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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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<S> <C>
FOR THE FISCAL YEAR COMMISSION FILE NUMBER
ENDED DECEMBER 31, 1997 0-11685
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RADYNE CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 11-2569467
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
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5225 S. 37TH STREET, PHOENIX, ARIZONA 85040
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (602) 437-9620
SECURITIES REGISTERED UNDER SECTION 12 (B) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.002 PAR VALUE
------------------------
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. / /
The aggregate market value of the voting stock held by non-affiliates
(deemed by the registrant to be persons, along with members of their families,
known to the registrant to beneficially own, exclusive of shares subject to
options, less than 5% of the outstanding shares of the registrant's common
stock) of the registrant as of March 4, 1998 was approximately $1,388,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a Court. Yes _X_ No ____
As of March 10, 1998, there were 5,931,346 shares of the registrant's common
stock outstanding.
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PART I
DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in the
Letter of the President included in the Annual Report to Stockholders and in
this Form 10-K, including without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business", are, or may be deemed to be, forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Various economic and competitive factors could
cause actual results to differ materially from those discussed in such
forward-looking statements, including factors which are outside of the control
of the Company, such as interest rates, foreign exchange rates and changes in
raw material costs, along with other factors noted in this Form 10-K with
respect to the Company's business.
ITEM 1. BUSINESS
GENERAL
Radyne was incorporated in the State of New York on November 25, 1980. The
Company's current address is 5225 South 37th Street, Phoenix, Arizona 85040 and
its telephone number is (602) 437-9620.
Radyne has been involved in the advanced design and production of digital
data communications equipment and associated equipment for satellite
telecommunications systems for over seventeen years. Since the Company's
inception in 1980, Radyne has established itself as a supplier in the satellite
ground equipment business.
Radyne designs, manufactures and sells satellite modems, frequency
converters, ancillary products and equipment racks containing integrated modems
and supporting equipment for data communications.
Although the Company was forced to file for Chapter 11 bankruptcy protection
in April 1994, it successfully emerged from bankruptcy in December of that year
upon the acquisition of approximately 91% of its Common Stock by Engineering and
Technical Services, Inc. ("ETS"), then a major customer of Radyne. On August 12,
1996, ETS was acquired by Singapore Technologies Pte Ltd through its indirect
wholly owned subsidiary, Stetsys US, Inc. ("ST"). As a result, approximately 91%
of the Company's Common Stock is now held by ST and an affiliate thereof. See
"Bankruptcy Reorganization" below.
In 1995, ETS caused Radyne to install a new management team, which promptly
moved the Company's operations from New York to Phoenix, Arizona and commenced
the hiring of an almost all new staff of engineering, sales and support
personnel, with funding advanced by ETS and subsequently ST and its affiliates.
The new Radyne team has reinstituted Radyne's research, development and
marketing programs and reinvigorated its product line.
On June 16, 1997, the Company completed an offering of its Common Stock to
its shareholders of record ("Rights Offering"). The Company sold a total of
2,171,625 shares of its Common Stock, including 144,100 shares to Directors and
employees of the Company and its affiliates and 1,976,000 shares to an affiliate
of ST, for $2.50 per share. The total proceeds of the Rights Offering were
$5,429,063, partially offset by $335,696 in associated costs.
OPERATING STRATEGY
Radyne's operating strategy is to (i) continue to build on the experience,
skills and customer access of its new management team, (ii) capitalize on its
development of smaller, less costly satellite modems, and (iii) expand into
market segments, such as rural telephone, private networks, government networks
and compressed television transmission. See "Target Markets" below.
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The Company's engineering staff and support facilities are dedicated to (i)
maintaining the state-of-the-art status of Radyne's traditional products for the
satellite ground equipment segment of the market, (ii) designing and enhancing
products for emerging markets, such as rural telephony for developing areas,
high-speed satellite communications, government data equipment and the growing
private network market, and (iii) providing special configurations to satisfy
customers' special needs.
Radyne's modems cover data rates from 2.4 Kilobytes per second to 155
Megabytes per second. The Company's frequency converters handle all three
frequency bands used in satellite communications. Radyne believes that most of
its current line of modems and converters are smaller and lower priced than the
previous generation of products, enabling large system installation in
significantly less rack space than the products of the Company's competitors.
The Company also markets redundancy switches which operate in conjunction with
satellite modems and converters and provide automatic fault monitoring and
switch over to standby equipment in the event of modem or converter failure.
Radyne's line of frequency converter products is usable in virtually all
earth stations for the conversion of intermediate frequencies to microwave
frequencies for satellite transmission. These converters are competitively
priced, small in size and offer either single, dual or all three bands used in
the satellite industry. In addition to being offered to commercial customers,
there is a military market for the three-band units.
The Company's newer products include a low cost modem with expanded features
and super fast acquisition capabilities, making it attractive for use in both
private networks and rural telephone systems being offered in China, Indonesia
and India, and a line of satellite frequency translators presently used for
testing in satellite earth stations.
The development of digital compression technology has allowed the
transmission of television in a small bandwidth, which has made TV transmission
by satellite more economical than ever before. Video compression allows many
times more channels on a satellite than was previously the case, thus producing
a market of major interest. This compression technology is used for transmission
of TV to network facilities, distribution of cable TV to cable companies, high
definition TV distribution and video teleconferencing. Radyne has developed
modulator products to be used in conjunction with compression equipment and has
been shipping these products for over one and one-half years with exceptional
market acceptance.
BANKRUPTCY REORGANIZATION
In December 1994, Radyne emerged from protection under Chapter 11 of the
Bankruptcy Code. The Company believes that the reasons for Radyne having sought
bankruptcy protection have been neutralized by its new management team and
interim financing sources. When Radyne filed its bankruptcy petition in April
1994, it was suffering from severe cash flow problems due to shrinking sales.
Years of uninspired management and the failure to maintain the sort of research
and development program which is necessitated by the fast-moving data
communications industry had left Radyne with an aging product line and an
inability to access emerging markets.
On April 28, 1994, Radyne filed a petition for relief under Chapter 11 of
the federal bankruptcy laws in the United States Bankruptcy Court for the
Eastern District of New York. Under Chapter 11, certain claims against the
Company in existence prior to the filing were stayed while the Company continued
business operations as debtor-in-possession. Claims secured against the
Company's assets were also stayed, although the holders of such claims had the
right to move the court for relief from the stay prior to the Company's
reorganization plan being confirmed. Secured claims were secured primarily by
liens on all of the Company's assets.
The Company received approval from the Bankruptcy Court to pay certain of
its pre-petition obligations, employee wages and benefits. Tax claims were
rescheduled for payment in equal quarterly
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installments of $9,600, with interest at 7%, over six years. A portion of these
tax claims is the sole remaining pre-petition liability of the Company.
On December 16, 1994, the Bankruptcy Court confirmed the Company's Plan of
Reorganization effective at the close of business on December 16, 1994. The
Plan, which has been consummated, called for the establishment of an escrow
account from which to pay claims and provided for the following:
(1) Exchange of Debt for Common Stock--The Company issued 17,000,000
(prior to a 1-for-5 Reverse Split) shares of previously authorized but
unissued Common Stock to Radyne Florida (a special purpose subsidiary of
ETS), which had previously purchased the Company's secured bank debt and the
position of certain holders of secured promissory notes. This issuance of
stock gave Radyne Florida approximately 91% of the Company's outstanding
Common Stock. In exchange for the stock, the Company was discharged of
$2,350,000 of debt owed to Radyne Florida. In addition, the 1,750,000
warrants held by Radyne Florida (purchased with the secured promissory
notes) were cancelled.
(2) Cancellation of Debt--Unsecured claims and capitalized lease
obligations were settled as follows:
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ORIGINAL
TYPE OF CLAIM AMOUNT REDUCTIONS COMPROMISED
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Accounts payable, accrued expenses, and capitalized
lease obligations................................ $ 1,483,343 $ 1,111,872 $ 371,471
Convertible debentures and bridge notes............ 487,885 439,225 48,660
Taxes.............................................. 309,143 99,866 209,277
------------ ------------ -------------
$ 2,280,371 $ 1,650,963 $ 629,408
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</TABLE>
(3) Other Claims--Priority Claims for wages of $53,786 were paid in
full.
Holders of the Company's Common Stock and options to purchase the Company's
Common Stock had their interests significantly diluted by the distribution of
Common Stock to Radyne Florida.
Holders of warrants to purchase the Company's Common Stock exchanged the
warrants for an aggregate of 53,437 shares of Common Stock.
TARGET MARKETS
Radyne has historically operated in an industry that has relatively few
customers. Today, fewer than 1,000 customers make up the market for satellite
data communication subsystems. Radyne's target markets include international
telecommunications, high speed satellite communications, rural telephony and
private network DAMA (demand assigned multiple access) users, as well as the
United States Government. Currently, Radyne has a presence in the international
telecommunications market, the DAMA products market and, with its new
DM-45/DD-45 and MM-155 modems, the High- Speed Video Conferencing and High
Definition Television markets but anticipates movement into the other markets in
the near future. Of course, there can be no assurance that Radyne will succeed
in capturing a significant share of these other markets.
The international telecommunications market includes users of IDR
(intermediate data rate), IBS (international business service) and open network
satellite equipment. The IDR environment is primarily for voice traffic, while
IBS is specific to business data traffic. In addition, the market includes
customers for MUX (multiplexers), switches and peripheral equipment. The
international telecommunications market should provide substantial business
opportunities for Radyne in the near future. To illustrate the magnitude of the
potential market for Radyne's satellite modems alone, the projected growth in
transponders can be depicted as follows. A transponder is the part of the
satellite that receives an uplink signal at one frequency, converts that
signal's frequency, amplifies it and then retransmits the signal to the ground.
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Satellites have an average of 24 transponders each. For each transponder, an
average of 50 modems is required (25 on the transmitting side and 25 on the
receiving end).
Rural telephony and private network DAMA products require special
communications equipment which is efficient for low traffic volume at many
different locations. DAMA products allow many users to access the same channel
on demand. Radyne serves the DAMA products segment of the market with its
DMD-2400 modem. The DMD-2400 can be utilized in both rural telephony and private
network systems. Rural telephony can be described as an intra-country
telecommunications network linking many small villages or islands in a country
like the Philippines, for example, ultimately allowing the villages to
communicate with each other and the world. A private network can be described as
a network in the commercial world. For example, many banks and other financial
institutions, airlines, and large and multi-unit corporations have the need for
satellite communications and may be linked via private networks.
Additionally, the Company has developed the new DMD-2401 VSAT/SCPC Modem,
which has enhanced features, to compliment the DMD-2400 products and to address
other user requirements. The Company sells its DAMA/VSAT compatible products to
system integrators (customers who make a business of supplying turnkey earth
station operations for their customers), domestically and abroad, as components
to systems that they have designed, as well as directly to end users. The
Company offers these products for sale on a global basis and believes their use
to be global.
Radyne has entered the high-speed satellite communications market with
various products that have been designed to incorporate the most advanced
technologies available. Communications equipment in this segment possesses
higher data rate capabilities of approximately 12-155 megabits per second,
allowing much more data to be transmitted. Over the last year and one-half, the
Company has introduced products such as the DVB- 3000 and DVB-3030 for the
Digital Television industry, which are ideal for use in digital video hub
uplinks, flyaway and mobile satellite news gathering applications. The DD-45 and
DM-45 is a multi-purpose solution for Digital Video Broadcast and High Speed
data transmission for use in, among other things, cable system
backup/restoral-over-satellite and high data rate links. The Company's newest
high-speed entrants are the DM-160 and MM-160 that offer an excellent solution
for high data rate requirements. Also, our new MM-155 Microwave Modem is ideal
for microwave link upgrades.
Additionally, the United States Government has provided a significant market
opportunity for Radyne as the defense budget shrinks and it becomes cost
prohibitive for the government to develop its own products. Because of the
expected growth in commercial off-the-shelf (COTS) and non-developmental item
(NDI) procurement, Radyne has targeted the US Government as an important revenue
source.
PRINCIPAL PRODUCTS
The following is a brief description of the Company's principal product
lines.
RCS-10/DMD-10 MODEM AND REDUNDANCY CONTROL SYSTEM
The RCS-10 represents the new generation system which is replacing the
RCS5000 family in Radyne's product line. It serves the same functions as the
RCS5000, but with a number of notable improvements. Up to 30 modems can be
combined in a single rack and each redundancy switch can control up to 10
modems. In addition to an expanded data rate range (9.6 Kbps to 8.448 Mbps
compared to the RCS5000's 64 Kbps to 8.448 Mbps), the RCS-10 offers an improved
display and menu structure and more options.
DMD-4500 IBS/IDR SATELLITE MODEM
This standard satellite modem provides selectable functions for Intelsat
IDR, IBS and closed network services and is easily programmable by earth station
personnel. Data rates may be selected in 8 Kbps steps between 48 Kbps and 8.448
Mbps. The DMD- 4500 can be used with a variety of redundancy switches and other
options.
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DMD-2401 SATELLITE MODEM (NEW PRODUCT)
The DMD-2401 is a low cost, light weight (8 pounds), fast acquisition (under
20 second) modem. It is capable of data rates ranging from 9.6 Kbps to 2.048
Mbps in steps of 1 Bps. Digital signal processing eliminates virtually all
on-board adjustments. This modem is designed to perform as both ends of a single
channel per carrier link or as a VSAT remote site modem in a hub system. Its
other applications include video conferencing, long distance learning, paging
and news gathering.
DVB-3000 AND DVB-3030 DIGITAL BROADCAST MODULATORS
The DVB-3000 AND DVB-3030 are flexible, programmable digital video satellite
modulators offering full compatibility with digital video standards. Their
principal applications are for digital video hub uplinks, mobile satellite news
gathering, video distribution and one-way data distribution. The DVB-3000 AND
DVB-3030 are high speed, offering programmable data rates ranging from 1.0 to
30.0 Mbps and fixed data rates of 30 to 50 Mbps. They are frequency agile with a
base range of 50 to 90 MHz and an optional range of 100 to 180 MHz in steps of
1.0 Hz.
CONVERTERS, TRANSLATORS AND OTHER MICROWAVE PRODUCTS
Radyne has a complete line of synthesized frequency up converters and down
converters. The SFC6400 C-Band Up Converter converts data or video signals in
the IF range of 50-180 MHz to uplink frequencies between 5.845 and 6.420 GHz.
The SFC4200 C-Band Down Converter converts microwave carriers in the 3.62 to
4.20 GHz range to the IF range of 50-180 MHz. The Company believes that its
SFC1450 Ku-Band Up Converter and the SFC1275G Ku-Band Global Down Converter
offer low phase noise, superior standard transmit output compression and the
only down converter to receive data and detect carrier power simultaneously. The
SFC1468 Tri-Band Synthesized Up Converter is capable of converting signals in
the IF range of 50-180 MHz to C, X and Ku band microwave uplink carriers. The
SFC1274G Tri-Band Synthesized Down Converter does the reverse.
The Company also offers a full line of Loop Test Translators, including
C-Band, Ku-Band, X-Band and Tri-Band models. These are self contained frequency
converters which perform transmit to receive loopback testing of earth station
equipment.
Following is a comparison of sales, by product category:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS TWELVE MONTHS
PRODUCT CATEGORY ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96
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<S> <C> <C> <C>
Modems and Peripherals....................... $ 11,605,016 $ 4,453,807 $ 3,626,398
Microwave Products........................... $ 1,841,836 $ 451,252 $ 203,125
-------------- -------------- --------------
Totals....................................... $ 13,446,852 $ 4,905,059 $ 3,829,523
</TABLE>
MANUFACTURING
The Company's products are to a certain extent assembled and tested at its
Phoenix, Arizona facilities using subsystems and circuit boards supplied by
subcontractors. Although the Company believes that it maintains adequate stock
to reduce the procurement lead time for certain components, the Company's
products use a number of specialized chips and customized components or
subassemblies produced by a limited number of suppliers. In light of previous
financial difficulties, Radyne had experienced some inflexibility on the part of
certain suppliers in regard to credit terms for delivered components. Due to the
Company's most recent history of credit performance, this inflexibility has
subsided during the last fiscal period and the Company now enjoys an overall
good working relationship with its vendors. However, in the event that such
suppliers were to be unable or unwilling to fulfill the Company's requirements,
the Company could experience an interruption in production until an alternative
source of supply was developed. The Company maintains an inventory of certain
chips and components and subassemblies to
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limit the potential for such an interruption. The Company believes that there
are a number of companies capable of providing replacements for the types of
unique chips and customized components and subassemblies used in its products.
SALES AND MARKETING
The Company sells its products through international representatives,
distributors and systems integrators which are supported by the Company's sales
and marketing personnel. In-house direct sales by the Company are targeted
toward large accounts, new accounts and the establishment of distributors in new
markets. The Company has recently established new distribution or representation
arrangements in the Middle East, South America, Asia and the Pacific Rim.
The Company's direct sales force is comprised of 10 individuals in the
marketing department, supported by systems and applications engineers. Direct
sales activities are focused on expanding the Company's international sales by
identifying emerging markets and establishing new distributor accounts.
Additionally, the Company directly targets certain major accounts which may
provide entry into new markets or lead to subsequent distribution arrangements.
Such major accounts tend to be telecommunications agencies and major
corporations in new international markets. The Company has a customer service
and support group, which primarily supports distributors and is responsible for
after-sale support and installation supervision. In certain instances the
Company uses third party companies for installation and maintenance.
Significant customers for the periods ended as indicated were as follows:
<TABLE>
<CAPTION>
SIX-MONTHS
TWELVE-MONTHS DECEMBER 31, TWELVE- MONTHS SIX-MONTHS
DECEMBER 31, 1997 1996 JUNE 30, 1996 JUNE 30, 1995
--------------------- --------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Customer A............... 2.5% 1.6% 6.4% 22.0%
Customer B............... 1.1 -0- -0- 15.3
Customer C............... 1.1 6.3 8.1 14.2
Customer D............... 2.7 15.6 12.7 11.7
Customer E............... 2.2 18.3 -0- -0-
Customer F............... 14.5 -0- -0- -0-
</TABLE>
No other customers represented more than 10% of the Company's sales.
The Company's sales in its principal foreign markets for the year ended
December 31, 1997 and for the six-month period ended December 31, 1996 consisted
of the following percentages of total sales:
<TABLE>
<CAPTION>
TWELVE MONTHS SIX MONTHS TWELVE MONTHS
REGION ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96
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<S> <C> <C> <C>
Asia......................................... 32% 31% 24%
Latin America................................ 12% 25% 6%
Europe....................................... 7% 9% 20%
</TABLE>
Export sales, as a percentage of total net sales, were about 46% in the six
and one half month period ended June 30, 1995, about 50% in the fiscal year
ended June 30, 1996, about 66% for the six month period ended December 31, 1996,
and approximately 55% for the fiscal year ended December 31, 1997. The Company
believes that this figure may rise in subsequent periods. The Company considers
its ability to continue to make sales in developing markets to be important to
its growth potential. However, there can be no assurance that the Company will
succeed in its efforts to cultivate such markets.
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COMPETITION
The Company has a number of major competitors in the satellite
communications field. These include large companies, such as Hughes Network
Systems, NEC, the EFData division of California Microwave and Spar Aerospace,
which have significantly larger and more diversified operations and greater
financial, marketing, human and other resources than Radyne. The Company
estimates that the major competitors, in the main markets in which it operates,
have the following market shares as compared to the Company's share:
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<CAPTION>
VSAT GOV'T DATA
COMPETITOR INTELSAT DIGITAL VIDEO NETWORKS EQUIPMENT
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<S> <C> <C> <C> <C>
EFData......................................... 35% 5% 25% 35%
Comstream/Spar................................. 10 10 10 5
Hughes Network................................. 10 0 0 0
NEC............................................ 10 10 0 0
SSE/Fairchild.................................. 10 0 5 15
Radyne......................................... 15 25 5 5
</TABLE>
The Company does not believe that any other single competitor has a greater
than 10% market share for any of these product classes. However, the foregoing
market share figures represent estimates based on the limited information
available to the Company, and there can be no assurance of precision.
The Company believes that it has been able to compete by concentrating its
sales efforts in the international market, utilizing the resources of local
distributors, and by emphasizing product features. However, most of the
Company's competitors offer products which have one or more features or
functions similar to those offered by the Company. The Company believes that the
quality, performance and capabilities of its products, its ability to customize
certain network functions and the relatively lower overall cost of its products,
as compared to the costs generally offered by the Company's major competitors,
have contributed to Radyne's ability to compete successfully. However, the
Company's major competitors have the resources available to develop products
with features and functions competitive with those offered by the Company. There
can be no assurance that such competitors will not successfully develop such
products or that the Company will be able to maintain a lower cost advantage for
its products. Moreover, there can be no assurance that the Company will not
experience increased competition in the future from these or other competitors
currently unknown.
EMPLOYEES
As of February 5, 1998, the Company had 75 full time employees, including
two executive officers, 55 in engineering, manufacturing and marketing
operations, and 18 in administration. None of the Company's employees are
represented by a union or governed by a collective bargaining agreement, and the
Company believes that its relations with its employees are satisfactory.
TECHNOLOGY
The Company believes that improvement of existing products, reliance upon
trade secrets, copyrights and unpatented proprietary know-how and the
development of new products are generally as important as patent protection in
establishing and maintaining a competitive advantage. Because patents often
provide only narrow protection which may not provide a competitive advantage in
areas of rapid technological change and because patent applications require
public disclosure of information which may otherwise be subject to trade secret
protection, Radyne has not obtained, and has no present intention to obtain,
patents on existing products. However, there can be no assurance that the
Company's technology will not be found to infringe upon the intellectual
property of others. If the Company's technology should be found to impermissibly
utilize the intellectual property of others, the Company's ability to utilize
the technology could be materially restricted or prohibited. In such event, the
Company might be required to obtain
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licenses from third parties to utilize the patents or proprietary rights of
others. No assurance can be given that any licenses required could be obtained
on terms acceptable to the Company or at all. In addition, in such event, the
Company could incur substantial costs in defending itself against infringement
claims made by third parties or in enforcing its own intellectual property
rights.
ITEM 2. PROPERTIES
The Company's sole office and production facility consists of a 16,337
square foot facility in Phoenix, Arizona. This facility is leased at an annual
cost of approximately $88,000. The fixed term of the lease expires on March 30,
1998, after which the term becomes month-to-month at a 25% increase in rental
rate. On November 6, 1997, the Board of Directors authorized the Company to
enter into a contract for a new facility, which is expected to be available for
occupancy in July 1998. The term of the lease is 10 years with options to renew.
The lease provides for rent in the amount of $45,000 per month, subject to a
nominal increase dependant upon costs of tenant improvements, for the first year
with an escalation of 3% per year during years 2 through 10 (Note 9). The
building is approximately 65,000 square feet in size (and is expandable to some
degree) and the Company believes that this new facility will provide for the
company's expected growth for the next ten years.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during the three
months ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market under
the OTC Bulletin Board symbol "RADN" (prior to the January 1997 1-for-5 Reverse
Split, the symbol was "RDYN"). However, there is no established trading market
as actual transactions are infrequent. The following table sets forth the range
of high and low trading prices as reported by the National Quotation Bureau,
Inc. for the periods indicated. It should be noted that these quotations relate,
to some extent, to periods prior to the Reverse Split. All pre-split quotations
have accordingly been multiplied by 5. At March 24, 1998, the Company had
approximately 450 shareholders of record. The Company believes that the number
of beneficial owners is actually in excess of 1,300, due to the fact that a
large number of shares are held in street name.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
1996:
First Quarter................................................................ 55/8 21/2
Second Quarter............................................................... 67/8 33/4
Third Quarter................................................................ 97/32 41/16
Fourth Quarter............................................................... 10 5
1997:
First Quarter................................................................ 6 31/8
Second Quarter............................................................... 31/4 3
Third Quarter................................................................ 103/4 5
Fourth Quarter............................................................... 101/2 4
</TABLE>
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The Company has not paid dividends on the Common Stock since inception and
does not intend to pay any dividends to its stockholders in the foreseeable
future. The Company currently intends to reinvest earnings, if any, in the
development and expansion of its business. The declaration of dividends in the
future will be at the election of the Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company,
general economic conditions and other pertinent factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the year ended
December 31, 1997,the six month period ended December 31, 1996, the year ended
June 30, 1996, the six and one-half month period ended June 30, 1995 and the ten
and one-half months ended December 16, 1994 and the selected balance sheet data
at those dates, are derived from the Financial Statements of the Company and
notes thereto audited by Deloitte & Touche LLP, independent certified public
accountants for the Company. The selected statement of operations data for the
year ended January 31, 1994 and the selected balance sheet data at January 31,
1994 are derived from the unaudited financial statements of the Company. These
unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, contain all
adjustments, consisting only of normal recurring accruals necessary for a fair
presentation of the financial position and results of operations for the periods
presented. Per share data and shares outstanding reflect an adjustment for the
effects of the 1-for-5 reverse split of the Company's common stock, which became
effective on January 9, 1997. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and notes thereto
included elsewhere in this 10-K Annual Report.
9
<PAGE>
STATEMENT OF OPERATIONS DATA
PREDECESSOR COMPANY (1)
<TABLE>
<CAPTION>
SIX MONTHS SIX-AND-ONE-HALF TEN-AND-ONE-HALF
YEAR ENDED ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 16,
1997 1996 1996 1995 1994
------------- ------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Net Sales.............................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $ 1,861,262 $ 2,569,396
Cost of Sales.......................... 8,022,262 4,052,433 2,559,350 1,228,747 2,229,329
Gross Profit (loss).................... 5,424,590 852,626 1,270,173 632,515 340,067
Selling, general and administrative
expense.............................. 4,242,138 1,437,971 1,843,576 961,162 1,658,388
Asset impairment charge (2)............ 421,000
Professional fees related to
reorganization....................... 600,198
Research and development............... 2,262,066 808,025 1,794,823
Operating income (loss)................ (1,079,614) (1,814,370) (2,368,226) (328,647) (1,918,519)
Interest expense....................... 677,102 255,604 256,871 36,209 118,235
Income (loss) before fresh start
adjustments and extraordinary
items................................ $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (2,036,754)
Fresh start adjustments................ 1,598,841
Loss before extraordinary items and
taxes on income...................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (437,913)
Extraordinary items (3)................ 2,699,156
Income (loss) before taxes............. (1,756,716) (2,069,974) (2,625,097) (364,856) 2,261,243
Net loss per share before extraordinary
items................................ (0.35) (0.55) (0.70) (0.10) (1.33)
Net Income (loss) per share............ (0.35) (0.55) (0.70) (0.10) 6.87
Weighted avg. number of outstanding
shares............................... 5,012,664 3,750,699 3,742,227 3,729,721 329,020
<CAPTION>
YEAR ENDED
JANUARY 31,
1994
-------------
<S> <C>
Net Sales.............................. $ 4,966,617
Cost of Sales.......................... 5,620,108
Gross Profit (loss).................... (653,491)
Selling, general and administrative
expense.............................. 3,363,893
Asset impairment charge (2)............
Professional fees related to
reorganization.......................
Research and development............... 785,679
Operating income (loss)................ (4,803,063)
Interest expense....................... 634,061
Income (loss) before fresh start
adjustments and extraordinary
items................................ $ (5,437,124)
Fresh start adjustments................
Loss before extraordinary items and
taxes on income...................... $ (5,437,124)
Extraordinary items (3)................
Income (loss) before taxes............. (5,437,124)
Net loss per share before extraordinary
items................................ (21.30)
Net Income (loss) per share............ (21.30)
Weighted avg. number of outstanding
shares............................... 255,169
</TABLE>
- ------------------------
(1) The Company petitioned for bankruptcy protection in April 1994 and operated
as a debtor-in-possession until December 16, 1994.
(2) Consists of the writedown of designs and drawings in light of the
introduction of replacement products.
(3) Consists of $1,062,667 gain on exchange of debt for common stock and
$1,636,489 gain on debt forgiveness.
BALANCE SHEET DATA
PREDECESSOR COMPANY
<TABLE>
<CAPTION>
AT 12/31/97 AT 12/31/96 AT 6/30/96 AT 6/30/95 AT 12/16/94
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............................ 569,692 186,488 971 2,109 256,398
Working capital (deficit)............................ 1,654,857 (5,851,527) (4,082,987) (1,343,018) (977,678)
Total assets......................................... 10,231,617 6,572,917 3,272,686 3,452,999 3,084,394
Long-term liabilities................................ 4,649,404 161,968 130,414 168,304 192,603
Total liabilities.................................... 11,381,678 11,019,543 5,669,338 3,264,554 2,531,093
Stockholder equity (deficit)......................... (1,150,061) (4,446,626) (2,396,652) 188,445 553,301
<CAPTION>
AT 1/31/94
------------
<S> <C>
Cash and cash equivalents............................ 84,467
Working capital (deficit)............................ (2,284,575)
Total assets......................................... 1,354,933
Long-term liabilities................................ 188,123
Total liabilities.................................... 3,612,875
Stockholder equity (deficit)......................... (2,257,942)
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
In reviewing the following material, the reader should take note of the fact
that the respective periods being compared are of various durations. This is due
to several changes in the Company's fiscal year. Upon emergence from bankruptcy
on December 16, 1994, the predecessor company's fiscal year ended on that date.
The adoption of the fiscal year of the Company's new parent (ETS) at that time
created a fiscal period from December 17, 1994 through June 30, 1995, followed
by a full year ended June 30, 1996. Upon becoming a subsidiary of ST in August
of 1996, the Company adopted ST's fiscal year (the calendar year), creating a
stub fiscal period from July 1 through December 31, 1996.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1996.
The Company's net sales increased 174% to $13,447,000 during the twelve
month period ended December 31, 1997 from $4,905,000 during the six months ended
December 31, 1996. This increase is primarily attributable to the increased time
frame of the current period relative to the prior period and to the introduction
of the Company's new product lines which have experienced exceptional market
acceptance.
The Company's cost of sales as a percentage of net sales decreased to 60%
during the twelve months ended December 31, 1997 from 83% for the six months
ended December 31, 1996. During the six months ended December 31, 1996,
adjustments to inventory of approximately $491,000 (10% of sales) for
obsolescence, of which $364,000 was related to the introduction of new products
(which essentially rendered one entire older product line obsolete), and
$340,000 (7% of sales) for start-up costs related to the introduction of new
products were included in the cost of sales as old product lines were replaced
with new product lines. These products included a new generation modem
sub-system which makes use of the Company's proprietary technology from older
products while adding features and reducing future manufacturing costs. Also,
the Company has introduced and shipped new "Digital Video Broadcast" modems
which have experienced exceptional acceptance in the marketplace.
The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit")
on sales of certain translator products developed by Merit. The royalty rate
ranges from five to ten percent of the selling price. During the period ended
December 31, 1997, the Company accrued $5,600 for royalty expenses, which were
included in direct cost of goods sold.
Selling, general and administrative costs increased to $4,242,000 or 32% of
sales during the twelve months ended December 31, 1997 from $1,438,000 or 29% of
sales for the six months ended December 31, 1996. The increase in expenses as a
percentage of sales was primarily attributable to company growth and market
expenses incurred for market penetration. The increase in pure dollars is also
attributable to the increased time frame of the current period over the prior
period.
The Company recorded an "asset impairment charge" of $421,000 during the six
months ended December 31, 1996, to reflect a valuation adjustment to Designs and
Drawings which were partially impaired due to the introduction of new product
lines. The valuation of designs and drawings is the result of adjustments made
by the Company to adopt Fresh Start reporting in accordance with AICPA Statement
of Position ("SOP") 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION
UNDER THE BANKRUPTCY CODE, and represents the excess reorganization value that
has been applied to the acquired technology supporting the Company's products
(Note 1 to the Financial Statements). Amortization of designs and drawings is
computed using the straight-line method over an estimated useful life of
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
four to seven years. The remaining asset carries a net book value of $472,000
and will be amortized using the straight-line method over the remaining
estimated useful life of one to four years.
Research and development expenditures increased to $2,262,000 (17% of sales)
during the twelve months ended December 31, 1997 from $808,000 (16% of sales)
for the six months ended December 31, 1996. The increase in expenses was
primarily attributable to the increased time frame of the current period over
the prior period and to major development programs instituted during the fiscal
year ended December 31, 1997. It is anticipated that the Company will continue
to experience high R&D expenses as it positions itself, through the introduction
of new products, to gain market share.
As of the last day of the fiscal period, the Company held approximately
$600,000 worth of inventory, in the form of finished goods in a ready-to-ship
status (Note 3), on the shipping dock for two orders placed with the Company
which were to be purchased with funds underlying international letters of
credit. Due to unexpected difficulties, the letters of credit were not received
by the end of the period reported on herein and so the products were not
shipped. Subsequent to the year end, only one of those letters of credit has
been received, for approximately one-half of the inventory (and about $450,000
in sales) while the other letter of credit is still pending. The pending letter
of credit is to be issued by an Indonesian bank and it is possible that this
letter of credit will not materialize, in which case the Company will be forced
to sell these goods to other customers. The impact of these delayed letters of
credit was to delay shipment, and revenue recognition, of approximately $945,000
in sales.
Interest expense net of interest income increased to $677,000 (5% of sales)
during the twelve months ended December 31, 1997 from $256,000 (5% of sales) for
the six months ended December 31, 1996. The large increase in expense was
primarily attributable to the increased time frame of the current period over
the prior period.
For the period ended December 31, 1997, the Company did not provide for
income taxes, due to the net loss. The Company also did not provide for income
taxes, for the six months ended December 31, 1996, due to net operating losses.
For the twelve month period ended December 31, 1997, the Company had a net
loss of ($1,757,000) as compared with a net loss of ($2,070,000) in the six
month period ended December 31, 1996. The decrease was primarily attributable to
increased sales with a lower percentage of cost of sales.
"New Orders Booked" (firm, fixed orders from customers) for the twelve
months ended December 31, 1997 were $15,788,000 as compared to $5,939,000 for
the year ended December 31, 1996. This increase was as a result of the increased
time frame of the current period over the prior period coupled with the
increased effort, on the part of the Company, to rejuvenate its marketing
strategy.
The Company's "Backlog" of orders to be shipped (unshipped orders from the
prior period (Backlog) plus New Orders Booked less orders shipped during the
period) was $4,814,000 as of December 31, 1997, an increase of 95% over the
$2,473,000 in Backlog as of December 31, 1996. The Company's Backlog consists of
firm orders as evidenced by written contracts and/or purchase orders from
customers. Approximately $945,000 of this amount is due to the effect of the
late letters of credit from two orders. One of these orders was from South
America and has subsequently shipped. The other order is from Indonesia and has
not shipped to date. This order is in jeopardy due to the current economic
crisis in Asia and particularly Indonesia. If this order is cancelled, the
Company will sell the inventory to other customers from which there are
sufficient orders in house to deplete this inventory. The Company believes that
while projected sales to certain Asian countries, including Indonesia, may be
affected by the current economic crisis, sales to other regions, including
domestic sales, should increase substantially during the 1998 fiscal year and
more than offset any decline in sales to the Asian region.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30,
1996.
The Company's net sales increased 28% to $4,905,000 during the six month
period ended December 31, 1996 from $3,830,000 during the twelve months ended
June 30, 1996. This increase was primarily attributable to the introduction of
the Company's new product lines which have experienced exceptional market
acceptance. Volume in terms of units sold has increased with sales of products
introduced since July 1, 1995 increasing from $434,000 for the period ended June
30, 1996 to $3,477,000 for the period ended December 31, 1996.
The Company's cost of sales as a percentage of net sales increased to 83%
during the six months ended December 31, 1996 from 67% for the fiscal year ended
June 30, 1996. There were two primary reasons for this increase in percentage,
both of which the Company considers largely extraordinary. First, there were
adjustments to inventory of $491,000 (10% of sales) for obsolescence. Of this
amount, $364,000 was related to the introduction of new products which
essentially rendered one entire product line obsolete, $110,000 was related to
ongoing product development and $17,000 was related to the valuation of excess
materials on hand. Second, $340,000 (7% of sales) of start-up costs related to
the introduction of new products were included in the cost of sales for the
period ended December 31, 1996. These products included a new generation modem
sub-system which makes use of the Company's proprietary technology from older
products while adding features and reducing future manufacturing costs. Also,
the Company introduced and shipped the new "Digital Video Broadcast" modem which
has experienced exceptional market acceptance. Also contributing to the increase
in cost of sales as a percentage of sales were freight charges related to
international sales (2% of sales) and higher than anticipated warranty expense
on some of the Company's older products (1% of sales).
The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit")
on sales of certain translator products developed by Merit. The royalty rate
ranges from five to ten percent of the selling price. During the period ended
December 31, 1996, the Company paid $2,200 for royalty expenses, which were
included in direct cost of goods sold.
Selling, general and administrative costs decreased to $1,438,000 or 29% of
sales during the six months ended December 31, 1996 from $1,844,000 or 48% of
sales for the fiscal year ended June 30, 1996. The decrease in expenses was
primarily attributable to the decreased time frame of the latter period over the
prior period and partially offset by increased costs related to the higher level
of business that the Company experienced during the latter period.
The Company recorded an "asset impairment charge" of $421,000 during the six
month period ended December 31, 1996 to reflect a valuation adjustment to
Designs and Drawings which were partially impaired due to the introduction of
new product lines.
Research and development expenditures decreased to $808,000 (16% of sales)
during the six months ended December 31, 1996 from $1,795,000 (47% of sales) for
the twelve months ended June 30, 1996. The decrease in expenses was primarily
attributable to the decreased time frame of the latter period relative to the
prior period. Additionally, the Company had embarked on a major development
program during the fiscal year ended June 30, 1996, in order to regain a
competitive posture after two fiscal periods during which the Company had made
no development effort. Interest expense net of interest income decreased to
$256,000 (5% of sales) during the six months ended December 31, 1996 from
$257,000 (7% of sales) for the fiscal year ended June 30, 1996. The small
decrease in expense was primarily attributable to the
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
decreased time frame of the latter period as compared to the prior period,
offset by additional interest from the Company's increased debt level.
For the six month period ended December 31, 1996, the Company did not
provide for income taxes, due to the net loss. The Company also did not provide
for income taxes for the twelve month period ended June 30, 1996, due to net
operating losses.
For the six month period ended December 31, 1996, the Company had a net loss
of ($2,070,000) as compared with a net loss of ($2,625,000) in the twelve month
period ended June 30, 1996. The decrease was primarily attributable to the
decreased time frame of the latter period relative to the prior period as
partially offset by the increase in cost of sales as a percentage of sales and
the expenses of increased business activity, and the $421,000 asset impairment
charge as discussed above.
"New Orders Booked" (firm, fixed orders from customers) for the six months
ended December 31, 1996 were $5,939,000 as compared to $4,184,000 for the year
ended June 30, 1996. The Company's "Backlog" of orders to be shipped (orders
from the prior period which had not yet been shipped plus New Orders Booked less
orders shipped during the period) was $2,473,000 as of December 31, 1996, an
increase of 72% over the $1,439,000 in Backlog as of June 30, 1996. The
Company's Backlog consists of firm orders as evidenced by written contracts
and/or purchase orders from customers.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO SIX AND ONE-HALF MONTH PERIOD ENDED
JUNE 30, 1995
The Company's net sales increased 206% to $3,830,000 during the period ended
June 30, 1996 from $1,861,000 during the six and one-half months ended June 30,
1995 primarily due to the increased time frame of the later period being
reported upon herein over the prior period.
The Company's cost of sales as a percentage of net sales increased to 67%
during the fiscal year ended June 30, 1996 from 66% for the six and one-half
months ended June 30, 1995.
Selling, general and administrative costs increased to $1,844,000 or 48% of
sales during the fiscal year ended June 30, 1996 from $961,000 or 52% of sales
for the six and one-half months ended June 30, 1995. The increase in expenses
was primarily attributable to the increased time frame of the later period over
the prior period.
Research and development expenditures increased to $1,795,000 during the
fiscal year ended June 30, 1996 from $-0- for the six and one-half months ended
June 30, 1995. The Company embarked on a major development program during the
fiscal year ended June 30, 1996, in order to regain a competitive posture after
two fiscal periods during which the Company had made no development effort.
Interest expense net of interest income increased to $257,000 (7% of sales)
during the fiscal year ended June 30, 1996 from $36,000 (2% of sales) for the
six and one-half months ended June 30, 1995, due primarily to increased
borrowings.
For the period ended June 30, 1996, the Company did not provide for income
taxes, due to the net loss. The Company also did not provide for income taxes
for the six and one-half month period ended June 30, 1995, due to net operating
losses.
For the twelve month period ended June 30, 1996, the Company had a net loss
of ($2,625,000) as compared with a net loss of ($365,000) in the period ended
June 30, 1995. The increase was primarily
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
attributable to the increased level of research and development expenditures and
interest expense, along with the increased time frame of the later period over
the prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $1,654,857 at December 31, 1997, as
compared to a deficit of ($5,852,000) at December 31, 1996, ($4,083,000) at June
30, 1996 and ($1,837,000) at December 31, 1995. The elimination of the deficit
from December 31, 1996 was due primarily to $5,050,000 of net proceeds from the
sale of Common Stock, pursuant to a Rights Offering to the Company's
shareholders ("Rights Offering"), new bank borrowings of $9,500,000 ($4,500,000
of which is classified as long-term) and a decrease in accounts receivable and
other current assets of approximately $400,000. This amount was partially offset
by payments on notes payable under lines of credit agreements of $1,994,000 and
payments on notes payable to affiliates of $6,600,000 and an approximately
$611,000 decrease in accounts payable and accrued liabilities, and an increase
of $3,399,000 in inventories.
Net cash used in operating activities was $4,945,000 for the twelve month
period ended December 31, 1997, as compared to $3,546,000 for the six months
ended December 31, 1996, as compared to $2,581,000 used in the year ended June
30, 1996 and $938,000 used in the six and half months ended June 30, 1995. The
principal causes for the difference in 1997 were the net loss for the period of
$1,757,000 and increases in inventories, approximately $600,000 of which was in
the form of finished goods which had been built in anticipation of two orders
placed with the Company which were to be purchased with funds underlying
international letters of credit. Due to unexpected difficulties, the letters of
credit were not received by the end of the period reported on herein and so the
products were not shipped. Subsequent to the year end, only one of those letters
of credit has been received, for approximately one-half of the inventory (and
about $450,000 in sales) while the other letter of credit is still pending. The
pending letter of credit is to be issued by an Indonesian bank and it is
possible that this letter of credit will not materialize, in which case the
Company will be forced to sell these goods to other customers. The impact of
these delayed letters of credit was to delay shipment, and revenue recognition,
of approximately $945,000 in sales as discussed above.
Cash used in investing activities, consisting of additions to equipment,
amounted to $593,000 for the period ended December 31, 1997, $255,000 for the
period ended December 31, 1996, $389,0000 for year ended June 30, 1996 and
$119,000 for the six and one-half month period ended June 30, 1995. The current
year's increase of $338,000 is consistent with management's plans to continue
investment in research & development and Company growth. The Company has no
material commitments to make capital expenditures in 1998 or thereafter. Certain
leasehold improvements relative to the new facility (ITEM 2 and Note 9), if any,
will be added to the landlord's cost basis of the property and amortized in the
form of increased rent.
The Company derived net cash from financing activities of $5,922,000 during
the year ended December 31, 1997, $3,986,000 during the six month period ended
December 31, 1996 and $2,969,000 during the year ended June 30, 1996, with the
difference resulting from greater net borrowings and the proceeds from the sale
of stock during the current period.
As a result of the foregoing, the Company increased its cash balance by
$383,000 for the twelve month period ended December 31, 1997, increased its cash
balance by $186,000 for the six months ended December 31, 1996 and decreased its
cash balance by $1,000 for the year ended June 30, 1996.
A bank line of credit, in the amount of $5,000,000, was established for the
Company with Bank of America NT&SA, Asian Banking Unit, by Stetsys US, Inc., the
beneficial owner of 57.3% of the
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Company's outstanding stock. As of December 31, 1997, the Company had drawn down
$4,500,000 of the available funds in the form of demand loans. An affiliate of
Stetsys US, Inc. issued a non-binding letter of awareness to the bank which
replaced a previous guarantee. The interest rates on these loans ranged from
7.15625% to 8.5% per annum. The Company also has an uncommitted $5,500,000
credit facility with Citibank NA with respect to which the same affiliate of ST
has also issued a non-binding letter of awareness. As of December 31, 1997, the
Company had drawn down $5,000,000 of the available funds in the form of demand
loans. Subsequent to the end of the period reported on herein, the bank line
with Bank of America was terminated and paid in full by the proceeds of a loan
from Stetsys US, Inc. in the amount of $4,618,272. The loan from Stetsys US,
Inc. bears interest at the rate of 6.84375% per annum and matures on February
15, 1999. Another $500,000 loan was made by ST at the same interest rate and
matures on January 4, 1999.
The purpose of all of the above described loans has been to finance or
refinance the capital needs associated with the Company's recent rapid sales and
Backlog growth and the cost of research and development. To date, the Company's
capital resources (as supplemented by loans from ST and its affiliates) have
been sufficient to fund its operations and increased level of business. The
Company believes that its bank credit lines and cash from operations are
unlikely to be sufficient to fund its planned future operations and capital
requirements for continued aggressive growth through the end of 1998. Therefore,
in order to sustain a high rate of sales increases and new product development,
management intends to formulate a plan for the Company to sell a substantial
amount of additional Common Stock during the second or third quarter of this
year. Of course there can be no assurance that the Company will be successful in
offering such securities. If the Company were to be unable to raise sufficient
capital, it might be necessary to delay or cut back on its plans for future
growth.
SUPPLEMENTARY INFORMATION
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 Compliance (Year 2000)
issue. As the year 2000 approaches, such systems may be unable to accurately
process certain date-based information.
The Company is in the process of communicating with others with whom it does
significant business to determine their Year 2000 readiness and the extent to
which the Company may be vulnerable to any third party Year 2000 issues. While
there do not appear to be any issues for which the Company is not prepared,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company would not have a material adverse effect on the Company.
In the opinion of the Company's management, the cost of addressing Year 2000
compliance will not be material. Management has studied the known problems of
Year 2000 compliance and has found that in all material respects, the Company's
existing software and hardware are compatible with Year 2000. Any future costs
to comply with Year 2000 issues will be expensed in the period that the costs
are incurred.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on
revenues or expenses during the last four fiscal periods reported on herein.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements as of December 31, 1997, December 31,
1996, June 30, 1996 and June 30, 1995 are included in this report as listed in
the Index to Financial Statements in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None reportable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and executive officers of the Company, their positions held
with the Company, and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Lim Ming Seong............................. 50 Director, Chairman of the Board
Chan Wee Piak.............................. 42 Director
Lee Yip Loi................................ 54 Director
Robert A. Grimes........................... 45 Director
Robert C. Fitting.......................... 62 Director and President
Steven W. Eymann........................... 45 Executive Vice President
Garry D Kline.............................. 48 Vice President of Finance
</TABLE>
Each director is elected for a period of one year at the Company's annual
meeting of stockholders and serves until the next meeting and until his
successor is duly elected and qualified. Officers are elected by, and serve at
the discretion of, the Board of Directors.
The following is a brief summary of the background of each director,
executive officer and certain key employees of the Company:
DIRECTORS AND EXECUTIVE OFFICERS:
LIM MING SEONG has a been a Director and Chairman of the Board of the
Company since August 13, 1996 and is chairman of its Compensation Committee. He
is the Chairman of ST and of Vertex Management, Inc., a member of the Singapore
Technologies group, and he has been Group Director of Singapore Technologies Pte
Ltd, an indirect parent of ST since February of 1995. From March 1992 until
February 1995, he was Executive Director of Singapore Technologies Ventures Pte
Ltd and from February 1990 to March 1992, he was Group President of Singapore
Technologies Holdings Pte Ltd. Prior to that time he held various corporate and
government positions, including Deputy Secretary in the Singapore Ministry of
Defense from 1979 to 1986.
LEE YIP LOI has been a Director of the Company since August 13, 1996 and is
chairman of the Audit Committee and a member of the Compensation Committee of
the Board. Mr. Lee is also a director of ST. He has been Regional Director
(America) of Singapore Technologies Pte Ltd since March 1994 and, from May 1990
to January 1997, he was President of it's affiliate, Metheus Corporation. Prior
to that time he held a number of managerial positions with such corporations as
Morgan Guaranty Trust and Singapore Technologies Pte Ltd and government
positions with the Singapore Ministries of Education, Defense, Culture and Home
Affairs.
CHAN WEE PIAK has been a Director since August 13, 1996 and is a member of
the Compensation Committee of the Board. He is a director of ST and has been
General Manager of Agilis Communication Technologies Pte Ltd, also a member of
the Singapore Technologies group, since January 1992. From
17
<PAGE>
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED)
November 1989 to February 1992, he was General Manager of Chartered Microwave
Pte Ltd. Prior to that time, he held various managerial positions in the
Singapore Ministry of Defense and with Singapore Electronic and Engineering.
ROBERT A. GRIMES, who is a member of the Audit and Compensation Committees
of the Board, has served as a member of the Board of Directors since December,
1994. For the past seven years Mr. Grimes has also served as a member of the
Board of Engineering and Technical Services, Inc. of which he was President
until December 31, 1997. He was also the President of ST from February 24, 1997
to January 23, 1998.
ROBERT C. FITTING has been President of the Company since February, 1995,
became a Director of the Company in March, 1995 and is a member of the Audit
Committee of the Board. Mr. Fitting has a Master of Electrical Engineering
degree from New York University and a Bachelors with distinction from Penn State
University. His professional career began at Bell Laboratories in 1962 where he
spent six years developing innovative communication technologies. Mr. Fitting
then joined the Motorola Government Electronics Division where he was an
engineering manager. He published more than a dozen technical papers and was
awarded a number of patents. He left Motorola in 1978 to build a new company
under an agreement with Comtech Telecommunications. The new company was named
Comtech Data Corporation, currently known as Fairchild Data Corporation. Mr.
Fitting was the General Manager and President of Comtech Data Corporation from
1978 to 1984. He left Comtech to start a new company called EFData Corporation.
As co-founder, CEO and President of EFData Corporation, Mr. Fitting built the
company into a worldwide market leader in satellite communications equipment.
While at EFData, Mr. Fitting won the "Arizona Entrepreneur of the Year" award in
1993 in the manufacturing/high technology category.
STEVEN EYMANN has been Executive Vice President of the Company since
February, 1995. Mr. Eymann graduated with honors and a Bachelor of Science in
Electrical Engineering from the University of Nebraska. His professional career
began at the Motorola Government Electronics Division where he was a design
engineer, task leader and finally a project leader for the DSU-23/29B fuse
development program. As project leader, he was responsible for project
management, budgets, schedules, and design and testing of the fuse. He designed
the computer-controlled automatic test set for factory testing based on an HP
9825 computer. The DSU-23/29B is an L-Band PN radar for accurate, low-cost
altitude direction. In June of 1981, Mr. Eymann joined Comtech Data Corporation
where he was Director of Product Development. He was responsible for budget,
schedule and technical aspects of all new product development within Comtech.
Prior to becoming the Director of Product Development, he served as a senior
engineer with program and technical design responsibility. He left Comtech in
1984 to begin a new company called EFData Corporation. As co-founder and Vice
President of EFData, Mr. Eymann was responsible for new product development and
engineering management in the design and manufacture of high technology,
military and commercial communications equipment.
GARRY KLINE, Vice President of Finance, Chief Financial Officer and
Secretary, joined the Company in September of 1995. From that time until July
1997 he was Secretary and Controller of the Company. From 1987 through 1995, Mr.
Kline served as CFO and Controller of EFData Corporation. Prior to 1987, Mr.
Kline served in various positions, including Vice President of Finance for
Megatronics Inc., a publicly held printed circuit board manufacturer, Vice
President of Operations for Vernal Lodging Associates, a hospitality management
company, and General Partner of Tax and Accounting Computer Service, an
accounting firm.
CERTAIN KEY EMPLOYEES:
PETER WEISSKOPF has been the President of the Microwave Products Division at
Radyne since June, 1995. At Radyne, he is responsible for the operation of the
microwave products division. His duties include
18
<PAGE>
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED)
marketing, design and manufacture of existing and new microwave products as well
as the administration of the division. Mr. Weisskopf has a Bachelor of Science
in Computer and Electrical Engineering from George Mason University. He has
worked as an engineer for several companies during his professional career,
including Magnavox Data Systems, M/A-COM Linkabit and M/A-COM Active Assemblies
Division. From 1990 to 1992, Mr. Weisskopf was an engineer at EFData
Corporation, where he designed synthesized frequency converters for use in
satellite communications. In 1992, Mr. Weisskopf founded Merit Microwave, Inc.
As founder and President of this start-up firm, Mr. Weisskopf designed and
marketed various microwave components and systems, including a complete line of
satellite loopback test translators.
ALAN POTTER has been the Vice President of Marketing for the Company since
December 1995. His duties at Radyne include market research, neoteric product
concepts, new corporate alliances and distribution systems in Europe and the
Middle East. He joined Radyne after ten years with EFData as Sales Manager. Mr.
Potter graduated from the University of Houston with honors, holding a Bachelor
of Arts in Communications. After post graduate studies at the University of
Massachusetts, Amherst, he began his professional career as an Associate
Professor of Communications at the University of Texas at Houston. While there,
in 1973, he developed and operated the first practical bi-directional coaxial
cable network to simultaneously carry voice, data and video communications. He
then designed, developed and managed a series of broadband cable television and
data networks for Columbia Cable Television, Michelson Media and Cox Cable
Communications. Mr. Potter joined Comtech Data in 1984 and, two years later, he
followed Messrs. Fitting and Eymann to initiate the Sales and Marketing
Department at EFData. He is currently an MBA candidate at the University of
Phoenix.
DAVE KOBLINSKI has been the Vice President of Operations for the Company
since March, 1995. Mr. Koblinski has a Bachelor of Science in Business
Administration from Arizona State University. He also holds a degree in
Electronics Technology from Mesa Community College. His professional career
began in 1982 at Comtech Data Corporation where he held the position of Customer
Service Representative. He was responsible for repairs, field and telephone
support of satellite data modems. From 1985 to 1995, Mr. Koblinski was the
Senior Product Manager for EFData Corporation. His general responsibilities at
EFData included relating customer requests and concerns to the factory. His
direct responsibilities included the customer service, technical publication and
order entry departments.
Based solely upon a review of Forms 3, 4 and 5 and amendments thereto
furnished to the registrant during the period from January 1,1997 to December
31, 1997, none of the officers or directors of the registrant or the beneficial
owners of its equity securities failed to file reports on Forms 3, 4 or 5
required to be filed during such period or prior thereto, except that Form 4
Reports were filed late on one occasion by each of Stetsys Pte Ltd, Temasek
Holdings (Private) Limited, Chan Wee Piak and Radyne Corp.
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION
The Company's policy is to pay no compensation to directors for acting as
such.
The following table sets forth the compensation for services in all
capacities to the Company for the period from the commencement of employment on
March 1, 1995 through December 31, 1997 of the Company's President and Executive
Vice President. No other executive officer or employee received total annual
salary and bonus of more than $100,000.
19
<PAGE>
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED)
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
YEAR ALL OTHER
NAME AND PRINCIPAL POSITION ENDED(1) SALARY OPTIONS (#) COMPENSATION(2)
- ----------------------------------------------------------- --------- ---------- ----------- -----------------
<S> <C> <C> <C> <C>
Robert C. Fitting. President............................... 12/31/97 $ 116,529 $ 1,165
12/31/96 $ 40,000 279,085 $ 435
06/30/96 $ 80,000 0 $ 738
06/30/95 $ 29,231 0 0
Steven Eymann Exec. Vice Pres.............................. 12/31/97 $ 111,162 $ 1,112
12/31/96 $ 40,000 279,085 $ 435
06/30/96 $ 80,000 0 $ 738
06/30/95 $ 29,231 0 0
</TABLE>
- ------------------------
(1) Mr. Fitting's and Mr. Eymann's employment with the Company commenced on
March 1, 1995, so the figures shown for the fiscal year ended June 30, 1995
reflect a four-month period. The Company's fiscal year has been changed to
the calendar year, so the figures shown for the period ended December 31,
1996 reflect a period of six months.
(2) Matching 401(k) plan contributions.
STOCK OPTIONS
No stock options were granted to the above executive officers during the
fiscal period ended December 31, 1997.
AGGREGATE OPTION EXERCISES IN 1997 AND HOLDINGS AT YEAR END
The following table sets forth information concerning option exercises and
option holdings for the fiscal period ended December 31, 1997 with respect to
Robert C. Fitting, the President of the Company and Steven Eymann, the Executive
Vice President.
AGGREGATE OPTIONS EXERCISED IN THE
LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED,
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS AT
NUMBER OF DECEMBER 31, 1997 DECEMBER 31, 1997(2)
SHARES ACQUIRED VALUE ---------------------------- ------------------------------
NAME ON EXERCISE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- --------------- --------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Fitting.................. 0.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00
Steven Eymann...................... 4,000.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00
</TABLE>
- ------------------------
(1) Based on the fair market value of the Common Stock on the exercise date,
less the per share exercise price.
(2) Based on the fair market value of the Common Stock of $2.50 per share, as
determined by the Company's Board of Directors, less the per share exercise
price.
20
<PAGE>
ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AGREEMENTS
Under the employment agreement between the Company and Mr. Fitting and Mr.
Eymann, they will serve as President and Vice President of the Company until the
earlier of June 30, 2000 or such time as the stock options described in the
above table become fully exercisable. Pursuant to the agreement, the Company
presently pays Mr. Fitting and Mr. Eymann annual salaries of $130,000 and
$125,000, respectively, and has granted them the stock options described in the
above table. Each of Mr. Fitting and Mr. Eymann has also agreed that if he
exercises any of the stock options, he will not engage in any business which
competes with the Company until after the second anniversary of his termination
of employment with the Company, except in the case of involuntary termination
without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Lim, Chan, Lee and Grimes.
There were no interlocking relationships between the Company and other entities
that might affect the determination of the compensation of the executive
officers of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date hereof, the ownership of the
Common Stock by (i) each person who is known by the Company to own of record or
beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and its President and Executive Vice President, and (iii)
all directors and executive officers of the Company as a group. Except as
otherwise indicated, the stockholders listed in the table have sole voting and
investment powers with respect to the shares indicated.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
NAME AND ADDRESS OF SHARES OF CLASS
- --------------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Stetsys US, Inc. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ 3,400,000 57.3%
Stetsys Pte Ltd. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ 5,376,000(1) 90.6%
Steven Eymann 5225 S. 37th Street Phoenix, Arizona 85040............................... 4,000 *
Robert C. Fitting 5225 S. 37th Street Phoenix, Arizona 85040........................... -- --
Robert A. Grimes 5225 S. 37th Street Phoenix, Arizona 85040............................ 5,500 *
Lee Yip Loi c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ -- --
Chan Wee Piak c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ 10,000 *
Lim Ming Seong c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The
Curie Singapore Science Park Singapore 118258........................................ -- --
All directors and executive officers of the Company as a group (4 persons)............. 21,000 *
</TABLE>
- ------------------------
* Less than one percent.
(1) The shares reported as owned by Stetsys Pte Ltd include the shares reported
as beneficially owned by Stetsys US, Inc., of which Stetsys Pte Ltd is sole
shareholder. 100% of the stock of Stetsys US, Inc. and Stetsys Pte Ltd is
ultimately owned by the Minister for Finance (Incorporated) of Singapore.
21
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sales to ETS for the twelve month period ended December 31, 1997, the six
month period ended December 31, 1996, the year ended June 30, 1996 and the six
and one-half period ended June 30, 1995 were $152,500, $307,300, $311,600 and
$159,700, respectively. ETS is a wholly owned subsidiary of ST. During the
fiscal year ended December 31, 1997, the six month period ended December 31,
1996 and the year ended June 30, 1996, respectively, the Company made sales to
Agilis Communication Technologies Pte Ltd, another member of the Singapore
Technologies group, of $540,500, $375,000 and $118,900. The General Manager of
Agilis, Chan Wee Piak, is a Director of the Company.
On August 12, 1996, Stetsys US, Inc. ("ST"), a member of the Singapore
Technologies Pte Ltd ("STPL") group, acquired 100% of the outstanding common
stock of ETS. (ST is a wholly owned Delaware subsidiary of Stetsys Pte Ltd,
which is a wholly owned subsidiary of STPL. STPL is an indirect wholly owned
subsidiary of Temasek Holdings (Private) Limited, which is in turn wholly owned
by the Minister for Finance (Incorporated) of Singapore). Messrs. Lim Ming
Seong, Lee Yip Loi and Chan Wee Piak are all both Directors of the Company and
officers of other corporations in the STPL group. From February 24, 1997 to
January 23, 1998, Robert A. Grimes, a Director of the Company, was also
President of ST.
On August 12, 1996, Singapore Technologies Electronics Pte Ltd ("STE"),
another member of the STPL group, made an unsecured loan of $4,500,000 to the
Company, the proceeds from which were used to pay down the loan payable to ETS.
This loan, which bore interest at 8%, was repaid on February 10, 1997 from the
proceeds of loans provided by Citibank NA and ST. Between November 8 and
December 18, 1996, ST made loans to the Company in the aggregate principal
amount of $2,100,000, with interest at 8% per annum and maturing in March, 1997.
At or about maturity, the accrued interest on these loans was paid by the
Company and the principal amounts were repaid with the proceeds of new loans
maturing on April 30, 1997. These loans by ST to the Company, totaling
$4,100,000 were repaid with proceeds of the Rights Offering.
Interest expense on notes payable to affiliates was $148,000, $205,900 and
$248,400 for the year ended December 31, 1997, the six-month period ended
December 31, 1996 and the year ended June 30, 1996, respectively, of which
$-0-and $152,400 were included in accrued expenses in the accompanying balance
sheet as of December 31, 1997 and 1996, respectively.
Subsequent to December 31, 1997, ST made loans of $500,000 and $4,618,272 to
the Company. The loans bear interest at 6.844% per annum with the principal and
accrued interest due on January 4 and February 15, 1999, respectively. The
proceeds of the $4,618,272 loan were used by the Company to repay a note payable
under the above mentioned $5,000,000 line of credit agreement with Bank of
America which was outstanding as of December 31, 1997 (Note 7). This line of
credit, as to which an ST affiliate had issued a non-binding letter of
awareness, was terminated at that time. The Company also has an uncommitted
$5,500,000 line of credit from Citibank N.A. as to which the same ST affiliate
has issued a non-binding letter of awareness. As of December 31, 1997,
$5,000,000 had been drawn down in the form of demand loans under this line of
credit.
The Company has notes receivable from stockholders totaling $40,086. These
notes bear interest at 4% and are due June 20, 1998.
22
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) The following is an index of financial statements of Radyne Corp.,
financial statement schedules and exhibits included in Part IV, Item 14:
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-1
Balance Sheets as at December 31, 1997 and 1996....................................... F-2
Statements of Operations for the Year Ended December 31, 1997, the Six-Month Period
Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month
Period Ended June 30, 1995............................................................ F-3
Statements of Stockholders' Capital Deficiency for the Year Ended December 31, 1997,
the Six Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six
and One-Half Month Period Ended June 30, 1995......................................... F-4
Statements of Cash Flows for the Year Ended December 31, 1997, the Six-Month Period
Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month
Period Ended June 30, 1995............................................................ F-5
Notes to Financial Statements......................................................... F-6
</TABLE>
FINANCIAL SCHEDULES
None
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C>
3.1* Restated Certificate of Incorporation
3.2* Bylaws, as amended and restated
10.1** 1996 Incentive Stock Option Plan
10.2*** Employment Agreement with Robert C. Fitting (Radyne Termsheet)
10.3 Lease dated November 11, 1997
27 Financial Data Schedule
</TABLE>
- ------------------------
* Incorporated by reference from Registrant's report on Form 10-Q, filed March
11, 1997.
** Incorporated by reference from Registrant's Registration Statement on Form
S-8, dated and declared effective on March 12, 1997.
*** Incorporated by reference from Registrant's amended Registration Statement
on Form S-1, dated May 9, 1997 and declared effective on May 12, 1997.
b) Registrant filed no reports on Form 8-K during the period of October 1
through December 31, 1997.
23
<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.
Radyne Corp.
(Registrant)
By: /s/ ROBERT C. FITTING
-----------------------------------------
Robert C. Fitting,
PRESIDENT
Dated: 21 March, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf by the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ ---------------------------
/s/ LIM MING SEONG Chairman of the Board of March 20, 1998
- ------------------------------ Directors
Lim Ming Seong
/s/ ROBERT C. FITTING President, Director March 20, 1998
- ------------------------------
Robert C. Fitting
Vice President, Finance, March 20, 1998
/s/ GARRY D. KLINE Chief Financial
- ------------------------------ (Principal Financial
Garry D. Kline Officer)
/s/ ROBERT A. GRIMES Director March 20, 1998
- ------------------------------
Robert A. Grimes
/s/ LEE YIP LOI Director March 20, 1998
- ------------------------------
Lee Yip Loi
/s/ CHAN WEE PIAK Director March 20, 1998
- ------------------------------
Chan Wee Piak
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Radyne Corp.
Phoenix, Arizona
We have audited the accompanying balance sheets of Radyne Corp. (the "Company")
as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' capital deficiency and cash flows for the year ended December 31,
1997, the six-month period ended December 31, 1996, the year ended June 30, 1996
and the six and one- half-month period ended June 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for the year ended
December 31, 1997, the six-month period ended December 31, 1996, the year ended
June 30, 1996 and the six and one-half-month period ended June 30, 1995 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 4, 1998
Phoenix, Arizona
F-1
<PAGE>
RADYNE CORP.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 569,692 $ 186,488
Accounts receivable--trade, net of allowance for doubtful accounts of $15,000
(1997) and $13,000 (1996)...................................................... 2,359,443 2,733,902
Inventories (Note 3)............................................................. 5,389,920 1,991,360
Prepaid expenses................................................................. 68,076 19,280
Deferred offering costs.......................................................... 75,018
------------- -------------
Total current assets........................................................... 8,387,131 5,006,048
------------- -------------
PROPERTY AND EQUIPMENT--NET (NOTES 4 AND 8)........................................ 1,322,551 849,564
------------- -------------
OTHER ASSETS:
Designs and drawings--net of accumulated amortization of $705,404 (1997) and
$475,696 (1996)................................................................ 471,935 701,643
Deposits......................................................................... 50,000 15,662
------------- -------------
Total other assets............................................................. 521,935 717,305
------------- -------------
TOTAL.............................................................................. $ 10,231,617 $ 6,572,917
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY CURRENT LIABILITIES
Note payable under line of credit agreement (Note 7)............................. $ 5,000,000 $ 1,993,820
Notes payable to affiliates (Note 6)............................................. 6,600,000
Obligations under capital leases (Note 8)........................................ 109,258 53,042
Accounts payable--trade.......................................................... 667,202 805,279
Accounts payable--affiliate...................................................... 16,062 436,362
Accrued expenses (Notes 5 and 6)................................................. 901,032 926,956
Taxes payable (Note 2)........................................................... 38,720 42,116
------------- -------------
Total current liabilities...................................................... 6,732,274 10,857,575
NOTE PAYABLE UNDER LINE OF CREDIT AGREEMENT (NOTES 6 AND 7)........................ 4,500,000
OBLIGATIONS UNDER CAPITAL LEASES (NOTE 8).......................................... 93,543 81,016
TAXES PAYABLE (NOTE 2)............................................................. 55,861 80,952
------------- -------------
Total liabilities.............................................................. 11,381,678 11,019,543
------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 7, 9 AND 12) STOCKHOLDERS' CAPITAL
DEFICIENCY (NOTES 2 AND 13):
Common stock, $.002 par value--authorized, 20,000,000 shares; issued and
outstanding, 5,931,346 shares (1997) and 3,759,721 shares (1996)............... 11,862 7,519
ADDITIONAL PAID-IN CAPITAL....................................................... 5,694,806 605,782
ACCUMULATED DEFICIT.............................................................. (6,816,643) (5,059,927)
NOTES RECEIVABLE FROM STOCKHOLDERS (NOTE 6)...................................... (40,086)
------------- -------------
Total stockholders' capital deficiency......................................... (1,150,061) (4,446,626)
------------- -------------
TOTAL.............................................................................. $ 10,231,617 $ 6,572,917
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
RADYNE CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX AND ONE-
SIX-MONTH HALF-MONTH
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales (Notes 6 and 11).................................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $1,861,262
Cost of Sales (Note 6)...................................... 8,022,262 4,052,433 2,559,350 1,228,747
------------- ------------- ------------- ------------
Gross Profit............................................ 5,424,590 852,626 1,270,173 632,515
Operating Expenses:
Selling, general and administrative (Note 6).............. 4,242,138 1,437,971 1,843,576 961,162
Asset impairment charge (Note 1).......................... 421,000
Research and development.................................. 2,262,066 808,025 1,794,823
------------- ------------- ------------- ------------
Total Operating Expenses.................................... 6,504,204 2,666,996 3,638,399 961,162
------------- ------------- ------------- ------------
Loss from operations before interest expense................ (1,079,614) (1,814,370) (2,368,226) (328,647)
Interest Expense--Net (Note 6).............................. 677,102 255,604 256,871 36,209
------------- ------------- ------------- ------------
Net loss.................................................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Basic and diluted net loss per common share (Note 1)........ $ (.35) $ (.55) $ (.70) $ (.10)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Weighted average number of common shares outstanding........ 5,012,664 3,750,699 3,742,227 3,729,721
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
See notes to financial statements
F-3
<PAGE>
RAYDYNE CORP.
STATEMENTS OF STOCKHOLDERS' CAPITAL DEFICIENCY
YEAR ENDED DECEMBER 31, 1997,
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF MONTH PERIOD ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- PAID-IN FROM
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS TOTAL
---------- --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 16, 1994 (Note
1)................................ 3,729,721 $ 7,459 $ 545,842 $ 553,301
Net loss.......................... $ (364,856) (364,856)
---------- --------- ------------ ------------ ------------
BALANCE, JUNE 30, 1995.............. 3,729,721 7,459 545,842 (364,856) 188,445
Shares issued to Merit Microwave
(Note 6)........................ 20,000 40 39,960 40,000
Net loss.......................... (2,625,097) (2,625,097)
---------- --------- ------------ ------------ ------------
BALANCE, JUNE 30, 1996.............. 3,749,721 7,499 585,802 (2,989,953) (2,396,652)
Additional shares issued to Merit
Microwave (Note 6).............. 10,000 20 19,980 20,000
Net loss.......................... (2,069,974) (2,069,974)
---------- --------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996.......... 3,759,721 7,519 605,782 (5,059,927) (4,446,626)
Issuance of common stock-net of
issuance costs of $335,696...... 2,171,625 4,343 5,089,024 5,093,367
Promissory notes received in
connection with issuance of
stock (Note 6).................. $ (40,086) (40,086)
Net loss.......................... (1,756,716) (1,756,716)
---------- --------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997.......... 5,931,346 $ 11,862 $ 5,694,806 $ (6,816,643) $ (40,086) $ (1,150,061)
---------- --------- ------------ ------------ ------------
---------- --------- ------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
RADYNE CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX AND ONE
YEAR SIX-MONTH YEAR HALF-MONTH
ENDED PERIOD ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(1,756,716) $(2,069,974) ($2,625,097) $ (364,856)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of assets.............................. 2,122
Depreciation and amortization........................... 454,183 177,535 276,913 147,523
Asset impairment charge................................. 421,000
Changes in operating assets and liabilities:
Accounts receivable....................................... 374,459 (2,450,031) 251,806 (202,687)
Bankruptcy claims escrow.................................. 106,613
Prepaids and other current assets......................... 26,222 (73,872) 73,581 99,534
Employee relocation incentives and advances............... 112,353 (109,353)
Inventories............................................... (3,398,560) (840,691) (247,843) (353,686)
Deposits.................................................. (34,338) (7,650) (191,796)
Accounts payable--trade................................... (138,077) 339,848 (113,243) 284,495
Accounts payable--affiliate............................... (420,300) 436,362
Accrued expenses.......................................... (25,924) 545,990 (253,337) (348,004)
Taxes payable............................................. (28,487) (24,053) (56,063) (6,093)
------------ ------------ ----------- ------------
Net cash used in operating activities................... (4,945,416) (3,545,536) (2,580,930) (938,310)
------------ ------------ ----------- ------------
Cash flows from investing activities--Capital expenditures.... (593,072) (255,118) (388,770) (119,042)
------------ ------------ ----------- ------------
Cash flows from financing activities:
Net borrowings from notes payable under line of credit
agreements................................................ 7,506,180 1,993,820
Proceeds from notes payable to affiliates................... 4,600,000 6,600,000 3,052,912 853,206
Payments on note payable to affiliate....................... (11,200,000) (4,594,696)
Net proceeds from sale of common stock...................... 5,053,281
Principal payments on capital lease obligations............. (37,769) (12,953) (84,350) (50,143)
------------ ------------ ----------- ------------
Net cash provided by financing activities............... 5,921,692 3,986,171 2,968,562 803,063
------------ ------------ ----------- ------------
Net increase (decrease) in cash............................... 383,204 185,517 (1,138) (254,289)
Cash and cash equivalents, beginning of period................ 186,488 917 2,109 256,398
------------ ------------ ----------- ------------
Cash and cash equivalents, end of period...................... $ 569,692 $ 186,488 $ 971 $ 2,109
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Supplemental disclosures of cash flow information--Cash paid
for interest................................................ $ 687,626 $ 72,258 $ 3,996 $ 7,059
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Supplemental disclosures of noncash investing and financing
activities:
The Company incurred capital lease obligations of $106,512
and $85,887 for new machinery and equipment for the year
ended December 31, 1997 and the six-month period ended
December 31, 1996, respectively...........................
In December 1996, the Company issued an additional 10,000
shares of common stock in conjunction with the asset
purchase from Merit Microwave, Inc. (Note 6)..............
</TABLE>
See notes to financial statements.
F-5
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business--Radyne Corp. (the "Company" or "Radyne") is located
in Phoenix, Arizona and designs, manufactures, and sells products, systems, and
crsoftware used for the transmission and reception of data over satellite and
cable communication networks.
Upon emergence from bankruptcy proceedings on December 16, 1994 (Note 2),
the Company became a majority-owned subsidiary of Radyne, Inc., which was a
wholly-owned subsidiary of Engineering and Technical Services, Inc. ("ETS"). On
August 12, 1996, Singapore Technologies Pte Ltd. ("STPL") acquired 100 percent
of the outstanding common stock of ETS through its indirect wholly owned
subsidiary, Stetsys US, Inc. ("ST"). The purchase price for the ETS stock was
$5,756,425. Subsequent to the acquisition of ETS by ST, Radyne, Inc. was merged
into ETS, which in turn distributed all of its Radyne shares to ST. ETS did not
push down any related purchase accounting adjustments since its ownership in the
Company was less than 95 percent. As a result, the accompanying financial
statements continue to reflect the historical accounts of the Company. The
Company changed its fiscal year-end to December 31 to conform to the year-end of
ST.
UNAUDITED SUMMARIZED FINANCIAL INFORMATION
Change in Fiscal Year--Effective August 12, 1996, the Company changed its
fiscal year-end from June 30 to December 31, to conform to the year-end of ST.
Summarized unaudited financial information for the six-months ended December 31,
1995 is as follows:
<TABLE>
<CAPTION>
UNAUDITED
------------
<S> <C>
Net sales....................................................................... $ 2,397,235
Gross profit.................................................................... 921,951
Net loss before income taxes.................................................... (583,887)
Income taxes.................................................................... --
Net loss........................................................................ (583,887)
Net loss per common share....................................................... (0.16)
</TABLE>
Rights Offering--In November 1996, the Board of Directors approved the
distribution to stockholders, other than the Company's principal stockholder,
ST, of subscription rights for the purchase of up to 215,833 shares of the
Company's common stock at a price of $2.50 per share. The Board of Directors
further approved the distribution of subscription rights to an affiliate of ST
to purchase up to 2,040,000 shares of the Company's common stock at a price of
$2.50 per share. This Rights Offering became effective on May 12, 1997 and was
concluded in June. ST's affiliate exercised 1,976,000 of its rights and
individuals associated with such affiliate exercised another 34,000. An
additional 51,525 rights issued to stockholders other than ST were exercised. In
a related offering under the Company's Incentive Stock Option Plan, 110,100
shares of the Company's common stock were purchased by employees at $2.50 per
share. Total proceeds received from the Rights Offering were partially offset by
approximately $336,000 of associated costs. The proceeds from the exercise of
these rights were used, in part, to satisfy notes payable to affiliates shown on
the accompanying balance sheet at December 31, 1996.
F-6
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Equivalents--The Company considers all money market accounts with a
maturity of 90 days or less to be cash equivalents.
Revenue Recognition--The Company recognizes revenue upon shipment of
product.
Inventories, consisting of satellite modems and related products, are valued
at the lower of cost (first-in, first-out) or market, including material, direct
labor, and overhead costs.
Property and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to operations as incurred, and improvements which extend
the useful lives of the assets are capitalized. Depreciation and amortization of
machinery and equipment are computed using the straight-line method over an
estimated useful life of three to seven years.
Designs and Drawings--The valuation of designs and drawings is the result of
adjustments made by the Company to adopt Fresh Start reporting in accordance
with AICPA Statement of Position ("SOP") 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, and represents the excess
reorganization value that has been applied to the acquired technology supporting
the Company's products (Note 2). Amortization of designs and drawings is
computed using the straight-line method over an estimated useful life of four to
seven years.
At December 31, 1996, the Company recognized a design and drawing impairment
charge of $421,000, with no associated tax benefit. With the introduction of new
products in October 1996, management determined that a portion of the technology
related to the original designs and drawings would be phased out or modified
with technology used in new products. Impairment was determined by comparing the
amount of undiscounted projected future cash flows attributable to each product
using the related technology to the carrying value of the asset. Projected
future cash flows were estimated for a period approximating the estimated
remaining lives of the long lived assets, based on products' earnings history,
market conditions and assumptions reflected in internal operating plans and
strategies.
Research and Development--The cost of research and development is charged to
expense as incurred.
Income Taxes--Radyne will file a consolidated federal income tax return with
ETS and ST through June 1997 (conclusion of the Rights Offering). Subsequent to
June 1997, Radyne will file separate federal income tax returns. Income taxes
have been computed as if the Company filed separate income tax returns for each
year. The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
consequences attributed to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Differences between income for financial and tax reporting
purposes arise primarily from amortization of certain designs and drawings and
accruals for warranty reserves and compensated absences. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-7
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk--The Company maintains ongoing credit
evaluations of its customers and generally does not require collateral. The
Company provides reserves for potential credit losses and such losses have not
exceeded management's expectations.
Net Loss Per Common Share--The Company presents earnings per share in
accordance with Statement of Financial Standards No. 128, Earnings per Share
("SFAS No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per
share, which is calculated utilizing only weighted average common shares
outstanding, and a diluted earnings per share which gives effect to all dilutive
potential common shares outstanding during the reporting periods. Per share
amounts have been adjusted to reflect a 1- for-5 reverse stock split that
occurred on January 9, 1997.
Fair Value of Financial Instruments--The fair value of accounts receivable,
accounts payable, and accrued expenses approximates the carrying value due to
the short-term nature of these instruments. Management has estimated that the
fair values of the notes payable, capital lease obligations, and taxes payable
approximate the current balances outstanding, based on currently available rates
for debt with similar terms.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the financial statement
date and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
New Accounting Pronouncements--The Financial Accounting Standards Board has
issued SFAS No. 131 on Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. This standard requires that public companies report certain
information about operating segments in their financial statements. It also
establishes related disclosures about products and services, geographic areas,
and major customers. The Company is currently evaluating what impact this
standard will have on its disclosures.
2. REORGANIZATION
On December 16, 1994, the Bankruptcy Court confirmed the Predecessor
Company's Plan of Reorganization effective at the close of business on December
16, 1994. Under the Plan of Reorganization, tax claims were rescheduled for
quarterly payments totaling approximately $9,600, with interest at 7 percent
through September 2000.
Under the provision of SOP 90-7, Radyne Corp., the Successor Company, was
required to adopt Fresh Start reporting as of the close of business on December
16, 1994, because the reorganization value of the Predecessor Company was less
than the total of all post-petition liabilities and prepetition allowed claims,
and the preconfirmation stockholders retained less than 50 percent of the
Successor Company's common stock.
F-8
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
3. INVENTORIES
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Raw materials and components...................................... $ 2,605,397 $ 1,108,019
Work-in-process................................................... 1,124,929 792,119
Finished goods.................................................... 1,950,594 577,222
Valuation allowance............................................... (291,000) (486,000)
------------ ------------
Total............................................................. $ 5,389,920 $ 1,991,360
------------ ------------
------------ ------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Machinery and equipment............................................. $ 1,298,715 $ 731,778
Furniture and fixtures.............................................. 373,548 243,559
------------ ----------
Total............................................................... $ 1,672,263 975,337
Less accumulated depreciation....................................... 349,712 125,773
------------ ----------
Property and equipment--net......................................... $ 1,332,551 $ 849,564
------------ ----------
------------ ----------
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Wages and related payroll taxes....................................... $ 486,840 $ 356,624
Interest.............................................................. 183,968 194,492
Professional fees..................................................... 85,500 171,000
Warranty reserve...................................................... 105,000 139,775
Other................................................................. 39,724 65,065
---------- ----------
Total accrued expenses................................................ $ 901,032 $ 926,956
---------- ----------
---------- ----------
</TABLE>
6. RELATED PARTY TRANSACTIONS
In June 1995, the Company acquired certain assets of Merit Microwave, Inc.
("Merit"), as well as the manufacturing rights to the Merit line of microwave
products, which include translators and frequency converters. The purchase price
of approximately $120,000 was allocated to inventory and machinery and
equipment, and was paid by the issuance of 30,000 shares of the Company's stock
($40,000), cash of $60,000, and the assumption of a payable of $20,000. Under
the terms of the agreement, the Company is
F-9
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
6. RELATED PARTY TRANSACTIONS (CONTINUED)
required to pay royalties to Merit of 5-10 percent on certain sales of microwave
products. From June 1995 to December 31, 1997, the Company paid royalties of
$10,200.
In July 1995, the Company's manufacturing operations were moved to ETS
pending the Company's relocation to Phoenix. As a result, the Company
transferred $726,345 of inventory and $115,155 of machinery and equipment to ETS
in exchange for an equal reduction in a loan payable to ETS, to facilitate the
commencement of subcontract manufacturing by ETS. During September 1996, in
recognition of the completion of the move to Phoenix and increase in staffing,
the Board of Directors determined that the Company should resume direct
manufacturing. To this end, the Company repurchased $22,100 of machinery and
equipment from ETS and was obligated to purchase $348,000 of inventory from ETS,
which ETS had acquired and or processed in the ordinary course of fulfilling
purchase orders from the Company. However, as the Company's products were
undergoing constant improvement, in September 1996, the Company considered it
necessary to treat $70,000 of such inventory as obsolete and another $20,000
thereof as slow-moving. Ongoing product development rendered another $90,000 of
this inventory obsolete shortly thereafter. Additional inventory of $457,000 and
$2,461,500 was purchased from ETS during the six-month period ended December 31,
1996 and the year ended June 30, 1996, respectively.
Sales to ETS for the year ended December 31, 1997, the six-month period
ended December 31, 1996, the year ended June 30, 1996 and the six and
one-half-month period ended June 30, 1995 were $152,500, $307,300, $311,600 and
$159,700, respectively.
Sales to Agilis Communication Technologies Pte Ltd. ("Agilis"), an affiliate
of ST, amounted to $540,000, $375,000 and $118,900 for the year ended December
31, 1997, the six-month period ended December 31, 1996 and the year ended June
30, 1996, respectively.
Prior to 1997, ETS provided management services to Radyne, for which ETS
charged Radyne $60,000, $120,000 and $65,000 for the six-month period ended
December 31, 1996, the year ended June 30, 1996 and the six and one-half-month
period ended June 30, 1995, respectively. Interest expense on notes payable to
affiliates was $148,000, $205,900 and $248,400 for the year ended December 31,
1997, the six-month period ended December 31, 1996 and the year ended June 30,
1996, respectively, of which $-0-and $152,400 were included in accrued expenses
in the accompanying balance sheet as of December 31, 1997 and 1996,
respectively.
Subsequent to December 31, 1997, an ST affiliate made loans of $5,118,272 to
the Company. The loans bear interest at 6.844 percent per annum with the
principal and accrued interest due in February 1999. The proceeds of the loan
were used in part by the Company to repay a note payable under a line of credit
agreement which was outstanding as of December 31, 1997 (Note 7).
The Company has notes receivable from stockholders totaling $40,086. These
notes bear interest at 4 percent and are due June 20, 1998.
F-10
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
7. NOTES PAYABLE
The Company had a note payable under a line of credit agreement with a bank
that permitted outstanding borrowings of $4,500,000. At December 31, 1997,
outstanding borrowings against the line were $4,500,000 plus accrued interest.
Subsequent to December 31, 1997, the Company repaid the note and accrued
interest with proceeds from affiliated debt (Note 6).
The Company has a $5,500,000 credit agreement with a bank that includes
$5,000,000 available under an uncommitted line of credit facility and facilities
for bank guarantees and/or standby letters of credit up to $500,000. STPL has
issued a nonbinding letter of awareness in connection with this credit
agreement. Borrowings under the line of credit bear interest at a fluctuating
rate equal to LIBOR or alternative Citibank's Quoted Rate plus 1 percent per
annum (6.844 percent-6.938 percent as of December 31, 1997). At December 31,
1997, outstanding borrowings against the line were $5,000,000 plus accrued
interest. The credit agreement requires that the Company maintain certain
financial leverage ratios. This credit facility is an uncommitted line of credit
which the bank may modify or cancel without prior notice.
8. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases machinery and equipment under capital leases. The net
book value of the equipment, $258,536 at December 31, 1997 and $146,958 at
December 31, 1996, is included in property and equipment in the accompanying
balance sheets and is being depreciated over the estimated useful lives of the
machinery and equipment.
Payments on capital lease obligations at December 31 are due as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 121,951
1999.............................................................. 81,453
2000.............................................................. 10,275
---------
Total minimum lease payments...................................... 213,679
Less amount representing interest................................. 10,878
---------
Present value of minimum lease payments........................... 202,801
Less current portion.............................................. 109,258
---------
Capital lease obligations due after one year...................... $ 93,543
---------
---------
</TABLE>
9. COMMITMENTS
Rent expense was approximately $94,000, $44,000, $95,000 and $57,000 for the
year ended December 31, 1997, the six-month period ended December 31, 1996, the
year ended June 30, 1996 and the six and one-half-month period ended June 30,
1995, respectively. During 1997, the Company entered into an agreement to lease
a new building which is scheduled to be ready for occupancy in June 1998. Future
minimum rentals under leases, including the new building lease, at December 31
are as follows:
F-11
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
9. COMMITMENTS (CONTINUED)
<TABLE>
<S> <C>
1998............................................................ $ 351,000
1999............................................................ 548,200
2000............................................................ 564,600
2001............................................................ 581,500
2002............................................................ 599,000
Thereafter...................................................... 3,568,400
---------
Total........................................................... $6,212,700
---------
---------
</TABLE>
10. INCOME TAXES
The following summary reconciles taxes (recovery) from operations at the
federal statutory rate with the actual provision (recovery):
<TABLE>
<CAPTION>
SIX AND
SIX-MONTH ONE-HALF-
YEAR PERIOD YEAR MONTH PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
Income taxes (recovery) at statutory
rate.............................. $ (597,000) $ (704,000) $ (893,000) $ (124,000)
Increase (decrease) in income taxes
(recovery) resulting from:
State income tax benefit............ (64,000) (75,000) (95,000)
Change in valuation allowance....... 613,000 775,000 988,000 117,600
Other adjustments................... 48,000 4,000 -- 6,400
------------ ------------ ----------- -------------
Total............................... $ -- $ -- $ -- $ --
------------ ------------ ----------- -------------
------------ ------------ ----------- -------------
</TABLE>
Deferred tax assets consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Gross deferred tax assets:
Cumulative tax effect of net operating loss carryforwards......... $ 4,620,000 $ 3,930,000
Tax credits....................................................... 210,000 210,000
Temporary differences............................................. (107,000) (30,000)
Valuation allowance............................................... (4,723,000) (4,110,000)
------------ ------------
Total............................................................. $ -- $ --
------------ ------------
------------ ------------
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $12,278,000 expiring in various years through 2013 and general
business credit carryforwards of $210,000
F-12
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
10. INCOME TAXES (CONTINUED)
expiring in various years through 2004 for utilization against taxable
income/taxes payable of future periods, if any. Approximately $6,200,000 of the
Company's net operating loss and tax credit carryforwards are subject to an
annual limitation under Internal Revenue Code Section 382, in future years, as a
result of changes in ownership of the Company's stock. Management believes that
the inability to utilize net operating loss and tax credit carryforwards to
offset future taxable income within the carryforward periods under existing tax
laws and regulations is more likely than not. Accordingly, a 100 percent
valuation allowance has been recorded against the net deferred tax asset as of
December 31, 1997 and 1996.
11. SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to significant customers as a percentage of net sales are as follows:
<TABLE>
<CAPTION>
SIX-MONTH SIX AND
YEAR PERIOD ONE-HALF- YEAR MONTH PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1997 1996 1996 1995
--------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Customer A............................ 2.5% 1.6% 6.4% 22.0%
Customer B............................ 1.1% -- -- 15.3%
Customer C............................ 1.1% 6.3% 8.1% 14.2%
Customer D............................ 2.7% 15.6% 12.7% 11.7%
Customer E............................ 2.2% 18.3% -- --
Customer F............................ 14.5% -- -- --
</TABLE>
No other customers represented greater than 10 percent of net sales during
the year ended December 31, 1997, the six-month period ended December 31, 1996,
the year ended June 30, 1996 and the six and one-half- month period ended June
30, 1995.
Export sales were 55 percent, 66 percent, 50 percent and 46 percent of net
sales for the year ended December 31, 1997, the six-month period ended December
31, 1996, the year ended June 30, 1996 and the six and one-half-month period
ended June 30, 1995, respectively. Net sales to Asia, Latin America and Europe
were 58 percent, 22 percent and 13 percent, respectively, of total export sales
for the year ended December 31, 1997. Net sales to Asia and Latin America were
46 percent and 37 percent, respectively, of total export sales for the six-month
period ended December 31, 1996. Net sales to Asia and Europe were 46 percent and
38 percent, respectively, of total export sales for the year ended June 30,
1996.
12. EMPLOYEE BENEFIT PLAN
The Company has a qualified contributory 401(k) plan that covers all
employees who have attained the age of 18 and are employed at the enrollment
date. Matching contributions were $30,230, $8,576, $11,606 and $1,159 for the
year ended December 31, 1997, the six-month period ended December 31, 1996, the
year ended June 30, 1996 and the six and one-half-month period ended June 30,
1995, respectively. Each participant may elect to contribute up to 15 percent of
his or her gross compensation up to the
F-13
<PAGE>
RADYNE CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SIX-MONTH PERIOD ENDED DECEMBER 31, 1996,
YEAR ENDED JUNE 30, 1996 AND
SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995
12. EMPLOYEE BENEFIT PLAN (CONTINUED)
maximum amount allowed by the Internal Revenue Service. The Company matches up
to 1 percent of the employee's salary.
13. STOCK OPTIONS
In November 1996, the Board of Directors adopted the 1996 Incentive Stock
Option Plan (the "Plan"), which was approved by the stockholders on January 8,
1997. The Plan provides for the grant of options to employees of the Company to
purchase up to 1,282,042 shares of common stock. The option price per share
under the Plan may not be less than the fair market value of the stock (110
percent of the fair market value for an optionee who is a 10 percent
stockholder) on the day the option is granted.
At December 31, 1997, the Company had 690,665 options outstanding at an
exercise price of $2.50 per share. 30,500 options are exercisable at the rate of
25 percent on each of the first four anniversaries of the grant date and expire
on the tenth anniversary of the grant date. The remaining 660,165 options have
been allocated among a group of 30 key employees. These options carry the right
to a cash bonus of $1.72 per purchased share, payable upon exercise. One-third
of these options will become exercisable, if and when the Company's earnings
before interest and taxes (calculated without regard to any charge for
compensation paid or payable under the Plan) for a period of four calendar
quarters ("EBIT") exceeds $1,000,000. Another one-third of these options will
become exercisable if and when EBIT exceeds $2,500,000 with the remaining
one-third becoming exercisable if and when EBIT exceeds $6,000,000. The options
become exercisable if EBIT exceeds the aforementioned prior to June 30, 2001.
All options which become exercisable expire in November 2006.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its Plan. The 660,165 options are
considered variable options, as defined by the provisions of APB No. 25 and
related interpretations. The Company will start recognizing compensation cost on
variable arrangements when the future events become probable of occurring. The
accrual of compensation cost under the variable arrangement has not commenced as
it is unlikely that the award will be earned in the near future due to
significant historical losses incurred by the Company. Accordingly, no
compensation cost has been recognized for the fixed or variable portions of the
Plan. Had compensation cost for the Plan been determined consistent with
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company's pro forma net loss and loss per common share for the
year ended December 31, 1997 would have been $2,028,121 and $.40, respectively.
The Company's pro forma net loss and loss per common share for the six-month
period ended December 31, 1996 would have been $2,115,074 and $.56,
respectively. The fair value of options granted under the Plan was estimated on
the date of grant with vesting periods ranging from two to four years using the
Black-Scholes option-pricing model with the following weighted average
assumptions used: no dividend yield, expected volatility of 118 percent-132
percent, risk free interest rate of 5.87 percent-6.83 percent, and expected
lives of five years.
Subsequent to December 31, 1997, the Company granted additional options to
employees to purchase 204,000 shares of common stock at an exercise price of
$2.50.
F-14
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EXHIBIT 10.3
LEASE AGREEMENT
BASIC LEASE INFORMATION
Date: November 11, 1997
Landlord: OMB Development I, L.L.C., an
Arizona limited liability company
Tenant: Radyne Corp., a New York corporation
Premises (Section 1.1): The building to be constructed on the
property by Landlord pursuant to this
Lease, containing approximately 75,000
square feet (more or less) of building
area
Property (Section 1.1): Lots 1 and 2 of Southbank 7 and 8 as shown
in Exhibit "A", containing approximately
208,000 square feet (more or less),
located in Phoenix, Arizona
Parking Spaces (Section 1.1): Two hundred ninety-five (295) exclusive
spaces for cars
Term (Section 2.1): Ten (10) years
Extension Terms (Section 2.4): Two (2) five (5) year renewal options
Commencement Date (Section 2.1): As defined in Section 2.1
Expiration Date (Section 2.1): As defined in Section 2.1
Base Rent (Section 4.1 (a)): $538,728 per year ($44,894 per month), as
increased annually pursuant to Section 4.2
Tenant Improvement Charge As defined in Section 2.2
(Section 2.2):
Tenant's Percentage Share
(Section 4.1(b)): 100%
Security Deposit (Section 2.1): $50,000.00
Rent Payment Address (Section 4.7): 8607 N. Timberlane Drive
Scottsdale, Arizona 85258
Permitted Use of the Premises Design, engineering and assembly of
satellite (Section 5.1): modems, frequency
converters and ancillary products and
related office uses
Liability Insurance (Section 9.3
and 9.8): $2,000,000
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Landlord's Address (Section 18.1): 8607 N. Timberlane Drive
Scottsdale, Arizona 85258
Tenant's Address (Section 18.1): Radyne Corp., at the address of the
Premises.
Real Estate Brokers (Section 19.5): CB Commercial Real Estate
Exhibit "A" - Plan (s) Outlining the Premises and the Property
Exhibit "B" - Work Letter
Exhibit "C" - Memorandum Confirming Term
Exhibit "D" - Subordination, Non-Disturbance and Attornment Agreement
Exhibit "E" - Estoppel Certificate
The foregoing Basic Lease Information is incorporated in and made a
part of the Lease to which it is attached. If there is any conflict between the
Basic Lease Information and the Lease, the Basic Lease Information shall
control.
OMB DEVELOPMENT I, L.L.C, RADYNE CORP.,
an Arizona limited liability company a New York corporation
By: /s/ Harold H. Benware By: /s/ R.C. Fitting
------------------------- ------------------
Its: Manager Its: President
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TABLE OF CONTENTS
ARTICLE PAGE
ARTICLE 1 Premises...................................................1
1.1 Lease of Premises..........................................1
ARTICLE 2 Term.......................................................1
2.1 Term of Lease..............................................1
2.2 Landlord's Work............................................2
2.3 Adjustment of Commencement Date............................2
2.4 Extension Option...........................................2
2.5 Holding Over...............................................3
2.6 Lease Year.................................................3
ARTICLE 3 Security Deposit...........................................3
3.1 Security Deposit...........................................3
3.2 Application of Security Deposit............................3
ARTICLE 4 Rent.......................................................4
4.1 Base Rent and Additional Rent..............................4
4.2 Base Rent Increase.........................................4
4.3 Late Payment...............................................4
4.4 Taxes Payable by Tenant....................................5
4.5 Rent Payable Address.......................................5
ARTICLE 5 Use of Premises............................................6
5.1 Permitted Use..............................................6
5.2 Rules and Regulations......................................6
ARTICLE 6 Utilities and Services ....................................6
6.1 Tenant's Responsibilities..................................6
6.2 Abatement of Rent When Tenant Is Prevented
From Using Premises........................................7
ARTICLE 7 Maintenance and Repairs....................................8
7.1 Quality of Construction - Standard for
Maintenance, Repairs and Operations........................8
7.2 Obligations of Landlord....................................8
7.3 Obligations of Tenant......................................9
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ARTICLE PAGE
ARTICLE 8 Alterations by Tenant......................................10
8.1 No Alterations by Tenant...................................10
8.2 Landlord's Property........................................11
ARTICLE 9 Indemnification and Insurance..............................12
9.1 Landlord's Indemnification.................................12
9.2 Tenant's Indemnification...................................12
9.3 Tenant's Liability Insurance...............................12
9.4 Worker's Compensation Insurance............................13
9.5 Property Insurance.........................................13
9.6 General Requirements.......................................13
9.7 Waiver of Subrogation......................................14
9.8 Landlord's Liability Insurance.............................14
9.9 Exculpation of Members.....................................14
ARTICLE 10 Property Taxes.............................................15
10.1 Property Taxes.............................................15
ARTICLE 11 Compliance With Legal Requirements.........................16
11.1 Comply With Law............................................16
ARTICLE 12 Assignment or Sublease.....................................16
12.1 Prohibition................................................16
12.2 Landlord's Consent or Termination..........................17
12.3 Completion.................................................17
12.4 Tenant Not Released........................................17
ARTICLE 13 Entry by Landlord..........................................18
13.1 Entry......................................................18
ARTICLE 14 Event of Default and Remedies..............................18
14.1 Default by Tenant..........................................18
14.2 Termination................................................19
14.3 Continuation...............................................20
14.4 Remedies Cumulative........................................20
14.5 Tenant's Primary Duty......................................20
14.6 Abandoned Property.........................................20
14.7 Landlord Default...........................................21
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ARTICLE PAGE
ARTICLE 15 Damage or Destruction......................................21
15.1 Restoration................................................21
15.2 Termination of Lease.......................................21
ARTICLE 16 Eminent Domain.............................................22
16.1 Condemnation...............................................22
16.2 Award......................................................22
16.3 Definition of Taking.......................................23
ARTICLE 17 Subordination and Sale.....................................23
17.1 Subordination..............................................23
17.2 Sale of Property...........................................24
ARTICLE 18 Estoppel Certificate.......................................24
18.1 Required Certificate.......................................24
ARTICLE 19 Notices....................................................25
19.1 Method.....................................................25
ARTICLE 20 Miscellaneous..............................................25
20.1 General....................................................25
20.2 No Waiver..................................................25
20.3 Attorney's Fees............................................26
20.4 Exhibits...................................................26
20.5 Brokers....................................................26
20.6 Entire Agreement...........................................26
20.7 Duty to Act Reasonably.....................................26
20.8 Days.......................................................27
20.9 Counter Parts..............................................27
20.10 Arbitration................................................27
ARTICLE 21 Hazardous Materials........................................27
21.1 Definition of Hazardous Materials..........................27
21.2 Definition of Environmental Requirements...................27
21.3 Prohibited Activities......................................28
21.4 Notice of Violations.......................................28
21.5 Tenant Indemnification.....................................28
21.6 Landlord Indemnification...................................29
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ARTICLE PAGE
21.7 Permitted Activities.......................................29
ARTICLE 22 Fair Market Rental Rate....................................29
22.1 Determination of Fair Market Rental Rate...................29
ARTICLE 23 Guaranty...................................................32
23.1 Guaranty...................................................32
23.2 Authorization..............................................33
23.3 Waiver.....................................................33
Exhibit A - Plan (s) Outlining the Property
Exhibit B - Work Letter
Exhibit C - Memorandum Confirming Term
Exhibit D - Subordination, Non-Disturbance and Attornment Agreement
Exhibit E - Estoppel Certificate
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<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT is made as of November 11, 1997, by and between OMB
DEVELOPMENT I, L.L.C., an Arizona limited liability company ("Landlord") and
RADYNE CORP., a New York corporation ("Tenant").
WITNESSETH:
ARTICLE 1
PREMISES
1.1 LEASE OF PREMISES. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, for the term and subject to the covenants
hereinafter set forth, to all of which Landlord and Tenant hereby agree, the
space in the building specified in the BASIC LEASE INFORMATION ("Premises"), on
the real property specified in the BASIC LEASE INFORMATION ("Property"), as
shown on the plan (s) attached hereto as Exhibit "A" and by this reference
incorporated herein. The Premises shall have located thereon two hundred
ninety-five (295) exclusive parking spaces for cars. Landlord and Tenant agree
that, for purposes of this Lease, the Premises and the Property, respectively,
each contains the number of square feet specified in the BASIC LEASE
INFORMATION, absent manifest error. Tenant shall be granted access to the
Premises, and the parking area twenty-four (24) hours per day, seven (7) days
per week, every day of the year.
ARTICLE 2
TERM
2.1 TERM OF LEASE. The term of this Lease shall be the term specified
in the BASIC LEASE INFORMATION, which shall commence on the date that Landlord
has (a) Substantially Completed Landlord's Work as defined in the Work Letter
attached hereto as Exhibit "B" and by this reference incorporated herein ("Work
Letter"); and (b) delivered possession of the Premises to Tenant ("Commencement
Date"); and, unless sooner terminated as hereinafter provided, this Lease shall
end on the date that is ten (10) years after the Commencement Date ("Expiration
Date"). The Commencement Date and the Expiration Date shall be adjusted pursuant
to Section 2.3 of this Lease. Notwithstanding the foregoing, if Landlord has not
Substantially Completed Landlord's Work and delivered possession of the Premises
to Tenant by June 1, 1998 ("Initial Completion Date"), Landlord shall pay to
Tenant on the actual Commencement Date an amount equal to the product of (i) One
Thousand Five Hundred and 00/100 Dollars ($1,500.00), multiplied by (ii) the
number of days following the Initial Completion Date to the date Landlord has
Substantially Completed Landlord's Work. In addition, if Landlord has not
Substantially Completed Landlord's Work by the date that is twelve (12) months
after the date of this Lease ("Outside Completion Date"), Tenant shall have the
right to terminate this Lease. The Initial Completion Date and the Outside
Completion Date shall be extended by one (1) business day for each business day
of delay in the Substantial Completion of the Premises that is caused by any
Force Majeure Delay or Tenant Delay (which terms are defined in the Work
Letter).
2.2 LANDLORD'S WORK. Landlord shall construct, and install in the
Premises, the building and improvements to be constructed and installed by
Landlord pursuant to the Work Letter. The terms Substantial Completion and
Landlord's Work shall have the meanings assigned to them in the Work Letter.
Landlord shall deliver possession of the Premises to Tenant on the date of
Substantial Completion of Landlord's Work, and Tenant shall accept such delivery
of the Premises, subject only to "punch-list" items
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(minor details of construction, mechanical adjustments or decorations which do
not materially interfere with the Tenant's use of the Premises). Landlord and
Tenant acknowledge that the Landlord's Work includes the Tenant Improvements,
which has the meaning assigned to it in the Work Letter. Landlord shall
construct and install in the Premises the Tenant Improvements and shall pay the
first One Million and 00/100 Dollars ($1,000,000.00) of the cost of the Tenant
Improvements. In the event that the Tenant Improvements cost less than One
Million and 00/100 Dollars ($1,000,000.00), Landlord shall pay to Tenant on the
actual Commencement Date an amount equal to the difference between (i) One
Million and 00/100 Dollars ($1,000,000.00), less (ii) the actual cost of the
Tenant Improvements. In the event that the Tenant Improvements exceed the sum of
One Million and 00/100 Dollars ($1,000,000.00), Tenant shall pay to Landlord as
additional rent an amount equal to (i) the difference between (a) the actual
cost of the Tenant Improvements and (b) One Million and 00/100 Dollars
($1,000,000.00), multiplied by (ii) .12 ("Annual Tenant Improvement Charge").
2.3 ADJUSTMENT OF COMMENCEMENT DATE. If the Commencement Date as
determined in accordance with Section 2.1 would not be the first day on the
month and the Expiration Date would not be the last day of the month, then the
actual Commencement Date shall be the first day of the next calendar month
following the date so determined and the actual Expiration Date shall be the
last day of the appropriate calendar month so the term of this Lease shall be
the full term specified in the BASIC LEASE INFORMATION. The period of the
fractional month between the date as determined in Section 2.1 and the actual
Commencement Date as determined in this Section 2.3 shall be on and subject to
all the covenants in this Lease and, on the date as determined in Section 2.1,
Tenant shall pay to Landlord, as additional rent, the monthly Base Rent (based
on the first month for which the Base Rent is to be paid) and all additional
rent payable under Section 4.1 hereof, calculated on a per diem basis, for such
period. Landlord and Tenant each shall, promptly after the actual Commencement
Date and the actual Expiration Date have been determined, execute and deliver to
the other a Memorandum Confirming Term in the form of Exhibit "C" attached
hereto and by this reference incorporated herein that sets forth the actual
Commencement Date and the actual Expiration Date for this Lease, but the term of
this Lease shall commence and end in accordance with this Lease whether or not
Memorandum Confirming Term is executed.
2.4 EXTENSION OPTION. Provided Tenant is not otherwise in default
under the terms of this Lease, Tenant shall have the option to renew this Lease
for two (2) consecutive terms of five (5) years each, by delivering notice to
Landlord of Tenant's option to extend at least nine (9) months, prior to the end
of the current term of this Lease, or any extension thereof. If Tenant fails to
timely deliver to Landlord notice of Tenant's option to extend, then Tenant
shall have waived its option to renew, and Tenant shall have no further right to
extend the term of this Lease. If Tenant exercises its right to extend, the term
of this Lease shall be extended for the applicable five (5) year periods and
Tenant shall continue to lease the Premises on all of the terms and conditions
of this Lease, except that: (a) the Base Rent payable by Tenant during the
renewal term(s) shall be the greater of (i) the Fair Market Rental Rate, as
defined in Article 22 hereof; or (ii) the Base Rent in effect at the expiration
of the original term of this Lease, or any extension thereof,
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whichever is applicable; and (b) after the renewal terms, Tenant shall have no
further renewal options under this Lease. Notwithstanding the foregoing, if an
Event of Default (as hereinafter defined) by Tenant occurs at any time from the
date Tenant gives Landlord notice of its option to extend up to and including
the first day of a renewal term, Landlord shall have the option of terminating
the Lease on the Expiration Date provided in the BASIC LEASE INFORMATION. In
such case, Tenant shall not be entitled to exercise its extension option.
2.5 HOLDING OVER. If Tenant holds possession of the Premises after the
expiration of the term of this Lease, or after expiration of the renewal terms
of this Lease if Tenant exercises its option to renew pursuant to Section 2.4
hereof, Tenant shall become a tenant from month to month under this Lease, but
the Base Rent during such month to month tenancy shall be equal to one hundred
fifty percent (150%) of the Base Rent in effect at the expiration of the term of
this Lease. Landlord and Tenant each shall have the right to terminate such
month to month tenancy by giving thirty (30) days' written notice of termination
to the other at any time. Receipt of any rent or any other act in apparent
affirmance of the tenancy provided for this Section 2.5 shall not operate as a
waiver of the right to terminate this Lease for breach of any terms, covenants
or obligations herein on Tenant's part to be performed.
2.6 LEASE YEAR. As used in this Lease, "Lease Year" shall mean each
period of twelve (12) months from the Commencement Date (as adjusted in
accordance with Section 2.3 hereof) during the term of this Lease.
ARTICLE 3
LETTER OF CREDIT
3.1 LETTER OF CREDIT. Tenant shall obtain and deposit with Landlord an
irrevocable letter of credit in the amount of Fifty Thousand and 00/100 Dollars
($50,000.00) ("Letter of Credit"), as partial security for Tenant's full and
faithful performance of each and every term, condition, covenant and provision
of this Lease. The Letter of Credit shall be issued by a bank qualified to do
and doing business in the state where the Premises are located and shall be in a
form acceptable to Landlord. The Letter of Credit shall provide that in the
event Tenant defaults in the performance of any term, condition, covenant or
provision hereof, Landlord may draw upon the whole or any part of the Letter of
Credit for the curing of any default or to compensate Landlord for any loss or
damage that Landlord may suffer because of Tenant's default. In no event shall
Tenant use such Letter of Credit as payment for rent or any other sum payable
under this Lease and any attempted use by Tenant of such Letter of Credit shall
constitute a material breach of this Lease.
3.2 APPLICATION OF LETTER OF CREDIT. Any use or application of the
Letter of Credit by Landlord shall be an addition to, and not substitution of or
as an alternative to, any other rights or remedies Landlord may have at law or
under this Lease, shall not prevent Landlord from pursuing its other rights and
remedies hereunder or at law or equity, and shall not prevent Landlord from
recovering damages in case of Tenant's default(s) in excess of the amount of the
Letter of Credit drawn upon. In no event shall the Letter of
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Credit be construed as a liquidation of the damages by the parties. If Landlord
draws upon any portion of the Letter of Credit, Landlord shall notify Tenant, in
writing, of the alleged default under this Lease and the amount of the Letter of
Credit drawn upon by Landlord. Not later than ten (10) days after such notice to
Tenant, Tenant shall obtain and deposit with Landlord a replacement Letter of
Credit in an amount equal to the amount drawn by Landlord on the initial Letter
of Credit, and Tenant's failure to do so shall be a material breach of this
Lease.
ARTICLE 4
RENT
4.1 BASE RENT AND ADDITIONAL RENT. Tenant shall pay to Landlord,
without offset of deduction of any nature whatsoever except as expressly set
forth in this Lease, the following amounts as rent for the Premises:
(a) During the term of this Lease, Tenant shall pay to Landlord,
as base monthly rent, the amount of monthly Base Rent
specified in the BASIC LEASE INFORMATION, as increased
annually pursuant to Section 4.2 hereof.
(b) During the term of this Lease, Tenant shall pay to Landlord as
additional rent:
i. Tenant's Percentage Share specified in the BASIC LEASE
INFORMATION of any Property Taxes (as hereinafter
defined) paid by Landlord;
ii. Tenant's Percentage Share specified in the BASIC LEASE
INFORMATION of any Insurance Costs (as hereinafter
defined) paid by Landlord; and
iii. Annual Tenant Improvement Charge.
(c) Throughout the term of this Lease, Tenant shall pay, as
additional rent, all other amounts of money and charges
required to be paid by Tenant under this Lease, whether or not
such amounts of money or charges are designated "additional
rent". As used in this Lease, "rent" shall mean and include
all Base Rent and additional rent payable by Tenant in
accordance with this Lease.
4.2 BASE RENT INCREASES. The annual Base Rent shall be adjusted on the
first anniversary date of the Commencement Date (as adjusted pursuant to Section
2.3), and on each successive anniversary date thereof during the term of this
Lease, including the renewal terms, if any (except for the first year of the
renewal term, if any, in which case the Base Rent shall be adjusted in
accordance with Section 2.4 hereof), to an amount equal to one hundred three
percent (103%) of the annual Base Rent in effect during the immediately
preceding year.
4.3 ADDITIONAL RENT PROCEDURES. The additional rent payable by Tenant
pursuant to Section 3.1(b) hereof shall be paid in accordance with the following
procedures:
(a) Within ten (10) days of receipt of its Property Tax bills and
within ten (10) days of receipt of notification of its Insurance
Costs, Landlord shall
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provide Tenant a copy of the Property Tax bills and Insurance
Costs for the Property.
(b) Tenant shall pay all Property Taxes and Insurance Costs at least
ten (10) days prior to the date such Property Taxes and Insurance
Costs become delinquent. Tenant shall promptly deliver to
Landlord evidence that the Property Taxes and Insurance Costs
have been paid. Tenant shall pay such Property Taxes and
Insurance Costs commencing with the Commencement Date (as
adjusted pursuant to Section 2.3) and throughout the term of the
Lease and the renewal terms, if any.
(c) If Tenant fails to timely pay all Property Taxes and Insurance
Costs, or fails to furnish Landlord with written evidence of the
payment of the Property Taxes and Insurance Costs, Landlord shall
have the right to pay the Property Taxes and Insurance Costs and
all Property Taxes and Insurance Costs paid by Landlord shall be
payable by Tenant as additional rent upon demand. Tenant shall
pay to Landlord, immediately upon demand, all costs incurred by
Landlord as a result of Tenant's failure to timely pay all
Property Taxes and Insurance Costs. If requested by any lender to
whom Landlord has granted a security interest in the Property, or
in the Event of Default by Tenant relative to the payment of Base
Rent or any additional monthly rent more than once in any
consecutive twelve (12) month period, Tenant shall pay to
Landlord a sum equal to one-twelfth (1/12) of the annual Property
Taxes and Insurance Costs payable by Tenant under this Lease.
(d) Tenant shall be entitled to any refund, credit or adjustment to
which Landlord is entitled.
(e) If the term of this Lease ends on a day other than the last day
of a calendar year, the amounts payable by Tenant under Section
4.1(b) hereof applicable to the calendar year in which such term
ends shall be prorated according to the ratio that the number of
days during the term of this Lease in such calendar year bears to
three hundred sixty-five (365). Termination of this Lease shall
not affect the obligations of Landlord and Tenant pursuant to
Section this 4.3 hereof to be performed after such termination.
(f) Tenant shall have the right to contest the Property Taxes, at
Tenant's cost and expense. Upon final determination of any
contest relating to the Property Taxes, Tenant shall immediately
reimburse Landlord for all Property Taxes.
4.4 LATE PAYMENT. Tenant acknowledges that the late payment by Tenant
of any monthly installment of Base Rent or additional monthly rent will cause
Landlord to incur costs and expenses, the exact amount of which is extremely
difficult and impractical to fix. Such costs and expenses will include
administration and collection costs and processing and accounting expenses.
Therefore, if any monthly installment of Base Rent or additional monthly rent is
not received by Landlord within ten (10) days after such
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installment is due, Tenant shall immediately pay to Landlord, in addition to
such rent, a late charge equal to five percent (5%) of such delinquent
installment. Landlord and Tenant agree that such late charge represents a
reasonable estimate of such costs and expenses and is fair reimbursement to
Landlord. In no event shall such late charge be deemed to grant Tenant a grace
period or extension of time within which to pay any monthly rent or prevent
Landlord from exercising any right or enforcing any remedy available to Landlord
upon Tenant's failure to pay each installment of monthly rent due under this
Lease when due, including the right to terminate this Lease and recover all
damages from Tenant.
4.5 TAXES PAYABLE BY TENANT. Tenant shall reimburse Landlord upon
demand for all taxes, assessments, excises, levies, fees and charges, including
all payments related to the cost of providing facilities or services, whether or
not now customary or within the contemplation of Landlord and Tenant, that are
payable by Landlord and levied, assessed, charged, confirmed or imposed by any
public or government authority upon, or measured by, or reasonably attributable
to (a) the cost or value of Tenant's equipment, furniture, fixtures and other
personal property located in the Premises or the cost of value of any
improvements made in or to the Premises by or for Tenant, regardless of whether
title to such improvements is vested in Tenant or Landlord, (b) any rent, taxes
and insurance payable under this Lease, including any gross income tax or excise
tax levied by any public or government authority with respect to the receipt of
any such rent, taxes and insurance, (c) possession, leasing, operation,
management, maintenance, alteration, repair, use or occupancy by Tenant of the
Premises, or (d) this transaction or any document to which Tenant is a party
creating or transferring an interest or an estate in the Premises. Such taxes,
assessments, excises, levies, fees and charges shall not include net income
(measured by the income of Landlord from all sources or from sources other than
solely rent) or franchise taxes of Landlord. All taxes, assessments, excises,
levies, fees and charges payable by Tenant under this Section 4.5 shall be
deemed to be, and shall be paid as, additional rent. Tenant shall pay directly,
prior to delinquency, any personal property taxes assessed with respect to
Tenant's trade fixtures and personal property.
4.6 RENT PAYMENT ADDRESS. Tenant shall pay all Base Rent under Section
4.1 hereof to Landlord, in advance, on or before the first day of each and every
calendar month during the term of this Lease. Tenant shall pay all additional
rent under Section 4.1 hereof to Landlord on or before the date it is due.
Tenant shall pay all rent to Landlord when due without notice, demand,
deduction, abatement or offset, except as expressly provided herein, in lawful
money of the United States of America, at the address for the payment of rent
specified in the BASIC LEASE INFORMATION, or to such other person or at such
other place as Landlord may from time to time designate in writing.
4.7 PROPERTY TAXES. For purposes of this Lease, "Property Taxes" shall
mean taxes, assessments, excises, levies, fees and charges (and any tax,
assessment, excise, levy, fee or charge levied wholly or partly in lieu thereof
or as a substitute therefor or as an addition thereto) of every kind and
description, general or special, ordinary or extraordinary, foreseen or
unforeseen, secured or unsecured, whether or not now customary or within the
contemplation of Landlord and Tenant, that are levied, assessed,
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charged, confirmed or imposed by any public or government authority on or
against, or otherwise with respect to, the Property or any part thereof or any
personal property used in connection with the Property, which are attributable
to the Property during the term of this Lease (collectively, the "Property
Taxes"). Property Taxes shall not include any of the following:
(i) Any state, federal, personal or corporate net income
taxes (measured by the income of Landlord from all sources or from
sources other than solely rent);
(ii) Any estate or inheritance taxes; and
(iii) Any franchise taxes.
4.8 INSURANCE COSTS. For purposes of this Lease, "Insurance Costs"
shall mean all premiums and other charges for all property, earthquake, flood,
loss of rental income, business interruption, liability and other insurance
relating to the Property carried by Landlord, including the insurance required
under Section 9.5 hereof.
ARTICLE 5
USE OF THE PREMISES
5.1 PERMITTED USE. The Premises shall be used only for the Permitted
Use of the Premises specified in the BASIC LEASE INFORMATION. Tenant shall not
do or permit to be done in, on or about the Premises, nor bring or keep or
permit to be brought or kept therein, anything that is prohibited by or will
conflict with any law, ordinance, rule, regulation or order now in force or that
may hereafter be enacted, or that is prohibited by any insurance policy carried
by Landlord for the Premises, or will in any way increase the existing rate of
(unless Tenant agrees to pay such increase), or disallow any fire rating or
sprinkler credit, or cause a cancellation of, or affect, any insurance for the
Premises. If Tenant causes any increase in the premium for any insurance
covering the Premises carried by Landlord, Tenant shall pay to Landlord, on
written demand as additional rent, the entire amount of such increase. Tenant
shall not do or permit anything to be done in or about the Premises that will in
any way unreasonably obstruct or unreasonably interfere with the rights of
Landlord or any other tenant. Tenant shall not use or allow the Premises to be
used for any unlawful activity, nor shall Tenant cause, maintain or permit any
nuisance in, on or about the Premises or commit or suffer to be committed any
waste in, on or about the Premises. Tenant shall not install any signs on the
Premises without the written consent of Landlord, except that Tenant shall have
the right to install a monument sign and a sign on the building, containing
Tenant's name on Tenant's customary logo format subject to statutes including
zoning ordinances, and all recorded private covenants, conditions and
restrictions. Tenant shall, at Tenant's expense, remove all such signs prior to
or upon termination of this Lease and repair any damage caused by the
installation or removal of such signs.
5.2 RULES AND REGULATIONS. Tenant shall faithfully observe and fully
comply with all reasonable, non-discriminatory rules and regulations ("Rules and
Regulations") from time to time made in writing by Landlord for the safety,
care, use and cleanliness of the
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Property and the preservation of good order therein. If there is any conflict,
this Lease shall prevail over the Rules and Regulations.
ARTICLE 6
UTILITIES AND SERVICES
6.1 TENANT'S RESPONSIBILITIES. Tenant shall pay, directly to the
appropriate supplier before delinquency, for all electricity, water, gas, heat,
light, power, telephone, sewer, refuse disposal and other utilities and services
supplied to the Premises, together with all taxes, assessments, surcharges and
similar expenses relating to such utilities and services. Tenant shall furnish,
at its cost and expense, the Premises with all telephone service, window
washing, security service, janitor, scavenger and disposal services, and other
services required by Tenant for the use of the Premises permitted by this Lease.
Tenant shall furnish, at its cost and expense all electric light bulbs and tubes
and restroom supplies used in the Premises. Landlord shall not be in default
under this Lease or be liable for any damage or loss directly or indirectly
resulting from, nor shall the rent be abated (except as provided in Section 6.2
hereof) or a constructive or other eviction be deemed to have occurred by reason
of, any interruption of or failure to supply or delay in supplying any such
utilities and services or any limitation, curtailment, rationing or restrictions
on use of water, electricity, gas or any resource or form of energy or other
service serving the Premises or the Property, whether such results from
mandatory restrictions or voluntary compliance with guidelines.
6.2 ABATEMENT OF RENT WHEN TENANT IS PREVENTED FROM USING PREMISES. In
the event that Tenant is prevented from using, and does not use, the Premises or
any portion thereof for three (3) consecutive business days or ten (10) days in
any twelve (12) month period ("Eligibility Period") as a result of any damage or
destruction to the Premises which is not caused by Tenant or any repair,
maintenance or alteration performed by Landlord after the Commencement Date and
required by the Lease which is not caused by Tenant, that materially interferes
with Tenant's use of the Premises, or any failure to provide access to the
Premises or because of an eminent domain proceeding or because of the presence
of Hazardous Materials in, on or around the Premises or the Property which is
not caused by Tenant that could, in Tenant's reasonable business judgment, pose
a health risk to occupants of the Premises then Tenant's rent shall be abated or
reduced, as the case may be, after expiration of the Eligibility Period for such
time that Tenant continues to be so prevented from using, and does not use, the
Premises or a portion thereof, in the proportion that the rentable area of the
portion of the Premises that Tenant is prevented from using, and does not use,
bears to the total rentable area of the Premises. However, in the event that
Tenant is prevented from conducting, and does not conduct, its business in any
portion of the Premises for a period of time in excess of the Eligibility
Period, and the remaining portion of the Premises is not sufficient to allow
Tenant to effectively conduct its business therein, and if Tenant does not
conduct its business from such remaining portion, then for such time after
expiration of the Eligibility Period during which Tenant is so prevented from
effectively conducting its business therein, the rent for the entire Premises
shall be abated. If Tenant's right to abatement occurs because of an eminent
domain taking and/or because of damage or destruction to the Premises or
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Tenant's property, Tenant's abatement period shall continue until Tenant has
been given sufficient time, and sufficient access to the Premises, to rebuild
the portion of the Premises it is required to rebuild, if any, to install its
property, furniture, fixtures, and equipment and to move in over one (1)
weekend. To the extent Tenant is entitled to abatement because of an event
covered by Sections 15.1 or 14.1, then the Eligibility Period shall not be
applicable. If a dispute arises between Landlord and Tenant pursuant to this
section, Landlord and Tenant shall meet and attempt in good faith to resolve
such dispute. If after such meeting, Landlord and Tenant do not reach a
resolution, either party may invite arbitration proceedings in accordance with
Section 19.10 by giving the other party written notice thereof.
ARTICLE 7
MAINTENANCE AND REPAIRS
7.1 QUALITY OF CONSTRUCTION - STANDARD FOR MAINTENANCE, REPAIRS AND
OPERATION. Landlord hereby warrants to Tenant that the Property and the Premises
to be constructed by Landlord or Landlord's contractor will be constructed and
operated in a first-class manner, free of all asbestos containing materials
("ACM") and in full compliance with all governmental regulations, ordinances,
and laws existing at the time of construction, including, but limited to, laws
pertaining to disabled access and Environmental Requirements (as hereinafter
defined) and all regulations and/or restrictions relating to the industrial
center in which the Premises is located (collectively, the "Applicable Laws").
All warranties made by Landlord's contractor or any subcontractor with respect
to the construction performed on the Property and/or Premises shall be made to
Tenant and Landlord. Landlord will be fully responsible for making all
alterations and repairs to the Property and the Premises, at Landlord's sole
cost and expense, (i) required in order to comply with the Americans with
Disabilities Act of 1990, 42 U.S.C. 12101 ET SEQ., as amended ("ADA"), (ii)
required to remove any and all ACM discovered at any time to have existed in the
Premises as of the Commencement Date, or (iii) resulting from or necessitated by
the failure by Landlord and/or Landlord's contractor to comply with the
Applicable Laws, or from Landlord's and/or Landlord's contractor's utilization
of Hazardous Materials in violation of Applicable Laws or that pose a health
risk to occupants of the Premises. Otherwise, Tenant shall maintain and operate
the Property and, subject to Landlord's repair obligations set forth in Section
7.2 below, the Premises, in excellent condition and repair, shall operate, and
provide services and security to, the Property, in a first-class manner
comparable to other first-class warehouse facilities in the vicinity of the
Property.
7.2 OBLIGATIONS OF LANDLORD. Landlord shall maintain and repair the
foundations, the roof and all other structural aspects of the Premises, unless
such repair or maintenance is required as a result of Tenant's negligence, in
which case Landlord is only required to maintain and repair to the extent the
costs of such maintenance and repair are covered by insurance proceeds received
by Landlord therefor. Tenant shall give Landlord written notice of the need for
any maintenance or repair for which Landlord is responsible, after which
Landlord shall have a reasonable opportunity to perform the maintenance or make
the repair, but in no event more than twenty-four (24) hours in the event of an
emergency
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and no more than thirty (30) days in other cases, unless Landlord commences such
maintenance or repair within such thirty-day period, and thereafter diligently
prosecutes such maintenance or repair to completion. If Landlord fails to
perform any maintenance or make any repairs for which Landlord is responsible
within such time periods, Tenant shall have the right to perform such
maintenance or make such repairs at Landlord's expense. Landlord shall reimburse
Tenant within fifteen (15) days after receipt of an invoice from Tenant for all
expenses incurred by Tenant in performing such maintenance or making such
repair, plus interest thereon at the rate of ten percent (10%) per annum
("Interest Rate") from the date incurred to the date paid, and if Landlord fails
to do so, Tenant shall have the right to deduct such expenses from the next
installment(s) of the rent coming due hereunder. Except as expressly provided in
this Lease, Tenant waives its right under any statute to make repairs at
Landlord's expense or to terminate this Lease because of Landlord's failure to
keep the Premises in good order, condition and repair. Except as expressly
provided in this Lease, Tenant waives its rights under Arizona Revised Statutes
Section 33-343 with respect to Landlord's obligations for tenantability of the
Premises, and Tenant's right to cease paying rent and terminate the Lease. Any
damage to any part of the Property for which Landlord is responsible that is
caused by the negligence or willful misconduct of Tenant or any agent, officer,
employee, contractor, licensee or invitee of Tenant shall be repaired by
Landlord at Tenant's expense, and Tenant shall pay to Landlord, immediately upon
billing by Landlord, as additional rent, the cost of such repairs incurred by
Landlord plus interest thereon at the Interest Rate less any amounts of
insurance proceeds received by Landlord therefor.
7.3 OBLIGATIONS OF TENANT. Tenant shall have, at all times during the
term of this Lease and at Tenant's sole cost and expense, maintain and repair
the Property and the Premises and every part thereof (except only the parts for
which Landlord is expressly made responsible under this Lease) and all
equipment, fixtures and improvements therein (including windows, glass, plate
glass, doors, special fronts, entries, exterior walls, the interior surfaces of
exterior walls, interior walls, floors, dock boards, truck doors, dock bumpers,
plumbing fixtures and equipment, heating and air conditioning systems,
electrical components and mechanical systems), landscaped areas and parking
areas and keep of all of the foregoing clean and in good order and operating
condition, ordinary wear and tear excepted. Tenant shall not damage the Premises
or disturb the integrity and support provided by any wall. Tenant shall, at
Tenant's expense, promptly repair any damage to the Premises caused by Tenant or
any agent, officer, employee, contractor, licensee or invitee of Tenant. Tenant
shall take good care of the Premises and keep the Premises free from dirt,
rubbish, waste and debris at all times. Tenant shall not overload the floors in
the Premises or exceed the load-bearing capacity of the floors in the Premises,
which is 3,000 pounds. Tenant shall, at Tenant's expense, enter into a regularly
scheduled preventative maintenance and service contract with a maintenance
contractor approved in writing by Landlord for servicing all hot water, heating
and air conditioning systems and equipment in the Premises. The maintenance and
service contract shall include all services suggested by the equipment
manufacturer and shall become effective (and a copy shall be delivered to
Landlord) within thirty (30) days after the Commencement Date. Tenant shall, at
the end of the term of this Lease, surrender to
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Landlord the Premises and all alterations, additions, fixtures and improvements
therein or thereto in the same condition as when received, ordinary wear and
tear and casualty damage excepted.
ARTICLE 8
ALTERATIONS OF THE PREMISES
8.1 NO ALTERATIONS BY TENANT. Tenant shall not make any alterations,
additions or improvements in or to the Premises or any part thereof, or attach
any fixtures or equipment thereto, without Landlord's prior written consent,
which consent shall not be unreasonably withheld, conditioned or delayed.
Notwithstanding the preceding sentence, Tenant may make alterations, additions
or improvements costing less than Five Thousand and 00/100 Dollars ($5,000.00)
in the aggregate, without Landlord's consent, provided such alterations,
additions or improvements will not materially adversely affect the structural,
exterior or roof elements of the Premises or the mechanical, electrical plumbing
or life safety systems of the Premises, but Tenant shall give prior written
notice of any such alterations, additions or improvements to Landlord. All
alterations, additions and improvements (except improvements made pursuant to
Exhibit "B", if any) in or to the Premises to which Landlord consents shall be
made by Tenant at Tenant's sole cost and expense as follows:
(a) Tenant shall submit to Landlord, for Landlord's written
approval, complete plans and specifications for all work to be
done by Tenant. Such plans and specifications shall be
prepared by responsible architect(s) and engineer(s), shall
comply with all applicable codes, laws, ordinances, rules and
regulations, shall not materially adversely affect any
systems, components or elements of the Premises, shall be in a
form sufficient to secure the approval of all government
authorities with jurisdiction over the Premises, and shall be
otherwise satisfactory to Landlord in Landlord's reasonable
discretion. Tenant shall pay all costs, including the fees and
expenses of the architect(s) and engineer(s), in preparing
such plans and specifications.
(b) Landlord shall notify Tenant within five (5) days of
Landlord's receipt of Tenant's request in writing whether
Landlord approves, or disapproves, such plans and
specifications, Landlord shall describe in writing the reasons
for disapproval. Tenant may submit to Landlord revised plans
and specifications for Landlord's prior written approval.
(c) All subsequent changes in the plans and specifications
approved by Landlord shall be subject to Landlord's prior
written approval. If Tenant wishes to make any such changes in
such approved plans and specifications, Tenant shall have such
architect(s) and engineer(s) prepare plans and specifications
for such change and submit them to Landlord for Landlord's
written approval. Landlord shall notify Tenant in writing
within five (5) days of Landlord's receipt of the revised
plans and specifications whether Landlord approves, or
disapproves, such changes
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and, if Landlord disapproves such change, Landlord shall
describe in writing the reasons for disapproval. Tenant may
submit to Landlord revised plans and specifications for such
change for Landlord's written approval. After Landlord's
written approval of such change, such change shall become part
of the plans and specifications approved by Landlord.
(d) Tenant shall obtain and comply with all building permits
and other governmental permits and approvals required in
connection with the work. Tenant shall, through Tenant's
contractor, perform the work substantially in accordance with
(i) the plans and specifications approved in writing by
Landlord, (ii) the permits obtained by Tenant, and (iii) all
applicable codes, laws, ordinances, rules and regulations.
Under no circumstances shall Landlord be liable to Tenant for
any damage, loss, cost or expense incurred by Tenant on
account of any plans and specifications, contractors or
subcontractors, design of any work, construction of any work,
or delay in completion of any work, except to the extent that
the same results from a breach by Landlord of its obligations
under this Lease or from Landlord's gross negligence or
willful misconduct.
(e) Tenant shall give written notice to Landlord of the date
on which construction of any work will be commenced at least
ten (10) days prior to such date. Tenant shall keep the
Premises free from mechanics', materialmen's and all other
liens arising out of any work performed, labor supplied,
materials furnished or other obligations incurred by Tenant.
Tenant shall promptly and fully pay and discharge all claims
on which any such lien could be based; provided however, that
the Tenant shall have the right to contest the amount or
validity of any such lien, provided Tenant gives prior written
notice of such contest to Landlord, prosecutes such contest by
appropriate proceedings in good faith and with diligence, and,
upon request by Landlord, furnishes such bond as may be
required by law to protect the Premises from such lien.
Landlord shall have the right to post and keep posted on the
Premises any notices that may be provided by law or which
Landlord may deem to be proper for the protection of Landlord
and the Premises from such liens.
(f) Landlord shall, at the time Tenant requests Landlord's
consent to any alterations, addition or improvement, inform
Tenant in writing whether Landlord will require the removal of
the alteration, addition or improvement in question at the
expiration or earlier termination of this Lease. If Landlord's
consent is not required, Landlord shall have the right to
provide to Tenant a written statement as to whether Landlord
will require the removal of the alteration, addition or
improvement in question at the expiration or earlier
termination of this Lease.
8.2 LANDLORD'S PROPERTY. Except as otherwise agreed by the parties,
all alterations, additions, fixtures and improvements made pursuant to Exhibit
"B", whether temporary or permanent in character, made in or to the Premises by
Landlord or Tenant, shall
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become part of the Premises and Landlord's property. All moveable furniture,
equipment, trade fixtures, computers, office machines, moveable partitions and
other personal property shall remain the property of Tenant. Upon termination of
this Lease, Tenant shall, at Tenant's expense, promptly remove all such moveable
furniture, equipment, trade fixtures, computers, office machines, movable
partitions and other personal property from the Premises and repair all damage
caused by any such removal.
ARTICLE 9
INDEMNIFICATION AND INSURANCE
9.1 LANDLORD'S INDEMNIFICATION. Landlord shall indemnify and defend
Tenant against and hold Tenant harmless from all claims, demands, losses, costs
and expenses, including reasonable attorneys' fees and disbursements, arising
from or related to any defect on the Property in existence on the Commencement
Date, or any default in the performance of Landlord's obligations, or any damage
to any property or any bodily or personal injury, illness or death of any person
occurring in, on or about the Premises or any part thereof, arising at any time,
to the extent caused by the negligence or willful misconduct of Landlord. This
Section 9.1 shall survive the termination of this Lease with respect to any
damage, bodily or personal injury, illness or death occurring prior to such
termination.
9.2 TENANT INDEMNIFICATION. Tenant shall indemnify and defend Landlord
against and hold Landlord harmless from all claims, demands, liabilities,
damages, losses, costs and expenses, including reasonable attorneys' fees and
disbursements, arising from or related to any use or occupancy of the Premises,
any default in the performance of Tenant's obligations, or any damage to any
property (including property of employees and invitees of Tenant) or any bodily
or personal injury, illness or death of any person (including employees and
invitees of Tenant) occurring in, on or about the Premises or any part thereof
arising at any time and from any cause whatsoever (except to the extent caused
by the negligence or willful misconduct of Landlord) or occurring outside the
Premises. This Section 9.2 shall survive the termination of this Lease with
respect to any damage, bodily or personal injury, illness or death occurring
prior to such termination.
9.3 TENANT'S LIABILITY INSURANCE. Tenant shall, at all times during
the term of this Lease and at Tenant's sole cost and expense, obtain and keep in
force comprehensive general liability, fire legal liability, and premises
operations insurance with a minimum combined single limit in the amount
specified in the BASIC LEASE INFORMATION per occurrence for bodily or personal
injury to, illness of, or death of persons and damage to property occurring in,
on or about the Premises, such insurance shall name Landlord and Landlord's
mortgagees, if any, as additional insureds, subject to Section 9.6. Tenant
shall, at Tenant's sole cost and expense, be responsible for insuring Tenant's
furniture, equipment, fixtures, computers, office machines and other personal
property.
9.4 WORKER'S COMPENSATION INSURANCE. Tenant shall, at all times during
the term of this Lease and at Tenant's sole cost and expense, obtain and keep in
force worker's compensation and employer's liability insurance in the state in
which the Premises are located.
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9.5 PROPERTY INSURANCE. Landlord shall, at all times during the term
of this Lease, at Tenant's cost and expense, obtain and keep in force (a) a
policy or policies of insurance covering loss or damage to the Property,
including the Premises but excluding Tenant's fixture, equipment and tenant
improvements paid for by Tenant, in an amount equal to the full replacement
value thereof (without deduction for depreciation), as the same may exist from
time to time, providing protection against all perils included within the
classification of "all risk", as such terms is used in the insurance industry,
and specifically including fire, extended coverage, vandalism, malicious
mischief, flood and earthquake ( in the event flood and/or earthquake coverage
is required by the lender having a lien on the Property), special extended
perils, debris removal, and containing the "Replacement Cost Endorsement"; (b)
boiler and machinery insurance covering pressure vessels, air tanks, boilers,
machinery, pressure piping, heating, ventilation and air conditioning equipment,
and elevator and escalator equipment, provided the Premises contain equipment of
such nature; and (c) plate glass insurance in such amounts as Landlord may
reasonably determine if the Premises contain plate glass.
9.6 GENERAL REQUIREMENTS. All insurance required to be maintained by
Tenant under this Article 9 may be maintained under blanket policies. All
insurance required to be maintained by Tenant under this Article 9 and all
renewals thereof shall be issued by good and responsible companies qualified to
do and doing business in the state where the Premises are located and having a
rating in Best's Insurance Guide of at least A-XI. Each policy to be maintained
by Tenant shall expressly provide that the policy shall not be canceled or
altered without thirty (30) days' prior written notice to Landlord and shall
remain in effect notwithstanding any such cancellation or alteration until such
notice shall have been given to Landlord and such period of thirty (30) days
shall have expired. Notwithstanding anything herein to the contrary, Tenant
shall have no obligation to insure against claims based on or arising from the
negligence or willful misconduct of Landlord or Landlord's mortgagee. All
insurance under this Article 9 to be maintained by Tenant shall name Landlord
and Landlord's mortgagee, if any, as an additional insured, shall be primary and
noncontributing with any insurance which may be carried by Landlord, and shall
expressly provide that Landlord, although named as an additional insured, shall
nevertheless be entitled to recover under the policy for any loss, injury or
damage to Landlord, except for claims based on or arising from the negligence or
willful misconduct of Landlord or Landlord's mortgagee. Upon the issuance of
each such policy to be maintained by Tenant, Tenant shall deliver a certificate
thereof to Landlord for retention by Landlord. If Tenant fails to insure or
fails to furnish to Landlord upon written notice to do so any certificate
thereof as required, Landlord shall have the right from time to time to effect
such insurance for the benefit of Tenant or Landlord or both of them and all
premiums paid by Landlord shall be payable by Tenant as additional rent on
demand. Tenant shall pay to Landlord, immediately upon demand all costs incurred
by Landlord as a result of Tenant's failure to obtain and maintain in effect the
policies of insurance required under this Article 9.
9.7 WAIVER OF SUBROGATION. Tenant waives on behalf of all insurers
under all policies of property, liability and other insurance (excluding
worker's compensation) now of hereafter carried by Tenant insuring or covering
the Premises, or any portion or any
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contents thereof, or any operations therein, all rights of subrogation which any
insurer might otherwise, if at all, have to any claims of Tenant against
Landlord. Landlord waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now or
hereafter carried by Landlord insuring or covering the Premises or any portion
or any contents thereof, or any operations therein, all rights of subrogation
which any insurer might otherwise, if at all, have to any claims of Landlord
against Tenant.
9.8 LANDLORD'S LIABILITY INSURANCE. At Landlord's election and
expense, Landlord may obtain and keep in force at all times during the term of
this Lease comprehensive general liability, fire legal liability and premises
operations insurance with a minimum combined single limit in the amount
specified in the BASIC LEASE INFORMATION per occurrence for bodily or personal
injury to, illness of, or death of persons and damage to property occurring in,
on or about the Property.
9.9 EXCULPATION OF MEMBERS. Tenant hereby agrees that members
("Members") of Landlord shall not be personally liable solely as a result of
acting as Members of Landlord for injury to Tenant's business, or any loss of
income therefrom, or for damage to the goods, wares, merchandise or other
property of Tenant, Tenant's employees, invitees, customers, or any other person
in, on or about the Premises or Property or for any other loss or consequential
damage of any nature whatsoever, nor shall the Members be liable for injury to
the person of Tenant, Tenant's employees, agents or contractors, whether damage
or injury is caused by results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, heating, ventilation, air conditioning,
life safety, mechanical and/or electrical systems, or lighting fixtures, or from
any other cause, whether the said damage or injury results from conditions
arising on the Premises or from other sources or places where the resulting
damage or injury occurs on or about the Premises, and regardless of whether the
cause of such damage or injury, or the means of repairing the same is
inaccessible to Tenant. Notwithstanding the foregoing, this Section 9.9 shall
have no effect if such damage or injury is caused by the gross negligence or
willful misconduct of the Members.
ARTICLE 10
COMPLIANCE WITH LEGAL REQUIREMENTS
10.1 COMPLY WITH LAW. Unless this Lease otherwise allocates the
responsibility for compliance to Landlord, Tenant shall at Tenant's sole cost
and expense, promptly comply with all laws, ordinances, rules, regulations,
orders and other requirements of any government or public authority now in force
or that may hereafter be in force, with all other requirements of any board of
fire underwriters or other similar body now or hereafter constituted, and with
all directions and certificates of occupancy issued pursuant to any law by any
governmental agency or officer, insofar as any thereof relate to or are required
by the condition, use of occupancy of the Premises or the operation, use or
maintenance of any personal property, fixtures, machinery, equipment or
improvements in the Premises, but Tenant shall not be required to make
structural changes or changes
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costing in excess of Ten Thousand and 00/100 Dollars ($10,000) cumulatively,
unless such changes are related to or required by Tenant's acts or unique use of
the Premises or by improvements made by or for Tenant.
ARTICLE 112
ASSIGNMENT OR SUBLEASE
11.1 PROHIBITION. Tenant shall not, directly or indirectly, without
the prior written consent of Landlord (which consent shall not be unreasonably
withheld, delayed or conditioned), assign this Lease or any interest herein or
sublease the Premises or any part thereof, or permit the use or occupancy of the
Premises by any person or entity other than Tenant. Tenant shall not, directly
or indirectly, without the prior written consent of Landlord (which consent
shall not be unreasonably withheld, delayed or conditioned), pledge, mortgage or
hypothecate this Lease or any interest herein. This Lease shall not, nor shall
any interest herein, be assignable as to the interest of Tenant involuntarily or
by operation of law without the prior written consent of Landlord. Any of the
foregoing acts without such prior written consent of Landlord shall be void and
shall, at the option of Landlord, constitute a default that entitles Landlord to
terminate this Lease. Notwithstanding anything to the contrary contained herein,
Tenant may assign this Lease at any time, or sublease all or part of the
Premises, without Landlord's prior written consent, to any entity that acquires
all or part of Tenant, or that is acquired in whole or in part by Tenant, or
that is controlled directly or indirectly by Tenant, or that controls, directly
or indirectly, Tenant ("Affiliate"), or that owns or is owned by an Affiliate,
so long as such transaction was not entered into as a subterfuge to avoid the
obligations or restrictions of this Lease. Tenant agrees that the instrument by
which any assignment or sublease to which Landlord consents is accomplished
shall expressly provide that the assignee or subtenant will perform all of the
covenants to be performed by Tenant under this Lease (in the case of a sublease,
only insofar as such covenants relate to the portion of the Premises subject to
such sublease) as and when performance is due after the effective date of the
sublease and that Landlord will have the right to enforce such covenants
directly against assignee or subtenant. Any purported assignment or sublease
without an instrument containing the foregoing provisions shall be void. Tenant
shall in all cases, regardless whether such assignment requires the consent of
Landlord, remain liable for the performance by any assignee or subtenant of all
such covenants.
11.2 LANDLORD'S CONSENT OR TERMINATION. If Tenant wishes to assign
this Lease or sublease all or any part of the Premises and Tenant is required to
obtain Landlord's consent pursuant to Section 11.1, Tenant shall give written
notice to Landlord identifying the intended assignee or subtenant by name and
address and specifying all of the terms of the intended assignment or sublease.
Tenant shall give Landlord such additional information concerning the intended
assignee or subtenant (including complete financial statements and a business
history) or the intended assignment or sublease (including true copies thereof)
as Landlord requests. For a period of twenty (20) days after such written notice
is given by Tenant, Landlord shall have the right, by giving written notice to
Tenant, to consent in writing to the intended assignment or sublease, unless
Landlord determines not to consent. If Landlord objects to such assignment or
sublease, Landlord
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shall notify Tenant in writing of the basis for Landlord's objection. Without
limiting any other provision of this Article 11, Landlord's criteria for
determining whether to consent to an assignment or sublease proposed by Tenant
shall not be more stringent than the criteria Landlord is obligated to or would
apply if another large creditworthy tenant of the Property was requesting such
consent. If Landlord does not deliver notice of Landlord's consent or refusal to
consent to Tenant within such twenty (20) day period, Landlord shall be deemed
to have consented to such assignment or sublease.
11.3 COMPLETION. If Landlord consents in writing, Tenant may complete
the intended assignment or sublease subject to the following covenants: (a) the
assignment or sublease shall be on the same terms as set forth on the written
notice given by Tenant to Landlord, (b) no assignment or sublease shall be valid
until an executed duplicate original of such assignment or sublease, in
compliance with Section 11.1 hereof has been delivered to Landlord; and (c)
Tenant reaffirms in writing its continued liability for the performance by an
assignee or subtenant of all of the covenants to be performed by Tenant under
the Lease.
11.4 TENANT NOT RELEASED. No assignment or sublease whatsoever shall
release Tenant from Tenant's obligations and liabilities under this Lease or
alter the primary liability of Tenant to pay all rent and to perform all
obligations to be paid and performed by Tenant. No assignments or sublease shall
amend or modify this Lease in any respect, and every assignment and sublease
shall be subject and subordinate to this Lease. The acceptance of rent by
Landlord from any other person or entity shall not be deemed to be a waiver by
Landlord of any provision of this Lease. Consent to one assignment or sublease
shall not be deemed consent to any subsequent assignment or sublease. Tenant
shall pay to Landlord all direct costs and shall reimburse Landlord for all
reasonable expenses incurred by Landlord in connection with any assignment or
sublease requested by Tenant, provided such costs and expenses do not exceed
Five Hundred and 00/100 Dollars ($500.00). If any assignee, subtenant or
successor of Tenant defaults in the performance of any obligation to be
performed by Tenant under this Lease, Landlord may proceed directly against
Tenant without the necessity of exhausting remedies against such assignee,
subtenant or successor.
ARTICLE 12
ENTRY BY LANDLORD
12.1 ENTRY. Landlord shall have the right to enter the Premises at any
time during the Business Hours and upon at least twenty-four (24) hours' prior
notice (except in the event of an emergency, in which case no prior notice shall
be required), and at Tenant's option, accompanied at all times during such entry
by an employee or representative of Tenant, to (a) inspect the Premises, (b)
exhibit the Premises to prospective purchasers, lenders or tenants, (c)
determine whether Tenant is performing all of Tenant's obligations, (d) supply
any service to be provided by Landlord, (e) post notices of nonresponsibility,
and, and (f) make any repairs to the Premises, or to make any repairs to utility
services, provided all such work shall be done promptly as reasonably
practicable and so as to cause as little interference to Tenant as reasonably
practicable. Tenant may
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designate certain areas of the Premises as "Secured Areas" should Tenant require
such areas for the purposes of securing certain valuable property or
confidential information. Landlord may not enter such Secured Areas except in
the case of emergency or in the event of a Landlord inspection, in which case
Landlord shall provide Tenant with three (3) days' written notice of the
specific date and time of such Landlord inspection. Tenant waives all claims for
damages for any injury or inconvenience to or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises or any other
loss occasioned by such entry, except to the extent caused by Landlord's gross
negligence or willful misconduct. Landlord shall have the right to use any and
all means that Landlord may deem reasonably necessary to open all doors in, or
about the Premises (excluding Tenant's vaults, safes and other Secured Areas
designated in writing by Tenant) in an emergency to obtain entry to the
Premises. Any entry to the Premises obtained by Landlord by any such means shall
not be construed or deemed to be a forcible or unlawful entry into or a detainer
of the Premises or an eviction, actual on constructive, of Tenant from the
Premises or any portion thereof.
ARTICLE 13
EVENT OF DEFAULT AND REMEDIES
13.1 DEFAULT BY TENANT. The occurrence of any one or more of the
following events ("Event of Default") shall constitute a breach of this Lease by
Tenant:
(a) Tenant fails to pay Base Rent, or any additional monthly
rent under Section 4.1 hereof, or any additional rent or other
amount of money or charge payable by Tenant hereunder as and
when such rent becomes due and payable and such failure
continues for more than ten (10) days after such rent or other
amount of money or charge is due; or
(b) Tenant fails to perform or breaches any other agreement
or covenant of this Lease to be performed or observed by
Tenant as and when performance or observance is due and such
failure or breach continues for more than thirty (30) days
after Landlord gives written notice thereof to Tenant;
provided, however, that if, by the nature of such agreement or
covenant, such failure or breach cannot reasonably be cured
within such period of thirty (30) days, an Event of Default
shall not exist as long as Tenant commences with due diligence
and dispatch the curing of such failure or breach within such
period of thirty (30) days and, having so commenced,
thereafter prosecutes with diligence and dispatch and
completes the curing of such failure or breach; or
(c) Tenant (i) files, or consents by answer or otherwise to
the filing against it of, a petition for relief or
reorganization or arrangement or any other petition in
bankruptcy or for liquidation or to take advantage of any
bankruptcy, insolvency or other debtors' relief law of any
jurisdiction, (ii) makes an assignment for the benefit of its
creditors, or (iii) consents to the appointment of a
custodian, receiver, trustee or other officer with similar
powers of Tenant or of any substantial part of Tenant's
property; or
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(d) Without consent by Tenant, a court or government
authority enters an order, and such order is not vacated
within sixty (60) days, (i) appointing a custodian, receiver,
trustee or other officer with similar powers with respect to
Tenant or with respect to any substantial part of Tenant's
property, or (ii) constituting an order for relief or
approving a petition for relief or reorganization or
arrangement or any other petition in bankruptcy or for
liquidation or to take advantage of any bankruptcy, insolvency
or other debtors' relief law of any jurisdiction, or (iii)
ordering the dissolution, winding-up or liquidation of Tenant;
or
(e) This Lease or any estate of Tenant hereunder is levied
under any attachment or execution and such attachment or
execution is not vacated within sixty (60) days; or
(f) Tenant vacates or abandons the Property at any time prior
to the expiration or earlier termination of this Lease except
as permitted under the Lease.
13.2 TERMINATION. If an Event of Default occurs, Landlord shall have
the right at any time to give a written termination notice to Tenant and, on the
date specified in such notice, Tenant's right to possession shall terminate and
this Lease shall terminate. Upon such termination, Landlord shall have the full
and immediate right to possession of the Premises, and Landlord shall have the
right to recover from Tenant all unpaid rent that had been earned at the time of
termination, the present value of all unpaid rent for the balance of the term of
this Lease after termination less the amount of such rental loss that Tenant
proves could have been reasonably avoided, and all the detriment caused by
Tenant's failure to perform all of Tenant's obligations under this Lease,
including but not limited to the cost of recovering possession of the Premises,
expenses of reletting, the cost of necessary repair, renovation and alteration
of the Premises and any real estate commissions actually paid.
13.3 CONTINUATION. If an Event of Default occurs, this Lease shall
continue in effect for so long as Landlord does not terminate Tenant's right to
possession, and Landlord shall have the right to enforce all of its rights and
remedies under this Lease, including the right to recover all rent as it becomes
due under this Lease. Acts of maintenance or preservation or efforts to relet
the Premises or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease, shall not constitute a termination
of Tenant's right to possession unless written notice of termination is given by
Landlord to Tenant.
13.4 REMEDIES CUMULATIVE. Upon the occurrence of an Event of Default,
Landlord shall the right to exercise and enforce all rights and remedies granted
or permitted by law. The remedies provided for in this Lease are cumulative and
in addition to all other remedies available to Landlord at law or equity by
statute or otherwise. Exercise by Landlord of any remedy shall not be deemed to
be an acceptance or surrender of the Property by Tenant, either by agreement or
by operation of law. Surrender of the Property can be affected only by the
written agreement of Landlord and Tenant.
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13.5 TENANT'S PRIMARY DUTY. All agreements and covenants to be
performed or observed by Tenant under this Lease shall be at Tenant's sole cost
and expense and without any abatement of rent, except as expressly provided
herein. If Tenant fails to pay any sum of money to be paid by Tenant or to
perform any other act to be performed by Tenant under this Lease after notice
and the passage of any applicable cure period, Landlord shall have the right,
but shall not be obligated, and without waiving or releasing Tenant from any
obligations of Tenant, to make any such payment or to perform any such other act
on behalf of Tenant in accordance with this Lease. All sums so paid by Landlord
and all necessary incidental costs shall be deemed additional rent hereunder and
Tenant shall pay the same to Landlord on written demand, together with interest
on all such sums from the date of expenditure by Landlord to the date of
repayment by Tenant at the Interest Rate.
13.6 ABANDONED PROPERTY. If Tenant is dispossessed by process of law
or otherwise, any movable furniture, equipment, trade fixtures or personal
property belonging to Tenant and left in the Premises for more than thirty (30)
days after Tenant is dispossessed of the Premises shall, at the option of
Landlord, be deemed to be abandoned and become the property of Landlord, and
Landlord shall have the right to sell or otherwise dispose of such personal
property in any commercially reasonable manner.
13.7 LANDLORD DEFAULT. If Landlord defaults under this Lease, Tenant
shall give written notice to Landlord specifying such default with
particularity, and Landlord shall have thirty (30) days after receipt of such
notice within which to cure such default, or, if such default cannot be cured
within thirty (30) days, such additional period of time as is reasonably
necessary to effectuate such cure, provided Landlord diligently and with
dispatch pursues the cure to completion. If Landlord fails to cure any such
default within the time periods specified herein, Tenant shall have the right to
take all actions reasonably necessary to cure such default, at Landlord's
expense. Landlord shall reimburse Tenant within fifteen (15) days after receipt
of an invoice from Tenant for all expenses incurred by Tenant in curing such
default, plus interest thereon at the Interest Rate from the date incurred to
the date paid, and if Landlord fails to do so, Tenant shall have the right to
deduct such expenses from the next installment(s) of rent coming due hereunder.
ARTICLE 14
DAMAGE OR DESTRUCTION
14.1 RESTORATION. If the Property or Premises, or any part thereof, is
damaged by fire or other casualty before the Commencement Date or during the
term of this Lease, and this Lease is not terminated pursuant to Section 14.2
hereof, Landlord shall repair such damage and restore the Property and the
Premises to substantially the same condition in which the Property and the
Premises existed before the occurrence of such fire or other casualty and this
Lease shall, subject to this Section 14.1, remain in full force and effect. If
such fire or other casualty damages the Premises or an area of the Property
necessary for Tenant's use and occupancy of the Premises, then, during the
period the Premises are rendered unusable by such damage, Tenant shall be
entitled to a reduction in
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Base Rent in the proportion that the area of the Premises rendered unusable by
such damage bears to the total area of the Premises. Landlord shall not be
obligated to repair any damage to, or to make any replacement of, any movable
furniture, equipment, trade fixtures or personal property in the Premises.
Tenant shall, at Tenant's sole cost and expense, repair and replace all such
movable furniture, equipment, trade fixtures and personal property.
14.2 TERMINATION OF LEASE. If the Premises, or any part thereof, is
damaged by fire or other casualty before the Commencement Date or during the
term of this Lease and (a) such fire or casualty occurs during the last twelve
(12) months of the term of this Lease and the repair and restoration work to be
performed by Landlord in accordance with Section 14.1 hereof cannot, as
reasonably estimated by Landlord, by completed within four (4) months after the
occurrence of such fire or other casualty, or (b) the repair and restoration
work to be performed by Landlord in accordance with Section 14.1 hereof cannot,
as reasonably estimated by Landlord, be completed within six (6) months after
the occurrence of such fire or other casualty, then, in any such event, either
Tenant or Landlord shall have the right, by giving written notice to the other
party within sixty (60) days after the occurrence of such fire or other
casualty, to terminate this Lease as of the date of such casualty. Landlord
shall also have the right to terminate if the Premises is destroyed by an event
for which Landlord is not required by this Lease to maintain insurance
(exclusive of any deductible). If neither Landlord or Tenant exercises the right
to terminate this Lease in accordance with this Section 14.2, Landlord shall
repair such damage and restore the Premises in accordance with Section 14.1
hereof and this Lease shall, subject to Section 14.1 hereof, remain in full
force and effect. A total destruction of the Premises shall automatically
terminate this Lease effective as of the date of such total destruction.
ARTICLE 15
EMINENT DOMAIN
15.1 CONDEMNATION. Landlord shall have the right to terminate this
Lease if any part (but less than all) of the Premises or any substantial part of
the Property (whether or not it includes the Premises) is taken by exercise of
the power of eminent domain before the Commencement Date or during the term of
this Lease. Tenant shall have the right to terminate this Lease if any portion
of the Premises or the Property is taken by exercise of the power of eminent
domain before the Commencement Date or during the term of this Lease and the
remaining portion of the Property is not reasonably suitable for Tenant's
purposes. In each such case, Landlord and Tenant shall exercise such termination
right by giving written notice to the other within thirty (30) days after the
date of such taking. If either Landlord or Tenant exercises such right to
terminate this Lease in accordance with this Section 15.1, this Lease shall
terminate as of the date of such taking. If neither Landlord nor Tenant
exercises such right to terminate this Lease in accordance with this Section
15.1, this Lease shall terminate as to the portion of the Premises so taken as
of the date of such taking and shall remain in force and effect as to the
portion of the Premises not so taken, Landlord shall restore the Premises to as
near the same condition as the Premises was in prior to the taking, and the Base
Rent shall be reduced as of the date of
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such taking in the proportion that the area of the Premises so taken bears to
the total area of the Premises. If all of the Premises is taken by exercise of
the power of eminent domain before the Commencement Date or during the term of
this Lease, this Lease shall terminate as of the date of such taking.
15.2 AWARD. If all or any part of the Premises is taken by exercise of
the power of eminent domain, all awards, compensation, damages, income, rent and
interest payable in connection with such taking shall, except as expressly set
forth in this Section 15.2, be paid to and become the property of Landlord, and
Tenant hereby assigns to Landlord all of the foregoing. Tenant shall have the
right to claim and receive directly from the entity exercising the power of
eminent domain only the share of any award determined to be owing to Tenant for
the taking of improvements installed by Tenant in the portion of the Premises so
taken, for the taking of Tenant's movable furniture, equipment, trade fixtures
and personal property, for loss of goodwill, for interference with or
interruption of Tenant's business, for removal and relocation expenses and for
the value of the leasehold estate created by this Lease and any unexpired term
of this Lease; provided, however, such award shall not reduce the compensation
otherwise payable to Landlord.
15.3 DEFINITION OF TAKING. As used herein, a "taking" means the
acquisition of all or part of the Premises for a public use by exercise of the
power of eminent domain or voluntary conveyance in lieu thereof and the taking
shall be considered to occur as of the earlier of the date on which possession
of the Premises (or part so taken) by the entity exercising the power of eminent
domain is authorized as stated in an order for possession or the date on which
title to the Premises (or part so taken) vests in the entity exercising the
power of eminent domain.
ARTICLE 16
SUBORDINATION AND SALE
16.1 SUBORDINATION. This Lease shall be subject and subordinate at all
times to the lien of all mortgages and deeds of trust securing any amount or
amounts whatsoever which may now exist or hereafter be placed on or against the
Premises or on or against Landlord's interest or estate therein, all without the
necessity of having further instruments executed by Tenant to effect such
subordination. If Landlord or any mortgagee shall elect to have this Lease prior
to the lien of its mortgage or deed of trust, and shall give written notice
thereof to Tenant, this Lease shall be deemed prior to such mortgage or deed of
trust. Tenant agrees to execute any documents required to effectuate such
subordination or to make this Lease prior to the lien of any mortgage or deed of
trust. Notwithstanding the foregoing, in the event of a foreclosure of any such
mortgage or deed of trust or of any other action or proceeding for the
enforcement thereof, or of any sale thereunder, this Lease shall not be
terminated or extinguished, nor shall the rights and possession of Tenant
hereunder be disturbed (except that, at any time when Event of Default by Tenant
exists under this Lease, any person who acquires Landlord's interest hereunder
shall have all of the rights and remedies provided under Article 13), and Tenant
shall attorn to the person who acquires the Landlord's interest hereunder
through any such mortgage or deed of trust. Tenant agrees to execute,
acknowledge and deliver upon
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demand such further instruments evidencing such subordination of this Lease to
the lien of all such mortgages and deeds of trust as may reasonably be required
by Landlord. Landlord shall provide Tenant with, and the effectiveness of this
Section 16.1 is conditioned on Landlord's delivering to Tenant, a nondisturbance
agreement conforming to the provisions of this Section 16.1, in the form
attached hereto as Exhibit "D" and by this reference incorporated herein, from
all current and future mortgagees, beneficiaries and ground lessors of Landlord.
16.2 SALE OF THE PROPERTY. If the original Landlord hereunder, or any
successor owner of the Premises, sells or conveys the Premises, all liabilities
and obligations on the part of the original Landlord, or such successor owner,
under this Lease accruing after such sale or conveyance shall terminate and the
original Landlord, or such successor owner, shall automatically be released
therefrom, and thereupon all such liabilities and obligations shall be binding
upon the new owner, provided such new owner has assumed in writing all
obligations of the original Landlord under this Lease. Tenant agrees to attorn
to such new owner.
ARTICLE 17
ESTOPPEL CERTIFICATE
17.1 REQUIRED CERTIFICATION. At any time and from time to time, Tenant
shall, within fifteen (15) days after written request by Landlord, execute,
acknowledge and deliver to Landlord an estoppel certificate in the form attached
hereto as Exhibit "E" and by this reference incorporated herein, certifying: (a)
that this Lease is unmodified and in full force and effect (or, if there have
been modifications, that this Lease is in full force and effect as modified and
stating the date and nature of each modification); (b) the Commencement Date and
the Expiration Date determined in accordance with Article 2 hereof and the date,
if any, to which all rent and other sums payable hereunder have been paid; (c)
that no notice has been received by Tenant of any default by Tenant hereunder
which has not been cured, except as to default specified in such certificate;
and (d) that Landlord is not in default under this Lease, except as to defaults
specified in such certificate. Any such certificate may be relied upon by
Landlord and any actual or prospective purchaser or mortgage lender of the
Premises or any part thereof. If Tenant does not deliver such certificate to
Landlord within such fifteen (15) day period, Tenant shall be estopped from
making any claims to the contrary that: (a) this Lease is unmodified and in full
force and effect; (b) the Commencement Date, the Expiration Date and the date to
which rent has been paid all are as set forth on the estoppel certificate; (c)
Tenant has not received any notice of default by Tenant under this Lease that
has not been cured; and (d) Landlord is not in default under this Lease.
Landlord hereby agrees to provide to Tenant an estoppel certificate signed by
Landlord, containing the same types of information, and within the same periods
of time, as are set forth in the estoppel certificate described above, except
such changes as are reasonably necessary to reflect that the estoppel
certificate is being granted and signed by Landlord to Tenant or Tenant's
lender, assignee or sublessee, rather than from Tenant to Landlord or to
Lender's lender or purchaser. In the event Landlord or Tenant requests that the
other party hereto execute an estoppel certificate, the requesting party shall
reimburse the other party for all direct
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costs and reasonable expenses incurred by the other party in reviewing,
negotiating and executing such estoppel certificate, provided such costs and
expenses do not exceed Five Hundred and 00/100 Dollars ($500.00) per request.
ARTICLE 18
NOTICES
18.1 METHOD. All requests, approvals, consents, notices and other
communications given by Landlord or Tenant under this Lease shall be properly
given only if made in writing and either deposited in the United States mail,
postage prepaid, certified mail with return receipt requested, or delivered by
hand (which may be through a messenger or recognized delivery, courier or air
express service) and addressed as follows: To Landlord at the address of
Landlord specified in the BASIC LEASE INFORMATION, or at such other place as
Landlord may from time to time designate in a written notice to Tenant; and to
Tenant at the address of Tenant specified in the BASIC LEASE INFORMATION, or at
such other place as Tenant may from time to time designate in a written notice
to Landlord. Such requests, approvals, consents, notices and other
communications shall be effective on the date of receipt (evidenced by the
certified mail receipt) if mailed or on the date of hand delivery if hand
delivered. If any such request, approval, consent, notice or other communication
is not received or cannot be delivered due to a change in the address of the
receiving party of which notice was not previously given to the sending party or
due to a refusal to accept by the receiving party, such request, approval,
consent, notice or other communication shall be effective on the date delivery
is attempted. Any request, approval, consent, notice or other communication
under this Lease may be given on behalf of a party by the attorney for such
party.
ARTICLE 19
MISCELLANEOUS
19.1 GENERAL. The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular and shall include, as appropriate,
each of their employees, officers, agents, contractors, invitees and licensees.
The words "include", "includes" and "including" shall be deemed to be followed
by the phrase "without limitation". If there is more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several. Time is of
the essence of this Lease and each and all of its provisions. This Lease shall
benefit and bind Landlord and Tenant and the permitted personal representatives,
heirs, successors and assigns of Landlord and Tenant. If any provision of this
Lease is determined to be illegal or unenforceable, such determination shall not
affect any other provision of this Lease and all such other provisions shall
remain in full force an effect. Neither Landlord nor Tenant shall record this
Lease or any memorandum or short form of it, without the other party's consent.
This Lease shall be governed by and construed in accordance with the laws of the
state in which the Premises is located.
19.2 NO WAIVER. The waiver by Landlord or Tenant of any breach of any
covenant in this Lease shall not be deemed to be a waiver of any subsequent
breach of the same or any other covenant in this Lease, nor shall any custom or
practice which may
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grow up between Landlord and Tenant in the administration of this Lease be
construed to waive or to lessen the right of Landlord or Tenant to insist upon
the performance by Landlord or Tenant in strict accordance with this Lease.
19.3 ATTORNEY'S FEES. If there is any legal action or proceeding
between Landlord and Tenant to enforce this Lease or to protect or establish any
right or remedy under this Lease, the unsuccessful party to such action or
proceeding shall pay to the prevailing party all costs and expenses, including
reasonable attorneys' fees and disbursements, incurred by such prevailing party
in such action or proceeding and in any appeal in connection therewith. If such
prevailing party recovers a judgment in any such action, proceeding or appeal,
such costs, expenses and attorneys' fees and disbursements shall be included in
and as a part of such judgment.
19.4 EXHIBITS. Exhibit "A" (Plan(s) Outlining the Premises and
Property), Exhibit "B" (Work Letter), Exhibit "C" (Memorandum Confirming Term),
Exhibit "D" (Subordination, Non-Disturbance and Attornment Agreement) and
Exhibit "E" (Estoppel Certificate) are attached hereto and made a part of this
Lease.
19.5 BROKERS. Landlord shall pay all fees and expenses of the real
estate brokers specified in the BASIC LEASE INFORMATION ("Brokers"), pursuant to
a separate agreement between Landlord and Brokers. Each of Landlord and Tenant
warrants and represents to the other party that Landlord or Tenant, as the case
may be, has negotiated this Lease directly with the Brokers and has not
authorized or employed, or acted by implication to authorize or to employ, any
real estate broker other than Brokers to act for Landlord or Tenant, as the case
may be, in connection with this Lease.
19.6 ENTIRE AGREEMENT. There are no oral agreements between Landlord
and Tenant affecting this Lease, and this Lease supersedes and cancels any and
all previous negotiations, arrangements, brochures, offers, agreements and
understandings, oral or written, if any, between Landlord and Tenant or
displayed by Landlord or Tenant with respect to the subject matter of this Lease
and the Premises. There are no commitments, representations or assurances
between Landlord and Tenant or between any real estate broker and Tenant other
than those expressly set forth in this Lease and all reliance with respect to
any commitments, representations or assurances is solely upon commitments,
representations and assurances expressly set forth in this Lease. This Lease may
not be amended or modified in any respect whatsoever except by an agreement in
writing signed by Landlord and Tenant.
19.7 DUTY TO ACT REASONABLY. Any time the consent of Landlord or
Tenant is required, such consent shall not be unreasonably withheld, conditioned
or delayed, unless expressly provided otherwise herein. Whenever this Lease
grants Landlord or Tenant the right to take action, exercise discretion,
establish rules and regulations or make allocations or other determinations,
Landlord and Tenant shall act reasonably and in good faith and take no action
that might result in the frustration of the reasonable expectations of a
sophisticated landlord and sophisticated tenant concerning the benefits to be
enjoyed under this Lease.
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19.8 DAYS. All references herein to less than "ten (10) days" shall
mean business days, and all references to "notice" shall mean written notice
given in compliance with Section 18.1. All references in the Lease to "month" or
"months" shall be deemed to include the actual number of days in such actual
month or months.
19.9 COUNTERPARTS. This Lease may be signed in multiple counterparts
which, when signed by all parties, shall constitute a binding agreement.
19.10 ARBITRATION. The initiation of arbitration proceedings pursuant
to Section 6.2 shall be with the American Arbitration Association under the
Commercial Arbitration Rules of the American Arbitration Association. The
decision of the Arbitrator shall be final and binding on the parties and
enforceable in a court of competent jurisdiction. The parties shall bear their
respective attorneys' fees and costs in connection with such arbitration, except
as the Arbitrator shall otherwise determine, and each such party shall bear
one-half (1/2) of the fees and expenses of the Arbitrator and of the American
Arbitration Association in connection with such arbitration.
ARTICLE 20
HAZARDOUS MATERIALS
20.1 DEFINITION OF HAZARDOUS MATERIALS. As used herein, the term
"Hazardous Material" means any hazardous or toxic substance, material or waste,
or any pollutant or contaminate, or words of similar import, which is or becomes
regulated by any local governmental authority, the state in which the Premises
are located, or the United States Government. The term "Hazardous Material"
includes, but is not limited to, any material or substance which is (i)
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. Section 1317), (ii) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903),
(iii) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C.
Section 9601, et seq.), (iv) asbestos, (v) petroleum (including crude oil or any
fraction thereof, natural gas, natural gas liquids, liquefied natural gas,
synthetic natural gas usable for fuel, or any mixture thereof), (vi) petroleum
products, (vii) polychlorinated biphenyls, (viii) urea formaldehyde, (ix) radon
gas, (x) radioactive matter, (xi) medical waste, and (xii) chemicals which may
cause cancer or reproductive toxicity.
20.2 DEFINITION OF ENVIRONMENTAL REQUIREMENTS. As used herein, the
term "Environmental Requirements" means all laws, ordinances, rules,
regulations, orders and other requirements of any government or public authority
now in force or which may hereinafter be in force relating to protection of
human health or the environment from Hazardous Material, including all
requirements pertaining to reporting, licensing, permitting, investigation and
remediation of emissions, discharges, storage, disposal or releases of Hazardous
Materials and all requirements pertaining to the protection of the health and
safety of employees or the public with respect to Hazardous Material.
20.3 PROHIBITED ACTIVITIES. Tenant shall not directly or indirectly
permit or conduct the handling, use, deposit, generation, treatment, storage or
disposal in, on or
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<PAGE>
about the Premises or Property of any Hazardous Material in excess of permitted
levels or reportable quantities under applicable Environmental Requirements
without prior written notice to Landlord. Any such handling, use, deposit,
generation, treatment, storage or disposal of any Hazardous Material permitted
by Landlord hereunder shall be in compliance with all Environmental
Requirements.
20.4 NOTICE OF VIOLATIONS. Tenant shall, within five (5) days after
Tenant's receipt thereof, give written notice to Landlord of any notice or other
communication regarding any (a) actual or alleged violation of Environmental
Requirements by Tenant or with respect to the Premises, (b) actual or threatened
migration of Hazardous Material from the Premises, or (c) the existence of
Hazardous Material in or on the Premises or regarding any actual or threatened
investigation, inquiry, lawsuit, claim, citation, directive, summons,
proceedings, complaint, notice, order, writ or injunction relating to any of the
foregoing.
20.5 TENANT INDEMNIFICATION. Tenant shall indemnify and defend
Landlord against and hold Landlord harmless from all claims, demands,
liabilities, damages, fines, encumbrances, liens, losses, costs and expenses,
including reasonable attorneys' fees and disbursements, and costs and expenses
of investigation, arising from or related to the existence on or after the
Commencement Date of Hazardous Material brought in or on the Property by Tenant
or the actual or threatened migration on or after the Commencement Date of
Hazardous Material from the Property as a result of contamination caused by
Tenant or the existence on or after the Commencement Date of a violation of
Environmental Requirements by Tenant with respect to the Property.
Notwithstanding the foregoing, Tenant shall not be required to indemnify, defend
or hold harmless Landlord with respect to Hazardous Materials brought or
migrating onto the Property or for violations of Environmental Requirements with
respect to the Property, unless Tenant is responsible for bringing the Hazardous
Materials onto the Property, for causing the migration or for the violation of
Environmental Requirements. To the extent Tenant has an indemnification
obligation under this Section 20.5, Tenant shall, to the reasonable satisfaction
of Landlord, perform all remedial actions necessary to remove any Hazardous
Material in or on the Property on or after the Commencement Date or to remedy
the actual or threatened migration from the Property of any Hazardous Material
or to remedy any actual or threatened violation of Environmental Requirements,
provided such remedial action is required under Environmental Requirements. This
Section 20.5 shall survive termination of this Lease.
20.6 LANDLORD INDEMNIFICATION. Landlord shall indemnify and defend
Tenant against and hold Tenant harmless from all claims, demands, liabilities,
damages, fines, encumbrances, liens, losses, costs and expenses, including
reasonable attorneys' fees and disbursements, and costs and expenses of
investigation, arising from or related to the existence prior to the
Commencement Date of Hazardous Materials brought in, on or, under the Property
by Landlord or the actual or threatened migration prior to the Commencement Date
of Hazardous Materials from the Property as a result of contamination caused by
Landlord or the existence prior to the Commencement Date of a violation of
Environmental Requirements by Landlord with respect to the Property.
- 28 -
<PAGE>
Notwithstanding the foregoing, Landlord shall not be required to indemnify,
defend or hold harmless Tenant with respect Hazardous Materials brought or
migrating onto the Property or for violations of Environmental Requirements with
respect to the Property, unless Landlord is responsible for bringing the
Hazardous Materials on to the Property, for causing the migration or for the
violation of Environmental Requirements. To the extent Landlord has an
indemnification obligation under this Section 20.6, Landlord shall, to the
reasonable satisfaction of Tenant, perform all remedial actions necessary to
remove any Hazardous Material in or on the Property or to remedy actual or
threatened violation of Environmental Requirements, provided such remedial
action is required under Environmental Requirements. This Section 20.6 shall
survive termination of this Lease.
20.7 PERMITTED ACTIVITIES. Notwithstanding the foregoing, Landlord
acknowledges and agrees that Tenant shall be permitted to store and use on the
Premises from time to time certain Hazardous Material whose nature and
quantities are customary in connection with the permitted uses of the Premises
(and in connection with any permitted Alterations performed by Tenant), and that
Tenant shall not be required to provide Landlord with specific notice of any
storage or use; provided that Tenant shall at all times comply with all
Environmental Requirements pertaining to any such Hazardous Material.
ARTICLE 21
FAIR MARKET RENTAL RATE
21.1 DETERMINATION OF FAIR MARKET RENTAL RATE. For the proposes of the
Lease the term "Fair Market Rental Rate" shall mean the annual amount per
rentable square foot that is in effect for comparable period of time
("Comparable Transactions") at the Property, or if there are not a sufficient
number of Comparable Transactions at the Property, what a comparable landlord of
a first-class industry facility with comparable vacancy factors would accept in
Comparable Transactions. In any determination of Comparable Transactions
appropriate consideration shall be given to the annual rental rates per rentable
square foot, the standard of measurement by which the rentable square footage is
measured, the type of escalation clause (e.g., whether increases in additional
rent are determined on a net or gross basis, and if gross, whether such
increases are determined according to a base year or a base dollar amount
expense stop), the extent of Tenant's liability under the Lease, abatement
provisions reflecting free rent and/or no rent during the period of construction
or subsequent to the commencement date as to the space in question, brokerage
commissions, if any, that would be payable by Landlord in similar transactions,
length of the Lease term, size and location of the premises being leased,
building standard work and/or tenant improvement allowances, if any, and other
generally applicable conditions of tenancy for such Comparable Transactions. The
intent is that Tenant shall obtain the same rent and other economic benefits
that Landlord would otherwise give in Comparable Transactions and that Landlord
will make and receive the same economic payments and concessions that Landlord
would otherwise make and receive in Comparable Transactions. If, for example,
after applying the criteria set forth above, Comparable Transactions provide a
new tenant with comparable space at Thirty-
- 29 -
<PAGE>
Two and 00/100 Dollars ($32.00) per rentable square foot, with a current base
year, three (3) months at no rent to construct improvements, four (4) months'
free rent, Fifty and 00/100 Dollars ($50.00) per usable square foot tenant
improvement allowance, a brokerage commission of Fifty Thousand and 00/100
Dollars ($50,000.00), and certain other generally applicable economic terms, the
Fair Market Rental Rate for Tenant shall not be Thirty-Two and 00/100 Dollars
($32.00) per rentable square foot only, but shall be the equivalent of
Thirty-Two and 00/100 Dollars ($32.00) per rentable square foot, the same base
year, three (3) months at no rent to construct improvements or three (3) months'
additional free rent in lieu of such construction, an additional four (4)
months' free rent, Fifty and 00/100 Dollars ($50.00) per usable square foot
tenant improvement allowance or payment in lieu of such allowance, a payment to
Tenant's then broker of a Fifty Thousand and 00/100 Dollars ($50,000.00)
brokerage commission (or if Tenant is not then represented by a broker, Tenant
shall receive a rent credit on the amount of the brokerage commission that
Landlord would have otherwise been required to pay) and such other generally
applicable economic terms.
Landlord shall determine the Fair Market Rental Rate by using its good
faith judgment. Landlord shall provide written notice of such amount within
fifteen (15) days (but in no event later than twenty (20) days) after Tenant
provides the notice to Landlord exercising Tenant's extension option(s). Tenant
shall have thirty (30) days ("Tenant's Review Period") after receipt of
Landlord's notice of the new rental within which to accept such rental or to
reasonably object thereto in writing. In the event Tenant objects, Landlord and
Tenant shall attempt to agree upon such Fair Market Rental Rate, using their
best good faith efforts. If Landlord and Tenant fail to reach agreement within
fifteen (15) days following Tenant's Review Period ("Outside Agreement Date"),
then each party shall place in a separate sealed envelope their final proposal
as to Fair Market Rental Rate and such determination shall be submitted to
arbitration in accordance with subsections (a) through (e) below. Failure of
Tenant to so elect in writing within Tenant's Review Period shall conclusively
be deemed its disapproval of the Fair Market Rental Rate determined by Landlord.
In the event that Landlord fails to timely generate the initial written
notice of Landlord's opinion of the Fair Market Rental Rate that triggers the
negotiation period, then Tenant may commence such negotiations by providing the
initial notice, in which event Landlord shall have fifteen (15) days
"(Landlord's Review Period") after receipt of Tenant's notice of the new rental
within which to accept such rental. In the event Landlord fails to accept in
writing such rental proposed by Tenant, then such proposal shall be deemed
rejected, and Landlord and Tenant shall attempt to agree upon such Fair Market
Rental Rate, using their best good faith efforts. If Landlord and Tenant fail to
reach agreement within fifteen (15) days following Landlord's Review Period
(which shall be, in such event, the "Outside Agreement Date" in lieu of the
above definition of such date), then each party shall place in a separate sealed
envelope their final proposal as to Fair Market Rental Rate and determination
shall be submitted to arbitration in accordance with subsections (a) through (e)
below. Failure of Landlord to so elect in writing within Landlord's Review
Period shall conclusively be deemed its disapproval of the Fair Market Rental
Rate determined by Tenant.
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<PAGE>
If the final determination of the Fair Market Rental Rate has not been
made prior to the date on which Tenant's obligation to pay rent during the
renewal term commences, then, from such date until the date the final
determination is made ("Interim Period"), Tenant shall pay estimated rent for
the Premises at the rate applicable to the Premises during the month immediately
preceding such rent commencement date. Once the final determination of the Fair
Market Rental Rate has been made, if the rent payable by Tenant for the Premises
pursuant to the Fair Market Rental Rate exceeds the rent paid by Tenant during
the Interim Period, Tenant shall pay the excess to Landlord concurrently with
its next installment of Base Rent, and, if the rent paid by Tenant during the
Interim Period exceeds the rent payable by Tenant for the Premises pursuant to
the Fair Market Rental Rate, then Landlord shall credit the excess against the
Base Rent or additional rent next coming due under the Lease.
(a) Landlord and Tenant shall meet with each other within five (5)
business days of the Outside Agreement Date and exchange the sealed
envelopes and then open such envelopes in each other's presence. If
Landlord and Tenant do not mutually agree upon the Fair Market Rental
Rate within five (5) business days of the exchange and opening of
envelopes, then, within ten (10) business days of the exchange and
opening of envelopes Landlord and Tenant shall agree upon and jointly
appoint a single arbitrator who shall by profession be a real estate
lawyer or broker who shall have been active over the five (5) year
period ending on the date of such appointment in the leasing of
industrial properties in the vicinity of the Property. Neither Landlord
nor Tenant shall consult with such broker or lawyer as to his or her
opinion as to Fair Market Rental Rate prior to the appointment. The
determination of the arbitrator shall be limited solely to the issue of
whether Landlord's or Tenant's submitted Fair Market Rental Rate for
the Premises is the closest to the actual Fair Market Rental Rate for
the Premises as determined by the arbitrator, taking into account the
requirements of this Article 21. Such arbitrator may hold such hearings
and require such briefs as the arbitrator, in his or her sole
discretion, determines necessary. In addition, Landlord and Tenant may
submit to the arbitrator with a copy to the other party within five (5)
business days after the appointment of the arbitrator any market data
and additional information that such party deems relevant to the
determination of Fair Market Rental Rate ("FMRR Data") and the other
party may submit a reply in writing within five (5) business days after
receipt of such FMRR Data.
(b) The arbitrator shall, within thirty (30) days of his or her
appointment, reach a decision as to whether the parties shall use
Landlord's or Tenant's submitted Fair Market Rental Rate by choosing
the submitted Fair Market Rental Rate that is closest to the actual
Fair Market Rental for the Premises as determined by the arbitrator,
and shall notify the Landlord and Tenant of such decision.
(c) The decision of the arbitrator shall be binding upon Landlord and
Tenant, except as provided below.
- 31 -
<PAGE>
(d) If Landlord and Tenant fail to agree upon and appoint an
arbitrator, then appointment of the arbitrator shall be made by the
Presiding Judge of the Maricopa County Superior Court, or if he or she
refuses to act, by any judge having jurisdiction over the parties.
(e) The cost of arbitration shall be paid by Landlord and Tenant
equally.
In the event that Tenant objects to the Fair Marker Rental Rate as
determined by the arbitration provision specified above, Tenant may elect to
rescind its extension option election notice at any time within sixty (60) days
following the establishment of the Fair Market Rental Rate as determined by such
arbitration. In the event Tenant elects to terminate the Lease, Tenant shall
reimburse Landlord for its reasonable attorneys' fees and reasonable costs
associated with such arbitration.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease
Agreement as of the date first hereinabove written.
OMB DEVELOPMENT I, L.L.C, RADYNE CORP.,
an Arizona limited liability company a New York corporation
By: /s/ Harold H. Benware By: /s/ R.C. Fitting
--------------------------- ------------------
Its: Manager Its: President
- 32 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED 12-31-97 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 569,692
<SECURITIES> 0
<RECEIVABLES> 2,374,443
<ALLOWANCES> (15,000)
<INVENTORY> 5,389,920
<CURRENT-ASSETS> 8,387,920
<PP&E> 1,672,263
<DEPRECIATION> (349,712)
<TOTAL-ASSETS> 10,231,617
<CURRENT-LIABILITIES> 6,732,274
<BONDS> 4,649,404
0
0
<COMMON> 11,862
<OTHER-SE> (1,161,923)
<TOTAL-LIABILITY-AND-EQUITY> 10,231,617
<SALES> 13,446,852
<TOTAL-REVENUES> 13,446,852
<CGS> 8,022,262
<TOTAL-COSTS> 8,022,262
<OTHER-EXPENSES> 6,502,204
<LOSS-PROVISION> 2,000
<INTEREST-EXPENSE> 677,102
<INCOME-PRETAX> (1,756,716)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,756,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,756,716)
<EPS-PRIMARY> (0.350)<F1>
<EPS-DILUTED> (0.350)
<FN>
<F1>The Company has determined that its EPS-Primary and EPS-Diluted do not
require restatement pursuant to Statement of Financial Accounting Standards
No. 128. A 1-for-5 reverse split of the Company's Common Stock became effective
on January 9, 1997. Prior Financial Data Schedules have not been restated for
this reverse split.
</FN>
</TABLE>
