SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the Fiscal Year ended April 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission File No. 1-8061
FREQUENCY ELECTRONICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 11-1986657
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 CHARLES LINDBERGH BLVD., MITCHEL FIELD, N.Y. 11553
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 516-794-4500
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------
Common Stock(par value $1.00 per share) American Stock Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 21, 1998 - $73,760,000
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of Registrant's Common Stock, par value $1.00
as of July 21, 1998 - 7,729,221.
DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by
reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held on or about October 5, 1998.
(Cover page 1 of 195 pages)
Exhibit Index at Page 55
<PAGE>
PART I
Item 1. Business
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GENERAL DISCUSSION
Frequency Electronics, Inc. (sometimes referred to as "Registrant",
"Frequency Electronics" or "Company") was founded in 1961 as a research and
development firm in the area of time and frequency control. Unless the context
indicates otherwise, references to the Registrant are to Frequency Electronics,
Inc. and its subsidiaries. References to "FEI" are to the parent company alone
and do not refer to any of the subsidiaries.
Frequency Electronics was incorporated in Delaware in 1968 and became the
successor to the business of Frequency Electronics, Inc., a New York
corporation, organized in 1961. The principal executive office of Frequency
Electronics is located at 55 Charles Lindbergh Boulevard, Mitchel Field, New
York 11553. Its telephone number is 516-794-4500.
The current authorized capital of the Registrant consists of 20,000,000
shares of $1.00 par value common stock, of which 7,712,346 shares were
outstanding at April 30, 1998, and 600,000 shares of $1.00 par value preferred
stock, none of which have been issued to date.,
At its inception, Registrant was involved principally in military defense
contracting by way of the design, development, manufacture, and marketing of
precision time and frequency control products. Its products are used in guidance
and navigation, communications, surveillance and electronic counter measure and
timing systems. Such products are used on many of the United States' most
sophisticated military aircraft, satellites, and missiles. The Registrant's
business was highly dependent upon the defense and space spending policies of
the U.S. Government. In recent years, changing defense priorities and severe
federal government budget pressures have significantly changed the market
environment for defense related products.
In an effort to better serve customers on a more competitive basis,
Registrant has transformed itself from a defense contract manufacturer into a
high-tech provider of precision time and frequency products used to synchronize
voice, data and video transmissions in commercial satellites and wireless
communications. Registrant has segmented its operations into two principal
industries: commercial products for space and wireless communications and
defense and space applications for United States Government end-use. The
Registrant's commercial space and commercial communications programs are
produced by its wholly-owned subsidiary FEI Communications, Inc. ("FEIC"). FEIC
was incorporated in Delaware in December 1991, and was created as a separate
subsidiary company to provide ownership and management of assets and other
services appropriate for commercial clients, both domestic and foreign.
Registrant has focused its internal research and development on
re-engineering its core technologies for the commercial markets. During fiscal
1998, 1997 and 1996 approximately 82%, 70% and 45%, respectively, of the
Registrant's sales were for commercial products used for commercial space
applications, wireless communications and foreign governments. For the years
ended April 30, 1998, 1997 and 1996, approximately 18%, 30% and 55%,
respectively, of the Registrant's sales were for U.S. Government end-use.
Registrant believes a substantial commercial market exists for its legacy
technologies and has developed several new commercial product lines as discussed
later in this Item 1.
MATERIAL DEVELOPMENTS
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government all of which is discussed at length
under Item 3. Legal Proceedings. Under the terms of the Settlement Agreement,
FEI paid an aggregate of $8 million to the Government. These settlement payments
are reflected in Registrant's consolidated results of operations for the fiscal
year ended April 30, 1998.
<PAGE>
By letter dated July 9, 1998, FEI was notified by the U.S. Department of
the Air Force of FEI's proposed debarment from Government contracting and from
directly or indirectly receiving the benefits of federal assistance programs.
The proposed debarment is based upon FEI's guilty plea entered in connection
with the Global Disposition and the Settlement Agreement. The proposed debarment
is effective as of July 9, 1998. The consequences of the proposed debarment and
its potential effect on FEI are discussed at length under Item 3. Legal
Proceedings.
In January 1998, in two transactions, Registrant sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust. In one sale
transaction, Registrant sold the building which it had leased to Laboratory
Corporation of America ("LCA"), receiving cash of approximately $15.6 million
and realizing a gain of approximately $5.4 million after selling expenses. In
the other sale, Registrant effected a tax-deferred exchange of the building
which it occupies for approximately 486,000 participation units of Reckson
Operating Partnership, L.P. ("REIT units") which were valued at closing at $12
million. The REIT units are convertible into an equivalent number of shares of
Reckson Associates Realty Corp., a publicly-traded company, after January 6,
1999. Registrant leased back approximately 43% of the building from the
purchaser. (See Item 2. Properties and Notes 6 and 8 to the accompanying
financial statements for additional information regarding these transactions and
the related accounting treatment.)
A portion of the cash proceeds from the LCA building sale were used to
repay the $9 million loan obtained to finance the original construction of the
LCA building. Preceeding the sale of its buildings, Registrant prepaid the
balance of its Nassau County Industrial Development Agency bonds in the amount
of $820,000, including accrued interest.
PRODUCTS
Historically, Registrant has designed, developed, manufactured and
marketed precision time and frequency control products for two principal
markets:. commercial space applications and wireless communications markets and
the traditional heritage government and military markets. Sales summaries for
the two markets during each of the last five years are set forth in Item 6
(Selected Financial Data).
Registrant's products are manufactured from raw material which, when
combined with conventional electronic components available from multiple
sources, become finished products, subsystems and systems used for satellite
applications, space exploration, wireless communications, position location,
radar, sonar and electronic counter-measures. These products, subsystems and
systems are employed in ground-based earth stations, domestic and international
satellites, fixed, transportable, portable and mobile communications
installations as well as aircraft, ships, submarines and missiles. The
Registrant's products are marketed as components, instruments, or complete
systems. Prices are determined based upon the complexity, design requirement and
delivery schedule as determined by project detail.
Components - The Registrant's key technologies include quartz, rubidium
and cesium from which it manufactures precision time and frequency standards and
higher level assemblies which allow the users to generate, synchronize,
transmit, and receive signals in order to locate their position, secure a
communications system, or guide a missile. The components class of Registrant's
products is rounded out with crystal filters and discriminators, surface
acoustic wave resonators, and space and high-reliability custom thick and thin
film hybrid assemblies.
Precision quartz oscillators use quartz resonators in conjunction with
electronic circuitry to produce signals with accurate and stable frequency. The
Registrant's products include several types of quartz oscillators, suited to a
wide range of applications, including: ultrastable units for critical satellite
and strategic systems, and fast warm-up, low power consumption units for mobile
applications, including commercial aircraft and telephony.
<PAGE>
The ovenized quartz oscillator is the most accurate type, wherein the
oscillator crystal is enclosed in a temperature controlled environment called a
proportional oven. The Registrant manufactures several varieties of temperature
controlling devices and ovens.
The voltage-controlled quartz oscillator is an electronically controlled
device wherein the frequency may be stabilized or modulated, depending upon the
application.
The temperature compensated quartz oscillator is an electronically
controlled device using a temperature sensitive device to directly compensate
for the effect of temperature on the oscillator's frequency.
The key components for the atomic instrument products (cesium and
rubidium) are manufactured totally from raw materials. The rubidium lamp, filter
and resonance cell provide the optical subassembly used in the manufacture of
the Registrant's optically pumped atomic rubidium frequency standards. The
cesium tube resonator is also manufactured totally from raw materials and is
used in the manufacture of the Registrant's cesium primary standard atomic
clocks.
High reliability, MIL-M-38510 Class S and B, custom hybrid assemblies are
manufactured in thick and thin film technologies for applications from DC to 44
GHz. These are used in manufacturing the Registrant's products, and also
supplied directly to customers, for space and other high reliability systems.
The Registrant, under an agreement with TRW's Electronics and Technology
Division, markets an extensive line of microwave products, including
millimeter/microwave monolithic integrated circuits ("MIMICs") developed by TRW
for the Department of Defense, and microwave monolithic integrated circuits
("MMICs") developed at TRW's own cost. These devices are incorporated into
"supercomponents" and integrated subassemblies.
Efficient and reliable DC-DC power converters are manufactured for the
Registrant's own instruments, and as stand alone products, for space and
satellite applications.
The Registrant manufactures filters and discriminators using its crystal
resonators, for use in its own radio-frequency and microwave receiver, signal
conditioner and signal processor products.
Instruments - The Registrant's instrument line consists of three basic
time and frequency generating instruments and a number of instruments which test
and distribute the time and frequency. The Registrant's time and frequency
generating instruments are the quartz frequency standard, rubidium atomic
standard, cesium beam atomic standards and VSAT transceivers.
The quartz frequency standard is an electronically controlled solid-state
device which utilizes a quartz crystal oscillator to produce a highly stable
output signal at a standardized frequency. The Registrant's frequency standard
is used in communications, guidance and navigation and time synchronization. The
Registrant's products also include a precision frequency standard with battery
back-up and memory capability enabling it to remain in operation if a loss of
power has occurred.
The optically pumped atomic rubidium frequency standard is a solid-state
instrument which provides both timing and low phase noise references used in
wireless communications systems. Rubidium oscillators combine sophisticated
glassware, light detection devices and electronics packages to generate a highly
stable frequency output. Rubidium, when energized by a specific radio frequency,
will absorb less light. The oscillator's electronics package generates this
specific frequency and the light detection device ensures, through monitoring
the decreased absorption of light by the rubidium and the use of feedback
control loops, that this specific frequency is maintained. This highly stable
frequency is then captured by the electronics package and generated as an output
signal. Rubidium oscillators provide atomic oscillator stability, at lower costs
and in smaller packages.
The cesium beam atomic standard utilizes the atomic resonance
characteristics of cesium atoms to generate precise frequency, several orders of
magnitude more accurate than other types of quartz frequency generators. The
atomic standard is a compact, militarized solid-state device which generates
these precision frequencies for use with advanced communications and navigation
equipment. A digital time-of-day clock is incorporated which provides visual
universal time display and provides digital timing for systems use. The atomic
standard manufactured by Registrant is a primary standard, capable of producing
time accuracies of better than one second in seven hundred thousand years.
<PAGE>
The VSAT transceivers consisting of C and KU Bands are intended for use in
satellite communications primarily for private data and voice earth stations.
As communications systems become more precise, the requirement for precise
frequency signals to drive a multitude of electronic equipment is greatly
expanded. To meet this requirement, the Registrant manufactures a distribution
amplifier which is an electronically controlled solid-state device that receives
frequency from a frequency standard and provides multiple signal outputs of the
input frequency. A distribution amplifier enables many items of electronic
equipment in a single facility, aircraft or ship to receive a standardized
frequency and/or time signal from a quartz, rubidium or cesium atomic standard.
Systems - Essentially, the Registrant's systems portion of its business is
manufactured by integrating selections of its products into subsystems and
systems that meet customer-defined needs. This is done by utilizing its unique
knowledge of interfacing these technologies and experience in applying them to a
wide range of systems. Registrant's systems generate electronic frequencies of
predetermined value and then divide, multiply, mix, convert, modulate,
demodulate, filter, distribute, combine, separate, switch, measure, analyze,
and/or compare these signals depending on the system application.
The Systems portion of the business includes a complete line of time and
frequency control systems, capable of generating many frequencies and time
scales that may be distributed to widely dispersed users, or within the confines
of a facility or platform, or for a single dedicated purpose. The time and
frequency control systems combine Registrant's cesium, rubidium and/or crystal
instruments with its other products, to provide systems for space and ground
based communications, space exploration, satellite tracking stations,
satellite-based navigation and position location, secure communication,
submarine and ship navigation calibration, and electronic counter-measures
applications. A number of these time and frequency control systems provide up to
quadruple redundancy to assure operational longevity.
BACKLOG
As of April 30, 1998, the Registrant's backlog amounted to approximately
$21.6 million as compared to the approximately $14 million backlog at April 30,
1997 (see Item 7). The backlog includes purchase orders and contracts from
commercial and foreign customers of approximately $20 million compared to $10
million last year. Approximately 50% of this backlog is expected to be filled
during Registrant's fiscal year ending April 30, 1999. While the backlog
includes firm purchase orders and contracts and may be a guideline in
determining the value of orders which may be deliverable in the period
indicated, it is subject to change by reason of several factors including
possible cancellation of orders, change orders, terms of the contracts and other
factors beyond the Registrant's control. Accordingly, the backlog is not
necessarily indicative of the revenues or profits (losses) which may be realized
when the results of such contracts are reported.
CUSTOMERS AND SUPPLIERS
The Registrant markets its products both directly and through 27
independent sales representative organizations located principally in the United
States. Sales to non-U.S. customers totaled approximately 18%, 21%, and 17% of
net sales in fiscal years 1998, 1997 and 1996 respectively.
The Registrant's products are sold to a variety of customers, both
commercial and governmental. For the years ended April 30, 1998, 1997 and 1996,
approximately 18%, 30% and 55%, respectively, of the Registrant's sales were
made under contracts to the U.S. Government or subcontracts for U.S. Government
end-use.
<PAGE>
Sales to Space Systems Loral ("SSL") and Motorola Corp. each exceeded 10%
of the Company's consolidated sales for the year ended April 30, 1998.
Collectively these two companies accounted for approximately 49% of the
Registrant's consolidated sales for the fiscal year. For the years ended April
30, 1997 and 1996, sales to Hughes Aircraft Company ("HAC") and SSL exceeded 10%
individually and were 51% and 39%, collectively, of consolidated sales. During
the three years ended April 30, 1998, sales to SSL and Motorola were for space
applications and commercial communications, respectively, while sales to HAC
were substantially for U.S. government end-use. The loss by the Registrant of
any one of these companies (except with respect to U.S. government end-use
business) would have a material adverse effect on the Registrant's business. The
Registrant believes its relationship with these companies to be mutually
satisfactory and, except for the proposed debarment by the U.S. Government
discussed in Item 3, is not aware of any prospect for the cancellation or
significant reduction of any of its commercial or existing U.S. Government
contracts.
The Registrant purchases a variety of components such as transistors,
resistors, capacitors, connectors and diodes for use in the manufacture of its
products. The Registrant is not dependent upon any one supplier or source of
supply for any of its component part purchases and maintains alternative sources
of supply for all of its purchased components. The Registrant has found its
suppliers generally to be reliable and price-competitive.
COMMERCIAL MARKETS
Registrant has transformed itself from a defense contract manufacturer
into a high-tech provider of time and frequency products used to synchronize
voice, data and video transmissions in commercial satellites and digital
wireless communications. Registrant has focused its internal research and
development on re-engineering its core technologies for the commercial markets.
As a result, Registrant has experienced accelerating growth in commercial
revenues and anticipates continued substantial sales growth in these areas.
Commercial Space:
The commercial use of satellites launched for communications, navigation,
weather forecasting, video and data transmissions has led to the increased need
and ability to transmit information to earth based receivers. This requires
precise timing and frequency control at the satellite. For example, Registrant
manufactures the master clocks (quartz, rubidium and cesium) and other
significant timing products for many satellite communication systems.
Registrant's space hybrid assemblies are used onboard spacecraft for command,
control and power distribution. Efficient and reliable DC-DC power converters
are also manufactured for the Registrant's own instruments and as stand alone
products for space and satellite applications. Registrant's subminiature
oven-controlled quartz crystal oscillator is a low cost, small size, precision
crystal oscillator suited for high-end performance required in satellite
transmissions, airborne telephony and geophysical survey positioning systems.
Registrant's space-quallified products have been utilized by commercial
satellite programs such as Globalstar, Eutelsat, Inmarsat and Worldstar. New
products based on Registrant's heritage military designs are being introduced to
take advantage of this emerging market. These new products include local
frequency generators, up and down converters, low noise amplifiers and complete
satellite transceivers.
Terrestrial Wireless Communications:
The telecommunications industry is rapidly expanding as a result of the
conversion from analog to digital systems and the expansion of cellular and PCS
networks. Wireless communication services have become an integral part of the
telecommunications market.
Wireless communication networks consist of numerous installations located
throughout a service area, each with its own base station connected by wire or
microwave radio through a network switch. Network operators are in the process
of converting older networks from analog to digital technology in order to
expand network coverage, increase capacity and improve transmission quality.
This upgrade requires very accurate frequency control at the base stations
accomplished through quartz or rubidium oscillators to achieve a higher degree
of precision.
Currently three leading digital technologies are utilized: Time Division
Multiple Access, Code Division Multiple Access and Global System for Mobile
Communications. These transmission protocols are segmented and transmitted over
a wider spectrum of bandwidths than available under analog systems. Digital
systems have a need for more accurate synchronization which is accomplished
through use of precise timing devices located throughout the system. Registrant
manufactures a Commercial Rubidium Atomic Standard, an extremely small, low
cost, low phase noise, stable atomic standard and temperature stable quartz
crystal oscillators ideally suited for use in advanced cellular communications
and wireless telecommunications.
<PAGE>
GOVERNMENT CONTRACTS
During the fiscal years ended April 30, 1998, 1997 and 1996, approximately
18%, 30% and 55%, respectively, of the Registrant's sales were made either
directly with U.S. Government agencies or indirectly with government agencies
through subcontracts intended for government end-use. All of these contracts
were on a fixed price basis. Under a fixed price contract the price paid to the
Registrant is not subject to adjustment by reason of the costs incurred by the
Registrant in the performance of the contract, except for costs incurred due to
contract changes ordered by the customer. These contracts are on a negotiated
basis under which the Registrant bears the risk of cost overruns and derives the
benefit from cost savings.
Negotiations on U.S. Government contracts are sometimes based in part on
Certificates of Current Costs. An inaccuracy in such certificates may entitle
the government to an appropriate recovery. From time to time, the Defense
Contracts Audit Agency ("DCAA") of the Department of Defense audits the
Registrant's accounts with respect to these contracts. The Registrant is not
aware of any basis for recovery with respect to past certificates.
All government end-use contracts are subject to termination by the
purchaser for the convenience of the U.S. Government and are subject to various
other provisions for the protection of the U.S. Government. In the event of such
termination, the Registrant is entitled to receive compensation as provided
under such contracts and in the applicable U.S.
Government regulations.
The Registrant's proprietary products have been used in guidance,
navigation, communications, radar, sonar surveillance and electronic
countermeasure and timing systems. Products are built in accordance with
Department of Defense standards and are in use on many of the United States'
most sophisticated military aircraft, satellites and missiles. The Global
Positioning Satellite System, as well as the MILSTAR Satellite System, are two
examples of the programs in which the Registrant participates. The Registrant
has manufactured the master clock for the Trident missile, the basic timing
system for the Voyager I and Voyager II deep space exploratory missions and the
quartz timing system for the Space Shuttle. The Registrant's cesium beam atomic
clock is presently employed in low frequency secure communications, surveillance
and positioning systems for the United States Air Force, Navy and Army.
Sales summaries for the Commercial and U.S. Government markets during each
of the last five years are set forth in Item 6 (Selected Financial Data).
<PAGE>
RESEARCH AND DEVELOPMENT
The Registrant's technological expertise has been an important factor in
its growth. Until a few years ago, virtually all of its research and development
activities had taken place in connection with customer-sponsored
development-oriented products conducted under fixed price contracts and
subcontracts in support of U.S. Government programs. The Registrant has been
successful in applying its resources to develop prototypes and preproduction
hardware for use in navigation, communication, guidance and electronic
countermeasure programs and space application. The output of these
customer-sponsored projects, in all cases, is of a proprietary nature.
Registrant has focused its internal research and development efforts on
improving the core physics and electronic packages in its time and frequency
products. Registrant continues to conduct research in developing new time and
frequency technologies and improving product manufacturability by seeking to
reduce its production costs through product redesign and other measures to take
advantage of lower cost components.
The Registrant continues to focus a significant portion of its own
resources and efforts on developing hardware for commercial satellite programs
and terrestrial wireless communications systems which it anticipates will result
in future growth and increased profits. During fiscal 1998, 1997 and 1996, the
Registrant expended $1.4 million, $1.5 million, and $1.1 million of its own
funds, respectively, on such research and development activity. (See also Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.) For fiscal 1999, the Registrant has committed up to an additional
$5.5 million to develop hardware for the growing commercial telecommunications
satellite market. This development effort is intended to meet the demand for
satellite transponder components in response to the anticipated launching of
over 2,000 commercial satellites, world-wide, over the next five to seven years.
PATENTS AND LICENSES
The Registrant believes that its business is not dependent on patent or
license protection. Rather, it is primarily dependent upon the Registrant's
technical competence, the quality of its products and its prompt and responsible
contract performance. However, the rights to inventions of employees working for
the Registrant are assigned to the Registrant and the Registrant presently holds
such patents and licenses. Also, in certain limited circumstances, the U.S.
Government may use or permit the use by the Company's competitors, certain
patents or licenses it has funded. Registrant does not believe that patents and
licenses are material to its business.
COMPETITION
The Registrant experiences intense competition with respect to all areas
of its business. The Registrant competes primarily on the basis of the accuracy,
performance and reliability of its products, the ability of its products to
perform in severe environments encountered in space, prompt and responsive
contract performance, and the Registrant's technical competence and price. The
Registrant has a unique and broad product line which includes all three
frequency standards - quartz, rubidium, and cesium. The Registrant believes its
ability to take such raw materials, manufacture finished products, integrate
them into systems and sub-systems, and to interface these systems with end-user
applications by determining the most appropriate type, all under one roof,
provides the Registrant with an advantage over many of its competitors.
Many of the Registrant's competitors are larger, have greater financial
resources and have larger research and development and marketing staffs than the
Registrant. With respect to the cesium beam atomic clock, quartz crystal
standard and rubidium frequency standard, the Registrant competes with
Hewlett-Packard Company, Datum, Inc., and E. G. and G., Inc. The Registrant's
principal competition for space products is the in-house capability of its major
customers.
EMPLOYEES
The Registrant employs 225 persons, none of whom are represented by labor
unions.
OTHER ASPECTS
The Registrant's business is not seasonal and no unusual working capital
requirements exist.
<PAGE>
Item 2. Properties
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Registrant occupies 93,000 square feet of a manufacturing and office
facility located in Mitchel Field, Long Island, New York. This facility is part
of the building which Registrant constructed in 1981 and expanded in 1988 on
land leased from Nassau County. In January 1998, the Registrant sold this
building and the related land lease with the County of Nassau, to Reckson
Associates Realty Corp. ("Reckson"), and leased back the space which it
presently occupies.
Registrant leases its manufacturing and office space from Reckson under an
11-year lease at an annual rental of $400,000 per year with Registrant paying
its pro rata share of real estate taxes along with the costs of utilities and
insurance. The lease provides for two 5-year renewal periods, exercisable at the
option of Registrant, with annual rentals of $600,000 during the first renewal
period and $800,000 during the second renewal period. Under the terms of the
lease, new office and engineering facilities for the Registrant were constructed
at the cost of Reckson. The leased space is adequate to meet Registrant's
present and future operational needs.
The sale of its building to Reckson, a real estate investment trust whose
shares are traded on the New York Stock Exchange ("REIT"), was effected through
a tax-deferred exchange of the building for approximately 486,000 participation
units of Reckson Operating Partnership, L.P. ("REIT units") which were valued at
closing at $12 million. Each REIT unit is convertible into one share of the
common stock of the REIT after January 6, 1999. REIT units may not be sold,
transferred, pledged or disposed of until January 1999. In addition,
approximately 27,000 REIT units have been placed in escrow which may be released
to Registrant based upon the price per share of the REIT on the date of
conversion of REIT units. Under the accounting provisions for sale and leaseback
transactions, the sale of this building is considered a financing and the REIT
units received are reflected as a noncurrent liability while the related
building continues to be reflected as an asset. Upon liquidation of the REIT
units, a portion of the resulting gain on this sale will be deferred and
recognized into income over the term of the leaseback with the balance
recognized in income on the date of liquidation.
In a separate transaction, Registrant also sold to Reckson an adjoining
building which Registrant had constructed and leased to Laboratory Corporation
of America. Registrant received cash of approximately $15.6 million and realized
a gain of approximately $5.4 million after selling expenses. A portion of the
cash proceeds of this sale were used to repay the $9 million loan obtained to
finance the original construction of the LCA building. Preceeding the sale of
its buildings, the Company prepaid the balance of its Nassau County Industrial
Development Bonds in the amount of $820,000, including accrued interest. (See
Note 7 to the accompanying financial statements.)
Item 3. Legal Proceedings
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On June 19, 1998 FEl and the United States government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and related documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters, as follows:
1. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern ,District
of New York, CR No. 93/1261 ("Indictment").
2. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CR No. 93/0176 ("Superseding Indictment"). (The
Indictment and Superseding Indictment are collectively
referred to as the "Criminal Cases").
<PAGE>
3. United States of America vs. Frequency Electronics, Inc.,
Martin Bloch, Abraham Lazar, Harry Newman and Marvin Norworth,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/5200 ("Fox Civil Case").
4. United States of America, ex rel, Howard B. Geldart,
Plaintiff-Relator vs. Frequency Electronics, Inc., Markus
Hechler, Harry Newman, Marvin Norworth and Steven Calceglia,
Defendants, United States District Court, Eastern District of
New York, CV No. 93/4750 ("Geldart qui tam Action").
5. AMRAAM/cesium Grand Jury investigation, United States District
Court, Eastern District of New York ("AMRAAM Investigation").
The foregoing matters are collectively referred to as the "Litigations".
On June 19, 1998 the Criminal Cases were disposed of, as follows: all
criminal charges brought by the United States against FEI's president, Martin B.
Bloch, its director, Abraham Lazar, its secretary/treasurer, Harry Newman, and
its retired contracts manager, Marvin Norworth, have been dismissed, with
prejudice, with all known criminal investigations of these individuals having
been resolved; and the criminal charges brought by the United States against FEI
have been dismissed, with prejudice, with the exception of a single charge of
submitting a false statement, which failed to disclose the full explanation of
its costs on a highly classified government project, as to which FEI pled guilty
and paid the U.S. a fine of $400 Thousand and $1.1 Million as reimbursement for
costs of its investigation, with all known criminal investigations of FEI having
been resolved.
On June 19, 1998 the Fox Civil Case was dismissed, with prejudice, as to
all defendants and FEI paid the U.S. $1.5 Million to settle this case.
On June 19, 1998 the Geldart qui tam Action was dismissed, with prejudice,
as to all defendants and FEI paid the U.S. $5 Million to settle this case.
The individual defendants to the Litigations made no payments to the
government with respect to the Settlement Agreement and Global Disposition. The
Settlement Agreement specifically provided that nothing in the Settlement
Agreement or any payment made pursuant to it constitutes evidence of an
admission of liability, and shall not be construed as an admission with respect
to any issue of law or fact by anyone other than as to FEI with respect to its
guilty plea. As a result of the dismissals of the Criminal Cases as to the
individual defendants, Martin B. Bloch has resumed his position as President of
FEI, Harry Newman has resumed his position as secretary/treasurer, and both
Martin B. Bloch and Abraham Lazar have resumed their original positions as
members of the Board of Directors. The Global Disposition eliminates the
substantial costs and expenses for defending the Litigations which would have
otherwise continued for many years. The payments made pursuant to the Settlement
Agreement have a material effect on Registrant's fiscal 1998 financial results.
A qui tam action was commenced in the United States District Court for the
Eastern District of New York entitled, "The United States of America ex rel.
Ralph Muller, Plaintiff, against Frequency Electronics, Inc., Raytheon Company,
Raytheon Company Subsidiaries #1-10, fictitious names for subsidiaries of
Raytheon Company, Hughes Aircraft Company, Hughes Aircraft Company subsidiaries
#1-20, fictitious names for subsidiaries of Hughes Aircraft Company, and Martin
Bloch, Defendants", index number CV-92 5716 ("Muller Qui Tam Action"). The
Muller Qui Tam Action was brought pursuant to the provisions of the False Claims
Act and is an action by which an individual may, under certain circumstances,
sue one or more third persons on behalf of the Government for damages and other
relief.
<PAGE>
The complaint was filed on or about December 3, 1992, in camera and under
seal pursuant to the provisions of the False Claims Act. The Court unsealed the
complaint by order dated December 3, 1993, after FEI complained to the United
States Attorney for the Eastern District of New York regarding newspaper
articles that charged FEI with manufacturing defective products based upon
claims in an unspecified and undisclosed qui tam action. It is believed that the
Government made applications to the Court on one or more occasions after
December 3, 1992, to continue to have the file in the Muller Qui Tam Action
remain under seal. The complaint was served on FEI and Martin B. Bloch on March
28, 1994 and March 30, 1994, respectively. Under the provisions of the False
Claims Act, the Government is permitted to take over the prosecution of the
action. The Government has declined to prosecute the Muller Qui Tam Action and
the plaintiff, Ralph Muller ("Muller"), is proceeding with the action on behalf
of the Government as is permitted under the False Claims Act. Moreover, while
the action names as parties defendant, Hughes Aircraft Company ("Hughes") and
Raytheon Company ("Raytheon"), along with several of their subsidiaries, it
appears that the Muller Qui Tam Action was dismissed voluntarily by Muller on
April 6, 1994, as to Hughes, Raytheon and their respective subsidiaries. FEI and
Martin Bloch moved to dismiss the complaint on various grounds and at the oral
argument of the motion to dismiss, the Court granted the motion to the extent
that the complaint failed to plead fraud with sufficient particularity as is
required under the Federal Rules of Civil Procedure and the plaintiff was
directed to serve an amended complaint. On February 6, 1996, plaintiff served an
amended complaint ("Amended Complaint").
The Amended Complaint, insofar as it pertains to FEI and Martin Bloch,
contains a series of allegations to the effect that Hughes and Raytheon
contracted with the Government to supply it with Advanced Medium Range Air to
Air Missiles ("AMRAAMS"); Hughes and Raytheon (collectively, the "Contractors")
entered into a subcontract with FEI pursuant to which FEI was to design,
manufacture, test, sell and deliver to the Contractors certain oscillators which
constituted components of the AMRAAMS; that FEI improperly designed,
manufactured and tested the oscillators; that numerous faulty and defective
oscillators were delivered to the Contractors; that the oscillators did not meet
contract specifications; that FEI was aware of the defective and faulty nature
of the oscillators; that FEI and Martin Bloch knowingly directed non-disclosure
of the design flaws; that the concealed design defects in developmental
oscillators permitted FEI to manufacture additional defective oscillators which
were used in operational missiles; that as a direct result of FEI's fraudulent
concealment of the defects, FEI was contracted to design and manufacture
additional oscillators; that when missiles were returned to FEI for repair, FEI
charged the Government for repair even though FEI knew the units had been
defective at the time of delivery; that FEI falsified test results and FEI and
Martin Bloch directed the falsification of test results; and that FEI sold and
delivered the oscillators to the Contractors; as a result of the faulty and
defective oscillators, many of the AMRAAMS failed to function properly; and that
the Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act,
and that the plaintiff Muller be awarded a bounty. Under the False Claims Act, a
recovery can be made in favor of the Government for a civil penalty of not less
than $5,000 and not more than $10,000 as to each false claim and for each false
record and statement, plus three times the amount of damages it is determined
the Government sustained, plus legal fees and expenses.
FEI has determined to vigorously defend the Muller Qui Tam Action. It has
answered the Amended Complaint, denied the material allegations, asserted
seventeen affirmative defenses, and counterclaims for: libel and product libel -
demanding damages of $3,000,000; republication of the libel and product libel -
demanding damages of $3,000,000; slander - demanding damages of $3,000,000;
tortious interference with prospects for additional business relations -
demanding damages of $1,865,010; prima facie tort - demanding damages of
$1,865,010; conversion - demanding damages of $11 plus an amount to be
determined at trial; breach of employment contract - demanding damages of
$1,865,010; breach of fiduciary duty - demanding damages of $1,865,010; plus
punitive damages in the amount of $30,000,000 on each of the tort causes of
action, and legal fees and expenses. The substance of the counterclaims alleged
against Muller are predicated upon a letter dated November 23, 1992 ("November
23 Letter") written by Muller's attorneys Schneider, Harris, Harris and Furman
("SHHF") to the Government which allegedly contained false and libelous
statements concerning FEI's design, manufacture and production of components for
Hughes and Raytheon in connection with the AMRAAMS.
<PAGE>
In addition, FEI has instituted a third party action against SHHF, Robert
Harris, Esq. and Rod Kovel, Esq., attorneys for Muller, in connection with their
alleged authoring and publishing of the November 23 Letter provided to the
Government. The third-party complaint asserts the same claims against the
attorneys as are asserted in the counterclaims against Muller, for libel and
product libel, republication of the libel and product libel, slander, tortious
interference with contractual relations, prima facie tort and conversion. The
counterclaims and third-party complaint have been served. Muller has replied to
the counterclaims asserted in FEI's answer to the Amended Complaint, denied the
substantive allegations and asserted various affirmative defenses. The
third-party defendants have replied to the third-party complaint and have denied
the allegations and asserted various affirmative defenses. Discovery has not
commenced.
Muller moved to dismiss the counterclaims in the answer and the third
party defendants moved to dismiss the third-party complaint. FEI and Martin
Bloch moved to dismiss the complaint in the Muller Qui Tam Action. The motions
were argued on January 5, 1996 and at the time the Court directed the plaintiff
to serve the Amended Complaint. At the oral argument, the Court deferred a
portion of its decision and, in addition, it indicated a formal decision and
order would be provided as to certain of the relief requested. By order dated
August 29, 1996, the Court stated that on January 5, 1996, the Government had
agreed to unseal the case file and that the balance of the relief requested was
denied or otherwise dealt with as reflected on the record at the oral argument
on January 5, 1996. On April 11, 1997, in open Court and on the record, the
Court ordered that the Muller Qui Tam Action is stayed pending resolution of the
Criminal Cases. The Criminal Cases are now resolved by reason of the Global
Disposition. Accordingly, it is anticipated prosecution of this action and the
counterclaims will be resumed.
No opinion can be offered as to the outcome of the Muller Qui Tam Action,
the FEI counterclaims, third-party action or the pending motions.
On December 1, 1993, FEI was served with a complaint in an action
entitled, "In the Court of Chancery of the State of Delaware In and For New
Castle County, Diane Solash Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, Abraham Lazar, John C. Ho, E. John Rosenwald,
Jr., individuals, Defendants and Frequency Electronics, Inc., a Delaware
Corporation, Nominal Defendant", Civil Action No. 13266 ("Solash Action"). At
the time this action was instituted, all of the individual defendants named in
the complaint were directors of FEI, Martin B. Bloch was president and chairman
of the board of directors and Abraham Lazar was a vice-president. Joseph P.
Franklin is presently chairman of the board of directors, Lazar has retired and
is no longer a vice president. On January 24, 1994, plaintiff served an amended
complaint adding as named defendants Harry Newman, FEI's secretary/treasurer and
Marvin Norworth, then FEI's contracts manager. This is a derivative action which
is permitted by law to be instituted by a shareholder for the benefit of a
corporation to enforce an alleged right or claim of the corporation where it is
alleged that such corporation has either failed and refused to do so or may not
reasonably be expected to do so. FEI is named as a nominal defendant. In the
Solash Action, the complaint alleges that the members of FEI's board of
directors may not reasonably be expected to authorize an action against
themselves.
The substance of the amended complaint contains allegations, in general,
as follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The amended complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the amended complaint, together with interest, costs, legal and other
experts' fees.
<PAGE>
FEI and all of the individual defendants have moved to dismiss the
complaint in the Solash Action ("Motion(s)"). To date, the Motions have not been
heard by the Court. FEI has determined to vigorously defend the Solash Action.
Discovery has not commenced. No opinion can be offered as to the outcome of the
Motions or with respect to the Solash Action.
On February 4, 1994, FEI was served with a complaint in an action entitled
"Supreme Court of the State of New York, County of New York, Moise Katz,
Plaintiff, against Martin B. Bloch, Joseph P. Franklin, Joel Girsky, John C. Ho,
Abraham Lazar, E. John Rosenwald, Jr., Defendants, and Frequency Electronics,
Inc., Nominal Defendant", Index Number 93-129450 ("Katz Action"). This is a
derivative action which is permitted by law to be instituted by a shareholder
for the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. FEI is named as a
nominal defendant. In the Katz Action, the complaint alleges that the members of
FEI's board of directors may not reasonably be expected to authorize an action
against themselves. At the time this action was instituted, all of the
individual defendants named in the complaint were directors of FEI, Martin B.
Bloch was president and chairman of the board of directors and Abraham Lazar was
a vice president. Joseph P. Franklin is presently chairman of the board of
directors. Lazar has retired and is no longer a vice president.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a
consequence, the matters alleged in the Indictment occurred; that the individual
defendants were grossly negligent and as a consequence the matters alleged in
the Indictment occurred; that the individual defendants voluntarily participated
in such wrongdoing and attempted to conceal it; and that the individual
defendants intentionally and negligently breached their fiduciary duty to FEI
and its shareholders. The complaint seeks judgment against these defendants in
favor of FEI in the amount of all losses and damages suffered by FEI on account
of the facts alleged in the complaint, together with interest, costs, legal and
other experts' fees.
FEI and all of the defendants have moved to dismiss the complaint in the
Katz Action ("Motion(s)"). At the time of the Motions, the plaintiff moved to
amend the complaint by setting forth certain additional allegations of
wrongdoing including, among others, amplifying allegations with respect to the
Indictment, setting forth allegations relating to the Muller Qui Tam Action, and
allegations attempting to clarify the relationship of the parties to the New
York forum, the latter allegations having been attacked on the Motions. In
connection with the Motions, the defendants stipulated that they would not
object to any application by the plaintiff Katz to intervene in the Solash
action. By order dated September 21, 1994, the Court granted the defendants'
Motions, dismissed the complaint and denied the plaintiff's cross-motions.
<PAGE>
On or about November 17, 1994, FEI was served with a complaint in an
action entitled, "In the Court of Chancery of the State of Delaware In and For
New Castle County, Moise Katz Derivatively, on behalf of Frequency Electronics,
Inc., a Delaware corporation, Plaintiff, vs. Martin B. Bloch, Peter O. Clark,
Joseph P. Franklin, Joel Girsky, John C. Ho, Abraham Lazar, E. John Rosenwald,
Jr., Harry Newman, Marvin Norworth, individuals, Defendants and Frequency
Electronics, Inc., a Delaware corporation, Nominal Defendant", Civil Action No.
13841 ("Katz Delaware Action"). All of the individual defendants named in the
complaint, with the exception of Harry Newman ("Newman") and Marvin Norworth
("Norworth"), were all directors of FEI, Martin B. Bloch was president and
chairman of the board of directors, Abraham Lazar was a vice-president, and
Joseph P. Franklin is presently chairman of the board of directors. Lazar has
retired and is no longer a vice president. Newman is FEI's secretary/treasurer
and Norworth was FEI's contracts manager and is retired. This is a derivative
action which is permitted by law to be instituted by a shareholder for the
benefit of a corporation to enforce an alleged right or claim of the corporation
where it is alleged that such corporation has either failed or refused to do so
or may not reasonably be expected to do so. FEI is named as a nominal defendant.
In the Katz Delaware Action, the complaint alleges that the members of FEI's
board of directors may not reasonably be expected to authorize an action against
themselves.
The substance of the complaint contains allegations, in general, as
follows: the Indictment was issued naming FEI, its directors at the time and
certain of its officers and employees as defendants and, generally alleged, that
they defrauded the government, submitted false statements and invoices on
government projects, destroyed and altered records, and made false statements
and submitted false documents to government officials (The Indictment has been
dismissed with prejudice. FEI pled guilty to a single charge under a Superseding
Indictment of submitting a false statement which failed to disclose the full
explanation of costs on a highly classified government project and the
Superseding Indictment was otherwise dismissed with prejudice as to all
defendants. The Indictment and Superseding Indictment generally contained
similar allegations.); the misconduct of FEI's personnel as alleged in the
Indictment is such that FEI is exposed to material and substantial monetary
judgments and penalties as well as the loss of significant Government business;
such misconduct is likely to continue; the individual defendants were under a
fiduciary obligation to FEI and its shareholders to supervise, manage, and
control with due care and diligence the business operations of FEI and the
business conduct of its personnel; that they failed to do so and as a direct
consequence, the matters alleged in the Indictment occurred; and that the
individual defendants breached their fiduciary duty. The complaint seeks
judgment against the individual defendants in the amount of all losses and
damages suffered by FEI and indemnification, on account of the matters alleged
in the complaint, together with interest, costs, legal, and other experts' fees.
Pursuant to the order of the Court, the Solash Action and the Katz
Delaware Action have been consolidated under consolidated Civil Action No.
13266, with the caption "In Re Frequency Electronics Derivative Litigation"
("Derivative Litigation").
In the Derivative Litigation, FEI and all of the individual defendants
have moved to dismiss the consolidated complaint and to stay the Derivative
Litigation pending a disposition of the Indictment and the Superseding
Indictment ("Motion(s)"). To date, the Motions have not been heard by the Court.
However, as a result of the Motions, pursuant to a Stipulation and Order of the
Court dated May 17, 1995, and a Stipulation and Order of the Court dated June
14, 1995, the Derivative Litigation has been dismissed as to Newman and Norworth
and is otherwise stayed pending a disposition of the Indictment, Superseding
Indictment and related investigations until the further order of the Court. The
Indictment, Superseding Indictment and the related investigations have been
disposed of by reason of the Global Disposition. Accordingly, it is anticipated
the prosecution of the Derivative Litigation will be resumed. FEI has determined
to vigorously defend the Derivative Litigation. Discovery has not been
commenced. No opinion can be offered as to the outcome of the Motion(s) or with
respect to the Derivative Litigation.
FEI has filed claims with its insurance carriers pertaining to potential
coverages for directors and officers relating to the first Grand Jury
Investigation, the Indictment and the Superseding Indictment, the Fox Civil
Case, the Muller Qui Tam Action, the AMRAAM Investigation, the Geldart Qui Tam
Action, the Solash Action and the Katz Action.
<PAGE>
Certain disclaimers of coverage have been made by the carriers with
respect to certain of these matters. No opinion can be offered as to coverage or
the extent of coverage under any of the foregoing policies. At the appropriate
time, FEI intends to vigorously pursue its rights with respect to these
insurance policies.
Included in selling and administrative expenses are legal fees incurred in
connection with the above matters of approximately $741,000, $890,000 and
$919,000 for fiscal years 1998, 1997 and 1996, respectively.
Government Contract Suspension and Debarment
By letter dated July 13, 1998, FEI was notified by the U.S. Department of
the Air Force that it terminated the suspension proceedings initiated against
FEI's president and director, Martin B. Bloch, its former vice president and
director, Abraham Lazar, its secretary/treasurer, Harry Newman and its former
contracts manager, Marvin Norworth. By letter dated July 9, 1998, FEI was
notified by the U.S. Department of the Air Force of FEI's proposed debarment
from Government contracting and from directly or indirectly receiving the
benefits of federal assistance programs. The proposed debarment is based upon
FEI's guilty plea entered in connection with the Global Disposition and the
Settlement Agreement. The proposed debarment is effective as of July 9, 1998 and
has the following consequences:
1. FEI's name will be published in the List of Parties Excluded
From Federal Procurement and Nonprocurement Programs, a
publication of the General Services Administration containing
the names of contractors debarred, suspended, proposed for
debarment, or declared ineligible by any agency of the Federal
Government. Proposed debarment is effective throughout the
executive branch of the Federal Government.
2. Offers will not be solicited from, contracts will not be
awarded to, exiisting contracts will not be renewed or
otherwise extended for, and subcontracts requiring Government
approval will not be approved for FEI by any agency in the
executive branch of the Federal Government unless the head of
the agency taking the contracting action or a designee states
in writing the compelling reason for continued business
dealings between FEI and the agency.
3. FEI may not conduct business with the Federal Government as an
agent or representative of other contractors.
4. No Government contractor may award a subcontract equal to or
in excess of $25,000 to FEI unless there is a compelling
reason to do so and the contractor first notifies the
contracting officer and further complies with certain
Government regulations.
5. No agency in the executive branch shall enter into, renew or
extend primary or lower tier covered transactions in which FEI
is either a participant or principal, unless the head of the
agency grants an exception in writing.
6. FEI may not act as an agent or representative of other
participants in federal assistance programs.
7. FEI's affiliation with or relationship to any organization
doing business with the Government will be carefully examined
to determine the impact of those ties on the responsibility of
the organization to be Government contractor or subcontractor.
Counsel for FEI have met with the Air Force suspension authority and have
explained FEI's position as to why the debarment is inappropriate. The period of
the proposed debarment has not been determined as yet. Debarment is imposed for
a period commensurate with the seriousness of the causes. Generally, debarment
does not exceed three years. The duration of FEI's preexisting suspension will
be considered in determining the debarment period. The debarring official may
also extend the debarment for an additional period if that official determines
that an extension is necessary to protect the Government's interest. A debarment
may not be extended solely on the basis of the facts and circumstances upon
which the initial debarment action was based. The debarring official has the
authority to reduce the period or extent of the debarment. Based upon applicable
Government regulations, FEI does not believe that the proposed debarment should
be for an extended period of time, although FEI is unable to predict the period
of such debarment.
<PAGE>
On February 14, 1997, FEI commenced an action in the United States
District Court for the Eastern District of Virginia, Alexandria Division,
entitled "Frequency Electronics, Inc., Plaintiff, v. United States of America,
Department of the Air Force, Defendant", which sought (1) a declaration that (i)
the Government's decision to continue the Company's suspension from Government
contracting beyond three years violates the applicable provisions of the Federal
Acquisition Regulations ("FAR"), (ii) its continuation of the suspension beyond
three years is punitive in nature, (iii) the summary nature of the
administrative decision to continue the suspension violates the Company's rights
under the Due Process Clause of the Fifth Amendment, denies the procedural due
process and the principles of fundamental fairness mandated by the FAR, and is
otherwise arbitrary and capricious, and an abuse of discretion, and (iv) further
consideration of the matter on remand to the Air Force Suspension Official would
prove to be an exercise in futility, (2) a preliminary and permanent injunction
prohibiting defendant from (i) continuing the Company's suspension, or (ii)
imposing a new suspension or debarment relating to the facts and circumstances
known by the Government at the time of the imposition of the suspension on
December 13, 1993, and (3) an order directing the Government to promptly and
expeditiously take the necessary action to remove the Company's name from the
GSA Lists of Parties Excluded from Federal Procurement or Non-Procurement
Programs.
The Air Force moved for summary judgment. On March 14, 1997, the District
Court granted the Air Force judgment, dismissed the action with prejudice, and
refused to grant and decide the Company's motion for a preliminary injunction.
The Company appealed the District Court's order to the United States Court of
Appeals for the Fourth Circuit. By an Order dated July 1, 1998 the Court of
Appeals affirmed the District Court Order. Registrant has not as yet decided
whether it will seek reargument or will petition the United States Supreme Court
for certiorari to review such decision.
In fiscal year 1999, Registrant anticipates that less than 10% of its
business will be comprised of prime and subcontracts in which the Government is
the end-user. Registrant expects that the balance of its business (greater than
90%), which it has been expanding in recent years, will be in commercial and
export markets unrelated to the Government. While FEI and Registrant believe
debarment is a serious matter, Registrant does not believe debarment will have a
material adverse effect on Registrant's business prospects, its financial
condition, results of its operations or its cash flows.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were required to be submitted by Registrant to a vote of
security holders during the fourth quarter of fiscal 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------
Matters
-------
The Common Stock of the Registrant is listed on the American Stock
Exchange under the symbol "FEI". The following table shows the high and low sale
price for the Registrant's Common Stock for the quarters indicated, as reported
by the American Stock Exchange and as adjusted for the 3-for-2 stock split in
the form of a 50% stock dividend, effective October 31, 1997.
FISCAL QUARTER HIGH SALE LOW SALE
1998 -
FIRST QUARTER $11 3/8 $ 6 3/8
SECOND QUARTER 19 1/2 10 13/16
THIRD QUARTER 20 13 1/8
FOURTH QUARTER 17 3/8 13 1/4
1997 -
FIRST QUARTER $ 6 1/8 $3 5/16
SECOND QUARTER 6 7/8 4 9/16
THIRD QUARTER 8 9/16 5 11/16
FOURTH QUARTER 8 1/2 6 1/8
As of July 21, 1998, the approximate number of holders of record of common
stock was 922.
DIVIDEND POLICY
On March 24, 1997, Registrant announced a policy of distributing a cash
dividend to shareholders of record on April 30 and October 31, payable on June 1
and December 1, respectively. Dividend amounts will be determined by the Board
of Directors prior to each declaration based on the Company's financial
condition and financial performance.
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The following table sets forth selected financial data including net sales
and operating profit (loss) for the five year period ended April 30, 1998. The
information has been derived from the audited financial statements of the
Company for the respective periods.
<TABLE>
<CAPTION>
Years Ended April 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Net Sales
Commercial $26,364 $19,612 $11,220 $ 6,103 $ 8,597
U.S. Government 5,633 8,317 13,872 17,978 18,867
------- -------- ------- ------- -------
Total Net Sales $31,997 $27,929 $25,092 $24,081 $27,464
======= ======= ======= ======= =======
Operating Profit
(Loss) ($ 9,105)(1) $ 2,675 $ 1,047 ($ 6,025) ($ 6,174)
======= ======= ======= ======= ========
Net Earnings
(Loss) $ 64 (2) $ 4,863 $ 2,822 ($ 3,843) ($ 4,622)
======= ======= ======= ======= ========
Average Common Shares Outstanding (3)
Basic 7,368,472 6,967,109 6,939,872 7,253,051 7,401,602
Diluted 7,787,140 7,319,250 6,995,133 7,253,051 7,401,602
Earnings (Loss) per Common Share (3)
Basic $ 0.01 $ 0.70 $ 0.41 ($ 0.53) ($ 0.62)
====== ====== ====== ====== =======
Diluted $ 0.01 $ 0.66 $ 0.40 ($ 0.53) ($ 0.62)
====== ====== ====== ====== =======
Total Assets $88,780 $74,866 $68,770 $65,032 $72,655
======= ======= ======= ======= =======
Long-Term Obligations
and Deferred Items $18,841 $ 5,460 $14,877 $14,959 $15,327
======= ======= ======= ======= =======
Cash dividend declared
per common share (3) $ 0.20 $ 0.10 - - -
======= ======= ======= ======= =======
</TABLE>
(1) Includes litigation settlement of $8 million and US government-related
inventory writedowns and reserves of $4.8 million.
(2) In addition to items in (1) above, includes net gain on sale of
buildings of $4.9 million and the reversal of the valuation allowance
on deferred tax assets of $2.6 million.
(3) All share and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31,
1997.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- ---------------------------------------------------------------
Results of Operations
---------------------
RESULTS OF OPERATIONS
The table below sets forth for the fiscal years ended April 30 the
percentage of consolidated net sales represented by certain items in the
Company's consolidated statements of operations:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales
Commercial 82.4% 70.2% 44.7%
US Government 17.6 29.8 55.3
----- ----- -----
100.0 100.0 100.0
Cost of Sales 80.9 64.7 66.5
Selling and administrative expenses 18.1 20.5 25.1
Litigation settlement 25.0 0.0 0.0
Research and development expenses 4.5 5.2 4.2
----- ----- -----
Operating profit (loss) (28.5) 9.6 4.2
Other income (expense) 24.3 8.6 7.8
Provision (benefit) for income taxes (4.4) 0.7 0.8
------ ----- -----
Net Earnings 0.2% 17.4% 11.2%
===== ===== =====
</TABLE>
Significant Fiscal 1998 Events
As more thoroughly described elsewhere in this Form 10-K and in the notes
to the financial statements, the Company's fiscal 1998 results of operations
were materially impacted by three singular events: (1) the settlement of the
litigations with the U.S. government (Item 3. Legal Proceedings and Note 9 to
the financial statements); (2) the sale of its real estate holdings (Item 2.
Properties and Notes 6 and 7 to the financial statements) and (3) the writedown
or reserve for inventories related to phasing out U.S. government business.
(Note 5 to the financial statements)
In June 1998, the Company settled all outstanding criminal and civil cases
brought by the U.S. government and made total payments of $8 million (Item 3.
Legal Proceedings). Accordingly, including related accrued litigation expenses,
the Company recorded a charge of $8.15 million against fiscal 1998 earnings.
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust, and leased back
a portion of the building which it occupies. (Item 2. Properties) In one sale
transaction, the Company sold the building which it had leased to Laboratory
Corporation of America, receiving cash of approximately $15.6 million and
realizing a gain of approximately $5.4 million after selling expenses. A portion
of the proceeds were used to repay the $9 million loan obtained to finance the
original construction of this building. In the other sale, the Company effected
a tax-deferred exchange of the building which it occupies for approximately
486,000 participation units of Reckson Operating Partnership, L.P. ("REIT
units") which were valued at closing at $12 million. The Company leased back
approximately 43% of this building from Reckson and incurred approximately
$500,000 of relocation expenses related to this leaseback during fiscal 1998.
Under the accounting provisions for sale and leaseback transactions, most of the
ultimate gain on this sale will be deferred and recognized into income over the
term of the lease with the balance recognized in income upon sale or conversion
of the REIT units into shares of Reckson Associates Realty Corp., a
publicly-traded company. Preceeding the sale of its building, the Company
prepaid the balance of its Nassau County Industrial Development Bonds in the
amount of $820,000, including accrued interest.
<PAGE>
During the fiscal year, the Company determined that a writeoff or reserve
of $4.8 million of certain work-in-progress and component parts inventory
related to US Government programs was appropriate. These inventory adjustments
result from the Company's transformation to a commercial space and
telecommunications manufacturer as well as its expectation for reduced
procurement volumes by the US Government due to both smaller Defense Department
budgets and the Government's migration to alternate technologies.
As a result of the building sales coupled with continued operating profits
before nonrecurring charges, the Company has utilized most of its tax net
operating loss carryforward. In addition, with the settlement of the U.S.
government litigation the uncertainty regarding realizability of the Company's
net deferred income tax asset has been removed thus eliminating the need for a
valuation allowance on such amount. Accordingly, during fiscal 1998, the Company
recorded a deferred tax benefit of $2.6 million (net).
Without these significant events, the Company's fiscal 1998 operating
profit, pre-tax earnings and net earnings would be materially different from
that reported in the financial statements as illustrated below:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating profit (loss)- as reported $(9,105) $2,675 $1,047
Add back:
Litigation settlement and expenses 8,150 - -
Inventory writedowns and reserves 4,764 - -
------ ------- ------
Adjusted operating profit 3,809 2,675 1,047
------ ------- ------
Other income (expense) - as reported 7,769 2,388 1,975
Less:
Gain on building sale, net of expenses (4,927) - -
------ ------ ------
Adjusted Other income (expense) 2,842 2,388 1,975
------ ------ ------
Adjusted pretax earnings $6,651 $5,063 $3,022
====== ====== ======
</TABLE>
Operating Profit (Loss)
Operating profit for the year ended April 30, 1998 decreased by $11.8
million from fiscal 1997. Without the litigation settlement and the inventory
adjustments described above, the operating loss would have been a profit of $3.8
million or an increase of $1.1 million (42%) over fiscal 1997's results. This
results from the 15% increase in net sales, a relatively constant gross margin
rate (34% vs. 35%) and a small decline in selling and administrative expenses.
Operating profit for the year ended April 30, 1997, improved by $1.6
million over the year ended April 30, 1996. This result was achieved through the
75% increase in sales to non-U.S. Government customers coupled with significant
improvement in gross margins due to cost cutting efforts. Reduced selling and
administrative expenses and more focused research and development costs, as
discussed below, further enhanced the operating results for the 1997 fiscal
year.
Net Sales
Net sales in fiscal 1998 increased by $4.1 million (15%) over fiscal 1997
with sales to commercial customers increasing by $6.8 million (34%). The
increasing proportion of commercial sales illustrates the Company's successful
transformation into a non-US government provider of specialty timing devices for
commercial space and terrestrial wireless applications. Both fiscal 1998 and
1997 commercial revenues reflect increasing sales of the Company's commercial
rubidium product line for application primarily in the cellular telephone
industry. Sales of this product line have more than doubled in each of the last
three years and are expected to continue to grow at a rapid pace as the Company
further advances its products into the marketplace.
<PAGE>
Net sales in fiscal 1997 increased by $2.8 million (11%) over fiscal 1996.
Sales to commercial customers for the fiscal year ended April 30, 1997 increased
by $8.4 million (75%) over fiscal 1996 as the Company continued to establish
itself as a hardware supplier to the commercial marketplace.
The Company believes that its 36-year legacy in building high-reliability,
precision timing and frequency generation devices for US Government programs
(principally DOD and NASA), uniquely positions it to successfully exploit the
much greater emerging markets in commercial space and wireless communications.
The Company therefore intends to focus its energies on these markets and is
phasing out its business with the U.S. Government. However, the Company will
continue to fulfill its current contractual obligations to US government
programs and will make its proprietary technology available for the benefit of
our country. Consequently, in fiscal 1999 and beyond, the proportion of sales to
be generated from US government programs is expected to continue the declining
trend. This will be significantly offset by increasing demands for the Company's
products in commercial space hardware and terrestrial wireless communications.
Gross margins
Gross margins for the fiscal year ended April 30, 1998 were negatively
impacted by the inventory writedowns and reserves described above. Without such
charges, gross margins would have been 34%. During fiscal 1998, the
profitability of commercial programs versus US government programs became more
distinct. Aggregate gross margins on commercial programs was 38%. US government
programs showed margins of 16% before inventory adjustments and recorded
negative margins of 69% after such adjustments.
Gross margins for the fiscal year ended April 30, 1997, improved modestly
over fiscal year 1996 increasing to 35.3% from 33.5%. These results reflect a
continuation of the cost reductions and process improvements which were
initiated in fiscal 1996. These results also reflect the growth in the
commercial product lines where margins, in general, are larger than on U.S.
government related contracts although the difference in fiscal 1997 was not as
great as that discussed above for fiscal 1998.
Included in the Company's overhead pool, a component of cost of sales, is
a charge for amortization of the Company's ESOP program (see Note 11 to the
financial statements). Due to a change in accounting for this program during
fiscal 1994, the Company recognizes an expense based upon the average market
value of the underlying shares of Company stock which are allocated to the ESOP
each year. As a result of the significant increase in the value of the Company's
stock during fiscal 1998, the charge to ESOP amortization has also increased
significantly, rising to approximately $1.2 million or 125% of the amount
charged to the overhead pool in fiscal 1997. (This is also primarily a non-cash
charge, exceeding the actual cash obligation of the Company by over $800,000.)
Without this excess amortization charge, aggregate gross margins on the
Company's commercial sales during fiscal 1998 would have exceeded 40%. The
impact of this charge in fiscal 1997 and 1996 was negligible. If the Company's
stock value remains at current or higher levels during the next two years, gross
margins will continue to be dampened by this additional noncash ESOP
amortization expense. Despite this potential reduction in margins, with the
continuing growth in sales of its commercial products, the Company anticipates
that future gross margins will be significantly higher than that experienced
during fiscal 1998.
<PAGE>
Selling and administrative expenses
Selling and administrative costs, excluding the litigation settlement and
related costs, declined by $77,000 or 1% for the year ended April 30, 1998, over
fiscal 1997. This decline resulted from reduced litigation-related spending
during much of the fiscal year, reduced accrual for bonuses and lower deferred
compensation expense to certain officers. These reductions were offset by
increased spending for computer system expense and stock-based compensation
amortization expenses, including $236,000 of ESOP amortization expense (see
discussion above under Gross Margins). The fiscal 1998 ESOP amortization is
$115,000 (95%) greater than the amount recorded in fiscal 1997 and exceeds the
actual cash outflow by $150,000.
Selling and administrative costs declined by $588,000 or 9% for the year
ended April 30, 1997, over fiscal 1996. This decrease resulted primarily from a
decrease in bad debt expense by $538,000 after the writeoff in fiscal 1996 of
certain outstanding receivables. While provisions for incentive bonuses in
fiscal 1997 increased in tandem with the improved profitability of the Company,
this was more than offset by decreases in other compensation-related areas such
as adjustments in deferred compensation accruals, better than expected growth in
cash surrender values of officers' and employees' life insurance, and lower
administrative headcount which was effected in the first quarter of fiscal 1996.
Without regard to bad debt expenses, bonuses and the legal fees related to the
government litigation, selling and administrative costs in fiscal 1997 were
$476,000 lower (10%) than in 1996. This result was achieved through a reduction
in the number of personnel, reduced insurance costs, lower usage of professional
services and improved operating efficiencies.
As sales increase, the ratio of selling and administrative expenses to net
sales is expected to decrease. As a result of its settlement of all outstanding
criminal and civil cases brought by the US government, the Company expects the
future level of legal costs to be significantly less than that experienced in
each of the last three years. Because a smaller proportion of Company personnel
are included in the selling and administrative category, the proportional impact
of increasing ESOP amortization will be less than that incurred in cost of
sales.
Research and development expenses
The level of effort in Company-funded research and development projects
during fiscal 1998 was comparable to that of fiscal 1997 with costs decreasing
by $20,000 (1%) from fiscal 1997 levels. Such costs reflect the successful
development of the rubidium and VSAT commercial product lines (see Item 1.
Business) but do not reflect satellite hardware development costs which were
partially funded by customer projects. While the Company retains production
rights to any technology which results from customer-funded, non-recurring
engineering efforts, the costs of such development are recorded in cost of
sales.
Research and development costs in the year ended April 30, 1997, increased
by $411,000 (39%) over fiscal 1996. This increase is due principally to costs
related to the Company's successful commmercial rubidium development efforts.
The Company will continue to focus its research and development activities
on those commercial projects which it expects will provide the best return on
investment and provide the best prospects for the future growth of the Company.
For fiscal 1999, the Company will make a substantial investment of capital and
technical resources to develop generic products for the satellite transponder
market. Where possible, the Company will attempt to secure partial customer
funding for such development efforts but is prepared to spend up to $5.5 million
of its own funds in order to bring such products to the market by the end of
fiscal 1999.
<PAGE>
Other Income (Expense)
Other income (expense) for the year ended April 30, 1998, included the
$4.9 million net gain on the sale of the Company's real estate holdings. Without
such gain, other income (expense) increased by $455,000 (19%) over fiscal 1997.
For the year ended April 30, 1997, other income (expense) increased by $413,000
(21%) over fiscal 1996.
In particular, fiscal 1998 investment income increased by $592,000 (38%)
over fiscal 1997 and fiscal 1997's income increased by $250,000 (19%) over
fiscal 1996. These results were achieved by continuing increases in
interest-earning assets in fiscal 1997 and fiscal 1998. Such assets grew
significantly in the last quarter of fiscal 1998 as a result of the net proceeds
from the real estate sales. In addition to interest income, the Company also
realizes quarterly dividend income on its REIT units. Interest rates, which
impact the level of investment income, were relatively stable in all three
years. Assuming interest rates remain stable, the Company anticipates that
investment income will increase modestly over the level attained in fiscal 1998.
Interest expense in fiscal 1998 decreased by $207,000 (24%) from fiscal
1997 and fiscal 1997 expense decreased by $88,000 (9%) from 1996 levels. During
the third quarter of fiscal 1998, the Company repaid its real estate-related
loans thus realizing significant reductions in its interest payments. For fiscal
1997, the reduced interest expense was the result of declining long-term debt
balances as the Company made scheduled principal payments. As a result of the
loan paydowns and a stable interest rate environment, the Company anticipates
that interest expense will be markedly lower in fiscal 1999 when compared to
earlier fiscal years.
Other income, net, in addition to the net gain on the sale of the
Company's real estate holdings also included rental income through December 1997
under the long-term direct finance lease with Laboratory Corporation of America.
Without the one-time gain, this category declined by $345,000 during fiscal 1998
from fiscal 1997 and by $270,000 from fiscal 1996 levels. This decrease is
attributable to the cessation of finance lease income as a result of the sale of
the leased property during January 1998 as well as additional costs incurred in
moving the Company's operations to new and more efficient space within the
leased back property. The Company anticipates that in future years other income,
net, will be an insignificant contributor to pretax earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet continues to reflect a highly liquid position
with working capital of $63 million at April 30, 1998, which is a substantial
increase from the working capital position of $37 million at April 30, 1997.
This change is principally due to the sale of the Company's real estate holdings
and the concurrent repayment of long-term debt. Included in working capital at
April 30, 1998 is $45.4 million of cash, cash equivalents and short-term
investments, including $12 million of REIT units which are convertible to
Reckson Associates Realty Corp. common stock after January 6, 1999. The
Company's current ratio at April 30, 1998 is 5.7 to 1 compared to a 3.6 to 1
ratio at April 30, 1997. Both ratios are below the Company's recent historical
current ratio of approximately 10 to 1. For year-end April 30, 1998, this ratio
is due to the accrual of $8 million related to the US government litigation
settlement which was paid in June 1998. Excluding such accrual from both cash
and accrued liabilities results in a current ratio of 12.4 to 1 at April 30,
1998. The lower ratio at April 30, 1997, was due to the classification of the $9
million construction loan, paid in January 1998, as a current liability.
Net cash provided by operating activities for the year ended April 30,
1998, was approximately $3.2 million compared to $4 million for fiscal 1997.
This decrease in cash inflow is due to the growth in unbilled receivables of
$5.9 million offset by payments on billed receivables, lower work-in-process
inventories (excluding writedowns and reserves) and higher accounts payable.
Unbilled receivables have grown due to the increased volume in commercial
contracts which, in general, do not provide upfront funding as is typical of
government-related long-term contracts. Work-in-process inventories have
decreased as more projects are accounted for on the percentage completion method
of revenue recognition. Accounts payable have increased by 45% from the balance
at April 30, 1997 due to the timing of the purchases for certain inventory and
purchases of capitalizable assets related to relocation of the Company's office
space within its leased back portion of the building.
<PAGE>
Net cash provided by investing activities for the year ended April 30,
1998, was $2.1 million. Of this amount, $6.6 million was from the proceeds of
the sale of the Company's real estate holdings after repayment of the real
estate construction loan. Through the real estate sale the Company also obtained
$12 million of REIT units. Such units are convertible into shares of Reckson
Associates Realty Corp. common stock after January 6, 1999 and, as such, are
treated as a non-cash item for fiscal 1998. (See Item 2. Properties) The Company
used $3.5 million (net) to acquire certain U.S. government and agency
securities. The Company may continue to invest cash equivalents in longer-term
securities or to convert short-term investments to cash equivalents as dictated
by its investment strategies. The Company also invested $750,000 in production
equipment which will improve the efficiency of its operations and an additional
$280,000 was used to obtain new computer hardware and a new telephone system
which will improve its financial and operational information systems. The
Company will continue to acquire more efficient equipment to automate its
production process and intends to spend $1.5 million to $2 million on capital
equipment related to the development and manufacture of new products. In the
second quarter of fiscal 1999, the Company intends to install the next upgrade
of its financial software, the cost of which is not expected to exceed $150,000,
including the acquisition of next generation personal computers for users. The
purchase of this financial software package two years ago, including the
upgrades, has satisfactorily addressed the issue of compliance with the year
2000 problem. The Company has determined that additional operational,
nonfinancial software must be obtained to resolve the year 2000 issue in certain
production and support areas, the cost of which will not exceed $50,000.
Net cash provided by financing activities for the year ended April 30,
1998, was $47,000. Of this amount, $1.9 million was received in full payment of
the mortgage note receivable due from the purchaser of the Company's former west
coast facility. In addition, payments of $914,000 were received from the sale of
shares of common stock from treasury to satisfy the exercise of stock options
granted to certain employees and payments of $148,000 were received against
notes receivable from certain officers and employees. These inflows were
partially offset by $1.4 million used to retire long-term debt and an additional
$1.5 million used to pay semi-annual cash dividends to shareholders. The Company
will continue to use treasury shares to satisfy the future exercise of stock
options granted to officers and employees in previous years. The Company may
repurchase shares of its common stock for treasury whenever appropriate
opportunities arise but it has neither a formal repurchase plan nor commitments
to purchase additional shares in the future.
In addition to the above investing and financing activities, as a result
of the building sales in January 1998, the Company received REIT units with a
value of $12 million and used $9 million from the cash proceeds of the LCA
building sale to pay down the real estate construction loan. Neither of these
transactions are reflected in the statement of cash flows. Only the net cash
proceeds of the LCA building sale are reflected in investing activities. (See
Item 2. Properties)
The Company will continue to expend its resources and efforts to develop
hardware for commercial satellite programs and terrestrial wireless
communication systems which management believes will result in future growth and
continued profitability. During fiscal 1999, the Company intends to
significantly increase its development spending to develop generic products for
the satellite transponder market. Where possible, the Company will attempt to
secure partial customer funding for such development efforts but is willing to
spend up to $5.5 million of its own funds in order to bring such products to the
market by the end of fiscal 1999. Internally generated cash will be adequate to
fund these development efforts.
<PAGE>
At April 30, 1998, the Company's backlog amounted to approximately $21.6
million as compared to the approximately $14 million backlog at April 30, 1997.
Backlog of commercial and foreign customers approximates $20 million at April
30, 1998. Of this backlog, approximately 50% is realizable during fiscal 1999.
As discussed more thoroughly in Item 3. Legal Proceedings and in Notes 9
and 10 to the consolidated financial statements, the Company has received a
notice of proposed disbarment from receiving contracts from any agency of the
U.S. Government, except under certain circumstances. Because of the Company's
transition to commercial products, the continuation of the debarment is not
expected to have a material adverse effect on liquidity, financial condition or
results of operations. Certain nongovernment initiated civil cases remain
outstanding and the Company is unable to determine the ultimate disposition of
such cases. Any disposition is not expected to have a material effect on the
Company's liquidity or financial condition.
The Company also has available for income tax purposes, approximately $1.5
million of net operating loss carryforwards which may be applied against future
taxable income.
OTHER MATTERS
See discussion of recently issued pronouncements included in Note 1 to the
consolidated financial statements. The financial information reported herein is
not necessarily indicative of future operating results orof the future financial
condition of Registrant. Except as noted, management is unaware of any impending
transactions or events that are likely to have a material adverse effect on
results from operations.
INFLATION
During fiscal 1998, as in the two prior fiscal years, the impact of
inflation on the Registrant's business has not been materially significant.
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Frequency Electronics, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing under Item 14.(a)(1) and (2) on page 54 present fairly, in all
material respects, the consolidated financial position of Frequency Electronics,
Inc. and Subsidiaries as of April 30, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Melville, New York
July 13, 1998.
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1998 and 1997
-----------
<TABLE>
<CAPTION>
ASSETS: 1998 1997
---- ----
(In thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,725 $ 3,448
Marketable securities (Note 3) 36,661 21,112
Accounts receivable, net of allowance for
doubtful accounts of $190 (Notes 4 and 14) 18,640 14,797
Inventories (Note 5) 6,475 11,060
Deferred income taxes (Note 13) 5,000 -
Prepaid expenses and other 986 1,233
------- -------
Total current assets 76,487 51,650
Property, plant and equipment, at cost,
less accumulated depreciation and
amortization (Notes 6 and 7) 9,159 9,059
Investment in direct finance lease - 9,702
Other assets 3,134 4,455
------- -------
Total assets $88,780 $74,866
======= =======
</TABLE>
Continued
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1998 and 1997
(Continued)
-----------
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY: 1998 1997
---- ----
(In thousands)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt (Note 7) $ 479 $ 9,718
Accounts payable - trade 1,283 882
Accrued liabilities (Note 9) 10,854 2,921
Dividend payable 771 746
Income taxes payable 145 73
------- ------
Total current liabilities 13,532 14,340
Long-term debt, net of current maturities (Note 7) 500 1,687
Deferred compensation (Note 12) 3,905 3,737
Deferred income taxes (Note 13) 2,400 -
Other liabilities (Note 6) 12,036 36
------ ------
32,373 19,800
------ ------
Commitments and contingencies (Notes 8 and 10)
Stockholders' equity (Note 12):
Preferred stock - authorized 600,000 shares
of $1.00 par value; no shares issued - -
Common stock - authorized 20,000,000 shares
of $1.00 par value; issued - 9,009,259 shares 9,009 6,006
Additional paid-in capital 36,306 35,190
Retained earnings 15,983 20,414
------ -------
61,298 61,610
Common stock reacquired and held in treasury -
at cost (1,296,913 shares in 1998 and
1,032,812 shares in 1997) (3,632) (4,612)
Unamortized ESOP debt (Notes 7 and 12) (1,000) (1,500)
Notes receivable-common stock (Note 11) (287) (435)
Unearned compensation (89) (77)
Unrealized holding gain 117 80
------- -------
Total stockholders' equity 56,407 55,066
------- -------
Total liabilities and stockholders' equity $88,780 $74,866
======= =======
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Operations
Years ended April 30, 1998, 1997 and 1996
-----------
<TABLE>
1998 1997 1996
---- ---- ----
(In thousands, except share data)
<S> <C> <C> <C>
Net sales (Note 14) $31,997 $27,929 $25,092
------- ------- -------
Cost of sales 25,870 18,075 16,689
Selling and administrative
expenses (Notes 9 and 10) 5,791 5,718 6,306
Litigation settlement (Note 9) 8,000 - -
Research and development expenses 1,441 1,461 1,050
------- ------- -------
Total operating expenses 41,102 25,254 24,045
------- ------- -------
Operating (loss) profit (9,105) 2,675 1,047
Other income (expense):
Investment income 2,135 1,543 1,293
Interest expense (672) (879) (967)
Other, net (Note 6) 6,306 1,724 1,649
------- ------- -------
(Loss) Earnings before (benefit) provision
for income taxes (1,336) 5,063 3,022
(Benefit) Provision for income
taxes (Note 13): (1,400) 200 200
------- ------- -------
Net Earnings $ 64 $ 4,863 $ 2,822
======= ======= =======
Net Earnings per common share:
Basic $ 0.01 $ 0.70 $ 0.41
====== ====== ======
Diluted $ 0.01 $ 0.66 $ 0.40
====== ====== ======
Average shares outstanding (Note 2):
Basic 7,368,472 6,967,109 6,939,872
========= ========= =========
Diluted 7,787,140 7,319,250 6,995,133
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these financial statements.
<PAGE>
FREQUENCY ELECTRONICS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended April 30, 1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
holding
Note gain or
Add'l Treasury stock Receivable (loss) on
Common Stock paid in Retained (at cost) Unamortized Common Unearned marketable
Shares Amount capital earnings Shares Amount ESOP debt Stock Compensation securities Total
--------- ------ ------- -------- ------- ------- --------- ------ ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1995 6,006,300 $6,006 $35,131 $13,443 964,305 ($4,387) ($2,500) ($822) ($ 18) ($39) $46,814
Amortization of ESOP debt
as a result of shares
allocated (156) 500 344
Shares issued under
restricted stock plan 49 (25,000) 92 (116) 25
Purchase of treasury stock 200,600 (698) (698)
Restricted stock
surrendered to treasury
stock 20,000 (82) 82
Amortization of unearned
compensation 21 21
Increase in market value of
marketable securities 95 95
Net Earnings 2,822 2,822
--------- ----- ------ ------ -------- ------ ----- ----- ------ ---- -------
Balance April 30, 1996 6,006,300 6,006 35,024 16,265 1,159,905 (5,075) (2,000) (740) (113) 56 49,423
Exercise of stock options (6) (127,093) 463 457
Amortization of ESOP debt
as a result of shares
allocated 172 500 672
Payment received for common
stock subscribed 305 305
Amortization of unearned
compensation 36 36
Increase in market value of
marketable securities 24 24
Cash dividend, $.15 per (714) (714)
share
Net Earnings 4,863 4,863
--------- ----- ------ ------ --------- ------ ------ ----- ------ ---- -------
Balance April 30, 1997 6,006,300 6,006 35,190 20,414 1,032,812 (4,612) (1,500) (435) (77) 80 55,066
Exercise of stock options (83) (162,495) 938 855
Amortization of ESOP debt
as a result of shares
allocated 976 500 1,476
Shares issued under
restricted stock plan 15 (7,500) 42 (52) 5
Independent Contractor
stock options granted 208 208
Payment received for common
stock subscribed 148 148
Amortization of unearned
compensation 40 40
Increase in market value of
marketable securities 37 37
Stock dividend, 3-for-2 3,002,959 3,003 (3,007) 434,096 (4)
Cash dividend, $.20 per (1,488) (1,488)
share
Net Earnings 64 64
--------- ------ ------- ------- --------- ------- ------- ----- ----- ---- -------
Balance April 30, 1998 9,009,259 $9,009 $36,306 $15,983 1,296,913 ($3,632) ($1,000) ($287) ($ 89) $117 $56,407
========= ====== ======= ======= ========= ======= ====== ===== ===== ==== =======
</TABLE>
The accompanying notes are an
integral part of these financial statements
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1998, 1997 and 1996
-----------
<TABLE>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 64 $4,863 $2,822
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Deferred tax benefit (2,600) - -
Depreciation and amortization
Property 943 921 974
Other 20 18 20
Provision for losses on account
receivable and inventories 4,537 42 996
Gains on marketable securities and
notes receivable (42) (70) (59)
Gain on sale or disposal of
property, plant and equipment (5,869) - (4)
Amortization resulting from
allocation of ESOP shares 1,476 672 344
Employee benefit plan provisions 444 407 765
Noncash interest on finance lease (15) (95) (155)
Changes in assets and liabilities:
Accounts receivable (3,843) (1,424) (101)
Inventories 48 (779) 180
Prepaid and other 247 (207) 231
Other assets (579) (418) (511)
Accounts payable - trade 401 (497) 652
Accrued liabilities 7,933 659 480
Income taxes payable 72 (6) 79
Refundable income taxes - - 318
Other liabilities (81) (37) (78)
----- ----- -----
Net cash provided by operating activities 3,156 4,049 6,953
----- ----- -----
Cash flows from investing activities:
Purchase of marketable securities (13,030) (25,927) -
Proceeds from sale or redemption of marketable
securities 9,560 10,541 5,910
Capital expenditures (1,043) (1,141) (330)
Proceeds from sale of property, plant
and equipment 6,587 - 513
------ ------- ------
Net cash provided by (used in)
investing activities 2,074 (16,527) 6,093
------ ------- ------
</TABLE>
Continued
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended April 30, 1998, 1997 and 1996
(Continued)
-----------
<TABLE>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments of long-term debt (1,374) (751) (749)
Purchase of treasury stock - - (698)
Payment of cash dividend (1,520) - -
Sale of stock from treasury - - 25
Payment on notes
receivable from employees 148 305 -
Proceeds from loan receivable 1,879 - -
Exercise of stock options 914 457 -
------ ------ ------
Net cash provided by (used in)
financing activities 47 11 (1,422)
------ ------ ------
Net increase (decrease) in cash and
cash equivalents 5,277 (12,467) 11,624
Cash and cash equivalents at beginning of year 3,448 15,915 4,291
------ ------ -------
Cash and cash equivalents at end of year $8,725 $3,448 $15,915
====== ====== =======
</TABLE>
Supplemental disclosures of cash flow information (Note 16):
Cash paid during the year for:
Interest $ 766 $ 979 $942
====== ===== ====
Income taxes $1,128 $ 206 $ 81
====== ===== ====
The accompanying notes are
an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of Frequency
Electronics, Inc. and its wholly-owned subsidiaries (the "Company" or
"Registrant;" References to "FEI" are to the parent company alone and do not
refer to any of its subsidiaries.). The Company is principally engaged in the
design, development and manufacture of precision time and frequency control
products and components for microwave integrated circuit applications. See Note
14 for information regarding the Company's commercial and U.S. government
business. Intercompany accounts and significant intercompany transactions are
eliminated in consolidation.
These financial statements have been prepared in conformity with generally
accepted accounting principles and require management to make estimates and
assumptions that affect amounts reported and disclosed in the financial
statements and related notes. Actual results could differ from these estimates.
Inventories:
Inventories, which consist of work-in-process, raw materials and components
are accounted for at the lower of cost (specific and average) or market.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and includes interest on
funds borrowed to finance construction. Expenditures for renewals and
betterments are capitalized; maintenance and repairs are charged to income when
incurred. When fixed assets are sold or retired, the cost and related
accumulated depreciation and amortization are eliminated from the respective
accounts and any gain or loss is credited or charged to income.
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates the future cash
flows expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the long-lived asset, an impairment
loss is recognized. To date, no impairment losses have been recognized.
Depreciation and Amortization:
Depreciation of fixed assets is computed on the straight-line method based
upon the estimated useful lives of the assets (40 years for buildings and 3 to
10 years for other depreciable assets). Leasehold improvements are amortized on
the straight-line method over the shorter of the term of the lease or the useful
life of the related improvement.
Revenue and Cost Recognition:
Revenues under larger long-term contracts, generally defined as orders in
excess of $100,000, are reported in operating results using the percentage of
completion method based upon the ratio that incurred costs bear to total
estimated costs. Changes in job performance may result in revisions to costs and
income and are recognized in the period in which revisions are determined to be
required. For smaller contracts and orders, sales of products and services to
customers are reported in operating results based upon shipment of the product
or performance of the services pursuant to contractual terms. Provisions for
anticipated losses are made in the period in which they become determinable.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as depreciation, indirect
labor and supplies. Selling, general and administrative costs are charged to
expense as incurred.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In accordance with industry practice, inventoried costs contain amounts
relating to contracts and programs with long production cycles, a portion of
which will not be realized within one year.
Income Taxes:
The Company recognizes deferred tax liabilities and assets based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
Earnings Per Share:
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share," became effective for the year ended April 30, 1998. In accordance
with SFAS 128, basic earnings per share are computed by dividing net earnings by
the weighted average number of shares of common stock outstanding. Diluted
earnings per share are computed by dividing net earnings by the sum of the
if-converted effect of unexercised stock options and the weighted average number
of shares of common stock. All periods have been restated to conform with the
requirements of SFAS 128.
All shares and per share amounts have been adjusted to reflect a 3-for-2
stock split in the form of a 50% stock dividend, effective October 31, 1997.
Marketable Securities:
Marketable securities consist of investments in common stocks, mutual
funds, and debt securities of U.S. government agencies. In addition, as a result
of the sale of the Company's real estate holdings (Note 6), marketable
securities include participation units in the Reckson Operating Partnership,
L.P. ("REIT units") which are convertible to common shares of Reckson Associates
Realty Corp. after January 6, 1999. Except for the REIT units, substantially all
other marketable securities at April 30, 1998 and 1997 were held in the custody
of one financial institution. Investments in certain debt and equity securities
are categorized as available for sale and are carried at fair value, with
unrealized gains and losses excluded from income and recorded directly to
stockholders' equity.
Cash Equivalents:
The Company considers certificates of deposit and other highly liquid
investments with original maturities of three months or less to be cash
equivalents. The Company places its temporary cash investments with high credit
quality financial institutions. Such investments may be in excess of the FDIC
insurance limit. No losses have been experienced on such investments.
Fair Values of Financial Instruments:
Cash and cash equivalents and loans payable are reflected in the
accompanying consolidated balance sheets at amounts considered by management to
reasonably approximate fair value based upon the nature of the instrument and
current market conditions. Management is not aware of any factors that would
significantly affect the value of these amounts.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock-based Plans:
Effective May 1, 1996, the Company adopted the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," under which the Company will continue
to measure compensation cost in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Historically, this
has not resulted in compensation cost upon the grant of options under a
qualified stock option plan. However, in accordance with SFAS No. 123, the
Company provides pro forma disclosures of net earnings (loss) and earnings
(loss) per share as if the fair value method had been applied beginning in
fiscal 1996.
Recently Issued Pronouncement
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which are effective for the Company
in future periods. These pronouncements deal with disclosure matters and will
not have any effect on the Company's financial position, results of operations
or cash flows upon adoption.
2. Earnings Per Share
Reconciliation of the weighted average shares outstanding for basic and
diluted Earnings Per Share are as follows:
Years ended April 30,
1998 1997 1996
---- ---- ----
Basic EPS Shares outstanding
(weighted average) 7,368,472 6,967,109 6,939,872
Effect of Dilutive Securities 418,668 352,141 55,261
---------- ---------- -----------
Diluted EPS Shares outstanding 7,787,140 7,319,250 6,995,133
========= ========= =========
3. Marketable Securities
Marketable securities at April 30, 1998 and 1997 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
April 30, 1998
Unrealized
Market Holding
Cost Value Gain
---- ----- ----
<S> <C> <C> <C>
REIT units $12,000 $12,000 -
Fixed income securities 23,200 23,253 53
Equity Securities 1,344 1,408 64
-------- -------- ----
$ 36,544 $ 36,661 $117
======== ======== ====
</TABLE>
<TABLE>
<CAPTION>
April 30, 1997
Unrealized
Market Holding
Cost Value Gain
---- ----- ----
<S> <C> <C> <C>
Fixed income securities $ 19,688 $ 19,763 $75
Equity Securities 1,344 1,349 5
-------- -------- ----
$ 21,032 $ 21,112 $80
======== ======== ===
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Maturities of fixed income securities classified as available-for-sale at
April 30, 1998 are as follows (in thousands):
Current $12,947
Due after one year through five years 9,752
Due after five years through ten years 501
-------
$23,200
=======
The proceeds from sales of available-for-sale securities, principally
fixed-income securities, and the gross realized gains (based on specific
identification) were as follows:
Years ended April 30,
1998 1997 1996
---- ---- ----
Proceeds from sales $9,560 $10,541 $5,910
Gross realized gains $42 $70 $58
4. Accounts Receivable
Accounts receivable include costs and estimated earnings in excess of
billings on uncompleted contracts accounted for on the percentage of completion
basis of approximately $13,618,000 at April 30, 1998 and $7,722,000 at April 30,
1997. Such amounts represent revenue recognized on long-term contracts that has
not been billed, pursuant to contract terms, and was not billable at the balance
sheet date.
5. Inventories
Inventories, which are reported net of reserves of $1,400,000 and $350,000
at April 30, 1998 and 1997, respectively, consisted of the following
(in thousands):
1998 1997
---- ----
Raw Materials and Component Parts $ 2,857 $ 2,797
Work in Progress 3,618 8,263
------- -------
$ 6,475 $11,060
======= =======
Title to all inventories related to United States Government contracts that
provide for progress billings vests in the U.S. Government.
6. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
1998 1997
---- ----
Buildings and building improvements $ 8,751 $ 8,751
Machinery, equipment and furniture 17,374 16,331
------ -------
26,125 25,082
Less, accumulated depreciation and
amortization 16,966 16,023
------ -------
$ 9,159 $ 9,059
======= =======
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In January 1998, in two transactions, the Company sold two buildings to
Reckson Associates Realty Corp., a real estate investment trust whose shares are
traded on the New York Stock Exchange ("REIT"). In one sale transaction, the
Company sold the building which it had leased to Laboratory Corporation of
America ("LCA"), receiving cash of approximately $15.6 million and realizing a
gain of approximately $5.4 million after selling expenses which amount is
included in "Other income, net."
In the other sale, the Company effected a tax-deferred exchange of the
building which it occupies for approximately 486,000 participation units of
Reckson Operating Partnership, L.P. ("REIT units") which were valued at closing
at $12 million. Each REIT unit is convertible into one share of the common stock
of the REIT after January 6, 1999. REIT units may not be sold, transferred,
pledged or disposed of until January 1999. In addition, approximately 27,000
REIT units have been placed in escrow which may be released to the Company based
upon the price per share of the REIT on the date of conversion of REIT units.
The Company leased back approximately 43% of the latter building from the
purchaser. Under the accounting provisions for sale and leaseback transactions,
the sale of this building is considered a financing and the REIT units received
are reflected as a noncurrent liability while the related building continues to
be reflected as an asset. Upon liquidation of the REIT units, a portion of the
resulting gain on this sale will be deferred and recognized into income over the
term of the leaseback with the balance recognized in income on the date of
liquidation. After Reckson completes renovation of the building at its expense,
the Company will occupy new space at an annual rental of $400,000. (Note 8)
A portion of the cash proceeds of the first sale were used to repay the $9
million loan obtained to finance the original construction of the LCA building.
Preceeding the sale of its buildings, the Company prepaid the balance of its
Nassau County Industrial Development Bonds in the amount of $820,000, including
accrued interest. (Note 7)
Depreciation and amortization expense for the years ended April 30, 1998,
1997 and 1996 was $943,000, $921,000, and $974,000, respectively.
Maintenance and repairs charged to operations for the years ended April
30, 1998, 1997 and 1996 was approximately $369,000, $347,000, and $320,000
respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
1998 1997
---- ----
Secured note payable in forty equal quarterly
installments of $125,000 through April 1, 2000
with interest at adjusted LIBOR plus 1.00%
(7.1875% at April 30, 1998) (1) $ 979 $ 1,468
Nassau County Industrial Development Bonds
payable in quarterly installments of $62,500
through September 30, 2000 at 79% of prime (Note 6) - 937
Real Estate Construction Loan in the amount of
$9,000,000, maturity date January 30, 1998
with interest at LIBOR plus 1.375% or prime
plus 0.25% (Note 6) - 9,000
------ -------
979 11,405
Less, current maturities 479 9,718
------ -------
$ 500 $ 1,687
====== =======
(1) This note, originally in the amount of $5,000,000, was used to
fund the purchase of 1,071,652 shares of the Company's common
stock for the Employee Stock Ownership Plan (ESOP). Under the
terms of this loan the Company has the right to borrow either
at the bank's stipulated prime rate, at LIBOR plus 1.0% or at
a designated fixed rate to be determined. Dividends received
on ESOP shares ($21,000 and $32,000 at April 30, 1998 and
1997, respectively) which have not been allocated to
participant accounts are used to pay a portion of the
principal of this note. (see Note 11.) The note is secured by
a portion of the Company's common stock held in treasury. The
note is scheduled to mature during the year ending April 30,
2000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Operating Leases
The Company leases its manufacturing and office space under a leaseback
agreement with Reckson Operating Partnership, L.P. (Note 6) The lease is
accounted for as an operating lease which initially expires in 2009. The lease
contains two five-year renewal periods at the option of the Company. Annual
rental payments are $400,000 for the initial 11-year term. Under the terms of
the lease the Company is required to pay real estate taxes, insurance and other
charges.
Prior to recognition of future amortization of the deferred gain
associated with the sale and leaseback of property (Note 6), lease commitments
for real property at April 30, 1998 are as follows (in thousands):
Aggregate Lease
Commitments
1999 $ 460
2000 445
2001 434
2002 422
2003 400
2004 and thereafter 2,267
------
$4,428
======
Lease rental expenses, including real estate taxes, charged to operations
for the years ended April 30, 1998, 1997, and 1996 were approximately $463,000,
$844,000, and $783,000, respectively.
9. Subsequent Events
On June 19, 1998, FEI and the United States Government (referred to as
either "U.S." or "Government") entered into a Plea Agreement, Civil Settlement
Agreement and Related Documents ("Settlement Agreement") thereby concluding a
global disposition ("Global Disposition") of certain previously reported pending
litigations and matters with the Government. Under the terms of the Settlement
Agreement, FEI paid an aggregate of $8 million to the Government. These
settlement payments are reflected in Registrant's consolidated results of
operations for the fiscal year ended April 30, 1998. Included in selling and
administrative expenses are accruals for additional legal fees related to this
settlement in the amount of $150,000.
By letter dated July 9, 1998, FEI was notified by the U.S. Department of
the Air Force of FEI's proposed debarment from Government contracting and from
directly or indirectly receiving the benefits of federal assistance programs.
The proposed debarment is based upon FEI's guilty plea entered in connection
with the Global Disposition and the Settlement Agreement. The proposed debarment
is effective as of July 9, 1998. The consequences of the proposed debarment and
its potential effect on FEI are discussed further in Note 10.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
10. Commitments and Contingencies
Private Civil Derivative Actions:
On December 1, 1993, and February 4, 1994, two separate derivative
shareholder actions (pursuant to a court order, are now consolidated under one
civil action) were served in state court naming FEI, as a nominal defendant, and
its directors at the time and certain of its officers and employees as
defendants and, generally alleges, based upon a November 1993 federal grand jury
indictment, that they defrauded the government, submitted false statements and
invoices on government projects, destroyed and altered records, and made false
statements and submitted false documents to government officials (The indictment
has been dismissed with prejudice. FEI pled guilty to a single charge under a
superseding indictment, of submitting a false statement which failed to disclose
the full explanation of costs on a highly classified government project, and the
superseding indictment was otherwise dismissed with prejudice as to all
defendants. The indictment and superseding indictment generally contained
similar allegations.); committed the acts as alleged in the qui tam action
described below; and that, as a result FEI is exposed to material and
substantial monetary judgments and penalties and the loss of significant
business and the directors were under a fiduciary obligation to manage and
control the business operations of FEI and the conduct of its personnel. A
derivative action is one permitted by law to be instituted by a shareholder for
the benefit of a corporation to enforce an alleged right or claim of the
corporation where it is alleged that such corporation has either failed and
refused to do so or may not reasonably be expected to do so. The complaint seeks
judgment against the directors in the amount of all losses and damages suffered
by FEI on account of the facts alleged in the complaint, together with interest
costs, legal and other professional fees. FEI and the other defendants have
denied the allegations of and intend vigorously to contest the derivative
actions.
Qui Tam Action:
In March 1994, a qui tam action was served upon the Company and Martin
Bloch, its president. A qui tam action is an action wherein an individual may,
under certain circumstances, bring a legal action against one or more third
persons on behalf of the Government for damages and other relief by reason of
one or more alleged wrongs perpetrated against the Government by such third
persons. The complaint alleges that the Company, in connection with its
subcontract to design and manufacture certain oscillators which are components
of the Government's Advance Medium Range Air to Air Missiles ("AMRAAMS"),
improperly designed, manufactured and tested the oscillators and as a result the
Government sustained damages. The complaint demands an unspecified amount of
damages allegedly suffered by the Government, and asks that the Court determine
the damages and assess civil penalties as provided under the False Claims Act.
Under the False Claims Act, a recovery can be made in favor of the Government
for a civil penalty of not less than $5,000 and not more than $10,000 as to each
false claim and for each false record and statement, plus three times the amount
of damages it is determined the Government sustained, plus legal fees and
expenses. The Company and Mr. Bloch have denied the allegations of and intend to
vigorously defend the qui tam action. On April 11, 1997, the Court ordered the
qui tam action stayed pending resolution of the criminal cases. The criminal
cases have now been resolved and it is, therefore, anticipated this litigation
will be resumed.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Company Position and Legal Fees:
FEI and the individual defendants in each of the legal matters described
above consider the allegations and the charges asserted to be unjustified. They
further consider the actions of FEI and the individual defendants with respect
to the subject matter of these charges to have been taken in good faith and
without wrongful intent, criminal or otherwise. Because of the uncertainty
associated with the foregoing matters, FEI is unable to estimate the potential
liability or loss that may result, if any, and, accordingly, no provision has
been made in the accompanying consolidated financial statements. However, an
unfavorable outcome of these matters could have a material impact on the
Company's financial position, results of operations and cash flows. Included in
selling and administrative expenses are legal fees incurred in connection with
the litigation settlement (Note 9) and the above matters of approximately
$741,000, $890,000, and $919,000 for the fiscal years ended April 30, 1998, 1997
and 1996, respectively.
Government Contract Suspension and Debarment:
By letter dated July 13, 1998, FEI was notified by the U.S. Department of
the Air Force that it terminated the suspension proceedings initiated against
FEI's president and director, Martin B. Bloch, its former vice president and
director, Abraham Lazar, its secretary/treasurer, Harry Newman and its former
contracts manager, Marvin Norworth. By letter dated July 9, 1998, FEI was
notified by the U.S. Department of the Air Force of FEI's proposed debarment
from Government contracting and from directly or indirectly receiving the
benefits of federal assistance programs. The proposed debarment is based upon
FEI's guilty plea entered in connection with the Global Disposition and the
Settlement Agreement. The proposed debarment is effective as of July 9, 1998 and
has the following consequences:
1. FEI's name will be published in the List of Parties Excluded
From Federal Procurement and Nonprocurement Programs, a
publication of the General Services Administration containing
the names of contractors debarred, suspended, proposed for
debarment, or declared ineligible by any agency of the Federal
Government. Proposed debarment is effective throughout the
executive branch of the Federal Government.
2. Offers will not be solicited from, contracts will not be
awarded to, exiisting contracts will not be renewed or
otherwise extended for, and subcontracts requiring Government
approval will not be approved for FEI by any agency in the
executive branch of the Federal Government unless the head of
the agency taking the contracting action or a designee states
in writing the compelling reason for continued business
dealings between FEI and the agency.
3. FEI may not conduct business with the Federal Government as an
agent or representative of other contractors.
4. No Government contractor may award a subcontract equal to or
in excess of $25,000 to FEI unless there is a compelling
reason to do so and the contractor first notifies the
contracting officer and further complies with certain
Government regulations.
5. No agency in the executive branch shall enter into, renew or
extend primary or lower tier covered transactions in which FEI
is either a participant or principal, unless the head of the
agency grants an exception in writing.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. FEI may not act as an agent or representative of other
participants in federal assistance programs.
7. FEI's affiliation with or relationship to any organization
doing business with the Government will be carefully examined
to determine the impact of those ties on the responsibility of
the organization to be a Government contractor or
subcontractor.
Counsel for FEI have met with the Air Force suspension authority and have
explained FEI's position as to why the debarment is inappropriate. The period of
the proposed debarment has not been determined as yet. Debarment is imposed for
a period commensurate with the seriousness of the causes. Generally, debarment
does not exceed three years. The duration of FEI's preexisting suspension will
be considered in determining the debarment period. The debarring official may
also extend the debarment for an additional period if that official determines
that an extension is necessary to protect the Government's interest. A debarment
may not be extended solely on the basis of the facts and circumstances upon
which the initial debarment action was based. The debarring official has the
authority to reduce the period or extent of the debarment. Based upon applicable
Government regulations, FEI does not believe that the proposed debarment should
be for an extended period of time, although FEI is unable to predict the period
of such debarment.
In fiscal year 1999, the Company anticipates that less than 10% of its
business will be comprised of prime and subcontracts in which the Government is
the end-user. The Company expects that the balance of its business (greater than
90%), which it has been expanding in recent years, will be in commercial and
export markets unrelated to the Government. While FEI and the Company believe
debarment is a serious matter, the Company does not believe debarment will have
a material adverse effect on its business prospects, financial condition,
results of its operations or its cash flows.
On February 14, 1997, the Company commenced an action in the United States
District Court for the Eastern District of Virginia against the U.S. Department
of the Air Force to obtain an injunction against continuance of the Government
contract suspension. The Air Force moved for summary judgment. On March 14,
1997, the District Court dismissed the Company's action with prejudice and
refused to grant the Company's motion for an injunction. The Company has
appealed the District Court's order to the United States Court of Appeals for
the Fourth Circuit. On July 1, 1998, the Court of Appeals affirmed the District
Court Order. The Company has not yet decided whether it will seek reargument or
will petition the United States Supreme Court for certiorari to review such
decision.
Other:
The Company is subject to various other legal proceedings and claims which
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position of the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
11. Notes Receivable - Common Stock
In October 1994, certain officers and employees acquired an aggregate of
375,000 shares of the Company's common stock in the open market. The purchase
price of these shares of approximately $822,000 was financed by advances from
the Company to such officers and employees. The notes, collateralized by the
shares of common stock purchased, accrue interest at 1/2% above prime (9.0% at
April 30, 1998) which is payable and adjusted annually. The principal is due in
its entirety at the earlier of termination of employment or October 1999. During
the years ended April 30, 1998 and 1997, certain officers and employees made
payments on their notes in the aggregate amount of $148,000 and $305,000,
respectively. During the year ended April 30, 1996, one of the officers left the
Company and surrendered 37,500 shares acquired under this arrangement.
Accordingly, the related note receivable was satisfied.
12. Employee Benefit Plans
Stock Options:
The Company has various Incentive Stock Option Plans ("ISOP's") for key
management employees (including officers and directors who are employees). The
ISOP's provide that eligible employees may be granted options to purchase an
aggregate of 1,350,000 shares of the Company's common stock. Under one Plan the
options are exercisable one year after the date of grant. Under the remaining
plans the options are exercisable over a four-year period beginning one year
after the date of grant. The options expire ten years after the date of grant
and are subject to certain restrictions on transferability of the shares
obtained on exercise. The options are granted at the discretion of the Stock
Option committee at an exercise price not less than the fair market value of the
Company's common stock on the date of grant.
During fiscal 1998, the Company established an Independent Contractor
Stock Option Plan under which up to 200,000 shares may be granted. An
Independent Contractor Stock Option Committee determines to whom options may be
granted from among eligible participants, the timing and duration of option
grants, the option price, and the number of shares of common stock subject to
each option. During the year ended April 30, 1998, the Company granted options
to acquire 112,500 shares at a price of $15.75, the then fair market value of
the Company's common stock. Of the shares granted, 22,750 are exercisable
immediately, 29,750 are exercisable one year from grant date, 30,000 are
exercisable two years from grant date, and 30,000 are exercisable three years
from grant date. For the year ended April 30, 1998, the Company recognized
compensation expense of $208,000 as a result of these stock option grants.
The excess of the consideration received over the par value of the
common stock or cost of treasury stock issued under these option plans has been
recognized as an increase in additional paid-in capital. No charges are made to
income with respect to the ISOP's.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATMENTS - Continued
Transactions under these plans, including the weighted average exercise
prices of the options, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 625,489 $3.38 874,373 $3.43 814,607 $3.45
Granted 219,000 $13.08 32,250 $4.38 78,000 $3.25
Exercised (216,551) $3.48 (257,884) $3.45 -
Expired or canceled (9,750) $5.64 (23,250) $3.48 (18,234) $3.41
------- ------- ------
Outstanding at end of year 618,188 $6.84 625,489 $3.38 874,373 $3.43
======= ======= =======
Exercisable at end of year 396,736 $4.29 534,026 $3.44 742,373 $3.45
======= ======= =======
Available for grant at
end of year 377,000 388,500 418,047
======= ======= =======
Weighted average fair value
of options granted during
the year $4.39 $1.80 $1.99
===== ===== =====
</TABLE>
The weighted average remaining contractual life of options outstanding
at April 30, 1998 and 1997 is 5.7 and 4.5 years, respectively. At April 30,
1998, 1997 and 1996, option prices per share were from $3.250 to $18.875.
Restricted Stock Plan:
During fiscal 1990, the Company adopted a Restricted Stock Plan which
provides that key management employees may be granted rights to purchase an
aggregate of 375,000 shares of the Company's common stock. The grants,
transferability restrictions and purchase price are determined at the discretion
of a special committee of the board of directors. The purchase price may not be
less than the par value of the common stock.
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
Wtd Avg Wtd Avg Wtd Avg
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Exercisable at beginning
of year 135,000 $4.00 135,000 $4.00 37,500 $0.67
Granted 7,500 $0.67 - 135,000 $4.00
Exercised (37,500) $3.40 - (37,500) $0.67
--------- ----- ------- ------- -----
Exercisable at end of year 105,000 $3.98 135,000 $4.00 135,000 $4.00
======= ===== ======= ===== ======= =====
Balance of shares available
for grant at end of year 92,250 99,750 99,750
====== ====== ======
</TABLE>
Transferability of shares is restricted for a four year period, except in
the event of a change in control as defined. Amounts shown as unearned
compensation in stockholders' equity represent the excess of the fair market
value of the shares over the purchase price at the date of grant which is being
amortized as compensation expense over the period in which the restrictions
lapse.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company applies the disclosure-only provision for SFAS No. 123 in
accounting for the plans. Accordingly, no compensation expense has been
recognized other than for restricted stock awards. Had compensation cost for
stock option awards under the plans been determined based on the fair value at
the grant dates consistent with the provisions of SFAS No. 123, the proforma
effect on the Company's financial statements would have been as follows:
1998 1997 1996
---- ---- ----
Net Earnings, as reported $ 64 $4,863 $2,822
====== ====== ======
Net (Loss) Earnings - pro forma ($ 69) $4,818 $2,801
====== ====== ======
Earnings per share, as reported:
Basic $ 0.01 $ 0.70 $ 0.41
====== ====== ======
Diluted $ 0.01 $ 0.66 $ 0.40
====== ====== ======
(Loss) Earnings per share- pro forma
Basic ($ 0.02) $ 0.70 $ 0.41
======= ====== ======
Diluted ($ 0.02) $ 0.66 $ 0.40
====== ====== ======
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for grants in 1998, 1997 and 1996,
respectively: dividend yield of 1.5%, 3.0% and 0.0%; expected volatility of 37%,
40% and 37%; risk free interest rate (ranging from 6.2% to 6.5%); and expected
lives of ranging from seven to ten years.
Employee Stock Ownership Plan/Stock Bonus Plan:
During 1990 the Company amended its Stock Bonus Plan to become an Employee
Stock Ownership Plan (ESOP). This amendment became effective January 1, 1990. A
loan in the amount of $5,000,000 was negotiated with a bank on May 22, 1990 to
fund the Trust. The loan is for a ten year period with forty equal quarterly
installments of $125,000, plus interest at various rates at the Company's
option. The Company reacquired 561,652 shares of its common stock during fiscal
1990. These shares plus approximately 510,000 additional shares issued by the
Company from its authorized, unissued shares were sold to the ESOP in May 1990.
Shares are released for allocation to participants based on the ratio of
the current year's debt service to the sum of the current year's debt service
plus the principal to be paid for all future years. Through April 30, 1998,
584,012 shares have been allocated to participant accounts.
Effective May 1, 1994, the Company changed its method of accounting for
its ESOP in accordance with Statement of Position ("SOP") 93-6. In accordance
with SOP 93-6 the annual expense related to the leveraged ESOP, determined as
interest incurred on the note plus compensation cost based on the fair value of
the shares released was approximately $1,569,000, $797,000 and $515,000 for the
years ended April 30, 1998, 1997 and 1996, respectively
The SOP also requires that ESOP shares that are committed to be released
are considered outstanding for purposes of calculating earnings per share. The
fair value of unallocated shares approximates $3.5 million and $2.1 million at
April 30, 1998 and 1997, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Deferred Compensation Plan:
The Company has a program for key employees providing for the payment of
benefits upon retirement or death. Under the plan, these employees receive
specified retirement payments for the remainder of the employees' life with a
minimum payment of ten years' benefits to either the employee or their
beneficiaries. The plan also provides for reduced benefits upon early retirement
or termination of employment. The Company pays the benefits out of its working
capital but has also purchased whole life insurance policies on the lives of
certain of the participant's to cover the optional lump sum obligations of the
plan upon the death of the participant.
Deferred compensation expense charged to operations during the years
ended April 30, 1998, 1997, and 1996 was approximately $227,000, $371,000 and
$774,000, respectively.
Profit Sharing Plan:
The Company adopted a profit sharing plan and trust under section 401(k)
of the Internal Revenue Code. This plan allows all eligible employees to defer a
portion of their income through voluntary contributions to the plan. In
accordance with the provisions of the plan, the Company can make discretionary
matching contributions in the form of cash or common stock. There were no such
contributions in fiscal 1998, 1997 or 1996.
Income Incentive Pool:
The Company maintains incentive bonus programs for certain employees
which are based on operating profits of the Company. The Company also adopted a
plan for the President and Chief Executive Officer of the Company, which formula
is based on pre-tax profits. The Company charged $490,000, $500,000 and $125,000
to operations under these plans for the fiscal years ended April 30, 1998, 1997
and 1996, respectively.
13. Income Taxes
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current Federal $ 225 $ 40 $ 45
Current State and Local 975 160 155
------ ------ ----
Current provision 1,200 200 200
Deferred tax provision 8 2,124 298
Reduction in valuation allowance (2,608) (2,124) (298)
------- ------ ----
Total provision (benefit) ($1,400) $ 200 $200
====== ====== ====
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table reconciles the reported income tax expense (benefit)
with the amount computed using the federal statutory income tax rate.
<TABLE>
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) ($ 454) $1,721 $1,027
State and local tax, net of federal
benefit 640 106 102
Excess ESOP amortization 332 - -
Nondeductible expenses 361 - -
Dividend received deduction (62) (32) (21)
Loss carryforward for which no tax
benefit was recorded - 530 -
Benefit of loss carry forward - - (619)
Adjustment to deferred tax balances
due to tax rates 374 - -
Reduction in valuation allowance (2,608) (2,124) (298)
Other items, net, none of which
individually exceeds 5% of
federal taxes at statutory rates 17 (1) 9
------ ------ ------
($1,400) $ 200 $ 200
====== ====== ======
</TABLE>
The components of deferred taxes are as follows (in thousands):
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Litigation settlement $3,040 $ -
Employee benefits 2,138 1,999
Inventory 803 276
Miscellaneous 8 2
Net operating loss carryforwards 614 5,072
------ ------
Total deferred tax asset 6,603 7,349
------ ------
Deferred tax liabilities:
Accounts receivable 2,302 2,248
Property, plant and equipment 1,701 2,493
------ ------
Total deferred tax liabilities 4,003 4,741
------ ------
Net deferred tax asset 2,600 2,608
Valuation allowance - (2,608)
------ ------
$2,600 $ -
====== ======
</TABLE>
At April 30, 1998, the Company has net operating loss carryforwards of
approximately $1.5 million which may be applied against future taxable income
and which expire in fiscal years 2008 through 2011.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. Industry and Operations
The Company is engaged in the manufacture and sale of precision time and
frequency control products for defense and space for U.S. Government end-use and
commercial communication and non-U.S. defense and space. As a result, the
Company's operations have been classified into two business segments as follows
(in thousands):
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales:
Commercial $26,364 $ 19,612 $ 11,220
U.S. Government 5,633 8,317 13,872
Operating profit (loss):
Commercial 6,130 3,242 2,140
U.S. Government (4,522) 2,011 1,551
Corporate (10,713) (2,578) (2,644)
Identifiable assets:
Commercial 19,221 15,809 10,408
U.S. Government 8,266 20,571 23,103
Corporate 55,414 38,486 35,259
Depreciation:
Commercial 698 649 427
U.S. Government 226 253 517
Corporate 19 19 30
Capital expenditures:
Commercial 693 600 3
U.S. Government 123 271 327
Corporate 227 270 -
</TABLE>
Sales to Space Systems Loral ("SSL") and Motorola Corp. each exceeded 10%
of the Company's consolidated sales for the year ended April 30, 1998.
Collectively, these two companies accounted for approximately 49% of the
Company's consolidated sales for the fiscal year. For the years ended April 30,
1997 and 1996, sales to Hughes Aircraft Company ("HAC") and SSL exceeded 10%
individually and 51% and 39%, respectively, of the Company's consolidated sales
for the same periods. During the three years ended April 30, 1998, sales to SSL
and Motorola were for space applications and commercial communications,
respectively, while sales to HAC were substantially all for U.S. Government
end-use.
Included in accounts receivable at April 30, 1998, are amounts due from
SSL and Motorola that total 63% of total accounts receivable. At April 30, 1997,
accounts receivable included amounts due from HAC and SSL comprising 60% of
total accounts receivable.
The loss by the Company of any one of these customers, except with respect
to U.S. Government end-use business, would have a material adverse effect on the
Company's business. The Company believes its relationship with these companies
to be mutually satisfactory and, except for the debarment discussed in Note 10,
is not aware of any prospect for the cancellation or significant reduction of
any of its commercial or U.S. Government contracts.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Export sales were as follows (in thousands):
1998 1997 1996
---- ---- ----
Korea $1,881 $2,418 $1,858
Italy 1,427 876 9
United Kingdom 1,003 519 871
France 855 690 225
Other 518 1,405 1,358
------ ------ ------
$5,684 $5,908 $4,321
====== ====== ======
15. Interim Results (Unaudited)
Quarterly results for fiscal years 1998 and 1997 are as follows (in
thousands, except per share data):
<TABLE>
1998 Quarter
1st 2nd 3rd 4th
--- --- --- ---
<S> <C> <C> <C> <C>
Net sales $7,301 $8,016 $8,033 $8,647
Gross profit 2,481 2,934 371 341
Net earnings (loss) 1,398 1,633 2,380 (5,347)
*Earnings (loss) per share
Basic $0.19 $0.22 $0.32 ($0.71)
Diluted $0.18 $0.21 $0.31 ($0.71)
</TABLE>
During the fourth quarter of fiscal 1998, the Company recorded an
accrual of $8 million for the litigation settlement (Note 9- Subsequent
Events) and wrote off or reserved against inventory related to certain
government programs in the amount of $2.5 million.
<TABLE>
1997 Quarter
1st 2nd 3rd 4th
--- --- --- ---
<S> <C> <C> <C> <C>
Net sales $6,124 $6,576 $7,558 $7,671
Gross profit 2,237 2,395 2,720 2,502
Net earnings 939 1,210 1,342 1,372
*Earnings per share
Basic $0.14 $0.18 $0.19 $0.20
Diluted $0.13 $0.17 $0.18 $0.19
</TABLE>
*Quarterly earnings per share data does not equal the annual amount
due to changes in the average common equivalent shares outstanding.
All per share amounts have been adjusted to reflect a 3-for-2 stock
split in the form of a 50% dividend, effective October 31, 1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
16. Other Information
The following provides information about investing and financing
activities of the Company that affect assets or liabilities but did not result
in cash flow for the three years ended April 30, 1998, 1997 and 1996 and,
therefore, are excluded from the Consolidated Statements of Cash Flows (in
thousands):
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Declaration of cash dividend $ 771 $746 -
3-for-2 stock split in the form of a 50%
stock dividend 3,003 - -
Proceeds from sale of LCA building
Used to pay down construction loan 9,000 - -
REIT units received in connection
with building sale 12,000 - -
Sale of a building, classified as asset
held for sale in 1995, for $2.3 million
consisting of $500,000 in cash and a
promissory note for $1.8 million. - - $1,800
Write-off of fully depreciated fixed assets - - 543
</TABLE>
<PAGE>
FREQUENCY ELECTRONICS, INC. and SUBSIDIARIES
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
---------
Description Balance Charged Charged
at to costs to other Balance at
beginning and accounts- Deductions end of
of period expenses describe -describe period
--------- -------- -------- --------- ------
<S> <C> <C> <C> <C>
Year ended April 30, 1998
- -------------------------
Allowance for doubtful
accounts $190 $49 $49(a) $190
Inventory reserves $350 $4,488 $3,438(b) $1,400
Year ended April 30, 1997
- -------------------------
Allowance for doubtful
accounts $483 $42 $335(a) $190
Inventory reserves $940 $590(b) $350
Year ended April 30, 1996
- -------------------------
Allowance for doubtful
accounts $562 $580 $659(a) $483
Inventory reserves $524 $416 $940
</TABLE>
(a) Accounts written off
(b) Inventory disposed or written off
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
--------------------
NONE
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------- --------------------------------------------------
Item 10(a) Directors of the Registrant
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 5, 1998.
Item 10(b) Executive Officers of the Registrant
The executive officers hold office until the annual meeting of the
Board of Directors following the annual meeting of stockholders, subject to
earlier removal by the Board of Directors. During fiscal 1994 certain officers
had taken voluntary leaves of absence as discussed in Registrant's Form 8-K
dated November 17, 1993. With the settlement of all criminal and civil
litigation brought by the US government, such officers have resumed their
positions with the Registrant.
The names of all executive officers of Registrant and all positions and
offices with the Registrant which they presently hold are as follows:
Joseph P. Franklin - Chairman of the Board of Directors, Chief Executive
Officer, Chief Financial Officer.
Martin B. Bloch - President, Chief Scientist and Director
Marvin Meirs - Vice President, Engineering and Director
Alfred Vulcan - Vice President, Systems Engineering
Markus Hechler - Vice President, Manufacturing and Assistant Secretary
Charles S. Stone - Vice President, Low Noise Development
Leonard Martire - Vice President, Space Systems and Business Development
Harry Newman - Secretary and Treasurer
None of the officers and directors are related.
Joseph P. Franklin, age 64, has served as a Director of the Company since
March 1990. In December 1993 he was elected Chairman of the Board of Directors,
Chief Executive Officer and has served as Chief Financial Officer since
September 15, 1996. He has been the Chief Executive Officer of Franklin S.A.,
since August 1987, a Spanish business consulting company located in Madrid,
Spain, specializing in joint ventures, and was a director of several prominent
Spanish companies. General Franklin was a Major General in the United States
Army until he retired in July 1987.
<PAGE>
Martin B. Bloch, age 62, has been a Director of the Company and of its
predecessor since 1961. Mr. Bloch is the Company's President and Chief
Scientist. Previously, he served as chief electronics engineer of the
Electronics Division of Bulova Watch Company.
Marvin Meirs, age 60, was employed by the Company in an engineering
capacity from 1966 to 1972 and rejoined the Company in such capacity in 1973,
serving as Vice President, Engineering since 1978.
Alfred Vulcan, age 61, joined the Company as an engineer in 1973 and has
served as its Vice President, Systems Engineering since 1978.
Markus Hechler, age 52, joined the Company in 1967, and has served as its
Vice President, Manufacturing since 1982, and as Assistant Secretary since 1978.
Charles S. Stone, age 67, joined the Company in 1984, and has served as its
Vice President since that time. Prior to joining the Company, Mr. Stone served
as Senior Vice President of Austron Inc., from 1966 to 1979, and Senior
Scientist of Tracor Inc., from 1962 to 1966.
Leonard Martire, age 61, joined the Company in August 1987 and served as
Executive Vice President of FEI Microwave, Inc., the Company's wholly-owned
subsidiary until May 1993 when he was elected Vice President, Space Systems.
Harry Newman, age 51, has been employed by the Company as Secretary and
Treasurer since 1979, prior to which he served as Divisional Controller of
Jonathan Logan, Inc., apparel manufacturers, from 1976 to 1979, and as
supervising Senior Accountant with Clarence Rainess and Co., Certified Public
Accountants, from 1971 to 1975.
Item 11. Executive Compensation
- -------- ----------------------
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 5, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------- --------------------------------------------------------------
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 5, 1998.
Item 13. Certain Relationships and Related Transactions
- -------- ----------------------------------------------
This item is incorporated herein by reference from the Registrant's
definitive proxy statement for the annual meeting of stockholders to be held on
or about October 5, 1998.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------- ----------------------------------------------------------------
(a) Index to Financial Statements, Financial Statement Schedules and Exhibits
The financial statements, financial statement schedule and exhibits are
listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
Included in Part II of this report:
Page(s)
Report of Independent Accountants 26
Consolidated Balance Sheets
April 30, 1998 and 1997 27-28
Consolidated Statements of Operations
-years ended April 30, 1998, 1997 and 1996 29
Consolidated Statements of Changes in Stockholders' Equity
- years ended April 30, 1998, 1997 and 1996 30
Consolidated Statements of Cash Flows
- years ended April 30, 1998, 1997 and 1996 31-32
Notes to Consolidated Financial Statements 33-50
(2) FINANCIAL STATEMENT SCHEDULES
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts 51
Other financial statement schedules are omitted because they
are not required, or the information is presented in the
consolidated financial statements or notes thereto.
(3) EXHIBITS
Exhibit 10.12 - Contribution Agreement between Registrant
and Reckson Operating Partnership L.P.
dated January 6, 1998 61
Exhibit 10.13 - Lease Agreement between Registrant and
Reckson Operating Partnership L.P. dated
January 6, 1998 110
Exhibit 10.14 - Plea Agreement, Civil Settlement and
Related Documents dated June 19, 1998 164
Exhibit 23.1 - Consent of Independent Accounts. 194
The exhibits listed on the accompanying Index to Exhibits
beginning on page 55 are filed as part of this annual report.
(b) REPORTS ON FORM 8-K
Registrant's Forms 8-K, dated February 24, 1998, containing disclosure
under Item 5 thereof, was filed with the Securities and Exchange
Commission during the quarter ended April 30, 1998. In addition, a Form
8-K dated June 19, 1998 containing disclosure under Item 5 thereof
(litigation settlement) was filed with the Securities and Exchange
Commission subsequent to year-end.
<PAGE>
INDEX TO EXHIBITS
ITEM 14(a)(3)
Certain of the following exhibits were filed with the Securities and
Exchange Commission as exhibits, numbered as indicated below, to the
Registration Statement or report specified below, which exhibits are
incorporated herein by reference:
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
1 (3) Copy of Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware (1) 3.1
2 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on March 27, 3.2
1981 (2)
3 (3) Copy of By-Laws of the
Registrant, as amended
to date (3) 3.3
4 (4) Specimen of Common Stock
certificate (1) 4.1
5 (10) Stock Bonus Plan of Registrant
and Trust Agreement
thereunder (4) 10.2
6 (10) Employment agreement
between Registrant and
Martin B. Bloch (4) 10.3
7 (10) Employment agreement
between Registrant and
Abraham Lazar (4) 10.4
8 (10) Employment agreement
between Registrant and
John C. Ho (4) 10.5
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- ---------------
9 (10) Employment agreement
between Registrant and
Marvin Meirs (4) 10.6
10 (10) Employment agreement
between Registrant and
Alfred Vulcan (4) 10.7
11 (10) Employment agreement
between Registrant and
Harry Newman (4) 10.8
12 (10) Employment agreement
between Registrant and
Marcus Hechler (4) 10.9
13 (10) Form of stock escrow
agreement between Vincenti &
Schickler as escrow agent
and certain officers of
Registrant (4) 10.10
14 (10) Form of Agreement concerning
Executive Compensation (2) 10.11
15 (10) Registrant's 1982 Incentive
Stock Option Plan (5) 15
16 (10) Amendment dated April 19,
1981 to Stock Bonus Plan
of Registrant and Trust
Agreement (3) 20.1
17 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with
Secretary of State of
Delaware on October 26,
1984 (6) 17
18 (10) Registrant's 1984 Incentive
Stock Option Plan (6) 18
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- --------------
19 (10) Registrant's Cash or Deferral
Profit Sharing Plan and
Trust under Internal Revenue
Code Section 401,
dated April 1, 1985 (7) 19
20 (10) Computation of Earnings Included in the
per Share of Common Financial
Stock Statements
21 (10) Amendment Restated Effective
as of May 1, 1984 of the
Stock Bonus Plan and Trust
Agreement of Registrant (7) 21
22 (3) Amendment to Certificate
of Incorporation of the
Registrant filed with the
Secretary of State of Delaware
on October 22, 1986 (8) 22
23 (10) Amendment Restated Effective
as of May 1, 1984 of the Stock
Bonus Plan and Trust Agreement
of Registrant (8) 23
24 (3) Amended and Restated
Certificate of
Incorporation of the
Registrant filed with
the Secretary of State
of Delaware on
October 26, 1987 (10) 24
25 (22) List of Subsidiaries
of Registrant (10) 25
26 (10) Employment agreement
between Registrant and
Charles Stone (9) 26
27 (10) Employment agreement
between Registrant and
Jerry Bloch (9) 27
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- --------------
28 (10) Registrant's 1987
Incentive Stock Option
Plan (9) 28
29 (10) Registrant's Senior
Executive Stock Option
Plan (9) 29
30 (10) Amendment dated Jan. 1, 1988
to Registrant's Cash or
Deferred Profit Sharing Plan
and Trust under Section 401
of Internal Revenue Code (9) 30
31 (10) Executive Incentive
Compensation Plan between
Registrant and various
employees (9) 31
32 (10) Amended Certificate of In-
corporation of the Registrant
filed with the Secretary of
State of Delaware on
November 2, 1989 (10) 32
33 (10) Registrant's Employee Stock
Option Plan (10) 33
34 (10) Loan agreement between
Registrant and Nat West
Dated May 22, 1990 (10) 34
35 (10) Loan Agreement between
Registrant's Employee
Stock Ownership Plan and
Registrant dated
May 22, 1990 (10) 35
36 (23) Consent of Independent
Accountants to incorporation
by reference of 1998 audit report
in Registrant's Form S-8
Registration Statement. 23.1
<PAGE>
Exhibit No.
as filed with
Registration
Exhibit No. Identifica- Statement or
in this tion per Reg. Description report specified
Form 10-K 229.601(b) of Exhibit below
- --------- ---------- -------------------------- --------------
37 (10) Registrant's 1997 Independent
Contractor Stock Option Plan (11 4.14
38 (10) Contribution Agreement between
Registrant and Reckson Operating
Partnership L.P. dated
January 6, 1998 10.12
39 (10) Lease agreement between
Registrant and Reckson
Operating Partnership, L.P.
dated January 6, 1998 10.13
40 (10) Plea Agreement, Civil Settlement
and Related Documents dated
June 19, 1998 10.14
<PAGE>
NOTES:
(1) Filed with the SEC as an exhibit, numbered as indicated above,
to the registration statement of Registrant on Form S-1, File No. 2-29609,
which exhibit is incorporated herein by reference.
(2) Filed with the SEC as an exhibit, numbered as indicated above,
to the registration statement of Registrant on Form S-1, File No. 2-71727,
which exhibit is incorporated herein by reference.
(3) Filed with the SEC as an exhibit, numbered as indicated above,
to the annual report of Registrant on Form 10-K, File No. 1-8061 for the
year ended April 30, 1981, which exhibit is incorporated herein by
reference.
(4) Filed with the SEC as an exhibit, numbered as indicated above,
to the registration statement of Registrant on Form S-1, File No. 2-69527,
which exhibit is incorporated herein by reference.
(5) Filed with the SEC as an exhibit, numbered as indicated above,
to the annual report of Registrant on Form 10-K, File No. 1-8061, for the
year ended April 30, 1982, which exhibit is incorporated herein by
reference.
(6) Filed with the SEC as an exhibit, numbered as indicated above,
to the annual report of Registrant on Form 10-K, File No. 1-8061, for the
year ended April 30, 1985, which exhibit is incorporated herein by
reference.
(7) Filed with the SEC as exhibit, numbered as indicated above, to
the annual report of Registrant on Form 10-K, File No. 1-8061, for the year
ended April 30, 1986, which exhibit is incorporated herein by reference.
(8) Filed with the SEC as an exhibit, numbered as indicated above,
to the annual report of Registrant on Form 10-K, File No. 1-8061, for the
year ended April 30, 1987, which exhibit is incorporated herein by
reference.
(9) Filed with the SEC as an exhibit, numbered as indicated above,
to the annual report of Registrant on Form 10-K, File No. 1-8061, for the
year ended April 30, 1989, which exhibit is incorporated herein by
reference.
(10) Filed with the SEC as an exhibit, numbered as indicated above,
to the annual report of Registrant on Form 10-K, File No. 1-8061, for the
year ended April 30, 1990, which exhibit is incorporated herein by
reference.
(11) Filed with the SEC as an exhibit, numbered as indicated above,
to the registration statement of Registrant on Form S-8, File No. 333-42233,
which exhibit is incorporated herein by reference.
------------------------
<PAGE>
Exhibit 10.12
CONTRIBUTION AGREEMENT
FREQUENCY ELECTRONICS, INC.
(the "Contributing Party")
and
RECKSON OPERATING PARTNERSHIP L.P.
(the "Partnership")
For Premises located at:
51 and 55 Charles Lindbergh Boulevard
Uniondale, New York
Dated: December 2, 1997
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS 1
2. TRANSFER OF PROPERTY; CONSIDERATION 5
3. INTENTIONALLY DELETED. 6
4. MATTERS TO WHICH THE SALE IS SUBJECT 6
5. OUTSTANDING INTEREST OR UNMARKETABLE TITLE 7
6. ADJUSTMENTS 8
7. CASUALTY 9
8. CONDEMNATION PENDING CLOSING 10
9. THE CONTRIBUTING PARTY'S WARRANTIES AND REPRESENTATIONS 11
10. THE CONTRIBUTING PARTY'S INSTRUMENTS AT CLOSING 16
11. PARTNERSHIP'S REPRESENTATIONS AND WARRANTIES 18
12. PARTNERSHIP'S INSTRUMENTS AT CLOSING 19
13. CONTRACT PERIOD 20
14. BROKERAGE 21
15. CONDITIONS PRECEDENT TO PARTNERSHIP'S OBLIGATION TO CLOSE TITLE 21
16. CLOSING 22
17. CONDITIONS PRECEDENT TO CONTRIBUTING PARTY'S OBLIGATION TO CLOSE TITLE23
18. NOTICES 23
19. DEFAULT 24
20. ASSIGNMENT 26
21. CONSTRUCTION UNDER FREQUENCY LEASE 26
22. COUNTERPARTS 28
23. FURTHER ASSURANCES 28
24. MISCELLANEOUS 28
25. ESCROW AGENT 29
26. ERNST & YOUNG LETTER 31
27. SALE OF PROPERTY 31
28. TAX CERTIORARI PROCEEDING 32
Exhibit A: Description of the Leased Parcel
Exhibit B: Description of the Leases
Exhibit C: Partnership Agreement
Exhibit D: Title Insurance Commitment
Exhibit E: December Rent
Exhibit F: Title Affidavit
Exhibit G: Service Contract, Brokerage Agreements and other Contracts
Exhibit H: Investor Questionnaire
Exhibit I: Assignment and Assumption of Ground Lease
Exhibit J: General Assignment
Exhibit K: FIRPTA Certificate
Exhibit L: Assignment and Assumption of Leases
Exhibit M: Form of Tenant Estoppels
Exhibit N: Registration Rights Agreement
Exhibit O: Landlord Estoppel - Ground Lease
Exhibit P: Lock-up Agreement
Exhibit Q: Intentionally Deleted
Exhibit R: Tax Certiorari
Exhibit S: Ernst & Young Letter
Exhibit T: List of Security Deposits and Delinquent Rent
Exhibit U: Terms of the Escrow
Exhibit X: Transfer Tax Indemnity
<PAGE>
CONTRIBUTION AGREEMENT
THIS CONTRIBUTION AGREEMENT (the "Agreement") made this 2nd day of
December, 1997 by and between FREQUENCY ELECTRONICS, INC., having an address at
55 Charles Lindbergh Boulevard, Mitchel Field, New York 11553 (hereinafter the
"Contributing Party") and RECKSON OPERATING PARTNERSHIP, L.P., having an address
at 225 Broadhollow Road, Melville, New York 11747-0983 (hereinafter, the
"Partnership").
W I T N E S S E T H:
For and in consideration of the mutual covenants and agreements herein
contained, the Contributing Party agrees to transfer and convey to the
Partnership all of the Contributing Party's right, title and interest in those
certain parcels of land located in the Town of Uniondale, New York, as more
particularly described on Exhibit A attached hereto (collectively, the "Leased
Parcel"), including, without limitation, all of the Contributing Party's right,
title and interest in the Ground Lease (as hereinafter defined) and the
Partnership agrees to accept such right, title and interest, subject to the
terms and conditions hereof, together with the buildings and improvements
thereon erected, and the Contributing Party's Other Interests (as hereinafter
defined), all of which, together with the Leased Parcel are hereinafter defined
collectively as the "Property".
The Contributing Party and the Partnership further agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following definitions shall apply:
1.1 "Business Day" shall mean any day other than a Saturday, Sunday or
State of New York or federal legal holiday.
1.2 The "Closing" shall mean the closing of the transactions
contemplated by this Agreement.
1.3 The "Closing Date" shall be the date the Contributing Party's
interest in the Ground Lease is assigned to the Partnership in accordance with
the terms and conditions of this Agreement.
1.4 The "Consideration" shall have the meaning set forth in Section
2.1 hereof.
1.5 The "Contract Period" shall mean the period commencing on the date
of this Agreement until the Closing Date.
1.6 The "Contributing Party's Other Interests" shall be all of the
Contributing Party's interests in and to the Property (including fixtures
appurtenant to the Property), or appertaining thereto, together with all the
singular tenements, hereditaments and appurtenances thereunto belonging or in
any wise appertaining, including without limitation:
a) All of the right, title and interest of the
Contributing Party in and to the Ground Lease and any easements, grants of
right or other agreements affecting the Property, or comprising the
"Permitted Encumbrances" (as hereinafter defined), including any structures
or improvements erected pursuant to such easements, grants of right or other
agreements, whether or not situate upon the Leased Parcel.
b) All of the right, title and interest, if any,
of the Contributing Party in and to any land lying in the bed of any street,
road or avenue opened or proposed in front of or adjoining the Leased
Parcel to the center line thereof and all right, title and interest of the
Contributing Party in and to any award to be made in lieu thereof and in and
to any unpaid award for damages to said premises by reason of change of grade of
any street; all real estate tax refunds with respect to the Property (which
real estate tax refunds are subject to adjustment in accordance with Section
6 hereof);and the Contributing Party shall execute and deliver tothe Partnership
on closing of title or thereafter on demand all proper instruments for the
conveyance of such title and the assignment and collection of any such award.
c) All of the rights and interest of the
Contributing Party in and to any lease,license or other like agreement affecting
the Property, including, without limitation, the Lockheed Lease, the National
Health Laboratory Lease and the Frequency Lease, and to any deposits or
securities held by the Contributing Party in connection therewith at the Closing
of title hereunder.
d) All of the rights and interest of the
Contributing Party in and to all permits, licenses, guaranties, warranties and
approvals of whatsoever nature affecting theProperty orany improvements thereon.
1.7 The "Deposit" shall mean those amounts paid by the Partnership
pursuant to subsection 2.3 of this Agreement together with all interest earned
thereon.
1.8 The "Environmental Laws" mean all federal, state and local laws,
regulations, rules and ordinances relating to pollution or protection of the
environment, enforceable against the Property or the Contributing Party
including, without limitation, laws relating to releases or threatened releases
of hazardous substances, oils, pollutants or contaminants into the indoor or
outdoor environment (including, without limitation, ambient air, surface water,
groundwater, land, surface and subsurface strata) or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, release,
transport or handling of hazardous substances, oils, pollutants or contaminants
expressly intending to include without limitation asbestos.
1.9 "FEI Realty Leases" shall mean, collectively, the Agreement of
Sublease dated December 27, 1990 between the Contributing Party, as landlord,
and Fei Realty Corp., as tenant, and the Agreement of Sublease dated December
27, 1990 between Fei Realty Corp., as landlord, and Frequency Properties Corp.,
as tenant.
1.10 The "Frequency Lease" shall mean the lease to be executed on or
prior to the Closing Date between the Partnership, as landlord and contract
vendee, and the Contributing Party, as tenant, with respect to all of the
premises located at 55 Charles Lindbergh Boulevard, Mitchel Field, New York not
leased pursuant to the Lockheed Lease, which Frequency Lease will contain
approximately 91,027 square feet of space.
1.11 "Ground Lease" shall mean the Lease Agreement dated February 24,
1981 between the County of Nassau, as landlord, and the Contributing Party, as
tenant, with respect to the Property.
1.12 The "Initial Escrowed Units" shall be equal to 513,259 Units (which
was derived by dividing $23.38 into $12,000,000) minus the Initial Free Units.
1.13 "Initial Free Units" shall be equal to $12,000,000 divided by the
Weighted Average Closing Price, provided, however that in no event shall the
Initial Free Units exceed 513,259 Units.
1.14 The "Investor Questionnaire" shall have the meaning set forth in
Section 9.14 hereof.
1.15 The "Leases" shall mean the National Health Laboratory Lease and
the other leases, if any, set forth on Exhibit B attached.
1.16 "Lockheed" shall mean Lockheed Martin Corporation of Maryland.
1.17 "Lockheed Lease" shall mean the lease to be entered into on or
prior to the Closing between the Partnership, as landlord and contract vendee,
and Lockheed, as tenant, with respect to approximately 123,000 square feet of
space located at 55 Charles Lindbergh Boulevard, Mitchel Field, New York.
1.18 "Lock-up Agreement" shall have the meaning set forth in Section
10.1(m) hereof.
1.19 "NHLI" shall mean National Health Laboratories Incorporated.
1.20 "NHLI Amendment" shall have the meaning set forth in Section
13.7 hereof.
1.21 "National Health Laboratory Lease" shall mean that certain Restated
Agreement of Sublease dated August 1, 1991 between the Frequency Properties
Corp., as landlord, and NHLI, as tenant, with respect to the premises located at
51 Charles Lindbergh Boulevard, Mitchel field, New York.
1.22 The term "Net Cost of Title Examination" shall mean the expense
actually incurred by the Partnership for title examination without the issuance
of a policy, but in no event however to exceed the net amount customarily
charged by a title company in Nassau County, State of New York for title
examination.
1.23 "NYSE" shall mean the New York Stock Exchange.
1.24 The "Partnership Agreement" shall mean the limited partnership
agreement of the Partnership dated June 2, 1995, a copy of which is attached
hereto as Exhibit C.
1.25 The "Permitted Encumbrances" shall be those restrictions,
covenants, agreements, easements, matters and things of record affecting title
to the Property designated as "Permitted Exceptions" on the Title Commitment.
1.26 The "Real Estate Taxes" shall mean real estate taxes and any
general or special assessments (exclusive of penalties and interest thereon, all
of which are to be paid at or prior to Closing by the Contributing Party)
imposed upon the Property, including but not limited to any general or special
assessments of any governmental or municipal authority or tax district,
including, without limitation, any assessments levied for public benefits to the
Property. Annual assessments are to be apportioned as of Closing pursuant to
local custom.
1.27 "Registration Rights Agreement" shall mean the registration rights
agreement in the form of Exhibit N attached hereto.
1.28 "REIT" shall mean Reckson Associates Realty Corp., a real estate
investment trust organized in the State of Maryland.
1.29 "REIT Common Stock" shall mean the common stock in the REIT that
is listed on the NYSE.
1.30 "Rents" shall mean all minimum rent and additional rent payable
by the Tenants under the Leases.
1.31 "Tenants" shall mean all of the tenants listed on Exhibit B
attached hereto and, upon execution of the Lockheed Lease and the Frequency
Lease, Lockheed and the Contributing Party, respectively.
1.32 "Termination Agreement" shall have the meaning set forth in
Section 13.6 hereof.
1.33 "Title Commitment" shall have the meaning set forth in Section 5
hereof.
1.34 "Title Insurer" shall have the meaning set forth in Section 5
hereof.
1.35 "Units" shall mean limited partnership units in the Partnership.
1.36 "Weighted Average Closing Price" shall mean a fraction, the
numerator of which is, for each of the trading days within 30 days immediately
prior to the day which is one Business Day prior to the Closing Date, the
product of the closing price as reported on the NYSE for a share of REIT Common
Stock on a particular Business Day multiplied by the number of shares traded on
such Business Day and the denominator of which is equal to the number of shares
traded during such 30 day period.
2. TRANSFER OF PROPERTY; CONSIDERATION
2.1 The Contributing Party agrees to transfer and convey to the
Partnership, and the Partnership agrees to purchase and acquire from the
Contributing Party, subject to and in accordance with the terms, provisions,
covenants and conditions more particularly set forth in this Agreement, all of
the Contributing Party's right, title and interest in and to the Property and
the Partnership shall deliver to the Contributing Party the Consideration
subject to the terms and provisions hereof providing for adjustments to the
Consideration. For purposes of this Agreement, the "Consideration" to be paid by
the Partnership to the Contributing Party for the Property is $27,586,580.00]
(of which $12,000,000 is allocated to the land referred to as "Parcel A" on
Exhibit A attached and $15,586,580) is allocated to the land referred to as
"Parcel B" on Exhibit A attached) to be payable as follows:
(a) Cash in the amount of $15,586,580 (less any adjustments to the
Consideration), which cash shall be paid to the Contributing Party (or its
designee) by wire transfer and
(b) 513,259 Units, of which an amount equal to the Initial Escrowed
Units shall be held in escrow by the Partnership. During the time that the
Partnership holds any Initial Escrowed Units in escrow, all distributions
(including dividends) relating to such Initial Escrowed Units shall be
distributed to the Contributing Party. The Initial Escrowed Units shall be
released from escrow to the Contributing Party or relinquished to the
Partnership for retirement, as the case may be, in accordance with Exhibit U
attached hereto.
2.2 The quarterly distribution payable with respect to the quarter in
which the Closing occurs shall be pro-rated and paid to the Contributing Party
when the quarterly distribution is made by the Partnership, provided, however,
that the Contributing Party shall only be entitled to its pro-rated share of
such distribution if the Contributing Party is the owner of the Units on the
Record Date applicable to such distribution.
2.3 Simultaneous with the execution of this Agreement, the Partnership
has deposited the sum of ONE MILLION DOLLARS ($1,000,000), by certified check or
wire transfer with the Escrow Agent pursuant to Article 25 hereof. On the
Closing Date, such $1,000,000, together with any interest earned thereon, shall
be delivered to the Contributing Party to the extent of the cash it is entitled
to receive under Section 2.1 (b) above. On the Closing Date, the Partnership
shall receive the Deposit to the extent it exceeds the amount of cash the
Contributing Party is entitled to receive under Section 2.1(b) above.
3. INTENTIONALLY DELETED.
4. MATTERS TO WHICH THE SALE IS SUBJECT
The Contributing Party shall assign and convey or cause to be assigned and
conveyed to the Partnership good and marketable leasehold title to the Property
free and clear of any and all mortgages, liens, leases, encumbrances and
easements, except:
4.1 All taxes, water meter and water charges and sewer rents, accrued or
unaccrued, fixed or not fixed, becoming due and payable after the Closing Date.
4.2 All zoning laws and building ordinances, resolutions, regulations
and orders of all boards, bureaus, commissions and bodies of any municipal,
county, state or federal government.
4.3 The Permitted Encumbrances.
5. OUTSTANDING INTEREST OR UNMARKETABLE TITLE
Attached hereto as Exhibit D is a title insurance commitment (the "Title
Commitment") from Commonwealth Land Title Insurance Company ("Title Insurer").
As a condition to the Closing, at the Partnership's expense, the Contributing
Party shall cause the Title Insurer to issue a leasehold policy at the Closing
to the Partnership insuring title to the Property as set forth in Exhibit D. The
Contributing Party agrees to discharge any existing lien or encumbrance shown on
the Title Commitment which can be discharged by the payment of money by the
Contributing Party.
If at the Closing it should appear that the Property is affected by any
outstanding interest or questions of title which the Partnership is not obliged
to take subject to in accordance with the terms of this Agreement (i.e. the
Permitted Encumbrances), and if such interest or question of title may,
according to reasonable expectations, be removed as an objection to title within
one (1) month from the scheduled Closing Date (i.e. December 23, 1997), the
Contributing Party may adjourn the Closing Date for a period not exceeding one
(1) month for such purpose. If the Property shall be affected by any lien or
encumbrance which is not disclosed on the Title Commitment and which may be
discharged by the payment of an ascertainable amount of money, then it shall be
the Contributing Party's obligation to discharge such lien or encumbrance, and
the Contributing Party shall be entitled to a reasonable adjournment from the
scheduled Closing Date (i.e. December 23, 1997) not to exceed one (1) month to
accomplish the discharge thereof; further, subject to the reasonable approval of
the Partnership and the Title Insurer, the Contributing Party shall have the
right to (i) bond or escrow for such lien or encumbrance if same is not readily
dischargeable or (ii) cause the Title Insurer to insure over the lien or
encumbrance. If after any applicable adjournment, the Contributing Party shall
be unable to convey the Property subject to and in accordance with the
provisions of this Agreement, the Partnership shall have the right to waive the
defect in title and accept such title as the Contributing Party can convey
without a reduction in the Consideration or terminate this Agreement by written
notice to the Contributing Party whereupon the Deposit shall be immediately
returned to the Partnership and the parties shall have no further rights or
obligations hereunder, except, that the Contributing Party shall reimburse the
Partnership for its Net Cost of Title Examination and its other out-of-pocket
due diligence costs (which out-of-pocket due diligence costs shall not exceed
$25,000). Notwithstanding anything in this Article to the contrary, the
Contributing Party shall in all events be obligated to cure and/or discharge (i)
all mortgages and other monetary liens set forth in the Title Commitment or
otherwise affecting the Property, provided, however that the Contributing
Party's liability with respect to monetary liens not disclosed on the Title
Commitment shall be limited to $500,000 and (ii) all voluntary (i.e., arising
from the Contributing Party's act or failure to act) outstanding encumbrances
which, after the date hereof, encumber the Property, provided, that if the
Contributing Party fails to cure and/or discharge such liens and encumbrances,
then the Partnership may, in its sole and absolute discretion, cure and/or
discharge such liens and encumbrances in which case the Consideration shall be
decreased by the amount of money expended by the Partnership to cure and/or
discharge such liens and encumbrances.
6. ADJUSTMENTS
6.1 All items of income and expense relating to the Property, including
the following, shall be apportioned between the parties as of midnight of the
day immediately preceding the Closing Date so that the Contributing Party shall
be charged with and have the benefit of such items accrued through the day
immediately preceding the Closing Date, and the Partnership shall be charged
with or have the benefit of such items from and after the Closing Date:
a) Rents - (i)if Rent has been paid with respect
to the month in which the Closing occurs, the Partnership shall receive a credit
to the Purchase Price in the amount of its share of such Rent,(ii) if Rent has
not yet been paid with respect to the month in which the Closing occurs, there
shall be no credit to the Purchase Price and the Partnership shall deliver tothe
Contributing Party its share of such Rent when and if (x) such Rent is paid to
the Partnership and (y) there are no other arrearages in Rent and (iii) if
there are any arrearages in Rent, there shall be no credit to the Purchase Price
and all Rents thereafter received shall be applied, after all Rents then due
and payable after the Closing Date have been paid in full, first,to arrearages
relating to the month in which the Closing occurs and second to arrearages
relating to the period prior to the Closing.
b) Real Estate Taxes (and all refunds of Real
Estate Taxes from any governmental authority), sewer and vault rents, charges
and license fees, and water meter and frontage charges.If the Closing Date shall
occur before the tax rate is fixed, the apportionment of taxes shall be upon
the basis of the tax rate for the next preceding year applied for the latest
assessed valuation and adjusted when the final tax rate is fixed. Any annual
assessments are to be prorated as of Closing pursuant to local custom.
(c) The service contracts, if any, set forth in Exhibit G
hereto.
(d) The provisions of this SectionE6 shall survive the Closing.
7. CASUALTY
a) If, on or prior to the date of the Closing,
all or a "material part" (as defined below) of the Property shall be damaged
or destroyed by fire or other casualty, then, in any such event,the Partnership
may, at its option, either (i) cancel this Agreement, whereupon subject to
Article 25, the Deposit shall be returned to the Partnership and the parties
hereto shall be released of all obligations and liabilities of whatsoever
nature in connection with this Agreement, or (ii) proceed to close the
transactions contemplated by this Agreement, in which event all of the
provisions of subsection 7(b)(i) and subsection 7(b)(ii) below shall apply.
b) If, on or prior to the date of the Closing,
less than a material part of the Property shall be destroyed or damaged by
fire or other casualty the Partnership shall nevertheless close title to the
Property pursuant to all the terms and conditions of this Agreement, subject
to the following: (i) the Contributing Party shall not (a) adjust and settle
any insurance claims, or (b) enter into any construction or other contract for
the repair or restoration of the Property without the Partnership's prior
written consent, which consent shall not be unreasonably withheld or delayed,
and (ii) at the Closing, the Contributing Party shall (1) pay over to the
Partnership the amount of any insurance proceeds relating to the Property,
to the extent collected by the Contributing Party in connection with such
casualty, less the amount of the actual expenses incurred by the Contributing
Party in making repairs to the Property occasioned by such casualty pursuant
to any contract (provided that such contract was reasonably approved by the
Partnership as required by this Section), (2) assign to the Partnership all of
the Contributing Party's right, title and interest in and to any insurance
proceeds relating to the Property that are uncollected at the time of the
Closing and that may be paid in respect of such casualty subject to the payment
of the Consideration by the Partnership to the Contributing Party, and (3)
pay to the Partnership the amount of any policy deductibles pursuant to the
insurance policies maintained by the Contributing Party (as opposed to
insurance or self-insurance maintained by tenants of the Property). The
Contributing Party shall reasonably cooperate with the Partnership in the
collection of such proceeds, which obligation shall survive the Closing.
c) For the purpose of this Section, the phrase
"a material part" of the Property shall mean that (i) the cost of repair or
restoration is estimated by a reputable contractor selected by the
Contributing Party and reasonably satisfactory to the Partnership, to be in
excess of Two-Hundred and Fifty Thousand and 00/100 Dollars, (ii) the length
of time required for the repair or restoration is estimated by a reputable
contractor selected by the Contributing Party and reasonably satisfactory to the
Partnership, to be in excess of three (3) months or (iii)Eany Tenant shall
have the right to cancel its Lease as a result of such casualty.
8. CONDEMNATION PENDING CLOSING
8.1 If prior to the Closing Date condemnation or eminent domain
proceedings shall be commenced by any competent public authority against the
Property or any part thereof, the Contributing Party shall promptly give the
Partnership written notice thereof. After notice of the commencement of any such
proceedings (from the Contributing Party or otherwise) and in the event that the
taking of such property is Material (as hereinafter defined), the Partnership
shall have the right (i) to accept title to the Property subject to the
proceedings, and pay to the Contributing Party the full Consideration, whereupon
any award payable to the Contributing Party shall be paid to the Partnership and
the Contributing Party shall deliver to the Partnership at the Closing all
assignments and other documents reasonably requested by the Partnership to vest
such award in the Partnership, or (ii) to rescind this Agreement and upon the
return of the Deposit, this Agreement shall be null and void and neither party
will have any further obligations hereunder. A taking shall be deemed to be
Material if said taking would either (i) materially interfere with the use and
operation of the Property for the contemplated use thereof (as reasonably
determined by the Partnership), or (ii) reduce the estimated value of the
Property (as reasonably determined by an appraiser chosen by the Partnership and
reasonably satisfactory to the Contributing Party) by $150,000 or more or
(iii)Eany Tenant shall have the right to cancel its Lease as a result of such
condemnation.
8.2 In the event of a non-Material taking of any part of the Property,
the Partnership shall accept the Property subject to the proceedings, whereupon
any award payable to the Contributing Party shall be paid to the Partnership and
the Contributing Party shall deliver to the Partnership at the Closing all
assignments and other documents reasonably requested by the Partnership to vest
such award in the Partnership.
9. THE CONTRIBUTING PARTY'S WARRANTIES AND REPRESENTATIONS
To induce the Partnership to enter into this Agreement and to purchase the
Property from the Contributing Party, the Contributing Party makes the following
representations, all of which the Contributing Party represents are true in all
material respects as of the date hereof and shall be true in all material
respects as of the Closing Date and shall be deemed remade as of that date:
9.1 The Contributing Party owns a valid leasehold interest in the
Property pursuant to the Ground Lease, subject to only those matters set forth
in Section 4 of this Agreement.
9.2 a) The execution, delivery and performance of this Agreement and
consummation of the transaction hereby contemplated in accordance with the terms
of this Agreement will not violate any contract, agreement, commitment, order,
judgment or decree to which the Contributing Party is a party or by which it or
the Property is bound.
b) The Contributing Party has the full right,
power and authority to sell and convey the Property to the Partnership as
provided herein and to carry out its obligations hereunder and shall deliver
reasonable proof of same to the Partnership at Closing.
c) Upon execution, this Agreement shall be the
valid and binding obligation of the Contributing Party,enforceable in accordance
with the terms hereof.
9.3 There is no pending written request, application or consent by or on
behalf of the Contributing Party for any zoning change or variance with respect
to the Property.
9.4 The Contributing Party has received no notice of, and the
Contributing Party has no actual knowledge of any, violation of any applicable
federal, state or local law and there are no pending or threatened appeals,
revocations or suspensions of any permits, approvals or consents relating to the
current use or proposed use of the Property.
9.5(a The Contributing Party has heretofore delivered to the Partnership
true and complete copies of all environmental studies in the Contributing
Party's possession relating to the Property.
b) There is no civil, criminal or administrative
action, suit, demand, claim, hearing, notice of violation, investigation,
proceeding, notice or demand letter pending relating to the Contributing Party,
the Property or, to the best knowledge of the Contributing Party, threatened
against the Contributing Party or the Property relating in any way to the
Environmental Laws or any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or approved
thereunder.
c) The Contributing Party has not, and the
Contributing Party has no actual knowledge of any other person who has,released,
buried or dumped any hazardous substances, oils, pollutants or contaminants or
any other wastes produced by, or resulting from, any business, commercial, or
industrial activities, operations or processes on, beneath or adjacent to the
Property except for inventories of such substances to be used, and wastes
generated therefrom, in the ordinarycourse of business of the Tenants (and
the Contributing Party has no actual knowledge that such inventories and wastes
are not being stored or disposed of in accordance with applicable laws and
regulations).
9.6 There are no existing or pending litigation, claims, condemnations
or sales in lieu thereof with respect to any aspect of the Property nor, to the
actual knowledge of the Contributing Party, have any actions, suits,
condemnations, proceedings or claims been threatened or asserted.
9.7 Except for the Leases, there are no outstanding leases, subleases or
any other type of possession agreement affecting any portion of the Property
(except for the Fei Realty Leases which will be terminated on or prior to
Closing and except for the sublease between the Contributing Party, as tenant
under the Frequency Lease, and American Financial, Inc.).
9.8 The Contributing Party is not a "foreign person" as defined in
Section 1445 of the Internal Revenue Code of 1986, as amended, and the income
tax regulations thereunder.
9.9 There is no action, suit or proceeding pending or, to the
Contributing Party's actual knowledge, threatened against the Property or any
portion thereof, or relating to or arising out of the ownership, management or
operation of the Property, in any court or before any federal, state or
municipal department, commission, board, bureau or other governmental
instrumentality. The Contributing Party is pursuing a tax certiorari proceeding
with respect to the Property and true and correct copies of the papers filed in
such proceeding have been delivered to the Partnership.
9.10 The Leases are in full force and effect and have not been modified
or amended in any way. To the best of the Contributing Party's knowledge, the
Contributing Party is not in default of any of its obligations under the Leases.
The Contributing Party has not received any notice or claim from any Tenant
stating that the Contributing Party is in default of any Lease. Except as set
forth in Exhibit T attached, none of the Tenants are in default in the payment
of rent and, to the Contributing Party's knowledge, none of the Tenants are in
default in any of their other respective obligations under the Leases and no
event has occurred which with notice or the passage of time or both would create
a default by any of the Tenants under the Leases. All brokerage fees have been
paid with respect to the Leases and no brokerage fees will be due upon any
renewal or extension of the Leases. The rent due and owing under the National
Health Laboratory Lease for the month of December 1997 is set forth in Exhibit E
attached. The Contributing Party is in possession of all of the security
deposits required by the Leases (which security deposits are listed in Exhibit T
attached) and none of such security deposits are in the form of letters of
credit.
9.11 Intentionally Deleted.
9.12 Attached hereto as Exhibit G is a list of service contracts,
brokerage agreements, employment contracts and other contracts which affect the
Property and shall remain in effect after the Closing. All of the service
contracts which are set forth on Exhibit G are cancellable upon thirty (30) days
prior notice. All service contracts, brokerage agreements and other contracts
which affect the Property and are not listed on Exhibit G shall be terminated on
or prior to the Closing Date.
9.13 The Ground Lease is in full force and effect and has not been
amended or modified in any respect. The Contributing Party is not in default of
any of its obligations under the Ground Lease and no event has occurred which
with notice or the passage of time or both would create a default by the
Contributing Party under the Ground Lease.
9.14 a) Upon the issuance of Units to the Contributing Party, the
Contributing Party shall become subject to, and shall be bound by, the terms and
provisions of the Partnership Agreement, including the terms of any power of
attorney contained therein, as the Partnership Agreement may be amended from
time to time in accordance with its terms.
b) The Contributing Party understands the risks
of, and other considerations relating to, the acquisition of the Units. The
Contributing Party, by reason of its business and financial experience,
together with the business and financial experience of those persons, if any,
retained by it to represent or advise it with respect to its investment in the
Units, (i) has such knowledge, sophistication and experience in financial
and business matters and in making investment decisions of this type that it is
capable of evaluating the merits and risks of an investment in the Partnership
and of making an informed investment decision, (ii) is capable of protecting
its own interest or has engaged representatives or advisors to assist it in
protecting its interests and (iii) is capable of bearing the economic risk
of such investment. If the Contributing Party retained a person to represent
or advise it with respect to the investment in Units that may be made hereby
then, at the Partnership's request, the Contributing Party shall, prior to
or at the Closing Date, (i) acknowledge in writing such representation and (ii)
cause such representative or advisor to deliver a certificate to the Partnership
containing such representations as are reasonably requested by the Partnership.
c) The Contributing Party understands that an
investment in the Partnership involves substantial risks. The Contributing
Party has been given the opportunity to make a thorough investigation of the
proposed activities of the Partnership and has been furnished with materials
relating to the Partnership and its proposed activities (including, but not
limited to, the prospectus dated March 6, 1997 of the REIT, the Form 10-K of the
REIT for the year ended December 31, 1996, the Form 10-Q of the REIT for the
quarter ended September 30, 1997 and all reports subsequently filed with the
Securities and Exchange Commission pursuant to Section 13 of the Securities Act
of 1934). The Contributing Party has been afforded the opportunity to obtain
any additional information deemed necessary by the Contributing Party to
verify the accuracy of any representations made or information conveyed to
the Contributing Party. The Contributing Party confirms that all documents,
records, and books pertaining to its investment in the Partnership and requested
by the Contributing Party have been made available or delivered to the
Contributing Party. The Contributing Party has had an opportunity to ask
questions of and receive answers from the Partnership, or from a person or
persons acting on the Partnership's behalf, concerning the terms and conditions
of this investment.
d) The Units to be issued to the Contributing
Party will be acquired by the Contributing Party for its own account for
investment only and not with a view to, or with any intention of,a distribution
or resale thereof, in whole or in part, or the grant of any participation
therein, without prejudice, however, to the Contributing Party's right (subject
to the terms of the Units) at all times to sell or otherwise dispose of all or
any part of its Units under an exemption from such registration available under
the Securities Act of 1933, as amended (the "Securities Act"), and applicable
state securities laws, and subject, nevertheless, to the disposition of its
assets being at all times within its control. The Contributing Party was not
formed for the specific purpose of acquiring an interest in the Partnership.
e) The Contributing Party acknowledges that (i)
the Units to be issued to the Contributing Party have not been registered under
the Securities Act or state securities laws by reason of a specific exemption
or exemptions from registration under the Securities Act and applicable state
securities laws and, if such Units are represented by certificates, such
certificates will bear a legend to such effect, (ii) the REIT's and the
Partnership's reliance on such exemptions is predicated in part on the accuracy
and completeness of the representations and warranties of the Contributing Party
contained herein, (iii)such Units, therefore, cannot be resold unless registered
under the Securities Act and applicable state securities laws, or unless
an exemption from registration is available, (iv) there is no public market for
such Units, and (v) the Partnership has no obligation or intention to register
such Units for resale under the Securities Act or any state securities laws
or to take any action that would make available any exemption from the
registrationrequirements of such laws.The Contributing Party hereby acknowledges
that because of the restrictions on transfer or assignment of such Units to be
issued hereunder which are set forth in the Partnership Agreement and the
Lock-up Agreement, the Contributing Party may have to bear the economic risk of
holdingthe Units for an indefinite period of time, although (i) under the terms
of the Lock-up Agreement, the Contributing Party will agree, during the one year
period following the Closing Date, not to present the Units for redemption
pursuant to the Partnership Agreement or otherwise to sell, transfer, exchange,
pledge or dispose of Units without the express written consentofthe Partnership,
provided, however, the Contributing Party shall execute an indemnity agreement
in favor of the Partnership in the form of Exhibit X attached hereto with
respect to any New York State transfer taxes which may be payable as result of
the Units being converted into REIT Common Stock prior to the second anniversary
of the Closing Date, provided, further that the Contributing Party shall, from
and after the Closing, have the right to pledge the Units, subject to the one
year restriction set forth above with respect to redemption to an institutional
lender reasonably acceptable to the Partnership and (ii) under the terms of the
Registration Rights Agreement, the holder of any such Common Stock issued upon a
presentation of Units for redemption will be afforded certain rights to have
such Common Stock registered for resale under the Securities Act or applicable
state securities laws.
f) The information set forth in the investor
questionnaire a form of which is attached hereto as Exhibit H (the "Investor
Questionnaire") which has been completed and executed by the Contributing
Party and delivered to the Partnership on the date hereof is true, correct
and complete.
All representations, warranties and covenants of the Contributing Party
contained in this Agreement or in any affidavit or other document delivered in
connection herewith shall be true and correct in all material respects at
Closing and shall survive the Closing but any action based thereon must be
commenced within one (1) year of Closing (except there shall be no time
limitation on the representations set forth in Section 9.14 hereof).
10. THE CONTRIBUTING PARTY'S INSTRUMENTS AT CLOSING
10.1 The Contributing Party shall execute, or where applicable, cause
the following to be delivered to the Partnership on the Closing Date (unless an
item is waived by the Partnership in its sole and absolute discretion):
a) an assignment and assumption of ground lease
in the form of Exhibit I hereto; and
b) assignments or other instruments inrecordable
form transferring and assigning to the Partnership the Contributing Party's
interest in all permits and approvals pertaining to the Property, all service
contracts and all of the Contributing Party's Other Interests in and to the
Property in the form of Exhibit J hereto; and
c) all such reasonable and customary affidavits
of title as may be reasonably required by the Title Insurer; and
d) a certificate from the Contributing Party
stating that all representations and warranties made by the Contributing Party
in this Agreement are true in all material respects as of the Closing Date as if
made on such date; and
e) duly executed New York State real estate
transfer tax forms for the Property. The Contributing Party shall at Closing pay
all real estate transfer and conveyance taxes payable to the appropriate state
and/or local governmental and/or municipal authorities. The Partnership shall
bear the expense of recording the assignment and assumption of ground lease; and
f) a duly executed affidavit as may be required
pursuant to Section 1445 of the Internal Revenue Code in the form of Exhibit K
hereto; and
g) assignments and assumptions of the Leases in
the form of Exhibit L attached; and
h) The Partnership shall receive a credit at
Closing for the security deposit with respect to the Leases; and
i) estoppel letters from each ofthe Tenants each
dated within 15 days of the Closing Date in a form substantially similar to that
attached hereto as Exhibit M (provided the estoppels shall not include
any monetary or material non-monetary defaults by the tenants or the
Contributing Party); and
j) letter to the Tenants directing all payments
due from and after the Closing to be made to the Partnership; and
k) the plans with respect to the buildings on
the Property to the extent in the Contributing Party's possession; and
l) an estoppel letter from the landlord under
the Ground Lease in a form substantially similar to that attached hereto as
Exhibit O, provided, however, that subsequent to Closing the Partnership shall
cooperate with the Contributing Party in attempting to release the Contributing
Party from any guaranty required by the lessor under the Ground Lease, provided
further,that the Contributing Party shall not be in default under this Agreement
if, after using diligent efforts, the Contributing Party is unable to deliver
such estoppel at Closing (it being understood that the Partnership shall not be
obligated to close the transaction contemplated by this Agreement without such
estoppel); and
m) a lock-up agreement (the "Lock-up Agreement")
in the form attached hereto as Exhibit P attached; and
n) the Investor Questionnaire; and
o) an indemnity agreement in the form of Exhibit
X attached hereto; and
p) the title affidavit in the form of Exhibit F
attached hereto; and
q) intentionally deleted; and
r) the Termination Agreement; and
s) the NHLI Amendment; and
t) the Frequency Lease; and
u) the Registration Rights Agreement; and
v) such other documents, instruments,resolutions
and other material reasonably requested by the Partnership as may be necessary
to effect the transfer of title hereunder or as may be reasonably requested
by the Title Insurer, including, without limitation, customary title affidavits.
11. PARTNERSHIP'S REPRESENTATIONS AND WARRANTIES
To induce the Contributing Party to enter into this Agreement, the Partnership
makes the following representations, all of which the Partnership represents are
true in all material respects as of the date hereof and shall be true in all
material respects as of the Closing Date and shall be deemed to be made as of
that date.
a) The Partnership is and at the Closing shallbe
a limited partnership duly organized and validly existing and in good standing
under the laws of the State of Delaware with full power and authority to own and
purchase the Property and to take all actions required by this Agreement.
b) The execution, delivery and performance of
this Agreement and consummation of the transaction hereby contemplated in
accordance with the terms of this Agreement will not violate the partnership
agreement of the Partnership or any contract, agreement, commitment, order,
judgment or decree to which Partnership is a party or by which it is bound,
and no consent of any other party is required.
c) The party or parties executing this Agreement
on behalf of the Partnership have been duly authorized and are empowered to bind
the Partnership to this Agreement and to take all actions required by this
Agreement.
d) Upon execution, this Agreement shall be the
binding obligation of the Partnership, enforceable in accordance with the terms
hereof.
e) No action, suit or proceeding is pending or,
to the best of the Partnership's knowledge, threatened against the Partnership
which would materially affect the Partnership's ability to fully perform its
obligations pursuant to this Agreement.
f) The REIT is the sole general partner of the
Partnership.
g) The Partnership is in receipt of the most
recent Form 10-K of the Contributing Party.
All representations, warranties and covenants of the Partnership contained in
this Agreement or in any affidavit or other document delivered in connection
herewith shall be true and correct in all material respects at Closing and shall
survive the Closing for one (1) year.
12. PARTNERSHIP'S INSTRUMENTS AT CLOSING
On the Closing Date, the Partnership shall deliver the Consideration to the
Contributing Party. Additionally, on the Closing Date, the Partnership shall
execute and deliver to the Contributing Party the following (unless an item is
waived by the Contributing Party in its sole and absolute discretion):
a) a certificate of an officer ofthe Partnership
stating that all representations and warranties made by Partnership in this
Agreement are true as of the Closing Date as if made on such date;
b) the assignment and assumption agreement
referred to in subsections 10.1(a) and 10.1(p) hereof;
c) the Registration Rights Agreement;
d) the Frequency Lease;
e) such other documents, instruments,resolutions
and other material necessary to effect the transfer of title hereunder and
reasonably requested by the Contributing Party or the Title Insurer.
13. CONTRACT PERIOD
13.1 Throughout the Contract Period, the Contributing Party shall
continue to operate the Property in the same manner as it is currently being
operated by the Contributing Party. The Contributing Party shall maintain
replacement cost casualty insurance throughout the Contract Period. During the
Contract Period, the Contributing Party shall not enter into any new lease
agreement, or amend, modify, extend or terminate any Lease, or any other form of
commitment which will bind the Partnership without the written consent of the
Partnership.
13.2 During the Contract Period, the Contributing Party shall not
without the written consent of the Partnership enter into any agreements
effecting the ownership and operation of the Property unless such contract(s)
shall be (i) fully cancelable or terminable prior to the Closing Date or (ii) if
such agreement is satisfactory to the Partnership in its sole discretion,
assignable to the Partnership.
13.3 During the Contract Period, neither the Contributing Party nor the
Partnership shall allow any interest in the Property to be liened, encumbered or
transferred.
13.4 During the Contract Period, the Contributing Party and the
Partnership shall negotiate in good faith the terms and provisions of the
Frequency Lease. The Parties acknowledge that either party may cancel this
Contract if the Frequency Lease is not executed at or prior to Closing in which
case the Deposit shall be returned to the Partnership.
13.5 During the Contract Period, the Partnership shall negotiate in good
faith the terms and provisions of the Lockheed Lease with Lockheed. The
Contributing Party acknowledges that (i) the Partnership shall control all lease
negotiations with Lockheed and (ii) the Partnership shall have the right to
cancel this Contract if the Lockheed Lease is not in full force and effect at
Closing in which case the Deposit shall be returned to the Partnership.
13.6 During the Contract Period, the Contributing Party hereby
represents to the Partnership that it will cause the Fei Realty Leases to be
terminated pursuant to an agreement (the "Termination Agreement") satisfactory
to the Partnership.
13.7 During the Contract Period, the Partnership shall negotiate in good
faith an amendment to the National Health Laboratory Lease (the "NHLI
Amendment") with NHLI. The NHLI Amendment shall provide, among other things,
that (i) the security deposit thereunder shall be equal to $1,500,000 and shall
be in the form of marketable securities, (ii) NHLI may replace the security
deposit at any time with a guaranty from its parent company if such parent
company is then rated BBB+ or greater by Moody's Investor Service, Inc.
("Moody's") and Standard & Poor's Ratings Group ("S&P"), provided, that if such
parent company thereafter loses such rating from either Moody's or S&P, then
NHLI shall immediately deposit cash or a letter of credit in the amount of
$1,500,000 with the Partnership and (iii) the provisions that allow for an
offset in rental payments in connection with the existing financing are no
longer effective.
14. BROKERAGE
The Partnership and the Contributing Party represent and warrant to each other
that this Agreement was brought about by the broker (the "Broker") named at the
end of this paragraph and that no other broker or person was in any way
instrumental or had any part in bringing about this transaction. The Partnership
agrees that, should any claim be made for commissions by any other broker or
person arising by, through or on account of any act of the Partnership or the
Partnership's representatives, the Partnership shall indemnify and hold the
Contributing Party harmless from and against any and all claim, liability, cost
or expense (including reasonable attorneys' fees) in connection therewith. The
Contributing Party agrees that should any claim be made for commissions by any
other broker or person arising by, through or on account of any act of the
Contributing Party or the Contributing Party's representatives, the Contributing
Party shall indemnify and hold the Partnership harmless from and against any and
all claim, liability, cost or expense (including reasonable attorneys' fees) in
connection therewith. When, as and if title closes hereunder, the Contributing
Party shall pay the brokerage commission due to Broker pursuant to the terms of
said separate agreement between the Contributing Party and Broker. The
provisions of this paragraph shall survive delivery of the deed, but the
provisions hereof shall not be deemed or construed as a covenant for the benefit
of any third party. The Broker is "NONE" .
15. CONDITIONS PRECEDENT TO PARTNERSHIP'S OBLIGATION TO CLOSE TITLE
The Partnership's obligations to close title under this Agreement on the Closing
Date shall be subject to the satisfaction of the following conditions precedent
prior to the Closing Date (it being understood that the Partnership may waive
any of the foregoing items in its sole and absolute discretion):
(i) all of the Contributing Party's representations and warranties made
in this Agreement shall be true and correct in all respects as of the
Closing Date as if they were made on that date;
(ii) the Contributing Party shall have performed all material
obligations and agreements undertaken by it herein to be performed at or
prior to the Closing Date;
(iii) the Partnership and the Contributing Party shall have entered into
the Frequency Lease and such Frequency Lease is in full force and effect;
(iv) the Partnership and Lockheed have entered into the Lockheed Lease
and such Lockheed Lease is in full force and effect at Closing;
(v) NHLI shall have entered into the NHLI Amendment on the terms set
forth in Section 13.7 hereof and the National Health Laboratory Lease, as
amended by the NHLI Amendment, is in full force and effect;
(vi) The FEI Realty Leases have been terminated pursuant to the
Termination Agreements;
(vii) The board of directors of the REIT shall approve the transactions
contemplated by this Agreement;
(viii) The Partnership shall have approved the quarterly financial
statement of the Contributing Party for the period ending October 31, 1997
and the stub period through November 30, 1997 (which stub period statement
shall be an unaudited statement).
16. CLOSING
a) The closing of title to the Property (the "Closing") shall take
place on December 23, 1997, provided, however, that either party shall have the
right, if it is unable to close on December 23, 1997, to extend the Closing for
up to a maximum of thirty (30) days (it being specifically understood that
neither party may extend the Closing beyond such thirty (30) day period).
b) If the Closing shall not occur as a result of the willful default of
the Contributing Party (it being understood that a default arising from a
legitimate business purpose shall be deemed to be a willful default), then,
subject to the next succeeding sentence, the Contributing Party shall pay upon
demand by the Partnership, the sum of $2 million to the Partnership.
Notwithstanding the foregoing, the Contributing Party shall not be obligated to
pay such $2 million if the Closing fails to occur as a result of the
Contributing Party's failure to deliver (i) any mortgage discharges required by
the Title Company, (ii) an assignment of the Ground Lease from the Nassau County
Industrial Development Agency to the Contributing Party, (iii) the estoppel set
forth in Exhibit M attached or Exhibit O attached, provided, however, that the
Contributing Party will use best efforts to obtain all of the documents set
forth in clauses (i) - (iii) above by December 23, 1997.
c) If the Closing shall not occur as result of the willful default of
the Partnership or if the Closing does not occur as a result of the conditions
set forth in Section 15(vii) or (viii) hereof not being satisfied, then, subject
to the next succeeding sentence, the Partnership shall, in addition to the
liquidated damages set forth in Section 19.1 hereof, pay upon demand by the
Contributing Party, the sum of $1 million to the Contributing Party.
Notwithstanding the foregoing, the Partnership shall not be obligated to pay
such $1 million if the Partnership elects not to close as a result of the
non-satisfaction of any of the conditions set forth in Section 15 hereof (other
than the conditions set forth in Section 15(vii) or (viii).
17. CONDITIONS PRECEDENT TO CONTRIBUTING PARTY'S OBLIGATION TO CLOSE TITLE
The Contributing Party's obligations to close title under this Agreement on the
Closing Date shall be subject to the satisfaction of the following conditions
precedent prior to the Closing Date:
(i) all of the Partnership's representations and warranties made in this
Agreement shall be true and correct in all respects as of the Closing Date
as if they were made on that date;
(ii) the Partnership shall have performed all material obligations and
agreements undertaken by it herein to be performed at or prior to the
Closing Date; and
(iii) the Partnership and the Contributing Party shall have entered into
the Frequency Lease.
18. NOTICES
All notices, requests and demands to be made hereunder to the parties hereto
shall be in writing (at the addresses set forth below) and shall be given by any
of the following means: (a) personal delivery (including, without limitation,
overnight delivery, courier or messenger services); (b) electronic
communication, whether by telex, telegram or telecopying (if confirmed in
writing sent by registered or certified, first-class mail, postage prepaid,
return receipt requested), or (c) registered or certified, first-class United
States mail, postage prepaid, return receipt requested. Notice by a party's
counsel shall be deemed to be notice by such party. Such addresses may be
changed by notice to the other parties given in the same manner as provided
above. Any notice, demand or request sent (x) pursuant to subsection (a) shall
be deemed received upon such personal delivery, (y) pursuant to subsection (b)
shall be deemed received on the day it is dispatched by electronic means, and
(z) pursuant to subsection (c) shall be deemed received five (5) days following
deposit in the mail.
If to the Contributing Party:
55 Charles Lindbergh Boulevard
Uniondale, New York 11553
Telecopy: 516-549-2015
With copies to: Morton Weber and Associates
201 North Service Road - Suite 300
Melville, New York 11747-3138
Attention: Paul Bloom, Esq.
Telecopy: 516-549-2015
To Partnership: c/o Reckson Associates
225 Broadhollow Road
Melville, NY 11747-0983
Attention: Jason Barnett
Telecopy: (516) 694-6390
With copies to: Brown & Wood LLP
One World Trade Center
New York, NY 10048-0557
Attention: Lee Saltzman, Esq.
Telecopy: (212) 839-5599
19. DEFAULT
19.1 Partnership's Default. If the Closing shall not occur as result of the
willful default of the Partnership or if the Closing does not occur as a result
of the conditions set forth in Section 15(vii) or (viii) hereof not being
satisfied, then, subject to the last sentence of this paragraph, (i) the
Partnership shall pay, upon demand by the Contributing Party, the sum of $1
million to the Contributing Party pursuant to Section 16(c) hereof, (ii) the
Partnership shall forfeit all rights and claims with respect to the Property
pursuant to this Agreement and to the Deposit and (iii) the Escrow Agent shall
remit the Deposit to the Contributing Party. The Contributing Party and the
Partnership hereby agree that payment of the Deposit to the Contributing Party
shall be deemed to be fair and adequate, but not excessive, liquidated damages
based upon the following considerations which the Contributing Party and the
Partnership agree would constitute damages to the Contributing Party for any
default by the Partnership but which are impossible to quantify, to wit: (i) the
removal of the Property from the real estate market together with the
uncertainty of obtaining a new purchaser at the same or greater purchase price;
(ii) the expenses incurred by the Contributing Party, including (but not by way
of limitation) attorneys' fees, taxes, mortgage interest, and other items
incidental to the maintenance of the Property until it is eventually sold; and
(c) all other expenses incurred by the Contributing Party as a result of the
Partnership's default. Notwithstanding the foregoing, the Partnership shall not
be obligated to pay such $1 million if the Partnership elects not to close as a
result of the non-satisfaction of any of the conditions set forth in Section 15
hereof (other than the conditions set forth in Section 15(vii) or (viii).
In the event of such termination, the Partnership shall immediately
return its executed copy of this Agreement to the Contributing Party for
cancellation together with all due diligence material, reports and studies
delivered to the Partnership or prepared by or on behalf of the Partnership.
19.2 The Contributing Party's Default. If the Closing shall not occur as a
result of the willful default of the Contributing Party (it being understood
that a default arising from a legitimate business purpose shall be deemed to be
a willful default), then, subject to the next succeeding sentence, the
Partnership's sole remedies shall be limited as follows: (i) the right to the
immediate return of the Deposit and the cancellation of this Agreement and (ii)
the Contributing Party shall pay, upon demand by the Partnership, the sum of $2
million to the Partnership in accordance with Section 16(b) hereof.
Notwithstanding the foregoing, the Contributing Party shall not be obligated to
pay such $2 million if the Closing fails to occur as a result of the
Contributing Party's failure to deliver (i) any mortgage discharges required by
the Title Company, (ii) an assignment of the Ground Lease from the Nassau County
Industrial Development Agency to the Contributing Party, (iii) the estoppel set
forth in Exhibit M attached or Exhibit O attached, provided, however, that the
Contributing Party will use best efforts to obtain all of the documents set
forth in clauses (i) - (iii) above by December 23, 1997.
The parties further agree that the party who is in default shall, in
addition to the aforesaid damages set forth in Section 19.1 or 19.2, pay all
costs and expenses incurred by the other party as a result of such other party's
enforcement of this Agreement, including reasonable attorneys' fees.
20. ASSIGNMENT
Except as set forth in Section 21 hereof, this agreement and the parties' rights
hereunder may not be assigned without the written consent of the non-assigning
party.
21. CONSTRUCTION UNDER FREQUENCY LEASE
a) Unless the capitalized terms used in this Article are given
a different meaning under this Agreement, such capitalized terms shall have the
meanings ascribed to them in the Frequency Lease.
b) Contributing Party and Partnership hereby agree that
promptly after the execution of this Agreement, Partnership shall have the right
to commence and perform the Landlord's Initial Construction pursuant to the
Frequency Lease. Contributing Party and Partnership hereby agree to perform
their respective obligations with respect to Landlord's Initial Construction as
if the Frequency Lease were currently in effect and the Term thereunder had
commenced, including, without limitation, Contributing Party's obligation to
vacate portions of its existing space and take possession of portions of the
Demised Premises in accordance with the Staging Schedule annexed as an Exhibit
to the Frequency Lease.
c) In the event Contributing Party and Partnership shall fail
to close under this Agreement before December 23, 1997, Partnership shall have
the right to invoice Contributing Party for the Construction Costs (as defined
below) incurred by Partnership through December 23, 1997 and thereafter to
invoice Contributing Party on a monthly basis for additional work Partnership
shall perform after December 23, 1997 in connection with Landlord's Initial
Construction. Such invoices shall be on a standard AIA Form of Application for
Payment (the "Requisitions") and Contributing Party shall pay Partnership
pursuant to each Requisition within 10 days after Contributing Party's receipt
thereof. For purposes of this Article, the term "Construction Costs" shall be
deemed to mean all actual costs incurred by Partnership in the performance of
Landlord's Initial Construction (including, without limitation, site specific
overhead costs; but excluding Partnership's non-site specific overhead and
administrative costs, markup and profit), up to a maximum for such actual costs
of $1,200,000.
d) In the event Contributing Party and Partnership shall close
under this Agreement, Contributing Party shall receive a credit at closing equal
to the Construction Costs it shall have paid to Partnership under this Article
to the date of such closing (with the exception of the $200,000 in Construction
Costs which Contributing Party shall be required to pay under the Frequency
Lease). After the closing, Contributing Party shall have no liability for
Construction Costs incurred by Partnership after the closing date (with the
exception of all or the respective portion of the $200,000 in Construction Costs
referred to above incurred after the closing date). Notwithstanding anything in
this Subsection (d), the timing of Contributing Party's obligation to pay for
such $200,000 in Construction Costs shall be as set forth in the Frequency
Lease.
e) In the event Contributing Party and Partnership shall not
close by reason of Partnership's willful default under this Agreement, then
Partnership shall reimburse to Contributing Party, within 10 days after such
default, the Constructions Costs which Contributing Party shall have paid to
Partnership.
f) In the event Contributing Party and Partnership shall not
close by reason of Contributing Party's default under this Agreement, then
Partnership shall have the right to be reimbursed pursuant to subsection (c)
above for the Construction Costs incurred by it, without the obligation to
perform any additional portion of the Landlord's Initial Construction.
g) In the event Contributing Party or Partnership shall fail
to pay to the other party any Construction Costs as required under this Article,
such unpaid Construction Costs shall accrue interest at the rate of 12% per
annum from the due date until the date of payment.
h) In the event a dispute shall arise as to the Construction
Costs due to Contributing Party or Partnership under this Article, the party
owed such disputed Construction Costs may, at its option, submit such dispute to
arbitration. Such arbitration shall be conducted on an expedited basis in Nassau
County pursuant to the rules of the American Arbitration Association ("AAA")
before a single arbitrator selected by the AAA and the determination of such
arbitrator shall be binding upon the parties hereto and enforceable by a court
of competent jurisdiction. The costs of such arbitration, including, without
limitation, the legal fees of the respective parties, shall be paid by the
losing party and shall be part of the arbitrator's award.
i) Partnership hereby consents to Contributing Party's
subtenant, American Financial, performing during the Contract Period internal
non structural work in its space as shown on the Plan annexed as Exhibit 4 to
the Frequency Lease provided (i) such work shall not unreasonably interfere with
Landlord's Initial Construction and (ii) such subtenant shall comply with the
reasonable insurance and other work conditions reasonably imposed by Landlord.
j) The Partnership shall have the right to assign all or a
portion of its rights in this Article 21 to a subsidiary or affiliate of the
Partnership.
k) The provisions of this Article shall survive the
termination of this Agreement.
22. COUNTERPARTS
This Agreement may be executed in counterparts. The signatures of the parties
who sign different counterparts of this Agreement or any of the instruments
executed to effectuate the purposes of this Agreement shall have the same effect
as if those parties had signed the same counterparts of this Agreement or of any
such instrument.
23. FURTHER ASSURANCES
The Partnership and the Contributing Party each agree to execute and deliver to
the other such further documents or instruments as may be reasonable and
necessary in furtherance of the performance of the terms, covenants and
conditions of this Agreement. This paragraph shall survive the Closing Date.
24. MISCELLANEOUS
24.1 In connection with the sale of the Property pursuant to this
Agreement, the Partnership agrees to pay the fees and disbursements of the title
company for searches, surveys, title reports and title insurance and recording
fees. The Contributing Party shall pay all real estate conveyance or transfer
taxes incurred in connection with the transfer of the Property.
24.2 This Agreement shall be binding upon and shall inure to the benefit
of the Contributing Party and the Partnership and their respective successors
and assigns.
24.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of New York. This Agreement shall be construed
without regard to any presumption or other rule requiring construction against
the party causing this Agreement to be drafted. If any words or phrases in this
Agreement shall have been stricken out or otherwise eliminated, whether or not
any other words or phrases have been added, this Agreement shall be construed as
if the words or phrases so stricken out or otherwise eliminated were never
included in this Agreement and no implication or inference shall be drawn from
the fact that said words or phrases were so stricken out or otherwise
eliminated.
24.4 The headings of the several Sections contained in this Agreement
are inserted only as a matter of convenience and for reference and in no way
define, limit or describe the scope of this Agreement or the intent of any
provision thereof.
24.5 The invalidity or unenforceability of any provision of this
Agreement shall not affect or impair any other provision of this Agreement.
24.6 This Agreement contains the entire agreement between the
Contributing Party and the Partnership, and any and all prior understandings and
dealings heretofore had are merged herein and any agreement hereafter made shall
be ineffective to change, modify or discharge this Agreement in whole or in part
unless such agreement hereafter made is in writing and signed by the
Contributing Party and the Partnership.
24.7 The Partnership shall have no right to record this Agreement or a
memorandum hereof. If the Partnership shall so record this Agreement or a
memorandum, the Partnership shall be in default of the terms and conditions of
this Agreement.
24.8 The Contributing Party shall use best efforts to pay off in full
any and all mortgages currently encumbering the Property on or before December
1, 1997. A default by the Contributing Party under this paragraph shall entitle
the Partnership to terminate this Agreement, provided, however, that the terms
of Section 16(b) hereof shall survive such termination.
24.9 Until the earlier of (i) the Closing or (ii) a material default
under this Agreement, the terms of this Agreement shall not be disclosed to any
third party other than each of the parties' attorneys, accountants and other
professionals. If the Partnership intentionally violates this paragraph by
issuing a press release (it being understood that an unauthorized disclosure by
an employee or agent of the Partnership shall not be deemed an intentional
violation of this paragraph), then, notwithstanding anything herein to the
contrary, all of the 513,259 Units referred to in Section 2.1(b) shall be deemed
"Initial Free Units" and there shall be no Units which are "Initial Escrowed
Units".
25. ESCROW AGENT
25.1 The Contributing Party and the Partnership hereby designate
Commonwealth Land Title Insurance Company as "Escrow Agent" to receive and hold
the Deposit delivered herewith by the Partnership in accordance with Article 2
hereof, and Escrow Agent agrees to act as such Escrow Agent subject to the
provisions of this Section.
25.2 The Deposit shall be deposited in an interest bearing money market
account at any federally insured banking institution. From and after the date of
a default by either party, all interest on the Deposit or the remaining portion
thereof shall be paid to the non-defaulting party.
25.3 On receipt by Escrow Agent of a statement executed by the
Contributing Party and the Partnership that title to the Property has closed
under this Agreement, Escrow Agent shall promptly deliver such Deposit to the
Partnership.
25.4 On receipt by Escrow Agent of a statement executed by the
Partnership prior to, on or after the Closing Date that title to the Property
has not closed under this Agreement because of a default by the Contributing
Party under this Agreement or because of the Contributing Party's inability to
convey title to the Property in accordance with the provisions of this Agreement
or because any contingency contained in this Agreement has not been satisfied or
waived Escrow Agent shall within ten (10) Business Days, deliver a copy of said
statement to the Contributing Party and return such Deposit to the Partnership
on the tenth (10th) Business Day after receipt by the Contributing Party of said
statement unless Escrow Agent, prior to such return, receives from the
Contributing Party a statement contesting the accuracy of the Partnership's
statement and demanding retention of said Deposit by Escrow Agent.
25.5 On receipt by Escrow Agent of a statement executed by the
Contributing Party prior to, on or after the Closing Date that title to the
Property has not closed under this Agreement because of a default by the
Partnership under this Agreement, Escrow Agent shall within ten (10) Business
Days deliver said statement to the Partnership and deliver such Deposit to the
Contributing Party on the tenth (10th) Business Day after receipt by the
Partnership of such statement unless Escrow Agent, prior to such delivery,
receives from the Partnership a statement contesting the accuracy of the
Contributing Party's statement and demanding retention of said Deposit by Escrow
Agent.
25.6 On receipt by Escrow Agent of a statement from the Contributing
Party or the Partnership, as the case may be, under subparagraph 25.4 or 25.5
above, Escrow Agent shall retain the Deposit and thereafter deliver the same to
either the Contributing Party or the Partnership as the Contributing Party or
the Partnership may direct by a statement executed by them both, provided if
there is any dispute with respect to the Deposit Escrow Agent may immediately
and with notice to the Contributing Party and the Partnership, surrender said
Deposit to a court of competent jurisdiction for such disposition as may be
directed by such court.
25.7 Upon delivery of the Deposit to either Partnership, the
Contributing Party or a court of competent jurisdiction under and pursuant to
the provisions of this Section, Escrow Agent shall be relieved of all liability,
responsibility or obligation with respect to or arising out of the Deposit and
any and all of its obligations arising therefrom.
25.8 The Escrow Agent shall not be liable for any error of judgment or
for any act done or omitted by it in good faith or for anything which it may in
good faith do or refrain from doing in connection herewith or for any negligence
other than its gross negligence, nor shall the Escrow Agent be answerable for
the default or misconduct of its agents, attorneys or employees if they be
selected with reasonable care. The Escrow Agent is authorized to act upon any
document believed by it to be genuine and to be signed by the proper party or
parties and will incur no liability in so acting.
25.9 The Escrow Agent has executed this Agreement for the sole purpose
of agreeing to act as such in accordance with the terms of this Agreement.
26. ERNST & YOUNG LETTER
Within five (5) Business Days of the Partnership's written request, the
Contributing Party shall execute and deliver to Ernst & Young a letter in the
form of Exhibit S attached hereto and deliver or otherwise make available to
Ernst & Young any financial information requested by Ernst & Young in connection
with any filings or disclosures by the Partnership or the REIT required by law.
The Contributing Party's obligations under this paragraph shall survive the
Closing Date.
27. SALE OF PROPERTY
Without the prior written consent of the Contributing Party, the Partnership
shall not sell, exchange or otherwise dispose of the Property for a period of
two (2) years from the Closing Date in a transaction which results in the
recognition of taxable gain to the Partnership and the allocation under section
704(c) of the Internal Revenue Code of 1986 (the "Code") of any portion of such
taxable gain ("the Section 704(c) Gain") to the Contributing Party, except if
there is a change in control of the Partnership or the REIT or a disposition of
all or substantially all of the assets of the Partnership or the REIT. However,
the foregoing restriction shall not be applicable after any of the following
shall have occurred; (i) the Contributing Party has disposed of at least
sixty-seven (67%) percent of the Units, either through the exchange of Units for
stock of the REIT, the distribution of "Units" to members of the Contributing
Party or otherwise; (ii) the federal adjusted tax basis of the Contributing
Party in the Units has been adjusted to reflect fair market value; or (iii) for
each of the current members of the Contributing Party, either the federal
adjusted tax basis of the member's interest in the Contributing Party has been
adjusted to reflect fair market value or the member has disposed of at least
sixty-seven (67%) percent of its interest in the Contributing Party. Nothing
contained herein shall prohibit the Partnership from selling, exchanging
(including, without limitation, an exchange pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended) or otherwise disposing of the
Property in violation of the restrictions set forth above in which case the
Partnership shall pay each member of the Contributing Party who was not, as of
the time of the disposition, described in clause (iii) above, any federal and
state income tax liability suffered by it with respect to its share of any
Section 704(c) Gain allocated to it upon such disposition.
28. TAX CERTIORARI PROCEEDING
(a) The Contributing Party has initiated a tax certiorari proceeding
(the "Tax Certiorari Proceeding") with respect to the assessed values
established for the Property. From and after the date hereof through the
Closing, the Contributing Party shall continue to pursue the Tax Certiorari
Proceeding but shall not settle such Tax Certiorari Proceeding without the
written consent of the Partnership. From and after the Closing, the Partnership
shall control all aspects of the Tax Certiorari Proceeding with the applicable
local municipality, provided, however, that in contesting and settling the Tax
Certiorari Proceeding, the Partnership shall make a good faith effort to protect
the Contributing Party's interest in the proceeding and provided, further, that
the Partnership shall continue to retain the counsel which is currently handling
the Tax Certiorari Proceeding. All tax refunds received by the Partnership as a
result of the Tax Certiorari Proceeding shall, after deducting the attorneys
fees and expenses incurred in obtaining such tax refund, be prorated as of the
Closing Date in accordance with Section 6.1 hereof. Within ten days after any
tax refunds are received by the Partnership, the Partnership shall pay to the
Contributing Party an amount equal to the Contributing Party's share of such
benefits determined as provided in Section 6.1 hereof.
(b) The Partnership hereby consents to the tax certiorari settlement, a
copy of which is attached hereto as Exhibit R.
IN WITNESS WHEREOF, the Contributing Party and the Partnership have
executed this Agreement as of the day and year first above written.
FREQUENCY ELECTRONICS INC.
By:/S/ Joseph Franklin
Name:Joseph Fanklin
Title:Chairman/CEO
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp.
By: /S/ Mitchell Rechler
Name:Mitchell Rechler
Title:Exec. V.P.
ESCROW AGENT
COMMONWEALTH LAND TITLE INSURANCE
COMPANY
By:
Name:
Title:
<PAGE>
STATE OF NEW YORK)
) ss.:
COUNTY OF SUFFOLK )
On the 2nd day of December, 1997, personally appeared Joseph Franklin, to me
known to be the person who executed the foregoing instrument and who, being duly
sworn, did depose and say that he is the Chairman/CEO of Frequency Electronics,
Inc., that he executed the foregoing instrument and that he had authority to
sign the same, and he acknowledged that it was his free act and deed and the
free act and deed of Frequency Electronics, Inc., before me.
/s/Paul Bloom
Notary Public
My Commission Expires: July 31, 1998
Commissioner of the Superior Court
STATE OF New York)
) ss.:
COUNTY OF Suffolk)
On the 2nd day of December, 1997, personally appeared Mitchell Rechler, to me
known to be the person who executed the foregoing instrument and who, being duly
sworn, did depose and say that he is an Executive Vice President of Reckson
Associates Realty Corp., general partner of Reckson Operating Partnership L.P.,
that he executed the foregoing instrument and that he had authority to sign the
same, and he acknowledged that it was his free act and deed and the free act and
deed of Reckson Associates Realty Corp., before me.
/s/Samuel Yedid
Notary Public
My Commission Expires: June 30, 1999
Commissioner of the Superior Court
<PAGE>
Exhibit 10.13
AGREEMENT OF LEASE
BETWEEN
RECKSON OPERATING PARTNERSHIP, L.P.
AND
FREQUENCY ELECTRONICS, INC.
<PAGE>
TABLE OF CONTENTS
SPACE 1
TERM 1
RENT 2
USE OF PREMISES................................................................4
TAXES 4
CONDITION OF PREMISES AND DELIVERY OF POSSESSION...............................8
REPAIRS, MAINTENANCE, FLOOR LOADS AND PARKING RESTRICTIONS....................14
TENANT'S ALTERATION...........................................................20
UTILITIES.....................................................................23
REQUIREMENTS OF LAW, SPRINKLERS...............................................24
INSURANCE.....................................................................27
DAMAGE OR DESTRUCTION.........................................................29
SUBORDINATION.................................................................31
INDEMNIFICATION...............................................................33
EMINENT DOMAIN................................................................34
RIGHT TO SUBLET OR ASSIGN.....................................................36
RIGHT TO INSPECT; POSTING SIGNS...............................................41
BANKRUPTCY....................................................................42
DEFAULT.......................................................................43
REMEDIES OF LANDLORD..........................................................44
ATTORNEY'S FEES...............................................................46
WAIVER OF REDEMPTION, COUNTERCLAIM, TRIAL BY JURY................... .........46
NO WAIVER.....................................................................47
END OF TERM...................................................................47
<PAGE>
BROKER........................................................................49
QUIET ENJOYMENT...............................................................49
NONLIABILITY OF LANDLORD......................................................50
NO ABATEMENT..................................................................51
APPLICABLE LAW AND CONSTRUCTION...............................................51
CONSTRUCTION ON ADJACENT PREMISES OR BUILDINGS................................52
UTILITY EASEMENT................................. ............................53
NOTICES.......................................................................53
BINDING EFFECT OF LEASE.......................................................53
UNAVOIDABLE DELAYS............................................................54
SEWER.........................................................................55
CLEANING, RUBBISH REMOVAL.....................................................55
SHORT TERM EXTENSION OPTION...................................................55
RENEWAL OPTION................................................................57
RIGHT OF FIRST OFFER..........................................................59
CONSENTS......................................................................60
EXHIBIT 1.....................................................................66
EXHIBIT 2.....................................................................67
EXHIBIT 3.....................................................................68
EXHIBIT 4.....................................................................69
EXHIBIT 5.....................................................................70
EXHIBIT 6.....................................................................71
<PAGE>
AGREEMENT OF LEASE
AGREEMENT OF LEASE made as of the 2nd day of December, 1997 between
RECKSON OPERATING PARTNERSHIP, L.P., a Delanware limited partnership having its
principal office at 225 Broadhollow Road, Suite 212 West, Melville, New York
11747 (hereinafter referred to as "Landlord"), and FREQUENCY ELECTRONICS, INC.,
a Delaware corporation having its principal office at 55 Charles Lindbergh
Boulevard, Uniondale, New York (hereinafter referred to as "Tenant").
SPACE
1. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord the space substantially shown on the Rental Plan initialed by the
parties and made a part hereof as Exhibit "1" ("Demised Premises" or "Premises")
in the building located at 55 Charles Lindbergh Boulevard, Uniondale, New York
(hereinafter referred to as the "Building"), and the parties stipulate and agree
that such space contains 91,027 rentable square feet in a Building containing
approximately 214,581 rentable square feet which constitutes 42.42 percent of
the area of the Building ("Tenant's Proportionate Share").
TERM
2. The term ("Term", "term" or "Demised Term") of this lease and
Tenant's obligation to pay Minimum Annual Rent and all items of Additional Rent
(as such terms are defined in Article 3 hereof) shall commence on the date on
which Landlord acquires the ground lease covering the Building (the "Rent
Commencement Date"). The Term of this lease shall expire on the day preceding
the day which is eleven (11) years after (a) the Rent Commencement Date, if such
date is the first day of the first full calendar month or (b) the first day of
the first full calendar month following the Rent Commencement Date, if such date
is not the first day of a calendar month (the "Expiration Date").
<PAGE>
RENT
3. (a) Tenant covenants to pay to Landlord at its principal office, or
at such place as Landlord shall from time to time direct in writing, the minimum
annual rent set forth below (the "Minimum Annual Rent"), and the additional rent
required to be paid pursuant to the terms of this lease ("Additional Rent").
Minimum Annual Rent and such other Additional Rent and charges which Tenant
shall be required to pay are hereinafter sometimes referred to as "Rent".
Minimum Annual Rent shall be as follows:
During the first through eleventh Lease Years, the Minimum Annual Rent
shall be $399,999.96 per Lease Year, payable in equal monthly
installments of $33,333.33
A "Lease Year" shall be comprised of a period of twelve (12) consecutive months.
The first Lease Year shall commence on the Rent Commencement Date but,
notwithstanding the first sentence of this paragraph, if the Rent Commencement
Date is not the first day of a month, then the first Lease Year shall include
the additional period from the Rent Commencement Date to the end of the then
current month. Each succeeding Lease Year shall end on the anniversary date of
the last day of the preceding Lease Year. For example, if the Rent Commencement
date is January 1, 1998, the first Lease Year would begin on January 1, 1998,
and end on December 31, 1998, and each succeeding Lease Year would end on
December 31st. If, however, the Rent Commencement Date is January 2, 1998, the
first Lease Year would end on January 31, 1999, the second Lease Year would
commence on February 1, 1999, and each succeeding Lease Year would end on
January 31st.
Within ten (10) business days after Landlord's delivery to Tenant of
Landlord's standard Rent Commencement Date Certificate, Tenant shall sign and
return said Certificate to Landlord.
(b) Tenant shall pay the Minimum Annual Rent in equal monthly
installments in advance on the first day of each calendar month included in the
term except that Tenant shall pay the Minimum Annual Rent due for the first
month of the first Lease Year upon execution of this lease.
<PAGE>
(c) All Rent shall be paid in lawful money of the United States which
shall be legal tender in payment of all debts and dues, public and private, at
the time of payment, at the address of Landlord set forth in this lease or at
such other place as Landlord in writing may designate on ten (10) days notice to
Tenant without any set-off or deduction whatsoever and without any prior demand
therefor.
(d) Unless another time shall be herein expressly provided, any
Additional Rent shall be due and payable together with the next succeeding
installment of Minimum Annual Rent, or, in the event of the expiration or sooner
termination of this lease, within ten (10) business days after receipt of a bill
from Landlord; and Landlord shall have the same remedies for failure to pay the
Additional Rent as for a non-payment of Minimum Annual Rent.
(e) For any portion of a calendar month included at the beginning or
end of the term, Tenant shall pay 1/30th of the closest applicable monthly
installment of Minimum Annual Rent for each day of such portion, payable in
advance at the beginning of such portion.
(f) In any case in which the Minimum Annual Rent or Additional Rent is
not paid within ten (10) business days of the day when same is due, Tenant shall
pay interest on such late payment accruing at the rate of one and one half (1
1/2%) percent per month from the date that such payment was due to the date of
payment, but in no event shall the interest charge exceed the maximum rate
permitted by law; and, in addition thereto, the sum of $100.00 for the purpose
of defraying expenses incident to the handling of such delinquent account.
Tenant further agrees that the interest charge assessed does not constitute a
lender or borrower/creditor relationship between Landlord and Tenant.
<PAGE>
(g) If Tenant shall default, beyond applicable notice and cure periods
provided herein for the cure thereof, in making any payment required to be made
by Tenant or in performing any obligation of Tenant under this lease which shall
require the expenditure of money, Landlord may, but shall not be obligated to,
make such payment on behalf of Tenant or expend such sum as may be necessary to
perform or fulfill such obligation. Any sums so paid by Landlord shall be deemed
Additional Rent and shall be due and payable to Landlord at the time of payment
of the next installment of Minimum Annual Rent.
USE OF PREMISES
4. (a) Tenant shall use and occupy the Premises solely for the lawful
purposes: general and executive offices, laboratory, light manufacturing and
research and development and for no other purpose. Tenant shall not use or
permit the use of the Premises contrary to any applicable statute, ordinance or
regulation or in violation of the Certificate of Occupancy of the Building, or
in a manner which would cause structural injury to the Building.
(b) Tenant acknowledges that the value of the Premises and the
reputation of Landlord will be seriously injured if the Premises are used for
any obscene or pornographic purposes or if any obscene or pornographic material
is permitted on the Premises. Tenant further agrees that Tenant will not permit
any such uses by Tenant or a sublessee of the Premises or an assignee of this
lease. This Paragraph shall directly bind any successors in interest to Tenant.
Tenant agrees that, if at any time, Tenant violates any of the provisions of
this Paragraph, such violation shall be deemed a breach of a substantial
obligation of the terms of this lease and objectionable conduct. Pornographic
material is defined for purposes of this Paragraph as any written or pictorial
matter with prurient appeal or any objects or instruments that are primarily
concerned with lewd or prurient sexual activity. Obscene material is defined
here as it is in Penal Law ss.235.00.
TAXES
5. (a) During the term of this lease, Tenant covenants and agrees to
pay, in the manner set forth in this Article, Tenant's Proportionate Share (as
defined in Article 1 and subsection (e) below) of all Real Estate Taxes, as
Additional Rent.
<PAGE>
(b) The term "Real Estate Taxes" shall be deemed to mean all
taxes and assessments, special or otherwise, assessed upon or with respect to
the ownership and all other taxable interests in the land and improvements
thereon which constitute the Real Property (as defined in Subdivision 7(A)(ii)
below), imposed by Federal, State or local governmental authority or any other
taxing authority having jurisdiction over Landlord's tax lot or lots, but shall
not include income, intangible, franchise, capital stock, estate or inheritance
taxes, or taxes based upon the receipt of rentals (unless the same shall be in
lieu of "Real Estate Taxes" as herein defined by whatever name the tax may be
designated).
(c) Commencing on the Rent Commencement Date and continuing
throughout the term of this lease, Tenant shall pay to Landlord Tenant's
Proportionate Share of the Real Estate Taxes for each tax year occurring in
whole or part during the term of this lease. Any amount due to Landlord under
the provisions of this Article shall be paid on the later of: (i) fifteen (15)
business days after receipt by Tenant from Landlord of an invoice therefor; or
(ii) the date on which the next succeeding installment of Minimum Annual Rent is
due. Landlord shall furnish Tenant with evidence of the amount of such Real
Estate Taxes. A copy of the tax bill shall be sufficient evidence of the amount
of Real Estate Taxes imposed upon the Real Property. Tenant shall also pay when
due any occupancy taxes arising under or in connection with this lease. In
addition to the foregoing, Tenant shall also be responsible for any increase in
Real Estate Taxes resulting from Tenant's improvements performed by or on behalf
of Tenant. Notwithstanding anything to the contrary expressly contained herein,
Tenant shall not be responsible for any increases in Real Estate Taxes to the
extent such increases are a result of tenant improvements performed by or on
behalf of other tenants in the Building or any tenant or occupant of 51 Charles
Lindbergh Boulevard, Uniondale, New York provided Tenant furnishes Landlord with
objective proof of same.
<PAGE>
(d) Landlord's failure during the term of this lease to
prepare and deliver any of the foregoing invoices, tax statements, or other
demand for payment of Real Estate Taxes or Landlord's failure to make a demand
for any other item of Additional Rent due hereunder shall not in any way waive
or cause Landlord to forfeit or surrender its rights to collect any of the
foregoing items of Additional Rent which may have become due during the term of
this lease, provided, however, that Landlord's right to collect such items of
Additional Rent shall only survive for a period of two (2) years following the
expiration or sooner termination of this lease.
(e) Landlord and Tenant acknowledge that the tax lot on which
the Building is located is the same tax lot on which the building known as 51
Charles Lindbergh Boulevard, Uniondale, New York is located. Until the tax lot
for the Building and 51 Charles Lindbergh Boulevard known as Section 44 Block F
Lot 377 ("Tax Lot") is divided into two (2) separate tax lots, Tenant's
Proportionate Share of the Real Estate Taxes shall be computed as follows.
As set forth on Exhibit 3 annexed hereto, the total taxes
billed for the Tax Lot in the 1996/97 school tax year and 1997 county tax year
were $1,195,837.16, of which $623,140.37 was attributable to the portion of the
Tax Lot on which the Building is located. On this basis and until the Tax Lot is
apportioned into two (2) lots, Tenant's Proportionate Share of the Real Estate
Taxes is 42.42% (as defined in Article 1 above) of $623,140.37, or $264,336.14
for the 1996/97 school tax year and the 1997 county tax year. In future tax
years, the Real Estate Taxes will be subject to increases or decreases resulting
from any increase or decrease in the portion of the gross assessed value (and
the tax rate applicable thereto) for the Tax Lot attributable to the portion of
the Tax Lot on which the Building is located (computed on the same basis as the
computation for the 1996/97 school tax year and 1997 county tax year).
(f) Tenant shall pay to Landlord on demand any Real Estate
Taxes relating to the term of this lease which may have been prepaid by
Landlord. With respect to any period at the expiration of the term of this lease
which shall constitute a partial tax year, Tenant shall be responsible for the
Real Estate Taxes allocable to such partial tax year and Landlord's tax
statement shall apportion the amount of the Additional Rental due hereunder. The
obligation of Tenant in respect of such Additional Rent applicable for the last
year of the term of this lease or part thereof shall survive the expiration of
the term of this lease.
<PAGE>
(g) Tenant shall not, without Landlord's prior written
consent, institute or maintain any action, proceeding or application in any
court or body or with any governmental authority for the purpose of changing the
Real Estate Taxes. However, if Landlord has failed to commence such a proceeding
by the sixtieth (60th) day prior to the final date to file challenges for the
tax year in question and Landlord has not provided to Tenant in writing, upon
Tenant's written request, a reasonable justification for not doing so prior to
such sixtieth (60th) day, then Tenant shall be permitted to commence such a
proceeding for the tax year in question at Tenant's sole cost and expense, upon
prior notice to Landlord and with the consent and cooperation of the other
tenants in the Building (and with the tenants of 51 Charles Lindbergh Boulevard,
Uniondale, New York in the event that the Real Estate Taxes are not apportioned
between separate tax lots for the Building and 51 Charles Lindbergh Boulevard,
Uniondale, New York). Reasonable justification for Landlord's failure to
commence a tax certiorari proceeding shall include, without limitation, an
agreement with the relevant taxing authorities not to file a tax certiorari
proceeding made in connection with the settlement of a prior tax certiorari
proceeding. In the event Tenant commences such a proceeding as permitted by this
Article, Tenant shall furnish Landlord with copies of all documents delivered
and received by or on behalf of Tenant in connection with said proceeding.
Landlord agrees to cooperate with Tenant in commencing such a proceeding in
Landlord's name and to execute any documentation reasonably requested by Tenant
in connection with said proceeding. In the event any such action initiated by
Landlord or Tenant is successful, then Tenant shall receive, or have credited
against its Rent thereafter due (at Landlord's option), or, following
termination of or expiration of this lease (provided such termination is not a
result of Tenant's uncured default hereunder), Landlord shall reimburse Tenant
for any tax refund or credit obtained thereby to the extent said Real Estate
Taxes were actually paid by Tenant (after reimbursement for the appropriate
expenses). The obligations of Landlord to reimburse or credit Tenant for any tax
refund or credit obtained in accordance with this section (g) shall survive the
expiration of the term of this lease.
<PAGE>
CONDITION OF PREMISES AND DELIVERY OF POSSESSION
6. (a) Landlord acknowledges that Tenant currently occupies a portion
of the Building in which the Demised Premises shall be constructed. Landlord
agrees to deliver the Premises to Tenant on a "turn-key" basis and to perform
all work and installations in accordance with the specifications annexed hereto
as Schedule A and as otherwise provided in the Rental Plan and Work Plans
annexed thereto (collectively, the "Rental Plan") annexed hereto as Exhibit 1
("Landlord's Initial Construction"). Landlord's Initial Construction costs shall
be calculated at the actual cost to Landlord (including, without limitation,
site specific overhead costs; but excluding Landlord's non-site specific
overhead and administrative costs, mark up and profit). In the event Landlord's
Initial Construction costs shall exceed One Million ($1,000,000.00) Dollars
(excluding any such costs incurred as a result of Tenant's request for changes
in plans, materials, finishes or installations), Tenant shall pay to Landlord,
as such additional costs are expended, a sum not to exceed Two Hundred Thousand
($200,000.00) Dollars. Landlord shall be responsible for any costs of Landlord's
Initial Construction exceeding One Million Two Hundred Thousand ($1,200,000.00)
Dollars (excluding any such costs incurred as a result of Tenant's request for
changes in plans, materials, finishes or installations). Landlord's Initial
Construction shall exclude any work associated with any other tenant or common
area within the Building and the cost of splitting any and all utilities
(including but not limited to heating, ventilating and air conditioning systems
and sprinkler systems) and constructing demising walls. Landlord shall, at no
cost to Tenant, assist Tenant with layouts and provide Tenant with architectural
services in connection with Landlord's Initial Construction.
(b) If Landlord shall be unable to deliver possession of the
Premises by the Rent Commencement Date, Landlord shall not be subject to any
liability for such failure to give possession and Tenant hereby waives the
provisions of Section 223-a of the Real Property Law of the State of New York
and any other law of like import now or hereafter enacted.
<PAGE>
(c) All of Landlord's Initial Construction shall be performed
by licensed, reputable contractors in accordance with all applicable laws,
codes, rules and regulations, and Landlord shall at its sole cost and expense,
obtain all necessary permits, approvals, certificates of occupancy or
certificates of completion required for Landlord's Initial Construction. Except
as otherwise provided in this Article 6 and subject to the provisions of Article
12 herein, Landlord agrees to indemnify and hold Tenant harmless from any claim,
damage, liability or expense arising out of Landlord's performance of Landlord's
Initial Construction. Landlord shall provide Tenant with ten (10) business days'
prior written notice of the date on which the Demised Premises shall be
substantially completed. "Substantially Completed" or "Substantial Completion"
or "Substantially Complete" as used herein is defined to mean when the
construction is complete as evidenced by the issuance of a temporary or
permanent certificate of occupancy (or the administrative approval to occupy the
Demised Premises preceding the administrative issuance of such certificates) and
when the Demised Premises are completed to such an extent as not to interfere
with the Tenant's use, occupancy and substantially full enjoyment of the Demised
Premises.
<PAGE>
(d) (i) In the event that Tenant fails to vacate the space
that it currently occupies and take possession of the Demised Premises on the
date the Demised Premises shall be Substantially Complete (as defined in the
foregoing Subsection), Tenant shall pay to Landlord, as Additional Rent, upon
demand, a sum equal to three times the Minimum Annual Rent computed on a per
diem basis for each day that Tenant fails to take possession of the Demised
Premises following the date of Substantial Completion. (Notwithstanding the
foregoing, Tenant shall not be liable for such Additional Rent, and Landlord
shall not make a demand therefor, unless, until and to the extent Landlord shall
be required to pay a penalty to Lockheed Martin Corporation ("Lockheed")
pursuant to Article 7(b) of the Lease for a portion of the Building (entered
into by Lockheed and Landlord contemporaneously with this Lease) by reason of
Landlord's failure to complete the Initial Construction (defined therein) by
June 7, 1998). Landlord shall permit Tenant and its contractors, suppliers and
workmen access to the Demised Premises prior to the date of substantial
completion in order for Tenant to install wiring for Tenant's telephone and
computer systems and perform other work necessary to prepare the Premises for
Tenant's use and occupancy. Subject to the provisions of Article 12 herein,
Tenant shall indemnify and hold Landlord harmless from any claim, damage,
liability or expense arising out of the foregoing Tenant's work. The scheduling
and coordination of Tenant's contractors and their workmen and mechanics will be
subject to reasonable regulation by Landlord and Landlord's contractor to avoid
unreasonable interferences with labor employed by Landlord or Landlord's
contractors.
<PAGE>
(ii) Landlord intends to complete Landlord's Initial
Construction in stages and to deliver the Demised Premises to Tenant in stages.
In order to facilitate Landlord's completion of Landlord's Initial Construction
and the work Landlord must perform to prepare a portion of the Building for
occupancy by Lockheed, Tenant shall use reasonable efforts to take occupancy
of the portions of the Demised Premises which have been Substantially Completed
(as defined below) by the dates set forth on the Staging Schedule annexed hereto
as Exhibit 5 (the"Staging Schedule") and to vacate the portions of Tenant's
existing space by the dates set forth on the Staging Schedule (provided the
related portion of the Demised Premises has been Substantially Completed by the
respective date). For purposes of this Subsection (ii) only, a portion of the
Demised Premises designated on the Staging Schedule shall be deemed to be
Substantially Completed when such portion is completed to the extent it is a
functional unit for the continued, uninterrupted operation of Tenant's
business or the portion of Tenant's business to be conducted therein (but
Landlord shall not be required to deliver a certificate of occupancy or other
administrative approval of occupancy with respect to each such portion until the
entire Demised Premises shall be Substantially Completed as defined in the
Subsection (i) above). Although the per diem penalty referred to in
Subsection (i) above shall not apply to the delivery of the portions of the
Demised Premises pursuant to the Staging Schedule (until the entire Demised
Premises shall be Substantially Completed as defined in Subsection (i) above),
Tenant's failure to make reasonable efforts to comply with its obligations under
this Lease with respect to the Staging Schedule shall be a default under this
Lease (but such default shall be subject to the applicable notice and cure
periods set forth in this Lease). Such reasonable efforts of Tenant shall
include, without limitation, the installation by Tenant of the wiring for
Tenant's telephone and computer systems so that the portions of the Demised
Premises set forth in the Staging Schedule shall be, by the date set forth in
such schedule for the Substantial Completion of the portion of the Demised
Premises in question, a functional unit for the continued, uninterrupted
operation of Tenant's business as it relates to such telephone and computer
systems.
Notwithstanding anything to the contrary set forth in the foregoing
grammatical paragraph, Tenant shall be in default of its obligations under this
lease if it shall fail to comply with the Staging Schedule in the following
respects:
(A) In the event Landlord shall have Substantially
Completed (as defined in Subsection (ii) above) the Hybrid Stockroom Area, the
Loading Dock/Receiving Area, and the Quality Control Area shown on the Staging
Schedule and shall have given Tenant at least ten (10) days prior written notice
of the date of such Substantial Completetion, Tenant's failure to vacate the
"ANC" space shown on the staging Schedule, within (10) days after Landlord's
Sunstantial Completion of the Hybrid Stockroom Area, the Loading Dock/Receiiving
Area, and the Quality Control Area, shall be deemed to be a default by Tenant
under this lease.
(B) In the event Landlord Shall have Substantially
Completed (as defined in Subsection (ii) aboce) the Tenant's new "AMRAAM" space
(located in the basement of the building) shown on the Staging Plan and shall
have given Tenant at leat ten (10) days prior written notice of the date of such
Substantial Completion, Tenant's failure to vacate the existing "AMRAAM" space
(locatd on the first floor of the Building) shown on the Staging Schedule,within
ten (10) days after Landlord's Substantial Completion of the new basement
"AMRAAM" space, shall be deeemed to be a default by Tenant under this lease.
(iii) Notwithstanding anything to the contrary set
forth in this Lease, in the event Tenant shall occupy a portion of the Demised
Premises prior to Landlord's receipt of a certificate of occupancy or other
administrative approval of Tenant's occupancy thereof as required under
Subsection (ii) above, Landlord shall indemnify, defend and hold Tenant harmless
against (a) any fines or penalties which may be imposed on Tenant by a
governmental agency by reason thereof; (b) any moving or other relocating costs
Tenant may reasonably incur by reason of vacating the subject portion of the
Demised Premises pursuant to an order of a governmental agency and reoccupying
the space previously occupied by Tenant for the same purpose as the space being
vacated or other reasonably suitable and equipped space in the Building
provided by Landlord; and (c) any direct damages described in the following
sentence ("Direct Damages") which Tenant may reasonably incur by reason of
down time during such relocation (but in no event shall Landlord be responsible
for consequential or indirect damages such as the loss of new business or
contracts). As to the Direct Damages referred to in (c) of the foregoing
sentence, Landlord shall only be responsible for Direct Damages which Tenant
shall reasonably incur by reason of down time in the laboratory areas set forth
on Exhibit 6 hereto (as opposed to office and administrative areas) and the
maximum Direct Damages Landlord shall be responsible for each day of down
time of such areas is the amount set forth on such exhibit for each such area.
Landlord shall only be responsible for such Direct Damages if (A) Tenant is
ordered to discontinue use of the subject laboratory area and Tenant in fact
discontinues use of such area and (B)_such order to discontinue use results
from Tenant's occupying the subject area without a certificate of occupancy
or other administrative approval to occupy rather than as a result of Tenant's
specific use or manner of use of the subject area. Tenant hereby agrees that
Landlord may contest, at Landlord's expense, any orde r that Tenant discontinue
its operations in a certain area of the Demised Premises and that as long as
Tenant is able to continue using the subject area during Landlord's contest of
such order, Tenant shall continue to operate in such space.
<PAGE>
(e) Notwithstanding anything to the contrary contained in
Article 8 herein, during the period of Landlord's Initial Construction and the
period of construction of the improvements to be made on behalf of Lockheed
Martin Corporation if Landlord performs such improvements, Landlord shall give
Tenant prior notice of scheduled interruptions of service, and Landlord shall
use best efforts (which include the use of overtime services) not to materially
interfere with Tenant's use and occupancy of the Premises.
(f) Notwithstanding the fact that Tenat shall use reasonable
efforts to vacate the portions of its existing space pursuant to the Staging
Schedule, Landlord and Tenant acknowledge that certain of Landlord's Initial
Constrution shall be performed while Tenant is occupying its current space.
Landlord hereby agrees not to unreasonably interfere with Tenant's use and
occupancy of its current space during such construction and Landlord and Tenant
hereby agree to cooperate in scheduling the work to be performed in such
occupied areas.
(g) Tenant hereby agrees that,in connection with its vacating
portions of its current space pursuant to the Staging Schedule, it shall remove
all its personal property from such space, including, without limitation, filing
cabinets and the contents thereof.
(h) For purposes of this lease "Administrative approval to
occupy" shall be deemed to meanthe applicable agency's final inspection approval
of the Landlord's initial construction. For purposes of articles 15 and 16 such
final inspection approval shall relate to the portion of the Demised Premises
being restored.
OPERATING EXPENSES
7. (A)(i) For purposes of this lease, the term "Operating Costs" shall
mean and include the aggregate of all those expenses to the extent incurred in
respect to the operation and maintenance of the Real Property (as such term is
defined in Subdivision (ii) below) in accordance with accepted principles of
sound management and accounting practices as applied to the operation and
maintenance of non-institutional first class research and development
properties, including, only the following: rent and Additional Rent under the
existing ground lease (without modification) with Nassau County covering the
Real Property; all insurance carried by Landlord applicable to the Real Property
(including, without limitation, primary and excess liability, all risk property
coverage at replacement cost, flood insurance, boiler insurance and rent
insurance); maintenance and repairs of grounds (including, without limitation,
all landscaping, lawn maintenance, tree and shrub spraying, walks, parking and
other vehicle ways and areas and common areas), underground conduits, pipes,
line equipment and systems; repaving, resurfacing and painting (including line
painting); removal of snow and ice; exterior and common area lighting and
utilities; irrigation; sprinkler repair and maintenance; water; and roof repair
and maintenance; and resurfacing and restriping of the parking lot. Operating
Costs shall not include expenses incurred by Landlord for the following repairs
to be made to the Real Property in connection with Landlord's acquisition of
same: installation of roofing membrane, curbing, resurfacing and restriping of
parking lot, and installation and/or relocation of lighting in parking lot.
<PAGE>
(ii) The term "Real Property" shall be the land upon which the
Building stands and any part or parts thereof utilized for parking, landscaped
areas or otherwise used in connection with the Building, and the Building and
other improvements appurtenant thereto.
(B) Tenant shall pay to Landlord, as Additional Rent, Tenant's
Proportionate Share of the Operating Costs as defined above without any "gross
up" of said costs and further provided that the total amount of reimbursement to
Landlord shall not exceed 100% as it relates specifically to the Real Property
and the Building.
(C) Commencing in the second Lease Year, Landlord shall render to
Tenant a statement containing a computation of Tenant's Proportionate Share of
the Operating Costs ("Landlord's Cost Statement") with respect to each Lease
Year during the Term of this lease. Landlord estimates that the Operating Costs
for the Building are currently approximately ($.35) cents per square foot, and
are subject to future increases. On the first day of each month during the first
Lease Year, Tenant shall pay to Landlord, as Additional Rent, an amount equal to
one-twelfth (1/12) of Tenant's Proportionate Share of the estimated Operating
Costs for the first Lease Year.
<PAGE>
(D) All Landlord's Cost Statements shall include the following amounts
with respect to the Lease Year to which they apply: (i) the total Operating
Costs incurred by Landlord during the Lease Year in question; (ii) Tenant's
Proportionate Share of Operating Costs for such Lease Year; (iii) all amounts
paid by Tenant during such Lease Year on account of the subject payment; and
(iv) the amount of the difference, if any, between such payment for such Lease
Year and the amounts paid by Tenant during such Lease Year on account of the
subject payment. On the later of fifteen (15) days after the rendition of such
Landlord's Cost Statement or the date on which the next installment of Minimum
Annual Rent is due, Tenant shall pay to Landlord, as Additional Rent, the amount
of the difference referred to in (iv) above, if any. In addition, together with
such payment, Tenant shall pay to Landlord, for each month that has transpired
since the commencement of the current Lease Year and the rendition of the
subject Landlord's Cost Statement, the difference between one-twelfth (1/12th)
of Tenant's Proportionate Share of Operating Costs shown on such statements and
the monthly payments toward Tenant's Proportionate Share of Operating Costs made
by Tenant for the prior months of such current Lease Year. In addition, on the
first day of each month following the rendition of the subject Landlord's Cost
Statement, Tenant shall pay to Landlord, on account of the next payment due from
Tenant for Operating Costs, one-twelfth (1/12th) of Tenant's Share of Operating
Costs set forth on the subject Landlord's Cost Statement.
REPAIRS, MAINTENANCE, FLOOR LOADS AND PARKING RESTRICTION
8. (a) Tenant shall at all times keep and maintain the Premises in good
order, condition and repair, and shall make all nonstructural repairs to the
Premises, including, without limiting the generality of the foregoing, (i)
maintenance and repair of the electrical, plumbing, sprinkler, heating, air
conditioning, ventilation and all other mechanical systems servicing the
Premises; (ii) regularly-scheduled cleaning and maintenance of the interior of
the Premises; and (iii) the repair and maintenance of all plate glass. If Tenant
fails to make any repairs or replacements required to be made by Tenant,
Landlord may, without obligation, perform same for the account of Tenant at
Tenant's expense and the cost thereof shall be due and payable by Tenant to
Landlord as Additional Rent. In the event that structural repairs, replacements
or alterations or any other repairs or replacements included under Article 8(b)
hereof shall be necessitated or occasioned, in whole or in part, by the acts,
omissions, or negligence of Tenant or any person claiming through or under
Tenant or any of their servants, employees, contractors, agents, visitors or
licensees, or by the use or occupancy or manner of use or occupancy of the
Premises by Tenant, or any such person, Landlord shall make such repairs,
replacements or alterations at Tenant's expense.
<PAGE>
(b) Landlord shall be responsible for performing (i)
maintenance and repair of the roof and structural elements of the Building; (ii)
maintenance, replacement and repair of all common areas, landscaping, sidewalks,
driveways and parking areas at the Building; and (iii) keeping the exterior
premises clean and free of debris, snow and ice. Except for Landlord's
obligation to keep the exterior premises clean and free of debris, snow and ice,
Landlord shall not be required to commence any repairs required to be performed
by it until after notice from Tenant that same are necessary, which notice,
except in the case of an emergency, (which shall not require notice) shall be in
writing and shall permit Landlord ten (10) days in which to commence such
repair. When necessary by reason of accident or other casualty occurring in the
Building or at the Premises or in order to make any necessary repairs,
alterations or improvements in or relating to the Building or the Premises or
other portions of Landlord's property, Landlord reserves the right to interrupt,
temporarily, on written notice to Tenant (except in the case of an emergency, in
which case no notice shall be required), the supply of utility services until
said repairs or improvements shall have been completed. Landlord shall pursue
such work with reasonable diligence and dispatch, and shall use reasonable
efforts not to unreasonably interfere with Tenant's use and occupancy of the
Demised Premises.
(c) Tenant shall not place a load upon any floor of the
Premises which exceeds the floor load per square foot area which such floor was
designed to carry. If Tenant shall desire a floor load in excess of that for
which the floor of any portion of the Premises is designed, upon submission to
Landlord of plans showing the location of and the desired floor live load for
the area in question, Landlord may strengthen and reinforce the same, at
Tenant's sole expense, so as to carry the live load desired. Business machines
and mechanical equipment used by Tenant which cause vibration or noise that may
be transmitted to or through the Building shall be placed and maintained by
Tenant, at its expense, in settings of cork, rubber or spring-type vibration
eliminators sufficient to eliminate such vibration or noise. Landlord hereby
acknowledges that Tenant utilizes vibration labs and maintains a six thousand
(6000) gallon liquid nitrogen tank in the ordinary course of its business, and
Landlord hereby consents to the use of such labs and the maintenance of such
tank, provided that Tenant complies with all applicable laws, regulations and
the provisions of this lease (including, without limitation, Article 11(d)), and
further provided that such use and maintenance, not to exceed Tenant's current
use and maintenance, does not unreasonably interfere with any other tenant's use
and occupancy of its premises.
<PAGE>
(d) Tenant shall comply with the following restrictions with
respect to the Premises:
(i) Tenant shall store all trash and refuse in
appropriate sealed and covered containers at the exterior of the Building
and shall attend to the regular disposal and removal thereof. Tenant may
continue to use the trash compactor that is currently located in the loading
dock outside the Premises, provided such use is consistent with applicable
laws, rules and regulations. American Financial Consultants, a current subtenant
at the Premises, may continue to use the dumpster that is located outside the
Building adjacent to the entrance of the portion of the Premises occupied by
American Financial Consultants, provided such use is consistent with applicable
laws, rules and regulations. Tenant agrees that the trash compactor and the
dumpster may be located in parking spaces allocated for Tenant's use.
(ii) Tenant shall receive all deliveries, load and
unload goods, merchandise, supplies, fixtures, equipment, furniture and rubbish
only through proper service doors and loading docks serving the Building, but
in no event through the main front entrance of the Building.Tenant may, however,
receive deliveries and load and unload goods through the main entrance to
Tenant's Premises.
(iii) Tenant shall not change the exterior colors or
architectural treatment of the Premises or make any alterations or changes to
the exterior of the Building or to the grading, planting or landscaping of the
exterior of the Building without the consent of Landlord which shall not be
unreasonably withheld. Landlord agrees that, during the term of this Lease and
any extension or renewal thereof, Landlord shall not change the address of the
Building or designate a name for the Building.
<PAGE>
(iv) Landlord shall, at Landlord's sole cost and
expense, install monument and directional signs outside the Building pursuant to
the sign plan annexed hereto as Exhibit "5". Tenant shall not place or install
or suffer to be placed or installed any other sign upon the Building or the
Premises unless such sign shall be approved by Landlord and shall be harmonious
with the signs of adjoining properties. Provided that Tenant complies with all
applicable laws, codes, rules and regulations, Landlord shall not unreasonably
withhold approval of Tenant's proposed signs. Landlord agrees that, during the
term of this lease and any extension or renewal thereof, Landlord shall not
consent to any other tenant's installation of a sign on the rear of the
Building. In any event, except as otherwise provided in Exhibit "5" annexed
hereto, Tenant shall not place or cause to be placed upon the Building any
awning, canopy, banner, flag, pennant, aerial, antenna or the like. All signs
or lettering on or about the Premises or the Building shall be neat and
reasonable size. The following are strictly prohibited:
(x) Paper signs and stickers;
(y) Moving, flickering or flashing lights;
(z) Exposed neon or fluorescent tubes or other exposed
light sources.
(v) Tenant shall have the right to use three hundred
fifty (350) parking spaces, forty-five (45) of which shall be reserved for
Tenant's use, as shown on Exhibit "2" annexed hereto. To the extent permitted
by law, Tenant may permit the parking of vehicles on the streets and roadways
adjoining or surrounding the Building. Tenant agrees that if Tenant or its
employees violate the restrictions in this subsection or other lawful parking
restrictions, such violators may be towed away by Landlord at Tenant's sole cost
and expense.
(vi) Tenant shall not manufacture or store any item
which causes offensive odors, irritations, or any discomfort to occupants of the
Building of which the Premises form a part.
<PAGE>
(vii) Tenant and its employees shall have full access
and use of the cafeteria in the Building, which cafeteria shall be operated by
the food service company that currently operates the cafeteria provided such
operator continues to be mutually acceptable to Tenant and Lockheed Martin
Corporation. Tenant's employees shall be permitted to use the cafeteria to
consume "bag lunches". Landlord agrees that it shall not charge rent to the food
service company that currently operates the cafeteria, provided that Landlord
is not required to make repairs or improvements to the cafeteria. In the
event that Landlord is required to make repairs or improvements to the
cafeteria, Landlord may charge the food service company that operates the
cafeteria, including the current food service operator, the amortized cost of
such repairs or improvements.Landlord reserves the right to charge a fair rental
to any food service company that may operate the cafeteria in the future in the
event that Tenant assigns or sublets fifty (50%) percent or more of the Demised
Premises.Landlord represents that it will maintain a cafeteria in the Building
during the term of this lease, and that Landlord shall not decrease the size of
the cafeteria during the term of this Lease. Tenant, at Tenant's sole cost and
expense, shall install a card key system to provide Tenant with an exclusive
means of access to and egress from the cafeteria to the Premises. Tenant may,
upon prior notice to Landlord, construct a separate entrance to the cafeteria
for the exclusive use of American Financial Consultants, a current subtenant of
the Premises.
(e) (i) Tenant may, at its own cost and expense,
install and operate a microwave, satellite or other antenna communication
systems (hereinafter the "Antenna") on the roof of the Building in an area which
shall not interfere with the antenna to be installed by Lockheed Martin
Corporation,another tenant in the Building. Tenant shall not install the Antenna
until it receives the prior written approval of Landlord, which approval
shall not be unreasonably withheld or delayed. Landlord may approve or amend
the manner of the installation of the Antenna within five (5) business days of
the date the Tenant submits plans and specifications for the location and
installation of the Antenna. After Landlord's approval but prior to installation
of the Antenna, Tenant shall submit to Landlord copies of all governmental and
quasi-governmental permits, licenses and authorizations which Tenant will obtain
at its own expense, a certificate of insurance evidencing insurance coverage
as required herein and any other insurance reasonably required by Landlord for
installation of Antenna.
<PAGE>
(ii) Tenant covenants and agrees that
neither Tenant nor its agents will cause any damage to the roof during the
installation and operation of the Antenna. Tenant shall coordinate the
installation of the Antenna with Landlord and Landlord's contractors,
subcontractors and/or agents in their installation or replacement of the roof.
Any mechanic's liens filed at any time against the Premises, for work claimed to
have been performed or for materials claimed to have been furnished to Tenant
or Tenant's contractors or subcontractors in connection with installation
of the Antenna, shall be discharged or bonded by Tenant within thirty (30) days
after filing by bonding, payment or otherwise, and upon Tenant's failure to
timely discharge or bond any such lien, Landlord may discharge same through
payment, bonding or otherwise and Tenant shall reimburse Landlord, upon demand,
for all costs incurred by Landlord in connection therewith.
(iii) If Landlord's insurance premium or
real estate tax assessment increases as a result of the Antenna,Tenant shall pay
such increase each year, as Additional Rent, within fifteen (15) days' of
Tenant's receipt of a bill from Landlord.
(iv) Tenant covenants and agrees that the
installation, operation, maintenance, repair and removal of the Antenna will
be at its sole risk and expense. Tenant agrees to indemnify and defend
Landlord against all claims, actions, damages, liability and expenses in
connection with the loss of life, personal injury, damage to property or
business or any other loss or injury arising out of the installation, operation
or removal of the Antenna, unless caused by Landlord's willful misconduct or
gross negligence.
(v) At any time prior to the expiration
date of the Term of this lease, in the event Landlord determines that the
operation of the Antenna is causing physical damage to the structural integrity
of the Building, Landlord shall provide Tenant with ten (10) days' written
notice of its intention to terminate operation of the Antenna.If Tenant fails to
rectify the problem within said ten (10) day period (or fails to commence
rectifying the problem and diligently proceed to rectify same in the event
the problem cannot be rectified within such ten (10) day period), operation
of the Antenna shall terminate upon the expiration of such ten (10) day period.
Notwithstanding the foregoing,Landlord shall, at Tenant's sole cost and expense,
repair any physical damage to the structural integrity of the Building caused
by operation of the Antenna.
<PAGE>
(vi) At the expiration or sooner termination
of this lease or upon termination of the operation of the Antenna, Tenant shall,
at Tenant's sole cost and expense, remove the Antenna from the Building.
Tenant shall leave the portion of the Building where the Antenna was located in
good order and repair, reasonable wear and tear excepted. If Tenant does not
remove the Antenna when so required, Tenant hereby authorizes Landlord to remove
and dispose of the Antenna and charge Tenant for all reasonable costs and
expenses incurred. Tenant agrees that Landlord shall not be liable for any
property disposed of or removed by Landlord.
<PAGE>
TENANT'S ALTERATION
9. Except as otherwise provided herein, after completion of the Demised
Premises as set forth in Schedule A, Tenant shall not make, without Landlord's
prior written consent, which consent shall not be unreasonably withheld or
delayed, any installations, replacements, alterations, improvements or changes
in or to the Premises (collectively, "Alterations"). In the event that Landlord
withholds consent to Tenant's proposed Alterations, Landlord shall provide
Tenant with the reason for such disapproval. Notwithstanding the foregoing,
Tenant, without Landlord's prior consent, shall be permitted to: (i) make
decorative alterations to the Premises consisting of painting, carpeting, wall
and floor covering and installing or replacing ceiling tiles; (ii) install,
replace or remove Tenant's trade fixtures and Tenant's personal property; and
(iii) make nonstructural alterations to the Premises including alterations to
the electrical, plumbing and gas lines provided that the cost of such
nonstructural alterations does not exceed $7,500.00 per project and further
provided said alterations do not affect the exterior of the Building or the
Building service systems used in common with other tenants of the Building. The
nonstructural alterations set forth in (iii) above are herein referred to as
"Minor Alterations". The term Alterations does not include subsections (i) and
(ii) above. All Minor Alterations shall be performed by licensed, reputable
contractors in accordance with all applicable laws, codes, rules and
regulations, and Tenant shall, at Tenant's sole cost and expense, obtain all
necessary permits, approvals, certificates of occupancy or certificates of
completion required for such Minor Alterations. All Alterations, Minor
Alterations and all building service equipment made or installed by or on behalf
of Tenant, shall immediately upon completion or installation thereof be and
become the property of Landlord (except for purposes of sales tax which shall
remain Tenant's obligation) and shall remain upon the Premises at the expiration
or sooner termination of this lease. Notwithstanding the foregoing, all trade
fixtures, movable partitions, furniture and furnishings installed at the expense
of Tenant shall remain the property of Tenant and Tenant may remove the same or
any part thereof during the term of this lease, or if the term shall end prior
to the date herein specifically fixed for such termination, then within a
reasonable time thereafter, but Tenant shall, at its expense, repair any and all
damage to the Premises resulting from or caused by such removal. Title to any
property which Tenant elects not to remove or which is abandoned by Tenant
shall, at the end of the term, vest in Landlord.
<PAGE>
Tenant shall not make any Alterations other than Minor Alterations
until it shall have first submitted to Landlord all drawings, plans, layouts and
specifications for such work ("plans and specifications") and Landlord shall
have approved or commented on same within five (5) business days from the date
Tenant fully submits such plans and specifications to Landlord. In the event
that Landlord fails to comment on such plans and specifications within ten (10)
business days' of the date Tenant furnishes Landlord with all of the information
required to be provided to Landlord herein, Landlord shall be deemed to have
consented to such plans and specifications. All such Alterations to be performed
by Tenant, excluding Minor Alterations, shall be in accordance with the approved
plans and specifications and Landlord shall have the right at any time during
the pendency of such Alterations to inspect the Premises and the manner of
construction. All plans and specifications shall be compatible with the
Landlord's building plans; comply with all applicable laws and the rules,
regulations, requirements and orders of any and all governmental agencies,
departments or bureaus having jurisdiction; and be fully detailed, including
locations and complete dimensions. For all Alterations, including Minor
Alterations, Tenant shall, at Tenant's expense, (i) cause all plans and
specifications to be filed with the governmental agencies having jurisdiction
thereover, if required by law, (ii) obtain when necessary all governmental
permits, licenses and authorizations required for the work to be done in
connection therewith, and (iii) obtain all necessary certificates of occupancy,
both temporary and permanent. Landlord shall execute such documents as may be
reasonably required in connection with the foregoing and Landlord shall
otherwise cooperate with Tenant in connection with obtaining the foregoing, but
without any expense to Landlord. No Alterations (including Minor Alterations)
shall commence in the Premises until (i) Tenant has procured all necessary
permits therefor and has delivered copies of same to Landlord, (ii) Tenant or
its contractors has procured a paid builder's risk insurance policy with a
combined single limit of Three Million ($3,000,000.00) Dollars for personal
injury, death and property damage claims naming Landlord as an additional
insured and has delivered to Landlord a certificate of insurance evidencing such
policy, or Tenant has provided Landlord with documentation from its insurance
carrier that the foregoing coverage for the work is provided by Tenant's
insurance policies required to be carried pursuant to Article 12(d) herein; and
(iii) Tenant or its contractor has procured a workmen's compensation insurance
policy covering the activities of all persons working at the Premises and has
delivered to Landlord a certificate of insurance evidencing such policy. Tenant
may use any licensed architect or engineer to prepare its plans and to file for
permits. However, all such plans and permit applications for all Alterations
(excluding Minor Alterations) shall be subject to review, revision and approval
by Landlord or its architect. Any mechanic's liens filed at any time against the
Premises, for work claimed to have been performed or for materials claimed to
have been furnished to Tenant or Tenant's contractors or subcontractors, shall
be discharged or bonded by Tenant within thirty (30) days after filing by
bonding, payment or otherwise, and upon Tenant's failure to timely discharge or
bond any such lien, Landlord may discharge same through payment, bonding or
otherwise and Tenant shall reimburse Landlord, upon demand, for all costs
incurred by Landlord in connection therewith. All such Alterations performed by
or on behalf of Tenant, (excluding Minor Alterations) shall be subject to a five
(5%) percent supervisory fee of Landlord, such fee not to exceed $20,000. If
Landlord performs such Alterations on Tenant's behalf, Landlord shall not charge
Tenant a supervisory fee.
<PAGE>
UTILITIES
10. (a) Tenant shall, at its own expense, secure directly from a
utility service provider fuel, heat, electricity and all other utilities
required in connection with its use of the Premises. If permitted by law, Tenant
may utilize a utility service provider of its choice. Landlord shall be
obligated only to provide Tenant with utility lines and facilities, in working
order, to service the Premises. All utilities shall be directly metered to
Tenant with the exception of water, for which Tenant shall pay its Proportionate
Share of such charges as Additional Rent on the later of ten (10) business days
of its receipt of a bill therefor or the date that the next installment of
Minimum Annual Rent is due. In the event that Tenant requires, uses or consumes
water for any purpose in addition to ordinary lavatory purposes, Landlord may,
at Tenant's sole cost and expense, install a water meter to measure Tenant's
water consumption for all purposes, and Tenant shall pay such water charges, as
measured by such meter, as Additional Rent on the later of ten (10) business
days of its receipt of a bill therefor or the date that the next installment of
Minimum Annual Rent is due. In the event that any other tenant of the Building
uses or consumes water for any purpose in addition to ordinary lavatory
purposes, Tenant shall not be required to pay for such other tenant's excess
water usage. Utilities for the common areas of the Building, including the
cafeteria, will be separately metered and Tenant shall be responsible to pay its
Proportionate Share of the costs of such utilities as measured by such meter as
Additional Rent on the later of ten (10) business days of its receipt of a bill
therefor or the date that the next installment of Minimum Annual Rent is due.
Notwithstanding anything to the contrary contained herein, Tenant shall only be
responsible for the cost of utilities required by Tenant in connection with its
use of the Premises during the period of time prior to installation of separate
utility lines and facilities to service the Premises.
(b) Tenant shall be responsible for all deposits required by
the respective utilities for service. Tenant shall comply with all requirements
of the utilities supplying said service. Landlord shall have no responsibility
for the installation of telephone or data service.
<PAGE>
REQUIREMENTS OF LAW, SPRINKLERS
11. (a) (i) Tenant shall promptly execute and comply with all statutes,
ordinances, rules, orders, regulations and requirements (including those which
require structural alterations based on Tenant's manner of use of the Premises)
of the federal, state, county and local government and of any and all their
departments and bureaus required and resulting from Tenant's use and occupancy
or alteration of the Premises; for the correction, prevention or abatement of
nuisances or other grievances in, upon, or connected with the Premises during
the term; and shall also promptly comply with and execute all rules, orders and
regulations of the New York Board of Fire Underwriters and the New York Fire
Insurance Rating Organization or any other similar body for the prevention of
fires at the Tenant's own cost and expense. In the event Tenant is required by
the provisions of this paragraph to make a structural alteration, such
alteration shall be made by Landlord at Tenant's sole cost and expense.
(ii) After completion of the Demised Premises as set
forth in Schedule "A", in the event that a statute, ordinance, rule, order or
regulation requires alterations or modifications to Building systems based on
work performed by Landlord or performed by or on behalf of other tenants in the
Building, Landlord shall perform such alterations or modifications at Landlord's
sole cost and expense.
<PAGE>
(b) Landlord shall keep and maintain any sprinkler system now
or hereafter installed in the Premises in good repair and working condition. If
the New York Board of Fire Underwriters or the New York Fire Insurance Exchange
or any bureau, department or official of any federal, state or local
governmental or quasi-governmental authority shall require any changes,
modifications or alterations, including, without limitation, additional
sprinkler heads or other equipment, to be made or supplied by reason of Tenant's
business or the location of partitions, trade fixtures, or other contents of the
Premises, or if such changes, modifications, alterations, additional sprinkler
heads or other equipment in the Premises are necessary to prevent the imposition
of a penalty or charge against the full allowance for a sprinkler system in the
fire insurance rate as fixed by said Exchange or by any Fire Insurance Company
with respect to the Building, the Premises or any adjoining or nearby buildings
or improvements, Tenant shall at Tenant's sole cost and expense, promptly make
and supply such changes, modifications, alterations, additional sprinkler heads
or other equipment.
(c) If by reason of Tenant's use and occupancy or abandonment
of the Premises, or if by reason of the improper or careless conduct of any
business upon or use of the Premises, the fire insurance rates for the Building,
or any other tenants or occupants of the Building or any adjoining or nearby
buildings or improvements (including contents and equipment coverage) shall at
any time be higher than it otherwise would be, Tenant shall reimburse Landlord,
as Additional Rent hereunder, for that portion of all fire insurance premiums
charged to such other owners, tenants or occupants because of the improper or
careless conduct of any business upon or use of the Premises to the extent that
Landlord is required to pay such other owners, tenants or occupants, and shall
make such reimbursement upon the first day of the month following billing
thereof by Landlord. If by reason of any other tenant's use and occupancy or
abandonment of their premises, or if by reason of any other tenant's improper or
careless conduct of any business upon or use of any other premises in the
Building, the fire insurance premiums for the Building shall at any time be
higher than they otherwise would be, Landlord shall use reasonable efforts to
collect such increases from such other tenants and, to the extent such sums are
collected, shall reimburse Tenant for, that portion of all fire insurance
premiums charged to Tenant because of any other tenant's improper or careless
conduct of any business upon or use of any other premises in the Building.
<PAGE>
(d) Tenant shall keep or cause the Premises to be kept free of
Hazardous Materials (hereafter defined). Without limiting the foregoing, Tenant
shall not cause or permit the Premises to be used to generate, manufacture,
refine, transport, treat, store, handle, dispose, transfer, produce or process
Hazardous Materials, except in compliance with all applicable federal, state and
local laws or regulations, nor shall Tenant cause or permit, as a result of any
intentional or unintentional act or omission on the part of Tenant or any
subtenant, a release of Hazardous Materials onto the Premises or onto any other
property. Tenant shall comply with and ensure compliance by all subtenants with
all applicable federal, state and local laws, ordinances, rules and regulations,
whenever and by whomever triggered, and shall obtain and comply with, and ensure
that all subtenants obtain and comply with, any and all approvals, registrations
or permits required thereunder. Tenant shall (A) conduct and complete all
investigations, studies, samplings, and testing, and all remedial removal, and
other actions necessary to clean up and remove all Hazardous Materials, on,
from, or affecting the Premises (i) in accordance with all applicable federal,
state and local laws, ordinances, rules, regulations, and policies, (ii) to the
satisfaction of Landlord, and (iii) in accordance with the orders and directives
of all federal, state, and local governmental authorities, and (B) defend,
indemnify, and hold harmless Landlord, its employees, agents, officers, and
directors, from and against any claims, demands, penalties, fines, liabilities,
settlements, damages, costs, or expenses of whatever kind or nature, known or
unknown, contingent or otherwise, arising out of, or in any way related to, (i)
the presence, disposal, release, or threatened release of any Hazardous
Materials which are on, from, or affecting the soil, water, vegetation,
buildings, personal property, persons, animals, or otherwise; (ii) any personal
injury (including wrongful death) or property damage (real or personal) arising
out of or related to such Hazardous Materials; (iii) any lawsuit brought or
threatened, settlement reached, or government order relating to such Hazardous
Materials; and/or (iv) any violation of laws, orders, regulations, requirements,
or demands of government authorities, or any policies or requirements of
Landlord which are based upon or in any way related to such Hazardous Materials,
including, without limitation, attorney and consultant fees, investigation and
laboratory fees, court costs, and litigation expenses. In the event this lease
is terminated, or Tenant is dispossessed, Tenant shall deliver the Premises to
Landlord free of any and all Hazardous Materials so that the conditions of the
Premises shall conform with all applicable Federal, State and Local laws,
ordinances, rules or regulations affecting the Premises. For purposes of this
paragraph, "Hazardous Materials" includes, without limit, any flammable
explosives, radioactive materials, hazardous materials, hazardous wastes,
hazardous or toxic substances, or related materials defined in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. Sections 9601, et seq.), the Hazardous Materials Transportation Act, as
amended (49 U.S.C. Sections 1801 et seq.), the Resource Conservation and
Recovery Act, as amended (42 U.S.C. Sections 9601, et seq.), and in the
regulations adopted and publications promulgated pursuant thereto, or any other
federal, state or local environmental law, ordinance, rule, or regulation.
Notwithstanding anything to the contrary expressly contained in this Article
11(d), Tenant shall be permitted to store and handle Hazardous Materials used in
the ordinary course of Tenant's business to the extent permitted by, and in
compliance with, federal, state and local laws, rules and regulations.
INSURANCE
12. (a) Tenant shall not do anything, or suffer or permit anything to
be done, in or about the Premises which shall result in a refusal by fire
insurance companies of good standing to insure the Building or any such property
in amounts reasonably satisfactory to Landlord.
(b) Tenant shall obtain and keep in full force and effect
during the Term, at its own cost and expense, (i) replacement cost insurance on
Tenant's machinery, equipment, furniture and fixtures, goods, wares,
merchandise, improvements/betterments and business interruption/extra expense in
sufficient amounts against damage caused by fire and all other perils covered by
a standard all risk insurance policy; and (ii) coverage under the worker's
compensation laws of the State of New York and employer's liability coverage;
and (iii) comprehensive general liability insurance in the amount of at least
$3,000,000.00 combined single limit for bodily injury and property damage,
subject to reasonable deductibles, including all standard broad form
comprehensive general liability extensions, including products liability and
completed operations, without limitation. Contractual liability, if not written
on a blanket basis, must be endorsed to cover indemnities specified herein.
<PAGE>
(c) Said insurance is to be written by a good and solvent
insurance company of recognized standing, admitted to do business in the State
of New York with a Best rating of not less than AM Best A Minus . Tenant shall
procure, maintain and place such insurance and pay all premiums and charges
therefor and upon failure to do so Landlord may, but shall not be obligated to,
procure, maintain and place such insurance or make such payments, and in such
event the Tenant agrees to pay the amount thereof, plus interest at the maximum
rate permitted by law, to Landlord on demand and said sum shall be in each
instance collectible as Additional Rent on the first day of the month following
the date of payment by Landlord. Tenant shall cause to be included in all such
insurance policies a provision to the effect that the same will be
non-cancelable except upon twenty (20) days written notice to Landlord. On the
Rent Commencement Date the original insurance policies or appropriate
certificates shall be deposited with Landlord. Any renewals, replacements or
endorsements thereto shall also be deposited with Landlord to the end that said
insurance shall be in full force and effect during the Term. Tenant shall be
permitted to provide the insurance coverage required under this Article pursuant
to blanket policies covering the Premises and other locations, provided the
coverage maintained under such blanket policies conforms with the requirements
of this Article.
<PAGE>
(d) Each party agrees to use its best efforts to include in
each of its insurance policies (insuring the Building and Landlord's property
therein, in the case of Landlord, and insuring Tenant's property, in the case of
Tenant, against loss, damage or destruction by fire or other casualty) a waiver
of the insurer's right of subrogation against the other party, or if such waiver
should be unobtainable or unenforceable (i) the inclusion of the other party as
an additional insured, but not a party to whom any loss shall be payable, or
(ii) each party shall agree in writing to limit its right of recovery to the
extent of the insurance required hereunder. If such waiver, agreement or
permission shall not be, or shall cease to be, obtainable without additional
charge or at all, each party shall pay the insurer's additional charge therefor,
such waiver, agreement or permission shall be included in the policy, or the
other party shall be named as an additional insured in the policy, but not a
party to whom any loss shall be payable. In the event that Landlord shall be
required to pay an additional charge to obtain a waiver of the insurer's right
of subrogation against Tenant, Landlord shall not include such additional
charges in Operating Costs. Each such policy which shall so name a party hereto
as an additional insured shall contain, if obtainable, agreements by the insurer
that the policy will not be cancelled without at least twenty (20) days prior
notice to both insureds and that the act or omission of one insured will not
invalidate the policy as to the other insured.
(e) Landlord shall use reasonable efforts to obtain
competitive rates for the fire insurance policies insuring the Building.
DAMAGE OR DESTRUCTION
13. (a) If the Building or the Premises or any part thereof shall be
damaged by fire or other casualty and Tenant gives prompt notice thereof to
Landlord, Landlord shall proceed with reasonable diligence to repair or cause to
be repaired such damage. The Minimum Annual Rent and Additional Rent (excluding
accrued penalties, fees and reimbursements due Landlord) shall be abated to the
extent that the Premises shall have been rendered untenantable, such abatement
to be from the date of such damage or destruction to the earlier to occur of (i)
Tenant's re-occupancy of the Premises or (ii) the date the Premises shall be
substantially repaired or rebuilt, and such abatement to be in the proportion
which the area of the part of the Premises so rendered untenantable bears to the
total area of the Premises. For purposes of this Article, "substantially
repaired or rebuilt" shall be deemed to occur upon the issuance of a certificate
of occupancy or certificate of completion covering the portion of the Premises
so repaired or rebuilt (or the administrative approval to re-occupy preceding
the administrative issuance of such certificates).
<PAGE>
(b) If the Premises shall be totally damaged or rendered
wholly untenantable by fire or other casualty, and Landlord has not terminated
this lease pursuant to Subsection (c) and Landlord has not completed the making
of the required repairs and restored and rebuilt the Premises and/or access
thereto within nine (9) months from the date of such damage or destruction, and
such additional time after such date (but in no event to exceed three (3)
months) as shall equal the aggregate period Landlord may have been delayed in
doing so by unavoidable delays or adjustment of insurance, Tenant may serve
notice on Landlord of its intention to terminate this lease, and, if within
thirty (30) days thereafter Landlord shall not have completed the making of the
required repairs and restored and rebuilt the Premises, this lease shall
terminate on the expiration of such thirty (30) day period as if such
termination date were the Expiration Date, and the Rent and Additional Rent
(excluding accrued penalties, fees and reimbursements due Landlord) shall be
apportioned as of such date and any prepaid portion of Rent and Additional Rent
(excluding penalties and fees) for any period after such date shall be refunded
by Landlord to Tenant.
(c) If the Building shall be so damaged by fire or other
casualty that substantial alteration or reconstruction of the Building shall, in
Landlord's opinion, be required, then in such event Landlord may, at its option,
terminate this lease and the Term and estate hereby granted, by giving Tenant
thirty (30) days notice of such termination within ninety (90) days after the
date of such damage. In the event that such notice of termination shall be
given, this lease and the Term and estate hereby granted, shall terminate as of
the date provided in such notice of termination (whether or not the Term shall
have commenced) with the same effect as if that were the Expiration Date, and
the Minimum Annual Rent and Additional Rent (excluding accrued penalties, fees
and reimbursements due Landlord) shall be abated to the extent that the Premises
shall have been rendered untenantable from the date of such damage to the
termination date, and such Minimum Annual Rent and Additional Rent (excluding
accrued penalties, fees and reimbursements due Landlord) shall be apportioned as
of the date of such damage or destruction and any prepaid portion of Minimum
Annual Rent or Additional Rent (excluding accrued penalties, fees and
reimbursements due Landlord) for any period after such date shall be refunded by
Landlord to Tenant. Notwithstanding the foregoing, in the event Landlord
terminates this lease pursuant to the provisions of this Article 13(c), and
thereafter reconstructs a building substantially similar to the Building, at
Tenant's option, this lease may be reinstated as of the date that the Demised
Premises are substantially completed for the balance of the remainder of the
term of this lease (or the Renewal Terms), and the Expiration Date (subject to
Tenant's right to extend that date as permitted in Article 39) shall remain the
date set forth in Article 2 herein.
<PAGE>
(d) Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting in any way
from such damage by fire or other casualty. Landlord will not carry insurance of
any kind on Tenant's property, and Landlord shall not be obligated to repair any
damage thereto or replace the same.
(e) This lease shall be considered an express agreement
governing any case of damage to or destruction of the Building or any part
thereof by fire or other casualty, and Section 227 of the Real Property Law of
the State of New York providing for such a contingency in the absence of such
express agreement, and any other law of like import now or hereafter enacted,
shall have no application in such case.
<PAGE>
SUBORDINATION
14. Provided Landlord shall deliver a Nondisturbance Agreement (defined
below) with respect thereto, this lease shall be subject and subordinate at all
times to the lien of any mortgages hereafter made provided same are made to a
lending institution. This lease shall be subject and subordinate in all respects
to the ground lease with Nassau County currently encumbering the Real Property
(the "Nassau County Lease") and any modifications, extensions, renegotiations or
replacements thereof with Nassau County. Provided Landlord shall provide Tenant
with a Nondisturbance Agreement with respect thereto, this lease shall be
subject and subordinate to any ground lease or underlying lease with a party
other than Nassau County (herein referred to, respectively, as a "future ground
lease" and a "future ground lessor") Tenant shall execute and deliver such
further instrument or instruments subordinating this lease to the lien of any
such mortgage or ground lease required by the applicable mortgagee or ground
lessor to the extent Tenant shall be required to subordinate to the applicable
mortgage or ground lease under this Article. As used in this lease, the term
"lending institution" shall mean savings bank, savings and loan association,
bank or trust company, real estate investment trust, investment bank or an
affiliate thereof, insurance company, university, public or private, or
employee, welfare, pension or retirement fund or system. Landlord shall obtain a
subordination, non-disturbance and attornment agreement (a "Nondisturbance
Agreement") on behalf of Tenant from any future mortgagee or future ground lease
on such mortgagee's or lessor's standard form which shall provide, inter alia,
that the leasehold estate granted to Tenant under this lease shall not be
terminated or disturbed (nor the rights of Tenant impaired) by reason of the
foreclosure of the mortgage or termination of the ground lease, so long as
Tenant shall not be in default under this lease beyond the applicable notice and
cure periods and shall pay all sums due under this lease without offsets or
defenses thereto and shall fully comply with the terms, covenants and conditions
of this lease on the part on Tenant to be performed and/or complied with, and in
the event that such future mortgagee or future ground lessor (or their
respective successor or assign) shall enter into and lawfully become possessed
of the Premises covered by this lease and shall succeed to Landlord's rights
hereunder, Tenant shall attorn to such successor as its landlord under this
lease and, upon the request of such successor landlord, Tenant shall execute and
deliver an attornment agreement in favor of the successor landlord, provided
such landlord agrees to be bound by Tenant's rights and Landlord's obligations
under this lease to the extent required under the Nondisturbance Agreement. The
Nondisturbance Agreement shall also provide that casualty proceeds received by
such future mortgagee or future ground lessor (or its successor or assign) after
such party takes possession of the Real Property, shall be applied to the
restoration of the Premises and the Building to the extent required under the
Nondisturbance Agreement. In the event a future mortgagee or future ground
lessor shall be unwilling to enter into a Nondisturbance Agreement, this lease
shall remain in full force and effect and the obligations of Tenant shall not in
any manner be affected except that, anything to the contrary contained in this
lease notwithstanding, this lease shall not be subject and subordinate to such
future mortgage or ground lease.
<PAGE>
(b) Upon demand, Tenant shall furnish to Landlord certified
balance sheets and operating statements for the past five (5) years and such
other information, financial or otherwise, concerning Tenant which may
reasonably be required by any prospective mortgagee. Notwithstanding the
foregoing, if Tenant is a company that is publicly traded on a national stock
exchange, Landlord shall accept quarterly and annual reports filed by Tenant
with the Securities and Exchange Commission in lieu of the foregoing certified
balance sheets and operating statements.
(c) In connection with any sale or financing of the Building,
the sale, merger or other reorganization of Landlord, or if required by Nassau
County, Tenant shall, upon not less than five (5) days' prior request by
Landlord, execute, acknowledge and deliver to Landlord a statement in writing
certifying (i) that this lease is unmodified and in full force and effect (or if
there have been modifications that the same are in full force and effect as
modified and identifying the modifications), (ii) the dates to which the Rent
and other charges have been paid, and (iii) that so far as the person making the
certificate knows, Landlord is not in default under any provision of this lease.
It is intended that any such statement may be relied upon by any person
proposing to acquire Landlord's interest in this lease, any prospective lessee
under a new ground or underlying lease, any prospective purchaser of the
Premises, or any prospective mortgagee, or assignee of any mortgage upon the
Premises.
INDEMNIFICATION
15. (a) Tenant shall, to the fullest extent permitted by law and at its
own cost and expense, defend and hold Landlord, its partners, directors,
officers, members, employees, servants, representatives and agents harmless from
and against any and all claims, loss, damages, expenses (including attorneys'
fees, witnesses' fees and all court costs) and liability (including statutory
liability) resulting from injury and/or death of any person or damage to or loss
of any property arising out of any negligent or wrongful act, error or omission
or breach of contract, in connection with the operations of Tenant. The
foregoing indemnity shall include injury or death of any employee of Tenant but
shall be limited to the extent of the insurance provided to protect against such
loss or claim. All of the foregoing shall relate only to the operations of and
by Tenant and shall not apply with regard to acts, omissions or negligence of
Landlord or its representatives.
<PAGE>
(b) Landlord shall, to the fullest extent permitted by law and
at its own cost and expense, defend, indemnify and hold Tenant, its partners,
directors, officers, members, employees, servants, representatives and agents
harmless from and against any and all claims, loss, damages, expenses (including
attorneys' fees, witnesses' fees and all court costs) and liability (including
statutory liability), resulting from injury and/or death of any person or damage
to or loss of any property arising out of any negligent or wrongful act, error
or omission or breach of contract, in connection with the operations of
Landlord. The foregoing indemnity shall include injury or death of any employee
of Landlord but shall be limited to the extent of the insurance provided to
protect against such loss or claim. All of the foregoing shall relate only to
the operations of and by Landlord and shall not apply with regard to acts,
omissions or negligence of Tenant or its representatives.
EMINENT DOMAIN
16. (a) If the whole of the Premises be taken under the power of
eminent domain for any public or quasi-public improvement or use, the term of
this lease shall expire as of the date of vesting of title in the condemning
authority, or if such date of vesting of title is not the date that Tenant is
dispossessed, then this lease shall expire as of the date that Tenant is
dispossessed of the Premises.
(b) If 25% or more of the Premises is taken under the power of
eminent domain or for any public or quasi-public purpose, Landlord or Tenant
shall have the option of cancelling and terminating this lease by written notice
served within sixty (60) days after the taking, and this lease shall thereupon
expire on the 90th day after the serving by Landlord or Tenant of said notice.
<PAGE>
(c) If less than 25% of the Premises is taken, this lease
shall remain in full force and effect, however, Minimum Annual Rent and
Additional Rent (excluding accrued penalties, fees and reimbursements due
Landlord) shall be reduced in proportion to the percentage of square feet of the
Premises so taken. If Tenant's parking area only is taken, then (i) if 25% or
less is taken, this lease shall not terminate but Minimum Annual Rent only
shall, unless Landlord provides substitute parking, substantially equal in size
to that which was taken, within sixty (60) days after the taking, for Tenant
within reasonable walking distance of the Premises, be apportioned pro rata in
accordance with the size and usefulness of the portion taken; or (ii) if more
than 25% is taken, then, unless Landlord provides substitute parking,
substantially equal in size to that which was taken, and within reasonable
walking distance of the Premises, within sixty (60) days after the taking, this
lease shall, at the option of Tenant, by written notice served between the 61st
and 90th days after the taking, be canceled and terminated effective sixty (60)
days from the date of said taking and if such notice is not served, this lease
shall not terminate but Minimum Annual Rent and Additional Rent (excluding
accrued penalties, fees and reimbursements due Landlord) only shall be
apportioned pro rata in accordance with the size and usefulness of the portion
taken.
(d) If this lease is not terminated or terminable under the
provisions of this Article 16, Landlord shall, with reasonable dispatch and at
Landlord's sole cost and expense, restore, reconstruct and rebuild the remaining
portion of the Premises and the Building and all the appurtenances, equipment,
utilities, facilities and installations to their condition prior to such taking,
in such manner that the resulting building and parking area and driveways shall
be a complete and integrated structural, architectural and functional unit
similar to and of equal material and workmanship to the Building and parking
area and driveways prior to such taking, with all the appurtenances, equipment,
utilities, facilities and installations throughout in good working order so as
to put both the parking area and driveways and the Premises in proper condition
to be used by Tenant for the same purposes as at the time of such taking, all in
accordance with plans and specifications to be prepared by Landlord, at the sole
cost and expense of Landlord.
<PAGE>
(e) If the nature of the work to be performed as a result of
the taking is such as to prevent the operation of the business (or any part
thereof) then being conducted thereon, or to make it impractical so to do, then
the Minimum Annual Rent and Additional Rent (excluding accrued penalties, fees
and reimbursements due Landlord) and other charges to be paid by Tenant under
this lease shall abate (pro rata based on the extent of the business so
prevented) until substantial completion of such work by Landlord such that
Tenant shall be able to operate its business. Substantial completion, for
purposes of this Article, shall be deemed to occur on the issuance of the
certificate of occupancy or certificate of completion (or the administrative
approval to occupy preceding the administrative issuance of such certificates).
(f) In the event of any taking under the power of eminent
domain, Tenant shall be entitled to bring a claim against the condemning
authority for the value of its leasehold interest. The right granted to Tenant
under this Article 16(f) is personal to Frequency Electronics, Inc. and is not
transferable by operation of law or otherwise.
RIGHT TO SUBLET OR ASSIGN
17. Landlord shall not unreasonably withhold or delay its consent to an
assignment of this lease or to a subletting of all or a portion of the Demised
Premises, provided that any such assignment or subletting shall be made solely
upon the following terms and conditions:
<PAGE>
(a) No assignment and no subletting shall become effective
unless and until Tenant shall have given Landlord at least ten (10) business
days' prior written notice ("Tenant's Notice") of such proposed assignment or
proposed bona fide subletting, together with a statement containing the name and
address of the proposed sublessee or assignee and information as to the nature
of the business of the sublessee or assignee, the approximate length of the
term, and the approximate size of the space being covered thereby. Landlord
hereby agrees not to contact or negotiate with the proposed subtenant or
assignee identified in Tenant's Notice for purposes of renting to such proposed
subtenant or assignee any additional space in the Building or any property owned
by Landlord until the earlier of the consummation of Tenant's sublease or
assignment transaction, or such time as Tenant and the proposed subtenant or
assignee cease negotiations (unless Landlord is already negotiating a
transaction with the proposed subtenant or assignee at the time Landlord
receives Tenant's Notice, in which case Landlord may continue such
negotiations).
Upon receipt of Tenant's Notice, Landlord shall thereupon have
the option, exercisable by written notice given within ten (10) business days
after Landlord's receipt of Tenant's Notice to: (i) approve the assignment or
subletting; or (ii) disapprove the assignment or subletting because the proposed
use of the proposed subtenant or assignee shall jeopardize the structural
integrity of the Building or the environmental condition of the Building or the
Real Property or be in violation of or conflict with the existing zoning
regulations or the existing certificate of occupancy of the Building. Landlord
shall state the reason for its disapproval. Failure by Landlord to respond to
Tenant within ten (10) business days after its receipt of Tenant's Notice shall
be deemed approval.
(b) There shall be no default by Tenant under any of the
terms, covenants and conditions of this lease beyond any applicable notice
and/or grace period at the time that Landlord's consent to any such subletting
or assignment is requested and on the date of the commencement of the term of
any such proposed sublease or the effective date of any such proposed
assignment.
(c) Upon receiving Landlord's written consent, a duly executed
copy of the sublease or assignment shall be delivered to Landlord within ten
(10) days after execution thereof. Any such sublease shall provide that the
sublessee shall comply with all applicable terms and conditions of this lease to
be performed by Tenant hereunder. Any such assignment of lease shall contain an
assumption by the assignee of all of the terms, covenants and conditions of this
lease to be performed by Tenant. Notwithstanding the foregoing, no such
assignment or subletting shall release or relieve Tenant from any obligations or
liability pursuant to the lease, for the entire remaining lease Term, except
that Tenant shall not be liable for increased obligations resulting from
amendments or extensions made without its consent.
<PAGE>
(d) Tenant may, without Landlord's consent, sell, assign and
transfer this lease and/or sublease all or any part of the Demised Premises to
an "Affiliated Entity" or to a "Successor Entity." An "Affiliated Entity" shall
be any corporation, partnership or other entity which is controlled by, under
common control with, or which itself controls Tenant, as indicated by direct or
indirect ownership of at least a 51% beneficial or legal interest in the entity
so controlled. A "Successor Entity" shall be any corporation, partnership or
other entity to which Tenant may sell all or substantially all of its assets or
into or with which Tenant shall be consolidated or merged.
(e) If this lease be assigned, or the Demised Premises or part
thereof be sublet, in violation of the provisions of this Lease, Landlord, at
its option, may collect rent from the assignee or occupant or, then or later,
institute an appropriate action for recovery of possession and/or rent. In
either event, Landlord may apply the net amount collected to the rent herein
reserved, but no such assignment, occupancy or collection shall be deemed either
as a waiver of any of the provisions hereof or an acceptance of the assignee,
undertenant or occupancy as a tenant, or as a release of Tenant from further
performance by Tenant of Tenant's obligations under this lease. Consent by
Landlord to an assignment or subletting shall not, in any way, be considered to
relieve Tenant from obtaining the express written consent of Landlord to any
other or further assignment or subletting.
(f) For purposes of this Article, (i) except if such tenant or
subtenant's stock is traded on a national exchange, the transfer of a majority
of the issued and outstanding capital stock of any corporate tenant or of a
corporate subtenant, or the transfer of a majority of the total interest in any
partnership (or other type of entity) tenant or subtenant, however accomplished,
whether in a single transaction or in a series of related or unrelated
transactions, shall be deemed an assignment of this lease, or of such sublease,
as the case may be; (ii) any person or legal representative of Tenant, to whom
Tenant's interest under this lease passes by operation of law or otherwise,
shall be bound by the provisions of this Article; and (iii) a modification or
amendment of a sublease shall be deemed a sublease.
<PAGE>
(g) Whenever Tenant shall claim under this Article or any
other part of this lease that Landlord has unreasonably withheld or delayed its
consent to some request of Tenant, Tenant shall have no claim for damages by
reason of such alleged withholding or delay, and Tenant's sole remedy thereof
shall be a right to obtain specific performance or injunction but in no event
with recovery of damages, except that the prevailing party in any such action
shall be entitled to attorneys' fees from the unsuccessful party.
Notwithstanding the foregoing, in the event Tenant maintains that Landlord has
unreasonably withheld or delayed its consent to a proposed assignment or
sublease, Tenant shall have the additional right of requiring binding
arbitration of such issue on the following terms:
(i) Such arbitration shall be before the then
current sitting or acting Chairman of the Real Estate Committee of the Nassau
County Bar Association or an attorney (with at least ten (10) years in real
estate law) selected by such Chairman if such Chairman is unable to act as the
arbitrator hereunder.
(ii) Such arbitration shall be conducted on an
expedited basis such that it shall be completed within the twenty (20) day
period (the "Arbitration Period") after Landlord receives Tenant's written
notice that it desires to arbitrate the reasonableness of Landlord's refusal
to consent. The hearing before the arbitrator shall not exceed one day and
the arbitrator shall render his decision prior to the end of the Arbitration
Period.
(iii) The decision of the arbitrator shall be binding
upon Landlord and Tenant. In the event the arbitrator shall find that Landlord
had unreasonably withheld its consent to the proposed assignment or sublease,
the arbitrator shall also require Landlord to pay to Tenant the sum of $50,000.
The decision of the arbitrator may be enforced by a court of competent
jurisdiction.
(iv) The losing party shall pay the expenses of the
arbitration.
(h) Tenant shall not mortgage, pledge, hypothecate or
otherwise encumber its interest under this lease without Landlord's prior
written consent, which consent shall not be unreasonably withheld or delayed in
connection with a financing by Tenant involving a pledge of this lease along
with other substantial assets of Tenant.
<PAGE>
(i) Landlord shall not be deemed to have unreasonably withheld
its consent if it refuses to consent to a subletting or assignment to an
existing tenant located at 51 or 60 Charles Lindbergh Boulevard, Uniondale, New
York , or if it refuses to consent to a subletting or assignment if Landlord has
comparable space available in the Building. Upon written request, Landlord shall
provide Tenant with its rental listings for 60 Charles Lindbergh Boulevard,
Uniondale, New York. (j) Landlord shall not be deemed to have unreasonably held
its consent if it refuses to approve a sublease of less than 10,000 square feet
of the Demised Premises.
(j) Landlord shall not be deemed to have unreasonably held its
consent if it refuses to approve a sublease of less than 10,000 square feet of
the Demised Premises.
(k) Notwithstanding the foregoing, Tenant agrees that it and
anyone holding through Tenant shall not sublet or assign all or any portion of
the Demised Premises to any subtenant or assignee who will use the Demised
Premises or a portion thereof for any of the following designated uses nor for
any other use which is substantially similar to any one of the following
designated uses:
(i) federal, state or local governmental division,
department or agency which generates heavy public traffic, including, without
limitation, court, social security offices, labor department office, drug
enforcement agency,motor vehicle agency, postal service, or military recruitment
office;
(ii) union or labor organization;
(iii) office for the practice of medicine, dentistry
or the rendering of other healthrelated services where such health related
services include the performance of medical procedures (the performance of
laboratory testing where no medical procedures on individuals are performed
shall not be prohibited under this restriction);
(iv) insurance claims office that does not
exclusively process claims, including, but not limited to,unemployment insurance
or worker's compensation insurance; and/or
(v) office for the sale of securities concentrating
in small capitalized stocks or highly speculative securities with a density of
more than one person per two hundred (200) square feet of space.
<PAGE>
(l) Notwithstanding anything contained in this Article to the
contrary, Tenant and its agents shall not engage in written or electronic
advertising which advertises any space in the Demised Premises as being
available for subletting or assignment at a specific dollar rental rate less
than the rate set forth in Landlord's open listing for space available in the
Building or 51 or 60 Charles Lindbergh Boulevard.
(m) Notwithstanding anything to the contrary expressly
contained in this Article 17, Landlord hereby consents to the existing sublease
between Tenant and American Financial Consultants, Inc. ("American Financial").
Landlord also consents to a new sublease (or an extension of the existing
sublease) with American Financial provided such new lease (i) commences
immediately after the expiration of the existing sublease; (ii) is substantially
in the same form and on the same terms as the proposed new sublease delivered by
Tenant to Landlord prior to the date of this Lease except that it may have a
term of up to five (5) years instead of the three (3) year term presently
provided in such new sublease, and (iii) it shall cover only the portion of the
Building marked as "American Financial" on the floor plan annexed hereto as
Exhibit 4 to this Lease.
<PAGE>
RIGHT TO INSPECT; POSTING SIGNS
18. (a) Tenant shall permit Landlord or Landlord's agents to enter the
Premises on reasonable notice and at all reasonable hours, except in the case of
an emergency, in which case no notice shall be required, for the purpose of (i)
inspecting the same; (ii) making repairs required by the terms of this lease to
be made by Tenant and which Tenant neglects or refuses to make; (iii) exhibiting
the Premises to ground lessors, prospective purchasers and mortgagees; (iv)
during the nine (9) months preceding the expiration of this lease, exhibiting
the Premises to brokers and prospective tenants, such showing limited to those
areas which Tenant has not designated as "secure" areas; and (v) for the purpose
of making any additions or alterations to the Building or to any surrounding
building provided, in each and every case, Landlord shall use its reasonable
efforts not to unreasonably interfere with the conduct of Tenant's business at
the Premises. If admission to the Premises cannot be obtained in the case of an
emergency Landlord or Landlord's agents may enter the Premises by any lawful
means without rendering Landlord or its agents liable to Tenant for damages by
reason thereof.
(b) During the nine (9) months preceding the end of the term,
Landlord may post and maintain, without hindrance or molestation, signs or
notices indicating that the Premises are for sale and/or for rent; however, no
such sign shall be affixed to a door or window of the Premises.
BANKRUPTCY
19. (a) If, at any time prior to the commencement of the term of this
lease, or if at any time during the term, there shall be filed by or against
Tenant in any court, pursuant to any statute, either of the United States or of
any State, a petition in bankruptcy or insolvency or for reorganization or for
the appointment of a receiver or trustee of all or a portion of Tenant's
property, and within thirty (30) days thereof Tenant fails to secure a discharge
thereof, or if Tenant makes an assignment for the benefit of creditors or
petition for or enters into an arrangement, this lease, at the option of
Landlord, exercised within a reasonable time after notice of the happening of
any one or more of such events, may be canceled and terminated, in which event
neither Tenant nor any person claiming through or under Tenant by virtue of any
statute or of an order of any court, shall be entitled to possession or to
remain in possession of the Premises but shall forthwith quit and surrender the
Premises, and Landlord, in addition to any other rights, may retain any rent,
security deposit or monies received by it from Tenant or others in behalf of
Tenant as partial liquidated damages.
<PAGE>
(b) In the event of the termination of this lease pursuant to
paragraph (a) of this Article 19, Landlord shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the Rent reserved hereunder for the unexpired portion of the term and the then
fair and reasonable rental value of the Premises for the same period. In the
computation of such damages, the difference between any installment of Rent
becoming due hereunder after the date of termination and the fair and reasonable
rental value of the Premises for the period for which such installment was
payable shall be discounted to the date of termination at the rate of 4% per
annum. If the Premises, or any part thereof, be relet by Landlord for the
unexpired term of this lease, the amount of rent reserved upon such reletting
shall prima facie be the fair and reasonable rental value for the part or the
whole of the Premises so relet during the term of the reletting. Nothing herein
contained shall limit or prejudice the right of Landlord to prove for and obtain
as liquidated damages by reason of such termination an amount equal to the
maximum allowed by any statute or rule of law, in effect at the time when, and
governing the proceeding in which, such damages are to be proved, whether or not
such amount be greater, equal to, or less than the amount of the difference
referred to above.
<PAGE>
DEFAULT
20. (a) If Tenant shall fail to pay any installment of Minimum Annual
Rent or any Additional Rent or other charges within ten (10) days of the day on
which same are required to be paid hereunder and Tenant fails to cure such
default within five (5) days after notice by Landlord, or if Tenant defaults in
fulfilling any of the other covenants of this lease and such default shall
continue for a period of twenty (20) days after notice, or if Tenant shall
dissolve or liquidate or commence to dissolve or liquidate, or if the Premises
become vacant or deserted, or if the said default or omission complained of
shall be of such a nature that the same cannot be completely cured or remedied
within said twenty (20) day period, and if Tenant shall not have diligently
commenced during such default within such twenty (20) day period, and shall not
thereafter with reasonable diligence and in good faith proceed to remedy or cure
such default, then, in any one or more of such events, Landlord may serve a
written three (3) day notice of cancellation of this lease upon Tenant, and upon
the expiration of said three (3) days, this lease and the term thereunder shall
end and expire as fully and completely as if the date of expiration of such
three (3) day period were the day herein definitely fixed for the end and
expiration of this lease, and the term thereof, and Tenant shall then quit and
surrender the Premises to Landlord but Tenant shall remain liable as hereinafter
provided. If Tenant shall default (i) in the timely payment of any item of Rent
and such default shall continue or be repeated for three consecutive months or
for a total of four months in any period of twelve months, or (ii) in the
performance of any particular term, condition or covenant of this lease more
than six times in any period of twelve months, then, notwithstanding that such
defaults shall have each been cured within the period after notice, if any, as
provided in this lease, any further similar default shall be deemed to be
deliberate and Landlord thereafter may serve a written ten (10) day notice of
termination of this lease to Tenant without affording to Tenant an opportunity
to cure such further default.
(b) If (i) the notice provided for in paragraph (a) above
shall have been given and the term shall expire as aforesaid, or (ii) if any
execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the Premises or any part thereof shall be taken or occupied
or attempted to be taken or occupied by someone other than Tenant, or (iii) if
Tenant shall make default with respect to any other lease between Landlord and
Tenant, or (iv) if Tenant shall fail to move into or take possession of the
Premises within fifteen (15) days after commencement of the term of this lease,
then, and in any of such events, Landlord may re-enter the Premises by any
lawful means, and dispossess Tenant (or the legal representative of Tenant or
other occupant of the Premises) by summary proceedings or otherwise and remove
their effects and hold the Premises as if this lease had not been made, and
Tenant hereby waives the service of notice of intention to re-enter or notice of
intention to institute legal proceedings to that end.
<PAGE>
REMEDIES OF LANDLORD
21. (a) If this lease is terminated or if Landlord re-enters the
Premises under Article 20 or any other such default provision contained herein,
Tenant shall pay to Landlord as damages sums equal to the Minimum Annual Rent
and Additional Rent that would have been payable by Tenant through and including
the Expiration Date had this lease not terminated or had Landlord not re-entered
the Premises, payable upon the due dates therefor specified in this lease;
provided, that if Landlord shall relet all or any part of the Premises for all
or any part of the period commencing on the day following the date of such
termination or re-entry to and including the Expiration Date, Landlord shall
credit Tenant with the net rents received by Landlord from such reletting, such
net rents to be determined by first deducting from the gross rents as and when
received by Landlord from such reletting the expenses incurred or paid by
Landlord in terminating this lease and of re-entering the Premises and of
securing possession thereof, as well as the expenses of reletting, including,
without limitation, altering and preparing the Premises for new tenants,
brokers' commissions, and all other expenses properly chargeable against the
Premises and the rental therefrom in connection with such reletting, it being
understood that any such reletting may be for a period equal to or shorter or
longer than said period; provided, further, that (i) in no event shall Tenant be
entitled to receive any excess of such net rents over the sums payable by Tenant
to Landlord under this lease, (ii) in no event shall Tenant be entitled, in any
suit for the collection of damages pursuant to this Article 21(a), to a credit
in respect of any net rents from a reletting except to the extent that such net
rents are actually received by Landlord prior to the commencement of such suit,
and (iii) Landlord shall have no obligation to so relet the Premises and Tenant
hereby waives any right Tenant may have, at law or in equity, to require
Landlord to so relet the Premises.
Suit or suits for the recovery of any damages payable hereunder by
Tenant or any installments thereof, may be brought by Landlord from time to time
at its election, and nothing contained herein shall require Landlord to postpone
suit until the date when the Term would have expired but for such termination or
re-entry. In all cases hereunder, and in any suit, action or proceeding of any
kind between the parties, it shall be presumptive evidence of the fact of the
existence of a charge being due, if Landlord shall produce a bill, notice or
certificate of any public official entitled to give such bill, notice or
certificate to the effect that such charge appears of record on the books in his
or her office and has not been paid.
<PAGE>
(b) Nothing contained in this lease shall be construed as
limiting or precluding the recovery by Landlord against Tenant of any sums or
damages to which, in addition to the damages relating to Tenant's failure to pay
Minimum Annual Rent and Additional Rent particularly provided above, Landlord
may lawfully be entitled by reason of any default hereunder on the part of
Tenant. Anything in this lease to the contrary notwithstanding, during the
continuation of any default by Tenant, Tenant shall not be entitled to exercise
any rights or options, or to receive any funds or proceeds being held, under or
pursuant to this lease.
(c) The specified remedies to which Landlord may resort
hereunder are cumulative and are not intended to be exclusive of any other
remedies or means of redress to which Landlord may lawfully be entitled, and
Landlord may invoke any remedy allowed at law or in equity as if specific
remedies were not herein provided for.
ATTORNEY'S FEES
22. If Tenant shall at any time be deemed by Landlord to be in default
hereunder, and if Landlord shall institute an action or summary proceeding
against Tenant based upon such default and Landlord shall be successful, or if
Landlord shall otherwise engage an attorney in connection with the enforcement
of any provision of this lease and Tenant shall actually be in default of such
provision, then Tenant shall reimburse Landlord for the reasonable expenses of
attorney's fees and disbursements incurred by Landlord. The amount of such
expenses shall be deemed to be "Additional Rent" hereunder and shall be due from
Tenant to Landlord on the first day of the month following the incurring of such
expenses.
<PAGE>
WAIVER OF REDEMPTION, COUNTERCLAIM, TRIAL BY JURY
23. Tenant hereby expressly (i) waives any and all rights of redemption
granted by or under any present or future laws in the event of Tenant being
evicted or dispossessed for any cause, or in the event of Landlord obtaining
possession of the Premises by reason of the violation by Tenant of any of the
covenants and conditions of this lease or otherwise. Landlord and Tenant hereby
waive trial by jury in any action, proceeding or counterclaim brought by either
of them against the other with respect to any matters arising out of or
connected with this lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the Premises, and/or any claim of injury or damage and any
emergency statutory or any other statutory remedy.
NO WAIVER
24. No act or thing done by Landlord or Landlord's agents during the
term hereby demised shall be deemed an acceptance of a surrender of the
Premises, and no agreement to accept such surrender shall be valid unless in
writing signed by Landlord. No employee of Landlord or of Landlord's agents
shall have any power to accept the keys of the Premises prior to the termination
of this lease. The delivery of keys to any employee of Landlord or of Landlord's
agents shall not operate as a termination of this lease or a surrender of the
Premises. The failure of Landlord to seek redress for violation of, or to insist
upon the strict performance of, any covenant or condition of this lease shall
not prevent a subsequent act, which would have originally constituted a
violation, from having all the force and effect of an original violation. The
receipt by Landlord of Rent with knowledge of the breach of any covenant of this
lease shall not be deemed a waiver of such breach. No provision of this lease
shall be deemed to have been waived by Landlord unless such waiver be in writing
signed by Landlord. The words "re-enter" and "re-entry" as used herein are not
restricted to their technical legal meaning.
<PAGE>
END OF TERM
25. (a) On the last day of the term hereof or on the earlier
termination thereof, Tenant shall peaceably and quietly leave, surrender and
deliver the Premises up to Landlord, debris-free, together with any and all
alterations, changes, additions, and improvements which may have been made upon
the Premises (except movable furniture or movable trade fixtures installed at
the expense of Tenant), in working order and condition, except for reasonable
wear and tear and damage by fire, other insured casualty or the elements
excepted, and Tenant shall remove all of its personal property from the Premises
and any property not so removed shall be deemed to have been abandoned and may
be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord
without notice to Tenant and without obligations to account therefor. Tenant's
obligation under this Article 25 shall survive the expiration or other
termination of this lease.
(b) In the event of any holding over by Tenant after the
expiration or termination of this lease without the consent of Landlord, for any
period beyond the First Extension Term or Second Extension Term, as the case may
be (as defined in Article 38 herein) Tenant shall:
(i) pay as holdover rental for each month of the
holdover tenancy an amount equal to two hundred (200%) percent of the Minimum
Annual Rent payable by Tenant for the last month prior to the Expiration Date of
the term of this lease, and otherwise observe, fulfill and perform all of its
obligations under this lease, including but not limited to, those pertaining to
Additional Rent, in accordance with its terms;
(ii) be liable to Landlord for any payment or rent
concession which Landlord may be required to make to any tenant in order to
induce such tenant not to terminate an executed lease covering all or any
portion of the Premises by reason of the holdover over by Tenant; and
(iii) be liable to Landlord for any damages suffered
by Landlord as the result of Tenant's failure to surrender the Premises.
No holding over by Tenant after the Term shall operate to
extend the Term.
<PAGE>
The holdover, with respect to all or any part of the Premises,
of a person deriving an interest in the Premises from or through Tenant,
including, but not limited to, an assignee or subtenant, shall be deemed a
holdover by Tenant.
Notwithstanding anything in this Article contained to the
contrary, the acceptance of any Rent paid by Tenant pursuant to this Paragraph
25(b), shall not preclude Landlord from commencing and prosecuting a holdover or
eviction action or proceeding or any action or proceeding in the nature thereof.
The preceding sentence shall be deemed to be an "agreement expressly providing
otherwise" within the meaning of Section 232-c of the Real Property Law of the
State of New York and any successor law of like import.
(c) If at any time during the last month of the term of this
lease Tenant shall have removed all or substantially all of Tenant's property
from the Premises, Landlord may, and Tenant hereby irrevocably grants to
Landlord a license to, immediately enter and alter, renovate and redecorate the
Premises, without elimination, diminution or abatement of Minimum Annual Rent or
Additional Rent, or incurring liability to Tenant for any compensation, and such
acts shall have no effect upon this lease.
BROKER
26. Tenant represents that this lease was not brought about by any
broker and all negotiations with respect to this lease were conducted
exclusively between Landlord and Tenant. Tenant agrees that if any claim is made
for commissions by any broker , through or on account of any acts of Tenant,
Tenant will hold Landlord free and harmless from any and all liabilities and
expenses in connection therewith, including Landlord's reasonable attorney's
fees.
<PAGE>
QUIET ENJOYMENT
27. Landlord covenants that if and so long as Tenant pays the Minimum
Annual Rent and Additional Rent and other charges reserved by this lease, and
performs all the terms, covenants and conditions of this lease on the part of
Tenant to be performed, Tenant shall quietly enjoy the premises subject,
however, to the terms of this lease and of any mortgage or mortgages to which
this lease by its terms is subject.
NONLIABILITY OF LANDLORD
28. (a) Landlord and Landlord's agents and employees shall not be
liable for, and Tenant waives all claims for, loss or damage to Tenant's
business or damage to person or property sustained by Tenant resulting from any
accident or occurrence (unless caused by or resulting from the negligence or
intentional acts or omissions of Landlord, its agents, servants or employees
other than accidents or occurrences against which Tenant is insured) in or upon
the Premises or the Building, including, but not limited to, claims for damage
resulting from: (i) any equipment or appurtenances becoming out of repair; (ii)
injury done or occasioned by wind; (iii) any defect in or failure of plumbing,
heating or air conditioning equipment, electric wiring or installation thereof,
gas, water, or steam pipes, stairs, porches, railings or walks; (iv) broken
glass; (v) the backing up of any sewer pipe or downspout; (vi) the bursting,
leaking or running of any tank, tub, washstand, water closet, waste pipe, drain
or other pipe or tank in, upon or about the Building or the Premises; (vii) the
escape of steam or hot water; (viii) water, snow or ice being upon or coming
through the roof, skylight, trapdoor, stairs, doorways, windows, walks or any
other place upon or near the Building or the Premises or otherwise; (ix) the
falling of any fixture, plaster, tile or stucco; and (x) any act, omission or
negligence of other tenants, licensees or of any other persons or occupants of
the Building or of adjoining or contiguous buildings or of owners of adjacent or
contiguous property.
<PAGE>
(b) If Landlord or a successor in interest is an individual
(which term as used herein includes aggregates of individuals such as joint
ventures, general or limited partnerships, or associations), such individual
shall be under no personal liability with respect to its obligations under this
lease, Tenant shall look solely to the equity of such individual in the land and
building constituting the Premises for the satisfaction of Tenant's remedies,
and in no event shall Tenant attempt to secure any personal judgment against any
such individual or any principal, partner, employee or agent of Landlord by
reason of such default by Landlord.
(c) The word "Landlord" as used herein means only the owner of
the landlord's interest for the time being in the land and Building (or the
owners of a lease of the Building or of the land and Building) of which the
Premises form a part, or Landlord's interest therein, and in the event of any
sale of the Building and land of which the Premises form a part, Landlord shall
be and hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder and it shall be deemed and construed without further
agreement between the parties or between the parties and the purchaser of the
Premises, that such purchaser has assumed and agreed to carry out any and all
covenants and obligations of Landlord hereunder.
NO ABATEMENT
29. Except as specifically provided in this lease, no diminution or
abatement of Rent or other compensation shall be claimed or allowed for
inconvenience or discomfort arising from the Landlord's making of additions,
repairs or improvements to the Building or to its equipment and fixtures, nor
for any space taken to comply with any law, ordinance or order of a governmental
authority .
<PAGE>
APPLICABLE LAW AND CONSTRUCTION
30. The laws of the State of New York shall govern the validity,
performance and enforcement of this lease. The invalidity or unenforceability of
any provision of this lease shall not affect or impair any other provision. The
submission of this document to Tenant for examination does not constitute an
offer to lease, or a reservation of or option to lease, and becomes effective
only upon execution and delivery thereof by Landlord and Tenant. All
negotiations, considerations, representations and understandings between the
parties are incorporated in this lease. Landlord or Landlord's agents have made
no representations or promises with respect to the Building or the Premises
except as herein expressly set forth. The headings of the several articles and
sections contained herein are for convenience only and do not define, limit or
construe the contents of such articles or sections. Whenever herein the singular
number is used, the same shall include the plural, and the neuter gender shall
include the masculine and feminine genders. Neither this lease nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.
<PAGE>
CONSTRUCTION ON ADJACENT PREMISES OR BUILDINGS
31. If any construction is in progress at, on or about the Building or
any excavation or other building operation shall be about to be made or shall be
made on any premises adjoining or above or below the Premises or on any portion
of the Building, Tenant shall permit Landlord or the adjoining owner or tenant
and their respective agents, employees, licensees and contractors, to enter the
Premises and to shore the foundations and/or walls thereof, and to erect
scaffolding and/or protective barricades around and about the Premises (but not
so as to preclude entry thereto) and to do any act or thing necessary for the
safety or preservation of the Premises. Tenant's obligations under this lease
shall not be affected by any such construction or excavation work, shoring-up,
scaffolding or barricading. Landlord shall not be liable in any such case for
any inconvenience, disturbance, loss of business or any other annoyance arising
from such construction, excavation, shoring-up, scaffolding or barricades, but
Landlord shall use its best efforts so that such work will cause as little
inconvenience, annoyance or disturbance to Tenant as possible consistent with
accepted construction practice in the vicinity and so that such work shall be
expeditiously completed.
UTILITY EASEMENT
32. This lease is subject and subordinate to any utility, gas, water,
electric, or telephone line easements, now or hereafter granted, affecting the
Premises, the Building, or the land upon which they are located, provided that
the same do not unreasonably interfere with the Building nor unreasonably
interfere with the use of the Premises by Tenant.
NOTICES
33. All notices to be given hereunder shall be in writing and given by
hand delivery or by certified or registered mail addressed to either of the
parties at the address hereinabove given or at any other subsequent mailing
address they may indicate by written notice, and if to Landlord with a copy to
Landlord's attorneys at Lazer, Aptheker, Feldman, Rosella & Yedid, LLP, Melville
Law Center, 225 Old Country Road, Melville, New York 11747, Attention: Samuel
Yedid, Esq. Any notice given hereunder by mail shall be deemed delivered when
delivered or delivery refused. Tenant hereby authorizes and designates the
manager of the Premises as an officer authorized to accept and receive service
of process.
<PAGE>
BINDING EFFECT OF LEASE
34. The covenants, agreements and obligations contained in this Lease
shall, except as herein otherwise provided, extend to, bind and inure to the
benefit of the parties hereto and their respective personal representatives,
heirs, successors and permitted assigns. Each covenant, agreement, obligation or
other provision herein contained shall be deemed and construed as a separate and
independent covenant of the party bound by, undertaking or making the same, not
dependent on any other provision of this lease unless otherwise expressly
provided.
UNAVOIDABLE DELAYS
35. (a) Whenever Landlord shall be required by the terms of this lease
or otherwise to make any improvements or repairs, to furnish any service, to
perform any construction or reconstruction, or to fulfill any other obligation
hereunder, and Landlord shall be delayed in, or prevented from, so doing,
Landlord shall not be deemed to be in default and this lease and the obligation
of Tenant to pay Rent hereunder and to perform all of the other covenants and
agreements hereunder on the part of Tenant to be performed shall not be
affected, impaired or excused, and any time limit herein fixed for Landlord's
performance thereof shall be extended if and so long as Landlord's
non-performance, delay or default shall be caused by reason of strike or labor
troubles, accidents, any rule, order, regulation or delay of any governmental
agency, or any department or subdivision thereof, governmental pre-emption in
connection with any national emergency or war, insurance claim or adjustment,
the conditions of supply and demand which have been or are affected by war or
other emergency, or any other cause beyond Landlord's reasonable control.
(b) Whenever Tenant shall be required by the terms of this
lease or otherwise to make any improvements or repairs, to perform any
construction or reconstruction, or to fulfill any other obligation hereunder
excluding the payment of Minimum Annual Rent and Additional Rent, and Tenant
shall be delayed in, or prevented from, so doing, Tenant shall not be deemed to
be in default, and any time limit herein fixed for Tenant's performance thereof
shall be extended if and so long as Tenant's non-performance, delay or default
shall be caused by reason of strike or labor troubles, accidents, any rule,
order, regulation or delay of any governmental agency, or any department or
subdivision thereof, governmental pre-emption in connection with any national
emergency or war, the conditions of supply and demand which have been or are
affected by war or other emergency, or any other cause beyond Tenant's
reasonable control.
<PAGE>
SEWER
36. Tenant shall only permit sanitary discharge into the sewer
servicing the Premises. Tenant shall comply with all requirements of the County
of Nassau, Department of Public Works, as they relate to use of the sewer,
including the payment of any excess volume charges as determined by the County
of Nassau.
CLEANING, RUBBISH REMOVAL
37. All janitorial work at the Premises shall be done by Tenant at its
sole cost and expense. Tenant shall provide for its own trash, rubbish and
garbage removal at its own expense and all rubbish, trash and garbage shall be
kept at the Premises subject to the rules and regulations of the appropriate
municipal authorities having jurisdiction thereof, and subject to the reasonable
rules and regulations set by Landlord, and shall at all times be kept in closed
containers reasonably acceptable to Landlord.
<PAGE>
SHORT TERM EXTENSION OPTION
38. (a) Provided Tenant is not then in default under any of the terms,
covenants or conditions of this lease (beyond all applicable notice and grace
periods set forth herein for the cure thereof), and further provided that Tenant
delivers, no later than one hundred and eighty (180) days prior to the otherwise
scheduled expiration of the Term, written notice of Tenant's intention to
exercise the extension option set forth in this Article 38, Tenant shall have
the option of extending the Term of this Lease for a period of up to six (6)
calendar months (the "First Short Term Extension Term") beyond the otherwise
scheduled end of the Term hereof. If Tenant shall elect to extend the Term for
less than six (6) calendar months, the written exercise notice from Tenant
referred to in the foregoing sentence shall specify the date during the
permitted six (6) calendar month period on which the First Short Term Extension
Term shall end and Tenant shall be bound by the selection of such end date. Such
occupancy of the Premises by Tenant during the First Short Term Extension Term
shall be under all of the terms, covenants and conditions in this lease
contained, except that the minimum monthly rental for each of said six (6)
months (or the portion thereof contained in the First Short Term Extension Term)
shall be equal to the Minimum Annual Rent (computed at a monthly rate by
dividing the Minimum Annual Rent by twelve (12)) payable by Tenant during the
first year of the first Renewal Term (as defined in Article 39 herein). Provided
Tenant properly exercises this extension option, such occupancy of the Premises
by Tenant during the First Short Term Extension Term shall not be deemed a
holdover. However, on or before the last day of the First Short Term Extension
Term, Tenant shall surrender and vacate the Premises in accordance with all of
the terms and conditions of this lease.
<PAGE>
(b) Provided Tenant is not then in default under any of the
terms, covenants or conditions of this lease (beyond all applicable notice and
grace periods set forth herein for the cure thereof), and further provided that
Tenant delivers, no later than one hundred and eighty (180) days prior to the
otherwise scheduled expiration of the first Renewal Term (as defined in Article
39 herein), written notice of Tenant's intention to exercise the extension
option set forth in this Article, Tenant shall have the option of extending the
term of this lease for a period of up to six (6) calendar months (the "Second
Short Term Extension Term") beyond the otherwise scheduled end of the first
Renewal Term hereof. If Tenant shall elect to extend the first Renewal Term for
less than six (6) calendar months, the written exercise notice from Tenant
referred to in the foregoing sentence shall specify the date during the
permitted six (6) calendar month period on which the Second Short Term Extension
Term shall end and Tenant shall be bound by the selection of such end date. Such
occupancy of the Premises by Tenant during the Second Short Term Extension Term
shall be under all of the terms, covenants and conditions of this lease
contained, except that the minimum monthly rental for each of said six (6)
months (or the portion thereof contained in the Second Short Term Extension
Term) shall be equal to the Minimum Annual Rent (computed at a monthly rate by
dividing the Minimum Annual Rent by twelve (12)) payable by Tenant during the
first year of the second Renewal Term (as defined in Article 39 herein).
Provided Tenant properly exercises this extension option, such occupancy of the
Premises by Tenant during the Second Short Term Extension Term shall not be
deemed a holdover. However, on or before the last day of the Second Short Term
Extension Term, Tenant shall surrender and vacate the Premises in accordance
with all of terms and conditions of this lease.
(c) This short term extension option is personal to Frequency
Electronics, Inc. and shall not be transferable by operation of law or
otherwise, except to a permitted assignee or subtenant pursuant to Article 17
herein. Time is of the essence with respect to Tenant's exercise of the rights
granted in this Article 38.
RENEWAL OPTION
39. Tenant shall have the right, to be exercised as hereinafter
provided, to extend the term of this lease for two (2) periods of five (5) years
each ("Renewal Terms") upon the following terms and conditions:
(a) That at the time of the exercise of such right and at the
commencement of each Renewal Term, Tenant shall not be in default in the
performance of any of the terms, covenants or conditions which Tenant is
required to perform under this lease.
(b) That Tenant shall notify Landlord in writing that Tenant
intends to exercise such option at least twelve (12) months prior to the
termination of the term set forth in Article 2 of this lease, or the first
Renewal Term, as the case may be, time being of the essence with respect to such
time period.
<PAGE>
(c) That such Renewal Terms shall be upon the same terms,
covenants and conditions as in this lease provided, except that (a) there shall
be no further option to extend this lease beyond the two (2) Renewal Terms
referred to above; (b) the Premises shall be delivered in its then "as is"
condition at the commencement of such Renewal Terms; and (c) the Minimum Annual
Rent to be paid by Tenant during each of the Renewal Terms shall be as follows:
During the first through fifth Lease Years of the first
Renewal Term, the Minimum Annual Rent shall be $600,000.00 per Lease Year ($6.59
per square foot), payable in equal monthly installments of $50,000.00.
During the first through fifth Lease Years of the second
Renewal Term, the Minimum Annual Rent shall be $800,000.04 per Lease Year ($8.79
per square foot), payable in equal monthly installments of $66,666.67.
Notwithstanding the foregoing, in the event that Tenant enters
into a sublease in accordance with Article 17 herein for a portion of the
Premises for a term that includes all or any part of the first Renewal Term or
the second Renewal Term, the Minimum Annual Rent to be paid by Tenant during
each of the Renewal Terms shall be increased as follows: (i) during the first
Renewal Term, the Minimum Annual Rent per Lease Year for the portion of the
Premises that are the subject of the sublease and for the term of the sublease
shall be $8.79 per square foot multiplied by the number of square feet that
Tenant occupies per square foot multiplied by the number of square feet of the
Premises that are sublet, and the Minimum Annual Rent for the balance of the
Demised Premises occupied by Tenant shall be $6.59 per square foot multiplied by
the number of square feet that Tenant occupies; and (ii)during the second
Renewal Term, the Minimum Annual Rent per Lease Year for the portion of the
Premises that are the subject of the sublease and for the term of the sublease
shall be $10.99 per square foot multiplied by the number of square feet of the
Premises that are sublet, and the Minimum Annual Rent for the balance of the
Demised Premises occupied by Tenant shall be $8.79 per square foot multiplied by
the number of square feet that Tenant occupies.
This renewal option is personal to Frequency Electronics, Inc. and
shall not be transferable by operation of law or otherwise, except to a
permitted assignee or subtenant pursuant to Article 17 herein.
<PAGE>
RIGHT OF FIRST OFFER
40. (a) Before offering all or any portion of any space within the
Building for lease (the "Offer Space") during the term of this lease to any
third party other than Lockheed, provided there is at least five (5) years
remaining under this lease (including the exercise of the renewal options
contained in Article 39 herein), Landlord will notify Tenant ("Landlord's
Notice") of the market rent and market rental increases ("Market Rent") upon
which it would be willing to lease the Offer Space. If, within ten (10) business
days after receipt of Landlord's Notice, Tenant notifies Landlord in writing
("Tenant's Notice") of its intention to exercise Tenant's right to lease the
Offer Space at the Market Rent, Landlord and Tenant will execute a lease
modification agreement (the "Offer Agreement"), for the Offer Space within
twenty (20) business days after Landlord's receipt of Tenant's Notice. Such
Offer Agreement shall be upon all the same terms as this lease, except for (i)
the Market Rent terms, (ii) other matters dependent upon the size of the Offer
Space, such as Tenant's Proportionate Share, and (iii) the term of the Offer
Agreement, which shall end on the Expiration Date or upon the expiration of any
renewal term hereof. If Tenant does not deliver such Tenant's Notice within such
ten (10) business day period, or if Tenant fails to enter into the Offer
Agreement for the Offer Space within such twenty (20) business day period, then
this Right of First Offer will lapse and be of no further force and effect for a
period of twelve (12) months and Landlord will have the right to lease the Offer
Space to a third party on the same or any other terms and conditions whether or
not such terms and conditions are more or less favorable than those offered to
Tenant, except that Landlord shall not lease the Offer Space to a third party
for less than fair market annual minimum rent. In the event that further Offer
Space becomes available during the last five (5) years of the term of this lease
(including the exercise of the renewal options contained in Article 39 herein),
the procedure set forth in this Article shall apply to such further Offer Space,
except that Landlord shall only be obligated to provide Landlord's Notice, and
Tenant may only exercise this Right of First Offer, one (1) time in any
consecutive twelve (12) month period.
<PAGE>
"Fair market annual minimum rent" shall mean the rate Landlord
generally receives or that is received for comparable space in the Building (or,
if no space in the Building has been leased in the twelve (12) month period
preceding the lease of the Offer Space then the rate Landlord generally receives
for comparable space in similar buildings in the area of the Building). "Fair
market annual minimum rent" shall not mean "net effective rent to Landlord". In
determining fair market annual minimum rent, no adjustment shall be made in
consideration of tenant improvements, brokerage commissions, rent concessions
and other concessions which Landlord may typically offer to other tenants.
(b) This Right of First Offer is personal to Frequency
Electronics, Inc. and is non-transferable by operation of law or otherwise,
except to a permitted assignee or subtenant pursuant to Article 17 herein.
CONSENTS
41. In any provision of this lease which requires that Landlord's
consent shall not be unreasonably withheld, such consent shall also not be
unreasonably delayed.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.
Landlord: RECKSON OPERATING PARTNERSHIP, L.P.,
BY: RECKSON ASSOCIATES REALTY
CORP., its general partner
By:/S/ Mitchell Rechler
Tenant:
FREQUENCY ELECTRONICS, INC.
By:/S/ Joseph Franklin
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF SUFFOLK )
On this 2nd day of December, 1997 before me personally came
Joseph Franklin to me known, who being by me duly sworn, did
depose and say that (s)he resides at 55 Charles Lindbergh Blvd.; that (s)he is
Chairman/CEO of Frequency Electronics, Inc., the corporation, the corporation
described in and which executed the foregoing instrument; that (s)he knows the
seal of the said corporation; that the seal affixed to the said instrument is
such corporate seal; that it was so affixed by order of the Board of Directors
of the said corporation; and that (s)he signed thereto by like order.
/S/ Paul Bloom
Notary Public
<PAGE>
SCHEDULE "A"
LANDLORD'S INITIAL CONSTRUCTION
1. Initial Office Finishing Schedule
In the event of any discrepancy between (i) this Schedule A and the work plans
(denoted as A-1 through A-2) (the "Work Plans") which are part of the Rental
Plan annexed hereto as Exhibit "1", on the one hand, and (ii) any other plans
annexed hereto, the Work Plans and this Schedule A shall control. The electrical
and heating, ventilating and air conditioning plans annexed hereto shall be
revised, if required (the "Revised Plans"), to conform (to the reasonable
satisfaction of Landlord and Tenant) to the Work Plans annexed hereto, and such
Revised Plans should be substituted for the electrical and heating, ventilating
and air conditioning plans annexed hereto, if required. Landlord will follow the
attached Tenant's plans in preparing Tenant's Demised Premises at Landlord's
cost (subject to Article 6 above) to the following specifications:
Erect the necessary dividing walls constructed of metal stud, 5/8" Fire X gypsum
board, with batts of 3" fiberglass for sound attenuation in demising walls.
Finish exterior walls with 1/2" sheetrock. Erect per approved plan dry-wall
partitioning of 2-1/2" metal studs with 5/8" gypsum board on each side to
underside of hung ceiling, unless otherwise noted.
Spackle and tape walls three coats to a smooth and true finish. Paint walls two
coats flat latex and doors and trim coats matching enamel. All walls in
executive area will receive building standard executive vinyl wallcovering.
Install in executive offices, main conference room and reception area, over
padding, executive grade, shaw 34 ounce cut pile carpet. Balance of space
carpeted with building standard 24 ounce loop pile carpet (glued down). Building
standard vinyl reinforced tile shall be installed in place of carpet in all lab
areas.
Install a 2' x 4' acoustical tile with a Travertine finish into existing grid.
The executive area shall receive new 2' x 2' grid and tile. New ceilings shall
be installed at 9'0".
<PAGE>
Install Landlord's building standard vertical blinds as required.
Provide interior building standard solid core doors on Tenant's plan.
2. Lavatory Area - Public Spaces
a) Separate male and female toilet facilities.
3. Landscaping
The building will be extensively landscaped with trees, plantings and other
materials. An underground sprinkler system will be provided with a time clock to
maintain proper watering.
4. Electrical Specifications
All electrical work shall be installed in accordance with the electrical scope
of work drawings E-1 and E-2 attached and the National Electrical Code, and the
local building code. A "Certificate of Compliance" shall be obtained from the
New York Board of Fire Underwriters at the completion of the project.
Lighting throughout the entire finished office area shall be obtained by the use
of the existing reused fixtures and recessed light 2' by 4' fluorescent fixtures
with prismatic lenses for all labs and general areas except the executive area
which shall receive parabolic lenses, not to exceed one (1) fixture for each
eighty (80) square feet of usable space. Local wall switches shall be provided
for control of lighting. Toilet, corridor, lobby and other similar areas shall
be lit to 50 foot candles. The executive area shall receive up to 30 wall wash
fixtures. All lighting included above shall have appropriate local room
switching.
Exit light lighting for all paths of egress shall be provided in accordance with
local building department regulations, if required.
All branch circuit wiring shall be above hung ceiling or within dry-wall
construction in finished areas and shall be type BX. All exposed conduits in
non-finished areas shall be thin-walled "EMT".
<PAGE>
In addition to electrical scope of work drawings attached, wall-mounted duplex
convenience outlets or floor mounted duplex outlets (such floor mounted duplex
outlets not to exceed a total of 15) shall be provided on the basis of one
duplex outlet for each 220 square feet of the Demised Premises. This formula
shall be used to establish the quantity of outlets. However, the exact location
of each outlet shall be coordinated with the Tenant's furniture layout. All
duplex outlets are to be considered as normal convenience outlets and shall be
wired up with an average of 5 to 8 outlets on one 20 ampere, 120 volt circuit.
Panel capacity shall be adequate to handle all tenant lighting and equipment
load.
No credit given for installation less than standard installation.
5. Heating, Ventilation and Air Conditioning Specifications
General
The intent of this specification is to define a design concept for the subject
area.
Design Criteria
Central air conditioning with modular systems with individual zone control shall
be capable of the following performance when the criteria noted are not
exceeded:
A) Between September 1 and June 1, the "heating system" shall be operative and
maintain a minimum of 70 degrees FDB when the outdoor temperature is 0 degrees
FDB and the prevailing wind velocity does not exceed 15 mph.
B) Between April 15 and October 14, the "cooling system" shall be operative and
maintain a maximum of 78 degrees FDB and 55% relative humidity when the outdoor
temperature is 95 degrees FDB and 75 degrees FDB with the prevailing wind
velocity not exceeding 13 mph.
C) During the overlapping seasons (April 15 - June 1 and September 1 -
October 15) both systems shall be operative (cooling and heating).
<PAGE>
D) Zoning temperature and balancing controls shall be operated solely
by the Landlord to assure the conditions above.
E) Maintenance of the foregoing temperature conditions is conditioned upon the
following criteria, which shall not be exceeded by the Tenant in any office
area, within the demised premises:
a) Population Density .................... 1 person per 150
square feet
b) Lighting and Electrical Load Density... 4 watts per
square foot
c) Exhaust and Ventilation Load........... 5 cfm per person
6. Ventilation
Bathrooms and similar areas to be ventilated per code using rooftop fans.
7. System Design - HVAC system control will be Teletrol and Elemco D.D.C.
systems.
Exterior Perimeter Zones
Heating/cooling of exterior offices and areas provided by variable air volume
terminals with integrated thermostats to meet Tenant's requirements for
individual control.
Interior Zones
Heating/cooling provided by variable air volume system terminals with integrated
thermostats for areas of 2,000 square feet or greater as shown on the attached
HVAC drawings excluding Tenant's clean rooms and crossed-out areas as shown.
<PAGE>
EXHIBIT 1
RENTAL PLAN (INCLUDING WORK PLANS)
(Not Attached to 10-K)
EXHIBIT 2
PARKING AND SIGN PLAN
(Not Attached to 10-K)
EXHIBIT 3
COMPUTATION OF REAL ESTATE TAXES
(Not Attached to 10-K)
EXHIBIT 4
FLOOR PLAN SHOWING AMERICAN FINANCIAL SPACE
(Not Attached to 10-K)
EXHIBIT 5
STAGING SCHEDULE
(Not Attached to 10-K)
EXHIBIT 6
DIRECT DAMAGES RESULTING FROM DOWN TIME IN LABORATORY AREAS
(Not Attached to 10-K)
<PAGE>
Exhibit 10.14
GAS:MC:ld
F.# 9000375
Fei.Not
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK - - - - - - - - - - -
- - - - - -X
UNITED STATES OF AMERICA
PLEA AGREEMENT, CIVIL
- against - SETTLEMENT AND RELATED
DOCUMENTS
FREQUENCY ELECTRONICS, INC., 93 CR 1261(TCP)
MARTIN BLOCH, ABRAHAM LAZAR 93 CR 1261(S-1)(TCP)
HARRY NEWMAN and MARVIN NORWORTH,
Defendants.
- - - - - - - - - - - - - - - - - X
UNITED STATES OF AMERICA
- against -
FREQUENCY ELECTRONICS, INC., 93 CV 5200(TCP)
MARTIN BLOCH, ABRAHAM LAZAR,
HARRY NEWMAN and MARVIN NORWORTH,
Defendants.
- - - - - - - - - - - - - - - - - X
UNITED STATES OF AMERICA
ex rel. HOWARD GELDART
- against -
FREQUENCY ELECTRONICS, INC., 93 CV 4750(TCP)
MARKUS HECHLER, HARRY NEWMAN,
MARVIN NORWORTH and STEVEN
CALCEGLIA,
Defendants.
- - - - - - - - - - - - - - - - --X
Pursuant to Rule 11 of the Federal Rules of Criminal
Procedure, the Office of the United States Attorney for the
Eastern District of New York (the "Office") and FREQUENCY
<PAGE>
2
ELECTRONICS, INC.("FEI"), MARTIN BLOCH, ABRAHAM LAZAR, HARRY NEWMAN,
MARVIN NORWORTH (hereinafter collectively referred to as "the individual
defendants"), and MARKUS HECHLER ("HECHLER") and STEVEN CALCEGLIA
("CALCEGLIA",) defendants in Civil Action No. 93 CV 4750(TCP) only,
agree to the following concerning the disposition of Indictment Nos. 93
CR 1261(TCP) and 93 CR 1261(S1)(TCP) and Civil Action Nos. 93 CV 5200
(TCP) and 93 CV 4750(TCP):
GUILTY PLEA BY FEI
1. Pursuant to Rule 11(e)(1)(C) of the Federal Rules of
Criminal Procedure, FEI will plead guilty to Count Ten of Indictment No.
93 CR 1261(S-1)(TCP), which charges a violation of Title 18, United
States Code, Section 1001. A copy of FEI's proposed plea allocution to
this count is attached hereto as Exhibit 1.
2. The Office and FEI waive the preparation of a
presentence report and request that FEI's sentencing proceed immediately
after its guilty plea.
3. At the time of sentencing, as its sentence, FEI
shall pay: (a) a criminal fine in the amount of Four Hundred Thousand
Dollars ($400,000.00); and (b) reimbursement to the United States for
the costs of its investigation in the amount of One Million One Hundred
Thousand Dollars ($1,100,000.00), both by means of a certified or bank
check made payable to the Office of
<PAGE> 3
the United States Attorney for the Eastern District of New York; and
(c) a statutory assessment of Two Hundred Dollars ($200.00), by means
of a certified or bank cheek made payable to the Clerk of Court,
Eastern District of New York.
4. As a result of its guilty plea, FEI may be subject
to administrative action including, but not limited to, suspension or
debarment from engaging in contracts with the United States. The office
will make no recommendation to the Department of Defense or any other
administrative agency and the Office will take no position as to what
administrative action, if any, should be taken as a result of FEI's
conviction. If requested by the Department of Defense or another
agency, however, the Office will provide a summary of the findings of
the Office's investigation and furnish any other related information.
5. The Office agrees that, subject to the Court's
approval of this agreement and acceptance of FEI's guilty plea and upon
payment of all sums set forth herein, a) no additional criminal charges
will be brought against FEI, or its present or former parents,
subsidiaries, affiliates, divisions, successors and assigns, or their
present and former officers, directors, employees and agents including
the individual defendants and HECHLER and CALCEGLIA, defendants in
Civil Action No. 93 CV4750(TCP) only, (A) for the activities charged in
Indictment Nos. 93 CR 1261(TCP) and 93 CR 1261(S-1)(TCP) (B) for the
<PAGE> 4
conduct, facts and matters alleged in the complaints and amended
complaints filed in Civil Action Nos. 93 CV 5200(TCP)(United States v.
Frequency Electronics, Inc., Martin Bloch, Abraham Lazar, Harry Newman
and Marvin Norworth), 93 CV 4750(TCP)(United States ex rel. Howard
Geldart v.Frequency Electronics, Inc., Markus Hechler, Harry Newman,
Marvin Norworth and Steven Calceglia,) and 92 CV 5716(TCP) (United
States of America ex rel. Ralph Muller v. Frequency Electronics, Inc.
et al.,) and (C) based upon investigations, conduct, facts or matters
known to the Office up to and including the date hereof, and b) the
Office will move to dismiss, with prejudice, Indictment No. 93 CR 1261
(TCP) and the remaining counts of Indictment No. 93 CR 1261(S-1)(TCP),
which charge FEI and the individual defendants. The parties acknowledge
that the Indictment which superseded Indictment No. 93 CR 1261, when
filed, bore an incorrect docket number of Cr. No. 93-0176, and that the
accurate docket number for the Superseding Indictment is 93 CR 1261(S-1)
and that this number should have appeared thereon.
6a. FEI and the individual defendants agree that with
respect to all charges set forth in Indictment Nos. 93 CR 1261(TCP) and
93 CR 1261(S-1)(TCP) they are not a "prevailing party" within the
meaning of the "Hyde Amendment," Section 617, P.L. 105-119 (Nov. 26,
1997) and will not file any claim under that law.
<PAGE> 5
b. FEI and the individual defendants withdraw any
motions and requests for discovery filed in connection with Indictment
Nos. 93 CR 1261(TCP) and 93 CR 1261(S-1)(TCP).
SETTLEMENT OF CIVIL ACTION NO. 93 CV 5200(TCP)
7a. In settlement of Civil Action No. 93 CV 5200 (TCP),
on or before the date of its guilty plea to Count Ten of
Indictment No. 93 CR 1261(S-1)(TCP) FEI shall pay the amount of
One Million Five Hundred Thousand Dollars ($1,500,000.00) in the
form of a certified or bank check made payable to the United
States Attorney for the Eastern District of New York.
b. Upon the Office' s receipt of the payment referred
to in Paragraph 7a, the Office, FEI and the individual defendants named
in Civil Action No. 93 CV 5200(TCP) will execute and file a stipulation
of dismissal with prejudice and without further costs or disbursements,
which, when so ordered by the Court, shall constitute a full and
complete disposition of Civil Action No. 93 CV 5200 (TCP.) A copy of the
proposed form of the Stipulation of Dismissal is attached hereto as
Exhibit 2. SETTLEMENT OF CIVIL ACTION NO. 93 CV 4750(TCP)
8a. In settlement of Civil Action No. 93 CV 4750 (TCP),
on or before the date of its guilty plea to Count Ten of Indictment No.
93 CR 1261(S-1)(TCP), FEI shall pay the amount of Five Million Dollars
($5,000,000.00) in the form of a certified
<PAGE> 6
or bank check made payable to the United States Attorney for the Eastern
District of New York.
b. Upon the Office's receipt of the payment referred to
in Paragraph 8a, the Office, the relator HOWARD GELDART ("GELDART",)
FEI and the individual defendants named in Civil Action No. 93 CV
4750(TCP) as well as HECHLER and CALCEGLIA, defendants in Civil
Action No. 93 CV 4750(TCP) only, will execute and file a stipulation
of dismissal with prejudice and without further costs or
disbursements, which, when so ordered by the Court, shall constitute
a full and complete disposition of Civil Action No. 93 CV 4750(TCP).
A copy of the form of the proposed Stipulation of Dismissal is
attached hereto as Exhibit 3.
c. Neither GELDART nor his attorney shall seek any
amounts in Civil Action No. 93 CV 4750 (TCP), including costs,
disbursements or attorneys' fees, from the United States, FEI or FEI's
present or former parents, subsidiaries, affiliates, divisions,
successors and assigns or their present or former officers, directors,
agents and employees including, without limitation, the individual
defendants, and HECHLER and CALCEGLIA, defendants only in Civil Action
No. 93 CV 4750 (TCP), other than that percentage of any recovery which
is within the range specified in the first sentence of 31 U.S.C. ss.
3730(d)(1) to which GELDART may be entitled, which sum shall be paid to
GELDART out of the payment made by FEI under paragraph 8a and GELDART
and
<PAGE> 7
his attorneys specifically waive any claim to reasonable attorneys' fees
and reasonable expenses as provided under the False Claims Act, 31
U.S.C. ss. 3729 et seq. ("False Claims Act".)
RIGHTS OF PARTIES NOT COMPROMISED IN OTHER MATTERS
9. The parties agree that nothing contained in this
agreement shall be deemed or intended to compromise the rights of the
parties in the following: a) the civil action entitled Frequency
Electronics, Inc. v. United States Department of the Air Force, 97 CV
230-A (United States District Court for the Eastern District of
Virginia,) in which an appeal is currently pending in the United States
Court of Appeals for the Fourth Circuit, and b) FEI's current suspension
from participating in federal contracts.
UNALLOWABLE COSTS AND DEDUCTIONS
10. FEI agrees that all costs (as defined in the
Federal Acquisition Regulations ("FAR") 31.205-47) incurred by or on
behalf of FEI and its present or former officers, directors, agents,
employees in connection with a) the matters covered by this agreement
(as defined below); b) the government's audit and investigation of the
matters covered by this agreement; c) FEI's investigation and defense of
the matters covered by this agreement, and any corrective action taken
by FEI; d) FEI's negotiation of this agreement and related documents;
and e) the payments made pursuant to this agreement shall be unallowable
<PAGE> 8
costs for government contracting accounting purposes and will be
separately accounted for by FEI. The "matters covered by this agreement"
include Indictment Nos. 93 CR 1261(TCP) and 93 CR 1261 (S-1) (TCP) and
Civil Action Nos.
93 CV 5200 (TCP) and 93 CV 4750 (TCP) and any related investigations.
AGREEMENT CONTINGENT UPON COURT APPROVAL
11. If the Court, pursuant to Rule 11(e)(4) of the
Federal Rules of Criminal Procedure, rejects this agreement or any
portion thereof or refuses to accept FEI's guilty plea or refuses to
dismiss, with prejudice, Indictment No. 93 CR 1261(TCP) and the
remaining open counts of Indictment No. 93 CR 1261(S-1)(TCP) or fails to
approve either of the proposed Stipulations of Dismissal, FEI, the
individual defendants, and HECHLER and CALCEGLIA, defendants in Civil
Action Nos. 93 CV 4750(TCP) only, GELDART and this Office will be
relieved of all obligations under this agreement. This agreement shall
then be fully null, void and terminated, and the fact that the parties
entered into this agreement shall not be admissible as evidence against
any party in any civil, criminal, administrative or appellate
proceeding.
RELEASE BY THE PARTIES
12. Upon the execution of this agreement, the
acceptance by the Court of its terms, including FEI's guilty plea to
Count Ten of Indictment 93 CR 1261(S-1)(TCP), and the timely
<PAGE> 9
receipt by the United States of all of the sums specified in Paragraphs
3, 7a and 8a herein, the UNITED STATES, GELDART, the individual
defendants, and HECHLER and CALCEGLIA, defendants in Civil Action Nos.
93 CV 4750(TCP) only, and FEI, as well as its present and former
parents, subsidiaries, affiliates , divisions, successors and assigns
and their present and former employees, officers and directors, hereby
release each other from any civil or administrative monetary claim or
cause of action they have or may have against each other at the date of
the execution of this agreement under the False Claims Act, 31 U.S.C.
ss. 3729 et seq., the Program Fraud Civil Remedies Act, the Contract
Disputes Act, the Truth in Negotiations Act, and related common law
theories of fraud, breach of contract, payment by mistake, or unjust
enrichment for the conduct of FEI, the individual defendants and HECHLER
and CALCEGLIA,, defendants in Civil Action No. 93 CV 4750(TCP) only, as
set forth in Indictment Nos. 93 CR 1261 and 93 CR 1261 (S-1) (TCP) and
the complaint in Civil Action No. 93 CV 5200(TCP) and the amended
complaint in Civil Action No. 93 CV 4750(TCP). The releases set forth in
this paragraph are subject to the following exceptions:
(a) The United States does not release FEI or any
individual from any claims arising under Title 26 of the United States
Code (the Internal Revenue Code);
<PAGE> 10
(b) The United States does not release FEI or any
individual from suspension or debarment from participation in federal
contracts; and
(c) The United States does not release FEI or any
individual from any claims for liability for defective, substandard or
deficient products or parts, including, but not limited to, claims in
tort, products liability, or under any express or implied warranty for
defective, substandard or deficient products or parts.
REMEDIES FOR BREACH
13. If FEI or an individual defendant breaches this
agreement by (a) FEI moving to withdraw its guilty plea herein or
challenging its conviction herein, directly or indirectly, including by
collateral attack or (b) FEI declaring bankruptcy within a 100 days of
payment of the sums hereunder to the United States and the Clerk of the
Court or (c) FEI taking any action to prevent payment of any sum as
specified in Paragraphs 3, 7, or 8a or any portion thereof as referred
to in this agreement or (d) FEI or an individual defendant instituting
suit under the Hyde Amendment, FEI will not be released from its guilty
plea, but this Office will be released from its obligation not to pursue
additional criminal charges against the breaching defendant. If FEI or
an individual defendant breaches this agreement, the breaching defendant
will be subject to prosecution for any federal criminal violation of
which the Office has knowledge,
<PAGE> 11
including, but not limited to, the activities alleged in the
aforementioned indictments and civil actions. Prosecutions for federal
criminal violations of which the Office had knowledge on the date this
agreement is signed, and which are not time-barred by the applicable
statutes of limitation on the date this agreement is signed, may be
commenced against FEI or the individual defendants in accordance with
this paragraph, notwithstanding the expiration of the statutes of
limitations between the signing of this agreement and the commencement
of any such prosecution. In addition, should FEI or an individual
defendant breach this agreement by engaging in the above enumerated
activities applicable to such defendant, the Office will be relieved of
its promises under paragraphs 5 and 12, and the breaching defendant will
lose the benefit of the representations made in these paragraphs.
14. All exhibits identified in this agreement
specifically, Exhibit 1, Proposed Plea Allocution by FEI to Count Ten of
Indictment No. 93 CR 1261 (S-1) (TCP) , Exhibit 2, Form of Stipulation
of Dismissal for Civil Action No. 93 CV 5200 (TCP) , Exhibit 3, Form of
Stipulation of Dismissal for Civil Action No. 93 CV 4750(TCP,) and
Exhibit 4, Form of FEI Board Resolution authorizing execution of this
agreement and related matters, are attached hereto and are incorporated
herein by reference.
15. The United States District Court for the Eastern
District of New York shall retain jurisdiction of this matter for
<PAGE> 12
purposes of enforcing the terms and conditions of this agreement and
resolving disputes under this agreement.
16. This agreement is limited to the Office and
the United States Department of Justice, Civil Division, and except as
otherwise stated, does not bind other federal, state or local
prosecuting authorities. Except as otherwise noted above, it does not
prohibit the United States or any agency thereof from initiating
any administrative or civil proceedings involving FEI, the individual
defendants or HECHLER AND CALCEGLIA, defendants in Civil Action
No. 93 CV 4750(TCP) only, including but not limited to suspension or
debarment in connection with federal contracts.
17. A copy of the resolution of FEI's Board of
Directors authorizing the entry of FEI's guilty plea, the payment of the
aforementioned sums, agreement to the proposed stipulations of dismissal
of the civil actions and the execution of this agreement is annexed
hereto as Exhibit 4.
18. The parties to this agreement acknowledge that this
agreement effects a settlement of disputed matters and that nothing in
this agreement nor any payment made pursuant hereto constitutes evidence
of an admission of liability by any person or entity and shall not be
construed to be an admission by any person or entity with respect to any
issue of law or fact. The foregoing sentence does not apply to any
guilty plea entered by FEI in United States v. Frequency Electronics,
Inc., et al., 93 CR 1261 (S-1) (TCP.)
<PAGE> 13
19. Apart from the written agreement dated December 23, 1997, between the Office
and FEI ("the December 23 Agreement") and any previous signed and written
proffer agreements entered into between the Office and any defendant named in
Indictment Nos. 93 CR 1261, or 93 CR 1261(S-1) and Civil Action Nos. 93 CV 5200
or 93 CV 4750 ("previous proffer agreements",) no promises, agreements or
conditions have been entered into by the parties other than those set forth in
this agreement and none will be entered into unless memorialized in writing and
signed by all parties. Apart from the December 23 Agreement and the previous
proffer agreements, this agreement supersedes all prior promises, agreements, or
conditions between the parties. To become effective, this agreement must be
signed by all signatories below.
Dated: Uniondale, New York
June 5, 1998
Respectfully submitted,
FREQUENCY ELECTRONICS, INC.
ZACHARY W. CARTER
By: /s/ Joseph P. Franklin
Chairman of the Board
Of Directors By: /s/ Michael Cornacchia
Assistant U.S. Attorney
Schickler & Schickler, L.L.P.
Attorneys for FREQUENCY By: /s/Charles Kleinberg
ELECTRONICS, INC. Assistant U.S. Attorney
By: /s/ Arnold S. Schickler, Esq. By: /s/ Valerie Caproni
Chief, Criminal Division
<PAGE> 14
Stillman & Friedman, P.C.
Attorneys for FREQUENCY
ELECTRONICS, INC. /S/ MARKUS HECHLER, Defendant
In Civil Action No.
By: /s/ Peter Chavkin, Esq. 93 CV 4750 (TCP) only
----------------------
/s/ MARTIN BLOCH, Defendant
Weinberg, Kaley, Gross
& Pergament, LLP
Lipsitz, Green, Fahringer Attorneys for HECHLER
Roll, Salisbury & Cambria, L.L.P.
Attorneys for BLOCH By: /s/ John Kaley, Esq.
By: /s/ Herald Price Fahringer, Esq.
/S/ STEVEN CALCEGLIA,
Defendant
In Civil Action No. 93 CV
4750 (TCP) only
/s/ ABRAHAM LAZAR, Defendant Howard, Darby & Levin, Esqs.
Attorneys for CALCEGLIA
Morvillo, Abramowitz, Grand
Iason & Silberberg, P.C. By: /s/ Gerard E. Lynch, Esq.
Attorneys for LAZAR
By: /s/ Elkan Abramowitz, Esq. /S/ MARVIN NORWORTH,
DEFENDANT
/S/ Robert Ellis, Esq.
Attorney for NORWORTH
<PAGE> 15
/s/ Howard Geldart, Relator
/s/ HARRY NEWMAN, DEFENDANT
/s/ Guy L. Heinemann, Esq.
Attorney for GELDART
/s/ Michael Rosen, Esq.
Attorney for NEWMAN
SO ORDERED, ADJUDGED AND
DECREED:
/S/ HONORABLE THOMAS C. PLATT 6/19/98
UNITED STATES DISTRICT JUDGE
EASTERN DISTRICT OF NEW YORK
<PAGE>
16
RESOLUTIONS OF THE BOARD OF DIRECTORS OF
FREQUENCY ELECTRONICS, INC.
The undersigned acting secretary of the Board of
Directors of Frequency Electronics, Inc. (the "Corporation",) a
corporation duly organized and existing under the laws of the State of
Delaware, does hereby certify that at a meeting of the Board of
Directors of the Corporation duly held on June 5, 1998, pursuant to the
by-laws of the Corporation, with all members of the Board of Directors
voting, the Board of Directors unanimously adopted the resolutions, an
follows:
RESOLVED, that the Corporation enter into and perform
all of its obligations under the Plea Agreement ("the Agreement") and
Proposed Stipulations of Dismissal substantially in the form attached
hereto with exhibits including, but not by way of limitation to,
entering a guilty plea to Count Ten of Indictment 93 CR 1261 (S-1)
(TCP) as set forth in the allocution attached to the Agreement as
Exhibit 1; waiving the preparation of a presentence report; and paying
to the United States and the United States District Court sums as set
forth in the Agreement and further
RESOLVED that this authorization extends to the
attached form of the Agreement and Stipulations of Dismissal, together
with any revisions, whether of form or substance, thereof approved by
any officer or director of the Corporation, such approval to be
conclusively evidenced by the execution by such officer or director of
the Agreement; and further
RESOLVED that the officers, directors and
representatives of the Corporation (including counsel) be, and each of
them hereby is, authorized and directed to take all action, including,
but not limited to, the execution and delivery in the name and on
behalf of the Corporation of all items of documentation considered
necessary or desirable by any of them to carry out the terms of the
Agreement and Stipulations of Dismissal and the intent of these
resolutions.
Dated: June 5, 1998
/s/ JOHN C. HO
---------------
John C. Ho
Acting Secretary
Sworn to before me this 5th day
of June, 1998
<PAGE>
Exhibit 10.14
GAS: MC: ld
F. # 9000375
FEI.ALL
ALLOCUTION BY FREOUENCY ELECTRONICS, INC
TO COUNT 10 OF INDICTMENT No. 93 CR l261(S-1)(TCP)
A. FREQUENCY ELECTRONICS, INC. ("FEI") was and still is a corporation
organized under the laws of the State of Delaware with its principal
offices and manufacturing facilities currently located at 55 Charles
Lindbergh Boulevard, Uniondale, New York.
B. FEI was engaged in the business of manufacturing certain electronic
devices for end use by the United States.
C. FEI had a fixed price contract to manufacture certain electronic
devices for the United States as a subcontractor-to TRW, Inc. ("TRW"),
which had a prime contract with the United States (the "Prime Contract").
Under the Prime Contract, the United States paid TRW for costs it had
incurred in connection with subcontracts, including payments to its
subcontractors such as FEI.
D. Under the Prime Contract, one of the TRW contracts on which FEI was
subcontractor was TRW Contract Number CL82372D7S ("the subcontract"). Under
the subcontract, FEI agreed to build a Surface Acoustical Wave Oscillator
under FEI project number 11528 (the "SAW project"). TRW formally entered
the subcontract with FEI in approximately December 1987, although FEI began
work relevant to the subcontract earlier than this date.
E. On February 2, 1988, TRW notified FEI and other subcontractors that
the United States, for its convenience, had decided to terminate portions
of the Prime Contract including the SAW project (the "stop work notice").
TRW requested that FEI submit to TRW its claim for work FEI had performed
in connection with the SAW project prior to the stop work notice. Among the
items which FEI was entitled to compensation for were hours worked by FEI
employees on the SAW project plus a percentage added to that amount
representing overhead and general and administrative costs.
F. On May 16, 1988, FEI submitted its claim for reimbursement to TRW
setting forth labor hours and costs FEI represented it had incurred on the
SAW project up to the point of the stop work notice. FEI did so in a
document called a Settlement Proposal Standard Form 1435 ("the Form 1435").
G. FEI knowingly and willfully submitted the Form 1435 knowing full
welland believing that the Form 1435 did not set forth labor hours and
costs FEI actually incurred on the SAW project. FEI acknowledges that
because its reimbursement claim was subject to negotiation by TRW and to
audit and review by the United States, the aforementioned misstatement in
the Form 1435 was material because TRW and United States auditors were
deprived of information necessary to properly review and negotiate FEI's
claim for reimbursement on the SAW project.
/s/Joseph Franklin
<PAGE>
Exhibit 10.14
GAS: MC: ld
F.0 9000375
FEIdis2
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - -X
UNITED STATES OF AMERICA STIPULATION OF DISMISSAL
93 CV 5200(TCP)
- - against -
FREQUENCY ELECTRONICS, INC.,
MARTIN BLOCH, ABRAHAM LAZAR,
HARRY NEWMAN and MARVIN NORWORTH,
Defendants.
- - - - - - - - - - - - - - - - -X
IT IS HEREBY STIPULATED AND AGREED, pursuant to Rule 41(a)(1)
of the Federal Rules of Civil Procedure, by and between the attorneys for the
plaintiff, the UNITED STATES OF AMERICA, and the attorneys for the defendants
FREQUENCY ELECTRONICS, INC., MARTIN BLOCH, ABRAHAM LAZAR, HARRY NEWMAN and
MARVIN NORWORTH, that the within action be and the same is hereby dismissed with
prejudice and without costs by any party as against any other.
2
Dated: Uniondale, New York
June 19, 1998
Schickler & Schickler, L.L.P. Zachary W. Carter
Attorneys for United States Attorney
FREQUENCY ELECTRONICS, INC.
By: /s/ Arnold S. Schickler, Esq. By: /s/ Michael Cornacchia
Assistant U.S. Attorney
Lipsitz, Green, Fahringer, Roll, By: /s/ Charles Kleinberg
Salisbury & Cambria, L.L.P. Attorney Assistant U.S.
Attorneys for MARTIN BLOCH
By: /s/ Herald Price Fahringer, Esq. By: /s/ Valerie Caproni
Chief, Criminal Division
/s/ Michael Rosen, Esq.
Attorney for HARRY NEWMAN
Morvillo, Abramowitz, Grand,
Mason & Silberberg, P.C.
Attorneys for ABRAHAM LAZAR
By: /s/ Elkan Abramowitz, Esq.
/s/ Robert Ellis, Esq.
Attorney for MARVIN NORWORTH
SO ORDERED, ADJUDGED AND DECREED:
/s/ Thomas C. Platt 6/19/98
HONORABLE THOMAS C. PLATT
UNITED STATES DISTRICT JUDGE
EASTERN DISTRICT OF NEW YORK
<PAGE>
Exhibit 10.14
GAS: MC: ld
F.# 9000375
FEI.Dis
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - -X
UNITED STATES OF AMERICA STIPULATION OF DISMISSAL
------------------------
ex rel. HOWARD GELDART, 93 CV 4750(TCP)
- -------
- --against -
FREQUENCY ELECTRONICS, INC.,
MARKUS HECHLER, HARRY NEWMAN,
MARVIN NORWORTH and
STEVEN CALCEGLIA,
Defendants.
- - - - - - - - - - - - - - - - -X
IT IS HEREBY STIPULATED AND AGREED, pursuant to Rule 41 (a)
(1) of the Federal Rules of Civil Procedure, by and between the attorneys for
the plaintiff, the UNITED STATES OF AMERICA, ex rel. HOWARD GELDART, and the
attorneys for the defendants FREQUENCY ELECTRONICS, INC., MARKUS HECHLER, HARRY
NEWMAN, MARVIN NORWORTH and STEVEN CALCEGLIA, that the within action be and the
same is hereby dismissed with prejudice and without costs by any party as
against any other.
Dated: Uniondale, New York
June 19, 1998
Schickler & Schickler, L.L.P. Zachary W. Carter
Attorneys for United States Attorney
FREQUENCY ELECTRONICS, INC.
By: /s/ Arnold S. Schickler, Esq. By: /s/ Michael Cornacchia
Assistant U.S. Attorney
Weinberg, Kaley, Gross & Pergament L.L.P.
Attorneys for MARKUS HECHLER By: /s/ Charles Kleinberg
Assistant U.S. Attorney
By: /s/ John Kaley, Esq.
Howard, Darby & Levin, Esqs.
Attorneys for STEVEN CALCEGLIA
By: /s/ Gerard E. Lynch, Esq. By: /s/ Valerie Caproni
Chief, Criminal Division
/s/ Guy L. Heineman, Esq.
Attorney for HOWARD GELDART /s/ Robert Ellis, Esq.
Attorney for MARVIN NORWORTH
/s/ Michael Rosen, Esq.
Attorney for HARRY NEWMAN
SO ORDERED, ADJUDGED AND DECREED:
/s/ Thomas C. Platt 6/19/98
HONORABLE THOMAS C. PLATT
UNITED STATES DISTRICT JUDGE
EASTERN DISTRICT OF NEW YORK
<PAGE>
Exhibit 10.14
U.S. Department of Justice United Sates Attorney's Office
United States Attorney 825 East Gate Boulevard
Eastern District of New York Garden City, NY 11530
IMA: CSX; mt June 19, 1998
F.#9000375
SCHICKLE.LTR
Arnold S. Schickler, Esq.
Schickler & Schickler, Esqs.
1700 Broadway
New York, New York 10019
Re: United States of America v. Frequency
Electronics, Inc., 93 CV 5200(TCP);
United States of America ex rel. Howard
Geldart v. Frequency Electronics, Inc.,
93 CV 4750(TCP)
Dear Mr. Schickler:
Frequency Electronics Inc. ("FEI") has recently executed a
Plea Agreement which, inter alia, settled the above-captioned civil actions.
Please be advised that, except for United States of America ex rel,. Ralph
Muller v. Frequency Electronics, Inc.,CV-93-57l6(TCP), which is presently
pending and as to which this letter makes no representations, neither this
office nor the Fraud Section of the Civil Division of the Department of Justice,
based on information presently available to us, has any present intention to
institute any additional civil fraud actions against FEI under the False Claims
Act, 31 U.S.C. 3729, or under related common law theories.
Please understand that we have not undertaken any search or
review of the Department's records to make this determination , and we are
unaware (and would typically be unaware) of matters under consideration by other
U.S. Attorney's Offices, other sections of the Department of Justice and other
agencies and departments of the United States.
This letter is presented for informational purposes only.
Whether in draft or executed form, it is in no way intended or offered as any
sort of inducement or consideration for a proposed settlement and dismissal and
shall form no part thereof.
Very truly yours,
ZACHRY W. CARTER
United States Attorney
By: /S/ Charles S. Kleinberg
--------------------------------
Charles S. Kleinberg
Assistant U.S. Attorney
/S/ Michael Cornacchiaa
-----------------------
Michael Cornacchiaa
Assistant U.S. Attorney
<PAGE>
Exhibit 10.14
U.S. Department of Justice United Sates Attorney's Office
United States Attorney 825 East Gate Boulevard
Eastern District of New York Garden City, NY 11530
GAS: MC: mt June 19, 1998
F.# 9000375
Mu1sch
Arnold S. Schickler, Esq.
Schickler & Schickler, Esqs.
1700 Broadway
New York, Now York 10019
Re: United States of America ex rel. Ralph
Muller v. Frequency Electronics, Inc.
Docket No. 93-CV-5716(TCP)
Dear Mr. Schickler:
This letter confirms that you requested this office to include
a provision in the plea agreement between your client and this Office concerning
Indictment Nos. 93 CR 1261(TCP) and 93 CR 1261(S-1(TCP) and Civil Action Nos. 93
CV 5200(TCP) and 93 CV 4750(TCP), pursuant to which this Office would agree not
to oppose a dismissal of Civil Action No. 93 CV 5716(TCP), which is captioned
United States of America ex rel. Ralph Muller v. Frequency Electronics, Inc.
(the "Muller Action"). While we decline to include such a term in the plea
agreement, please be advised that, at present, the United States does not plan
to intervene in the Muller Action. Moreover, the position of this Office is that
it will not oppose a stipulated dismissal of the Muller Action if: a) the
settlement agreement does not provide for the relator Ralph Muller to receive
money or financial consideration of any kind or, if the settlement agreement
does provide for Muller to receive money or financial consideration of any kind
such amounts are allocated fairly and in accordance with the law and that the
United States receives its statutory share; and b) the terms of the settlement
agreement are reviewed and consented to by the United States Department of
Justice ("DOJ"), Civil Division, to ensure that it is consistent with DOJ
policies.
Very truly yours,
ZACHRY W. CARTER
United States Attorney
By: /S/ Michael Cornacchia
------------------------------
Michael Cornacchia
Assistant U.S. Attorney
/S/ Charles S. Kleinberg
------------------------
Charles S. Kleinberg
Assistant U.S. Attorney
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of Frequency Electronics, Inc. on Form S-8 (File No. 333-42233) of our report
dated July 13, 1998, on our audits of the consolidated financial statements and
financial statement schedule of Frequency Electronics, Inc. as of April 30, 1998
and 1997, and for the years ended April 30, 1998, 1997 and 1996, which report is
included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Melville, New York
July 29, 1998
<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.
FREQUENCY ELECTRONICS, INC.
Registrant
By: /s/ Joseph P. Franklin
----------------------
Joseph P. Franklin
Chairman of the Board
and Chief Executive Officer
By: /s/ Alan L. Miller
------------------
Alan L. Miller
Controller
Dated: July 29, 1998
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/ John Ho Director 7/29/98
--- -------
John Ho
/s/ Joel Girsky Director 7/29/98
--- -----------
Joel Girsky
/s/ Martin B. Bloch President & Director 7/29/98
--- ---------------
Martin B. Bloch
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