMENT AND NOTE ("First Amendment"), made and entered into as of
the 10th day of February, 1998, by and between DATRON SYSTEMS
INCORPORATED, a Delaware corporation ("Company"), and UNION BANK OF
CALIFORNIA, N.A., a national banking association ("Bank"),
W I T N E S S E T H:
WHEREAS, on August 8, 1997, the Company and the Bank entered into
a certain Amended and Restated Credit Agreement and Note (the "Credit
Agreement") pursuant to which the Bank agreed to extend to the Company
and the Company agreed to accept from the Bank certain credit
facilities more particularly described therein; and
WHEREAS, the Company and the Bank desire (i) to evidence the
waiver by the Bank of the Company's compliance with one of the
financial covenants set forth in the Credit Agreement for the fiscal
quarter of the Company ended December 31, 1997, and (ii) to amend the
Credit Agreement (A) to extend the Revolving Loan Facility Termination
Date through and including April 30, 1999, (B) to decrease the maximum
amount available under the Revolving Loan Facility by an amount (the
"Reduction Amount") equal to the greater of Four Million Dollars
($4,000,000.00) or one hundred percent (100%) of the net proceeds
received by D/T from its financing (the "Simi Valley Financing") of
the real property presently encumbered by the Deed of Trust (the
"Property"), such decrease to become effective on the date on which
the Simi Valley Financing closes or April 30, 1998, whichever is the
earlier (the "Reduction Date"), (C) to decrease the maximum aggregate
amount available under the Revolving Loan Facility, the Standby
Facility and the L/C Facility by the Reduction Amount, such decrease
to become effective on the Reduction Date, (D) to modify certain of
the covenants with which the Company is to comply, and (E) to provide
for certain ancillary matters;
NOW, THEREFORE, for and in consideration of the premises hereof,
and other good and valuable consideration the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. All capitalized terms used in this First Amendment shall,
unless otherwise defined herein or unless the context otherwise
requires, have the meanings given thereto in the Credit Agreement.
2. The Bank hereby waives, for the fiscal quarter of the Company
ended December 31, 1997, and only for such fiscal quarter, compliance
by the Company with the profitability covenant set forth in Subsection
4.02(k) of the Credit Agreement, and agrees that such noncompliance
shall not constitute an Event of Default under the Credit Agreement or
under the Credit Agreement as amended by this First Amendment. The
waiver here given is specific to the covenant, and for the fiscal
quarter of the Company, referred to above and shall not operate as a
waiver of compliance by the Company with any other covenant set forth
in the Credit Agreement, or in the Credit Agreement as amended by this
First Amendment, or with the covenant referred to above for any other
fiscal quarter of the Company.
3. Section 1.01 of the Credit Agreement is amended to read as
follows:
1.01 Availability of the Facilities. Subject to the terms and
conditions of this Agreement, the Bank shall (x) from time to time
during the period commencing on the First Amendment Effective Date and
ending on April 30, 1999 (the "Revolving Loan Facility Termination
Date"), advance to the Company such loans as the Company may request
under the Revolving Loan Facility (individually a "Revolving Loan" and
collectively the "Revolving Loans"), and (y) from time to time during
the period commencing on the First Amendment Effective Date and ending
on June 30, 1999 (the "Letter of Credit Facilities Termination Date"),
issue for the account of the Company much standby letters of credit as
the Company may request under the Standby Facility (individually a
"Standby L/C" and collectively the "Standby L/C's"), and such
commercial documentary letters of credit as the Company may request
under the L/C Facility (individually a "Commercial L/C" and
collectively the "Commercial L/C's"); provided, however, that:
(a) Except as otherwise provided in Subsections 1.01(b),
(c), (d), (e) and (f) hereof, the sum of:
(i) the aggregate principal amount of all outstanding
Revolving Loans ("Revolving Loan Utilization");
(ii) the aggregate amount available to be drawn under
all Standby L/C's;
(iii) the aggregate amount of unpaid reimbursement
obligations in respect of all drafts drawn under Standby L/C's (the
sum of the aggregate amounts described in Subsection 1.01(a)(ii)
hereof and in this Subsection 1.01(a)(iii) being hereinafter referred
to as "Standby L/C Utilization");
(iv) the aggregate amount available to be drawn under
all Commercial L/C's; and
(v) the aggregate amount of unpaid reimbursement
obligations in respect of all drafts drawn under Commercial L/C's (the
sum of the aggregate amounts described in Subsection 1.01(a)(iv)
hereof and in this Subsection 1.01(a)(v) being hereinafter referred to
as "Commercial L/C Utilization");
shall not exceed in the aggregate (x) at any given time during the
period commencing on the First Amendment Effective Date and ending on
the Reduction Date, Nineteen Million Five Hundred Thousand Dollars
($19,500,000.00), and (y) at any other given time, the difference
between Nineteen Million Five Hundred Thousand Dollars
($19,500,000.00) and the Reduction Amount;
(b) Revolving Loan Utilization shall not exceed in the aggregate
(i) at any given time during the period commencing on the First
Amendment Effective Date and ending on the Reduction Date, the lesser
of (A) Nine Million Five Hundred Thousand Dollars ($9,500,000.00), or
(B) the difference between Nineteen Million Five Hundred Thousand
Dollars ($19,500,000.00) and the sum of Standby L/C Utilization and
Commercial L/C Utilization, and (ii) at any other given time, the
lesser of (A) the difference between Nine Million Five Hundred
Thousand Dollars ($9,500,000.00) and the Reduction Amount, or (B) the
difference between Nineteen Million Five Hundred Thousand Dollars
($19,500,000.00) and the mum of Standby L/C Utilization, Commercial
L/C Utilization and the Reduction Amount;
(c) Commercial L/C Utilization "hall not exceed in the aggregate
at any one time the least of (i) Two Million Dollars ($2,000,000.00),
(ii) the difference between Fifteen Million Dollars ($15,000,000.00)
and Standby L/C Utilization, or (iii) the difference between Nineteen
Million Five Hundred Thousand Dollars ($19,500,000.00) and the sum of
Revolving Loan Utilization, Standby L/C Utilization and, at any time
after the Reduction Date, the Reduction Amount;
(d) Standby L/C Utilization "hall not exceed in the aggregate at
any one time, the lesser of (i) the difference between Fifteen Million
Dollars ($15,000,000.00) and Commercial L/C Utilization, or (ii) the
difference between Nineteen Million Five Hundred Thousand Dollars
($19,500,000.00) and the sum of Revolving Loan Utilization, Commercial
L/C Utilization and, at any time after the Reduction Date, the
Reduction Amount;
(e) Standby L/C Utilization relating to Standby L/C's issued in
favor of beneficiaries located in countries listed in Column B or
Column C of Exhibit A hereto shall not exceed, as to all beneficiaries
located in any given country listed in Column B or Column C of Exhibit
A hereto, Three Million Five Hundred Thousand Dollars ($3,500,000.00)
in the aggregate at any one time; and
(f) Standby L/C Utilization relating to Standby L/C's issued in
favor of beneficiaries located in countries listed in Column D of
Exhibit A hereto (individually a "Column D Country" and collectively
the "Column D Countries") shall not exceed in the aggregate at any one
time (i) in the case of all beneficiaries located in any given Column
D Country, Five Hundred Thousand Dollars ($500,000.00), and (ii) in
the case of all beneficiaries located in all Column D Countries, the
least of (A) Two Million Five Hundred Thousand Dollars
($2,500,000.00), (B) the difference between (1) Fifteen Million
Dollars ($15,000,000.00), and (2) the sum of Standby L/C Utilization
relating to Standby L/C's issued in favor of all beneficiaries located
in all countries other than Column D Countries and Commercial L/C
Utilization, or (C) the difference between (1) Nineteen Million Five
Hundred Thousand Dollars ($19,500,000.00), and (2) the sum of Standby
L/C Utilization relating to Standby L/C's issued in favor of all
beneficiaries located in all countries other than Column D Countries,
Commercial L/C Utilization, Revolving Loan Utilization and, at any
time after the Reduction Date, the Reduction Amount.
Within the limits set forth above, and except as otherwise
provided herein, the Company may utilize the Facilities, repay
amounts-owing thereunder, and reutilize the Facilities.
4. The proviso which immediately follows clause (ii) of
Subsection 1.02(d) of the Credit Agreement is amended to read as
follows:
provided, however, that the rates set forth in Subsections
1.02(d)(i) and (ii) hereof shall each be reduced by thirty-five
one-hundredths of one percent (0.35%) per annum (x) on the tenth
(lOth) Banking Day following the first date subsequent to September
29, 1998 on which a monthly Financial Statement delivered by the
Company to the Bank pursuant to Subsection 4.01(a)(i) hereof reflects
profitability of not less than Two Hundred Fifty Thousand Dollars
($250,000.00) for each of the two (2) consecutive fiscal quarters of
the Company most recently ended and the Company is in compliance with
each and all of the terms and conditions set forth in this Agreement
and the other Facility Documents in the case of any Reference Rate
Revolving Loan or in the case of a LIBOR Revolving Loan which is first
made on or after such date, or (y) on the first day of the First
Interest Period which commences on or after such tenth (10th) Banking
Day in the case of a LIBOR Revolving Loan which was made prior to, and
is outstanding on, such tenth (10th) Banking Day.
5. The first sentence of Subsection 1.02(g)(i) of the Credit
Agreement is amended to read as follows:
If not sooner repaid, the Company shall repay the aggregate
unpaid principal amount of all Revolving Loans on the Revolving Loan
Facility Termination Date; provided, however, that on the Reduction
Date, the Company shall repay such portion of the aggregate unpaid
principal amount of all Revolving Loans as shall be necessary (A) to
reduce Revolving Loan Utilization to an amount not greater than the
difference between Nine Million Five Hundred Thousand Dollars
($9,500,000.00) and the Reduction Amount, and (B) to reduce the sum of
Revolving Loan Utilization, Standby L/C Utilization and Commercial L/C
Utilization to an amount not greater than the difference between
Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00) and
the Reduction Amount.
6. Subsection 1.02(h) of the Credit Agreement is amended to read
as follows:
(h) Revolving Loan Commitment Fee. During the period
commencing on January 1, 1998 and ending on the Reduction Date, the
Company shall pay to the Bank a commitment fee of one-quarter of one
percent (1/4 of 1%) per annum on the difference between Nine Million
Five Hundred Thousand Dollars (69,500,000.00) and the average daily
principal amount of outstanding Revolving Loans during each calendar
quarter or portion thereof. Thereafter, and until the Revolving Loan
Facility Termination Date, the Company shall pay to the Bank a
commitment fee of one-quarter of one percent (1/4 of 1%) per annum on
the difference between (i) Nine Million Five Hundred Thousand Dollars
($9,500,000.00), and (ii) the mum of (A) the average daily principal
amount of outstanding Revolving Loans during each calendar quarter or
portion thereof, and (B) the Reduction Amount. Such fee "hall be
payable quarterly in arrears on the last day in each March, June,
September and December (commencing on the first such day to occur
after the First Amendment Effective Date), and at maturity (whether by
acceleration or otherwise).
7. Subsection 4.02(a) of the Credit Agreement is amended to read
as follows:
(a) Liens. The Company will not, and will not permit any
Subsidiary to, create or assume, or permit to exist, any mortgage,
lien, charge or encumbrance on, pledge of, or other security interest
in, any property or assets of any kind of the Company or such
Subsidiary, except for Permitted Liens, liens created in favor of the
Bank and such liens as D/T may create or cause to be created on the
Property in connection with the Simi Valley Financing.
8. Subsection 4.02(f) of the Credit Agreement is amended to read
as follows:
(f) Unsecured Indebtedness. Investments. Advances and
Guaranties. The Company will not, and will not permit any Subsidiary
to, incur any unsecured Indebtedness, advance funds to (whether by way
of loan, "sock purchase, capital contribution, or otherwise) or incur
any Indebtedness with respect to the obligations of, any Person;
provided, however, that (i) the Company may (A) on or prior to June
30, 1998, purchase the residence of a certain officer of the Company
for a purchase price not to exceed Seven Hundred Fifty Thousand
Dollars ($750,000.00), and hold such residence as an investment until
such time as the Company deems it appropriate to sell the same, and
(B) guaranty the obligations of DWC arising under a lease of new
facilities to be entered into by DWC on or prior to December 31, 1998,
and (ii) the Company and its Subsidiaries may (A) make acquisitions,
whether by purchase of stock or by purchase of assets, of all or any
substantial division or portion of the assets and business of another
Person as and to the extent permitted by Subsection 4.02(e) hereof,
(B) make advances to finance sales in the ordinary course of business,
(C) incur trade debt in the ordinary course of business, and (D)
purchase certificates of deposit from banks with deposits in excess of
Five Hundred Million Dollars ($500,000,000.00), securities issued by
the United States government and commercial paper rated A-1 by
Standard & Poor's or Prime-1 by Moody 's.
9. Subsection 4.02(k) of the Credit Agreement is amended to read
as follows:
(k) Profitability. The Company will not (i) permit its
consolidated net after tax profits to be less than Fifty-three
Thousand Dollars ($53,000.00) for the fiscal quarter of the Company
ending March 31, 1998, or less than One Thousand Dollars ($1,000.00)
for the fiscal year of the Company ending March 31, 1998, and (ii)
permit its consolidated net after tax profits to be less than Two
Hundred Fifty Thousand Dollars ($250,000.00) for any fiscal quarter of
the Company ending on or after June 30, 1998.
10. Subsection 6.01(i) of the Credit Agreement is amended by
deleting therefrom the period which appears at the end of such
subsection and by substituting in lieu thereof a semicolon followed by
the word "or".
11. Section 6.01 of the Credit Agreement is amended by the
addition thereto of a new Subsection 6.01(j) to read as follows:
(j) The Simi Valley Financing shall fail to close on or
prior to April 30, 1998, or shall close on or prior to April 30, 1998
but shall fail to generate net proceeds in an amount equal to or
greater than Three Million Five Hundred Thousand Dollars
($3,500,000.00).
12. Section 7.01 of the Credit Agreement is amended by the
addition thereto of the following definitions in proper alphabetic
order:
"First Amendment" shall mean that certain Waiver and First
Amendment to Amended and Restated Credit Agreement and Note, dated as
of February 10, 1998, by and between the Company and the Bank.
"First Amendment Effective Date" shall mean the date on which the
First Amendment becomes effective as provided in Paragraph 13 thereof.
"Property" shall have the meaning given to that term in the
second recital to the First Amendment.
"Reduction Amount" shall have the meaning given to that term in
the second recital to the First Amendment.
"Reduction Date" shall have the meaning given to that term in the
second recital to the First Amendment.
"Simi Valley Financing" shall have the meaning given to that term
in the second recital to the First Amendment.
13. This First Amendment shall become effective on the date on
which the Bank shall have received the following:
(a) This First Amendment, duly executed by the Company;
(b) A Consent in the form appended hereto as Exhibit I, duly
executed by D/T; and
(c) A Consent in the form appended hereto as Exhibit II,
duly executed by DWC.
14. In order to facilitate the closing of the Simi Valley
Financing, the Bank shall, as promptly as practicable following Bank's
receipt of written notice that D/T and D/T's lender are prepared to
close such financing, deliver to an escrow agent acceptable to the
Bank, the Company, D/T and D/T's lender (a) a reconveyance of the Deed
of Trust, in recordable form, and (b) an instruction letter
authorizing such escrow agent either (i) to cause such reconveyance to
be recorded at such time as such escrow agent has taken possession of,
and is prepared to remit to D/T or D/T's order, net proceeds of the
Simi Valley Financing in an amount equal to or greater than Three
Million Five Hundred Thousand Dollars ($3,500,000.00), or (ii) to
return such reconveyance to the Bank unrecorded if such escrow agent
has not taken possession of, and is not prepared to remit to D/T or
D/T's order, net proceeds of the Simi Valley Financing in an amount
equal to or greater than Three Million Five Hundred Thousand Dollars
($3,500,000.00) by the close of business on the tenth (10th) Banking
Day following the date much escrow agent receives such reconveyance
and instruction letter (or such later date to which the Bank may
consent in writing).
15. Except as expressly provided herein, the Credit Agreement is
unchanged and remains in full force and effect.
16. This First Amendment shall be governed by and construed in
accordance with the laws of the State of California.
17. This First Amendment may be executed in any number of
identical counterparts, any set of which signed by both parties hereto
shall be deemed to constitute a complete, executed original for all
purposes.
IN WITNESS WHEREOF, the Bank and the Company have caused this
First Amendment to be executed as of the day and year first above
written.
UNION BANK OF CALIFORNIA,
N.A.
By: /s/JACK LENHOF
Title: Vice President
By: /s/STEPHEN DUNNE
Title: Vice President
DATRON SYSTEMS INCORPORATED
By: /s/ WILLIAM L. STEPHAN
Title: Vice President and Chief Financial Officer
By: /s/ DAVID A. DERBY
Title: President and Chief Executive Officer
EXHIBIT 10.61
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
February 13, 1998 is made by and between NORTH COUNTY INDUSTRIAL.
PARK, L.P. and DATRON WORLD COMMUNICATIONS INC. (collectively the
"Parties," or individually a "Party").
1.2(a) Premises: That certain portion of the Building, including
all improvements therein or to be provided by Lessor under the terms
of this Lease, commonly known by the street address of Lot E, Vista
Commerce Center, located in the City of Vista County of San Diego,
State of California, with zip code 92083, as outlined on Exhibit 1
attached hereto ("Premises"). The "Building" is that certain building
containing the Premises and generally described as (describe briefly
the nature of the Building): 106,000 s.f. concrete tilt-up building of
which the Premises will consist of approx. 70,000 rentable square
feet.
In addition to Lessee's rights to use and occupy the Premises as
hereinafter specified, Lessee shall have non-exclusive rights to the
Common Areas (as defined in Paragraph 2.7 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. The Premises, the Building, the Common Areas, the
land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the
"Industrial Center." (Also see Paragraph 2.)
1.2(b) Parking: 200 unreserved vehicle parking spaces ("Unreserved
Parking Spaces"); and n/a reserved vehicle parking spaces ("Reserved
Parking Spaces"), (Also see Paragraph 2.6.)
1.3 Term: 10 years and 1 months ("Original Term") commencing See
Addendum 2 ("Commencement Date") and ending 10 years later
("Expiration Date"). (Also see Paragraph 3.)
1.4 Early Possession: see Addendum 2. ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3.)
1.5 Base Rent: $ See Add. 3 per month ("Base Rent"), payable on
the first day of each month commencing Commencement Date (Also see
Paragraph 4.)
[] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 3.2 attached hereto.
1.6 (a) Base Rent Paid Upon Execution: $ -0- as Base Rent for the
period. See Addendum 12
1.6 (b) Lessee's Share of Common Area Operating Expenses: See Add.
4 percent ( %) ("Lessee's Share") as determined by other criteria
as described in Addendum 4.
1.7 Security Deposit: $58,800.00 ("Security Deposit"). (Also see
Paragraph 5.) See Addendum 12
1.8 Permitted Use: General office, sales administration or any other
use or purpose permitted under applicable zoning and other applicable
laws. Manufacturing, assembly, research and development, storage.
("Permitted Use") (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see
Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in
this transaction and are consented to by the Parties (check applicable
boxes):
[] CB Commercial Real Estate Group represents Lessor exclusively
("Lessor's Broker");
[] Diversified Properties/CB Commercial represents Lessee
exclusively ("Lessee's Broker"); or
[ ] _______________________________ represents both Lessor and
Lessee ("Dual Agency"). (Also see Paragraph 15.)
1.10(b) Payment to Brokers. Upon the execution of this Lease by
both Parties, Lessor shall pay to said Broker(s) jointly, or in such
separate shares as they may mutually designate in writing, a fee as
set forth in a separate written agreement between Lessor and said
Broker(s) (or in the event there is no separate written agreement
between Lessor and said Broker(s), the sum of $_____) for brokerage
services rendered by said Broker(s) in connection with this
transaction.
1.11 Guarantor. The obligations of the Lessee under this Lease are to
be guaranteed by Datron Systems Incorporated See Exhibit "7"
("Guarantor"). (Also see Paragraph 37.)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 1 through 18, and Exhibits "1" through "17"
all of which constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all
of the terms, covenants and conditions set forth in this Lease. Unless
otherwise provided herein, any statement of square footage set forth
in this Lease, or that may have been used in calculating rental and/or
Common Area Operating Expenses, is an approximation which Lessor and
Lessee agree is reasonable and the rental and Lessee's Share (as
defined in Paragraph 1.6(b)) based thereon is not subject to revision
whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that
the existing plumbing, electrical systems, fire sprinkler system,
lighting, air conditioning and heating systems and loading doors, if
any, in the Premises, other than those constructed by Lessee, shall be
in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly
after receipt of written notice from Lessee setting forth with
specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If Lessee does not give Lessor written notice of
a noncompliance with this warranty within ninety days after the
Commencement Date, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants that any improvements (other than those constructed by Lessee
or at Lessee's direction) on or in the Premises which have been
constructed or installed by Lessor or with Lessor's consent or at
Lessor's direction shall comply with all applicable covenants or
restrictions of record and applicable building codes, regulations and
ordinances in effect on the Commencement Date. Lessor further warrants
to Lessee that Lessor has no knowledge of any claim having been made
by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with
regard to the Premises as of the Commencement Date. Said warranties
shall not apply to any Alterations or Utility Installations (defined
in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do
not comply with said warranties, Lessor shall, except as otherwise
provided in this Lease, promptly after receipt of written notice from
Lessee given within six (6) months following the Commencement Date and
setting forth with specificity the nature and extent of such non
compliance, take such action, at Lessor's expense, as may be
reasonable or appropriate to rectify the non-compliance. Lessor makes
no warranty that the Permitted Use in Paragraph 1.8 is permitted for
the Premises under Applicable Laws (as defined in Paragraph 2.4).
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy itself with respect to
the condition of the Premises (including but not limited to the
electrical and fire sprinkler systems, security, environmental
aspects, seismic and earthquake requirements, and compliance with the
Americans with Disabilities Act and applicable zoning, municipal,
county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "Applicable Laws" )
and the present and future suitability of the Premises for Lessee's
Intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, is satisfied with reference
thereto, and assumes all responsibility therefore as the same relate
to Lessee's occupancy of the Premises and for the terms of this Lease;
and (c) that neither Lessor, nor any of Lessor's agents, has made any
oral or written representations or warranties with respect to said
matters other than as set forth in this Lease.
2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior
to the date set forth in Paragraph 1.1 Lessee was the owner or
occupant of the Premises. In such event, Lessee shall, at Lessee's
sole cost and expense, correct any non-compliance of the Premises with
said warranties.
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in
Paragraph 1.2(b) on those portions of the Common Areas designated from
time to time by Lessor for parking. Lessee shall not use more parking
spaces than said number. Said parking spaces shall be used for parking
by vehicles no larger than full-size passenger automobiles or pickup
trucks, herein called "Permitted Size Vehicles." Vehicles other than
Permitted Size Vehicles shall be parked and loaded or unloaded as
directed by Lessor in the Rules and Regulations (as defined in
Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to
or are controlled by Lessee or Lessee's employees, suppliers,
shippers, customers, contractors or invitees to be loaded, unloaded,
or parked in areas other than those designated by Lessor for such
activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it
may have, to remove or tow away the vehicle involved and charge the
cost to Lessee, which cost shall be immediately payable upon demand by
Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide
the parking facilities required by Applicable Law.
2.7 Common Areas - Definition. The term "Common Areas" is defined as
all areas and facilities outside the Premises and within the exterior
boundary line of the Industrial Center and Interior utility raceways
within the Premises that are provided and designated by the Lessor
from time to time for the general non exclusive use of Lessor, Lessee
and other lessees of the Industrial Center and their respective
employees, suppliers, shippers, customers, contractors and invitees,
including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped
areas.
2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers,
contractors, customers and invitees, during the term of this Lease,
the non-exclusive right to use, in common with others entitled to such
use, the Common Areas as they exist from time to time, subject to any
rights, powers, and privileges reserved by Lessor under the terms
hereof or under the terms of any rules and regulations or restrictions
governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to
include the right to store any property, temporarily or permanently,
in the Common Areas. Any such storage shall be permitted only by the
prior written consent of Lessor or Lessor's designated agent, which
consent may be revoked at any time. In the event that any unauthorized
storage shall occur then Lessor shall have the right, without notice,
in addition to such other rights and remedies that it may have, to
remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 Common Areas - Rules and Regulations. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and
management of the Common Areas and shall have the right, from time to
time, to establish, modify, amend and enforce reasonable Rules and
Regulations with respect thereto in accordance with Paragraph 40.
Lessee agrees to abide by and conform to all such Rules and
Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor
shall not be responsible to Lessee for the noncompliance with said
rules and regulations by other lessees of the Industrial Center.
2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, Including, without
limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, loading and
unloading areas, ingress, egress, direction of traffic, landscaped
areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any
portion thereof; and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as
Lessor may, in the exercise of sound business judgment, deem to be
appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises
after the Early Possession Date but prior to the Commencement Date,
the obligation to pay Base Rent shall be abated for the period of such
early occupancy. All other terms of this Lease, however, (including
but not limited to the obligations to pay Lessee's Share of Common
Area Operating Expenses and to carry the insurance required by
Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the
Original Term.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if
one is specified in Paragraph 1.4, or if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to
any liability therefor, nor shall such failure affect the validity of
this Lease, or the obligations of Lessee hereunder, or extend the term
hereof, but in such case, Lessee shall not, except as otherwise
provided herein, be obligated to pay rent or portion any other
obligation of Lessee under the terms of this Lease until Lessor
delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to
Lessor within ten (10) days after the end of said sixty (60) day
period, cancel this Lease, in which event the parties shall be
discharged from all obligations hereunder, provided further, however,
that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease
hereunder shall terminate and be of no further force or effect. Except
as may be otherwise provided, and regardless of when the Original Term
actually commences, if possession is not tendered to Lessee when
required by this Lease and Lessee does not terminate this Lease, as
aforesaid, the period free of the obligation to pay Base Rent, if any,
that Lessee would otherwise have enjoyed shall run from the date of
delivery of possession and continue for a period equal to the period
during, which the Lessee would have otherwise enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or
omissions of Lessee.
4. Rent.
4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges,
as the same may be adjusted from time to time, to Lessor in lawful
money of the United States, without offset or deduction, on or before
the day on which it is due under the forms of this Lease. Base Rent
and all other rent and charges for any period during the term hereof
which is for less than one full month shall be prorated based upon the
actual number of days of the month involved. Payment of Base Rent and
other charges shall be made to Lessor at its address stated herein or
to such other persons or at such other addresses as Lessor may from
time to time designate in writing to Lessee.
4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b)) of an Common Area Operating Expenses,
as hereinafter defined, during each calendar year of the term of this
Lease, in accordance with the following provisions: See Addendum 16
(a) "Common Area Operating Expenses" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership
and operation of the Industrial Center, including, but not limited to,
the following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition, of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, Irrigation systems;
Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to service
the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2) to be paid
by lessor for the Building and the Common Areas under Paragraph 10
hereof.
(vi) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building
in the Industrial Center or to the operation, repair and maintenance
thereof, shall be allocated entirely to the Building or to such other
building. However, any Common Area Operating Expenses and Real
Property Taxes that are not specifically attributable to the Building
or to any other building or to the operation, repair and maintenance
thereof, shall be equitably allocated by Lessor to all buildings in
the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an
obligation upon Lessor to either have said improvements or facilities
or to provide those services unless the Industrial Center already has
the same, Lessor already provide the services, or Lessor has agreed
elsewhere in this Lease to provide the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement
of actual expenses is presented to Lessee by Lessor. At Lessors
option, however, an amount may be estimated by Lessor from time to
time of Lessee's Share of annual Common Area Operating Expenses and
the same shall be payable monthly or quarterly, as Lessor shall
designate, during each 12 month period of the Lease term, on the same
day as the Base Rent is due hereunder. Lessor shell deliver to Lessee
within (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual
Common Area Operating Expenses incurred during the preceding year. If
Lessee's payments under this Paragraph
4.2(d) during said preceding year exceed Lessee's share as indicated
on said statements, Lessee shall be credited the amount of such, over-
payment against Lessee's Share of Common Area Operating expenses next
becoming due. If Lessee's payments under this Paragraph 4.2(d) during
said preceding year were less than Lessee's Share as Indicated on said
statement, Lessee shall pay to Lessor the amount of the deficiency
within ten (10) days after delivery by Lessor to Lessee of said
statement.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as
security for Lessee's faithful performance of Lessee's obligations
under this Lease. If Lessee fails to pay Base Rent or other rent or
charges due hereunder, or otherwise Defaults under this Lease (as
defined in Paragraph 13.1, Lessor may use, apply or retain all or any
portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost,
expense, loss or damage (including attorneys' fees) which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or
any portion of said Security Deposit, Lessee shall within ten (10)
days after written request therefore deposit monies with Lessor
sufficient to restore said Security Deposit to the full amount
required by this Lease. Lessor shall not be required to keep all or
any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term
hereof and after Lessee has vacated the Premises, return to Lessee
(or, at Lessors option, to the last assignee, if any, of Lessee's
interest herein), that portion of the Security Deposit not used or
applied by Lessor. Unless otherwise expressly agreed in writing by
Lessor, no part of the Security Deposit shall be considered be held in
trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which
is reasonably comparable thereto, and for no other purpose. Lessee
shall not use or permit the use of the Premises in a manner that is
unlawful, creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to the Premises or neighboring premises
or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay
its consent to any written request by Lessee, Lessee's assignees or
subtenants, and by prospective assignees and subtenants of Lessee, its
assignees and subtenants, for a modification of said Permitted Use, so
long as the same will not impair the structural integrity of the
improvements on the Premises or in the Building or the mechanical or
electrical systems therein, does not conflict with uses by other
lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible
pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days after such request
give a written notification of same, which notice shall include an
explanation of Lessor's reasonable objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The form "Hazardous
Substance" as used in this Lease shall mean any product, substance,
chemical, material or waste whose presence, nature, quantity and/or
intensity or existence, use, manufacture, disposal, transportation,
spill, release or effect, either by itself or in combination with
other materials expected to be on the Premises, is either: (i)
potentially injurious to the public health, safety or welfare, the
environment, or the Premises (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of
Lessor to any governmental agency or third party under any applicable
statute or common law theory. Hazardous Substance shall include, but
not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any
products or by-products thereof. Lessee shall not engage in any
activity in or about the Premises which constitutes a Reportable Use
(as hereinafter defined) of Hazardous Substances without the express
prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3), "Reportable Use" shall mean (i) the
Installation or use of any above or below ground storage tank, (ii)
the generation, possession, storage, use, transportation, or disposal
of a Hazardous Substance that requires a permit from, or with respect
to which a report, notice, registration or business plan is required
to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to
which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties.
Notwithstanding the foregoing, Lessee may, without Lessor's prior
consent, but upon notice to Lessor and in compliance with all
Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the
Permitted Use, so long as such use is not a Reportable Use and does
not expose the Premises or neighboring properties to any meaningful
risk of contamination or damage or expose Lessor to any liability
therefor. In addition, Lessor may (but without any obligation to do
so) condition its consent to any Reportable Use of any Hazardous
Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to
protect itself, the public, the Premises and the environment against
damage, contamination or injury and/or liability therefor, including
but not limited to the installation (and, at Lessor's option, removal
on or before Lease expiration or earlier termination) of reasonably
necessary protective modifications to the Premises (such as concrete
encasements) and/or the deposit of an additional Security Deposit
under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to
believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously
consented to by Lessor, Lessee shall immediately give Lessor written
notice thereof, together with a copy of any statement, report, notice,
registration, application, permit, business plan, license, claim,
action, or proceeding given to, or resolved from, any governmental
authority or private party concerning the presence, spill, release,
discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable
Use involving the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about
the Premises (including, without limitation, through the plumbing or
sanitary sewer system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and
the Premises, harmless from and against any and all damages,
1iabililies, judgments, costs, claims, liens, expenses, penalties,
loss of permits and attorneys' and consultants' fees arising out of or
involving any Hazardous Substance brought onto the Premises by or for
Lessee or by anyone under Lessee's control. Lessee's obligations under
this Paragraph 6.2(c) shall include, but not be limited to, the
effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of
investigation (including consultants' and attorneys' fees and
testing), removal, remediation, restoration and/or abatement thereof,
or of any contamination therein involved, and shall survive the
expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with
respect to Hazardous Substances, unless specifically so agreed by
Lessor in writing' at the time of such agreement.
6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner,
comply with all "Applicable Requirements," which term is used in this
Lease to mean all laws, rules, regulations; ordinances, directives,
covenants, easements and restrictions of record, permits, the
requirements of any applicable fire insurance underwriter or rating
bureau, and the recommendations of Lessor's engineers and/or consul
tants, relating in any manner to the Premises (including but not
limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under about the Premises, including
soil and groundwater conditions, and
(iii) the use, generation, manufacture, production, installation,
maintenance, removal, transportation, storage, spill, or release of
any Hazardous Substance), now in effect or which may hereafter come
into effect. Lessee shall, within five (5) days after receipt of
Lessor's written request, provide Lessor with copies of all documents
and information, including but not limited to permits, registrations,
manifests, applications, reports and certificates, evidencing Lessee's
compliance with any Applicable Requirements specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies
of any documents involved) of any threatened or actual claim, notice,
citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable
Requirements.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders
of any mortgages, deeds of trust or ground leases on the Premises
("Lenders") shall have the right to enter the Premises at any time in
the case of an emergency, and otherwise at reasonable times, for the
purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease and all Applicable Requirements
(as defined in Paragraph 6.3), and Lessor shall be entitled to employ
experts end/or consultants in connection therewith to advise Lessor
with restrict to Lessee's activities, including but not limited to
Lessee's installation, operation, use, monitoring, maintenance, or
removal of any Hazardous Substance on or from the Premises. The costs
and expenses of any such Inspections shall be paid by the party
requesting same, unless a Default or Breach of this Lease by Lessee or
a violation of Applicable Requirements or a contamination, caused or
materially contributed to by Lessee, is found to exist or to be
imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent
violation or contamination. In such case, Lessee shall upon request
reimburse Lessor or Lessor's Lender, as the case may be, for the costs
and expenses of such Inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2
(Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole cost and expense and at
all times, keep the Premises and every part thereof in good order,
condition and repair (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably
or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of such portion of the Premises), including,
without limiting the generality of the foregoing, all equipment or
facilities specifically serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose
connections if within the Premises, fixtures, interior walls, interior
surfaces of exterior walls, ceilings, floors, windows, doors, plate
glass, and skylights, but excluding any items which are the
responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in
keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Lessee's obligations
shall include restorations, replacements or renewals when necessary to
keep the Premises and all improvements thereon or a pan thereof in
good order, condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and
substance for and with a contractor specializing and experienced in
the inspection, maintenance and service of the heating, air
conditioning and ventilation system for the Premises. However, Lessor
reserves the right, upon notice to Lessee, to procure and maintain the
contract for the heating, air conditioning and ventilating systems,
and if Lessor so elects, Lessee shall reimburse Lessor, upon demand,
for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days'
prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on
Lessee's behalf, and put the Premises in good order, condition and
repair, in accordance with Paragraph 13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7,1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor,
subject to reimbursement pursuant to Paragraph 4.2, shall keep in good
order, condition and repair the foundations, exterior walls,
structural condition of interior bearing walls, exterior roof, fire
sprinkler and/or standpipe and hose (if located in the Common Areas)
or other automatic tire extinguishing system including fire alarm
and/or smoke detection and equipment, fire hydrants, parking lots,
walkways, parkways, driveways, landscaping, fences, signs and utility
systems serving the Common Areas and all parts thereof, as well as
providing the services for which there is a Common Area Operating
Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to
paint the interior surfaces of exterior walls nor shall Lessor be
obligated to maintain, repair or replace windows, doors or plate glass
of the Premises. Lessee expressly waives the benefit of any statute
now or hereafter in effect which would otherwise afford Lessee the
right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or
Common Areas in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility
installations" is used in this Lease to refer to all air lines, power
panels, electrical distribution, security, fire protection systems,
communications systems, lighting fixtures, healing, ventilating and
air conditioning equipment, plumbing, and fencing in, on or about the
Premises. The term "Trade Fixtures" shall mean Lessee's machinery and
equipment which can be removed without doing material damage to the
Premises. The term "Alterations" shall mean any modification of the
improvements on the Premises which are provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade
Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are
defined as Alterations and/or Utility Installations made by Lessee
that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee
shall not make nor cause to be made any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's
prior written consent. Lessee may, however, make alterations and non-
structural Utility Installations to the interior of the Premises
(excluding the roof) without Lessor's consent but upon notice to
Lessor, so long as they are not visible from the outside of the
Premises, do not involve puncturing, relocating or removing the roof
or any existing walls, or changing or interfering with the fire
sprinkler or fire detection systems and the current cost thereof on
any one occasion does not exceed $25,000.00.
(b) Consent. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the
Lessor shall be presented to the Lessor in written form with detailed
plans. All consents given by Lessor, whether by virtue of Paragraph
7.3(a) or by subsequent specific consent, shall be deemed conditioned
upon: (1) Lessee's acquiring all applicable permits required by
governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of
the work thereon; and (iii) the compliance by Lessee with all
conditions of said permits In a prompt and expeditious manner. Any
Alterations or Utility installations by Lessee during the term of this
Lease shall be done in a good and workmanlike manner, with good and
sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish to
Lessor with as-built plans and specifications therefor, Lessor may,
(but without obligation to do so) condition its consent to any
requested Alteration or Utility Installation that costs $25,000.00 or
more upon Lessee's providing Lessor with a lien and completion bond in
an amount equal to one and one-half times the estimated cost of such
Alteration or Utility Installation.
(c) Lien Protection. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or
for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in, on, or about the Premises'
that will cost $25,000.00 or more, and Lessor shall have the right to
post notices of non-responsibility in or on the Premises as provided
by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense,
defend and protect itself, Lessor and the Premises against the same
and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof against the Lessor or
the Premises. If Lessor shall require, Lessee shall furnish to Lessor
a surety bond satisfactory to Lessor in an amount equal to one and one-
half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for same, as required by law for
the holding of the Premises free from the effect of such lien or
claim. In addition, Lessor may require Lessee to pay Lessor's
attorney's fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in
this Paragraph 7.4, all Alterations and Utility Installations made to
the Premises by Lessee shall be the property of and owned by Lessee,
but considered a part of the Premises, Lessor may, at any time and at
its option, elect in writing to Lessee to be the owner of all or any
specified part of the Lessee-owned Alterations and Utility
Installations. Unless otherwise instructed per Subparagraph 7.4(b)
hereof, all Lessee-Owned Alterations and Utility Installations shall,
at the expiration or earlier termination of this Lease, become the
property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) Removal. Unless otherwise agreed in writing. Lessor may require
the removal at any time of all or any part of any Alternations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and
state of repair, ordinary wear and tear excepted. Ordinary wear and
tear shall not include any damage or deterioration that would have
been prevented by good maintenance practice or by Lessee performing
all of its obligations under this Lease. Except as otherwise agreed or
specified herein, the Premises, as surrendered, shall include the
Alterations and Utility Installations. The obligation of Lessee shall
include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as
well as the removal of any storage tank installed by or for Lessee,
and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by
Applicable Requirements and/or good practice. Lessee's Trade Fixtures
shall remain the property of Lessee and shall be removed by Lessee
subject to its obligation to repair and restore the Premises per this
Lease.
8. Insurance; Indemnity.
8.1 Payment of Premiums. The cost of the premiums for the
Insurance policies maintained by Lessor under this Paragraph 8 shall
be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof.
Premiums for policy periods commencing prior to, or extending beyond,
the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee, Lessor and any Lender(s) whose names have
been provided to Lessee in writing (as additional insureds) against
claims for bodily injury, personal injury and property damage based
upon, involving or arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such
Insurance shall be on an occurrence basis providing single limit
coverage in an amount not less than $1,000,000 per occurrence with an
"Additional Insured-Managers or Lessors of Premises" endorsement and
contain the Amendment of the Pollution Exclusion endorsement for
damage caused by heat: smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability
assumed under this Lease as an "insured contract" for the performance
of Lessee's indemnity obligations under this Lease. The limits of
said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any
obligation hereunder. All insurance to be carried by Lessee shall be
primary to and not contributory with any similar insurance carried by
Lessor, whose insurance shall be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall
not be named as an additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to any Lender(s), insuring
against loss or damage to the Premises. Such insurance shall be for
full replacement cost, as the same shall exist from time to time, or
the amount required by any Lender(s), but in no event more than the
commercially reasonable and available insurable value thereof if, by
reason of the unique nature or age of the improvements involved, such
latter amount is less than full replacement cost. Lessee-Owned
Alternations and Utility Installations, Trade Fixtures and Lessee's
personal property shall be insured by Lessee pursuant to Paragraph
8.4. If the coverage is available and commercially appropriate,
Lessor's policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage
for the enforcement of any ordinance or law regulating the
reconstruction or replacement of nay undamaged sections of the
Building required to be demolished or removed by reason of the
enforcement of any building, zoning, safety or land use laws as the
result of a covered loss but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in
lieu of any co-insurance clause, waiver of subrogation, and inflation
guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S.
Department of Labor Consumer Price Index for All Urban Consumers for
the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and any Lender(s), insuring the
loss of the full rental and other charges payable by all lessees of
the Building to Lessor for one year (including all Real Property
Taxes, insurance costs, all Common Area Operating Expenses and any
scheduled rental increases). Said insurance may provide that in the
event the Lease is terminated by reason of an insured loss, the period
of indemnity for such coverage shall be extended beyond the date of
the completion of repairs or replacement of the Premises, to provide
for one full year's loss of rental revenues from the date of any such
loss. Said insurance shall contain an agreed valuation provision in
lieu of any coinsurance clause, and the amount of coverage shall be
adjusted annually to reflect the projected rental income, Real
Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating
Expenses shall include any deductible amount in the event of such
loss.
(c) Adjacent Premises. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common
Areas or other buildings in the Industrial Center if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and
Utility Installations unless the item in question has become the
property of Lessor under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or,
at Lessor's option, by endorsement to a policy already carried,
maintain insurance coverage on all of Lessee's personal property,
Trade Fixtures and Lessee-Owned Alterations and Utility Installations
in, on, or about the Premises similar in coverage to that carried by
Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance
shall be full replacement cost coverage with a deductible not to
exceed $5,000 per occurrence. The proceeds from any such insurance
shall be used by Lessee for the replacement of personal property and
the restoration of Trade Fixtures and Lessee-Owned Alterations and
Utility Installations. Upon request from Lessor, Lessee shall provide
Lessor with written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the
Premises are located, and maintaining during the policy term a General
Policyholders Ratings of at least B+, V, or such other rating as may
be required by a Lender, as set forth in the most current issue of
"Best's Insurance Guide." Lessee shall not do or permit to be done
anything which, shall invalidate the insurance policies referred to in
this Paragraphs 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date
or the Commencement Date, certified copies of, or certificates
evidencing the existence and amounts of, the insurance required under
Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days' prior written
notice to Lessor, Lessee shall at least thirty (30) days prior the
expiration of such policies, furnish Lessor with evidence of renewals
or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount
shall be payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss or damage to their property
arising out of or incident to the perils required to be insured
against under Paragraph 8. The effect of such releases and waivers of
the right to recover damages shall not be limited by the amount of
insurance carried or required, or by an deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance
companies issuing property damage insurance waive any right to
subrogation that such companies may have against Lessor or Lessee, as
the case may be, so long as the insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor,
partners and Lenders, from and against any and all claims, loss of
rents and/or damages, costs, liens, judgments, penalties, loss of
permits, attorneys' and consultants' fees, expenses and/or liabilities
arising out of, involving, or in connection with, the occupancy of the
Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the
performance in a timely manner of any obligation on Lessee's part to
be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or
proceeding involved therein, and whether or not (in the case of claims
made against Lessor) litigated and/or reduced to judgment. In case any
action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor
and Lessor shall cooperate with Lessee in such defense. Lessor need
not have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees,
customers, or any other person in or about the Premises, whether such
damage or injury is caused by or results from fire, storm,
electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of
which the Premises are a part, from other sources or places, and
regardless of whether the cause of such damage or injury or the means
of repairing the same is accessible or not. Lessor shall not be liable
for any damages arising from any act or neglect of any other lessee of
Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no
circumstances be liable for injury to Lessee's business or for any
loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is less
than fifty percent (50%) of the then Replacement Cost (as defined In
Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations
and Utility Installations and Trade Fixtures) immediately prior to
such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty
percent (50%) or more of the then Replacement Cost of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures) immediately prior to such damage or destruction. In
addition, damage or destruction to the Building, other than
Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building, the cost of which damage or
destruction is fifty per cent (50%) or more of the total Replacement
Cost (excluding Lessee-Owned Alterations and Utility Installations and
Trade Fixtures of any lessees of the Building) of the Building shall,
at the option or Lessor, be deemed to be Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures, which was caused by an event required to be covered by
the insurance described in Paragraph 8.3(a) irrespective of any
deductible amounts or coverage limits involved.
(d) "Replacement Cost" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition,
debris removal and upgrading required by the operation of applicable
building codes, ordinances or laws, and without deduction for
depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination
by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or
under the Premises.
9.2 Premises Partial Damage - Insured Loss. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's
expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-
Owned Alterations and Utility Installations) as soon as reasonably
possible and this Lease shall continue in full force and effect. In
the event, however, that there is a shortage of insurance proceeds and
such shortage is due to the fact that, by reason of the unique nature
of the improvements in the Premises, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall
have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance
thereof, within ten (10) days following receipt of written notice of
such shortage and request therefor, if Lessor receives said funds or
adequate assurance thereof within said ten (10) day period, Lessor
shall complete them as soon as reasonably possible and this Lease
shall remain in full force and effect. If Lessor does not receive such
funds or assurance within said period, Lessor may nevertheless elect
by written notice to Lessee within ten (10) days thereafter to make
such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain
in full force and effect. If Lessor does not receive such funds or
assurance within such ten (10) day period, and if Lessor does not so
elect to restore and repair, then this Lease shall terminate sixty
(60) days following the occurrence of the damage or destruction.
Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to
flood or earthquake shall be subject to Paragraph 9.3 rather than
Paragraph 9.2, notwithstanding that there may be some insurance
coverage, but the net proceeds of any such insurance shall be made
available for the repairs if made by either party.
9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that
is not an insured Loss occurs, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at
Lessee's expense and this Lease shall continue in full force and
effect), Lessor may at Lessor's option, either (i) repair such damage
as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give writ
ten notice to Lessee within thirty (30) days after receipt by Lessor
of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date
of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the
right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's commitment to pay for the repair
of such damage totally at Lessee's expense and without reimbursement
from Lessor. Lessee shall provide Lessor with the required funds or
satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such repairs
as soon as reasonably possible after the required funds are available.
If Lessee does not give such notice and provide the funds or assurance
thereof within the times specified above, this Lease shall terminate
as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required
by any authorized public authority), this Lease shall terminate sixty
(60) days following the date of such Premises Total Destruction,
whether or not the damage or destruction is an Insured Loss or was
caused by a negligent or willful act of Lessee. In the event, however,
that the damage or destruction was caused by Lessee, Lessor shall have
the right to recover Lessor's damages from Lessee except as released
and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to
repair exceeds one month's Base Rent, whether or not an Insured Loss,
Lessor may, at Lessor's option, terminate this Lease effective sixty
(60) days (allowing the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within thirty
(30) days after the date of occurrence of such damage. Provided,
however, if Lessee at that time has an exercisable option to extend
this Lease or to purchase the Premises, then Lessee may preserve this
Lease by (a) exercising such option, and (b) providing Lessor with any
shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is
ten (10) days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (ii) the day prior to the date
upon which such option expires. If Lessee duly exercises such option
during such period and provides Lessor with funds (or adequate
assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably
possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or
assurance during such period, then this Lease shall terminate as of
the date set forth in the first sentence of this Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and Other charges, if any,
payable by Lessee hereunder (or the period during which such damage or
condition, its repair, remediation or restoration continues, shall be
abated in proportion to the degree to which Lessee's use of the
Premises is impaired, but not in excess of proceeds from insurance
required to be carried under Paragraph 8.3(b). Except for abatement of
Base Rent, Common Area Operating Expenses and other charges, if any,
as aforesaid, all other obligations of Lessee hereunder shall be
performed by Lessee, and Lessee shall have no claim against Lessor for
any damage suffered by reason of any such damage, destruction, repair,
remediation or restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not
commence, in a substantial and meaningful way, the repair or
restoration of the Premises within ninety (90) days after such
obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of
Lessee's election to terminate, this Lease on a date not less than
sixty (60) days following the giving of such notice. If Lessee gives
such notice to Lessor and such Lenders and such repair or restoration
is not commenced within thirty (30) days after receipt of such notice,
this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises
within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this
Paragraph 9.6 shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work
on the Premises, whichever occurs first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case
Lessee shall make the investigation and remediation thereof required
by Applicable Requirements to this Lease shall continue in full force
and effect, but subject to Lessor's rights under Paragraph 6.2(c) and
Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon
as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost
to investigate and remediate such condition exceeds twelve (12) times
the then monthly Base Rent or S100,000 whichever is greater, give
written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such Hazardous Substance
Condition of Lessor's desire to terminate this Lease as of the date
sixty (60) days following the date of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this
Lease, Lessor shall have the right within ten (10) days alter the
receipt of such notice to give written notice to Lessor of Lessee's
commitment to pay for the excess costs of (a) Investigation and
remediation of such Hazardous Substance Condition to the extent
required by Applicable Requirements, over (b) an amount equal to
twelve (12) times the then monthly Base Rent or $100,000, whichever is
greater.
Lessee shall provide Lessor with the funds required of Lessee or
satisfactory assurance thereof within thirty (30) days following said
commitment by Lessee. In such event this Lease shall continue in full
force and effect, and Lessor shall proceed to make such investigation
and remediation as soon as reasonably possible after the required
funds are available. If Lessee does not give such notice and provide
the required funds or assurance thereof within the time period
specified above, this Lease shall terminate as of the date specified
in Lessor's notice of termination.
9.8 Termination ~ Advance Payments. Upon termination of this
Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any
advance payment made by Lessee to Lessor and so much of Lessee's
Security Deposit as has not been, or is not then required to be, used
by Lessor under the terms of this Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the forms of this
Lease shall govern the effect of any damage to or destruction of the
Premises and the Building with respect to the termination of this
Lease and hereby waive the provisions of any present or future statute
to the extent it is inconsistent herewith.
10. Rea1 Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and
except as otherwise provided in Paragraph 10.3, any such amounts shall
be included in the calculation of Common Area Operating Expenses in
accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definition. As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or
assessment, general, special, ordinary or extraordinary, and any
license fee, commercial rental tax, improvement bond or bonds, levy or
tax (other than inheritance, personal income or estate taxes) imposed
upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street,
drainage, or other improvement district thereof, levied against any
legal or equitable interest of Lessor in the Industrial Center or any
portion thereof, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises.
The term "Real Property Taxes" shall also include any tax, fee, levy,
assessment or charge, or any increase therein, imposed by reason of
events occurring, or changes in Applicable Law taking effect, during
the term of this Lease, including but not limited to a change in the
ownership of the Industrial Center or in the improvements thereon, the
execution of this Lease, or any modification, amendment or transfer
thereon and whether or not contemplated by the Parties. In calculating
Real Property Taxes for any calendar year, the Real Property Taxes for
any real estate tax year shall be included in the calculation of Real
Property Taxes for such calendar year based upon the number of days
which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records
and work sheets as being caused by additional improvements placed upon
the Industrial Center by other lessees or by Lessor for the exclusive
enjoyment of such other lessees. Notwithstanding Paragraph 10.1
hereof, Lessee shall, however, pay to Lessor at the time Common Area
Operating Expenses are payable under Paragraph 4.2, the entirety of
any increase in Real Property Taxes if assessed solely by reason of
Alterations, Trade fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable
proportion of the Real Property Taxes for all of the land and
improvements included within the tax parcel assessed, such proportion
to be determined by Lessor from the respective valuations assigned in
the assessor's work sheets or such other information as may be
reasonably available, Lessor's reasonable determination thereof, in
good faith shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations
and Utility Installations, Trade Fixtures, furnishings, equipment and
all personal property of Lessee contained in the Premises or stored
within the Industrial Center. When possible, Lessee shall cause its
Lessee-Owned Alterations and Utility Installations, Trade Fixtures,
furnishings, equipment and all other personal property to be assessed
and billed separately from the real property of Lessor. If any of
Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the Taxes attributable to Lessee's property
within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and
services supplied to the Premises, including but not limited to
electricity, telephone, security, gas and cleaning of the Premises,
together with any taxes thereon. If any such utilities or services
are not separately metered to the Premises or separately billed to the
Premises, Lessee shall pay to Lessor a reasonable proportion to be
determined by Lessor of all such charges jointly metered or billed
with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. Assignment and Subletting. See Addendum 17.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assign") or sublet all or any part of Lessee's interest in this Lease
or in the Premises without Lessor's prior written consent given under
and subject to the terms of Paragraph 39.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1, or a
non-curable Breach without the necessity of any notice and grace
period. If Lessor elects to treat such unconsented to assignment or
subletting as a non-curable Breach, Lessor shall have the right to
either: (i) terminate this Lease; or (ii) upon thirty (30) days'
written notice ("Lessor's Notice"), increase the monthly Base Rent for
the Premises to the greater of the then fair market rental value of
the Premises, as reasonably determined by Lessor, or one hundred ten
percent (110%) of the Base Rent then in effect. Pending determination
of the new fair market rental value, if disputed by Lessee, Lessee
shall pay the amount set forth in Lessor's Notice, with any
overpayment credited against the next installment(s) of Base Rent
coming due, and any underpayment for the period retroactively to the
effective date of the adjustment being due and payable immediately
upon the determination thereof. Further, in the event of such Breach
and rental adjustment, (i) the purchase price of any option to
purchase the Premises held by Lessee shall be subject to similar
adjustment to the then fair market value as reasonably determined by
Lessor (without the Lease being considered an encumbrance or any
deduction for depreciation or obsolescence, and considering the
Premises at its highest and best use and in good condition) or one
hundred ten percent (110%) or the price previously in effect, (ii) any
index-oriented rental or price adjustment formulas contained in this
Lease shall be adjusted to require that the base index be determined
with reference to the index applicable to the time of such adjustment,
and (iii) any fixed rental adjustments scheduled during the remainder
of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting shall
not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, nor (iii) alter the
primary liability of Lessee for the payment of Base Rent and other
sums due Lessor hereunder or for the performance of any other
obligations to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or
disapproval of an assignment. Neither a delay in the approval or
disapproval of such assignment nor the acceptance of any rent for
performance shall constitute a waiver or estoppel of Lessor's right to
exercise its remedies for the Default or Breach by Lessee of any of
the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by
the assignee or sublessee. However, Lessor may consent to subsequent
sublettings and assignments of the sublease or any amendments or
modifications thereto without notifying Lessee or anyone else liable
under this Lease or the sublease and without obtaining their consent,
and such action shall not relieve such persons from liability under
this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or anyone else responsible for the performance of the
Lessee's obligations under this Lease, including any sublessee,
without first exhausting Lessor's remedies against any other person or
entity responsible therefor to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but
not limited to the intended use and/or required modification of the
Premises, if any, together with a non-refundable deposit of $500.00,
as reasonable consideration for Lessor's considering and processing
the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be
reasonably requested by lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to
conform and comply with each and every term, covenant, condition and
obligation herein to be observed or performed by Lessee during the
term of said assignment or sublease, other than such obligations as
are contrary to or inconsistent with provisions of an assignment or
sublease to which Lessor has specifically consented in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee
of all or any part of the Premises and shall be deemed included in all
subleases under this Lease whether or not expressly Incorporated
therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee, and
Lessor may collect such rent and income and apply same toward Lessee's
obligations under this Lease; provided, however, that until a Breach
(as defined in Paragraph 13.1) shall occur in the performance of
Lessee's obligations under this Lease, Lessee may, except as otherwise
provided in this Lease, receive, collect and enjoy the rents accruing
under such sublease, Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed
liable to the sublessee for any failure of Lessee to perform and
comply with any of Lessee's obligations to such sublessee under such
Sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a
Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become
due under the sublease. Sublessee shall rely upon any such statement
and request from Lessor and shall pay such rents and other charges to
Lessor without any obligation or right to inquire as to whether such
Breach exists and notwithstanding any notice from or claim from Lessee
to the contrary. Lessee shall have no right or claim against such
sublessee, or, until the Breach has been cured, against Lessor, for
any such rents and other charges so paid by said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in
which event Lessor shall undertake the obligations of the sublessor
under such sublease from the time of the exercise of said option to
the expiration of such sublease; provided, however, Lessor shall not
be liable for any prepaid rents or security deposit paid by such
sublessee to such sublessor or for any other prior defaults or
breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No subleases under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without
Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure
the Default of Lessee within the grace period, if any, specified in
such notice. The sublessee shall have a right of reimbursement and
offset from and against Lessee for any such Defaults cured by the
sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), S350.00 is a reasonable sum per such occurrence
for legal services and costs in the preparation and service of a
notice of Default, and that Lessor may include the cost of such
services and costs in said notice as rent due and payable to cure said
default. A "Default" by Lessee is defined as a failure by Lessee to
observe, comply with or perform any of the terms, covenants,
conditions or rules applicable to Lessee under this Lease. A "Breach"
by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is
specified herein, the failure by Lessee to cure such Default prior to
the expiration of the applicable grace period, and shall entitle
Lessor to pursue the remedies sot forth in Paragraphs 13.2 and/or
19.3:
(a) The vacating of the Premises without the Intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common
Area Operating Expenses, or any other monetary payment required to be
made by Lessee hereunder as and when due, the failure by Lessee to
provide Lessor with reasonable evidence of insurance or surety bond
required under this Lease, or the failure of Lessee to fulfill any
obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of three (3) days
following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with
Applicable Requirements per Paragraph 6.3, (ii) the Inspection,
maintenance and service contracts required under Paragraph 7.1 (b),
(iii) the rescission of an unauthorized assignment or subletting per
Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v)
the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under
this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or
(viii) any other documentation or information which Lessor may
reasonably require of Lessee under the terms of this lease, where any
such failure continues for a period of ten (10) days following written
notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40
hereof that are to be observed, complied with or performed by Lessee,
other than those described in Subparagraphs 13.1 (a), (b) or (c),
above, where such Default continues for a period of thirty (30) days
after written notice thereof by or on behalf of Lessor to Lessee;
provided, however, that if the nature of Lessee's Default is such that
more than they (30) days are reasonably required for its cure, then it
shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of
creditors: (ii) Lessee's becoming a "debtor" as defined in 11 U.S.
Code Section 101 or any successor statute thereto (unless, in the case
of a petition filed against Lessee, the same is dismissed within sixty
(60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where possession is
not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all
of Lessee's assets located at the Premises or of Lessee's interest in
this Lease, where such seizure is not discharged within thirty (30)
days; provided, however, in the event that any provision of this
Subparagraph 13.1(e) is contrary to any applicable law, such provision
shall be of no force or effect, and shall not affect the validity of
the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any
Guarantor, was materially false.
(g) If the performance of Lessee's obligations under this Lease
is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in
accordance with the forms of such guaranty, (iii) a Guarantor's
becoming insolvent or the subject of a bankruptcy filing, (iv) a
Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach
of its guaranty obligation on an anticipatory breach basis, and
Lessee's failure, within sixty (60) days following written notice by
or on behalf of Lessor to Lessee of any such event, to provide Lessor
with written alternative assurances of security, which, when coupled
with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed
at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after
written notice to Lessee (or in case of an emergency, without notice),
Lessor may at its option (but without obligation to do so), perform
such duty or obligation on Lessee's behalf, including but not limited
to the obtaining of reasonably required bonds, insurance polices, or
governmental licenses, permits or approvals. The costs and expenses of
any such performance by Lessor shall be due and payable by Lessee to
Lessor upon Invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at
its own option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check in the event of a
Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or
without further notice or demand, and without limiting Lessor in the
exercise of any right or remedy which Lessor may have by reason of
such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession of the
Premises to Lessor. In such event Lessor shall be entitled to recover
from Lessee: (i) the worth at the time of the award of the unpaid rent
which had been earned at the time of termination; (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 rental loss that the Lessee proves could have been
reasonably avoided (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 rental loss that the Lessee proves
could be reasonably avoided and (iv) any other amount necessary to
compensate Lessor for a11 the detriment proximately caused by the
Lessee's failure to perform its obligations under this Lease or which
in the ordinary course of things would be likely to result therefrom,
including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and
alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with
this Lease applicable to the unexpired term of this Lease. The worth
at the time of award of the amount referred to in provision (iii) of
the immediately preceding sentence shall be computed by discounting
such amount at the discount rate of the Federal Reserve Bank of San
Francisco or the Federal Reserve Bank District in which the Premises
are located at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessees Default or Breach of this
Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Lessor shall have the right
to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraph 13.1 (b), (c) or
(d) was not previously given, a notice to pay rent or quit, or to
perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also
constitute the applicable notice for grace period purposes required by
Subparagraph 13.1(b),(c) or (d). In such case, the applicable grace
period under the unlawful detainer statue shall run concurrently after
the one such statutory notice, and the failure of Lessee to cure the
Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease
entitling Lessor to the remedies provided for in this Lease and/or by
said statute.
(b) Continue, the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4)
after Lessee's Breach and recover the rent as it becomes due, provided
Lessee has the right to sublet or assign, subject only to reasonable
limitations. Lessor and Lessee agree that the limitations on
assignment and subletting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee
from liability under any indemnity provisions of this Lease as to
matters occurring or accruing during the term hereof or by reason of
Lessee's occupancy of the Premises.
13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor
or free or abated rent or either charges applicable to the Premises,
or for the giving or paying by Lessor to or for Lessee of any cash or
other bonus, inducement or consideration for Lessee's entering into
this Lease, all of which concessions are hereinafter referred to as
"Inducement Provisions" shall be deemed conditioned upon Lessee's full
and faithful performance of all of the forms, covenants and conditions
of this Lease to be performed or observed by Lessee during the term
hereof the same may be extended. Upon the occurrence of a Breach (as
defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provision shall automatically be deemed deleted from this
lease and of not further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid
by Lessor under such an Inducement Provision shall be immediately due
and payable by Lessee to Lessor, and recoverable by Lessor, as
additional rent due under this Lease, notwithstanding any subsequent
cure of said Breach by Lessee. The acceptance by Lessor of rent or
the cure of the Breach which initiated the operation of this Paragraph
13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at
the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause
Lessor to incur costs not contemplated by this Lease, the exact amount
of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, processing and accounting charges,
and late charges which may be imposed upon Lessor by the terms of any
ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within fifteen
(15) days after such amount shall be due, then, without any
requirement of notice to Lessee, Lessee shall pay to Lessor a late
charge equal to six percent (6%) of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by
lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late
charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of Base Rent, then notwithstanding Paragraph
4.1 or any other provision of this Lease to the contrary, Base Rent
shall, at Lessor's option, become due and payable quarterly in
advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
Paragraph 13.5, a reasonable time shall in no event be less than
thirty (30) days after receipt by Lessor, and by any Lender(s) whose
name and address shall have been furnished to Lessee in writing for
such purpose, of written notice specifying wherein such obligation of
Lessor has not been performed; provided, however, that if the nature
of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonable required for its performance, then Lessor
shall not be in breach of this Lease if performance is commenced
within such thirty (30) day period and thereafter diligently pursued
to completion.
14. Condemnation. If the Premises or any portion thereof are taken
under the power of eminent domain or sold under the threat of the
exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as
of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the
portion of the Common Areas designated for Lessee's parking, is taken
by condemnation, Lessee may, at Lessee's option, to be exercised in
writing within ten (10) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken
possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in
full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in the same proportion as
the rentable floor area of the Premises taken bears to the total
rentable floor area of the Premises. No reduction of Base Rent shall
occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises
under the power of eminent domain or any payment made under threat of
the exorcise of such power shall be the property of Lessor, whether
such award shall be made as compensation for diminution of value of
the leasehold or for the taking of the fee, or as severance damages;
provided, however, that Lessee shall be entitled to any compensation,
separately awarded to Lessee for Lessee's relocation expenses and/or
toss of Lessee's Trade Fixtures. In the event that this Lease is not
terminated by reason of such condemnation, Lessor shall to the extent
of its net severance damages received, over and above Lessee's Share
of the legal and other expenses incurred by Lessor in the condemnation
matter, repair any damage to the Premises caused by such condemnation
authority. Lessee shall be responsible for the payment of any amount
in excess of such net severance damages required to complete such
repair.
15. Brokers' Fees.
16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall
within ten (10) days after written notice from the other Party (the
"Requesting Party") execute, acknowledge and deliver to the Requesting
Party a statement in writing in a form similar to the then most
current "Tenancy Statement" form published by The American Industrial
Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the
Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance, or
sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser
designated by Lessor such financial statements of Lessee and such
Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the
past three (3) years. All such financial statements shall be received
by Lessor and such lender or purchaser in confidence and shall be used
only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean
the owner or owners at the time in question of the fee title to the
Premises. In the event of a transfer of Lessor's title or interest in
the Premises or in this Lease, Lessor shall deliver to the transferee
or assignee (in cash or by credit) any unused Security Deposit held by
Lessor at the time of such transfer or assignment. Except as provided
in Paragraph 15.3, upon such transfer or assignment and delivery of
the Security Deposit, as aforesaid, the prior Lessor shall be relieved
of all liability with respect to the obligations and/or covenants
under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as
hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in now way
affect the validity of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within
thirty days following the date on which it was due, shall bear
interest from the date due at the prime rate charged by the largest
state chartered bank in the state in which the Premises are located
plus four percent (4%) per annum, but not exceeding the maximum rate
allowed by law.
20. Time of Essence. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the
Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under
the terms of this Lease are deemed to be rent.
22. No Prior or other Agreements; Broker Disclaimer. This Lease
contains all agreements between the Parties with respect to any matter
mentioned herein, and no other prior or contemporaneous agreement or
understanding shall be effective, Lessor and Lessee each represents
and warrants to the Brokers that it has made, and is relying safely
upon, its own investigation as to the nature, quality, character and
financial responsibility of the other Party to this Lease and as to
the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or
breach hereof by either Party. Each Broker shall be an intended third
party beneficiary of the provisions of this Paragraph 22.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or
by messenger or courier service) or may be sent by regular, certified
or registered mail or U.S. Postal Service Express Mail, with postage
prepaid, or by facsimile transmission during normal business hours,
and shall be deemed sufficiently given if served in a manner specified
in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the
other specify a different address for notice purposes, except that
upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering
notices to Lessee. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such
party or parties at such addresses as Lessor may from time to time
hereafter designate by written notice to Lessee.
23.2 Date of Notice. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of
delivery shown on the receipt card, or if no delivery date is shown,
the postmark thereon. If sent by regular mail, the notice shall be
deemed given forty eight (48) hours after the same is addressed as
required herein and mailed with postage prepaid. Notices delivered by
United Stales Express Mail or overnight courier that guarantees next
day delivery shall be deemed given twenty-four (24) hours after
delivery of the same to the United States Postal Service or courier.
If any notice is transmitted by facsimile transmission or similar
means, the same shall be deemed served or delivered upon telephone or
facsimile confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is
received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of
any other term, covenant or condition hereof, or of any subsequent
Default or Breach by Lessee of the same or any other term, covenant or
condition hereof. Lessor's consent to, or approval of, any such act
shall not be deemed to render unnecessary the obtaining of Lessor's
consent to, or approval of, any subsequent or similar act by Lessee or
be construed as the basis of an estoppel to enforce the provision or
provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting
rent, the acceptance of rent by Lessor shall not be a waiver of any
Default or Breach by Lessee of any provision hereof. Any payment given
Lessor by Lessee may be accepted by Lessor on account of moneys or
damages due Lessor, notwithstanding any qualifying statements or
conditions made by Lessee in connection therewith, which such
statements and/or conditions shall be of no force or effect whatsoever
unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the
other, execute, acknowledge and deliver to the other a short form
memorandum of this Lease for recording purposes. The Party requesting
recordation shall be responsible for payment of any fees or taxes
applicable thereto.
26. No Right to Holdover. See Addendum 18.
27. Cumulative Remedies. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative with all
other remedies in law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be
observed or performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon
the parties, their personal representatives, successors and assigns
and be governed by the laws of the State in which the Premises are
located. Any litigation between the Parties hereto concerning this
Lease shall be initialed in the county in which the Premises are
located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of Trust,
or other hypothecation or security device (collectively, "Security
Device"), now or hereafter placed by Lessor upon the real property of
which the Premises are a part, to any and all advances made on the
security thereof, and to a11 renewals, modifications, consolidations,
replacements and extensions thereof. Lessee agrees that the Lenders
holding any such Security Device shall have no duty, liability or
obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any
such obligation, Lessee will give any Lender whose name and address
have been furnished Lessee in writing for such purpose notice of
Lessor's default pursuant to Paragraph 13.C. If any Lender shall elect
to have this Lease and/or any Option granted hereby superior to the
lien of its Security Device and shall give written notice thereof to
Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party
who acquires ownership of the Premises by reason of a foreclosure of a
Security Device and that in the event of such foreclosure, such now
owner shall not: (i) be liable for any act of omission of any prior
1essor or with respect to events occurring prior to acquisition of
ownership, (ii) be subject to any offsets or defenses which Lessee
might have against any prior lessor, or (iii) be bound by prepayment
of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of
this Lease shall be subject to receiving assurance (a non-disturbance
agreement) from the Lender that Lessee's possession and this Lease,
including any options to extend the form hereof, will not be disturbed
so long as Lessee is not in Breach hereof and attorns to the record
owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents;
provided, however, that upon written request from Lessor or a Lender
in connection with a sale, financing or refinancing of Premises,
Lessee and Lessor shall execute such further writings as may be
reasonably required to separately document any such subordination or
non-subordination, attornment and/or non-disturbance agreement as is
provided for herein.
31. Attorneys' Fees. If any Party or Broker brings an action or
proceeding, to enforce the forms hereof or declare rights hereunder,
the Prevailing Party (as hereafter defined) in any such, proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys'
fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to
decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party or Broker who substantially obtains or
defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker
of its claim or defense. The attorneys' fee award shall not be
computed in accordance with any court fee schedule, but shall be such,
as to fully reimburse all attorneys' fees reasonably incurred. Lessor
shall be entitled to attorneys' fees, costs and expenses incurred in
preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently
commenced in connection with such Default or resulting Breach.
Broker(s) shall be intended third party beneficiaries of This
Paragraph 31. ,
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times for the
purpose of showing the same to prospective purchasers, lenders, or
Lessees, and making such alterations, repairs, improvements or
additions to the Premises or to the Building, as Lessor may reasonably
deem necessary. Lessor may at any time place on or about the Premises
or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place
on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability
to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises
without first having obtained Lessor's prior written consent.
Notwithstanding anything to the contrary in this Lease, Lessor shall
not be obligated to exercise any standard of reasonableness in
determining whether to grant such consent.
34. Signs. The installation of any sign on the Premises by or for
Lessee shall be subject to the provisions of Paragraph 7 (Maintenance,
Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights
to the use of the roof of the Building, and the right to install
advertising signs on the Building, including the roof, which do not
unreasonably interfere with the conduct of Lessee's business; Lessor
shall be entitled to all revenues from such advertising signs. See
Addendum 13.
35. Termination; Merger. Unless specifically stated otherwise in
writing by Lessor, the voluntary or other surrender of this Lease by
Lessee, the mutual termination or cancellation hereof, or a
termination hereof by Lessor for Breach by Lessee, shall automatically
terminate any sublease or lesser estate in the Premises; provided,
however, Lessor shall, in the event of any such surrender, termination
or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by
written notice to the holder of any such lessor interest, shall
constitute Lessor's election to have such event constitute the
termination of such interest.
36. Consents.
{a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be
unreasonably withheld or delayed. Lessor's actual reasonable costs and
expenses (including but not limited to architects', attorneys',
engineers' and other consultants' fees) incurred in the consideration
of, or response to, a request by Lessee for any Lessor consent
pertaining to this Lease or the Premises, including but not limited to
consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of
an invoice and supporting documentation therefor. In addition to the
deposit described in Paragraph 12.2(e), Lessor may, as a condition to
considering any such, request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit
held under Paragraph 5) reasonably calculated by Lessor to represent
the cost Lessor will incur in considering and responding to Lessee's
request. Any unused portion of said deposit shall be refunded to
Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not
constitute an acknowledgment that no Default or Breach by Lessee of
this Lease exists, nor shall such consent be deemed a waiver of any
then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify
herein any particular condition to Lessor's consent shall not preclude
the impositions by Lessor at the time of consent of such further or
other conditions as are then reasonable with reference to the
particular matter for which consent is being given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this Lease
per Paragraph 1.11, the form of the guaranty to be executed by each
such Guarantor shall be in the form most recently published by The
American Industrial Real Estate Association, and each such Guarantor
shall have the same obligations as Lessee under this Lease, including
but not limited to the obligation to provide the Tenancy Statement and
information required in Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or
refuses, upon reasonable request by Lessor to give: (a) evidence of
the due execution of the guaranty called for by this Lease, including
the authority at the Guarantor (and of the party signing on Guarantors
behalf) to obligate such Guarantor on said guaranty, and resolution of
its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signatures of
the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by
Lessor, (c) a Tenancy Statement, or (d) written confirmation that the
guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the
Premises and the performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this
Lease, Lessee shall have quiet possession of the Premises for the
entire term hereof subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (b) the right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the
right of first refusal to lease other property of Lessor or the right
of first offer to lease other property of Lessor: (c) the right to
purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the
right to purchase other property of Lessor, or the right of first
refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 Options Personal to Original Lease. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in
Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily
assigned or exercised try any person or entity other then said
original Lessee while the original Lessee is in full and actual
possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee
are not assignable, either an a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from
this Lease in any manner, by reservation or
otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be
exercised unless the prior Options to extend or renew this Lease have
been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the
period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or
(ii) during the period of time any monetary obligation due Lessor from
Lessee is unpaid (without regard to whether notice thereof is given
Lessee), or (iii) during the time Lessee is in Breach of this Lease,
or (iv) in the event that Lessor, has given to Lessee three (3) or
more notices of separate Default under Paragraph 13.1 during the
twelve (12) month period immediately preceding the exercise of the
Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of Paragraph
39.4(a)
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding
Lessee's due and timely exercise of the Option, if, after such
exercise and during the term of this Lease, (i) Lessee fails to pay to
Lessor a monetary obligation of Lessee for a period of thirty (30)
stays after such obligation becomes due (without any necessity of
Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph
13.1 during any twelve (12) month period, whether or not the Defaults
are cured, or (iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and
keep and observe all reasonable rules and regulations (Rules and
Regulations) which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking
and unloading of vehicles and the preservation of good order, as well
as for the convenience of other occupants or tenants of the Building
and the Industrial Center and their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental
payable to Lessor hereunder does not include the cost of guard service
or other security measures, and that Lessor shall have no obligation
whatsoever to provide same. Lessee assumes all responsibility for the
protection of the Premises, Lessee, its agents and invitees and their
property from the acts of third parties.
42. Reservations. Lessor reserves the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements,
rights of way, utility raceways, and dedications that Lessor deems
necessary, and to cause the recordation of parcel maps and
restrictions, so long as such easements, rights of way, utility
raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to
sign any documents reasonably requested by Lessor to effectuate any
such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise
as to any amount or sum of money to be paid by one Party to the other
under the provisions hereof, the Party against whom the obligation to
pay the money is asserted shall have the right to make payment "under
protest" and such payment shall not be regarded as a voluntary payment
and there shall survive the right on the part of said Party to
institute suit for recovery of such sum. If it shall be adjudged that
there was no legal obligation on the part of said Party to pay such
sum or any part thereof, said Party shall be entitled to recover such
sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.
44. Authority. If either Party hereto is a corporation, trust, or
general or limited partnership, each individual executing this Lease
on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. If
Lessee is a corporation, trust or partnership, Lessee shall, within
thirty (30) days after request by Lessor, deliver to Lessor evidence
satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this
Lease and the typewritten or handwritten provisions shall be
controlled by the typewritten or handwritten provisions.
46. Offer. Preparation of this Lease by either Lessor or Lessee or
Lessor's agent or Lessee's agent and submission of same to Lessee or
Lessor shall not be deemed an offer to lease. This Lease is not
intended to be binding until executed and delivered by all Parties
hereto.
47. Amendments. This Lease may be modified only in writing, signed by
the parties in interest at the time of the modification. The Parties
shall amend this Lease from time to time to reflect any adjustments
that are made to the Base Rent or other rent payable under this Lease.
As long as they do not materially change Lessee's obligations
hereunder, Lessee agrees to make such reasonable non-monetary
modifications to this Lease as may be reasonably required by an
institutional insurance company or pension plan Lender in connection
with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein,
if more than one person or entity is named herein as either Lessor or
Lessee, the obligations of such multiple parties shall be the joint
and several responsibility of all persons or entities named herein as
such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH
TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS
LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES
HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF
THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND
PURPOSE,OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE
CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE
PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS
SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEOUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES
OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED
SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the
dates specified above their respective signatures.
Executed at: El Cajon, California
on: March 24, 1998
By LESSOR:
North County Industrial Park LP
by: Whammy, Inc., General Partner
By: /s/ JEFFREY C. HAMANN
Name Printed: Jeffrey C. Hamman
Title: President
By: /s/ DANIEL M. WHITAKER
Name Printed: Daniel M. Whitaker
Title: Secretary
Address: 475 W. Bradley Avenue
El Cajon, CA 9202
Telephone: (619) 440-7424
Facsimile: (619) 440-8914
Executed at: Escondido, California
on: March 23, 1998
By LESSEE:
Datron World Communications Inc.
By: /s/ WILLIAM L. STEPHAN
Name Printed: William L. Stephan
Title: Secretary/Treasurer
Address: 304 Enterprise Street
Escondido, CA 92029
Telephone: (760) 747-1079
Facsimile: (760) 747-2474
ADDENDUM TO LEASE
This Addendum to Lease ("Addendum") is made by and between NORTH
COUNTY INDUSTRIAL PARK, L.P., a California limited partnership
("LESSOR") and DATRON WORLD COMMUNICATIONS INC., a California
corporation ("LESSEE") and is intended to supplement that certain
Standard Industrial/Commercial Multi-Tenant Lease-Modified Net between
LESSOR and LESSEE dated February 13, 1998, ("Lease") to which this
Addendum is annexed. If there is any inconsistency between this
Addendum and the Lease, the terms of this Addendum shall supersede and
control. LESSOR and LESSEE agree as follows:
1. Premises and Building Shell Description. "Building" means the
freestanding building denoted on the site plan ("Site Plan"), which is
annexed to this Addendum as EXHIBIT "1", as VISTA COMMERCE CENTER Lot
E and the "Premises" means and refers to the portion of the Building
as depicted in EXHIBIT "1", which is being leased to LESSEE pursuant
to this Lease. The Building is planned to consist of the Building
Shell Improvements as described in section 5 of this Addendum, subject
to subsection 1.2 of this Addendum. The Building Shell Improvements
are being designed and constructed substantially in accordance with
those certain preliminary architectural plans dated February 24, 1998
prepared by Paul Giese ("Architect") which are more particularly
described in EXHIBIT "2" annexed to this Addendum ("Preliminary
Building Shell Plans"). The components of the Building Shell
Improvements construction shall also conform to the specifications
attached as EXHIBIT "3" to this Addendum ("Building Shell
Specifications").
1.1 Planned Size and Final Measurement. It is planned that the
Building will contain approximately 106,000 rentable square feet, of
which the Premises will consist of approximately single story 70,000
rentable square feet. All square footage measurements shall be from
the roof "drip line" and in accordance with the Building Owners and
Managers Association International ("BOMA") standards. Following
Substantial Completion (as defined below) of all of the Building Shell
Improvements and the Tenant Improvements, LESSOR will, in good faith,
certify the actual rentable square feet of the Premises to establish
the exact rentable square feet for all purposes of the Lease. If
LESSEE disputes LESSOR's certification of the actual rentable square
feet of the Premises, LESSEE shall notify LESSOR in writing within ten
(10) days of LESSEE's receipt of the certified rentable square feet of
the Premises from LESSOR of LESSEE's intent to exercise its rights
under this section. In such event, LESSOR and LESSEE shall submit the
dispute concerning rentable square feet of the Premises to the
Architect, and the Architect's certification of rentable square feet
of the Premises will be binding upon LESSOR and LESSEE.
1.2 Modifications. LESSEE agrees that LESSOR may make modifications to
the Building Shell Improvements design on account of government or
lender requirements and otherwise as reasonably determined by LESSOR;
provided, however any such modifications shall not: (a) increase or
decrease the total rentable square feet of the Premises by more than
two percent (2%); (b) materially change the Building Shell
Specifications; or (c) materially and adversely affect LESSEE's use of
the Premises.
2. Effective Date/Term/Commencement Date. Notwithstanding any other
provision of the Lease, this Lease shall be effective upon execution
by LESSOR and LESSEE ("Effective Date") and shall constitute a legally
binding contract for LESSOR to deliver possession of the Premises in
accordance with the requirements of this Lease and for LESSEE to
accept possession and pay the rentals beginning upon the Commencement
Date (as defined below). Notwithstanding that the Effective Date of
this Lease is the date of execution of this Lease, LESSEE's obligation
to commence payment of the rentals payable under this Lease shall not
commence until the occurrence of the Commencement Date. The obligation
to pay Rent shall be abated for the first month of the term of the
Lease. All other terms of the Lease, however, (including but not
limited to the obligation to pay real property taxes and insurance
premiums and to maintain the premises) shall be in effect during the
rental abatement period.
2.1 Commencement Date. Except as otherwise provided in section 5.5 of
this Addendum, the term "Commencement Date" means the date of the
Substantial Completion (as defined below) of the Building Shell
Improvements and the Tenant Improvements. The term "Completion Date
means February 1,1999, provided such date shall be subject to
extension (a) on account of delays caused by LESSEE as described in
subsection 5.5 of this Addendum, (b) for delays caused by fire,
earthquake or other unavoidable casualties or inclement weather
conditions not reasonably anticipatable, (c) extraordinary or unusual
governmental action other than usual permit and inspection procedures,
(d) for delays encountered as a result of the discovery of any unknown
or concealed conditions affecting the Premises, (e) for delays caused
by general area-wide labor or material shortages or labor disputes
(such a strikes or lockouts), or any other causes not the fault of
LESSOR or LESSOR's Contractor, subcontractors, agents or employees or
(S) by one (1) day for each day after October 30, 1998, the issuance
of the building permit for the Tenant Improvements is delayed,
provided such delay is caused by LESSEE per Sections 5.2, 5.3, 5.4.1,
5.5, 5.7, 7 and 9.
2.2 LESSOR's Delay. In the event that the Completion is delayed on
account of the Default of LESSOR or on account of the fault of
LESSOR's Contractor in failing to timely cause Substantial Completion
of the Building Shell and Tenant Improvements, LESSEE shall be
entitled to a Delay Credit" against the Rent becoming due on and after
the Commencement Date in an amount equal to one (1) day of Rent for
each day that the Completion Date is so delayed.
2.3 Commencement Date Delay. Notwithstanding Section 2.2, the LESSOR
will have until October, 15, 1998 to notify the LESSEE of up to a 90
day delay in the Commencement Date beyond February 1, 1999. If the
LESSOR so notifies the LESSEE in writing, then the Delay Credit per
section 2.2 will be reduced to S3,70.0 per month or any part thereof
during such 90 day delay period only and the "Delay Credit" per
Section 2.2 will be calculated from the new Commencement Date.
2.4 Lease Term. The initial of the Lease ("Lease Terms") shall be a
period of ten (10) years beginning one month after the Commencement
Date; and ending one hundred twenty (120) consecutive months later;
provided, however, if the Commencement Date occurs other than on the
first day of a calendar month, the Initial Lease Term shall be deemed
extended for a period of time equal to the number of days between the
Commencement Date and the beginning of the first full calendar month
following the Commencement Date. The initial term of the Lease is
subject to extension in accordance with section 8 of this Addendum.
2.5 "Lease Year" Defined. The term "Lease Year" means each consecutive
twelve (12) month period during the Lease Term; provided, however, in
the case of the first Lease Year, such Lease Year shall be a period of
time beginning on the Commencement Date and ending twelve (12)
consecutive months following the Commencement Date, and each
subsequent Lease Year shall be determined from the anniversary of the
expiration of such first Lease Year; provided, further, however, if
the Commence Date occurs other than on the first day of a calendar
month, the first Lease Year shall be deemed extended for a period time
equal to the number of days between the Commencement Date and the
beginning of the first full calendar month following the Commencement
Date.
2.6 The first month after the Commencement Date shall be Rent free.
3. Rent. "Rent" for the Premises shall be the sum of (a) the Base Rent
described in subsection 3.1 of this Addendum, subject to adjustment as
provided in subsection 3.2 of this Addendum, (b) the Allowance
Amortization Charge as determined under subsection 3.3 of this
Addendum, (c) LESSEE's Share of Common Area Operating Expenses as
defined in Paragraph 4 of the Lease, and (d) any other amounts
becoming payable by LESSEE under the Lease. The Rent shall be payable
on the first day of each month.
3.1 Base Rent. The monthly Base Rent set forth in Paragraph 1.5 of the
Lease for the first Lease Year (as defined below) of the Original Term
represents the full Base Rent payable upon the Commencement Date
determined by multiplying the amount of S.42 per rentable square foot
by the estimated total 70,000 rentable square feet of the Premises. If
there is a variance in the rentable square footage of the Premises as
actually constructed, the Base Rent for the first Lease Year shall be
adjusted based on the actual rentable square feet within the Premises
multiplied times $.42 per rentable square foot.
3.2 Increase in Rent. The Rent shall be increased at the beginning of
the second Lease Year, and at the beginning of each Lease Year
thereafter, by an amount equal to 3% of the sum of Base Rent plus
Allowance Amortization charge in effect during the immediately
preceding Lease Year.
3.3 Tenant Improvement Allowance Amortization. As more particularly
provided in section 5 of this Addendum, LESSOR will provide a Tenant
Improvement Allowance ("Allowance") to pay a portion of the Tenant
Improvement Costs (as defined below). The term "Allowance Amortization
Charge" means an amount to be added to the Base Rent, and shall be
payable by LESSEE as a part of the Rent from and after the
Commencement Date, which is calculated as follows: (a) determine the
aggregate amount of the Allowance expended by LESSOR for the Tenant
Improvements Costs; (b) amortize the amount of the Allowance based on
an economic return equivalent to eleven percent (11 %) per annum to
derive a monthly payment sufficient to pay in full an amount equal to
the Allowance and such economic return over a period of time from the
Commencement Date to the end of the Lease term specified in Lease
Paragraph 1.3; and (c) the resulting monthly payment shall equal the
Allowance Amortization Charge. If the amount of the Allowance
Amortization Charge is determined after the Commencement Date on
account of a delay in finalizing the Tenant Improvement Costs, then
LESSEE shall pay LESSOR the amount accruable from the Commencement
Date to the end of the then current month, adjusted for any Free Rent
within fifteen (15) days after LESSOR's billing for such accrued
amounts, and shall thereafter pay the monthly Allowance Amortization
Charge with each payment of Base Rent. LESSEE shall have the right to
pay in full the remaining unamortized balance of the Allowance during
the last thirty (30) days of any Lease Year, provided that any such
payment must be in the full amount of the unamortized balance of the
Allowance as of the date of the payment, and LESSOR shall not be
obligated to accept any lesser payment or payments at any other time.
Upon LESSEE's full payment of the unamortized balance of the
Allowance, the Allowance Amortization Charge shall no longer be
payable by LESSEE as additional rent.
4. LESSEE's Share of Common Area Operating Expenses. The LESSEE's
Share of Common Area Operating Expenses stated in Paragraph 1.6(b) of
the Lease is an estimate based on the estimated rentable square feet
to be included in the Industrial Center, the Building and the
Premises. Following completion, the actual percentage will be adjusted
to equal a percentage determined by dividing the rentable square feet
in the Premises by the total rentable square feet, as certified by
LESSOR, in the Industrial Center. Notwithstanding any other provision
of the Lease, LESSOR agrees that the property management fee allocable
to LESSEE's Share of Common Area Operating Expenses shall not exceed
two percent (2%) of the Base Rent. In addition, LESSEE shall have the
right, at its expense, to audit or otherwise inspect the books and
records of LESSOR regarding the calculation of the Common Area
Operating Expenses.
5. Building Shell Improvements and Tenant Improvements. LESSOR, at its
expense, shall construct the Building Shell Improvements. The phrase
"Building Shell Improvements" means the improvements comprising the
Building to be constructed as shown in the Building Shell Plans and
the Building Shell Specifications, including (a) roofing, fascia,
exterior walls, doors and windows, and truck doors (both at grade and
at dock level), (b) footings and concrete floors, (c) fire sprinkler
system, (d) conduits and pipes for telephone, electricity, water, fire
sprinklers and sewer brought to "stub out", termination points in or
above a perimeter wall of the Premises, (e) a main electrical
termination panel for the Building, (f) paving and finish of parking
areas, entrance areas and walkways, (g) landscaping for the Industrial
Center as reasonably determined by LESSOR, and (h) site improvements
consisting of street, gutters, sidewalks, curbs, storm drains and
erosion control (construction period and permanent) as required to
comply with governmental requirements
5.1 Tenant Improvements. The phrase "Tenant Improvements" means all
interior improvements which are not a part of the Building Shell
Improvements, including (a) partitions, walls, doors, (b) all interior
surface finishes, including wall coverings, paint, floor coverings,
suspended ceilings and other similar items, (c) duct work, heat pumps,
vents, filters, diffusers, terminal boxes and accessories for
completion of heating, ventilation and air conditioning systems within
the Premises, (d) electrical distribution systems (including panels,
subpanels, wires and outlets), lighting fixtures, outlets, switches
and other electrical work to be installed in the Premises, (e)
plumbing lines, fixtures and accessories, (f) all fire and life safety
control systems such as fire walls and fire alarms (including piping,
wiring and accessories) to be located in the Premises, (g) entrance
door signage and directory listings, as authorized by LESSOR, (h)
improvements required for compliance with Title 24, (i) level
mechanism for load docks; provided, however, LESSEE's trade fixtures,
equipment and personal property (including telephone systems, chairs,
tables, furniture, movable partitions and other equipment used in
LESSEE's business) shall not be considered part of the Tenant
Improvements.
5.2 Design of Tenant Improvements. LESSEE shall furnish to LESSOR for
its approval, a space plan showing the configuration of the Improved
Office Space no later than May I5, 1998, which shall be the Approved
Space Plan following LESSOR's approval. LESSEE shall furnish to LESSOR
a complete set of plans and specifications detailing all Tenant
Improvements no later than June 30, 1998 ("Tenant Improvement Plans).
Unless otherwise approved by LESSOR, the Tenant Improvement Plans will
be prepared by the Architect, who shall also obtain permits for the
plans. Should Architect, in LESSEE's sole opinion, not progress in a
timely fashion to meet the June 30, 1998, requirement for the Tenant
Improvement Plans, LESSEE may select a different architect/space
planner to develop the Tenant Improvement Plans. In such event, all
expenses incurred by LESSOR's Architect shall not be part of the
Allowance, and all expenses incurred by LESSEE's architect shall be
part of the Allowance and shall be reimbursed by LESSOR to LESSEE on a
monthly basis. Further, the June 30, 1998, date outlined herein shall
be adjusted forward by the amount of days from May 15, 1998 to the
date LESSEE gives written notice of its election to terminate
Architect. If LESSEE does not execute and deliver the Lease on or
before March 1, 1998, or if LESSEE delays in providing the Approved
Space Plan and/or the Tenant Improvement Plans such delays shall not
change the Commencement Date of the Lease, which shall be the date the
Premises would have been available for occupancy, but for any such
delay; provided such delays will delay the date for Substantial
Completion. The Tenant Improvement Plans shall be subject to LESSOR's
prior approval, which will not be unreasonably withheld; provided,
however, LESSOR shall have the absolute right of disapproval, in its
sole discretion, of any Tenant Improvements which (a) alter or
otherwise affect any structural component of the Building, (b) are
visible from the exterior of the Premises, (c) do not conform to the
Approved Space Plan for the Improved Office Space, or (d) the Tenant
Improvement Plans specify materials which are not readily available or
customarily and ordinarily used in similarly situated construction
work where the procurement of such materials would cause a delay in
Substantial Completion. LESSOR shall respond within fifteen (15) days
after receipt of the Tenant Improvement Plans in which to approve or
disapprove in writing the Tenant Improvement Plans. If LESSOR
disapproves the Tenant Improvement Plans, it shall state with
specificity the reasons for such disapproval. If LESSOR reasonably
disapproves the Tenant Improvement Plans, LESSEE shall promptly cause
the Tenant Improvement Plans to be revised and resubmitted to LESSOR
for its review and approval within fifteen (15) days from notice of
LESSOR's disapproval. Following LESSOR's approval, LESSOR will have
the Architect submit the Tenant Improvement Plans for government plan
checking and a building permit, if required, provided, LESSOR shall
have the right to approve any changes required by such governmental
authorities. The final Tenant Improvement Plans shall be subject to
any changes required by governmental authorities.
5.3 Approved Contractor. Hamann Construction, a licensed general
contractor, will be the general contractor for construction of the
Building Shell Improvements and Tenant Improvements. LESSOR and LESSEE
hereby approve Hamann Construction acting as the general contractor
("Contractor"). Contractor's agreed-upon markup (profit and overhead)
for the Tenant Improvements will be 12% of the actual costs incurred
in the development and construction of the Tenant Improvements
exclusive only of the costs of the preparation of the Tenant
Improvement Plans and government permits. LESSEE shall have the right
to review the subcontract proposals ("Bids") for the Major Trades (as
defined below) required for construction of the Tenant Improvements.
No later than thirty (30) days prior to the commencement of
construction, LESSOR shall cause Contractor to deliver to LESSEE Bids
for each Major Trade from no less than three (3) licensed and
qualified subcontractors together with a written notice specifying the
Bids which Contractor recommends for acceptance. LESSEE shall have the
right to reasonably disapprove one of the Bids for each of the Major
Trades selected by Contractor by giving LESSOR written notice of any
objection that LESSEE may have to such Bids within five (5) days from
LESSEE's receipt of the Bids from Contractor; provided, however,
LESSEE shall not have the right to disapprove more than one (1) bid
within a Major Trade, and Contractor shall have the right to select
any of the remaining Bids in such Major Trade category. LESSEE's
notice of disapproval shall explain in detail the basis for the
disapproval of any Bid recommended by Contractor. Contractor shall
have the right to utilize any subcontractors submitting Bids for which
LESSEE does not timely give notice of its disapproval. The term "Major
Trades" means portions of the construction work: consisting of the
supply or installation of electrical, heating and air conditioning,
fire sprinkler system, framing, drywall, plumbing, painting, floor
coverings, suspended ceilings, glass, doors and ceramic tile.
5.3.1 Project Schedule. Contractor shall provide to LESSEE a project
schedule for both the Shell Building and the Tenant Improvements
within three months of the execution of the Lease. Thereafter,
Contractor shall provide LESSEE monthly updates to the Project
Schedule.
5.4 Allowance for Tenant Improvement Costs. LESSOR agrees to pay a
maximum of $980,000.00 ("Allowance") for Tenant Improvement Costs as
defined below. The Allowance shall be applied solely to pay the cost
of such Tenant Improvements, and under no circumstances shall LESSEE
be entitled to any payment on account of any unused, portion of the
Allowance following completion of the Tenant Improvements and payment
of the Tenant Improvement Costs. The amount of the Allowance actually
advanced by LESSOR shall be used to calculate the amount of the
Allowance Amortization Charge described in subsection 3.3 of this
Addendum.
5.4.1 Excess Costs Payable BY LESSEE. LESSEE will be responsible for
payment of any excess Tenant Improvement Costs which exceed the amount
of the Allowance payable by LESSOR under subsection of this Addendum.
LESSEE shall deposit funds with LESSOR (or make such other
arrangements to guaranty payment of such excess costs as are
acceptable to LESSOR) in an amount equal to such excess prior to the
issuance of the building permit for construction of the Tenant
Improvements, except in the case of excess costs resulting from
changes during construction.
Any construction changes shall be subject to LESSOR's approval and
LESSEE shall deposit funds with LESSOR to pay such costs within five
(S) days following notice of Contractor's cost for any change.
5.5 Completion and Acceptance of Building Shell and Tenant
Improvements. The Commencement Date of the Lease shall not occur until
Substantial Completion (as defined in subsection 5.5.1 of this
Addendum) of the Building Shell Improvements reasonably required for
occupancy of the Building, and the Tenant Improvements.
Notwithstanding the preceding provisions, if Substantial Completion is
delayed on account of LESSEE's failure to timely submit the Tenant
Improvement Plans (or any revisions thereto), LESSEE's request for
special materials, finishes or installations (i.e. materials which are
not readily available or customarily and ordinarily used in similarly
situated construction work) not shown in the Tenant Improvement Plans
as approved by LESSOR, changes to the Approved Space Plan or approved
Tenant Improvement Plans requested by LESSEE or other delays caused by
LESSEE, the Commencement Date of this Lease shall occur prior to
Substantial Completion and as of the date Substantial Completion would
have occurred but for such delays by LESSEE. Notwithstanding the
foregoing, a delay in Substantial Completion attributable to LESSEE
for actions other than those deadlines outlined in section
5.2 shall not be deemed to have occurred unless LESSOR gives LESSEE
notice of its action causing such delay and LESSEE fails to take
actions necessary to prevent a delay of LESSEE's obligations hereunder
condoning for three days after receipt of written notice from LESSOR
specifying LESSEE's action which will cause such delay.
5.5.1 "Substantial Completion" Defined. The term Substantial
Completion" means the date upon which LESSOR reasonably satisfies all
of the following requirements: (a) the construction of the applicable
Building Shell Improvements is substantially completed, subject only
to minor corrective work which does not affect or limit LESSEE's use
of the Premises; provided, LESSOR shall complete any such minor work
within thirty (30) days; (b) the construction of the applicable Tenant
Improvements is substantially completed in accordance with the Tenant
Improvement Plans as modified only by any changes requested by LESSEE
and approved by LESSOR or as otherwise permitted by this Lease,
subject only to minor corrective work which does not affect or limit
LESSEE's use of the Premises; provided, LESSOR shall complete any such
minor work within thirty (30) days; (c) LESSOR has procured a
certificate of occupancy (whether temporary or permanent) or other
applicable permit permitting LESSEE's immediate use and occupancy of
the Building; and (d) LESSOR has given LESSEE written notice stating
that such Substantial Completion has occurred and that the Premises
are available for LESSEE's immediate possession and occupancy ("Notice
of Possession"). LESSOR shall give LESSEE at least ten (10) days
written notice in advance of the estimated date of Substantial
Completion.
5.5.2 Condition of Premises. Prior to the Commencement Date, LESSEE
and LESSOR shall conduct a walk-through inspection of the Premises and
prepare and sign a punch-list of all items needing additional work by
LESSOR, and LESSEE shall thereafter have an additional sixty (60) days
in which to identify to LESSOR any construction deficiencies or
defects which were not readily observable at the time of the
preparation of the first punch-list, whereupon say items so identified
in no more than three (3) additional punch-lists and agreed to by
LESSOR following consultation with LESSEE, will be added to the final
punch-list. The punch-lists to be prepared by LESSEE shall not include
any damage to the Premises caused by LESSEE's move-in, which damage
shall be repaired or corrected by LESSEE, at its expense. If LESSEE
fails to submit the final punch-list to LESSOR within the sixty (60)
day period immediately following the Commencement Date, it shall be
deemed that there are no items needing additional work or repair.
LESSOR's contractor shall complete all reasonable punch-list items
within thirty (30) days after the walk-through inspection and within
thirty (30) days following LESSOR's receipt of any additional
punch-lists, or as soon as practicable thereafter. Upon LESSOR or
LESSOR's contractor's indication to LESSEE of the completion of such
punch-list items, LESSEE shall acknowledge the completion of such
items in writing to LESSOR. If LESSEE fails either to so acknowledge
the completion of such items within seven (7) days of such stated
completion or within such seven day period to specify in writing to
LESSOR in reasonable detail any such previously listed punch-list
items that remain uncompleted, all such items shall be deemed approved
by LESSEE.
5.6 LESSOR's Enforcement of Contractor Warranties. LESSOR has obtained
from Contractor the following warranties ("Contractor Warranties"):
"CONTRACTOR unconditionally warrants all materials and equipment
furnished under this Contract will be new, unless otherwise specified,
and that all Work will be of good quality, free from material faults
and defects and in conformance with the Contract Documents.
CONTRACTOR, at its expense, shall repair or replace any Work requiring
replacement or repair within one (1) year from completion of the
Project, except with respect to the roof membrane only, which
CONTRACTOR will repair or replace within two (2) years as required to
prevent water penetration. In the event CONTRACTOR fails to timely
perform its warranty obligation, OWNER shall have the right to cause
such repairs or replacements and CONTRACTOR shall be liable for the
reasonable costs of such repairs or replacements.
LESSOR agrees to take such commercially reasonable action as necessary
to enforce such Contractor Warranties for the repair or maintenance of
the Premises on account of any items covered by the Contractor
Warrantees, including patent or latent defects or deficiencies in the
Premises.
5.6.1 Exclusion From Common Area Operating Expenses. Notwithstanding
any other provision, any costs of repairs or replacement of any patent
or latent defect or deficiency identified during the period the
applicable Contractor Warranties remain in effect shall not be
included in calculating Common Area Operating Expenses.
5.7 LESSEE's Fixturization. No later than thirty (30) days prior to
the expected date of Substantial Completion of the Building, LESSOR
shall permit LESSEE to enter upon the Premises for the purposes of
permitting LESSEE to commence installation of LESSEE's machinery and
trade fixtures ("Fixturization Period"). LESSEE agrees to carry out
such work in such manner as will not interfere with Contractor's work.
LESSOR shall not be responsible for securing the Premises or liable
for any loss or damage to any such machinery or trade fixtures
installed by LESSEE prior to the delivery of possession of the
Premises. LESSEE shall not be responsible for payment of any of the
Rent during the Fixturization Period, provided LESSEE shall be
responsible for compliance with all other terms and conditions of the
Lease, including the provisions in Paragraph 8 of the Lease requiring
LESSEE to maintain certain insurance.
6. Hazardous Materials Questionnaire. Without limiting LESSEE's
obligations under Paragraph 6 of the Lease regarding compliance with
Hazardous Substance Laws, LESSEE shall, within ten (10) days from the
execution of the Lease, complete and deliver to LESSOR for its filing
with applicable government authorities a Hazardous Materials
Questionnaire in the form as set forth in EXHIBIT "4" annexed to this
Addendum.
7. Additional Provisions Regarding Financial Statements.
Notwithstanding the provisions of Paragraph 16.2 of the Lease, LESSOR
agrees to accept the audited financial statements of Guarantor in lieu
of separate financial statements from LESSEE so long as LESSEE's
financial performance is reported only as a part of Guarantor's
consolidated financial statements; provided, however, LESSEE agrees to
cooperate with LESSOR to provide information concerning LESSEE's
separate business and financial affairs to the extent required by
LESSOR's lender.
8. Option to Extend. Subject to the provisions of Paragraph 39 of the
Lease, LESSEE shall have the option to extend the Lease Term for one
additional term of five (5) years, which option is exercisable only by
LESSEE giving LESSOR written notice of the election to exercise such
option ("Election Notice") no earlier than twelve (12) months and no
later than nine (9) months before the expiration of the Original Term.
If LESSEE fails for any reason to timely give such Election Notice,
such option rights shall automatically terminate and be of no further
force or effect and LESSEE shall not have any other right to extend
the Original Term.
8.1 Remaining Lease Terms. Except as provided in this subsection and
in subsection 8.2 of this Addendum, if LESSEE elects to extend the
Original Term, all other terms and conditions of the Lease shall
remain in effect during such extended term except: (a) no tenant
improvements or allowances shall be provided by LESSOR, and LESSEE
shall be deemed to have extended the term of the Lease and accepted
the Premises "AS IS" in their then-existing condition and without
representation or warranty from LESSOR; (b) upon expiration of the
five (5) year extension, LESSEE shall have no further right to extend
the term of the Lease; and (c) the Base Rent applicable during the
option term shall be determined in accordance with subsection 8.2 of
this Addendum.
8.2 Adjustment to Base Rent. The Base Rent for the extension period
shall be an amount equal to the "far rental value" of the Premises as
determined in the following manner:
(a) Within thirty (30) days from LESSEE's Election Notice, LESSOR
and LESSEE shall meet in an effort to negotiate, in good faith, the
fair rental value of the Premises for the option period. If LESSOR and
LESSEE have not agreed upon the fair rental value of the Premises at
least ninety (90) days prior to the beginning of the applicable option
period, the fair rental value shall be determined by appraisal, by one
or more appraisers ("Appraiser(s)"). The Appraisers shall have at
least five (5) years experience in the appraisal of
commercial/industrial real property in the area in which the Premises
is located and shall be members of professional organizations such as
M.A.I. or equivalent.
(b) If LESSOR and LESSEE are not able to agree upon the fair
rental value of the Premises within the prescribed time period, then
LESSOR and LESSEE shall attempt to agree in good faith upon a single
Appraiser not later than seventy-five (75) days prior to the beginning
of the applicable option period. If LESSOR and LESSEE are unable to
agree upon a single Appraiser within such time period, then LESSOR and
LESSEE shall each appoint one Appraiser not later than sixty-five (65)
days prior to the beginning of the applicable option period. Within
ten (10) days thereafter, the two (2) appointed Appraisers shall
appoint a third Appraiser. If either LESSOR or LESSEE fails to appoint
its Appraiser within the prescribed time period, the single Appraiser
appointed shall determined the fair rental value of the Premises. If
both parties fail to appoint Appraisers within the prescribed time
periods, then the first Appraiser thereafter selected by a party shall
determine the fair rental value of the Premises. Each party shall bear
the cost of its own Appraiser and the parties shall share equally the
cost of the single or third Appraiser, if applicable.
(c) For the purposes of such appraisal, the term "fair rental
value. shall mean the price that a ready and willing tenant would pay,
as of the beginning of the applicable option period, as monthly rent
to a ready and willing landlord of property comparable to the Premises
if such property were exposed for lease on the open market for a
reasonable period of time and taking into account all of the purposes
for which such property may be used. If a single Appraiser is chosen,
then such Appraiser shall determine the fair rental value of the
Premises. Otherwise, the fair rental value of the Premises shall be
the arithmetic average of the two (2) of the three (3) appraisals
which are closest in amount, and the third appraisal shall be
disregarded. LESSOR and LESSEE shall instruct the Appraiser(s) to
complete the determination of the fair rental value not later than
thirty (30) days prior to the beginning of the applicable option
period. If the fair rental value is not determined prior to the
beginning of the, option period, then LESSEE shall continue to pay to
LESSOR the Base Rent applicable to the Premises immediately prior to
such extension, until the fair rental value is determined. When the
fair rental value of the Premises is determined, LESSOR shall deliver
notice thereof to LESSEE, and if the fair rental value is higher,
LESSEE shall pay to LESSOR, within ten (10) days after receipt of such
notice, the difference between the Base Rent actually paid by LESSEE
to LESSOR and the new Base Rent determined hereunder.
(d) Notwithstanding any other provision of this Lease, in no event
shall the Base Rent in effect for the last year of the Original Term
be decreased on account of the operation of this section.
9. Corporate Resolution. Within ten (10) days of Lease execution,
LESSEE shall provide LESSOR with a certified copy of a Corporate
Resolution authorizing William L. Stephan sign this Lease on behalf of
DATRON WORLD COMMUNICATIONS INC.
10. Estimated Operating Expense Budget. A copy of the 1998 Estimated
Common Area Operating Expenses Budget is attached to this Addendum as
EXHIBIT "5". LESSEE acknowledges that (a) this estimate is being
provided only to illustrate the projected amounts and categories of
expense and that actual results may be different than the estimates;
and (b) it is aware that amounts and categories of expense may vary in
future years as the Premises ages. Common Area Operating Expenses
shall not increase by more than five percent (5%) per year
cumulatively not including property taxes.
11. Current Rules and Regulations. Pursuant to Paragraph 2.9 of the
Lease, LESSOR has adopted the Rules and Regulation annexed to this
Addendum as EXHIBIT "6", and such Rules and Regulations shall remain
in effect until changed by LESSOR in accordance with the Lease.
12. Security Deposit. If LESSEE is not in default at Commencement of
the Lease then 1/2 of the security deposit under section 1.7 of the
Lease will be applied to the second month's rent, when due.
13. Signage. LESSEE shall be granted primary building signage (two
sides of the building) and monument signage at the entrance and corner
of the site. If a single user moves into the balance of the Project,
they will be permitted to install a sign on their end of the building.
If the building is leased to multiple tenants, they will be limited to
door signage.
14. Additional Provisions Regarding Parking. Notwithstanding any other
provision, LESSEE shall have the right to mark any of the parking
spaces set aside on EXHIBIT "1" as LESSEE's parking spaces with
carefully painted lettering or logo identifying LESSEE not exceeding
18" by 12".
15. Antennas. Subject to LESSEE's compliance, at its expense, with all
Applicable Laws as defined in subparagraph 2.4 of the Lease, LESSOR
consents to LESSEE's installation of one 60' tower and three 20' whip
antennas at the locations shown on EXHIBIT "1". Said tower and
antennas shall be for the private use of the LESSEE and not for any
other commercial purpose.
16. Additional Provisions Regarding Common Area Operating Expenses.
(e) Common Area Operating Expenses shall include reasonable
expenditures which would be capitalized in accordance with generally
accepted accounting principles, but such expenditure shall be prorated
on an annual basis over the useful life of the improvement or facility
so replaced or rehabilitated, and from the date of any expenditure,
there shall be included in Common Area Operating Expenses during any
single Lease Year only the pro rata portion of that expenditure as is
properly allocable to such Lease Year. Common Area Operating Expenses
shall not include:
(1) the cost of any additional or extraordinary services provided
to other tenants of the Building;
(2) costs paid for directly by LESSEE;
(3) principal and interest payments on loans secured by deeds of
trust recorded against the Industrial
Center;
(4) real estate sales or leasing brokerage commissions;
(5) executive salaries of off-site personnel employed by LESSOR
except for the charge (or pro rata share) of the manager of the
Industrial Center;
(6) expenses for repairs or other work occasioned by fire,
windstorm or other insured casualty (excluding any insurance
deductible therefrom);
(7) expenses incurred in leasing or procuring new tenants,
including any advertising costs associated with vacant spaces in the
Premises, Building or Industrial Center;
(8) legal expenses incurred in enforcing or negotiating the terms
of any lease, or in connection with any financing or syndication of
the Industrial Center;
(9) interest or amortization payments on any debt and rent
payable under any lease to which this Lease is subject and all costs
and expenses associated with any such debt or lease;
(10) expenses incurred by LESSOR to the extent the same are
reimbursed from any other tenant, occupants of the Industrial Center
or third parties (other than as Common Area Operating Expenses
reimbursed or other similar reimbursement from such other parties);
and
(11) interest or penalties due for late payment by LESSOR, of any
Common Area Operating.
17. Additional Provisions Regarding Assignment and Subletting. Subject
to Subparagraph 12.2 of the Lease and except as provided in subsection
17.2 below, LESSOR agrees to consent to LESSEE's assignment of the
Lease or any subleasing of a portion of the Premises in any Permitted
Transaction (as defined below); provided, however, any such assignment
or subleasing shall not release or otherwise affect the liability of
LESSEE, or any Guarantor, for the obligations under this Lease.
17.1 "Permitted Transaction" Defined. The phrase Permitted
Transaction" means and refers to an assignment or sublease in
connection with a transaction being undertaken in good faith and not
for the purpose of indirectly subletting or assigning the Lease
through a step transaction or otherwise, and which meets any one of
the following requirements:
(a) an assignment or sublease to a subsidiary, affiliate, division
or corporation controlling, controlled by or under common control with
LESSEE;
(b) an assignment or sublease to a successor corporation related
to LESSEE by merger, consolidation, nonbankruptcy reorganization or
government action;
(c) an assignment of the Lease or sublease to another entity,
which is not affiliated with LESSEE ("Unaffiliated Transferees) in
conjunction with the concurrent good faith sale and transfer to such
Unaffiliated Transferee of substantially all of LESSEE's assets; or
(d) LESSEE's sale of capital stock through the NYSE, AMEX or any
other major public exchange, and any such sale shall not be deemed an
assignment, subletting or ocher transfer of this Lease or the Premises
requiring LESSOR's consent.
17.2 Exception. Prior to the consummation of any Permitted
Transaction, LESSEE shall cause the proposed assignee or subtenant to
complete and submit to LESSOR a Hazardous Materials Questionnaire in
the form as set forth in EXHIBIT "4" signed by the proposed assignee
or subtenant. Notwithstanding any other provision, LESSOR shall have
the right to decline to consent to any Permitted Transaction in which
the assignee's or subtenant's use of the Premises would increase the
risk of contamination of any Hazardous Substance as compared to the
risk presented by LESSEE's use of the Premises.
17.3 Additional Rental. Except in the case of a Permitted Transaction,
fifty percent (50%) of any sums or other economic consideration
(without deduction) received by LESSEE as a result of an assignment or
subletting to which LESSOR has consented, whether denominated rentals
under the assignment or sublease or otherwise, which exceed, in the
aggregate, the total sums which LESSEE is obligated to pay LESSOR
under this Lease (prorated to reflect obligations allocable to that
portion of the Premises subject to a sublease) shall be payable to
LESSOR as additional rental under this Lease without affecting or
reducing any other obligation of LESSEE under this Lease. Such amounts
shall be due and payable within fifteen (15) days from LESSEE's
receipt. In the event of subletting of only a portion of the Premises,
in calculating whether the rent received by LESSEE exceeds the rent
payable under this Lease, the rent payable under the Lease shall be
prorated according to the square footage involved in order to reflect
the rent applicable to the space sublet. In no event shall this
provision be construed or applied to reduce the Base Rent or other
charges payable by LESSEE under this Lease, nor modify, waive or
otherwise affect LESSOR's rights and remedies in the event of a
sublease or assignment (other than a Permitted Transaction) without
LESSOR's consent. In the cases of an assignment or sublease (other
than a Permitted Transaction) to which LESSOR has not given its
consent, in addition to all other rights and remedies, LESSOR may
elect, by giving LESSEE written notice, to adjust the rentals payable
under this Lease based on the then fair rental value of the Premises.
18. Additional Provisions Regarding Holdover. If LESSEE remains in
possession of all or any part of the Premises after the expiration of
the Term, with the consent of LESSOR, such tenancy shall be from
month-to-month only and not a renewal hereof or any extension for any
further teen, and in such case, Base Rent shall be increased to an
amount equal to one hundred fifty percent (150%) of the Base Rent paid
during the last month of the Term and all other sums due hereunder
shall be payable in the amount and at the time applicable at the time
of expiration and at the time specified in this Lease and such
month-to-month tenancy shall be subject to every other term, covenant
and agreement of this Lease.
"LESSOR"
NORTH COUNTY INDUSTRIAL PARK, L.P.,
a California limited partnership
By: WHAMMY, INC.,
a California corporation, General Partner
Dated: 3/24/1998 By: /S/JEFFREY C. HAMMAN
President
Dated: 3/30/1998 By: /s/DANIEL M. WHITAKER
Secretary
"LESSEE"
DATRON WORLD COMMUNICATIONS INC.,
a California corporation
Dated: March 23, 1998 By: /s/WILLIAM L. STEPHAN
Secretary/Treasurer
EXHIBIT 10.62 FOURTH AMENDMENT TO TRANS WORLD COMMUNCATIONS, INC.
LEASE AGREEMENT DATED MARCH 1, 1998
FOURTH AMENDMENT DATED MARCH 1, 1998 TO THAT LEASE DATED NOVEMBER 15,
1988 BETWEEN ENTERPRISE HEIGHTS INDUSTRIAL CENTRE ASSOCIATES,
"LANDLORD", AND TRANSWORLD COMMUNICATIONS, A WHOLLY OWNED SUBSIDIARY
OF DATRON SYSTEMS, INC. "TENANT", FOR THE PREMISES AT 298,302 AND 304
ENTERPRISE STREET IN ESCONDIDO, CALIFORNIA.
All the terms and conditions of the Lease remain in full force and
effect except the following:
2.0l Term:
The term of the lease shall be as follows:
298, 302 and 304 February 1, 1993 thru January 31, 1999
300 Enterprise,
Suites "L" & "M" March 1, 1995 thru January 31, 1999
300 Enterprise,
Suites "A", "B" & "C" May 1, 1995 thru January 31, 1999
Unless sooner terminated pursuant to any provision hereof.
Notwithstanding Article 14.01, provided Tenants is not otherwise
in breach or in default of this Lease, beyond any applicable notice
and cure period, the term(s) may be extended at Tenant's option upon
not less than 90 days notice (i.e. on or before November 1, 1998) to
have either February 28, 1999. March 31, 1999, or April 30, 1999 be
the new expiration date of the Lease on the same terms and conditions
as set forth herein, with no additional increase in rent or fees
required under Articles VI and VIII.
3.01 Rent:
The basic monthly rent shall be changed to:
March 1, 1998 thru January 31, 1999 - $35,053.06
(Subject to Rental Adjustment provisions contained in Paragraphs
3.01 and 15.2 of the First Amendment to Lease which remain unchanged).
14.20 Additional Provisions
Enterprise Heights Partners, and or Broker have permission to
enter premises with 24 hours notice to show prospect tenants.
15.6 Taxes and Reimbursement for Costs:
The current $4,786.86 monthly fee to cover all items required of
Tenant under articles VI and VIII shall be increased as follows:
March 1, 1998 thru January 31, 1999 - $5,581.48
(Subject to the adjustment provisions contained in Paragraph
3.02)
Date: 03/24/98 Date: 3/23/98
LANDLORD TENANT
Enterprise Heights Datron World Communications Inc.
Industrial Centre formerly known as Transworld
Associates Communications Inc.
By:/s/ CHARLES R. SWIMMER By:/s/ WILLIAM L. STEPHAN
Charles R. Swimmer, William L. Stephan
General Partner Secretary/Treasurer
EXHIBIT 10.63
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
BETWEEN THE REGISTRANT AND RICHARD W. PERSHING
DATED AS OF APRIL 1, 1998
This First Amendment to Employment Agreement is entered into as
of April 1, 1998 by and between DATRON SYSTEMS INCORPORATED, a
Delaware corporation (the "Company") and RICHARD W. PERSHING (the
"Employee").
RECITALS
The Company and Employee are parties to an Employment Agreement
dated as of May 1, 1990, which they desire to amend as provided
herein.
NOW THEREFORE, the parties agree as follows:
1. Duties. Section 1 of the Agreement is amended to read as
follows:
"Employee is employed by Company in the position of
Assistant to the President for the term set forth in Section 5.
Employee shall work at Company's office located at 75-572 Debby Lane,
Indian Wells, California. Employee shall perform such duties as may
be reasonably designated by Company."
2. Compensation. Section 3 of the Agreement is amended to read
as follows:
"During the term of the Agreement, Company shall pay
Employee a salary at the annual rate then in effect in equal
installments on a weekly basis; provided however, that the annual rate
will not be less than $12,000."
3. Termination. Section 5, Subsections (a) and (c) of the
Agreement are amended to read as follows:
At the end of Subsection (a) insert the following paragraph:
"If Employee's employment is terminated by the Company under
Section 5(a), the annual rate specified in Section 3 shall increase to
$150,000 effective upon delivery of notice of termination.
Subsection (c) is amended to read:
"If Employee dies, Company shall continue to pay Employee's
salary and continue Employee's benefits for six months following the
date of death."
4. Continuation of Terms. In all other respects the provisions
of the Agreement shall continue to be effective.
DATRON SYSTEMS INCORPORATED
By: /s/ DAVID A. DERBY, President
/s/ RICHARD W. PERSHING
EXHIBIT 10.64
WAIVER AND SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT AND NOTE
THIS WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT
AGREEMENT AND NOTE ("Second Amendment") is made and entered into as of
April 30, 1998, by and between DATRON SYSTEMS INCORPORATED, a Delaware
corporation ("Borrower" or "Company") and UNION BANK OF CALIFORNIA,
N.A. ("Bank"). This Second Amendment amends that certain Amended and
Restated Credit Agreement, as previously Amended, by and between Bank
and Borrower dated as of August 8, 1997 ("Credit Agreement").
RECITALS
A. Whereas, the parties hereto agreed to certain modifications
of the Facility Documents ("Loan Documents").
B. Whereas, on August 1, 1995 Datron/Transco, Inc.("Guarantor")
executed its Continuing Guaranty in the amount of Twenty-Nine Million
and No/100 Dollars ($29,000,000.00) of Borrower's Obligations to Bank
on August 1, 1995, and Datron World Communications Inc.("Guarantor"
with each Guarantor referenced herein together as "Guarantors")
executed its Continuing Guaranty in the amount of Twenty-Nine Million
and No/100 Dollars ($29,000,000.00) of Borrower's Obligations to Bank,
both of which remain in full force and effect and referenced herein
inclusive with Loan Documents.
C. Whereas, the Borrower and the Bank desire to evidence (1)
the Bank's waiver of the Borrower's compliance with three of the
financial covenants for the periods ending for the fourth quarter and
fiscal year end March 31, 1998, (2) modify two of the financial
covenants (a) one for the first quarter ending June 30, 1998, and
(b)one for the fiscal year ending March 31, 1999, and (3) modify the
timing of the decrease in the maximum amount available under the
Revolving Loan Facility, the Standby Facility and the UC Facility from
April 30, 1998 to July 31, 1998 (Reduction Date) without changing the
Reduction Amount, and (4) modify the minimum amount of the Simi Valley
Financing from $3,500,000.00 to $3,300,000.00 ("Designated Defaults"),
and (5) to provide for certain ancillary matters.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and for other
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Bank and Borrower and Guarantors hereby agree as
follows:
1. Incorporation of Recitals. Each of the above recitals is
incorporated herein and deemed to be the agreement of the Bank and
Borrower and Guarantors and is relied upon by each party to this
Second Amendment in agreeing to the terms of this Second Amendment.
All capitalized terms used in this Second Amendment shall, unless
otherwise defined herein or unless the context otherwise requires,
have the meanings given thereto in the Credit Agreement.
2. Confirmation of Collateral. Borrower hereby grants and confirms
that all obligations of Borrower to Bank are secured by a duly
recorded security interest of first priority in the Collateral.
2.a. Confirmation of Guarantys. Each Guarantor hereby acknowledges and
confirms such Guarantor's respective unconditional obligation as
Guarantor of the obligations of Borrower to Bank as set forth in its
Guaranty and reaffirms and restates each and every term, condition and
provision thereof.
3. Confirmation of Representations and Warranties. Borrower hereby
confirms all representations and warranties contained in the Loan
Documents and reaffirms all covenants set forth therein, as amended.
Further, Borrower certifies that, as of the date of this Second
Amendment, there exists no Event of Default as defined in the Loan
Documents other than the Designated Defaults, nor any condition, act
or event which with the giving of notice or the passage of time or
both would constitute an Event of Default.
4. Conditions Precedent. Borrower understands that this Second
Amendment shall not be effective and Bank shall have no obligation to
amend the terms of the Loan Documents as provided herein unless and
until each of the following conditions precedent has been satisfied
not later than the respective date set forth below, or waived by Bank
(in Bank's sole discretion), for whose sole benefit such conditions
exist, with Bank's determination as to whether they have been timely
satisfied being conclusive absent manifest error:
4.1 On or before May 15, 1998, Borrower and Guarantors shall have
executed and delivered to Bank this Second Amendment;
4.2 On or before May 15, 1998, Borrowers shall have paid the Extension
and Waiver Fee of Twelve Thousand Dollars ($12,000.00) which is equal
to one-half (.5%) percent per annum of the Revolving Loan Facility
Commitment annualized for the three month period; and,
4.3 On or before such time as Bank may require, Borrowers shall have
taken any and all actions and execute and deliver to Bank any and all
documents necessary or appropriate in Bank's sole discretion to
effectuate this Second Amendment.
5. Waiver of Defaults. Subject to all of the terms and conditions of
this Second Amendment, including, without limitation, the requirements
of Sections 4 and 5 hereof, Bank hereby agrees to waive, for the
fiscal quarter and fiscal year end of the Borrower ending March 31,
1998, and only for such fiscal quarter and year end, compliance by the
Borrower with the Tangible Net Worth, Profitability, and Cash Flow
Coverage Ratio covenants as set forth in Subsections 4.02(i), (k), and
(m) of the Credit Agreement, and agrees that such noncompliance shall
not constitute an Event of Default under the Credit Agreement or under
the Credit Agreement as amended by the First and this Second
Amendment. The waiver here given is specific to the covenants, and for
the fiscal quarter and year end of the Borrower, referred to above and
shall not operate as a waiver of compliance by the Borrower with any
other covenant set forth in the Credit Agreement, or in the Credit
Agreement as amended by the First or this Second Amendment, or with
the covenants referred to above for any other fiscal quarter or year
end of the Borrower.
6. Modification of Loan Documents. To induce Bank to enter into this
Second Amendment, Borrower agrees that the Loan Documents are hereby
supplemented and modified as follows, which modifications shall
supersede and prevail over any conflicting provisions of the Loan
Documents:
6.1 Subsection 4.02(i) Tangible Net Worth of the Credit Agreement is
amended to read as follows:
The Company will not, as at the end of any fiscal quarter or fiscal
year end of the Company, permit its consolidated Tangible Net Worth to
be less than Twenty-Three Million Four Hundred Thousand and No/100
Dollars ($23,400,000.00).
6.2 Subsection 4.02(k) Profitability of the Credit Agreement is
amended to read as follows:
The Company will not (1) permit its consolidated net after tax profits
to be less than Ninety-Seven Thousand Dollars ($97,000.00) for the
fiscal quarter of the Company ending June 30, 1998, and (2) permit its
consolidated net after tax profits to be less than Two Hundred Fifty
Thousand Dollars ($250,000.00) for any fiscal quarter of the Company
ending on or after September 30, 1998.
6.3 Subsection 6.010 The Simi Valley Financing of the Credit Agreement
is amended to read as follows:
Simi Valley Financing shall fail to close on or prior to July 31,
1998, or shall close on or prior to July 31, 1998 but shall fail to
generate net proceeds in an amount equal to or greater than Three
Million Three Hundred Thousand Dollars ($3,300,000.00).
6.4 Subsection 1.01(b), (c), (d), (e) and (f) Availabilities of the
Facilities of the Credit Agreement is amended such that any reference
to the Reduction Date shall be changed from April 30, 1998 to July 31,
1998 hereafter; therefore, the maximum amounts available under the
Revolving Loan Facility, the Standby Facility and the UC Facility
shall be reduced by the Reduction Amount of Four Million dollars
($4,000,000.00) on the Reduction Date.
6.5 Subsection 1.02(d) of the Credit Agreement is amended in its
entirety to read as follows:
Revolving Loan Interest Rate Options. The Company shall pay interest
on the unpaid principal amount of each Revolving Loan from the date of
such loan (if such loan is made on or after the Effective Date), from
the Effective Date (if such loan is a Reference Rate Revolving Loan
made prior to the Effective Date), or from the first day of the hrst
Interest Period for such loan which commences on or after the
Effective Date (if such loan is a LIBOR Revolving Loan made prior to
the Effective Date), until the maturity thereof (whether by
acceleration or otherwise), at one of the following rates per annum:
(i) Reference Rate Option - During such periods as such Revolving Loan
is a Reference Rate Revolving Loan, a rate per annum equal to the
Reference Rate plus one and one-half percent (1.5%), such rate to
change from time to time as the Reference Rate shall change; or
(ii) LIBO Rate Option - during such periods as such Revolving Loan is
a LIBOR Revolving Loan, a rate per annum equal at all times during
each Interest Period for such loan to the LIBO Rate for such Interest
Period ~ two and one-half percent (2.5%).
Each Revolving Loan shall, at any given time prior to maturity, bear
interest at one, and only one, of the above rates.
7. Release. Borrower and each Guarantor hereby, for itself, its
successors, heirs, executors, administrators and assigns, releases,
acquits and forever discharges Bank, its directors, officers,
employees, agents, affiliates, successors, administrators and assigns
("Released Parties") of and from any and all claims, actions, causes
of action, demands, rights, damages, costs, loss of service, expenses
and compensation whatsoever which any Borrower or Guarantor might have
because of anything done, omitted to be done, or allowed to be done by
any of Released Parties and in any way connected with the Liabilities
or this Second Amendment or the other Loan Documents as of the date of
execution of this Second Amendment, WHETHER KNOWN OR UNKNOWN, FORESEEN
OR UNFORESEEN, including without limitation, any settlement
negotiations and also including without limitation, any damages and
the consequences thereof resulting or to result from the events
described, referred to or inferred hereinabove ("Released Matters").
Each Borrower and Guarantor further agrees never to commence, aid or
participate in (except to the extent required by order or legal
process issued by a court or governmental agency of competent
jurisdiction) any legal action or other proceeding based in whole or
in part upon the foregoing. In furtherance of this general release,
each Borrower and Guarantor acknowledges and waives the benefits of
California Civil Code Section 1542 (and all similar ordinances and
statutory, regulatory, or judicially created laws or rules of any
other jurisdiction), which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR
Borrower and each Guarantor agrees that this waiver and release is an
essential and material term of this Second Amendment and that the
agreements in this paragraph are intended to be in full satisfaction
of any alleged injuries or damages in connection with the Released
Matters. Borrower and each Guarantor represents and warrants that it
has not purported to convey, transfer or assign any right, title or
interest in any Released Matter to any other person or entity and that
the foregoing constitutes a full and complete release of the Released
Matters. Borrower and each Guarantor also understands that this
release shall apply to all unknown or unanticipated results of the
transactions and occurrences described above, as well as those known
and anticipated. Borrower and each Guarantor has consulted with legal
counsel prior to signing this release, or had an opportunity to obtain
such counsel and knowingly chose not to do so, and executes such
release voluntarily, with the intention of fully and finally
extinguishing all Released Matters.
8. Effect of Amendment. Bank and Borrower and each Guarantor agree
that except as expressly provided herein, the Credit Agreement and the
Loan Documents shall remain in full force and affect in accordance
with their respective terms, without waiver or modification. Each of
Borrower and Guarantors acknowledges that it is relying on no written
or oral agreement, representation, warranty, or understanding of any
kind made by Bank or any employee or agent of Bank except for the
agreements of Bank set forth herein or in the Credit Agreement or
other Loan Documents.
9. Applicable Law; Jurisdiction. Except as otherwise provided herein,
this Second Amendment and the rights and obligations of the parties
hereto shall be governed by the laws of the State of California
without regard to principles concerning choice of law. In any action
arising out of or connected with this Second Amendment, Borrower and
Guarantors each hereby expressly consents to the personal jurisdiction
of any state or federal court located in the State of California and
also consents to service of process by any means authorized by federal
or governing state law.
IN WITNESS WHEREOF, Bank and Borrower and each Guarantor have executed
this Second Amendment as of the date set forth in the preamble.
BORROWER BANK
DATRON SYSTEMS, INC. UNION BANK OF CALIFORNIA, N.A.
By: /s/ WILLIAM L. STEPHAN By:/s/EMILY DENNY McKNIGHT
Title: Vice President and Chief Title: Vice President
Financial Officer
GUARANTOR
DATRON/TRANSCO INC.
By:/s/DAVID A. DERBY
Title: Chairman
GUARANTOR
DATRON WORLD COMMUNICATIONS, INC.
By:/s/DAVID A. DERBY
Title: Chairman
EXHIBIT 13
CERTAIN PORTIONS OF REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS
FOR FISCAL YEAR ENDED MARCH 31, 1998 CONTAINING INFORMATION
REQUIRED BY PART I AND PART II OF THIS REPORT
Information required by Part II, Item 5: Market for Registrant's
Common Equity and Related Stockholder Matters. This information is
contained in the section captioned "Common Stock Activity" on the
inside back cover of the Annual Report.
Common Stock Activity
The common stock of Datron Systems Incorporated is traded on the
Nasdaq National Market tier of the Nasdaq Stock Market under the
symbol DTSI. The following table sets forth the high and low closing
sales prices by quarter for the two most recent fiscal years as
reported by Nasdaq:
Fiscal Year 1998
Quarter Ended High Low
-------- -------
June 30, 1997 $10.625 $ 9.00
September 30, 1997 $12.9375 $ 9.75
December 31, 1997 $11.625 $10.125
March 31, 1998 $10.375 $7.50
Fiscal Year 1997
Quarter Ended High Low
------- -------
June 30, 1996 $15.50 $11.675
September 30, 1996 $12.313 $8.75
December 31, 1996 $10.375 $6.00
March 31, 1997 $10.063 $6.813
On March 31, 1998, there were approximately 1,700 stockholders of the
Company's common stock. The Company has never paid a cash dividend on
its common stock and does not anticipate doing so in the foreseeable
future.
Information required by Part II, Item 6: Selected Financial Data.
This information is contained in the section captioned "Datron Systems
Incorporated Selected Financial Data" on the inside front cover of the
Annual Report.
Selected Financial Data
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of
Operations
Net sales $54,628,000 $53,269,000 $61,165,000 $70,033,000 $65,636,000
Net income (loss) (3,163,000) 268,000 (1,241,000) 3,920,000 5,251,000
Earnings (loss)per
share assuming
dilution<F1> $(1.18) $0.10 $(0.48) $1.51 $2.10
Balance Sheets
Working capital $20,354,000 $24,756,000 $18,042,000 $14,241,000 $13,540,000
Total assets 51,284,000 56,476,000 58,459,000 55,944,000 49,488,000
Long-term debt 5,600,000 8,900,000 5,200,000 0 0
Total liabilities 21,679,000 23,868,000 26,588,000 23,079,000 20,887,000
Stockholders'
equity<F2> 29,605,000 32,608,000 31,871,000 32,865,000 28,601,000
Book value
per share $11.05 $12.26 $12.24 $12.84 $11.40
</TABLE>
[FN]
<F1> See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of shares used in computing earnings
(loss) per share.
<F2> No dividends were declared or paid during the years presented.
</FN>
Information required by Part II, Item 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations. This
information is contained on pages 6 through 9 of the Annual Report.
Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Overview
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide products and services that address the needs of
emerging satellite and radio communication markets. It reports
operations in two business segments: Antenna and Imaging Systems, and
Communication Products and Services.
The Antenna and Imaging Systems business segment designs and
manufactures specialized satellite communication systems, subsystems
and antennas that are sold worldwide to commercial and governmental
customers, including the U.S. Department of Defense ("DoD"). Fiscal
1998 sales for this segment were $33,789,000, a 1% increase from
fiscal 1997 sales of $33,304,000. The DoD accounted for 31% and 47%
of this segment's sales in fiscal 1998 and 1997, respectively.
Because of the decline in U.S. defense spending, the Company has been
pursuing additional markets for this segment's products. The primary
such market has been remote sensing satellite earth stations. Sales
of remote sensing products represented 33% and 35% of this segment's
sales in fiscal 1998 and 1997, respectively. Sales of antenna systems
for non-defense governmental agencies accounted for 18% and 4% of this
segment's sales in fiscal 1998 and 1997, respectively. Another
additional market is mobile direct broadcast satellite ("DBS")
television reception systems for recreational vehicles, boats and
large business jets. Sales of DBS products represented 18% and 14% of
this segment's sales in fiscal 1998 and 1997, respectively.
The Communication Products and Services business segment designs,
manufactures and distributes high frequency and very high frequency
radios and accessories for worldwide military and civilian purposes.
Fiscal 1998 sales for this segment were $20,839,000, a 4% increase
from fiscal 1997 sales of $19,965,000. Foreign customers accounted
for 88% of fiscal 1998 sales and 94% of fiscal 1997 sales. During
fiscal 1998, this segment sold radio products to an Asian customer
that accounted for 24% of this segment's sales and 9% of consolidated
sales. During fiscal 1997, sales of radio products to the same Asian
customer accounted for 30% of this segment's sales and 11% of
consolidated sales.
Consolidated sales for fiscal 1998 were $54,628,000, a 3% increase
from fiscal 1997 consolidated sales of $53,269,000. The increase in
sales was primarily due to higher sales of DBS antennas and radio
products, partially offset by lower sales of products for the DoD.
Net loss for fiscal 1998 was $3,163,000, or $1.18 per share, compared
with net income in fiscal 1997 of $268,000, or $0.10 per share. The
net loss was primarily due to low gross margins resulting from cost
overruns at the Antenna and Imaging Systems business segment. The net
loss also included the write-off of the Company's investment in
EarthWatch Incorporated of $1,113,000, or $0.42 per share. The
investment in EarthWatch was made as part of a contract to supply
earth station antennas in 1995 in support of EarthWatch's plans to be
the first to launch a high-resolution, commercial remote sensing
satellite. Although EarthWatch launched their first satellite in
December 1997, communication with the satellite was subsequently lost
and EarthWatch will need to raise new financing to achieve a longer
term objective. Consequently, the decision was made to write off the
investment.
In March 1996, the Company announced its plan to consolidate its image
processing division in San Jose, California with its remote sensing
earth station business in Simi Valley, California. Both of those
functions are part of the Antenna and Imaging Systems business
segment. In connection with the consolidation, the Company recorded a
restructuring charge of $1,421,000 ($855,000, or $0.32 per share,
after taxes). Major categories of costs and expenses included in the
restructuring charge were estimated employee severance, $683,000;
goodwill write-off, $679,000; and estimated future losses on facility
lease, $59,000.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. A variety of
factors could cause the Company's actual results to differ from the
anticipated results expressed in such forward-looking statements.
These include, among others, uncertainties stemming from the
dependence of the Company on foreign sales and on large orders from a
relatively small number of customers, risks relating to the decline in
the Company's traditional defense business and the Company's efforts
to develop and market consumer products, lack of timely development or
customer acceptance of new products, and the impact of competition.
Investors are referred to the Company's periodic reports under the
Securities Exchange Act of 1934, including without limitation, the
Investment Considerations set forth in the Company's Annual Report on
Form 10-K.
The consolidated financial statements and notes thereto that appear on
pages 10 through 23 should be read in conjunction with the following
review.
RESULTS OF OPERATIONS
Operating results for the last three fiscal years are presented for
each of the Company's two business segments (in thousands):
<TABLE>
<CAPTION>
ANTENNA AND IMAGING SYSTEMS
Years Ended March 31,
---------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net sales $33,789 $33,304 $31,872
======= ======= =======
Percent of consolidated
net sales 62% 63% 52%
=== === ===
Gross profit $4,963 $9,923 $8,682
Operating expenses before
corporate expenses and
restructuring 7,472 8,110 10,341
------ ------ ------
Operating income
(loss) $(2,509) $1,813 $(1,659)
====== ===== ======
Percent of consolidated
operating income (loss)
before corporate expenses
and restructuring 179% 80% (137%)
==== === ====
</TABLE>
Sales of Antenna and Imaging Systems increased $485,000, or 1%, in
fiscal 1998 compared with fiscal 1997 sales. The increase was
primarily due to higher sales of DBS antenna products, partially
offset by lower sales for the DoD and similar customers and by lower
sales of remote sensing systems. Although sales for the DoD were 34%
lower in fiscal 1998 than in fiscal 1997, higher sales of similar
antenna products to other customers made up for most of the decline.
Sales of Antenna and Imaging Systems increased $1,432,000, or 4%, in
fiscal 1997 compared with fiscal 1996 sales. The increase was
primarily due to sales of new DBS antenna products and to higher sales
of remote sensing systems, partially offset by lower sales for the
DoD.
Gross profit percentage on Antenna and Imaging Systems' sales was
14.7% in fiscal 1998 compared with 29.8% in fiscal 1997 and 27.2% in
fiscal 1996. The decrease in fiscal 1998 from fiscal 1997 was
primarily due to cost overruns resulting from the necessity to
substantially increase cost estimates to complete several projects.
The Company periodically reviews and revises these costs. The need
for increased expenditures was identified in the fourth quarter when
those projects were undergoing final integration and testing. Several
projects had design defects requiring redesign and rework. The
increase in fiscal 1997 from fiscal 1996 was primarily due to the
absence of a write-off of non-recoverable costs associated with a
canceled remote sensing order in fiscal 1996. Efficiencies resulting
from the consolidation of the Company's remote sensing business into
the Simi Valley facility and reductions in reserves for contract
contingencies also contributed to the increase.
Operating loss percentage on sales of Antenna and Imaging Systems'
products was 7.4% in fiscal 1998 compared with an operating income
percentage of 5.4% of sales in fiscal 1997 and an operating loss
percentage before provision for restructuring of 5.2% of sales in
fiscal 1996. The decrease in fiscal 1998 from fiscal 1997 was
primarily due to lower gross margins, partially offset by lower new
product development and selling expenses. The improvement in fiscal
1997 from fiscal 1996 was primarily due to higher gross profits and to
lower research and development, selling and administrative expenses.
COMMUNICATION PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Net sales $20,839 $19,965 $29,293
======= ====== ======
Percent of consolidated
net sales 38% 37% 48%
=== === ===
Gross profit $6,404 $5,426 $9,531
Operating expenses before
corporate expenses and
restructuring 5,293 4,970 6,660
------ ----- -----
Operating income $1,111 $456 $2,871
====== ===== ======
Percent of consolidated
operating income (loss)
before corporate
expenses and
restructuring (79%) 20% 237%
=== === ====
</TABLE>
Sales of Communication Products and Services increased $874,000, or
4%, in fiscal 1998 compared with fiscal 1997 sales. The increase in
sales was primarily due to a higher backlog of orders at the beginning
of fiscal 1998 than at the beginning of fiscal 1997. Sales of radio
products to two Asian customers accounted for $7,181,000, or 34%, of
this segment's fiscal 1998 sales. Sales of Communication Products and
Services decreased $9,328,000, or 32%, in fiscal 1997 compared with
fiscal 1996 sales. The decrease was due to lower orders resulting
from delays in new product development and from softness in the
worldwide radio market. Sales of radio products to the same two Asian
customers accounted for $10,885,000, or 55%, of this segment's fiscal
1997 sales. Sales of radio products to one of the same Asian
customers accounted for $11,457,000, or 39%, of this segment's fiscal
1996 sales. One customer will often account for a large percentage of
this segment's annual sales; however, it is unusual to have large
sales from the same customer in successive years.
Gross profit percentage on Communication Products and Services' sales
was 30.7% in fiscal 1998 compared with 27.2% in fiscal 1997 and 32.5%
in fiscal 1996. The improvement in fiscal 1998 from fiscal 1997 was
due to production efficiencies resulting from lower labor and overhead
costs, partially offset by higher materials costs resulting from a
less favorable product mix. The decline in fiscal 1997 from fiscal
1996 was due to higher labor and overhead costs, production
inefficiencies resulting from a much lower sales level than the
previous year and to increases in the provision for inventory
obsolescence.
Operating income percentage on sales of Communication Products and
Services was 5.3% in fiscal 1998 compared with 2.3% of sales in fiscal
1997 and 9.8% of sales in fiscal 1996. The increase in fiscal 1998
compared with fiscal 1997 was due to higher gross margins, partially
offset by higher administrative and new product development expenses.
The decrease in fiscal 1997 compared with fiscal 1996 was due to lower
gross profits and higher new product development expenses, partially
offset by lower selling and administrative expenses. Because
operating losses were incurred in the Antenna and Imaging Systems
business segment in fiscal 1998 and 1996, and because a consolidated
operating loss before corporate expenses and restructuring was
incurred in fiscal 1998 and consolidated operating income before
corporate expenses and restructuring was incurred in fiscal 1996,
operating income attributable to the Communication Products and
Services business segment was (79%) and 237% of consolidated operating
income (loss) before corporate expenses and restructuring in fiscal
1998 and 1996, respectively.
Consolidated expenses were as follows:
Selling, general and administrative ("SG&A") expenses were $12,179,000
in fiscal 1998 compared with $11,770,000 in fiscal 1997 and
$15,101,000 in fiscal 1996. Fiscal 1998 SG&A expenses increased 3%
over fiscal 1997 SG&A expenses primarily because of higher
administrative expenses at the Communication Products and Services
business segment and because of increases in reserves for commitments
and contingencies at the Antenna and Imaging Systems business segment.
Selling expenses declined at both business segments. Fiscal 1997 SG&A
expenses decreased 22% over fiscal 1996 SG&A expenses due to spending
reductions at both business segments, cost reductions related to the
Company's fourth quarter fiscal 1996 consolidation and restructuring,
and to reductions in reserves for commitments and contingencies that
the Company determined were no longer necessary.
Research and development ("R&D") expenses were $1,987,000 in fiscal
1998 compared with $2,432,000 in fiscal 1997 and $3,280,000 in fiscal
1996. Fiscal 1998 R&D expenses decreased 18% over fiscal 1997 R&D
expenses because of lower spending on development programs for mobile
DBS products, partially offset by higher spending on development
programs for new radio products. The Company expects to increase
spending on new product development programs in fiscal 1999. Most of
the anticipated increase will be for programs to enhance tracking
antenna capabilities. Fiscal 1997 R&D expenses decreased 26% over
fiscal 1996 R&D expenses primarily because of lower spending on
development programs for mobile DBS products, partially offset by
higher spending on development programs for new radio products.
Interest expense was $373,000 in fiscal 1998 compared with $607,000 in
fiscal 1997 and $211,000 in fiscal 1996. The 39% decrease in fiscal
1998 was due to lower levels of term debt during fiscal 1998. The
188% increase in fiscal 1997 from fiscal 1996 was due to much higher
levels of term debt during fiscal 1997.
The effective income tax provision (benefit) rates for fiscal years
1998, 1997 and 1996 were (26.4%), 51.1% and (39.8%), respectively.
The low benefit rate in fiscal 1998 was due to the Company's inability
to take a deduction for the write-off of its investment in EarthWatch
Incorporated because of a lack of offsetting capital gains. The high
provision rate in fiscal 1997 was due to relatively high unallowable
expenses for tax purposes compared with low fiscal 1997 pre-tax book
income.
Order backlog at March 31 was as follows:
1998 1997
----------- -----------
Antenna and Imaging Systems $19,949,000 $13,086,000
Communication Products and
Services 5,494,000 4,862,000
----------- -----------
Total $25,443,000 $17,948,000
=========== ===========
The 52% increase in Antenna and Imaging Systems backlog at March 31,
1998 compared with March 31, 1997 was primarily due to higher bookings
of remote sensing systems and antennas for the DoD and other non-
defense governmental customers.
The 13% increase in Communication Products and Services backlog at
March 31, 1998 compared with March 31, 1997 was due to improved order
bookings in the third and fourth quarters of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURES
At March 31, 1998, working capital was $20,354,000 compared with
$24,756,000 at March 31, 1997, a decrease of $4,402,000 or 18%.
Significant changes affecting working capital during fiscal 1998 were
as follows: accounts receivable decreased $2,409,000 primarily due to
good collections and low fourth quarter sales in fiscal 1998;
inventories decreased $261,000 primarily due to an increase in the
provision for inventory obsolescence; accounts payable and accrued
expenses increased $1,927,000. The Company's cash position at March
31, 1998 was $634,000 compared with $1,072,000 at March 31, 1997, a
decrease of 41%. At March 31, 1998, the Company had borrowed
$5,600,000 in term debt from its bank to meet operating cash
requirements. Those borrowings represented a 37% decrease in term
debt from the $8,900,000 of borrowings at March 31, 1997.
Capital expenditures were $1,125,000 in fiscal 1998 compared with
$891,000 in fiscal 1997. Capital expenditures in fiscal 1999 are
expected to be higher than they were in fiscal 1998.
At March 31, 1998, the Company had a $19,500,000 revolving line of
credit with its bank, of which up to $15,000,000 may be used for the
issuance of letters of credit and up to $9,500,000 may be used for
direct working capital advances provided that total credit extended
does not exceed $19,500,000. The letter of credit facility expires on
June 30, 1999 and the working capital facility expires on April 30,
1999. In April 1998, the Company amended its revolving line of credit
with its bank. Under the amended agreement, effective July 31, 1998,
the Company will have a committed revolving line of credit in the
amount of $15,500,000, of which up to $15,000,000 may be used for the
issuance of letters of credit and up to $5,500,000 may be used for
direct working capital advances. Total credit extended may not exceed
$15,500,000. The Company believes its existing working capital,
anticipated future cash flows from operations and available credit
with its bank are sufficient to finance presently planned capital and
working capital requirements through the end of fiscal 1999. Certain
business opportunities could arise that would require working capital
and credit availability for the issuance of letters of credit in
amounts that exceed current credit limits with its bank. The Company
believes there are alternative sources of financing available that
would provide the necessary credit in that event; however, there can
be no assurance the Company will be able to obtain such financing.
Certain portions of the Company's internal operating systems and some
software included in products sold to its customers are subject to
failure as a result of the Year 2000 date issue (the "Year 2000
issue"). The Company is addressing this issue by examining those
systems and software programs where there may be a risk of failure
resulting from the Year 2000 issue, and determining an appropriate
course of action to remedy identified problems in a timely fashion.
In addition, the Company is in process of communicating with suppliers
and others with whom it conducts business to assess whether they are
Year 2000 compliant, and if not, to gain assurance they are taking
appropriate steps to become compliant. The Company does not believe
it will incur a material financial impact from the risk of failure, or
from the costs associated with assessing the risk of failure, arising
from the Year 2000 issue.
The Company has never paid a cash dividend on its common stock and
does not anticipate doing so in the foreseeable future. Inflation and
changing prices have not had a significant impact on the
Company's historical operations.
Information required by Part II, Item 8: Financial Statements and
Supplementary Data. This information is contained on pages 10 through
24 of the Annual Report.
DATRON SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1998 1997
------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $634,000 $1,072,000
Accounts receivable, net 15,487,000 17,896,000
Inventories 14,048,000 14,309,000
Deferred income taxes 3,502,000 2,788,000
Prepaid expenses and other current assets 848,000 1,168,000
-----------------------
Total current assets 34,519,000 37,233,000
Property, plant and equipment, net 10,864,000 12,030,000
Goodwill, net 5,646,000 5,851,000
Investment --- 1,113,000
Other assets 255,000 249,000
------------------------
Total assets $51,284,000 $56,476,000
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,745,000 $7,647,000
Accrued expenses 3,932,000 3,103,000
Customer advances 965,000 744,000
Income taxes payable 203,000 194,000
Current portion of restructuring reserve 320,000 789,000
------------------------
Total current liabilities 14,165,000 12,477,000
Long-term debt 5,600,000 8,900,000
Restructuring reserve --- 435,000
Deferred income taxes 1,914,000 2,056,000
------------------------
Total liabilities 21,679,000 23,868,000
------------------------
Commitments and contingencies -- Note 9
Stockholders' equity:
Preferred stock -- par value $0.01;
authorized 2,000,000 shares, none
issued or outstanding --- ---
Common stock -- par value $0.01;
authorized 10,000,000 shares,
3,070,063 and 3,063,937 shares issued
in 1998 and 1997, respectively 31,000 31,000
Additional paid-in capital 10,670,000 10,602,000
Retained earnings 21,254,000 24,417,000
Treasury stock, at cost; 390,779 and
404,521 shares in 1998 and 1997,
respectively (2,106,000) (2,198,000)
Stock option plan and stock purchase
plan notes receivable (244,000) (244,000)
------------------------
Total stockholders' equity 29,605,000 32,608,000
------------------------
Total liabilities and stockholders' equity $51,284,000 $56,476,000
========================
See notes to consolidated financial statements.
</TABLE>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Net sales $54,628,000 $53,269,000 $61,165,000
Cost of sales 43,261,000 37,920,000 42,952,000
------------------------------------
Gross profit 11,367,000 15,349,000 18,213,000
Selling, general
and administrative 12,179,000 11,770,000 15,101,000
Research and development 1,987,000 2,432,000 3,280,000
Restructuring --- --- 1,421,000
------------------------------------
Operating income (loss) (2,799,000) 1,147,000 (1,589,000)
Interest expense (373,000) (607,000) (211,000)
Other income (expense) (1,126,000) 8,000 (261,000)
------------------------------------
Income (loss) before income
taxes (4,298,000) 548,000 (2,061,000)
Income taxes (benefit) (1,135,000) 280,000 (820,000)
------------------------------------
Net income (loss) ($3,163,000) $268,000 ($1,241,000)
====================================
Earnings (loss) per common share ($1.18) $0.10 ($0.48)
====================================
Weighted average number of
common shares outstanding 2,670,000 2,629,000 2,591,000
====================================
Earnings (loss) per common share
-- assuming dilution ($1.18) $0.10 ($0.48)
====================================
Weighted average number of
common and common equivalent
shares outstanding 2,670,000 2,676,000 2,591,000
====================================
See notes to consolidated financial statements.
</TABLE>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stock Option Plan
Common Stock Additional and Stock Purchase
Par Paid-In Retained Treasury Plan Notes
Shares Value Capital Earnings Stock Receivable Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 2,559,623 $31,000 $10,587,000 $25,390,000 ($2,979,000) ($164,000) $32,865,000
Purchase of treasury stock (4,401) (51,000) (51,000)
Stock options exercised
for treasury stock and
tax benefits 48,970 (37,000) 397,000 (80,000) 280,000
Stock option compensation 18,000 18,000
Net loss (1,241,000) (1,241,000)
--------------------------------------------------------------------------------------------
Balance at March 31, 1996 2,604,192 31,000 10,568,000 24,149,000 (2,633,000) (244,000) 31,871,000
Purchase of treasury stock (8,776) (84,000) (84,000)
Stock options exercised
for treasury stock and
tax benefits 64,000 (4,000) 519,000 515,000
Stock option compensation 38,000 38,000
Net income 268,000 268,000
-------------------------------------------------------------------------------------------
Balance at March 31, 1997 2,659,416 31,000 10,602,000 24,417,000 (2,198,000) (244,000) 32,608,000
Stock issued under employee
stock purchase plan 6,126 45,000 45,000
Purchase of treasury stock (4,058) (53,000) (53,000)
Stock options exercised
for treasury stock and
tax benefits 17,800 4,000 145,000 149,000
Stock option compensation 19,000 19,000
Net loss (3,163,000) (3,163,000)
--------------------------------------------------------------------------------------------
Balance at March 31, 1998 2,679,284 $31,000 $10,670,000 $21,254,000 ($2,106,000) ($244,000) $29,605,000
============================================================================================
See notes to consolidated financial statements.
</TABLE>
DATRON SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ($3,163,000) $268,000 ($1,241,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,513,000 2,953,000 3,317,000
Restructuring (904,000) (1,267,000) 588,000
Loss on investment 1,113,000 --- ---
Changes in operating assets and liabilities:
Accounts receivable 2,409,000 (2,879,000) 2,594,000
Inventories 261,000 1,499,000 (5,807,000)
Deferred income taxes (856,000) 801,000 229,000
Prepaid expenses and other assets 297,000 1,389,000 (1,819,000)
Accounts payable and accrued expenses 1,927,000 (3,145,000) (754,000)
Customer advances 221,000 (2,949,000) 1,236,000
Income taxes payable 9,000 (46,000) (2,311,000)
Other liabilities --- --- (23,000)
------------------------------------
Net cash provided by (used in) operating activities 3,827,000 (3,376,000) (3,991,000)
------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and equipment (1,125,000) (891,000) (2,683,000)
Purchase of investment --- (223,000) (890,000)
------------------------------------
Net cash used in investing activities (1,125,000) (1,114,000) (3,573,000)
------------------------------------
Cash Flows from Financing Activities
(Decrease) increase in long-term debt (3,300,000) 3,700,000 5,200,000
Stock options exercised and tax benefits 213,000 553,000 378,000
Purchase of treasury stock (53,000) (84,000) (51,000)
Payment advanced against stock option
plan note receivable --- --- (80,000)
------------------------------------
Net cash provided by (used in) financing activities (3,140,000) 4,169,000 5,447,000
------------------------------------
Decrease in cash (438,000) (321,000) (2,117,000)
Cash at beginning of year 1,072,000 1,393,000 3,510,000
------------------------------------
Cash at end of year $634,000 $1,072,000 $1,393,000
====================================
Supplemental Cash Flow Information:
Interest paid $384,000 $635,000 $224,000
Income tax paid (refunds received) ($367,000)($1,989,000) $3,306,000
See notes to consolidated financial statements.
</TABLE>
DATRON SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Datron Systems Incorporated and its wholly owned subsidiaries (the
"Company") provide satellite communication and image processing
systems through its Antenna and Imaging Systems business segment and
high-quality radio and other wireless communication products to a
worldwide market through its Communication Products and Services
business segment. The Antenna and Imaging Systems business segment
designs and manufactures specialized satellite communication systems,
subsystems and antennas that are sold worldwide to commercial and
governmental customers, including the U.S. Department of Defense.
This business segment also provides earth station hardware, software
and image processing systems for the remote sensing satellite systems
market, and produces mobile satellite television reception systems for
recreational vehicles, boats and airplanes. This business segment
operates from facilities in Simi Valley, California. Communication
products include HF (high frequency) and VHF (very high frequency)
radio products and communication systems that are designed and
manufactured in Escondido, California. These products are sold
worldwide through a network of Company salespersons and independent
dealers and sales representatives.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions also affect
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Inventories
Inventories are carried at the lower of cost (first-in, first-
out) or market (determined on the basis of estimated realizable
value).
Property, Plant and Equipment
Property, plant and equipment are carried at cost.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Useful lives range from two to
ten years for machinery and equipment and furniture and fixtures, and
from twenty to forty years for buildings and building improvements.
Leasehold improvements are amortized over the related lease term.
Goodwill
Goodwill represents the excess of the cost of purchased businesses
over the fair value of their net assets at date of acquisition and is
being amortized on a straight-line basis over periods ranging from 20
to 38 years. The recoverability of goodwill is evaluated on a
recurring basis utilizing the fair value methodology. As part of the
restructuring charge at March 31, 1996, $679,000 in goodwill was
written off. See Notes 3 and 4. Accumulated amortization of goodwill
was $2,055,000 at March 31, 1998 and $1,850,000 at March 31, 1997.
Investment
Investment represents preferred stock in EarthWatch Incorporated.
There is no public market for any of EarthWatch's securities. On
December 24, 1997, EarthWatch launched its first remote sensing
satellite and subsequently lost communications with it. EarthWatch
management has indicated they need to raise additional financing to
achieve a longer term objective. Because there can be no assurance
EarthWatch will be able to raise additional financing or achieve their
objectives, the investment of $1,113,000 was written off in the fourth
quarter of fiscal 1998.
Treasury Stock
Repurchased shares of the Company's common stock are included in
treasury stock at cost. Shares issued from treasury stock for
exercise of stock options are issued at original cost on a first-in,
first-out basis.
Revenue Recognition
Revenue from product sales is generally recognized at the time of
shipment. Revenue from certain fixed-price contracts requiring
substantial performance over several periods prior to commencement of
deliveries is accounted for under the percentage-of-completion (cost-
to-cost) method of accounting. Expected profits or losses on these
contracts are based upon the Company's estimates of total sales value
and cost at completion. These estimates are reviewed and revised
periodically throughout the lives of the contracts, and adjustments
resulting from such revisions are recorded in the periods in which
revisions are made. Losses on contracts are recorded in full as they
are identified.
Accounts receivable include unbilled costs and accrued profits
related to contracts accounted for under the percentage-of-completion
method of accounting. There are no material amounts of contract
holdbacks or claims subject to uncertainty of realization.
Substantially all amounts are expected to be collected within one
year. Funds received from customers in advance of contract work are
classified as current liabilities.
Income Taxes
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
This statement requires that deferred income taxes be reported in the
Company's financial statements utilizing the asset and liability
method. Under this method, deferred income taxes are determined based
on enacted tax rates applied to the differences between the financial
statement and tax basis of assets and liabilities.
Earnings (Loss) Per Share
Effective for the three-month period ended December 31, 1997, the
Company adopted SFAS No. 128, "Earnings Per Share." This statement
provides simplified standards for the computation and presentation of
earnings per share ("EPS"), making EPS comparable to international
standards. SFAS No. 128 requires dual presentation on the face of the
income statement of "Basic" and "Diluted" EPS by entities with complex
capital structures, replacing "Primary" and "Fully Diluted" EPS
illustrated under Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share."
Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects potential dilution from common stock equivalents,
similar to Fully Diluted EPS, but uses only the average stock price
during the period as part of the computation.
Shares used in computing earnings (loss) per common share -
assuming dilution include the weighted average of common stock
outstanding plus equivalent shares issuable under the Company's stock
option plans, when such amounts are dilutive. Options to purchase
320,000 shares of common stock at prices ranging from $6.50 - $16.00
were not included in the computation of diluted EPS at March 31, 1998
because the effect of such options would be anti-dilutive. Such
options expire at various dates from February 20, 1999 to March 22,
2008.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which was
effective for the Company beginning April 1, 1996. SFAS No. 123
requires expanded disclosures for stock-based compensation
arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on
the intrinsic value of the equity instrument awarded. The Company
will continue to apply APB Opinion No. 25 to its stock-based
compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share. See Note 8.
NOTE 3. RESTRUCTURING
In March 1996, the Company announced its plan to consolidate its
image processing division in San Jose, California with its remote
sensing earth station business in Simi Valley, California. In
connection with this decision, a restructuring charge in the amount of
$1,421,000 ($855,000, or $0.32 per share, after taxes) was recorded in
the fourth quarter ended March 31, 1996. The major categories of
costs and expenses included in this restructuring charge are as
follows:
Estimated employee severance $ 683,000
Goodwill write-off 679,000
Estimated future losses on
facility lease 59,000
---------
Total $1,421,000
=========
In fiscal 1993, the Company restructured its Antenna and Imaging
Systems business segment. The restructuring reserve at March 31, 1998
and 1997 includes remaining estimated future losses on the Company's
Camarillo, California facility lease of $320,000 and $1,224,000,
respectively.
NOTE 4. ACQUISITION OF BUSINESS
On August 11, 1994, the Company acquired the business and assets of
International Imaging Systems, Inc. (I2S), a privately held company
located in Milpitas, California. At March 31, 1996, remaining
goodwill from this acquisition in the amount of $679,000 was written
off as part of the Company's decision to consolidate its remote
sensing business. See Note 3.
NOTE 5. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
Accounts receivable at March 31:
1998 1997
------------ -----------
<S> <C> <C>
Billed $ 8,676,000 $14,019,000
Unbilled 7,001,000 4,103,000
------------ -----------
Subtotal 15,677,000 18,122,000
Allowance for doubtful
accounts (190,000) (226,000)
------------ ----------
Total $15,487,000 $17,896,000
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Inventories at March 31:
1998 1997
------------ ----------
<S> <C> <C>
Raw materials $ 7,830,000 $9,316,000
Work-in-process 4,067,000 2,753,000
Finished goods 2,151,000 2,240,000
------------ -----------
Total $14,048,000 $14,309,000
============ ===========
</TABLE>
Inventories are presented net of allowances for obsolescence of
$1,656,000 and $1,350,000 at March 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Property, plant and equipment at March 31:
1998 1997
------------ -----------
<S> <C> <C>
Land and buildings $ 8,557,000 $ 8,529,000
Machinery and equipment 15,201,000 14,590,000
Furniture and office equipment 1,506,000 1,443,000
Leasehold improvements 821,000 815,000
Construction-in-process 299,000 66,000
----------- -----------
Subtotal 26,384,000 25,443,000
Accumulated depreciation
and amortization (15,520,000) (13,413,000)
------------ -----------
Total $10,864,000 $12,030,000
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Accrued expenses at March 31:
1998 1997
---------- -----------
<S> <C> <C>
Salaries and employee benefits $1,731,000 $1,408,000
Warranty allowance 933,000 707,000
Commission and service fees 519,000 421,000
Contract loss allowance 87,000
Other 749,000 480,000
---------- ----------
Total $3,932,000 $3,103,000
========== ==========
</TABLE>
NOTE 6. LONG-TERM DEBT
At March 31, 1998, the Company had a committed revolving line of
credit with its bank of $19,500,000, of which up to $15,000,000 may be
used for the issuance of letters of credit and up to $9,500,000 may be
used for direct working capital advances. Total credit extended may
not exceed $19,500,000. The letter of credit facility expires on June
30, 1999 and the working capital facility expires on April 30, 1999.
Interest is payable on borrowings under the line of credit at the
bank's prime rate plus 0.85% or at LIBOR plus 1.85%, at the option of
the Company. At March 31, 1998, the bank's prime rate was 8.50%.
The line of credit is secured by assets of the Company and contains
certain financial covenants with which the Company is in compliance.
A commitment fee of 0.25% is payable to the bank on the unused portion
of the working capital facility. At March 31, 1998, there were
borrowings of $5,600,000 under the line and the bank had issued
letters of credit against the line totaling $7,408,000.
On April 30, 1998, the Company amended its credit agreement and
note with its bank. Under the amended agreement, effective July 31,
1998, the Company will have a committed revolving line of credit with
the bank of $15,500,000, of which up to $15,000,000 may be used for
the issuance of letters of credit and up to $5,500,000 may be used for
direct working capital advances. Total credit extended may not exceed
$15,500,000. Interest is payable on borrowings under the line of
credit at the bank's prime rate plus 1.50% or at LIBOR plus 2.50%, at
the option of the Company.
The Company believes the carrying amount of its outstanding long-
term debt at March 31, 1998 and 1997 is a reasonable estimate of its
fair value. This was determined based on a review of borrowing rates
available to the Company at March 31, 1998 and 1997 for loans with
similar terms and maturities.
NOTE 7. INCOME TAXES
Effective April 1, 1993, the Company changed its method of
accounting for income taxes from the provisions of APB Opinion No. 11,
"Accounting for Income Taxes" (Deferred Method) to the provisions of
SFAS No. 109, "Accounting for Income Taxes" (Liability Method).
The Company's deferred income tax assets and liabilities at March
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Contract loss and other allowances $1,652,000 $1,419,000
Alternative minimum tax credits 557,000
Accrued employee benefits 424,000 384,000
Net operating loss carryover 369,000 171,000
Investment tax credits 207,000 173,000
Restructuring reserve 137,000 530,000
Other 156,000 111,000
--------- ---------
Total 3,502,000 2,788,000
--------- ---------
Deferred income tax liabilities:
Depreciation (1,639,000) (1,777,000)
State taxes (275,000) (279,000)
--------- ---------
Total (1,914,000) (2,056,000)
--------- ---------
Net deferred income tax asset $1,588,000 $ 732,000
========= =========
</TABLE>
As of March 31, 1998, the Company had $294,000 and $3,039,000 of
federal and California net operating loss carryforwards, respectively.
In addition, the Company had $557,000 and $207,000 of federal and
California credit carryforwards, respectively. The federal net
operating loss carryforwards expire in 2013, and the California net
operating loss carryforwards expire from 2001 to 2003. There is no
expiration date for the federal credit carryforwards. The California
credit carryforwards expire from 2004 to 2006. In the event of
certain ownership changes, the Tax Reform Act of 1986 imposes certain
restrictions on the amount of net operating loss carryforwards which
may be used in any year by the Company.
The provision (benefit) for income taxes for the years ended March
31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Federal:
Current $ (280,000) $(599,000) $(1,059,000)
Deferred (694,000) 811,000 335,000
State:
Current 78,000 10,000
Deferred (161,000) (10,000) (106,000)
----------- --------- ----------
Total $(1,135,000) $ 280,000 $ (820,000)
=========== ========= ==========
</TABLE>
The provision (benefit) for income taxes differs from the federal
statutory tax rate for the years ended March 31 due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Expected tax (benefit)
at statutory rate $(1,461,000) $ 186,000 $ (701,000)
Disallowed capital loss 378,000
State tax (benefit), net
of federal tax effect (103,000) 20,000 (63,000)
Foreign Sales Corporation
earnings (70,000) (28,000) (116,000)
Goodwill amortization 70,000 70,000 70,000
Other differences 51,000 32,000 (10,000)
----------- --------- ----------
Total $(1,135,000) $ 280,000 $ (820,000)
=========== ========= ==========
</TABLE>
NOTE 8. EMPLOYEE INCENTIVE PLANS
In May 1985, the Company adopted the 1985 Stock Option Plan (1985
Plan). Under the 1985 Plan, as amended, 500,000 shares of common stock
may be issued upon the exercise of options granted to employees of the
Company at not less than the fair market value on the date of grant
and to directors of the Company at not less than 85% of the fair
market value on the date of grant. Options become exercisable ratably
over three years and expire ten years from the date of grant. The
1985 Plan expired in May 1995. As of March 31, 1998, 15,000 shares of
common stock had been issued in connection with the exercise of an
option granted pursuant to the 1985 Plan for which $80,000 of the
exercise price received was in the form of a secured promissory note.
The note is due June 11, 1998 and bears interest at 6.27% per annum.
In February 1995, the Company adopted the 1995 Stock Option Plan
(1995 Plan), which was approved by the Company's stockholders at the
1995 Annual Meeting. The 1995 Plan permits up to 500,000 shares of
common stock to be issued upon the exercise of options granted under
the 1995 Plan. However, because the number of shares available for
issuance under the 1995 Plan was reduced by the number of options
granted and outstanding under the 1985 Plan at the time of its
expiration in May 1995, the effective number of shares authorized for
issuance under the 1995 Plan is 206,700, of which 61,073 were
available under the 1985 Plan at the time of its expiration. Terms of
issuance and exercise of options granted under the 1995 Plan are
similar to those under the 1985 Plan.
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Had compensation
expense for the Company's two fixed stock option plans (the 1985 Plan
and 1995 Plan) been determined consistent with the provisions of SFAS
No. 123 based on the fair value at date of grant for awards made in
fiscal years ended March 31, 1998, 1997 and 1996, and assumed
forfeiture rates of 12%, 10% and 10%, respectively, net income (loss)
and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- -----------
<S> <C> <C> <C>
Net income (loss)
- -----------------
As reported $(3,163,000) $268,000 $(1,241,000)
Pro forma $(3,601,000) $ 62,000 $(1,532,000)
Earnings (loss) per
common share
- -------------------
As reported $(1.18) $0.10 $(0.48)
Pro forma $(1.35) $0.02 $(0.59)
Earnings (loss) per
common share -
assuming dilution
- -------------------
As reported $(1.18) $0.10 $(0.48)
Pro forma $(1.35) $0.02 $(0.59)
</TABLE>
The pro forma effect on net income (loss) for fiscal years 1998,
1997 and 1996 is not representative of the pro forma effect on net
income in future years because it does not take into consideration pro
forma compensation expense related to grants awarded prior to April 1,
1995. The weighted-average fair value of options granted under the
two stock option plans with exercise prices equal to market price
during fiscal years 1998, 1997 and 1996 is estimated at $4.17, $5.44
and $6.81, respectively, and the weighted-average exercise prices for
those options was $8.92, $11.25 and $14.58, respectively. The
weighted-average fair value of options granted under the two stock
option plans with exercise prices at less than market price during
fiscal years 1998, 1997 and 1996 is estimated at $4.36, $7.06 and
$9.45, respectively, and the weighted-average exercise prices for
those options was $7.23, $11.26 and $15.73, respectively. These
estimates were determined by using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants
awarded in fiscal years 1998, 1997 and 1996, respectively: dividend
yield of 0%, 0% and 0%; expected volatility of 44%, 45% and 43%; risk-
free rate of return of 5.81%, 6.42% and 6.09%; and expected lives of 5
years, 5 years and 5 years. A change in these assumptions could
result in a significant change to the indicated fair value amounts.
A summary of the status of the Company's two fixed stock option
plans as of March 31, 1998, 1997 and 1996 and activity during the
years then ended is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 219,580 $11.35 270,150 $10.46 247,300 $7.98
Granted 164,000 $8.81 30,500 $11.25 84,500 $14.99
Canceled (45,820) $13.42 (17,070) $12.90 (12,680) $11.77
Exercised (17,800) $7.67 (64,000) $7.13 (48,970) $5.72
------- ------ ------- ------ ------- ------
Outstanding at
end of year 319,960 $9.96 219,580 $11.35 270,150 $10.46
======= ===== ======= ====== ======= ======
Options exercisable
at end of year 145,293 $10.86 143,780 $10.30 182,650 $8.66
======= ===== ======= ====== ======= ======
</TABLE>
Stock option compensation expense related to options granted at
less than fair value on date of grant pursuant to the 1985 Plan and
1995 Plan was $19,000, $38,000 and $18,000 in fiscal years 1998, 1997
and 1996, respectively.
Information about fixed stock options outstanding at March 31, 1998
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted-
Ave Weighted- Weighted-
Range of Remaining Ave Ave
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- -------
<C> <C> <C> <C> <C> <C>
$6.50 - $7.23 15,000 7.4 years $6.98 5,000 $6.50
$8.08 - $9.50 199,500 7.3 $8.60 73,167 $8.71
$10.00 - $12.88 67,460 7.8 $11.41 37,460 $11.81
$14.25 - $16.00 38,000 6.2 $15.68 29,666 $15.67
- --------------- ------- --- ------ ------- ------
$6.50 - $16.00 319,960 7.3 years $9.96 145,293 $10.86
=============== ======= === ====== ======= ======
</TABLE>
At March 31, 1998, 34,270 shares were available for grant under the
1995 Plan.
In March 1988, the Company adopted the 1988 Key Employee Stock
Purchase Plan (Purchase Plan). Under terms of the Purchase Plan,
75,000 shares of common stock may be made available for purchase at
fair market value to key employees as determined by the board of
directors. As of March 31, 1998, 50,000 shares had been purchased
pursuant to the Purchase Plan, and a note receivable in the amount of
$164,000 due April 10, 1999 at an interest rate of 4.99% was
outstanding.
The Company has a non-contributory qualified profit sharing plan.
Employees are eligible to participate on April 1 following their date
of employment and benefits vest over seven years. Annual
contributions are determined by the board of directors. Such amounts
were zero, zero and zero for the fiscal years ended March 31, 1998,
1997 and 1996, respectively.
In November 1995, the Company adopted the Supplemental Executive
Profit Sharing Plan, effective as of April 1, 1994. The plan is a
deferred compensation plan intended to provide certain executive
employees with additional funds for their retirement. Terms of
participation and vesting of benefits are similar to those of the
qualified profit sharing plan. Eligibility for participation and
annual contributions are determined by the board of directors.
Contributions for the fiscal years ended March 31, 1998, 1997, and
1996, were zero, $56,000 and zero, respectively.
In August 1997, the Company adopted the Employee Stock Purchase
Plan, effective as of July 1, 1997. Employees are eligible to
participate in the plan if they have been employed a minimum of six
months and work at least 20 hours per week. Eligible employees may
use funds from accumulated payroll deductions to purchase shares of
Company common stock at the end of six-month offering periods. They
may contribute up to 10% of gross earnings toward such purchases, not
to exceed $12,500 per offering period, and may purchase a maximum of
1,000 shares per offering period. The purchase price for the shares
is 85% of the lesser of the fair market value of the common stock at
the beginning of the offering period or at the end of the offering
period. Shares purchased must be held for a minimum of three months
before they can be sold. At the end of the first offering period on
December 31, 1997, the Company issued 6,126 shares of common stock to
employees at a purchase price of $7.33 per share. A total of 200,000
shares has been authorized for issuance under the Employee Stock
Purchase Plan.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company leases certain production and office facilities and
certain equipment under noncancelable operating leases. As a result
of the fiscal year 1993 restructuring, a portion of one of the
Company's production facilities has been subleased to three subtenants
whose subleases expire on June 28, 1998. The Company's San Jose
facility has been subleased to a subtenant whose sublease expires on
March 31, 1999. In March 1998, the Company signed a new ten-year
lease for a production and office facility located in Vista,
California. That lease commences February 1, 1999. Future minimum
operating lease obligations for each of the years ended March 31 are
as follows:
<TABLE>
<CAPTION>
Total Lease Sublease Net Lease
Year Obligation Income Obligation
- ---------- ----------- -------- ----------
<S> <C> <C> <C>
1999 $945,000 $296,000 $649,000
2000 667,000 667,000
2001 649,000 649,000
2002 632,000 632,000
2003 630,000 630,000
Thereafter 3,973,000 3,973,000
--------- -------- ---------
Total $7,496,000 $296,000 $7,200,000
========= ======== =========
</TABLE>
Approximately $320,000 of this future net lease obligation is
included in the restructuring reserve. See Note 3.
Total rent expense under noncancelable operating leases was
$618,000, $567,000 and $787,000 for the fiscal years ended March 31,
1998, 1997 and 1996, respectively. Additional rent payments in the
amounts of $638,000, $695,000 and $465,000 were charged to the
restructuring reserve during the fiscal years ended March 31, 1998,
1997 and 1996, respectively.
In the normal course of business, the Company is subject to claims
and litigation that may be raised by governmental agencies in
connection with the Company's long-term contract business and other
civil claims by private parties. In connection with a Defense
Contract Audit Agency (DCAA) audit of a $9.6 million U.S. Navy
contract completed in 1989, DCAA has submitted a report to the
Contracting Officer alleging deficiencies in the information provided
to the Navy at the time the contract was negotiated and recommending a
reduction in the contract value of $2.7 million. During the fiscal
year ended March 31, 1995, DCAA amended its recommendation to a
reduction in contract value of $1.9 million. The Company is confident
that its actions have been appropriate at all times and believes that
the conclusions in the DCAA report are erroneous; the Company intends
to challenge the report and its conclusions vigorously. During the
fiscal year ended March 31, 1998, the Company had several discussions
with the Contracting Office regarding this matter. In the opinion of
management, resolution of this matter would not materially affect the
consolidated financial position of the Company.
In August 1992, Trans World Communications, Inc. (Trans World), a
wholly owned subsidiary of the Company and which was renamed Datron
World Communications Inc. on March 31, 1995, was named as defendant in
a lawsuit filed by ATACS Corporation (ATACS) and AIRTACS Corporation
(AIRTACS) relating to a contract to provide radio communication
shelters. ATACS and AIRTACS contend that Trans World entered into an
agreement to team with them on the contract and then wrongfully failed
to use them as subcontractors. They seek damages in excess of
$2,000,000. In a May 28, 1997 ruling, the court found Trans World in
breach of a teaming agreement but was not able to determine what
damages, if any, were incurred by ATACS and AIRTACS. The court
ordered both parties to submit supplemental findings to support their
positions regarding damages. On September 3, 1997, the court awarded
ATACS and AIRTACS one dollar ($1.00) in damages. ATACS and AIRTACS
have appealed the court's decision. The Company has taken a cross
appeal with respect to the issue of whether the Company was in breach
of any teaming agreement. The Company believes that final resolution
of this matter will not materially affect the consolidated financial
position of the Company.
NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two business segments: Antenna and Imaging
Systems, and Communication Products and Services. See Note 1. The
following table contains certain segment, geographic and customer
information about the Company's business:
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Net sales:
Antenna and Imaging Systems $33,789,000 $33,304,000 $31,872,000
Communication Products and
Services 20,839,000 19,965,000 29,293,000
----------- ----------- -----------
Total $54,628,000 $53,269,000 $61,165,000
=========== =========== ===========
Operating income (loss):
Antenna and Imaging Systems $(2,509,000) $ 1,813,000 $(1,659,000)
Communication Products and
Services 1,111,000 456,000 2,871,000
---------- ---------- ----------
Total (1,398,000) 2,269,000 1,212,000
Restructuring (1,421,000)
General corporate expenses (1,401,000) (1,122,000) (1,380,000)
Interest expense (373,000) (607,000) (211,000)
Other income (expense) (1,126,000) 8,000 (261,000)
---------- ----------- ----------
Income (loss) before income
taxes $(4,298,000) $ 548,000 $(2,061,000)
=========== =========== ===========
Identifiable assets:
Antenna and Imaging Systems $24,891,000 $26,596,000 $29,076,000
Communication Products and
Services 20,286,000 24,603,000 22,807,000
Corporate 6,107,000 5,277,000 6,576,000
----------- ----------- -----------
Total $51,284,000 $56,476,000 $58,459,000
=========== =========== ===========
Capital additions:
Antenna and Imaging Systems $ 655,000 $ 190,000 $ 1,821,000
Communication Products and
Services 456,000 688,000 861,000
Corporate 14,000 13,000 1,000
---------- ----------- -----------
Total $1,125,000 $ 891,000 $ 2,683,000
========== =========== ===========
Depreciation and amortization:
Antenna and Imaging Systems $1,658,000 $ 1,791,000 $ 2,141,000
Communication Products and
Services 837,000 1,149,000 1,163,000
Corporate 18,000 13,000 13,000
---------- ----------- -----------
Total $2,513,000 $ 2,953,000 $ 3,317,000
========== =========== ===========
Net sales:
U.S. $24,589,000 $27,316,000 $25,697,000
Asia 16,104,000 18,148,000 20,116,000
Europe 4,923,000 2,251,000 4,846,000
South America 4,547,000 2,792,000 3,386,000
Africa 3,979,000 2,484,000 6,493,000
Other 486,000 278,000 627,000
----------- ----------- -----------
Total $54,628,000 $53,269,000 $61,165,000
=========== =========== ===========
Sales for U.S. Department of
Defense:
Antenna and Imaging Systems $10,386,000 $15,787,000 $17,658,000
Communication Products and
Services 1,682,000 558,000 529,000
----------- ----------- -----------
Total $12,068,000 $16,345,000 $18,187,000
=========== =========== ===========
</TABLE>
For the fiscal year ended March 31, 1998, two customers accounted for
17% and 15% of Antenna and Imaging Systems net sales and three customers
accounted for 24%, 12% and 10% of Communication Products and Services net
sales. For the fiscal year ended March 31, 1997, three customers accounted
for 13%, 12% and 11% of Antenna and Imaging Systems net sales and two
customers accounted for 31% and 24% of Communication Products and Services
net sales. For the fiscal year ended March 31, 1996, one customer
accounted for 15% of Antenna and Imaging Systems net sales and one customer
accounted for 39% of Communication Products and Services net sales.
NOTE 11. QUARTERLY FINANCIAL DATA - Unaudited
(in thousands, except per-share data)
<TABLE>
<CAPTION>
Fiscal Year 1998
Earnings
(Loss)
Per Share
Net Gross Net Assuming
Sales Profit Income (Loss) Dilution
------- ------ ------------- --------
<S> <C> <C> <C> <C>
First Quarter $10,341 $2,355 $(548,000) $(0.21)
Second Quarter 14,937 3,611 149,000 0.06
Third Quarter 17,081 4,268 347,000 0.13
Fourth Quarter 12,269 1,133 (3,111,000) (1.16)
------- ------- ----------- -------
Fiscal Year $54,628 $11,367 $(3,163,000) $(1.18)
======= ======= =========== =======
</TABLE>
First quarter results reflect low sales of radio communication products
and military antennas. Sales of both radio communication products and
military antennas increased in the second and third quarters, however, the
improvement in net income during those quarters was primarily due to higher
gross profits on the higher radio communication product sales. Low gross
margins on sales of antenna and imaging systems products during the first
three quarters, resulting from higher engineering costs and improperly bid
contracts, were a major factor contributing to the cumulative net loss
through the third quarter. The lower fourth quarter net sales and large net
loss were primarily due to cost overruns at the Company's Datron/Transco
Inc. subsidiary resulting from increases in estimates to complete several
projects that required redesign and rework. Also included in the fourth
quarter net loss was a $1,113,000 ($0.42 per share) write-off of the
Company's investment in EarthWatch Incorporated.
<TABLE>
<CAPTION>
Fiscal Year 1997
Earnings
Per Share
Net Gross Net Assuming
Sales Profit Income Dilution
------- ------ ------ --------
<S> <C> <C> <C> <C>
First Quarter $12,457 $3,456 $29 $0.01
Second Quarter 14,620 3,909 155 0.06
Third Quarter 12,923 3,612 20 0.01
Fourth Quarter 13,269 4,372 64 0.02
------- ------- ---- -----
Fiscal Year $53,269 $15,349 $268 $0.10
======= ======= ===== =====
</TABLE>
Net sales, gross profits and net income were relatively consistent from
quarter-to-quarter, and generally lower than they were in fiscal 1996.
Lower sales of radio communication products were primarily responsible for
the decline, partially offset by lower operating expenses. Third quarter
net income reflects a $552,000 ($330,000, or $0.12 per share, after taxes)
reduction in reserves for commitments and contingencies. Fourth quarter
net sales reflect $666,000 in sales returns of DBS antenna products from a
former distributor. Gross profit for the fourth quarter reflects a
$605,000 increase in the Company's provision for inventory obsolescence.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Datron Systems Incorporated
Escondido, California
We have audited the accompanying consolidated balance sheets of
Datron Systems Incorporated and its subsidiaries as of March 31, 1987
and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Datron
Systems Incorporated and its subsidiaries as of March 31, 1998 and
1997 and the results of their operations and their cash flows for each
of the three years in the period ended March 31, 1998 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Diego, California
May 8, 1998
EXHIBIT 21:
DATRON SYSTEMS INCORPORATED
SUBSIDIARIES
MARCH 31, 1998
Percentage of Jurisdiction
Voting Securities in which
Name Owned by Parent Incorporated
- -------------------------------- ------------------ -------------
Datron World Communications Inc. 100% California
Datron/Transco Inc. 100% California
Datron/Trans World Communications
Int'l Ltd. (a Foreign Sales
Corporation) 100% U.S. Virgin
Islands
EXHIBIT 22
Proxy Statement, Notice of Annual Meeting of Stockholders to be
Held Wednesday, August 5, 1998 at 11:00 A.M. and Form of Proxy (to be
deemed filed only to the extent required by the instructions to
exhibits for reports on Form 10-K) to be filed within 120 days of the
end of the Registrant's fiscal year.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement Numbers 2-99763, 33-16985 and 33-20785 of Datron Systems
Incorporated on Form S-8 of our reports dated May 8, 1998, appearing
in and incorporated by reference in the Annual Report on Form 10-K of
Datron Systems Incorporated for the year ended March 31, 1998.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Diego, California
June 25, 1998
EXHIBIT 24
POWER OF ATTORNEY
(on signature page 16)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 634
<SECURITIES> 0
<RECEIVABLES> 15,677
<ALLOWANCES> 190
<INVENTORY> 14,048
<CURRENT-ASSETS> 34,519
<PP&E> 26,384
<DEPRECIATION> 15,520
<TOTAL-ASSETS> 51,284
<CURRENT-LIABILITIES> 14,165
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 29,574
<TOTAL-LIABILITY-AND-EQUITY> 51,284
<SALES> 54,628
<TOTAL-REVENUES> 54,628
<CGS> 43,261
<TOTAL-COSTS> 43,261
<OTHER-EXPENSES> 15,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 373
<INCOME-PRETAX> (4,298)
<INCOME-TAX> (1,135)
<INCOME-CONTINUING> (3,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,163)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS FINANCIAL DATA SCHEDULE HAS BEEN
RESTATED TO REFLECT THE REGISTRANT'S ADOPTION OF STATEMENT
OF ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." THIS
SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS
ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,393
<SECURITIES> 0
<RECEIVABLES> 15,264
<ALLOWANCES> 247
<INVENTORY> 15,808
<CURRENT-ASSETS> 37,298
<PP&E> 24,692
<DEPRECIATION> 10,857
<TOTAL-ASSETS> 58,459
<CURRENT-LIABILITIES> 19,256
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 31,840
<TOTAL-LIABILITY-AND-EQUITY> 58,459
<SALES> 61,165
<TOTAL-REVENUES> 61,192
<CGS> 42,952
<TOTAL-COSTS> 42,952
<OTHER-EXPENSES> 20,063
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 238
<INCOME-PRETAX> (2,061)
<INCOME-TAX> (820)
<INCOME-CONTINUING> (1,241)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,241)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS FINANCIAL DATA SCHEDULE HAS BEEN
RESTATED TO REFLECT THE REGISTRANT'S ADOPTION OF STATEMENT OF
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE
SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 814
<SECURITIES> 0
<RECEIVABLES> 24,288
<ALLOWANCES> 226
<INVENTORY> 14,731
<CURRENT-ASSETS> 43,173
<PP&E> 24,207
<DEPRECIATION> 10,506
<TOTAL-ASSETS> 64,988
<CURRENT-LIABILITIES> 21,765
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 33,864
<TOTAL-LIABILITY-AND-EQUITY> 64,988
<SALES> 49,355
<TOTAL-REVENUES> 49,380
<CGS> 33,907
<TOTAL-COSTS> 33,907
<OTHER-EXPENSES> 13,920
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104
<INCOME-PRETAX> 1,449
<INCOME-TAX> 530
<INCOME-CONTINUING> 919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 919
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS FINANCIAL DATA SCHEDULE HAS BEEN
RESTATED TO REFLECT THE REGISTRANT'S ADOPTION OF STATEMENT OF
ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE
SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> SEP-30-1995
<CASH> 110
<SECURITIES> 0
<RECEIVABLES> 20,126
<ALLOWANCES> 172
<INVENTORY> 12,063
<CURRENT-ASSETS> 35,182
<PP&E> 23,344
<DEPRECIATION> 9,614
<TOTAL-ASSETS> 56,208
<CURRENT-LIABILITIES> 18,502
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 33,664
<TOTAL-LIABILITY-AND-EQUITY> 56,208
<SALES> 30,016
<TOTAL-REVENUES> 30,035
<CGS> 19,726
<TOTAL-COSTS> 19,726
<OTHER-EXPENSES> 9,102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 1,171
<INCOME-TAX> 429
<INCOME-CONTINUING> 742
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 742
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
EXHIBIT 99.1
ANNUAL REPORT OF THE DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
ANNUAL REPORT
For the fiscal year ended March 31, 1998
DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
(Full title of the plan)
Datron Systems Incorporated
304 Enterprise Street, Escondido, California 92029-1297
(Name of issuer of the securities held pursuant to
the plan and the address of its principal executive office)
DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
<PAGE> F-1
Index To Financial Statements
Page
Independent Auditors' Report F-2
Financial Statements:
Statement of Net Assets Available for Benefits F-3
Statement of Changes in Net Assets Available
for Benefits F-4
Notes to Financial Statements F-5
Schedules:
None
All schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the
notes thereto.
<PAGE> F-2
INDEPENDENT AUDITORS' REPORT
Datron Systems Incorporated
Employee Stock Purchase Plan
We have audited the accompanying statements of net assets available
for benefits of Datron Systems Incorporated Employee Stock Purchase
Plan (the "Plan") as of March 31, 1998 and the related statements of
changes in net assets available for benefits for the nine months ended
March 31, 1998. These financial statements are the responsibility of
the Plan's management Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, information regarding the Plan's net
assets available for benefits as of March 31, 1998 and the changes in
net assets available for benefits of the Plan for the nine months
ended March 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
San Diego, California
June 22, 1998
<PAGE> F-3
DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
March 31,
1998
Cash $25,220
Participant contributions receivable 2,313
-------
Net assets available for benefits $27,532
=======
See accompanying notes to financial statements
<PAGE> F-4
DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
Nine Months
Ended
March 31, 1998
Participant contributions $94,937
Benefits paid (44,911)
Cash disbursements to employees
withdrawing from the plan (22,493)
--------
Net increase $27,532
Net assets available for benefits:
Beginning of period 0
-------
End of period $27,532
=======
See accompanying notes to financial statements
<PAGE> F-5
DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
Note 1. Plan Description
In August 1997, the stockholders adopted, effective July 1, 1997,
the Datron Systems Incorporated Employee Stock Purchase Plan (the
"Stock Purchase Plan") under Section 423 of the Internal Revenue Code.
The Stock Purchase Plan is intended to provide eligible employees with
the opportunity to acquire an equity interest in Datron Systems
Incorporated (the "Company") through the acquisition of purchase
rights.
Employees are eligible to participate in the plan if they have
been employed a minimum of six months and work at least 20 hours per
week. Eligible employees may use funds from accumulated payroll
deductions to purchase shares of Company common stock at the end of
six-month offering periods. They may contribute up to 10% of gross
earnings toward such purchases, not to exceed $12,500 per offering
period, and may purchase a maximum of 1,000 shares per offering
period. The purchase price for the shares is 85% of the lesser of the
fair market value of the common stock at the beginning of the offering
period or at the end of the offering period. Shares purchased must be
held for a minimum of three months before they can be sold. At the
end of the first offering period on December 31, 1997, the Company
issued 6,126 shares of common stock to employees at a purchase price
of $7.33 per share. A total of 200,000 shares has been authorized for
issuance under the Employee Stock Purchase Plan.
Note 2. Summary of Significant Accounting Policies
Basis of Accounting
The Stock Purchase Plan's financial statements are prepared on the
accrual basis of accounting.
Administrative Expenses of the Plan
All expenses incurred in the administration of the Stock Purchase Plan
are paid by the Company.
<PAGE> F-6
Contributions
Contributions to the Stock Purchase plan are recorded as compensation
is earned by participants. Such contributions originate from after-
tax payroll deductions of participants.
Income Taxes
The Stock Purchase Plan was established under Section 423 of the
Internal Revenue Code and is, therefore, exempt from income taxes.
<PAGE> F-7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Compensation Committee of the Datron Systems Incorporated Employee
Stock Purchase Plan has duly caused this annual report to be signed by
the undersigned thereunto duly authorized.
DATRON SYSTEMS INCORPORATED
EMPLOYEE STOCK PURCHASE PLAN
By:/s/ WILLIAM L. STEPHAN Date: June 25, 1998
William L. Stephan
Datron Systems Incorporated
Employee Stock Purchase
Plan Compensation Committee
