<PAGE>
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 ended December 31, 1996
Commission file number: 0-9788
RICHEY ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0594451
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7441 Lincoln Way, Suite 100, Garden Grove, California 92641
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (714) 898-8288
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
------------------------------
(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 filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 20, 1997, was $81,448,925
based on the last sales price on the Nasdaq Stock Market ("Nasdaq") on that
date.
As of March 20, 1997, 9,062,685 shares of the registrant's common stock
were outstanding.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Richey Electronics, Inc.'s (the "Company" or "Richey
Electronics") proxy statement for its annual meeting of stockholders to be held
on May 1, 1997, which is being filed with the Securities and Exchange Commission
(the "Commission") concurrently herewith, are incorporated by reference into
Part III of this Form 10-K (Items 10 through 13).
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Richey Electronics is a leading specialty distributor of interconnect,
electromechanical and passive electronic components and a provider of related
value-added assembly services to more than 16,000 customers nationwide. Richey
Electronics has been built through a series of transactions beginning in
December 1990 with the acquisition of the operations of Richey/Impact
Electronics Inc. and continuing with the merger with Brajdas Corporation in 1993
and the acquisition of the operations of In-Stock in 1994, IEI and Deanco in
1995 and MS Electronics and Summit Distributors in 1996. Since the initial
acquisition, the Company's growth has been directed by one of the most
experienced management teams in its industry. Through acquisitions and internal
growth that improved the Company's operating leverage, Richey Electronics' sales
and earnings have increased from approximately $33.0 million and $700,000,
respectively, in 1991 to $226.2 million and $6.5 million, respectively, in 1996.
Giving pro forma effect to the acquisition of Deanco, the Company ranked in 1995
as the third largest distributor of interconnect devices in the United States
and as the sixth largest distributor of electromechanical/passive components in
the United States, based on information presented in the April 25, 1996 edition
of PURCHASING MAGAZINE.
The Company distributes a broad line of connectors, switches, wire, cable
and heat shrinkable tubing and other interconnect, electromechanical and passive
electronic components used in the assembly and manufacturing of electronic
equipment. Richey Electronics currently distributes electronic components for
more than 100 component manufacturers, of which more than 80 have franchised the
Company nationally by agreeing to supply its distribution activities in all of
its present and future locations. Management believes that the Company
represents the broadest line of connector manufacturers in its industry, with
nine of the ten leading North American manufacturers supplying the Company. The
Company is nationally franchised by eight of these leading manufacturers.
Richey Electronics also provides a wide variety of value-added assembly
services, which typically generate higher gross margins than traditional
component distribution. The Company's customers are primarily small- and
medium-sized original equipment manufacturers ("OEMs") that produce electronic
equipment used in a wide variety of industries, including the
telecommunications, computer, medical, transportation and aerospace industries.
In 1996, the Company continued to complete strategic acquisitions. On
March 19, 1996, the Company acquired the assets and business of MS Electronics,
Inc. ("MS Electronics"). MS Electronics specializes in the distribution of
interconnect, electromechanical and passive electronic components and provides
related value-added assembly services in the Baltimore-Washington marketplace.
On December 5, 1996, the Company acquired the assets and business of Summit
Distributors, Inc. ("Summit Distributors"), a Buffalo, New York distributor of
interconnect, electromechancial and passive electronic components.
In 1996, the Company issued $55,755,000 of 7% Convertible Subordinated
Notes due 2006 (the "Notes") in a private placement. The Notes are convertible
into shares of the Company's common stock (the "Common Stock") at a conversion
price of $14.125 per share (subject to adjustment). The Company maintains an
effective shelf registration statement with the Commission to register resales
of the Notes and the Common Stock issuable upon conversion. The net proceeds
from the issuance of the Notes were approximately $53.8 million and were used to
repay the Company's $30.0 million term loan and to pay down its revolving line
of credit.
The Company's principal executive offices are located at 7441 Lincoln Way,
Garden Grove, California 92641, and its telephone number is (714) 898-8288.
INDUSTRY OVERVIEW
Over the last 30 years, the electronics industry has grown significantly as
a result of increased demand for products incorporating sophisticated electronic
components, such as telecommunications and computer equipment. This industry
growth has been matched by an increase in the number of products, component
manufacturers and OEMs.
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The electronics distribution industry has become an increasingly important
sales channel for the electronics industry because distributors can market
component manufacturers' products to a broader range of OEMs than suppliers
could economically serve with their direct sales forces. Historically,
manufacturers of electronic components have sold directly to larger OEMs and
relied upon distributors to serve smaller customers. Today, distributors have
become more of an extension of component manufacturers' product delivery channel
by providing value-added assembly services and technical support to customers,
stocking sufficient local inventory to ensure timely delivery of components and
managing customer credit. Distributors also work with OEMs to ensure that
component manufacturers' products are designed into new products. This is
particularly important because product innovations in the electronics industry
often come from smaller, entrepreneurial companies.
As component manufacturers have increasingly focused their direct sales
efforts on the largest OEMs, and less on smaller customers, the distribution
segment has increased its share of the total United States connector market from
an estimated 22% in 1980 to an estimated 31% in 1995, according to the August
28, 1995 edition of ELECTRONIC NEWS. The Company estimates that approximately
one-half of all electronic components are purchased by the top 100 customers who
purchase many of their components directly from component manufacturers.
Approximately 100,000 other OEMs purchase products from both distributors and
manufacturers, with smaller customers purchasing a greater proportion of their
products from distributors.
MARKET SIZE. According to the December 2, 1996 edition of ELECTRONIC NEWS,
the electronics distribution industry recorded approximately $21 billion in
sales in 1996. Of these sales, the Company estimates that approximately $15
billion consisted of sales of semiconductors and computer related peripherals,
which management believes are generally characterized by lower margins and are
not sold by the Company. The remaining $6 billion consisted of sales of
interconnect (connectors, sockets), electromechanical (relays, switches) and
passive (resistors, capacitors) components, which are marketed by the Company.
The Company does not intend to directly compete in the semiconductor or computer
peripheral markets of the electronics distribution industry.
TRENDS. Consolidation is one of the most significant trends affecting the
electronic component distribution industry. Of the 25 largest electronics
distributors in 1985, only 11 remain independent today. The factors driving
consolidation among electronic component distributors include the desire of
manufacturers to sell through fewer distributors, the need for distributors to
increase operating leverage and the desire of OEMs to satisfy component
requirements with fewer vendors. A series of mergers and acquisitions over the
last ten years have created a number of very large distribution companies that
have increasingly focused on their larger customers and on expanding
international operations. As a result of this large customer focus, regional and
specialty distributors such as the Company have gained market share among small-
and medium-sized OEMs. These smaller customers often require value-added
assembly services, detailed technical information about available products,
assistance in coordinating product design and engineering with materials
resource planning, fast response to inventory availability inquiries, dependable
on-time deliveries and other services.
In addition to the consolidation of distributors, manufacturers are
limiting the number of distributors through which they market their products in
an effort to improve operating efficiency. Regional distributors must therefore
demonstrate strong local market positions and client relationships when
competing to obtain or retain top manufacturer franchises. Many of these
distributors have made substantial efforts to expand local market share by
emphasizing customer services, such as value-added assembly, just-in-time
inventory management, automatic replenishment and in-plant stores.
Another key trend is the outsourcing of component assembly, which allows
OEMs to enhance profitability by concentrating resources on product design,
marketing and other core aspects of their business. By serving a number of
customers, distributors can often produce subassemblies more efficiently than
many small- and medium-sized OEMs. The September 9, 1996 edition of ELECTRONIC
BUYERS NEWS estimates that OEM outsourcing is now a $40 billion industry growing
at an estimated 20% per annum.
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DISTRIBUTION AND SERVICES
The Company distributes interconnect, electromechanical and passive
electronic components used in the assembly and manufacturing of electronic
equipment. It also provides a wide variety of value-added assembly services,
which typically generate higher gross margins than traditional component
distribution. These value-added assembly services consist of (i) component
assembly, which is the assembly of components to manufacturer specifications and
(ii) contract assembly, which is the assembly of cable assemblies, battery packs
and mechanical assemblies to customer specifications. The Company's value- added
assembly services respond to an industry trend toward outsourcing in which
purchasing, manufacturing and distribution functions are allocated to the most
efficient provider. The Company believes that outsourcing represents a
significant opportunity to expand sales, margins and operating profits.
COMPONENT DISTRIBUTION. The distribution of interconnect,
electromechanical and passive electronic components accounted for approximately
70.4% of the Company's net sales in 1996. These products include connectors,
wire, cable, relays, switches, motors, batteries, power supplies, resistors,
capacitors, transformers, heat shrinkable tubing and potentiometers. The
Company sources its products from such leading suppliers as 3M, AMP "ACES",
Bentley-Harris, Berg Electronics, Burndy/Framatome, C&K, Dale/Vishay, Delta,
Deutsch, Eaton, EBM/Papst, Grace Specialty Polymers, KEMET, Kings, Micro
Switch/Honeywell, Molex, Panasonic, Panduit, Raychem Electronics, Raychem
PolySwitch, Samtec and Wieland.
VALUE-ADDED ASSEMBLY SERVICES. The electronics industry's trend toward the
use of outside vendors to provide value-added assembly services represents a
growth opportunity for the Company. Outsourcing offers OEMs the opportunity to
invest financial resources in areas with higher returns, such as engineering and
marketing. Additionally, the capital investment required to stay current in
manufacturing technologies is beyond the financial capability of many smaller
OEMs. By servicing a large number of such customers, the Company spreads such
costs over a larger business base. Moreover, by integrating assembly services
with extensive inventories, the Company is able to eliminate a large amount of
shipping, handling and receiving costs from the process. For many OEMs, the
Company is able to offer assembly services at a lower cost to the customer while
producing higher margins for itself. The Company currently builds a variety of
component assemblies to customer or manufacturer specifications, including
cable, battery pack, switch and mechanical assemblies, wire harnesses, fan and
motor assemblies, and provides engraving and molding services. With the
acquisition of Deanco in 1995, Richey obtained the capability to encase its
cable and harness assemblies in heat shrinkable tubing, which was a significant
portion of Deanco's value-added assembly business. The Company has increased its
emphasis on higher-margin, value-added assembly services, which grew from $21.2
million, or 23.5% of sales, in 1994 to $33.0 million, or 29.0% of sales, in 1995
and to $66.9 million, or 29.6% of sales, in 1996.
The Company currently provides value-added assembly services primarily from
its Los Angeles, California, Boston, Massachusetts and Portland, Oregon
facilities, having an aggregate of approximately 81,000 square feet dedicated to
value-added assembly services. In addition, the Company also provides value-
added assembly services from its San Diego and Santa Clara, California
facilities, its Dallas, Texas facility and its Gaithersburg, Maryland facility.
SALES AND MARKETING
The Company provides its customers with a wide range of products from a
large number of electronic component manufacturers. The Company believes that it
has developed valuable long-term customer relationships and an in-depth
understanding of its customers' needs and purchasing patterns. Richey
Electronics serves a broad range of customers in a wide variety of industries,
including the telecommunications, computer, medical, transportation and
aerospace industries. In 1996, Richey Electronics distributed electronic
components to more than 16,000 customers nationwide, none of which represented
more than 1.5% of net sales of the Company.
The Company's sales representatives are trained to identify their
customers' electronic component requirements and to actively market the
Company's entire product line to satisfy these needs. During the design process,
sales representatives meet with the customers' engineers and designers to
discuss their component needs and any design or procurement problems. The sales
representatives suggest components that meet performance criteria,
3
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are cost effective and focus on specific problems. Through this approach,
components carried by the Company are often incorporated into final product
specifications.
The Company had approximately 325 sales representatives as of December 31,
1996. Sales representatives are compensated primarily by commission based on
the gross profits obtained on their sales. The Company now has sales offices in
21 of the 31 major metropolitan distribution markets in the United States, which
accounted for 80% of the total distribution market in 1995 according to the
December 2, 1996 edition of ELECTRONIC NEWS. The Company's market positions are
particularly strong in the northeastern and western United States.
The Company's local sales efforts are supported by central marketing
groups, located in Garden Grove, California and in Boston, Massachusetts, which
are responsible for identifying new suppliers and developing supplier relations,
coordinating national advertising, negotiating supplier agreements and promoting
new and existing product lines within the Company.
OPERATIONS
DISTRIBUTION. The principal focus of the Company's distribution business
is to provide OEM customers with rapid and reliable deliveries of electronic
components and a wide variety of related value-added assembly services. The
Company utilizes a computerized system of inventory control to assist in
marketing its products and to coordinate purchases from manufacturers. Each
sales office and warehouse, as well as management, are linked through the
Company's computer system, providing detailed on-line information regarding the
price and availability of the Company's entire stock of inventory, as well as
on-line access to the inventories of several of the Company's major suppliers.
The Company also offers its customers a number of operational services,
including just-in-time delivery and electrical data interchange programs.
After product price and availability are established, the Company's system
automatically places an order for shipment, or allocates inventory to the
assembly operations, if so required. The system then instructs warehouse
personnel to pull products for shipment and, via its locator system, informs
them as to the location of the inventory. In order to optimize use of available
warehouse space, the Company uses a random-access, multi-bin system whereby
inventory is stored in the first available space.
If the order is scheduled for delivery over an extended period of time or
requires inventory purchases to fulfill all or part of the customer's
requirements, the system will inform the product management team, via a buy
action report, that action must be taken. The product manager makes the
appropriate buying decision which is forwarded, in most cases, by electronic
purchase order to component manufacturers.
Approximately 51% of the Company's inventory is located in Los Angeles, 23%
in Boston and 16% in Santa Clara, California. The Company constantly reviews
inventories in an effort to maximize inventory turnover and customer service.
The Company believes its turnover ratio (4.4x for 1996) compares favorably with
those achieved by competitors for similar interconnect, electromechanical and
passive component inventories.
VALUE-ADDED ASSEMBLY SERVICES. The Company offers a wide variety of value-
added assembly services, including component assemblies, cable and harness
assemblies, battery packs, heat shrinkable tubing and other related
electromechanical subassemblies. After a customer's assembly order is taken,
the inventory requirements are automatically routed, via the computer system, to
the warehouse and assembly facilities. The system tracks the order through the
entire assembly process, including final inspection and shipment to the
customer. The Company conducts stringent quality control tests in-line during
assembly, and also conducts physical, mechanical and electrical tests at the
conclusion of the assembly process. A Company-wide emphasis on quality is
evidenced by the certification of its Garden Grove and Los Angeles facilities to
the ISO 9002 standard. The Company has met the certification requirements of
the International Standards Organization for ISO 9002 certification by operating
its Garden Grove and Los Angeles facilities in accordance with established,
written procedures.
4
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COMPONENT MANUFACTURERS
Management believes that the Company has one of the strongest product
offerings, or line cards, in the markets it serves. The Company has
non-exclusive franchise (distribution) agreements with more than 100 component
manufacturers, of which more than 80 have franchised the Company nationally by
agreeing to supply its distribution activities in all of its present and future
locations. The Company now represents nine of the ten leading North American
connector manufacturers and has national franchises from eight of these
manufacturers. The Company is the largest electronic components distributor for
many major national manufacturers, including Deutsch, 3M, Raychem and Samtec.
For the year ended December 31, 1996, the Company's top five suppliers
accounted for approximately 43% of net sales. The Company's largest supplier is
Raychem, which accounted for approximately 15% of the Company's net sales in
1996.
The Company generally purchases products from manufacturers pursuant to
franchise agreements. Being a local authorized distributor is a valuable
marketing tool for the Company because customers receive warranty benefits and
support from the component manufacturer when they purchase products from Richey
Electronics. As an authorized distributor, the Company provides customers a
benefit from the marketing and engineering support available from the Company's
manufacturers, who assist the Company in closing sales and attracting new
customers.
Most of the Company's franchise agreements are cancelable by either party,
typically upon 30 to 60 days' notice. These agreements generally provide for
price protection, stock rotation privileges and the right to return certain
inventory if the agreement is canceled. Price protection is usually in the form
of a credit to the distributor at the time of sale by the distributor for
inventory for which the manufacturer has reduced its prices. Stock rotation
privileges typically allow the Company to exchange inventory in an amount up to
5% of a prior period's purchases. Upon termination of a franchise agreement, the
right of return generally requires the manufacturer to repurchase the Company's
inventory at the Company's adjusted purchase price. If the Company terminates
the franchise agreement, there is usually a 10% to 15% restocking charge. The
Company believes that the provisions of these franchise agreements should
generally reduce the Company's exposure to significant inventory losses,
although there can be no assurance that the Company will not experience
significant inventory losses as a result of such potential terminations or
otherwise.
COMPETITION
The electronics distribution industry is highly competitive, primarily with
respect to price and product availability. The Company believes that breadth of
product line, level of technical expertise and quality of service are also
particularly important to small- and medium-sized OEMs. The Company competes
with large national distributors, as well as regional and specialty
distributors, many of whom distribute the same or competitive products. Many of
the Company's competitors have significantly greater assets, greater financial
and personnel resources and larger investments in technology and infrastructure
than the Company.
In 1996, total North American sales in the electronic components
distribution industry (including semiconductors and computer related
peripherals) were approximately $21 billion, of which the top 25 distributors
had sales of approximately $17.5 billion. The Company ranked in 1996 as the
nineteenth largest distributor of electronic components in the United States,
based on information presented in the December 2, 1996 edition of ELECTRONIC
NEWS. According to information presented in the April 25, 1996 edition of
PURCHASING MAGAZINE, giving pro forma effect to the acquisition of Deanco,
the Company in its market niche of interconnect, electromechanical and
passive components ranked in 1995 as the third largest distributor of
interconnect devices in the United States and as the sixth largest
distributor of electromechanical/passive components in the United States.
5
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EMPLOYEES
The Company had approximately 1,050 employees as of December 31, 1996.
Approximately 125 of the Company's employees are corporate personnel involved in
product management, finance, quality control or senior management. Another 100
employees work in the Company's Los Angeles, Boston and branch warehouses; 325
persons are employed in branch sales and marketing efforts and 500 persons are
employed on a full-time or on-call basis in value-added assembly services.
There are no collective bargaining contracts covering any of the Company's
employees. The Company believes its relationship with its employees is
satisfactory.
BACKLOG
The Company believes that order backlog (confirmed orders from customers
for shipment within the next 12 months) generally averages two to three months'
sales in the electronics distribution industry. Order backlog at December 31,
1996 was $53.8 million, up from $53.0 million at December 31, 1995 (including
Deanco's contribution of $21.5 million to backlog as of December 31, 1995).
Order backlog is not necessarily indicative of future sales for any particular
period. Orders constituting the Company's backlog are subject to delivery
rescheduling, price negotiations and cancellation at the option of the buyer
without significant penalty.
ENVIRONMENTAL PROTECTION
The nature of the Company's operations do not present any significant risks
to the environment. Therefore, no material capital expenditures were or are
expected to be required for environmental protection.
ITEM 2. PROPERTIES
The Company leases all facilities used in its business. The following table
summarizes the principal properties occupied by the Company:
EXPIRATION DATE
LOCATION SQUARE FOOTAGE OF LEASE
---------------- ------------------ ---------------
ADMINISTRATIVE AND SALES OFFICE:
Garden Grove, California . . . . . . 27,500 2001
WAREHOUSING, ASSEMBLY AND SALES:
Boston, Massachusetts. . . . . . . . 60,000 2004
Dallas, Texas. . . . . . . . . . . . 15,300 2001
Gaithersburg, Maryland . . . . . . . 13,000 1999-2001
Los Angeles, California. . . . . . . 55,000 2000
Portland, Oregon . . . . . . . . . . 30,000 2001
Santa Clara, California . . . . . . 42,200 2002
The Company also leases sales offices in Arizona, California, Colorado,
Connecticut, Florida, Georgia, Illinois, Kansas, Maryland, Minnesota, Missouri,
New Jersey, New York and Washington which range in size from 600 to 8,000 square
feet.
The Company believes its facilities are suitable for their uses and are, in
general, adequate for the Company's current needs. The Company believes that
lease extensions or replacement space may be obtained for all of its leased
facilities upon the expiration of the current lease terms, in most cases at
rates which are not materially higher than those currently in effect.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is being traded on Nasdaq under the symbol
"RCHY."
The following table sets forth, for the periods indicated, the high and low
sales prices of the Company's Common Stock as reported by Nasdaq.
STOCK PRICE
HIGH LOW
-------- -------
CALENDAR YEAR 1995:
First quarter. . . . . . . . . . . . . . $ 7 3/4 $ 6
Second quarter . . . . . . . . . . . . . 7 1/2 5 1/2
Third quarter. . . . . . . . . . . . . . 9 6
Fourth quarter . . . . . . . . . . . . . 13 3/4 7 1/2
CALENDAR YEAR 1996: . . . . . . . . . . . .
First quarter. . . . . . . . . . . . . . $13 1/4 $ 9 1/2
Second quarter . . . . . . . . . . . . . 16 10 3/8
Third quarter. . . . . . . . . . . . . . 13 1/4 7 1/4
Fourth quarter . . . . . . . . . . . . . 12 8 1/4
CALENDAR YEAR 1997:
First quarter (through March 20, 1997) . $14 1/8 $10 3/8
On March 20, 1997, there were approximately 1,429 holders of record of
the Company's Common Stock.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain earnings for working capital to support growth, to
reduce outstanding indebtedness and for general corporate purposes. In addition,
the Company's revolving line of credit contains provisions that prohibit the
Company from paying cash dividends on its Common Stock. Accordingly, the Company
does not expect to pay any dividends on its Common Stock in the foreseeable
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 4 of Notes to Financial Statements.
SALE OF NOTES
On February 26, 1996 and March 22, 1996, the Company sold to Jefferies &
Company, Inc. and Cruttenden Roth Incorporated (the "Initial Purchasers")
$55,755,000 aggregate principal amount of 7% Convertible Subordinated Notes
due 2006. The Notes were sold to the Initial Purchasers in a private
placement pursuant to the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended (the "Act"). In connection
with the purchase of the Notes, each of the Initial Purchasers represented to
the Company that it is an accredited investor as defined in Regulation D
under the Act and agreed to comply with other applicable requirements
necessary to make such exemption available. The Notes were sold to the Initial
Purchasers for cash at a purchase price of 96.5% of the principal amount
thereof. The Notes are convertible into shares of the Company's Common Stock
at a conversion price of $14.125 per share (subject to adjustment in certain
events). The Company maintains an effective shelf registration statement with
the Commission to register resales of the Notes and the Common Stock issuable
upon conversion.
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SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data of the
Company and should be read in conjunction with and is qualified by "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements, Notes to Financial Statements and other
financial information included herein. All of the financial information is
derived from financial statements that have been audited by McGladrey & Pullen,
LLP, independent auditors.
<TABLE>
<CAPTION>
YEARS ENDED (1)
-----------------------------------------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1994 1995 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
OPERATIONS STATEMENT DATA:
Net sales. . . . . . . . . . . . . . $31,387 $64,995 $90,266 $117,057 $226,215
Cost of goods sold . . . . . . . . . 23,105 48,741 68,176 89,080 168,664
------- ------- -------- -------- --------
Gross profit . . . . . . . . . . . . 8,282 16,254 22,090 27,977 57,551
Selling, warehouse
general and admini-
strative and amortization . . . . 7,144 13,889 17,318 20,874 41,070
Acquisition-related
restructuring costs (2). . . . . . -- -- -- 1,450 -
------- ------- -------- -------- --------
Operating income . . . . . . . . . . 1,138 2,365 4,772 5,653 16,481
Interest expense . . . . . . . . . . 388 1,198 1,606 867 5,569
Income tax expense (3) . . . . . . . 308 460 1,273 1,918 4,376
------- ------- -------- -------- --------
Net income . . . . . . . . . . . . . $ 442 $ 707 $ 1,893 $ 2,868 $ 6,536
------- ------- -------- -------- --------
------- ------- -------- -------- --------
Earnings per common share (4)
Primary . . . . . . . . . . . . . $ 0.16 $ 0.14 $ 0.32 $ 0.36 $ 0.72
------- ------- -------- -------- --------
------- ------- -------- -------- --------
Fully Diluted . . . . . . . . . . 0.16 0.14 0.32 0.36 $ 0.70
------- ------- -------- -------- --------
------- ------- -------- -------- --------
Weighted average number of shares
outstanding (4)
Primary . . . . . . . . . . . . . 2,774 5,085 5,889 8,036 9,060
Fully Diluted . . . . . . . . . . 2,774 5,085 5,889 8,036 12,376
OTHER FINANCIAL DATA:
EBITDA (5) . . . . . . . . . . . . . $ 1,283 $ 3,362 $ 5,537 $6,565(6) $19,581
EBITDA margin (5). . . . . . . . . . 4.1% 5.2% 6.1% 5.6%(6) 8.7%
Depreciation and amortization. . . . 145 997 765 912 3,100
Inventory turnover ratio (7) . . . . 3.7x 4.4x 4.9x 5.0x 4.4x
Days sales outstanding in accounts
receivable (7). . . . . . . . . . 41 43 42 42 44
</TABLE>
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1994 1995(8) 1996
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . $3,014 $ 6,888 $ 5,317 $ 34,076 $43,033
Total assets . . . . . . . . . . . . 9,669 30,918 35,013 118,941 124,761
Short-term debt. . . . . . . . . . . 3,181 6,995 10,443 835 4,012
Long-term debt . . . . . . . . . . . -- 8,151 3,594 61,652 65,205
Stockholders' equity . . . . . . . . 3,333 6,898 8,785 27,392 33,953
</TABLE>
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Footnotes to Selected Financial Data
(1) In the period from 1993 through 1996, the following transactions were
completed. On April 6, 1993, RicheyImpact Electronics, Inc.
("RicheyImpact") merged with Brajdas Corporation, a California corporation
("Brajdas"), with Brajdas as the surviving legal entity (the
"Richey-Brajdas Merger"). Brajdas subsequently changed its name to Richey
Electronics, Inc. and reincorporated in Delaware. The Richey-Brajdas
Merger was recorded as a reverse purchase acquisition with RicheyImpact as
the accounting acquirer. Thereafter, Richey Electronics acquired the
businesses of the following companies on the following dates: the In-Stock
products division of Anchor Group, Inc. ("In-Stock") on April 4, 1994,
Inland Empire Interconnects ("IEI") on August 16, 1995, Deanco, Inc.
("Deanco") on December 20, 1995, MS Electronics on March 19, 1996 and
Summit Distributors on December 5, 1996. See Note 2 of Notes to Financial
Statements for pro forma information with respect to acquisitions. Unless
otherwise indicated, the information in the above table of Selected
Financial Data excludes the results of operations of Brajdas prior to the
Richey-Brajdas Merger and excludes the results of operations of each such
business acquired in the period from 1994 through 1996 prior to the date on
which it was acquired.
(2) Consists of restructuring costs associated with the consolidation of the
operations of Deanco into the Company, including the Company's closure of
certain of its facilities and other costs associated with the
consolidation.
(3) The Company has net operating loss carryforwards which reduce its cash tax
payments. See Note 8 of Notes to Financial Statements.
(4) The Richey-Brajdas Merger was accounted for as a reverse purchase
acquisition with RicheyImpact being the accounting acquirer. Per share data
for all periods from January 1, 1992 through April 6, 1993, the date of the
Richey-Brajdas Merger, are based upon the weighted average number of shares
of Brajdas indirectly acquired by the former stockholders of RicheyImpact.
(5) EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. The Company has included EBITDA data (which are not a measure
of financial performance under generally accepted accounting principles)
because it understands such data are used by certain investors. EBITDA
margin represents EBITDA as a percentage of net sales. Because of the
significant amortization of intangible assets and non-cash income tax
expense incurred as a result of the Company's NOLs, the Company believes
that EBITDA may be a meaningful measure of its financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Deferred Tax Assets."
(6) Excluding the restructuring reserve of approximately $1.4 million, which is
an operating expense, EBITDA would have been approximately $8.0 million and
EBITDA margin would have been 6.8% for the year ended December 31, 1995.
(7) Inventory turnover ratio and days sales outstanding in accounts receivable
calculations are based upon Richey Electronics' annualized sales and cost
of sales for the fourth quarter and accounts receivable and inventory
balances at year-end. The calculation for the year ended December 31, 1995
excludes the effect of the acquisition of Deanco.
(8) Includes Deanco as the acquisition of Deanco was completed on December 20,
1995.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Richey Electronics is a leading specialty distributor of interconnect,
electromechanical and passive electronic components and a provider of related
value-added assembly services to more than 16,000 customers nationwide. The
Company distributes a broad line of connectors, switches, wire, cable and heat
shrinkable tubing and other interconnect, electromechanical and passive
electronic components used in the assembly and manufacturing of electronic
equipment. Richey Electronics also provides a wide variety of value-added
assembly services, which typically generate higher gross margins than
traditional component distribution. These value-added assembly services consist
of (i) component assembly, which is the assembly of components to manufacturer
specifications and (ii) contract assembly, which is the assembly of cable
assemblies, battery packs and mechanical assemblies to customer specifications.
The Company's customers are primarily small- and medium-sized OEMs. The Company
intends to capitalize on a trend toward outsourcing by increasing sales of
value-added assembly services. These sales increased from $21.2 million, or
23.5% of sales, in 1994 to $33.0 million, or 29.0% of sales, in 1995 and to
$66.9 million, or 29.6% of sales, in 1996. Pro forma for the acquisition of
Deanco, 1995 sales of value-added assembly services were $51.5 million.
In the period from 1994 through 1996, the Company continued to grow
through strategic acquisitions of businesses with operations similar to those of
the Company. On April 4, 1994, the Company completed the acquisition of the
assets and business of In-Stock for $1.9 million in cash, funded by its
revolving line of credit. On August 16, 1995, the Company completed the
acquisition of the assets and business of IEI for $1.2 million in cash, funded
by its revolving line of credit. On December 20, 1995, the Company acquired
Deanco, through the acquisition of the stock of Deanco's parent, Electrical
Distribution Acquisition Company ("EDAC"), for consideration comprised of an
aggregate stock purchase price of approximately $34.1 million in cash, the
redemption of EDAC stockholder notes of approximately $6.6 million and the
assumption of Deanco debt of approximately $19.3 million. The Company funded
the purchase consideration for the acquisition of Deanco by its revolving line
of credit and a term loan from its senior lender. On March 16, 1996, the
Company completed the acquisition of certain assets and the business of MS
Electronics for the purchase price of approximately $2.5 million in cash, funded
by its revolving line of credit, and the assumption of MS Electronics' debt of
approximately $500,000. On December 5, 1996, the Company acquired the
inventory, accounts receivable and fixed and intangible assets of Summit
Distributors, including the right to use its name, in a private sale from its
commercial lender in Buffalo, New York. The Company did not assume any
liabilities of Summit Distributors in the transaction. The purchase price and
related transaction costs for the Summit Distributors acquisition were $1.1
million and were paid in cash, funded by the Company's revolving line of credit.
All of the acquisitions in the period from 1994 through 1996 were accounted for
as purchase business combinations with the operations of the acquired business
included subsequent to the acquisition date. See Note 2 of Notes to Financial
Statements for pro forma information with respect to acquisitions.
The Company will seek to complete additional strategic acquisitions in
connection with the ongoing consolidation occurring in the electronics
distribution industry.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items in the statements of
operations as a percentage of net sales for the periods shown.
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
------- ------- -------
Net sales . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . 75.5 76.1 74.6
----- ----- -----
Gross profit . . . . . . . . . . . . 24.5 23.9 25.4
Selling, warehouse, general and
administrative . . . . . . . . . . 18.6 17.4 17.5
Amortization of intangibles. . . . . .6 .4 .6
Acquisition-related restructuring
costs. . . . . . . . . . . . . . . -- 1.2 --
----- ----- -----
Operating income . . . . . . . . . . 5.3 4.9 7.3
Interest expense . . . . . . . . . . 1.8 0.7 2.5
----- ----- -----
Income before income taxes. . . . . . 3.5 4.1 4.8
Income tax expense . . . . . . . . . 1.4 1.6 1.9
----- ----- -----
Net income . . . . . . . . . . . . . 2.1% 2.5% 2.9%
----- ----- -----
----- ----- -----
YEAR ENDED DECEMBER 31, 1996 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Net sales rose to $226.2 million in 1996, an increase of $109.1 million, or
93.2%, over 1995 net sales of $117.1 million which included approximately $3.5
million of post-acquisition Deanco sales. Net sales of electronic components
rose to $159.3 million in 1996 from $80.6 million in 1995 (excluding Deanco
sales), an increase of 97.6%. This increase in component sales is primarily the
result of the acquisition of Deanco. Net sales of value-added assembly services
rose to $66.9 million in 1996 from $33.0 million in 1995 (excluding Deanco
sales), an increase of 102.7%. This increase for value-added services is
primarily the result of the Deanco acquisition and increased demand for these
services. Pro forma for the acquisition of Deanco, net sales for 1995 would
have been $217.0 million, compared with net sales of $226.2 million for 1996.
See Note 2 of Notes to Financial Statements.
Gross profit was $57.6 million in 1996 compared with gross profit of $28.0
million in 1995 (including approximately $800,000 of gross profit from Deanco's
operations after it was acquired by the Company). Gross profit as a percentage
of net sales was 25.4% for 1996 as compared to 23.9% for 1995. This 1.5%
increase in gross profit percentage was due to (i) improved value-added gross
profit margins, (ii) growth in value-added assembly services as a percentage of
total sales to approximately 30% in 1996 from approximately 29% in 1995, (iii)
an increased percentage of component orders to be shipped in under 30 days which
typically have higher margins than orders with longer shipping schedules and
(iv) improved electronic component margins attributed to certain higher margin
product lines acquired with Deanco.
Operating expenses in 1996 were $41.1 million compared to $22.3 million in
1995 (including a $1.45 million restructuring charge in the fourth quarter of
1995 associated with the acquisition of Deanco), an increase of 84.3%.
Exclusive of such restructuring charge, operating expenses increased 97% from
1995 to 1996 primarily due to acquisitions. Operating expenses as a percentage
of net sales were 18.1% for 1996 compared with 19.0% for 1995 after giving
effect to such restructuring charge and 17.8% exclusive of such restructuring
charge. Exclusive of such restructuring charge, operating expenses as a
percentage of net sales increased 0.3% from 1995 to 1996, of which approximately
0.2% is attributable to the amortization of intangibles associated with the
acquisition of Deanco. The 1996 increase in expenses as a percentage of sales
is also due to the fact that Deanco's expenses as a percentage of sales were
historically significantly higher than those of the Company and during the first
part of 1996 the Company realized only a portion of the expected cost savings
from the integration of Deanco into the Company. The operational integration of
Deanco and MS Electronics was completed in the third quarter of 1996 and
contributed
11
<PAGE>
to an approximately $2.4 million reduction in operating expenses for the third
and fourth quarters of 1996 from the first and second quarters of 1996.
Interest expense was $5.6 million for 1996 compared with $867,000 for 1995.
The increase in interest expense was primarily due to increased borrowings to
finance acquisitions.
The Company's provision for federal and state income tax expense increased
to $4.4 million for 1996 compared with $1.9 million for 1995. This increase was
proportional to the increase in pre-tax earnings. As of December 31, 1996, the
Company had approximately $13.5 million in federal net operating loss
carryforwards available to reduce future cash tax payments. For the period
ended December 31, 1996, cash tax payments were reduced approximately $1.7
million for the utilization of these NOLs. See "Deferred Tax Assets" and Note 8
of Notes to Financial Statements.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Net sales were $117.1 million in 1995, an increase of $26.8 million, or
OP29.7%, from $90.3 million in 1994. Excluding sales of approximately $3.5
million from acquired Deanco operations after December 19, 1995, net sales
increased 25.8% in 1995. Excluding Deanco, net sales of electronic components
increased to $80.6 million in 1995 from $69.1 million in 1994, an increase of
16.6%, and net sales of value-added assembly services increased to $33.0 million
in 1995 from $21.2 million in 1994, an increase of 55.7%. Component sales
increased in 1995 due to (i) the general strength of the market for electronic
products, such as computers, telecommunications and aerospace equipment, and
(ii) the addition of new franchised lines to the Company's product offering
together with geographic expansion of existing franchises. Rapid growth in net
sales of value-added assembly services resulted from the continuing trend of
OEMs to outsource the assembly of their products as well as management's
decision to accept larger contract assembly orders from larger customers than
it had in the past. On a pro forma basis, assuming the acquisition of Deanco
had occurred as of January 1, 1994, net sales would have been $193.5 million and
$217.0 million for 1994 and 1995, respectively.
The Company believes that order backlog (confirmed orders from customers
for shipment within the next 12 months) generally averages two to three
months' sales in the electronics distribution industry. Order backlog at
December 31, 1996 was $53.8 million, up from $53.0 million at December 31,
1995 (including Deanco's contribution of $21.5 million to backlog as of
December 31, 1995).
Gross profit was $28.0 million in 1995, an increase of $5.9 million, or
26.7%, from $22.1 million in 1994. Excluding gross profit of approximately
$800,000 from acquired Deanco operations after December 19, 1995, gross profit
increased 23.0% in 1995. Overall, the Company's gross margin declined to 23.9%
in 1995 from 24.5% in 1994. The Company's component distribution gross margins
remained approximately the same in 1995 as compared to 1994. Value-added
assembly gross margins declined in 1995 compared to 1994 due to (i) an increase
in the number of larger orders from larger customers which typically provide
lower gross margins than the Company previously experienced, (ii) the
acquisition of IEI which had historically lower gross margins than the Company
and (iii) inefficiencies related to the closing of IEI's facility and the move
and integration of IEI into one of the Company's existing facilities.
Operating expenses increased from $17.3 million in 1994 to $22.3 million in
1995 (including a $1.45 million restructuring charge in the fourth quarter of
1995 to cover the costs of closing certain of Deanco's facilities and
consolidating the operations of Deanco into the Company), an increase of 29%.
Exclusive of such restructuring charge, operating expenses increased 20.5%,
primarily due to acquisitions. Operating expenses as a percentage of net sales
were 19.2% for 1994 compared with 19.0% for 1995 after giving effect to such
restructuring charge and 17.8% exclusive of such restructuring charge.
Exclusive of such restructuring charge, operating expenses as a percentage of
net sales declined 1.3% from 1994 to 1995 as a direct result of the Company's
strategy to increase its operating leverage by spreading its fixed costs over a
larger sales base.
Interest expense declined to $867,000 in 1995 from $1.6 million in 1994.
The decrease in interest expense was due to a substantial reduction in the
Company's borrowings resulting from the use of the $15.7 million of net proceeds
from its 1995 secondary offering of 3,165,000 shares of Common Stock to retire
its subordinated debt and to pay down its revolving line of credit.
The Company's provision for federal and state income tax expense increased
to $1.9 million in 1995 from $1.3 million in 1994, proportional to the increase
in pre-tax earnings. For the period ended December 31, 1995, cash tax payments
were reduced approximately
12
<PAGE>
$1.7 million for the utilization of state and federal NOLs. See "Deferred Tax
Assets" and Note 8 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In December 1995 and January 1996, the Company funded the purchase
consideration for the acquisition of Deanco, using advances under its $45
million revolving line of credit facility (the "Revolving Line of Credit") and a
$30 million term loan (the "Term Loan"), each provided by First Interstate Bank
of California ("FICAL") pursuant to a loan agreement (the "Loan Agreement")
entered into with the Company in connection with the Deanco acquisition. The
Revolving Line of Credit is now maintained with Wells Fargo Bank, N.A., as
successor to FICAL under the Loan Agreement. The Company also used the
Revolving Line of Credit to fund the March 1996 purchase of MS Electronics and
the December 1996 purchase of Summit Distributors.
In the first quarter of 1996, the Company issued $55,755,000 of 7%
Convertible Subordinated Notes due 2006 (the "Notes") in a private placement.
The Notes are convertible into 3,947,000 shares of the Company's Common Stock at
a conversion price of $14.125 per share (subject to adjustment). The Company
maintains an effective shelf registration with the Commission to register
resales of the Notes and the Common Stock issuable upon conversion. The net
proceeds from the Company's sale of the Notes were approximately $53.8 million
and were used to repay the Term Loan and to pay down the Revolving Line of
Credit. See Note 4 of Notes to Financial Statements.
The Loan Agreement governing the Revolving Line of Credit limits the
Company's ability to create or incur liens on assets, to make distributions or
investments, to enter into any mergers or make additional acquisitions or
dispositions of assets and to enter into transactions with affiliates. In
addition, the Company must comply with various financial and other covenants
established by the bank. The Loan Agreement also provides the bank with the
right to terminate the commitment on 30 days' notice if there is a change in
control of the Company (generally, the acquisition of more than 50% of the
Company's capital stock).
As of December 31, 1996, the Company had outstanding borrowings under the
Revolving Line of Credit of approximately $10.5 million and additional borrowing
capacity of approximately $28 million. The Company believes that available
borrowings under the Revolving Line of Credit and cash generated by operations
will be adequate to meet its anticipated funding commitments for the remainder
of 1997.
Net cash provided by operating activities was $4.2 million for 1996 as
compared with $236,000 for 1995 and $4.0 million for 1994. The 1996 increase
over 1995 is primarily a result of an increase in net income and non-cash
expenses. 1996 earnings before interest, income taxes, depreciation and
amortization (EBITDA) were approximately $19.6 million compared with
approximately $6.6 million for 1995.
Net cash used in investing activities increased to $9.0 million in 1996
from $3.3 million in 1995 and $2.9 million in 1994. All of the investing
activities were funded by borrowings under revolving line of credit facilities
and net cash provided by operating activities. In 1996, the Company invested
$1.3 million in improvements and equipment, primarily for leasehold improvements
and value-added machinery and equipment. An additional $7.7 million was used to
pay for acquisition and restructuring costs primarily associated with the
Deanco, MS Electronics and Summit Distributors acquisitions. In 1995, the
Company invested $1.3 million in improvements and equipment, primarily for
leasehold improvements at its principal value-added assembly facility in Los
Angeles and its corporate headquarters in Garden Grove. An additional $1.2
million was used for the IEI acquisition. During 1994, the Company spent
$400,000 on improvements and equipment to enhance its value-added assembly
capabilities, $1.8 million for the In-Stock acquisition and $500,000 in costs
associated with the Richey-Brajdas Merger. The Company anticipates incurring
capital expenditures of approximately $1.3 million in 1997, all of which will be
financed with net cash from operating activities and borrowings under its
Revolving Line of Credit. The Company's actual capital expenditures may vary
significantly from its current expectations, based on a number of factors,
including, but not limited to, additional acquisitions, if any.
Inventory turnover for the year ended December 31, 1996, was 4.4x compared
to 5.0x for 1995 (excluding the effect of the acquisition of Deanco in December
1995). This decrease is the result of management's decisions
13
<PAGE>
to strengthen the Company's line card by adding new product lines that require
minimum initial stocking levels and to make inventory turnover rates on product
lines acquired with Deanco consistent with the Company's goals, as Deanco
historically had a higher inventory turnover rate.
Days sales outstanding in accounts receivable increased to 44 days for 1996
from 42 days for 1995 as a result of the Deanco acquisition.
DEFERRED TAX ASSETS
As of December 31, 1996, the Company had approximately $13.5 million in net
operating loss carryforwards, which expire between 2005 and 2008. The NOLs
resulted from Brajdas losses prior to the Richey-Brajdas Merger.
Section 382 of the Internal Revenue Code of 1986, as amended and related
regulations impose certain limitations on a corporation's ability to use NOLs if
more than a 50% change in ownership occurs. The Company's issuance of
additional Common Stock in 1995, together with an earlier acquisition,
constitutes more than a 50% change in ownership. As a result, the usage of NOLs
is restricted to approximately $4.9 million on an annual basis.
The Company has been consistently profitable since December 28, 1990 and
generated taxable income before NOL carryforwards of approximately $6.9 million
in 1996. Based on its current level of profitability, management believes that
the Company will be able to fully utilize the NOLs prior to their expiration.
However, management has continued to maintain a valuation allowance due to the
inherent uncertainties in forecasting future taxable income. Management
believes that it is "more likely than not" that the Company will be able to
generate the approximately $14 million of future taxable income necessary to
realize the recorded amount of the net deferred tax asset prior to expiration of
the NOLs. The amount of deferred tax asset considered realizable, however, would
be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this Item 8 are listed in Item 14(a)
and are submitted at the end of this Form 10-K.
14
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth certain statements of operations data for
the periods indicated. The quarterly financial information provided excludes the
financial results of In-Stock, IEI, Deanco, MS Electronics and Summit
Distributors prior to the date of the respective acquisition. This information
has been derived from unaudited financial statements which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. These
operating results are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Net sales. . . . . . . . . . . . . . $58,384,000 $58,212,000 $53,713,000 $55,906,000
Gross profit . . . . . . . . . . . . 14,313,000 14,806,000 14,116,000 14,316,000
Net income . . . . . . . . . . . . . 1,142,000 1,735,000 1,754,000 1,905,000
Earnings per common share
Primary . . . . . . . . . . . . . 0.13 0.19 0.19 0.21
Fully Diluted . . . . . . . . . . 0.13 0.18 0.18 0.20
Shipping Days. . . . . . . . . . . . 64 64 62 64
1995
Net sales. . . . . . . . . . . . . . $26,596,000 $28,305,000 $28,803,000 $33,353,000
Gross profit . . . . . . . . . . . . 6,513,000 6,660,000 6,931,000 7,873,000
Net income . . . . . . . . . . . . . 680,000 909,000 1,070,000 209,000
Earnings per common share
Primary . . . . . . . . . . . . . 0.12 0.11 0.12 0.02
Fully Diluted . . . . . . . . . . 0.12 0.11 0.12 0.02
Shipping Days. . . . . . . . . . . . 64 64 62 62
1994
Net sales. . . . . . . . . . . . . . $20,247,000 $23,105,000 $22,838,000 $24,076,000
Gross profit . . . . . . . . . . . . 4,855,000 5,562,000 5,793,000 5,880,000
Net income . . . . . . . . . . . . . 355,000 532,000 471,000 535,000
Earnings per common share
Primary . . . . . . . . . . . . . 0.06 0.09 0.08 0.09
Fully Diluted . . . . . . . . . . 0.06 0.09 0.08 0.09
Shipping Days. . . . . . . . . . . . 65 64 63 62
</TABLE>
- ---------------
The unaudited quarterly results of operations indicate that net sales rose
from $480,000 per shipping day in the fourth quarter of 1995 (excluding Deanco)
to $912,000, $910,000, $866,000 and $874,000 per shipping day in the four
consecutive quarters of 1996, respectively. The calendar for 1997 contains 62,
64, 63 and 64 shipping days for the first through fourth quarters, respectively.
Quarterly operating results may fluctuate significantly from quarter to quarter
in the future.
15
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding directors and executive
officers of the Company is set forth in the Company's definitive Proxy Statement
(the "1997 Proxy Statement") to be filed with the Commission relating to its
annual meeting of stockholders to be held on May 1, 1997, under the headings
"Nominees for Election as Directors," "Other Executive Officers of the Company"
and "Section 16(a) Beneficial Ownership Reporting Compliance," and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding compensation of the
Company's directors and executive officers set forth in the 1997 Proxy Statement
under the headings "Board Meetings and Director Compensation" and "Executive
Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item regarding beneficial ownership of the
Common Stock by certain beneficial owners and by management of the Company set
forth in the 1997 Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management" is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item regarding certain relationships and
related transactions with management of the Company set forth in the 1997 Proxy
Statement under the headings "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related Transactions" is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
Independent Auditor's Report
Balance Sheets at December 31, 1995 and 1996
Statements of Income for the years ended December 31, 1994, 1995
and 1996
Statements of Stockholders' Equity for the years ended December
31, 1994, 1995 and 1996
16
<PAGE>
Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996
Notes to Financial Statements
2. Financial Statement Schedules
Not Applicable.
3. Exhibits
2.1 Stock Purchase Agreement, dated November 15, 1995, among Richey
Electronics, Inc., Deanco, Inc., Electrical Distribution
Acquisition Company and all of the stockholders of Electrical
Distribution Acquisition Company. *4* (2.1)
2.2 First Amendment to Stock Purchase Agreement and Instrument of
Joinder dated December 20, 1995 among Richey Electronics, Inc.,
Deanco, Inc., Electrical Distribution Acquisition Company and all
of the stockholders of Electrical Distribution Acquisition
Company. *4* (2.2)
2.3 Sales Tax Indemnification Agreement dated December 20, 1995 among
Richey Electronics, Inc. and the stockholders of Electrical
Distribution Acquisition Company identified therein. *4* (2.3)
3.1 Restated Certificate of Incorporation of Richey Electronics, Inc.
*5* (3.1)
3.2 Bylaws of Richey Electronics, Inc. *5* (3.2)
4.1 Indenture between Richey Electronics, Inc. and First Trust of
California, National Association, dated as of February 15, 1996.
*10* (4.1)
4.2 Registration Rights Agreement among Richey Electronics, Inc.,
Jefferies & Company, Inc. and Cruttenden Roth Incorporated, dated
as of February 26, 1996. *12* (4.2)
10.1 Indemnification Agreement among Barclay and Company, Inc.,
Brajdas Corporation, Donald I. Zimmerman and certain former
shareholders of RicheyImpact Electronics, Inc. identified therein
dated as of April 5, 1993. *2* (E)
10.2 Letter re Amendment to Indemnification Agreement by Barclay and
Company, Inc. and Donald I. Zimmerman, and agreed to by BRJS
Investment Holding Corp., Brajdas Corporation and the other
persons and entities identified therein dated April 23, 1993. *1*
(10.3)
10.3 Registration Rights Agreement between Brajdas Corporation and
BRJS Investment Holding Corp. dated April 2, 1993. *2* (10.4)
10.4 Employment Agreement between William C. Cacciatore and Brajdas
Corporation dated as of April 1, 1993. *1* (10.18)
10.5 Addendum to Employment Agreement (William C. Cacciatore) dated as
of February 21, 1995. *8* (10.37)
10.6 Second Addendum to Employment Agreement (William C. Cacciatore)
dated as of May 17, 1995. *10* (10.31)
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<PAGE>
10.7 Employment Agreement between C. Don Alverson and Brajdas
Corporation dated as of April 1, 1993. *1* (10.17)
10.8 Addendum to Employment Agreement (C. Don Alverson) dated as of
February 21, 1995. *8* (10.38)
10.9 Second Addendum to Employment Agreement (C. Don Alverson) dated
as of May 17, 1995. *10* (10.32)
10.10 Employment Agreement between Richard N. Berger and Brajdas
Corporation dated as of April 1, 1993. *1* (10.20)
10.11 Addendum to Employment Agreement (Richard N. Berger) dated as of
February 21, 1995. *8* (10.39)
10.12 Employment Agreement between Norbert W. St. John and Brajdas
Corporation dated as of April 1, 1993. *1* (10.19)
10.13 Addendum to Employment Agreement (Norbert W. St. John) dated as
of February 21, 1995. *8* (10.40)
10.14 Second Addendum to Employment Agreement (Norbert W. St. John)
dated as of May 17, 1995. *10* (10.33)
10.15 Employment Agreement between William Class and Richey
Electronics, Inc. dated as of January 1, 1996. *11* (10.1)
10.16 Employment Agreement between Charles W. Mann and Richey
Electronics, Inc. dated as of April 1, 1995. *12* (10.35)
10.17 Service and Management Agreement dated December 18, 1990 by and
among RicheyImpact Electronics, Inc., Palisades Associates, Inc.
and Saunders Capital Group, Inc. *3* (10.2)
10.18 Agreement to Assume and Amend the Service and Management
Agreement among Brajdas Corporation, Palisades Associates, Inc.
and Saunders Capital Group, Inc. dated as of April 6, 1993. *3*
(10.3)
10.19 Modification Agreement among the Company, Palisades Associates,
Inc. and Saunders Capital Group, Inc. dated as of January 2,
1995. *8* (10.26)
10.20 Modification Agreement by and between Richey Electronics, Inc.
and Palisades Associates, Inc. dated as of February 21, 1995. *8*
(10.41)
10.21 1993 Stock Appreciation Rights Plan. *6* (A)
10.22 1992 Stock Option Plan. *8* (10.35)
10.23 Form of Incentive Stock Option Agreement. *8* (10.36)
10.24 Lease between Principal Mutual Life Insurance Company and Richey
Electronics, Inc. for lease of premises at 7441 Lincoln Way,
Garden Grove, California. *8* (10.32)
10.25 Lease between M&M Enterprises, a California General Partnership
and Richey Electronics, Inc. for lease of premises at 10871 La
Tuna Canyon Road, Sun Valley, California. *8* (10.33)
18
<PAGE>
10.26 Lease between Hownat Trust and Deanco, Inc. for lease of premises
at 87 Concord Street, North Reading, Massachusetts, Boston
Massachusetts. *10* (10.21)
10.27 Lease between Murray Center Venture and Deanco ACA Manufacturing,
Inc. for lease of premises at Building 1, Murray Business Center,
3601 SW Murray Blvd., Beaverton, Oregon 97201. *10* (10.25)
10.28 Lease Agreement between Fujita California Partners III and
Deanco, Inc., Acacia Division, for premises at 3230 Scott
Boulevard, Santa Clara, California.
10.29 Loan Agreement dated as of December 20, 1995 among Richey
Electronics, Inc., the banks named therein and First Interstate
Bank of California, as Agent. *4* (10.1)
10.30 First Amendment to the Loan Agreement dated as of February 26,
1996 among Richey Electronics, Inc., the banks named therein and
First Interstate Bank of California, as Agent. *10* (10.30)
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of Richey Electronics, Inc.
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of McGladrey & Pullen, LLP
27.1 Financial Data Schedule
--------------------
*1* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K for Brajdas Corporation for the fiscal year ended
February 28, 1993, filed May 28, 1993.
*2* Incorporated by reference to the designated exhibit of the Statement
on Schedule 13D filed on behalf of BRJS Investment Holding Corp., C.
Don Alverson, William C. Cacciatore, Greg A. Rosenbaum and Norbert W.
St. John with the Commission on April 20, 1993.
*3* Incorporated by reference to the designated exhibit of the Transition
Report on Form 10-Q for Brajdas Corporation for the period from
January 1, 1993 through July 2, 1993, filed August 4, 1993.
*4* Incorporated by reference to the designated exhibit of Form 8-K for
Richey Electronics, Inc. dated December 20, 1995, filed January 3,
1996.
*5* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-1, filed January 7, 1994,
Registration No. 33-73916.
*6* Incorporated by reference to the designated exhibit of the definitive
proxy statement for the 1993 Annual Meeting of Stockholders, filed
July 13, 1993.
*7* Incorporated by reference to the designated exhibit of the Form 8-K
for Brajdas Corporation dated July 7, 1993, filed July 13, 1993.
*8* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-2, filed February 23, 1995,
Registration Statement No. 33-89690.
*9* Incorporated by reference to the designated exhibit of the Quarterly
report on Form 10-Q for Richey Electronics, Inc. for the period ending
March 31, 1995, filed May 15, 1995.
19
<PAGE>
*10* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K for the Company for the fiscal year ended December
31, 1995, filed April 1, 1996.
*11* Incorporated by reference to the designated exhibit of the Quarterly
report on Form 10-Q for Richey Electronics, Inc. for the period ending
June 28, 1996, filed August 12, 1996.
*12* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-2, filed April 26, 1996, Registration
No. 333-02983.
Exhibits 10.4 - 10.23 are management contracts or compensatory plans or
arrangements required to be filed as exhibits pursuant to Item 14(c) of Form
10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Garden
Grove, State of California, on March 21, 1997.
RICHEY ELECTRONICS, INC.
By /s/ Richard N. Berger
------------------------------------------
Richard N. Berger
Vice President, Chief Financial
Officer and Secretary
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
- --------- ----- ----
/s/ William C. Cacciatore Chairman of the Board, March 21, 1997
- ------------------------------ President, Chief Executive
William C. Cacciatore Officer (Principal
Executive Officer)
/s/ C. Don Alverson Director March 21, 1997
- ------------------------------
C. Don Alverson
/s/ Richard N. Berger Vice President, Chief March 21, 1997
- ------------------------------ Financial Officer and
Richard N. Berger Secretary (Principal
Financial and Accounting
Officer)
/s/ Greg A. Rosenbaum Director March 21, 1997
- ------------------------------
Greg A. Rosenbaum
/s/ Norbert W. St. John Director March 21, 1997
- ------------------------------
Norbert W. St. John
21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Richey Electronics, Inc.
Garden Grove, California
We have audited the accompanying balance sheets of Richey Electronics, Inc. as
of December 31, 1995 and 1996, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Richey Electronics, Inc. as of
December 31, 1995 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Pasadena, California
February 7, 1997
22
<PAGE>
RICHEY ELECTRONICS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . $ 572,000 $ 30,000
Trade receivables. . . . . . . . . . . . . 25,622,000 27,111,000
Inventories. . . . . . . . . . . . . . . . 31,450,000 37,631,000
Deferred income taxes. . . . . . . . . . . 3,948,000 2,629,000
Other current assets . . . . . . . . . . . 1,481,000 1,235,000
------------ ------------
TOTAL CURRENT ASSETS. . . . . . . . . . 63,073,000 68,636,000
------------ ------------
IMPROVEMENTS AND EQUIPMENT, NET . . . . . . 3,469,000 3,668,000
------------ ------------
OTHER ASSETS AND INTANGIBLES
Deferred income taxes. . . . . . . . . . . 4,979,000 2,218,000
Deferred debt costs. . . . . . . . . . . . 500,000 2,533,000
Other. . . . . . . . . . . . . . . . . . . 661,000 473,000
Goodwill . . . . . . . . . . . . . . . . . 46,259,000 47,233,000
------------ ------------
52,399,000 52,457,000
------------ ------------
$118,941,000 $124,761,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt . . . $ 835,000 $ 4,012,000
Accounts payable . . . . . . . . . . . . . 18,250,000 16,551,000
Accrued expenses . . . . . . . . . . . . . 6,088,000 4,502,000
Accrued restructuring costs. . . . . . . . 3,824,000 538,000
------------ ------------
TOTAL CURRENT LIABILITIES . . . . . . . 28,997,000 25,603,000
------------ ------------
ACCRUED RESTRUCTURING COSTS . . . . . . . . 900,000 --
------------ ------------
LONG-TERM DEBT
Subordinated notes payable . . . . . . . . 2,982,000 2,000,000
Other long-term debt . . . . . . . . . . . 58,670,000 7,450,000
Convertible subordinated notes payable . . -- 55,755,000
------------ ------------
61,652,000 65,205,000
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value,
authorized 10,000 shares, issued none. . -- --
Common stock, $.001 par value,
authorized 30,000,000 shares. . . . . . 9,000 9,000
Additional paid-in capital . . . . . . . . 20,976,000 21,001,000
Retained earnings. . . . . . . . . . . . . 6,407,000 12,943,000
------------ ------------
27,392,000 33,953,000
------------ ------------
$118,941,000 $124,761,000
------------ ------------
------------ ------------
See Notes to Financial Statements.
23
<PAGE>
RICHEY ELECTRONICS, INC.
STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . $90,266,000 $117,057,000 $226,215,000
Cost of goods sold . . . . . . . . . . . . . 68,176,000 89,080,000 168,664,000
----------- ------------ ------------
Gross profit . . . . . . . . . . . . . . . 22,090,000 27,977,000 57,551,000
----------- ------------ ------------
Operating expenses:
Selling, warehouse, general and
administrative. . . . . . . . . . . . . 16,750,000 20,415,000 39,622,000
Amortization of intangibles. . . . . . . . 568,000 459,000 1,448,000
Restructuring costs. . . . . . . . . . . . -- 1,450,000 --
----------- ------------ ------------
17,318,000 22,324,000 41,070,000
----------- ------------ ------------
OPERATING INCOME . . . . . . . . . . 4,772,000 5,653,000 16,481,000
Interest expense . . . . . . . . . . . . . . 1,606,000 867,000 5,569,000
----------- ------------ ------------
Income before income taxes . . . . . . . . 3,166,000 4,786,000 10,912,000
Federal and state income taxes . . . . . . . 1,273,000 1,918,000 4,376,000
----------- ------------ ------------
NET INCOME . . . . . . . . . . . . . $ 1,893,000 $ 2,868,000 $ 6,536,000
----------- ------------ ------------
----------- ------------ ------------
Earnings per common share:
Primary. . . . . . . . . . . . . . . . . . $ 0.32 $ 0. 36 $ 0.72
----------- ------------ ------------
----------- ------------ ------------
Fully diluted. . . . . . . . . . . . . . . 0.32 0.36 0.70
----------- ------------ ------------
----------- ------------ ------------
Weighted average number of shares outstanding:
Primary. . . . . . . . . . . . . . . . . . 5,889,000 8,036,000 9,060,000
----------- ------------ ------------
----------- ------------ ------------
Fully diluted. . . . . . . . . . . . . . . 5,889,000 8,036,000 12,376,000
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
RICHEY ELECTRONICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------
ADDITIONAL
SHARES PAR PAID-IN RETAINED
OUTSTANDING VALUE CAPITAL EARNINGS TOTAL
----------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 5,889,000 $ 6,000 $ 5,246,000 $ 1,646,000 $ 6,898,000
Reverse stock split
adjustments -- -- (6,000) -- (6,000)
Net income -- -- -- 1,893,000 1,893,000
---------- ------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1994 5,889,000 6,000 5,240,000 3,539,000 8,785,000
Issuance of common stock in
public offering, net of
offering expenses 3,165,000 3,000 15,736,000 -- 15,739,000
Net income -- -- -- 2,868,000 2,868,000
---------- ------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 9,054,000 9,000 20,976,000 6,407,000 27,392,000
Stock options exercised
and other 6,000 -- 25,000 -- 25,000
Net income -- -- -- 6,536,000 6,536,000
---------- ------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 9,060,000 $ 9,000 $ 21,001,000 $ 12,943,000 $ 33,953,000
---------- ------- ------------ ------------ ------------
---------- ------- ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
RICHEY ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,893,000 $ 2,868,000 $ 6,536,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 765,000 912,000 3,100,000
Deferred taxes 1,157,000 1,065,000 4,080,000
Change in operating assets and liabilities,
net of effect of business combinations:
(Increase) decrease in:
Trade receivables (1,107,000) (2,448,000) 592,000
Inventories (1,518,000) (2,727,000) (4,329,000)
Other current assets 14,000 (260,000) 284,000
Increase (decrease) in:
Accounts payable and accrued expenses 2,820,000 (624,000) (4,573,000)
Accrued restructuring costs -- 1,450,000 (1,450,000)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,024,000 236,000 4,240,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of improvements and equipment (401,000) (1,316,000) (1,310,000)
Payment of acquisition and restructuring costs (2,512,000) (2,025,000) (7,706,000)
------------- ------------- -------------
NET CASH (USED IN) INVESTING ACTIVITIES (2,913,000) (3,341,000) (9,016,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances (repayments) on revolving
line of credit 1,848,000 (8,843,000) --
Borrowings (repayments) under long-term
revolving line-of-credit arrangement -- 1,974,000 (7,911,000)
Term loan borrowings -- -- 30,000,000
Payments on long-term debt (2,957,000) (5,202,000) (71,114,000)
Proceeds from issuance of common stock, net -- 15,739,000 25,000
Proceeds from issuance of convertible subordinated debt -- -- 55,755,000
Transaction costs associated with refinancing activities -- -- (2,521,000)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,109,000) 3,668,000 4,234,000
------------- ------------- -------------
INCREASE (DECREASE) IN CASH 2,000 563,000 (542,000)
Cash
Beginning 7,000 9,000 572,000
------------- ------------- -------------
Ending $ 9,000 $ 572,000 $ 30,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
RICHEY ELECTRONICS, INC.
STATEMENTS OF CASH FLOWS, CONTINUED
THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 1,675,000 $ 1,230,000 $ 3,961,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes $ 46,000 $ 1,249,000 $ 437,000
------------- ------------- -------------
------------- ------------- -------------
Assets acquired, liabilities assumed and
securities issued in business combinations:
Working capital $ 1,464,000 $ 15,362,000 $ 1,980,000
Leasehold improvements and equipment 103,000 1,646,000 101,000
Other assets -- 861,000 --
Goodwill 274,000 47,287,000 2,272,000
Restructuring and transaction costs -- (3,427,000) --
Subordinated notes payable -- (2,982,000) --
Other liabilities assumed -- (23,434,000) --
Stock payment notes -- (34,106,000) --
------------- ------------- -------------
------------- ------------- -------------
Net cash paid $ 1,841,000 $ 1,207,000 $ 4,353,0000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
RICHEY ELECTRONICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Richey Electronics, Inc. (the Company) is a specialty distributor of
electronic components and a provider of value-added assembly services. The
Company distributes a broad line of connectors, switches, wire, cable and heat
shrinkable tubing, and other interconnect, electromechanical and passive
electronic components used in assembly and manufacture of electronic equipment.
Richey has distribution rights from major worldwide suppliers, none of which
individually accounted for sales greater than 16% in 1996. Richey's corporate
headquarters are based in California and it has markets in 17 states.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
YEAR END
The Company reports its annual operating results based upon a calendar year
end (December 31) and its quarterly results using the Friday nearest the end of
each quarter.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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, liabilities, revenue and
expenses during the reporting period. Actual results could differ from those
estimates and could materially impact the reported amount of assets and
liabilities and future operating results.
CONCENTRATION OF CREDIT RISK
The Company distributes electronic components to small- and medium-sized
manufacturers in a wide variety of industries including telecommunications,
computer, medical, transportation and aerospace. Credit is extended based on an
evaluation of the customer's financial condition and collateral is typically not
required. Credit losses are provided for in the financial statements through a
charge to operations. For the year ended December 31, 1996, sales to no
individual customer represented more than 1.5% of net sales. Credit losses have
been consistently within management's expectations and were not material in any
year presented. A valuation allowance for known and anticipated credit losses
is maintained but is not material.
INVENTORIES
Inventories consist of electronic components held for sale and are valued
at the lower of cost (first-in, first-out method) or market. The Company
periodically reviews the age and turnover of its inventory to determine whether
any inventory has become obsolete or has declined in value and incurs a charge
to operations for known and anticipated inventory obsolescence. The Company has
not incurred any material charges to operations for inventory obsolescence.
IMPROVEMENTS AND EQUIPMENT
Improvements and equipment are stated at cost, less accumulated
depreciation and amortization. Equipment is depreciated using the straight-line
method over estimated service lives ranging from three to seven years.
Improvements are amortized over the life of the lease or the economic life of
the asset, whichever is shorter.
GOODWILL
The Company is amortizing goodwill on a straight-line method over lives
ranging from 15 to 40 years, principally 40 years.
Financial Accounting Standards Board (FASB) Statement No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF became effective for the year ended December 31, 1996. Statement No. 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable
28
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. No
adjustments were required for Statement No. 121.
The Company also periodically reviews the value of its goodwill not related
to specific long-lived assets to determine if an impairment has occurred. The
Company does not believe that an impairment of its goodwill has occurred based
on an evaluation of operating income, cash flows and business prospects.
DISTRIBUTION AGREEMENTS AND CUSTOMER LISTS
Distribution agreements and customer lists acquired pursuant to a previous
acquisition have been amortized using the straight-line method over their
respective estimated economic lives and these intangibles were fully amortized.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
liabilities are recognized for taxable temporary differences and deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred
tax assets are reduced by a valuation allowance when it cannot be demonstrated
that the deferred tax assets are more likely than not to be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
EARNINGS PER COMMON SHARE
Earnings per common share are computed using the weighted average number of
shares of common stock outstanding. The weighted average number of shares used
for computing fully diluted earnings per share assumes that the 7% Convertible
Subordinated Notes due 2006 (the Notes) which were sold by the Company in the
first quarter of 1996 through a private offering are converted at $14.125 per
share on the date they were issued. The Notes are not common stock equivalents
and, therefore, are not considered in determining the primary weighted average
number of shares. Net income used in computing fully diluted earnings per share
is increased for the interest expense, net of tax, associated with the Notes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable and payable, and debt instruments. The carrying value of financial
instruments, other than the debt instruments, is representative of their fair
value due to short-term maturity. The carrying value of the Company's revolving
line of credit and subordinated debt is considered to approximate their fair
value because the interest rate of these instruments is consistent with current
rates offered to the Company. The fair value of the 7% Convertible Subordinated
Notes is $58,933,000 based upon quoted market prices.
ACCOUNTING FOR STOCK-BASED COMPENSATION
During 1996 the Company adopted FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which establishes financial accounting and reporting
standards for stock-based compensation plans. The statement suggests
stock-based compensation transactions with employees be accounted for at fair
value. Transactions after December 15, 1995 with nonemployees must be accounted
for based on the fair value of the consideration received or the fair value of
the equity instruments issued, whichever is more reliably measurable. An
enterprise may continue to follow the requirements of Accounting Principles
Board (APB) Opinion No. 25 for employees, which does not require compensation to
be recorded if the consideration to be received is at least equal to the market
value of the shares at the measurement date. If an enterprise elects to follow
APB Opinion No. 25, it must disclose the pro forma effects on net income as if
compensation were measured in accordance with the suggestions of Statement No.
123. The Company follows APB Opinion No. 25.
29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 2. BUSINESS COMBINATIONS
In the period from 1994 to 1996, the Company completed several business
combinations. All of these acquisitions were accounted for as purchase business
combinations with the operations of the acquired business included subsequent to
the acquisition date. Each of the acquired businesses had operations similar to
the Company's. These acquisitions are described as follows:
IN-STOCK ACQUISITION
On April 4, 1994, the Company completed the purchase of the assets and
business of the In-Stock Products division of Anchor Group, Inc. (In-Stock),
located in Boston, Massachusetts.
INLAND EMPIRE INTERCONNECTS ACQUISITION
On August 16, 1995, the Company completed the purchase of the assets and
business of Inland Empire Interconnects (IEI), an Ontario, California molded
cable assembly company.
EDAC AND SUBSIDIARY (DEANCO ACQUISITION)
On December 20, 1995, the Company completed the purchase of all the issued
and outstanding capital stock of Electrical Distribution Acquisition Company
(EDAC). EDAC, a holding company, and its wholly owned subsidiary, Deanco, Inc.
(Deanco), were acquired for $34,106,000 of stock payment notes, the assumption
of $5,962,000 of existing EDAC stockholder notes and the assumption of all other
debt of Deanco. These notes were paid on January 2, 1996. The Company merged
EDAC into the Company in January 1996 and merged Deanco into the Company in
October 1996.
In connection with the Deanco Acquisition, the Company closed certain of
its own facilities and incurred other costs associated with the consolidation of
the operations of Deanco into the Company. During 1995 the Company recognized a
restructuring charge of $1,450,000. All of these costs were paid by December
31, 1996. No adjustments were made to the original estimates of this
restructuring accrual.
Also in conjunction with the Deanco Acquisition, the Company accrued
restructuring costs of $3,100,000 at December 31, 1995 related to the
consolidation of Deanco's operations into the Company. Those costs related to
the operations of Deanco were recorded as a purchase accounting adjustment,
resulting in an increase in goodwill. At December 31, 1995, current accrued
restructuring costs of $3,824,000 and long-term restructuring costs of $900,000
consisted of the unpaid portion of $1,450,000 and $3,100,000 restructuring
charge and other restructuring items related to past acquisitions. At December
31, 1996 the remaining accrued restructuring costs of $538,000 consist of
approximately $140,000 for severance, $165,000 for lease and facility costs for
Deanco facilities to be closed and other items of $232,000. During 1996 certain
adjustments were made to the preliminary estimates recorded at December 31,
1995. These purchase accounting adjustments related to a reduction in costs for
redundant facility consolidations of $900,000 due to the Company's decision to
retain Deanco's Santa Clara facility and close Richey's San Jose facility. This
reduction was offset by an increase in product line termination costs from
$300,000 to $665,000, an increase in severance costs for Deanco employees of
$148,000 and an increase in other costs directly attributable to the
acquisition. The Company expects the remaining accrued restructuring costs of
$538,000 to be paid within the next 12 months.
MS ELECTRONICS
On March 19, 1996, the Company completed the acquisition of the assets and
business of MS Electronics, Inc. (MS Electronics). The purchase price and
related transaction costs, including the assumption of MS Electronics' debt of
$525,000, were approximately $3,111,000 and were paid in cash. The allocation
of the purchase price is as follows: $2,231,000 to estimated fair value of
tangible assets acquired, $1,288,000 to liabilities assumed and $2,168,000 to
goodwill.
SUMMIT DISTRIBUTORS
On December 5, 1996, the Company completed the acquisition of the assets
and business of Summit Distributors, Inc. The purchase price and related
transactions costs were $1,138,000 and were paid in cash. The preliminary
allocation of the purchase price was $1,095,000 to current assets and $43,000 to
fixed assets.
30
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 2. BUSINESS COMBINATIONS, (CONTINUED)
PRO FORMA RESULTS (UNAUDITED)
The following pro forma results assume the 1995 Deanco acquisition occurred
as of the beginning of 1995. The 1996 Summit Distributors and MS Electronics
acquisitions and the 1995 IEI acquisition are not included in the pro forma
financial information because those acquisitions would not have materially
changed reported sales or net income. The unaudited pro forma results have been
prepared utilizing the historical financial statements of the Company and Deanco
before extraordinary items. The unaudited pro forma results give effect to
certain adjustments, including amortization of acquired intangibles and
goodwill, elimination of duplicate facilities and redundant salaries, interest
expense and related tax effects.
Year Ended
December 31, 1995
(Unaudited)
-----------------
Net Sales . . . . . . . . . . . . . . . . . $ 216,983,000
Net Income. . . . . . . . . . . . . . . . . 4,377,000
Earnings per share. . . . . . . . . . . . . 0.54
The pro forma financial information does not purport to be indicative of
the results of operations that would have occurred had the transactions actually
taken place at the beginning of the period presented.
NOTE 3. IMPROVEMENTS AND EQUIPMENT
Improvements and equipment at December 31 consist of the following:
1995 1996
---------- ----------
Improvements. . . . . . . . . . . . . . . . $2,084,000 $1,738,000
Furniture, fixtures and equipment . . . . . 2,597,000 4,998,000
---------- ----------
4,681,000 6,736,000
Less accumulated depreciation and amortization 1,212,000 3,068,000
---------- ----------
$3,469,000 $3,668,000
---------- ----------
---------- ----------
NOTE 4. BORROWING ARRANGEMENTS
REVOLVING LINE OF CREDIT
The Company has a bank revolving line of credit of $45,000,000, which
expires December 31, 1999. The revolving line of credit allows advances of up
to 85% of eligible receivables and 50% of eligible inventory, as defined. The
revolving line of credit has several interest rate pricing features available
and at December 31, 1996, $8,000,000 bears interest at the Eurodollar rate plus
2.25% (total of 7% at December 31, 1996) and $2,450,000 bears interest at 1%
above the bank's prime rate (total of 9.25% at December 31, 1996). The Company
is required to pay the lender a quarterly unused line fee equal to 3/8%,
quarterly, of the difference between the maximum commitments and the daily
average outstanding borrowings for the prior quarter. The credit agreement
contains various restrictive covenants which require the Company to meet certain
financial conditions, including maintaining a minimum level of stockholders'
equity, minimum profitability, fixed charge coverage and cash flow leverage
ratios. In addition, the Company is restricted from the payment of cash
dividends. At December 31, 1996, $10,450,000 was outstanding under the
Company's revolving line of credit. The Company intends to maintain
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 4. BORROWING ARRANGEMENTS, (CONTINUED)
borrowings of at least $7,450,000 during 1997; therefore, $3,000,000 of the
balance is classified as a current liability.
The following is a summary of borrowings under revolving lines of credit:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average interest rate in effect
at year end. . . . . . . . . . . . . . . . . . . . 10.0% 8.2% 7.5%
Available borrowings at year end. . . . . . . . . . . $ 5,452,000 $18,261,000 $28,195,000
Maximum outstanding borrowings during
the year . . . . . . . . . . . . . . . . . . . . . 12,610,000 18,361,000 31,106,000
Weighted average interest rate for the
borrowings outstanding during the year . . . . . . 8.9% 9.3% 7.7%
</TABLE>
The Company's revolving line of credit provides that up to $3,000,000 of
the available line can be used for letters of credit. None were outstanding at
year end.
7% CONVERTIBLE SUBORDINATED NOTES OFFERING
In 1996 the Company issued $55,755,000 of 7% Convertible Subordinated Notes
(the Notes) due 2006. The Notes are convertible into 3,947,000 shares of the
Company's common stock at a conversion price of $14.125 per share (subject to
certain adjustments) at the holder's option at any time after 60 days following
the issuance and prior to maturity. The payment of principal and interest on
these notes is subordinated to all senior debt consisting of $10,450,000
outstanding at December 31, 1996 under the Company's revolving line of credit.
The Company maintains an effective shelf registration statement with the
Securities and Exchange Commission to register resales of the Notes and the
common stock issuable upon conversion.
The Notes may not be redeemed by the Company prior to March 4, 1999.
Thereafter the Notes may be redeemed at the option of the Company at a
redemption price of 103.5% of outstanding principal in 1999 decreasing by 0.5%
each year until March 1, 2006.
In addition, under certain circumstances, the holders of these Notes have
the option to require the Company to repurchase the Notes. These designated
events include a more than 50% change in control.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 4. BORROWING ARRANGEMENTS, (CONTINUED)
LONG-TERM DEBT
Long-term debt at December 31, as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revolving line of credit $ 18,361,000 $ 10,450,000
Convertible subordinated notes payable, interest at 7.0%
due March 1 and September 1 annually, principal due September 1, 2006. -- 55,755,000
Stock payment notes for Deanco Acquisition, paid
January 2, 1996. 34,106,000 --
Subordinated promissory notes payable to former EDAC
management and stockholders, paid January 2, 1996. 5,962,000 --
Subordinated promissory notes payable to former stock-
holders of Deanco, unsecured, due in annual installments
of $1,000,000 beginning in 1997 with a final payment of $953,000 on
September 30, 1999, interest payable annually at 8%. 2,982,000 2,953,000
Unsecured subordinated note payable to a corporation,
paid January 1, 1996. 700,000 --
Other 376,000 59,000
------------ ------------
Less current maturities 62,487,000 69,217,000
835,000 4,012,000
------------ ------------
$ 61,652,000 $ 65,205,000
------------ ------------
------------ ------------
</TABLE>
Aggregate maturities of long-term debt as of December 31, 1996, are as follows:
1997. . . . . . . . . . . . . . . . . . . . $ 4,012,000
1998. . . . . . . . . . . . . . . . . . . . 1,000,000
1999. . . . . . . . . . . . . . . . . . . . 8,450,000
2006. . . . . . . . . . . . . . . . . . . . 55,755,000
-----------
$69,217,000
-----------
-----------
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 5. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
1995 1996
---------- ----------
Compensation. . . . . . . . . . . . . $3,193,000 $2,790,000
Interest. . . . . . . . . . . . . . . 1,040,000 1,464,000
Other . . . . . . . . . . . . . . . . 1,855,000 248,000
---------- ----------
$6,088,000 $4,502,000
---------- ----------
---------- ----------
NOTE 6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office and warehouse space under operating lease
agreements with various terms and conditions with rent escalations typically
based on the Consumer Price Index.
Future minimum lease payments under these leases, exclusive of lease
payments on duplicate facilities which have been accrued, are as follows:
1997. . . . . . . . . . . . . . . . . . . . $1,965,000
1998. . . . . . . . . . . . . . . . . . . . 1,923,000
1999. . . . . . . . . . . . . . . . . . . . 1,760,000
2000. . . . . . . . . . . . . . . . . . . . 1,004,000
Thereafter. . . . . . . . . . . . . . . . . 1,796,000
----------
$8,448,000
----------
----------
Total rent expense under operating leases, including rent for facilities
leased on a month-to-month basis, was $678,000, $903,000 and $2,016,000 for
1994, 1995 and 1996, respectively.
CONTINGENT LIABILITIES
There are no material legal proceedings pending or, to the knowledge of
management, threatened against the Company.
NOTE 7. SERVICE AND MANAGEMENT AGREEMENT
The Company is party to a Service and Management Agreement dated
December 18, 1990, as amended and modified, with a director. The Service and
Management Agreement terminates on December 31, 1997; however, the term is
automatically extended for additional two-year consecutive periods unless
earlier terminated. Management fees payable under this and prior agreements
were approximately $244,000 in 1994, $234,000 in 1995 and $175,000 in 1996,
including a $64,000 termination payment in 1995 to a former party to this
agreement.
34
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Currently paid or payable:
Federal. . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 $ 745,000 $ 697,000
State. . . . . . . . . . . . . . . . . . . . . . . . . . 56,000 108,000 426,000
Deferred . . . . . . . . . . . . . . . . . . . . . . . . 1,157,000 1,065,000 3,253,000
---------- ---------- ----------
$1,273,000 $1,918,000 $4,376,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table presents a reconciliation from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax income for
those adjustments representing more than 5% of pretax income:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" statutory rate 35% 35% 35%
Increase (decrease) in rate resulting from:
State income taxes, net of federal tax benefit 5 5 5
-- -- --
40% 40% 40%
-- -- --
-- -- --
</TABLE>
Net deferred taxes at December 31 consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities, other . . . . . . . . . . . $ 314,000 $ 210,000
----------- -----------
Deferred tax assets:
Net operating loss carryforwards (NOLs) . . . . . . 7,096,000 4,720,000
Costs capitalized to inventory for tax purposes . . 919,000 716,000
Accrued expenses not deductible until paid. . . . . 2,462,000 410,000
Other . . . . . . . . . . . . . . . . . . . . . . . 890,000 968,000
----------- -----------
11,367,000 6,814,000
Less valuation allowance. . . . . . . . . . . . . . (2,126,000) (1,757,000)
----------- -----------
9,241,000 5,057,000
----------- -----------
Net. . . . . . . . . . . . . . . . . . . . . . . $ 8,927,000 $ 4,847,000
----------- -----------
----------- -----------
</TABLE>
Net deferred tax assets described above have been included in the
accompanying balance sheets as follows:
1995 1996
----------- -----------
Current assets. . . . . . . . . . $ 3,948,000 $ 2,629,000
Noncurrent assets . . . . . . . . 4,979,000 2,218,000
----------- -----------
$ 8,927,000 $ 4,847,000
----------- -----------
----------- -----------
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES, (CONTINUED)
As of December 31, 1996, the Company had acquired net operating loss
carryforwards which have the following expiration dates:
Expiration Date FEDERAL
--------------- -----------
2005. . . . . . . . . . . . . . . . . . . . $ 454,000
2006. . . . . . . . . . . . . . . . . . . . 9,673,000
2007. . . . . . . . . . . . . . . . . . . . 2,588,000
2008. . . . . . . . . . . . . . . . . . . . 771,000
-----------
$13,486,000
-----------
-----------
Section 382 of the Internal Revenue Code of 1986 imposes certain
limitations on a corporation's ability to use net operating loss carryforwards
if more than a 50% ownership change occurs. The Company's issuance of
additional common stock in 1995, together with an earlier acquisition,
constitutes a more than 50% ownership change. As a result, the usage of the
NOLs are restricted to approximately $4,900,000 on an annual basis.
The Company has been consistently profitable and generated taxable income
before NOL carryforwards of approximately $6.9 million in 1996. Based on its
current level of profitability, management believes that the Company will be
able to fully utilize the NOLs prior to their expiration. However, management
has continued to maintain a valuation allowance due to the inherent
uncertainties in forecasting future taxable income. Management believes that it
is "more likely than not" that the Company will be able to generate the
approximately $14 million of future taxable income necessary to realize the
recorded amount of the net deferred tax asset prior to the expiration of the
NOLs. The amount of deferred tax asset considered realizable, however, would be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
NOTE 9. EMPLOYEE BENEFIT PLANS
STOCK APPRECIATION RIGHTS PLAN
On July 7, 1993, the Company adopted a Stock Appreciation Rights Plan.
Each stock appreciation right (SAR) provides the recipient with the right to
receive a cash payment equal to the excess, if any, of the fair market value of
a share of the Company's common stock on the date the SAR is exercised over the
fair market value on the date the SAR was granted, or such other value as
determined by the Compensation Committee. The maximum number of rights that may
be awarded under the plan may not exceed approximately 589,000. To date, no
rights have been granted under this plan.
STOCK OPTION PLAN
The Company has a stock option plan adopted in 1992. The options granted
generally vest at a rate of 25% per year over a four-year period and expire ten
years from the date of grant. The exercise price of the options is equal to the
quoted market price at the date of grant.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 9. EMPLOYEE BENEFIT PLANS, (CONTINUED)
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1994 Price 1995 Price 1996 Price
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year . . . -- 226,737 $6.00 493,071 $6.34
Granted . . . . . . . . . . . . . . 226,737 $6.00 266,334 6.63 135,300 9.80
Terminated and canceled . . . . . . -- -- (7,363) 6.00
Exercised . . . . . . . . . . . . . -- -- (8,360) 6.07
-------- -------- --------
Outstanding at end of year . . . . . . 226,737 $6.00 493,071 $6.34 612,648 $7.11
-------- -------- --------
-------- -------- --------
Options exercisable, end of year . . . -- 45,642 $6.00 186,591 $6.67
Available for grant, end of year . . . 362,197 95,863 284,424
Weighted average fair value of
options granted during the year. . . -- $4.35 $7.07
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options outstanding
- -------------------------------------------------
Number Remaining Options
Outstanding Contractual Life Exercise Price Exercisable
- ----------- ---------------- -------------- -----------
212,014 7 $ 6 106,005
265,334 8 7 65,586
110,300 9 10 15,000
25,000 9 11 --
------- --------
612,648 8 186,591
------- --------
------- --------
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under this plan
consistent with the method of FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1995 1996
------------ ------------
Net income As reported $ 2,868,000 $ 6,536,000
Pro forma 2,707,000 6,242,000
Primary earnings per share As reported 0.36 0.72
Pro forma 0.34 0.69
Fully diluted earnings
per share As reported 0.36 0.70
Pro forma 0.34 0.67
The pro forma compensation cost was recognized for the fair value of the
stock options granted, which was estimated using the Black-Scholes model with
the following assumptions: expected volatility of 42% and 53% in
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 9. EMPLOYEE BENEFIT PLANS, (CONTINUED)
1995 and 1996, respectively, and risk-free interest rate of 6.75% for 1995 and
6.5% for 1996, the options would be exercised at the end of the exercise period
and no dividends.
401(K) SAVINGS PLAN
The Company has a defined contribution 401(k) savings plan covering
substantially all its employees. The plan provides the Company with an option
to match any participants' contributions; however no such contributions were
made by the Company during 1994, 1995 or 1996.
NOTE 10. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1996
Net sales. . . . . . . . . . . . . . $ 58,384,000 $ 58,212,000 $ 53,713,000 $ 55,906,000
Gross profit . . . . . . . . . . . . 14,313,000 14,806,000 14,116,000 14,316,000
Net income . . . . . . . . . . . . . 1,142,000 1,735,000 1,754,000 1,905,000
Primary earnings per
common share . . . . . . . . . . . . 0.13 0.19 0.19 0.21
Fully diluted earnings per
common share . . . . . . . . . . . . 0.13 0.18 0.18 0.20
1995
Net sales. . . . . . . . . . . . . . 26,596,000 28,305,000 28,803,000 33,353,000
Gross profit . . . . . . . . . . . . 6,513,000 6,660,000 6,931,000 7,873,000
Net income . . . . . . . . . . . . . 680,000 909,000 1,070,000 209,000
Primary earnings per
common share . . . . . . . . . . . . 0.12 0.11 0.12 0.02
Fully diluted earnings per
common share . . . . . . . . . . . . 0.12 0.11 0.12 0.02
1994
Net sales. . . . . . . . . . . . . . 20,247,000 23,105,000 22,838,000 24,076,000
Gross profit . . . . . . . . . . . . 4,855,000 5,562,000 5,793,000 5,880,000
Net income . . . . . . . . . . . . . 355,000 532,000 471,000 535,000
Primary earnings per
common share . . . . . . . . . . . . 0.06 0.09 0.08 0.09
Fully diluted earnings per
common share . . . . . . . . . . . . 0.06 0.09 0.08 0.09
</TABLE>
38
<PAGE>
Richey Electronics, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 1996
Exhibit Index
Exhibit
Number
- -------
2.1 Stock Purchase Agreement, dated November 15, 1995, among Richey
Electronics, Inc., Deanco, Inc., Electrical Distribution Acquisition
Company and all of the stockholders of Electrical Distribution
Acquisition Company. *4* (2.1)
2.2 First Amendment to Stock Purchase Agreement and Instrument of Joinder
dated December 20, 1995 among Richey Electronics, Inc., Deanco, Inc.,
Electrical Distribution Acquisition Company and all of the
stockholders of Electrical Distribution Acquisition Company. *4* (2.2)
2.3 Sales Tax Indemnification Agreement dated December 20, 1995 among
Richey Electronics, Inc. and the stockholders of Electrical
Distribution Acquisition Company identified therein. *4* (2.3)
3.1 Restated Certificate of Incorporation of Richey Electronics, Inc. *5*
(3.1)
3.2 Bylaws of Richey Electronics, Inc. *5* (3.2)
4.1 Indenture between Richey Electronics, Inc. and First Trust of
California, National Association, dated as of February 15, 1996. *10*
(4.1)
4.2 Registration Rights Agreement among Richey Electronics, Inc.,
Jefferies & Company, Inc. and Cruttenden Roth Incorporated, dated as
of February 26, 1996. *12* (4.2)
10.1 Indemnification Agreement among Barclay and Company, Inc., Brajdas
Corporation, Donald I. Zimmerman and certain former shareholders of
RicheyImpact Electronics, Inc. identified therein dated as of April 5,
1993. *2* (E)
10.2 Letter re Amendment to Indemnification Agreement by Barclay and
Company, Inc. and Donald I. Zimmerman, and agreed to by BRJS
Investment Holding Corp., Brajdas Corporation and the other persons
and entities identified therein dated April 23, 1993. *1* (10.3)
10.3 Registration Rights Agreement between Brajdas Corporation and BRJS
Investment Holding Corp. dated April 2, 1993. *2* (10.4)
10.4 Employment Agreement between William C. Cacciatore and Brajdas
Corporation dated as of April 1, 1993. *1* (10.18)
10.5 Addendum to Employment Agreement (William C. Cacciatore) dated as of
February 21, 1995. *8* (10.37)
10.6 Second Addendum to Employment Agreement (William C. Cacciatore) dated
as of May 17, 1995. *10* (10.31)
10.7 Employment Agreement between C. Don Alverson and Brajdas Corporation
dated as of April 1, 1993. *1* (10.17)
10.8 Addendum to Employment Agreement (C. Don Alverson) dated as of
February 21, 1995. *8* (10.38)
10.9 Second Addendum to Employment Agreement (C. Don Alverson) dated as of
May 17, 1995. *10* (10.32)
39
<PAGE>
10.10 Employment Agreement between Richard N. Berger and Brajdas Corporation
dated as of April 1, 1993. *1* (10.20)
10.11 Addendum to Employment Agreement (Richard N. Berger) dated as of
February 21, 1995. *8* (10.39)
10.12 Employment Agreement between Norbert W. St. John and Brajdas
Corporation dated as of April 1, 1993. *1* (10.19)
10.13 Addendum to Employment Agreement (Norbert W. St. John) dated as of
February 21, 1995. *8* (10.40)
10.14 Second Addendum to Employment Agreement (Norbert W. St. John) dated as
of May 17, 1995. *10* (10.33)
10.15 Employment Agreement between William Class and Richey Electronics,
Inc. dated as of January 1, 1996. *11* (10.1)
10.16 Employment Agreement between Charles W. Mann and Richey Electronics,
Inc. dated as of April 1, 1995. *12* (10.35)
10.17 Service and Management Agreement dated December 18, 1990 by and among
RicheyImpact Electronics, Inc., Palisades Associates, Inc. and
Saunders Capital Group, Inc. *3* (10.2)
10.18 Agreement to Assume and Amend the Service and Management Agreement
among Brajdas Corporation, Palisades Associates, Inc. and Saunders
Capital Group, Inc. dated as of April 6, 1993. *3* (10.3)
10.19 Modification Agreement among the Company, Palisades Associates, Inc.
and Saunders Capital Group, Inc. dated as of January 2, 1995. *8*
(10.26)
10.20 Modification Agreement by and between Richey Electronics, Inc. and
Palisades Associates, Inc. dated as of February 21, 1995. *8* (10.41)
10.21 1993 Stock Appreciation Rights Plan. *6* (A)
10.22 1992 Stock Option Plan. *8* (10.35)
10.23 Form of Incentive Stock Option Agreement. *8* (10.36)
10.24 Lease between Principal Mutual Life Insurance Company and Richey
Electronics, Inc. for lease of premises at 7441 Lincoln Way, Garden
Grove, California. *8* (10.32)
10.25 Lease between M&M Enterprises, a California General Partnership and
Richey Electronics, Inc. for lease of premises at 10871 La Tuna Canyon
Road, Sun Valley, California. *8* (10.33)
10.26 Lease between Hownat Trust and Deanco, Inc. for lease of premises at
87 Concord Street, North Reading, Massachusetts, Boston Massachusetts.
*10* (10.21)
10.27 Lease between Murray Center Venture and Deanco ACA Manufacturing, Inc.
for lease of premises at Building 1, Murray Business Center, 3601 SW
Murray Blvd., Beaverton, Oregon 97201. *10* (10.25)
10.28 Lease Agreement between Fujita California Partners III and Deanco,
Inc., Acacia Division, for premises at 3230 Scott Boulevard, Santa
Clara, California.
10.29 Loan Agreement dated as of December 20, 1995 among Richey Electronics,
Inc., the banks named therein and First Interstate Bank of California,
as Agent. *4* (10.1)
10.30 First Amendment to the Loan Agreement dated as of February 26, 1996
among Richey Electronics, Inc., the banks named therein and First
Interstate Bank of California, as Agent. *10* (10.30)
40
<PAGE>
11.1 Statement regarding computation of per share earnings.
21.1 Subsidiaries of Richey Electronics, Inc.
23.1 Consent of McGladrey & Pullen, LLP
23.2 Consent of McGladrey & Pullen, LLP
27.1 Financial Data Schedule
- ---------------
*1* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K for Brajdas Corporation for the fiscal year ended
February 28, 1993, filed May 28, 1993.
*2* Incorporated by reference to the designated exhibit of the Statement
on Schedule 13D filed on behalf of BRJS Investment Holding Corp., C.
Don Alverson, William C. Cacciatore, Greg A. Rosenbaum and Norbert W.
St. John with the Commission on April 20, 1993.
*3* Incorporated by reference to the designated exhibit of the Transition
Report on Form 10-Q for Brajdas Corporation for the period from
January 1, 1993 through July 2, 1993, filed August 4, 1993.
*4* Incorporated by reference to the designated exhibit of Form 8-K for
Richey Electronics, Inc. dated December 20, 1995, filed January 3,
1996.
*5* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-1, filed January 7, 1994,
Registration No. 33-73916.
*6* Incorporated by reference to the designated exhibit of the definitive
proxy statement for the 1993 Annual Meeting of Stockholders, filed
July 13, 1993.
*7* Incorporated by reference to the designated exhibit of the Form 8-K
for Brajdas Corporation dated July 7, 1993, filed July 13, 1993.
*8* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-2, filed February 23, 1995,
Registration Statement No. 33-89690.
*9* Incorporated by reference to the designated exhibit of the Quarterly
report on Form 10-Q for Richey Electronics, Inc. for the period ending
March 31, 1995, filed May 15, 1995.
*10* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K for the Company for the fiscal year ended December
31, 1995, filed April 1, 1996.
*11* Incorporated by reference to the designated exhibit of the Quarterly
report on Form 10-Q for Richey Electronics, Inc. for the period ending
June 28, 1996, filed August 12, 1996.
*12* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-2, filed April 26, 1996, Registration
No. 333-02983.
41
<PAGE>
EXHIBIT 10.28
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
(DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, September 29, 1994, is made by and between Fujita California Partners III
("LESSOR") and Deanco Incorporated, Acacia Division, a Delaware Corporation
("LESSEE") (collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
and commonly known by the street address of 3230 Scott Boulevard, Santa Clara
located in the County of Santa Clara, State of California and generally
described as (describe briefly the nature of the property) an approximately
42,174 square foot R&D building improved with approximately 10,000 square feet
of office space ("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: 5 years and 3.5 months ("ORIGINAL TERM") commencing
December 15, 1994 ("COMMENCEMENT DATE") and ending March 31, 2000 ("EXPIRATION
DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: ("EARLY POSSESSION DATE"). (See Paragraphs
3.2 and 3.3 for further provisions.)
1.5 BASE RENT: $21,930.48 per month ("BASE RENT"), payable on the
first day of each month commencing March 15, 1995 (Lessee shall pay 1/2 months
rent on April 1, 1995). (See Paragraph 4 for further provisions.)
/ / If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $21,930.48 as Base Rent for
the period March 15, 1995 - April 15, 1995.
1.7 SECURITY DEPOSIT: $24,039.48 ("SECURITY DEPOSIT"). (See
Paragraph 5 for further provisions.)
1.8 PERMITTED USE: Office, sales, warehouse, light assembly and
other related legal uses. (See Paragraph 6 for further provisions.)
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1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless
otherwise stated herein. (See Paragraph 8 for the further provisions.)
1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes): Brian
O'Toole represents
/X/ Lessor exclusively ("LESSOR'S BROKER"); both Lessor and Lessee, and CPS
represents
/X/ Lessee exclusively ("LESSEE'S BROKER"); both Lessee and Lessor.
(See Paragraph 15 for further provisions.)
1.11 GUARANTOR. The Obligations of the Lessee under this Lease are
to be guaranteed by N/A ("GUARANTOR"). (See Paragraph 37 for further
provisions.)
1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting
of Paragraphs 49 through 60 and Exhibits "A" all of which constitute a part of
this Lease.
2. PREMISES.
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, is an approximation which Lessor
and Lessee agree is reasonable and the rental 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, fire sprinkler system, lighting, air conditioning, heating,
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 non-compliance with this warranty within
forty-five (45) days after the Commencement Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Brokers 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, compliance with Applicable
Law, as defined in Paragraph 6.3) 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 and assume all
responsibility therefor as
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the same relate to Lessee's occupancy of the Premises and/or the term 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 the said matters
other than as set forth in this Lease.
2.5 LESSEE 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.
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 Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, (including but not limited to the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) 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 as agreed herein 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 perform 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 thirty (30) days thereafter, cancel this Lease, in which event the
Parties shall be discharged form all obligations hereunder; provided, however,
that if such written notice by Lessee is not received by Lessor within said ten
(10) day period, Lessee's right to cancel this Lease shall terminate and be of
no further force or effect. Except as may be otherwise provided, and regardless
of when the 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 what Lessee would otherwise have
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 cause payment of Base Rent and other
rent or charges, as the same may be adjusted from time to time, to be received
by Lessor in lawful
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money of the United States, without offset or deduction, on or before the day on
which it is due under the terms of this Lease. Base Rent and all other rent and
charges for any period during the term hereof which is for less than one (1)
full calendar monthly shall be prorated based upon the actual number of days of
the calendar 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.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon 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 therefor
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee all, upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. 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 a
vacated the Premises, return to Lessee (or, at Lessor's 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 to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of
the Premises in a manner that creates waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to, neighboring premises or
properties. Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessees assignees or subtenants, and
by prospective assignees and subtenants of the Lessee, its assignees and
subtenants, for a modification of said permitted purpose for which the premises
may be used or occupied, so long as the same will not impair the structural
integrity of the improvements on the Premises, the mechanical or electrical
systems therein, is not significantly more burdensome to the Premises 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 give a written notification of same, which notice shall include an
explanation of Lessor's reasonable objections to the change in use.
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6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
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 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, by-products or fractions
thereof. Lessee shall not engage in any activity in, on or about the Premises
which constitutes a Reportable Use (as hereinafter defined) or Hazardous
Substances without the express prior written consent of Lessor and compliance
in a timely manner (at Lessee' sole cost and expense) with all Applicable Law
(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. Reportable Use shall also include Lessee's being responsible for the
presence in, on or about the Premises of a Hazardous Substance with respect to
which any Applicable Law requires 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 in compliance with
all Applicable Law, use any ordinary and customary materials reasonably required
to be used by Lessee in the normal course of Lessee's business permitted on the
Premises, 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
damages or expose Lessor to any liability therefor. In addition, Lessor may
(but without any obligation to do so) condition its consent to the use or
presence of any Hazardous Substance, activity or storage tank 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 therefrom
or therefor, including, but not limited to, the installation (and 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, or a condition
involving or resulting from same, has come to be located in, on, under or about
the Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor. Lessee shall also
immediately give Lessor a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding given
to, or received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance
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or contamination in, on, or about the Premises, including but not limited to all
such documents as may be involved in any Reportable Uses involving the Premises.
(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 loss of rents
and/or damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and attorney's and consultant's fees arising out of or
involving any Hazardous Substance or storage tank brought onto the Premises by
or for Lessee or under Lessee's control. Lessee's obligations under this
Paragraph 6 shall include, but not limited to, the effects of any contamination
or injury to person, property or the environmental created or suffered by
Lessee, and the cost of investigation (including consultant's and attorney's
fees and testing), removal, remediation, restoration and/or abatement thereto,
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 or storage
tanks, unless specifically so agreed by Lessor in writing at the time of such
agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in
this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently
and in a timely manner, comply with all "APPLICABLE LAW," which term is used in
this Lease to include 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 consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and ground water conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. 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 Law 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 Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as
defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any
time, in the case of an emergency, and otherwise at reasonable times, on 24
hours written notice for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable Laws
(as defined in Paragraph 6.3), and to employ experts and/or consultants in
connection therewith and/or to advise Lessor with respect to Lessee's
activities, including but not limited to the installation, operation, use,
monitoring, maintenance, or removal of any Hazardous Substance or storage tank
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
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Lease, violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or 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 any 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 Paragraph 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to compliance with
covenants, etc), 7.2 (Lessor's obligations to repair), 9 (storage and
destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and
expense and at all times, keep the non-structural parts of the Premises and
every part thereof in good order, condition and repair, normal wear and tear
excepted, and non-structural (whether or not such portion of the Premises
requiring repairs, 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, the elements or the age of such portion of the
Premises), including, without limiting the generality of the foregoing, all
equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fire sprinkler and/or standpipe and hose or other
automatic fire extinguishing system, including fire alarm and/or smoke detection
systems and equipment, fire hydrants, fixtures, walls (interior), ceilings,
roofs, floors, windows, doors, plate glass, skylights landscaping, driveways,
parking lots, fences, retaining walls, signs, sidewalks and parkways located in,
on, about, or adjacent to the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control. 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 part thereof in good order, condition and state of
repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure
and maintain contracts, with copies to Lessor, in customary form and substance
for, and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire
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alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof
covering and drain maintenance and (vi) asphalt and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and
agreements of Lessor contained in Paragraphs 2.2 and para 51, 52 of Add.
(relating to condition of the Premises), 2.3 (relating to compliance with
covenants, restrictions and building code), 9 (relating to destruction of the
Premises) and 14 (relating to condemnation of the Premises), it is intended by
the Parties hereto that Lessor have no obligation, in any manner whatsoever, to
repair and maintain the Premises, the improvements located thereon, or the
equipment therein, or non structural, all of which obligations are intended to
be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the
Parties that the terms of this Lease govern the respective obligations of the
Parties as to maintenance and repair of the Premises. Lessee and Lessor
expressly waive the benefit of any statute now or hereafter in effect to the
extent it is inconsistent with the terms of this Lease with respect to, or which
affords Lessee the right to make repairs at the expense of Lessor or to
terminate this Lease by reason of any needed repairs.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communication systems, lighting fixtures, heating,
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 that can be removed without doing material damage to the Premises.
The term "ALTERATIONS" shall mean any modification of the improvements on the
Premises from that which are provided by Lessor under the terms of this Lease,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. "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 as defined in Paragraph 7.4(a). Lessee shall not make any
Alterations or Utility Installation in, on, under or about the Premises without
Lessor's prior written consent. Lessee may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof), as
long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative cost
thereof during the term of this Lease as extended does not exceed $25,000.
(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 Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed condition upon: (i) 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 in compliance with all
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Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by any
mechanics' 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, 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 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 the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In
addition, in the event the Lessee does not follow the method as prescribed
above, then, 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 or become the owner thereof as hereinafter provided in this Paragraph
7.4, all Alterations and Utility Additions 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
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
their installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations 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, with all of the improvements, parts and surfaces thereof 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
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practice or by Lessee performing all of its obligations under this Lease.
Except as otherwise agreed or specified in writing by Lessor, the Premises, as
surrendered, shall include the 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
Alterations and/or 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 Law and/or good service 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 FOR INSURANCE. Regardless of whether the Lessor or
Lessee is the Insuring Party, Lessee shall pay for all insurance required under
this Paragraph 8 except to the extent of the cost attributable to liability
insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums
for policy periods commencing prior to or extending beyond the Lease term shall
be prorated to correspond to the Lease term. Payment shall be made by Lessee to
Lessor within ten (10) days following receipt of an invoice for any amount due.
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 and Lessor (as an additional insured) 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" 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. In the event Lessor is the Insuring
Party, 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.
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8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party 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 the holders of any
mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist from
time to time, or the amount required by Lenders, 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. If Lessor is the Insuring Party, however,
Lessee Owned Alterations and Utility Installations shall be insured by Lessee
under Paragraph 8.4 rather than by Lessor. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or
earthquake), 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 any undamaged sections of
the Premises 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
cause of loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance 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. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss, as defined
in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition,
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 Lender(s), insuring the loss
of the full rental and other charges payable by Lessee to Lessor under this
Lease for one (1) year (including all real estate taxes, insurance costs, and
any scheduled rental increases). Said insurance shall 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,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be
liable for any deductible amount in the event of such loss.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring
Party, the 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. If Lessee is the Insuring Party, the
policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned
Alterations and Utility Installations.
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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, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and 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 Rating"
of at least B+, V, or such other rating as may be required by a Lender having a
lien on the Premises, 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 Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insureds and loss payable clauses as
required by this Lease. No such policy shall be cancellable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall at least thirty (30) days prior to 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. If
the Insuring Party shall fail to procure and maintain the insurance required to
be carried by the Insuring Party under this Paragraph 8, the other Party may,
but shall not be required to, procure and maintain the same, but at Lessee's
expense.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") 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 of or damage to the Waiving Party's
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 any deductibles applicable thereto.
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, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing 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
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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, and whether well founded or not. 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, steam, 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 the 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, or 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 tenant of Lessor. 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 improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, the repair cost of which damage or
destruction is less than 50% of the then Replacement Cost of the Premises
immediately prior to such damage or destruction, excluding from such calculation
the value of the land and Lessee Owned Alterations and Utility Installations.
(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 50% or more of
the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, 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
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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 PARTIAL DAMAGE-INSURED LOSS. If a 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; provided, however, that
Lessee shall, at Lessor's election, make the repair of any damage or
destruction the total cost to repair of which is $10,000 or less, and, in
such event, Lessor shall make the insurance proceeds available to Lessee on a
reasonable basis for that purpose. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly
contribute the shortage in proceeds (except as to the deductible which is
Lessee's responsibility) as and when required to complete said repairs. In
the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, 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, the party responsible for making the
repairs 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
in such case Lessor does not so elect, 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 a 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, but subject to Lessor's
rights under Paragraph 13). 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 written 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 giving of such
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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 Lessee's
said commitment. 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 and 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 a 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 8.6.
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 (1) month's Base Rent, whether or not an Insured Loss, Lessor
may, at Lessor's option, terminate this Lease effective sixty (60) days
following 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, within twenty (20) days following the occurrence of
the damage, or before the expiration of the time provided in such option for its
exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option
and (ii) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs. If Lessee duly exercises such
option during said Exercise 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 said Exercise Period, then
Lessor may at Lessor's option terminate this Lease as of the expiration of said
sixty (60) day period following the occurrence of such damage by giving written
notice to Lessee of Lessor's election to do so within ten (10) days after the
expiration of the Exercise Period, notwithstanding any term or provision in the
grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2
(Partial Damage-Insured), whether or not Lessor or Lessee repairs or restores
the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues, shall be abated
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in proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of Base Rent, Real Property Taxes, insurance premiums, 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 repair 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 receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
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 Law and this Lease shall continue in full force and effect, but
subject to Lessor's rights under 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 $100,000, 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 ninety (90) days following the giving 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 investigation and remediation of such Hazardous Substance
Condition totally at Lessee's expense and without reimbursement from Lessor
except to the extent of 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 Lessee's said commitment. 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 and the required
funds are available. If Lessee does not give such notice and provide the
required funds or assurance thereof within the times specified above, this Lease
shall terminate as of the date specified in Lessor's notice of termination. If a
Hazardous Substance Condition occurs for which Lessee is not legally
responsible, there shall be abatement of Lessee's obligations under this Lease
to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed
twelve (12) months.
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9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee 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 WAIVE STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises with respect to the termination of this Lease and hereby waive the
provisions of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property
Taxes, as defined in Paragraph 10.2, applicable to the Premises during the
term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be
made at least ten (10) days prior to the delinquency date of the applicable
installment. Lessee shall promptly furnish Lessor with satisfactory evidence
that such taxes have been paid. If any such taxes to be paid by Lessee shall
cover any period of time prior to or after the expiration or earlier
termination of the term hereof, Lessee's share of such taxes shall be
equitably prorated to cover only the period of time within the tax fiscal
year this Lease is in effect, and Lessor shall reimburse Lessee for any
overpayment after such proration. If Lessee shall fail to pay any Real
Property Taxes required by this Lease to be paid by Lessee, Lessor shall have
the right to pay the same, and Lessee shall reimburse Lessor therefor upon
demand.
(b) ADVANCE PAYMENT. In order to insure payment when due
and before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option, to estimate the current Real Property Taxes
applicable to the Premises, and to require such current year's Real Property
Taxes to be paid in advance to Lessor by Lessee, (i) in a lump sum amount equal
to the installment due, at least twenty (20) days prior to the applicable
delinquency date. When the actual amount of the applicable tax bill is known,
the amount of such equal monthly advance payment shall be adjusted as required
to provide the fund needed to pay the applicable taxes before delinquency. If
the amounts paid to Lessor by Lessee under the provisions of this Paragraph are
insufficient to discharge the obligations of Lessee to pay such Real Property
Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand,
such additional sums as are necessary to pay such obligations. All moneys paid
to Lessor under this Paragraph may be intermingled with other moneys of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of the obligations of Lessee under this Lease, then any balance of
funds paid to Lessor under the provisions of this Paragraph may, subject to
proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated
as an additional Security Deposition under Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." 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
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bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Premises 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
Premises or in the real property of which the Premises are a part, 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 Premises or
in the improvements thereon, the execution of this Lease, or any modification,
amendment or transfer thereof, and whether or not contemplated by the Parties.
10.3 JOINT ASSESSMENT. If the Premises are not separately
assessed, Lessee's liability 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.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon Lessee Owned Alterations,
Utility Installations, Trade Fixtures, furnishings, equipment and all personal
property of Lessee contained in the Premises or elsewhere. When possible,
Lessee shall cause its 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 personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee
within ten (10) days after receipt of a written statement setting forth the
taxes applicable to Lessee's property or, at Lessor's option, as provided in
Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING.
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,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in the Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged
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buy-out or otherwise), whether or not a formal assignment or hypothecation of
this Lease or Lessee's assets occurs, which results or will result in a
reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal
to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it
was represented to Lessor at the time of the execution by Lessor of this Lease
or at the time of the most recent assignment to which Lessor has consented, or
as it exists immediately prior to said transaction or transactions constituting
such reduction, at whichever time said Net Worth of Lessee was or is greater,
shall be considered an assignment of this Lease by Lessee to which Lessor may
reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this
Lease shall be the net worth of Lessee (excluding any guarantors) established
under generally accepted accounting principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor' option,
be a Default curable after notice per paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable 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 to
fair market rental value or on hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. 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 market value
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
(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%) of the price
previously in effect, whichever is greater, (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
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this paragraph 12.1 by
Lessor shall be limited to compensatory damages and 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, or (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.
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(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 or 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
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 on the Lease or sublease and without
obtaining their consent, and such action shall not relieve such persons from
liability under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or any one else responsible for the performance of the Lessee's
obligations under this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(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.
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 an 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
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rents accruing under such sublease. Lessor shall not, by reason of this 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 sublessee 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), 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" is defined as a failure by the Lessee to observe,
comply with or perform any of the terms, covenants, conditions or rules
applicable to Lessee under this Lease. A "*BREACH" 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
________________
* after Lessee's receipt of written notice of such Default with sufficient
specificity to identify the nature of such Default.
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such Default prior to the expiration of the applicable grace period, shall
entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(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 or any other monetary
payment required to be made by Lessee hereunder, whether to Lessor or to a third
party, 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
Law 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(b), (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 (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 thirty (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.C.
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
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that any provision of this subparagraph (e) is contrary to any applicable law,
such provision shall be of no force or effect, and not affect the validity of
the remaining provisions.
(f) The discovery by Lessor that any financial statement
given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
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 policies, 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 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
all 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 the leasing commission paid by Lessor 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 prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. 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 therein 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 subparagraphs 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
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constitute the applicable notice for grace period purposes required by
subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period
under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute
shall run concurrently after the one such statutory notice, and the failure of
Lessee to cure the Default within the greater of the two 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 abandonment and recover the rent as it becomes due, provided Lessee
has the right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree 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 the 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 for free or abated rent or other 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
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from this Lease and
of no 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 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 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
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be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed
covering the Premises. Accordingly, if any installment of rent or any other sum
due from Lessee shall not be received by Lessor or Lessor's designee within ten
(10) days after such amount shall be due, then, without any requirement for
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.
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 the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished 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 reasonably 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 land area
not occupied by any building, 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 building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. 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 exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent if its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by
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the condemning authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such
repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes
of this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay
to said Brokers 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 Brokers (or in the event there is no separate written agreement
between Lessor and said Brokers, the sum of $______________) for brokerage
services rendered to said Brokers to Lessor in this transaction.
15.5 Lessee and Lessor each represent and warrant to the other that
it has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 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 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 If Lessor desires to finance, refinance, or sell the Premises,
any part thereof, or the building of which the Premises are a part, Lessee and
all Guarantors of Lessee's performance hereunder 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.
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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, or, if this
is a sublease, of the Lessee's interest in the prior lease. 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, 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 no 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 (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
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 solely 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.
23. NOTICES.
23.1 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, 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
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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 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 States 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 confirmation of receipt of the transmission
thereof, provided a copy is also delivered via delivery or mail. If notice is
received on a Sunday or 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 of any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any 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 preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. 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. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
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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 initiated in the
county 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 all 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 and allow such Lender thirty
(30) days following receipt of such notice for the cure of said default before
invoking any remedies Lessee may have by reason thereof. 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 new owner shall not:
(i) be liable for any act or omission of any prior lessor 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 (1) 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 term 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 the 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.
29
<PAGE>
31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's 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' fees award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the 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.
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 on no less than 24 hours advanced
written notice 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 of which they are a part, 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 twenty (120) 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. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. 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,
during the last ninety (90) days of the lease term, Lessor reserves all rights
to install, and all revenues from the installation of, such advertising signs on
the Premises, as do not unreasonably interfere with the conduct of Lessee's
business.
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
30
<PAGE>
make a written election to the contrary by written notice to the holder of any
such lesser 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' or 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, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor's consent to
any act, assignment of this Lease or subletting of the Premises by Lessee shall
not constitute an acknowledgement 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 imposition
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 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 said 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 called for by Paragraph 16.
37.2 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 of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature 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 observance and performance of all of the covenants, conditions and
provisions on Lessee's part
31
<PAGE>
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 Paragraph 39 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 LESSEE. 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 by any
person or entity other than 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 as 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 the 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 Default under Paragraph 13.1,
whether or not the Defaults are cured, during the twelve (12) month period
immediately preceding the exercise of the Option.
(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
32
<PAGE>
to Lessor a monetary obligation of Lessee for a period of thirty (30) days 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
Default 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. MULTIPLE BUILDINGS. If the Premises are part of a group of building
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable 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 such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
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 to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use 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 provisions shall be controlled by the typewritten or handwritten
provisions.
33
<PAGE>
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed 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
SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS
SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO
THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS
SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES 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 LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED
SHOULD BE CONSULTED.
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<PAGE>
The parties hereto have executed this Lease at the place on the dates
specified above to their respective signatures.
Executed at Garden Grove Executed at Fremont
------------------------ ------------------------
on 10/4/94 on 10/3/94
--------------------------------- ---------------------------------
by LESSOR: by LESSEE:
Fujita California Partners III Deanco, Acacia Division, a Delaware
- ------------------------------------ ------------------------------------
corporation
- ------------------------------------ ------------------------------------
By /s/ John L. Paglassotti By /s/ Bob Wehenkel
----------------------------------- ----------------------------------
Name Printed: John L. Paglassotti Name Printed: Bob Wehenkel
------------------------ -----------------------
Title: V. P. Title:
------------------------- ------------------------------
By By
--------------------------------- ---------------------------------
Name Printed: Name Printed:
----------------------- ----------------------
Title: Title:
------------------------------- ------------------------------
Address: Address:
----------------------------- ----------------------------
Tel. No. (___)____ Fax No. (___)____ Tel. No. ( ) Fax No. ( )
--- ---- --- ---- --- ---- --- ----
NOTICE: These forms are often modified to meet changing requirements of law
and industry needs. Always write or call to make sure you are
utilizing the most current form: American Industrial Real Estate
Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA
90071. (213) 687-8777. Fax No. (213) 687-8616.
- -C- COPYRIGHT 1990-BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION. ALL RIGHTS
RESERVED. NO PART OF THESE WORKS MAY BE REPRODUCED IN ANY FORM WITHOUT
PERMISSION IN WRITING.
35
<PAGE>
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE DATED SEPTEMBER
6, 1994 BETWEEN FUJITA CALIFORNIA PARTNERS III, A CALIFORNIA LIMITED
PARTNERSHIP, (LESSOR), AND DEANCO INC., ACACIA DIVISION A DELAWARE CORPORATION,
(LESSEE), FOR THE PROPERTY AT 3230 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA.
PAGE ONE OF THREE
- --------------------------------------------------------------------------------
49. RENT: December 15, 1994 thru March 14, 1995 monthly rent shall be $ 0.00
March 15, 1995 thru March 31, 1996 monthly rent shall be $21,931.52
April 1, 1996 thru March 31, 1997 monthly rent shall be $22,352.22
April 1, 1997 thru March 31, 1998 monthly rent shall be $23,195.70
April 1, 1998 thru March 31, 1999 monthly rent shall be $23,617.44
April 1, 1999 thru March 31, 2000 monthly rent shall be $24,039.18
50. TENANT IMPROVEMENTS: Prior to the commencement of the lease term, Lessor
agrees to complete, at its sole cost and expense, the following work of
improvement (hereinafter referred to as "Lessors Work").
A. The remodeling of the premises to provide for approximately
ten thousand square feet of office space, together with such other work as
described below. All work with respect to such alterations shall be done in a
good and workmanlike manner, in compliance with all applicable laws, rules and
regulations applicable to the premises (including Title 24 modifications), and
in accordance with the Plans and Specifications approved by Lessee and attached
hereto as Exhibit "A".
B. To remove the tile mastic, roofing and other materials that
Lessor is aware of containing asbestos in the building improvements situated on
the premises. Should tenant require any changes in the floorplan or materials
specified then tenant shall reimburse Lessor for any additional costs upon
completion or said additional costs shall be amortized over the term of the
lease at an interest rate of 8% per annum.
51. CONDITION: Notwithstanding Paragraph 2.2 Lessor hereby will be
responsible for any necessary repairs to the air-conditioning and heating
systems during the first twelve (12) months of the lease term.
52. LESSOR'S OBLIGATION TO REPAIR AND MAINTAIN: Section 7.2 of the Lease is
hereby amended to include the following:
"7.2 LESSOR'S OBLIGATIONS: Lessor shall, at Lessor's expense, keep
the foundations, roof structure, subflooring, exterior walls (except for
paint), rough plumbing and electric service to the panel in good order,
condition and repair".
<PAGE>
53. TRIPLE NET CHARGES, TAXES AND INSURANCE: From and after March 31, 1996,
and continuing throughout the term of the Lease, Lessee shall not be responsible
for any increase in real property taxes or property insurance (unless said
increases are due directly to Tenant's occupancy or use) in excess of ten
percent (10%) per year.
54. OPTION TO EXTEND: Lessee shall have two (2) options to extend this lease
for periods of three (3) years each. Lessee must exercise its option by
informing Lessor of its intent to exercise said option in writing no later than
eight (8) months prior to the termination of the original or first extended
term, whichever may be the case. In the event Lessee does not notify Lessor as
specified, then this clause shall be of no further force or effect. The rent
during the option terms shall be 95% of market value and shall include annual
CPI increases. Market value shall be determined as follows:
A) Six months (6) prior to the commencement of the option period
Lessor and Lessee shall meet to establish and agree upon new market value rent
for the option period. If the parties cannot agree, then:
i) Lessor and Lessee shall immediately appoint a mutually
acceptable appraiser or broker to establish the new market rent within the next
30 days. Any associated costs will be split equally between the parties, or
ii) Both Lessor and Lessee shall each immediately select any
pay the appraiser or broker of their choice to establish a market rent within
the next 30 days. If, for any reason either one of the appraisals is not
completed within the next 30 days, as stipulated, then the appraisal that is
completed at that time shall automatically become the new market rent. If both
appraisals are completed and the two appraisers/brokers cannot agree on a
reasonable average market rent then they shall immediately select a third
mutually acceptable appraiser/broker to establish a third market rent within the
next 30 days. The average of the two appraisals closest in value shall then
become the new market rent. The costs of the third appraisal will be split
equally between the parties.
iii) In the event Lessee does not accept the market rent as
determined above then Lessee shall have the right to notify Lessor no later than
ninety (90) days prior to expiration of the original or extended term that it
will not extend the lease and will vacate the premises at the expiration of the
lease term.
B) Upon the establishment of new market rent as described above,
the monthly rental sum calculated for the option period will become the new
"Base Rent" for the purpose of calculating Cost of Living Adjustments described
above.
55. HAZARDOUS SUBSTANCES: Lessor has disclosed that as of the date of
execution of this Lease there exists certain asbestos in the floor tile mastic
and the roof membrane which Lessor covenants to remove prior to the commencement
date of the lease term. Other than the asbestos which has been disclosed and
which will be removed by Lessor prior to the commencement of the lease term, to
the best of Lessor's knowledge and without any investigation there are no
2
<PAGE>
Hazardous Materials on the premises which are in violation of applicable law.
Lessor and Lessor's successors will not hold Lessee or Lessee's assignees
responsible for any hazardous substances which are not attributable to Lessee or
Lessee's Invitees use, occupancy or presence at the leased premises.
56. HOLDING OVER: This lease shall terminate without further notice at the
expiration of the lease term. Any holding over by Lessee after expiration shall
not constitute a renewal or extension of the lease term or give Lessee any
rights in or to the premises unless otherwise expressly provided in this lease.
Any holding over after the expiration without the express consent of Lessor,
shall be construed to be a tenancy from month to month at 115% of the monthly
base rent of the last month of the lease term, and shall otherwise be on the
terms and conditions herein specified insofar as applicable unless otherwise
mutually agreed in writing by the parties.
57. COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE: To the best of
Lessor's knowledge and without investigation the improvements on the Premises
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
With the exception of the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with the standards listed
above Lessor shall, except as otherwise provided in this Lease, promptly after
receipt of written notice from an appropriate governmental agency setting forth
with specificity the nature and extent of such non-compliance, rectify the same
at Lessor's expense.
58. CONDITIONS OF LEASE: Delivery of this Lease to Lessor, duly executed by
Lessee, constitutes an offer by Lessee to lease the Premises as herein set forth
and under no circumstances shall such delivery be deemed to crate an option or
reservation to lease the Premises for the benefit of Lessee. The Lease shall
only become effective and binding upon execution of this Lease by Lessor and
delivery of a signed copy to Lessee.
59. ASSIGNMENT AND SUBLETTING: Lessee shall have the right to assign this
Lease or sublet the Premises to a company which is an affiliated company,
meaning a company which is either controlled by Lessee, or which controls
Lessee, or which enjoys substantially common ownership and whose financial net
worth is greater than or equal to Deanco Inc.'s net worth as stated in the year
and financial statements, dated June 1993.
60. CAPITAL EXPENDITURES: During the initial term of the lease and all
options thereafter if it is determined by mutual agreement of Lessee and
Lessor that capital expenditures in connection with repair or replacement of
the existing roof membrane, HVAC system, or parking lot are necessary after
cumulative said repairs exceed Ten Thousand Dollars ($10,000.00), then the
additional costs shall be paid by Lessor, amortized over the useful life of
the improvement
3
<PAGE>
and added to Tenant's monthly rent over the portion of the lease term
applicable to Tenant's occupancy, unless said repairs or replacement are due
to lack of proper maintenance or negligence of Lessee, in which case said
costs shall be the sole responsibility of the Lease.
ACKNOWLEDGED AND AGREED:
DEANCO INC., ACACIA DIVISION
By: /s/ Bob Wehenkel Date: 10/3/94
-------------------------------------- ------------------------
Bob Wehenkel, President
By: /s/ John L. Paglassotti Date: 10/4/94
-------------------------------------- ------------------------
Fujita California Partners III,
a California Limited Partnership
4
<PAGE>
EXHIBIT 11.1
RICHEY ELECTRONICS, INC.
COMPUTATION OF EARNINGS PER SHARE
($ AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED TWELVE MONTHS ENDED
----------------------- -------------------------
DEC 31, DEC 31, DEC 31, DEC 31,
1996 1995 1996 1995
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Primary earnings per share:
Net income used to compute primary
earnings per share $ 1,905 $ 209 $ 6,536 $ 2,868
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average number of shares used to
compute primary earnings per share 9,063 9,054 9,060 8,036
-------- ------- -------- --------
-------- ------- -------- --------
Primary earnings per share $ 0.21 $ 0.02 $ 0.72 $ 0.36
-------- ------- -------- --------
-------- ------- -------- --------
Fully diluted earnings per share:
Net income $ 1,905 $ 209 $ 6,536 $ 2,868
Add: Interest on convertible subordinated
notes payable, net of taxes 649 -- 2,100 --
-------- ------- -------- --------
Net income used to compute fully diluted
earnings per share $ 2,554 $ 209 $ 8,636 $ 2,868
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average number of shares
outstanding 9,063 9,054 9,060 8,036
Add: Weighted average shares of
convertible subordinated notes payable assuming
conversion 3,947 -- 3,316 --
-------- ------- -------- --------
Weighted average number of shares used to
compute fully diluted earnings per share 13,010 9,054 12,376 8,036
-------- ------- -------- --------
-------- ------- -------- --------
Fully diluted earnings per share $ 0.20 $ 0.02 $ 0.70 $ 0.36
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF RICHEY ELECTRONICS, INC.
RI Interconnect Systems, Inc., a Delaware corporation.
Richey Electronics, Inc. has not contributed capital to this wholly-owned
subsidiary and this subsidiary does not have any assets.
<PAGE>
EXHIBIT 23.1
[MCGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the April 24, 1996
Registration Statement and related prospectus on Form S-2 of our report,
dated February 7, 1997, which appears on page 22 of the annual report on Form
10-K, relating to the financial statements of Richey Electronics, Inc. as of
December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996. We also consent to the reference to our Firm under
the caption "Experts" appearing in the prospectus.
MCGLADREY & PULLEN, LLP
Pasadena, California
March 18, 1997
<PAGE>
EXHIBIT 23.2
[MCGLADREY & PULLEN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the January 12, 1996
Registration Statement on Form S-8 of our report, dated February 7, 1997, on
the financial statements of Richey Electronics, Inc. as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31,
1996, which appears on page 22 of Form 10-K of Richey Electronics, Inc. for
the year ended December 31, 1996.
MCGLADREY & PULLEN, LLP
Pasadena, California
March 18, 1997
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