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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended January 31, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-27414
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REMEC, INC.
(Exact Name of Registrant as Specified in its Charter)
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CALIFORNIA 95-3814301
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9404 CHESAPEAKE DRIVE, SAN DIEGO, 92123
CALIFORNIA
(Address of Principal Executive Offices) (Zip Code)
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Registrant's telephone number, including area code: (619) 560-1301
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: NONE
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Indicate by check mark whether REMEC (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 twelve (12) months (or such shorter period that REMEC was required
to file such reports) and (2) has been subject to such filing requirements for
the past ninety (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. / /
The aggregate market value of the voting stock held by non-affiliates of
REMEC on March 5, 1999 was approximately $359.8 million based on the last
reported sale price on the Nasdaq National Market of $17.625 per share of such
stock on March 5, 1999.
The number of outstanding shares of Registrant's Common Stock as of March 5,
1999 was 23,194,753.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for REMEC's Annual Meeting of Shareholders
expected to be held on June 4, 1999, a definitive copy of which will be filed
with the SEC within 120 days after the end of the year covered by this Form
10-K, are incorporated by reference herein in Part III of this Form 10-K.
This document contains 188 pages.
The Exhibit Index begins on page 50.
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REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1999
TABLE OF CONTENTS
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PAGE
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PART I..................................................................................................... 1
ITEM 1. BUSINESS.......................................................................................... 1
ITEM 2. PROPERTIES........................................................................................ 11
ITEM 3. LEGAL PROCEEDINGS................................................................................. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS................................................... 11
PART II.................................................................................................... 12
ITEM 5. MARKET FOR REMEC'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................................................................. 12
ITEM 6. SELECTED FINANCIAL DATA........................................................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................................... 14
Results of Operations...................................................................................... 15
Fiscal Year Ended January 31, 1999 vs. Fiscal Year Ended January 31, 1998.................................. 15
Fiscal Year Ended January 31, 1998 vs. Fiscal Year Ended January 31, 1997.................................. 16
Liquidity and Capital Resources............................................................................ 17
Interest Rate Risk......................................................................................... 17
Year 2000 Readiness Disclosure............................................................................. 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................................................. 19
PART III................................................................................................... 20
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 20
ITEM 11. EXECUTIVE COMPENSATION........................................................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................................................... 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 22
PART IV.................................................................................................... 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K....................................................................................... 22
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PART I
THE STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT RELATE TO FUTURE
PLANS, EVENTS OR PERFORMANCE ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY DUE TO A VARIETY OF FACTORS, INCLUDING THE RISKS
DESCRIBED IN THIS ANNUAL REPORT AND THE OTHER DOCUMENTS REMEC FILES FROM TIME TO
TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. REMEC UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULT
OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
ITEM 1. BUSINESS
INTRODUCTION
REMEC, Inc. is a leader in the design and manufacture of microwave
multi-function modules (MFMs) for microwave transmission systems used in defense
applications and has recently entered, and now derives significant revenue from,
the commercial wireless telecommunications market. REMEC believes that its
expertise in microwave transmission system components such as filters,
amplifiers, mixers, switches and oscillators and its expertise in integrating
these components into MFMs give REMEC a strong competitive position in the
emerging commercial wireless infrastructure equipment market. REMEC's
capabilities enable it to develop and manufacture MFMs with reduced size,
weight, parts count and cost, and increased reliability and performance.
REMEC comprises an expanding family of companies that provide components,
MFMs and sub-systems across the total functionality of a microwave transmission
system. Corporate offices are located in San Diego, California with engineering
and manufacturing facilities located in: the San Diego and San Jose areas of
California; Etobicoke, Ontario, Canada; and Palm Bay, Florida. Manufacturing
operations are established in San Jose, Costa Rica and in Tijuana, Mexico,
supporting high volume component fabrication and electronic assembly and test
functions. REMEC's customer base consists primarily of US based wireless
infrastructure original equipment manufacturers (OEMs) and prime defense
contractors.
REMEC's products operate at radio (300 MHz to 1 GHz), microwave (1 GHz to 20
GHz) and millimeter wave (20 GHz to 50 GHz) frequencies (these frequencies are
collectively referred to elsewhere in this Annual Report on Form 10-K as
"microwave"). Modern wireless telecommunications systems employ microwave
transmission technology pioneered in the defense industry. Microwave frequency
bands have been used for emerging wireless telecommunications applications
because they are less congested and have more available bandwidth, affording
greater voice, data and video transmission capacity than lower frequency bands.
Driven by technological advances and regulatory changes, demand for wireless
telecommunications products has increased in recent years for applications such
as mobile telephony (cellular and personal communication systems (PCS)), rural
telephony, very small aperture terminals (VSAT), paging, wireless cable,
interactive television and wireless local loop. These emerging wireless
applications require a large infrastructure of microwave transmission equipment
such as base stations and point-to-point radios. REMEC believes that the
evolution of cellular and PCS infrastructure, as well as other wireless
telecommunications systems, will require increased integration in order to
reduce size, weight and cost and to increase reliability and producibility of
base station equipment.
REMEC also designs and manufactures precision instruments for guidance,
control and measurement systems used by the defense, aerospace, petroleum and
mining industries.
INDUSTRY BACKGROUND
In recent years there has been a significant increase in demand for wireless
telecommunications services from business and consumer users worldwide. This
trend has led to significant growth in the number of subscribers for existing
wireless communications systems and to the emergence of new wireless
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applications. In response to the increasing demand, governmental regulatory
agencies continue to allocate additional frequencies for a broad range of
wireless voice, data and facsimile services. All of these services require
substantial deployment or expansion of microwave transmission infrastructure
equipment to meet traffic demand.
Cellular and PCS mobile telephony has accounted for much of the growth in
the wireless telecommunications industry. Cellular service uses radio base
stations that transmit and receive calls in localized areas. Each base station
has a finite capacity so as demand increases, the number of base stations
required to provide services also increases. A number of other factors are
currently increasing demand for base station infrastructure equipment.
Additional PCS frequency bands have recently been licensed, requiring new
equipment operating at frequencies different than current cellular frequencies.
Conversion from analog to digital cellular systems requires the replacement
and/or expansion of current cellular networks. In large urban areas, increased
demand has required the deployment of micro base stations to maintain service
quality and reliability. Wireless "local loop" services, which use the same
equipment as cellular/PCS networks, are being installed in developing regions of
the world, since they can be implemented more rapidly and economically than
wired telephone systems.
The wireless telecommunications industry has also seen significant growth
from point-to-point and point-to-multipoint radio systems which operate at
higher frequencies and with much higher capacities. Point-to-point radios have
been traditionally used in low volumes for high capacity trunking applications
in telephony networks. As a result of telecommunications industry deregulation,
these radios are now being used in large area networks and in telephone bypass
applications by competitors to the traditional phone companies. New cellular and
PCS networks are now typically interconnected using point-to-point radios. New
point-to-multipoint systems are being developed by certain other companies to
provide voice and data services in large urban areas in direct competition with
the local telephone companies.
Another growing segment of the wireless communications industry is VSAT
(very small aperture terminals), which are communications systems utilizing
fixed-site satellite terminals. Historically, these systems were primarily
designed for certain specific data applications. However, recent improvements in
VSAT technology for satellite-based wireless voice and data networks have led to
their increasing use in a variety of broader, higher system throughput
commercial applications such as mobile and rural telephony and more complicated
data transmissions. Satellite telephony systems are being utilized by developing
countries that lack a land-based telecommunication infrastructure, and which
seek to provide telephone service for large areas fairly rapidly and on a
cost-effective basis. Additionally, even where land systems exist, satellite
systems are used to fill in coverage for remote areas.
Wireless transmissions require the conversion of information into a higher
frequency signal that can be transmitted and received through the air.
Generally, the frequency spectrum is allocated for different wireless uses by
governmental entities. The following diagram illustrates the frequency ranges at
which various wireless applications operate or are expected to operate.
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ALLOCATION OF FREQUENCY RANGE FOR WIRELESS APPLICATIONS
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BAND FREQUENCY RANGE USES
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LOW FREQUENCY (LF)VERY HIGH < 300 MHz Navigation Equipment
FREQUENCY (VHF) (Aeronautical/Marine)
AM/FM Radio
Amateur/CB Radio
Television
Dispatch Radio
ULTRA HIGH FREQUENCY (UHF) 300 - 800 MHz UHF Television
Specialized Mobile Radio (SMR)
Paging
Wireless Data Collection
HIGH RADIO FREQUENCY (RF) 800 MHz - 1 GHz Analog Cellular
Digital Cellular
Two-way Messaging
Cordless Phone
MICROWAVE 1 - 2 GHz Private Radio Networks
PCS
Mobile Satellite Telephony
Military Communication/Navigation
MICROWAVE/MILLIMETER WAVE 2 - 50 GHz VSAT
Satellite Voice/Messaging
Point-to-Point Radios
Wireless TV
Radar
Electronic Warfare
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THE REMEC OPPORTUNITY
All of the wireless communications services described above require
substantial deployment or expansion of microwave transmission infrastructure
equipment. REMEC believes that it is particularly well suited to address those
requirements due to its broad portfolio of microwave capabilities and its
expertise at integrating microwave functions in a single package.
Historically, microwave systems for defense applications were built by prime
contractors who would procure single function components (such as filters,
amplifiers and mixers) from various specialized manufacturers. These single
function components were then connected to create the complete microwave
transmission system. In order to prevent components from interfering with each
other or being damaged, components were individually packaged. In response to
the demands of the Department of Defense to increase performance for microwave
transmission systems (especially systems on aircraft and missiles), prime
contractors integrated more functionality into the systems while reducing size
and weight. To accomplish this, the prime contractors demanded higher levels of
integration from component suppliers.
REMEC, which started in 1983 as a producer of single function components,
took a leadership role in developing microwave MFMs in which numerous component
functions are integrated into a single module. Integrating multiple functions
into one module reduces packaging and interconnects, permits improved
performance through optimal partitioning and implementation of functions and
minimizes over-engineering of products. The result has been significant
reductions in size, weight and cost and improvements in producibility and
reliability.
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REMEC believes that the evolution of commercial wireless telecommunications
systems also requires increased integration to reduce size, weight and cost and
to increase reliability and producibility of base station equipment. REMEC
believes that the high cost of facilities, power and maintenance necessitates
the development of small, highly reliable and cost effective microwave "front
ends" (the circuitry of the radio that enables signals to be transmitted and
received at microwave frequencies) for wireless transmission systems, requiring
the increased use of MFMs. In addition, increasing use of MFMs facilitates
higher volume commercial production of wireless infrastructure equipment.
REMEC believes that the following core competencies enable it to address the
microwave requirements of customers in the wireless telecommunications market:
INTEGRATION EXPERTISE. Integration is a key part of designing high
performance equipment that operates at higher frequencies or that must operate
over a broad frequency range. By effectively integrating multiple functions into
single modules, REMEC has been able to accomplish the following:
- reduce packaging and interconnects
- improve performance through optimal partitioning and implementation of
functions
- reduce product size and parts count
- increase reliability
- minimize over engineering of products (e.g., avoid using higher
performance, more costly components than are necessary
- reduce unit cost
CONCURRENT ENGINEERING. REMEC has excelled at developing products optimized
in design, process and manufacturing implementation by employing a concurrent
engineering approach during the product development cycle. REMEC's concurrent
engineering approach extends to both its customer and supplier base. REMEC often
participates in its customers' product development cycle during the conceptual
design stage and is able to influence its customers' system architecture/design
in order to optimize for cost and performance at the MFM level. Likewise, REMEC
invites suppliers to participate in the design process to optimize material and
device selection. In the product design process, product teams with design,
process, quality and manufacturing engineering expertise review the product
design in an effort to assure its producibility, high quality and affordability.
Manufacturing process development and tooling occurs concurrently with product
development. REMEC believes that its concurrent engineering process reduces
cycle times and costly product redesigns when products move to volume
production.
TECHNOLOGY LEADERSHIP. Since its inception in 1983, REMEC has developed
over 2,500 microwave MFMs and components and has become an important supplier of
MFMs to many of the nation's leading telecommunication OEMs and defense
contractors. REMEC is strategically partnered with a number of OEMs, including
P-COM, Inc., STM Wireless, Inc., Digital Microwave Corporation, and Lucent
Technologies, Inc. where REMEC provides all, or a large percentage of, the
microwave content in an OEM product. This partnership typically includes
concurrent engineering activity and shared technology development. REMEC also
has received significant recognition, including "preferred supplier"
designations, from numerous defense customers including Lockheed Martin
Corporation, TRW Inc., Northrop Grumman Corporation, Raytheon Company and
Motorola Inc. These distinctions generally carry with them the opportunity to
bid on all new product procurements by the customer in REMEC's area of expertise
allowing REMEC to increase market share. REMEC has developed a large number of
proprietary designs that provide performance/cost advantage to its customers.
These designs are continuously improved through technological evolution which is
guided by REMEC's Technology Board. These designs can be re-applied or re-used
resulting in rapid product development and time to market. A large number of
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proprietary manufacturing processes have also been developed to support large
volume production of microwave circuits.
VERTICAL INTEGRATION IN DESIGN AND MANUFACTURING. With vertical
integration, REMEC focuses on and retains control of each step of the entire
design and manufacturing process while minimizing the use of outside sources and
subcontractors for key services. Vertical integration reduces time to market and
unit costs and improves quality control, reliability and REMEC's ability to
implement volume production. REMEC has enhanced its vertical integration
capability with recent acquisitions, including a surface mount board assembly
manufacturer and several microwave component companies which provide key
functional capabilities that can be used in REMEC's product designs.
STRATEGY
REMEC intends to enhance its position as a leading developer and supplier of
microwave MFMs and components to wireless telecommunications infrastructure OEMs
and to retain leadership in developing and supplying microwave MFMs and
components to the defense industry. Execution of the company's strategy
incorporates the following key elements:
LEVERAGE BREADTH OF MICROWAVE CAPABILITIES IN TELECOM EQUIPMENT
MARKET. Through internal development and acquisitions, REMEC believes that it
has compiled one of the broadest portfolio of microwave capabilities in the
industry. REMEC intends to leverage that breadth of expertise by offering total
microwave solutions to telecommunications infrastructure OEMs for all of their
microwave component and subsystem needs. REMEC believes that it can provide such
customers significant benefits in cost, performance, and time to market compared
to other microwave vendors who can supply only single function components.
MAINTAIN AND ENHANCE LEADERSHIP IN MICROWAVE TECHNOLOGY. REMEC intends to
maintain and enhance its leadership in microwave technology in continuing its
participation in selected defense programs that involve highly sophisticated,
state-of-the-art microwave technology. REMEC has formed a Technology Board
comprised of its key executives and chief engineers to disseminate throughout
the company technological improvements made in various subsidiaries of the
company and to anticipate changes in technology and the evolving technological
needs of its customers. REMEC believes that the skills developed by it in the
defense industry and honed in the commercial wireless market will continue to be
a key factor in achieving substantial reductions in the size and cost of
commercial wireless infrastructure equipment.
BUILD STRATEGIC CUSTOMER ALLIANCES. REMEC intends to continue to focus on
developing significant customer alliances with leading wireless OEMs and defense
prime contractors. REMEC concentrates its efforts on applications which offer
the potential for recurring high volume production. In wireless
telecommunications, REMEC's strategy is to enter into strategic alliances with
selected leaders in each of the wireless market segments targeted by the
company. REMEC supports its customers during their conceptual design stage to
influence the system architecture/design to optimize for cost, performance and
producibility, further enhancing the likelihood of follow-on business.
MAINTAIN COST COMPETITIVENESS. REMEC intends to continue to implement
process manufacturing automation and believes that its ability to develop a high
level of automated product alignment and test capability offers an important
competitive advantage. REMEC also intends to expand its foreign manufacturing
operations (in Canada, Costa Rica and, through a maquiladora program, Mexico)
when appropriate to lower its costs and/or to access an available workforce.
REMEC also believes that its capabilities in integrating numerous functions into
single modules will enable it to continue to produce high performance products
at competitive cost.
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PURSUE ACQUISITIONS. REMEC pursues acquisitions to augment technology by
acquiring specialized component firms and to take advantage of opportunities to
consolidate niche companies in the currently fragmented microwave equipment
industry. REMEC believes that expansion of capability through the acquisition of
component firms when combined with REMEC's technological and manufacturing
skills at the component level will allow it to achieve improved levels of MFM
integration. REMEC believes that it will thereby be better able to respond to
customer requirements for reduced size and weight and lower cost.
PRODUCTS
Every microwave transmission system contains a microwave "front end" that
performs the function of transforming modulated voice, data or video from an
intermediate frequency ("IF") signal (generally 10 MHz to 500 MHz) into a
microwave frequency signal for transmission and/or converting an incoming signal
from microwave frequencies back into an IF modulated voice, data or video
signal. A microwave front end will usually consist of several interconnected
MFMs and single function components.
POINT-TO-POINT/POINT-TO-MULTIPOINT RADIO MARKET. In the point-to-point
radio market, REMEC manufactures microwave front ends or outdoor units (ODUs) as
well as the individual microwave modules (including diplexers, transceivers,
synthesizers) that provide the microwave front end functionality. Traditionally,
radio companies such as P-COM purchased individual modules and performed ODU
integration internally. As these radio companies have grown, there has been a
significant trend toward outsourcing the entire ODU. Using REMEC's broad
functional microwave capability, REMEC has been able to obtain a large portion
of ODU business from its existing customers. REMEC also supplies a significant
portion of microwave modules to traditional customers with established in-house
integration capability.
VSAT MARKET. Like the point-to-point radio business, REMEC has focused its
VSAT business at the ODU level. Most VSAT system integrators procure the
complete ODU. REMEC also provides microwave modules such as power amplifiers to
ODU integrators. A significant portion of this business is with STM, although
REMEC is currently marketing an industry standard SCPOC (single channel per
carrier) ODU at C-Band with plans to develop an additional product this year.
REMEC has also completed development of a low cost SES VSAT terminal for STM for
rural telephony applications.
CELLULAR/PCS MARKET. In the cellular/PCS market, REMEC sells components
including filters, amplifiers, VCOs and mixers that are used in base station
infrastructure equipment. REMEC also sells a number of MFMs including delay
filter assemblies and filter/LNA assemblies for higher performance digital base
stations to customers such as Motorola Inc. REMEC expects to derive significant
synergy from recently acquired component capability to provide more fully
integrated radio solutions to this industry much like the VSAT and
point-to-point radio business.
DEFENSE MARKET. REMEC focuses its efforts on defense programs which it
believes have the highest probability of follow-on production. Tactical
aircraft, satellites, missile systems and smart weapons comprise the majority of
the platforms of REMEC's customers. Defense industry programs from which REMEC
derives or may derive significant revenues include: (i) the F-22 Stealth
Tactical Fighter Aircraft program for the U.S. Air Force for which REMEC is
developing switch amplifiers, switch filters, integrated switch modules, power
amplifiers, frequency generators, frequency concerters and frequency multipliers
for three different microwave subsystems (CNI, Radar and Electronic Warfare);
(ii) the Airborne Self-Protection Jammer (ASPJ) program for foreign military
customers and the U.S. Navy for which REMEC has developed and produced a
28-channel switched filter bank and multi-function components such as frequency
modulators; (iii) the Advanced Medium Range Air to Air Missile (AMRAAM) program
for the U.S. Air Force for which REMEC has developed and produced frequency
multipliers, converters and filters; and (iv) the Longbow Missile and Radar
programs for the U.S. Army for which REMEC has developed and is producing MFMs,
amplifiers, VCOs and filters.
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The following table lists certain of REMEC's microwave components and MFMs:
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PRODUCT TYPES FUNCTION
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<S> <C>
Filters, Duplexers and Multiplexers.......... Separate desired frequency bands from undesired bands
Amplifiers................................... Increase signal strength and power
Frequency Mixers............................. Provide frequency conversion function
Voltage Controlled Oscillators............... Generate frequency controlled by an input voltage
Dielectric Resonator Oscillators............. Generate fixed frequency microwave signal
Cavity Oscillators........................... Generate fixed frequency microwave signal
Switches..................................... Switch signal between different signal paths
Switch Attenuators........................... Select discrete attenuation values
Variable Attenuators......................... Select continuously variable attenuation values
Switch Matrices.............................. Allow MxN connectivity between M-inputs and
N-outputs
Switched Delay Lines......................... Select discrete phase delays
Switched Filters............................. Select between multiple filters
Multipliers.................................. Multiply an input frequency by an integer
Comb Generators.............................. Provide several multiplied frequencies in a single
output
Frequency Generators......................... Generate multiple discrete frequency outputs
Frequency Synthesizers....................... Generate a discrete stepped frequency output
Frequency Converters......................... Provide frequency conversion function
Tranceivers.................................. Transmit, receive and channel select microwave signals
for satellite applications
Point-to-Point Radio Front Ends.............. Transmit, receive and channel select microwave signals
for terrestrial applications
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CUSTOMERS
REMEC's customers for commercial wireless MFMs and components include P-COM,
Inc., STM Wireless, Inc., Digital Microwave Corporation, General Instrument
Corp., Alcatel Network Systems, Inc. and Motorola Inc. REMEC's customers for
defense microwave MFMs and components include Lockheed Martin Corporation,
Motorola Inc., Northrop Grumman Corporation and Raytheon Company (including
portions of Hughes Aircraft Co. and Texas Instruments which Raytheon acquired in
1997). During fiscal 1997 and 1998, sales to P-COM, Inc. accounted for
approximately 13% and 14%, respectively, of net sales. During fiscal 1999, sales
to Motorola, Inc. and Raytheon Company accounted for 14% and 11%, respectively,
of net sales.
BACKLOG
REMEC's order backlog as of January 31, 1998 and January 31, 1999 was $214.9
million and $222.8 million, respectively. REMEC includes in its backlog only
those orders for which it has accepted purchase orders. However, backlog is not
necessarily indicative of future sales. In certain circumstances, customers
place purchase orders but release quantities incrementally against those
purchase orders, subject to an agreed period of performance. At the time a
purchase order is placed, REMEC records the entire amount of the purchase order
as backlog, even if the customer releases quantities incrementally against the
purchase order. A substantial amount of REMEC's backlog can be canceled at any
time without penalty, except, in most cases, for the recovery of REMEC's actual
committed costs and profit on
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work performed up to the date of cancellation. A failure to develop products
meeting contract specifications could lead to a cancellation of the related
purchase orders.
SALES AND MARKETING
REMEC uses a team-based sales approach to facilitate close management by
Company personnel of relationships at multiple levels of the customer's
organization, including management, engineering and purchasing personnel.
REMEC's integrated sales approach involves a team consisting of a senior
executive, a business development specialist, members of REMEC's engineering
department and, occasionally, a local technical sales representative. In
particular, the use of experienced engineering personnel as part of the sales
effort enables close technical collaboration with the customer during the design
and qualification phase of new communications equipment which, REMEC believes,
is critical to the integration of its products into its customers equipment.
REMEC's executive officers are also involved in all aspects of REMEC's
relationships with its major customers and work closely with their senior
management. REMEC utilizes manufacturers and sales representatives to identify
opportunities.
To date, REMEC has sold its products overseas with the assistance of
independent sales representatives. Sales outside of the United States
represented 7%, 7% and 6% of net sales in fiscal years ended January 31, 1997,
1998 and 1999, respectively. Sales outside of the United States are denominated
in U.S. dollars in order to reduce the risks associated with the fluctuations of
foreign currency exchange rates. The international sales do not include products
sold to foreign end users by REMEC's domestic OEM customers.
MANUFACTURING
REMEC assembles, tests, packages and ships products at its manufacturing
facilities in the following locations: San Diego, Escondido, San Jose, Santa
Clara and Milpitas, California; Melbourne, Florida; Toronto, Canada; San Jose,
Costa Rica. REMEC also has products manufactured through a contract
manufacturing operation in Tijuana, Mexico. REMEC believes that process
expertise and discipline are key elements of successful high volume production
of microwave MFMs because of the precise specifications required. Since
inception, REMEC has been manufacturing products for defense programs in
compliance with the stringent MIL-Q-9858 specifications. REMEC received ISO-9001
certification from the Defense Electronics Supply Center for its microwave
facilities. ISO-9001 is a standard established by the International Organization
for Standardization that provides a methodology by which manufacturers can
obtain quality certification. Although this certification is not currently
required by any of its customers, REMEC believes that it will be beneficial to
the acquisition of future business. To assure the highest product quality and
reliability and to maximize control over the complete manufacturing cycle and
costs, REMEC seeks to achieve vertical integration in the manufacturing process
wherever appropriate.
Historically, the volume of REMEC's production requirements in the defense
markets was not sufficient to justify the widespread implementation of automated
manufacturing processes. REMEC anticipates that increased sales of its products
to the wireless telecommunications industry will require a significant increase
in REMEC's manufacturing capacity. Accordingly, REMEC has introduced automated
manufacturing techniques for product assembly and testing and is currently
planning to expand its facilities.
REMEC attempts to utilize standard parts and components that are available
from multiple vendors. However, certain components used in REMEC's products are
currently available only from single sources, and other components are available
from only a limited number of sources. REMEC's reliance on contract
manufacturers and on sole suppliers involves several risks, including a
potential inability to obtain critical materials or services and reduced control
over production costs, delivery schedules, reliability and quality of components
or assemblies. Any inability to obtain timely deliveries of acceptable quality,
or any other circumstance that would require REMEC to seek alternative contract
manufacturers or suppliers, could
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delay REMEC's ability to deliver its products to its customers, which in turn
would have a material adverse effect on REMEC's business, financial condition
and results of operations. Despite the risks associated with purchasing
components from single sources or from a limited number of sources, REMEC has
made the strategic decision to select single source or limited source suppliers
in order to obtain lower pricing, receive more timely delivery and maintain
quality control. In 1997, REMEC acquired Veritek which provides surface mount
capabilities and expertise. REMEC also relies on contract manufacturers for
circuit board assembly. REMEC generally orders components and circuit boards
from its suppliers and contract manufacturers by purchase order on an as needed
basis.
COMPETITION
The markets for REMEC's products are extremely competitive and are
characterized by rapid technological change, new product development, product
obsolescence and evolving industry standards. In addition, price competition is
intense and significant price erosion generally occurs over the life of a
product. REMEC faces some competition from component manufacturers who have
integration capabilities, but believes that its primary competition is from the
captive manufacturing operations of large wireless telecommunications OEMs
(including all of the major telecommunications equipment providers) and defense
prime contractors who are responsible for a substantial majority of the present
worldwide production of MFMs. REMEC's future success is dependent upon the
extent to which these OEMs and defense prime contractors elect to purchase from
outside sources rather than manufacture their own microwave MFMs and components.
REMEC's customers and large manufacturers of microwave transmission equipment
could also elect to enter into the non-captive market for microwave products and
compete directly with REMEC. Many of REMEC's current and potential competitors
have substantially greater technical, financial, marketing, distribution and
other resources than REMEC and have greater name recognition and market
acceptance of their products and technologies. No assurance can be given that
REMEC's competitors will not develop new technologies or enhancements to
existing products or new products that will offer superior price or performance
features or that new products or technologies will not render obsolete the
products of REMEC's customers. For example, innovations such as a wireless
telephone system utilizing satellites instead of terrestrial base stations or a
device that integrates microwave functionality could significantly reduce the
potential market for REMEC's products. REMEC believes that to remain competitive
in the future it will need to invest significant financial resources in research
and development.
RESEARCH AND DEVELOPMENT
Research and development expenses recorded by REMEC for the fiscal years
ended January 31, 1997, 1998 and 1999 were approximately $4,605,000, $5,108,000
and $7,851,000, respectively. REMEC's research and development efforts in the
defense industry are conducted in direct response to the unique requirements of
a customer's order and, accordingly, are included in cost of sales and the
related funding in net sales. REMEC expects that as its commercial business
expands, research and development expenses will increase in amount and as a
percentage of sales.
GOVERNMENT REGULATIONS
REMEC's products are incorporated into wireless telecommunications systems
that are subject to regulation domestically by the FCC and internationally by
other government agencies. Although the equipment operators and not REMEC are
responsible for compliance with such regulations, regulatory changes, including
changes in the allocation of available frequency spectrum, could materially
adversely affect REMEC's operations by restricting development efforts by
REMEC's customers, obsoleting current products or increasing the opportunity for
additional competition. Changes in, or the failure by REMEC to manufacture
products in compliance with, applicable domestic and international regulations
could have a material adverse effect on REMEC's business, financial condition
and results of operations. In addition,
9
<PAGE>
the increasing demand for wireless telecommunications has exerted pressure on
regulatory bodies worldwide to adopt new standards for such products, generally
following extensive investigation of and deliberation over competing
technologies. The delays inherent in this governmental approval process have in
the past caused and may in the future cause the cancellation, postponement or
rescheduling of the installation of communications systems by REMEC's customers,
which in turn may have a material adverse effect on the sale of products by
REMEC to such customers.
REMEC is also subject to a variety of local, state and federal governmental
regulations relating to the storage, discharge, handling, emission, generation,
manufacture and disposal of toxic or other hazardous substances used to
manufacture REMEC's products. The failure to comply with current or future
regulations could result in the imposition of substantial fines on REMEC,
suspension of production, alteration of its manufacturing processes or cessation
of operations.
Because of its participation in the defense industry, REMEC is subject to
audit from time to time for its compliance with government regulations by
various agencies, including the Defense Contract Audit Agency, the Defense
Investigative Service and the Office of Federal Control Compliance Programs.
These and other governmental agencies may also, from time to time, conduct
inquiries or investigations that may cover a broad range of Company activity.
Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. Also, an adverse finding in
any such audit, inquiry or investigation could involve penalties that may have a
material adverse effect on REMEC's business, financial condition or results of
operation.
REMEC believes that it operates its business in material compliance with
applicable government regulations.
INTELLECTUAL PROPERTY
REMEC does not presently hold a patent applicable to its products which is
significant. In order to protect its intellectual property rights, REMEC relies
on a combination of trade secret, copyright and trademark laws and employee and
third-party nondisclosure agreements, as well as limiting access to and
distribution of proprietary information. There can be no assurance that the
steps taken by REMEC to protect its intellectual property rights will be
adequate to prevent misappropriation of REMEC's technology or to preclude
competitors from independently developing such technology. Furthermore, there
can be no assurance that, in the future, third parties will not assert
infringement claims against REMEC or with respect to its products for which
REMEC has indemnified certain of its customers. Asserting REMEC's rights or
defending against third party claims could involve substantial costs and
diversion of resources, thus materially and adversely affecting REMEC's
business, financial condition and results of operations. In the event a third
party were successful in a claim that one of REMEC's products infringed its
proprietary rights, REMEC may have to pay substantial royalties or damages,
remove that product from the marketplace or expend substantial amounts in order
to modify the product so that it no longer infringes such proprietary rights,
any of which could have a material adverse effect on REMEC's business, financial
condition and results of operations.
EMPLOYEES
As of March 1, 1999, REMEC had a total of 1,904 employees, including 1,204
in manufacturing and operations, 258 in research, development and engineering
129 in quality assurance, 28 in sales and marketing and 284 in administration,
material procurement and planning. REMEC believes its future performance will
depend in large part on its ability to attract and retain highly skilled
employees. None of REMEC's employees is represented by a labor union and REMEC
has not experienced any work stoppage. REMEC considers its employee relations to
be good.
10
<PAGE>
ITEM 2. PROPERTIES
REMEC's principal administrative, engineering and manufacturing facilities
are located in eight buildings aggregating approximately 200,000 square feet in
San Diego and Escondido, California, consisting of one 21,000 square foot
facility owned by REMEC and seven leased facilities, pursuant to leases which
expire in December 2002 through March 2007. REMEC's Northern California
operations are located in three leased buildings aggregating approximately
79,000 square feet in San Jose, Milpitas and Santa Clara, California. These
leases expire on various dates beginning in August 1999 through October 2003.
Q-bit owns a 51,000 square foot building located in Melbourne, Florida. REMECINC
S.A. is located in San Jose, Costa Rica in a 39,000 square foot building. REMEC
is in the process of purchasing this property. Nanowave leases approximately
25,000 square feet in two buildings located in Toronto, Canada, under leases
which expire in September 2001. REMEC believes that its existing facilities are
adequate to meet its current needs and that suitable additional or alternative
space will be available on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
Neither REMEC nor any of its subsidiaries is presently subject to any
material litigation, nor to REMEC's knowledge, is such litigation threatened
against REMEC or its subsidiaries, other than routine actions and administrative
proceedings arising in the ordinary course of business, all of which
collectively are not anticipated to have a material adverse effect on the
business or financial condition of REMEC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of REMEC's shareholders during the last
quarter of its fiscal year ended January 31, 1999.
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<PAGE>
PART II
ITEM 5. MARKET FOR REMEC'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Prior to the quotation of REMEC's Common Stock on the Nasdaq National Market
beginning on February 1, 1996, there was no established trading market for the
Common Stock. Since February 1, 1996, the Common Stock has been quoted on the
Nasdaq National Market under the symbol "REMC." The following table sets forth
the range of high and low closing sale prices of the Common Stock as reported on
the Nasdaq National Market for the quarterly periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDING JANUARY 31, 1998
First Quarter(1).................................................................. $ 18.828 $ 14.000
Second Quarter(1)................................................................. 31.250 16.828
Third Quarter..................................................................... 38.313 20.000
Fourth Quarter.................................................................... 27.250 17.125
FISCAL YEAR ENDING JANUARY 31, 1999
First Quarter..................................................................... $ 29.000 $ 24.875
Second Quarter.................................................................... 25.125 7.625
Third Quarter..................................................................... 10.625 7.313
Fourth Quarter.................................................................... 21.938 11.469
FISCAL YEAR ENDING JANUARY 31, 2000
First Quarter (through March 5, 1999)............................................. $ 20.500 $ 15.125
</TABLE>
- ------------------------
(1) Adjusted for a three-for-two stock split paid on June 27, 1997 to
shareholders of record as of June 20, 1997.
The last reported sale price of the Common Stock on the Nasdaq National
Market on March 5, 1999 was $17.625. As of March 5, 1999 there were
approximately 764 holders of record of Common Stock.
DIVIDEND POLICY
REMEC currently intends to retain all future earnings, if any, for use in
the operation and development of its business and, therefore, does not expect to
declare or pay any cash dividends on its Common Stock in the foreseeable future.
REMEC's line of credit agreement restricts the amount of cash dividends that
REMEC may pay. See Note 4 to Consolidated Financial Statements.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
REMEC's statements of income for each of the years in the three year period
ended January 31, 1999 and with respect to the balance sheets at January 31,
1998 and 1999, are derived from the audited consolidated financial statements
which are included elsewhere in this Annual Report on Form 10-K and are
qualified by reference to such financial statements. The statement of operations
data for the years ended January 31, 1995 and 1996 and the balance sheet data at
January 31, 1995, 1996 and 1997, are derived from audited financial statements
not included in this Annual Report on Form 10-K. The following selected
financial data should be read in conjunction with the Consolidated Financial
Statements for REMEC and notes thereto and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1)(3):
Net sales................................................... $ 81,978 $ 93,228 $ 118,554 $ 156,057 $ 158,402
Cost of sales............................................... 57,994 66,172 85,659 108,053 113,013
--------- --------- --------- --------- ---------
Gross profit................................................ 23,984 27,056 32,895 48,004 45,389
Operating expenses:
Selling, general and administrative..................... 15,646 16,611 19,349 24,773 28,206
Research and development................................ 2,067 4,016 4,605 5,108 7,851
--------- --------- --------- --------- ---------
Total operating expenses............................ 17,713 20,627 23,954 29,881 36,057
--------- --------- --------- --------- ---------
Income from operations...................................... 6,271 6,429 8,941 18,123 9,332
Gain on sale of subsidiary.................................. -- -- -- 2,833 --
Interest income (expense) and other, net.................... (590) (401) 48 2,280 3,111
--------- --------- --------- --------- ---------
Income before provision for income taxes.................... 5,681 6,028 8,989 23,236 12,443
Provision for income taxes.................................. 2,394 2,429 4,017 8,501 2,115
--------- --------- --------- --------- ---------
Net income.................................................. $ 3,287 $ 3,599 $ 4,972 $ 14,735 $ 10,328
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share:
Basic................................................... $ .25 $ .28 $ .30 $ .71 $ .45
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. $ .25 $ .28 $ .30 $ .68 $ .44
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculations:
Basic................................................... 12,965 12,892 16,517 20,841 23,028
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted................................................. 12,965 13,009 16,828 21,534 23,482
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA(1)(3):
Cash and cash equivalents................................... $ 3,628 $ 3,828 $ 63,172 $ 41,937 $ 82,314
Working capital............................................. 15,620 17,575 84,112 84,496 133,681
Total assets................................................ 42,357 48,558 125,440 153,865 206,585
Long-term debt.............................................. 3,235 4,781 2,462 -- --
Total shareholders' equity.................................. 24,489 27,247 103,555 128,495 188,934
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
BACKLOG(1)(2):.............................................................................. $ 214,855 $ 222,787
</TABLE>
- ------------------------------
(1) REMEC acquired Magnum in August 1996, Radian in February 1997, C&S Hybrid in
June 1997 and Q-bit in October 1997, each of which was accounted for as a
pooling of interests and, as such, all financial amounts contained in the
above table have been restated to include the financial results and data of
Magnum, Radian, C&S Hybrid and Q-bit for all periods presented. REMEC
acquired Verified Technical Corporation in March 1997 and Nanowave
Technologies Inc. in October 1997 in transactions accounted for as
purchases.
(2) Backlog is not necessarily indicative of future sales and is generally
subject to cancellation. See "Item 1. Business--Backlog."
(3) In February 1999, REMEC announced its plan to acquire Airtech plc in
exchange for common stock with a value of approximately $32.0 million. The
acquisition will be accounted for as a pooling of interests and accordingly,
all financial amounts contained in the above table will be restated to
include the financial results and data of Airtech plc for all periods
presented. See Note 10--Subsequent Event in the accompanying financial
statements for presentation of the proforma results.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
REMEC commenced operations in 1983 and has become a leader in the design and
manufacture of microwave multi-function modules (MFMs) for microwave
transmission systems used in defense applications and the commercial wireless
telecommunications industry. REMEC's consolidated results of operations include
the operations of REMEC Microwave, Inc. (Microwave), REMEC Wireless, Inc.
(Wireless), Humphrey, Inc. (Humphrey), REMEC Magnum, Inc. (Magnum), Verified
Technical Corporation (Veritek), C&S Hybrid, Inc. (C&S Hybrid), Q-bit
Corporation (Q-bit) and Nanowave Technologies Inc. (Nanowave) and REMECINC S.A.
(REMEC Costa Rica). REMEC's consolidated results of operations also include the
operations of RF Microsystems (RFM) for the period from April 30, 1996 to August
26, 1997.
REMEC's research and development efforts for customers in the defense
industry are conducted in direct response to the unique requirements of a
customer's order and, accordingly, expenditures related to such efforts are
included in cost of sales and the related funding is included in net sales. As a
result, historical REMEC funded research and development expenses have been
minimal. As REMEC's commercial business has expanded, research and development
expenses have generally increased in amount and as a percentage of sales. REMEC
expects this trend to continue, although research and development expenses may
fluctuate on a quarterly basis both in amount and as a percentage of sales.
Effective April 30, 1996, REMEC acquired all of the outstanding common stock
of RFM and various VSAT microwave design and manufacturing resources from STM in
a transaction that was accounted for as a purchase. RFM provides the Department
of Defense with research and analysis, systems engineering and test evaluation
services. The consolidated statements of income and cash flows for all periods
subsequent to April 30, 1996 include RFM's operating results from April 30,
1996. On August 26, 1997, REMEC sold RFM in exchange for cash consideration of
$5.0 million. The sale resulted in an after-tax gain of $1,728,000, or $0.08 per
share.
On August 26, 1996, REMEC acquired all of the outstanding common stock of
Magnum in a transaction that was accounted for as a pooling of interests. Magnum
is a leading supplier of oscillators and mixers. On February 28, 1997, REMEC
acquired all of the outstanding common stock of Radian, in a transaction that
was accounted for as a pooling of interests. Radian provides the defense market
with microwave components, primarily synthesizers, receivers, oscillators and
filters. On June 27, 1997, REMEC acquired all of the outstanding common stock of
C&S Hybrid in a transaction that was accounted for as a pooling of interests.
C&S Hybrid is a manufacturer of transmitter and receiver hardware assemblies
that are integrated into terrestrial-based point-to-point microwave radios
primarily for use in commercial applications. On October 24, 1997, REMEC
acquired all of the outstanding common stock of Q-bit in a transaction that was
accounted for as a pooling of interests. Q-bit is a manufacturer of amplifier-
based microwave components and multi-function modules. All accompanying
historical financial statement information has been restated to include the
operations, assets and liabilities of Magnum, Radian, C&S Hybrid, and Q-bit.
In March 1997, REMEC acquired Veritek, a producer of high quality surface
mount manufacturing assemblies in a transaction accounted for as a purchase. The
consolidated statements of income and cash flows for all periods subsequent to
March 31, 1997 include Veritek's operating results from April 1, 1997. In
October 1997, REMEC formed REMEC Canada (as a wholly owned subsidiary) for the
purpose of facilitating the acquisition of Canadian companies, including the
then contemplated acquisition of Nanowave, a manufacturer of amplifier based
microwave and millimeter wave components and multi-function modules, in a
transaction accounted for as a purchase. REMEC Canada completed the acquisition
of Nanowave effective as of October 29, 1997. The fiscal 1998 consolidated
statements of income and cash flows include Nanowave's operating results from
October 31, 1997.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total net sales, certain
consolidated statements of income data for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net sales............................................................. 100% 100% 100%
Cost of sales......................................................... 71 69 72
--- --- ---
Gross profit...................................................... 29 31 28
Operating expenses:
Selling, general & administrative................................. 18 16 17
Research and development.......................................... 5 3 4
--- --- ---
Total operating expenses...................................... 23 19 21
--- --- ---
Income from operations................................................ 6 12 7
Gain on sale of subsidiary............................................ -- 1 --
Interest income and other, net........................................ 2 1 --
--- --- ---
Income before provision for income taxes.............................. 8 14 7
Provision for income taxes............................................ 1 5 3
--- --- ---
Net income............................................................ 7% 9% 4%
--- --- ---
--- --- ---
</TABLE>
FISCAL YEAR ENDED JANUARY 31, 1999 VS. FISCAL YEAR ENDED JANUARY 31, 1998
NET SALES. Net sales increased 2% from $156.1 million during fiscal 1998 to
$158.4 million during fiscal 1999. The increase in sales was primarily
attributable to the increased revenues from REMEC's Veritek and Nanowave
subsidiaries (which were acquired in March and October 1997, respectively, and
therefor do not have a full year's operations included in the fiscal 1998
results of operations) which offset the reduction in demand from REMEC's
commercial customers as a result of the economic difficulties in certain
international markets in which those customers operate and a decline in sales of
REMEC's precision instrument products.
GROSS PROFIT. Gross profit decreased 5% from $48.0 million in fiscal 1998
to $45.4 million in fiscal 1999. Consolidated gross margins decreased from 31%
during fiscal 1998 to 29% during fiscal 1999. The fluctuations in REMEC's gross
margins are primarily attributable to changes in the mix of products sold and to
reduced production volume at certain of REMEC's production facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased 14% from $24.8 million during fiscal
1998 to $28.2 million during fiscal 1999. The increase in SG&A was primarily
attributable to inclusion of a full year of SG&A costs from REMEC's Veritek and
Nanowave subsidiaries, accounting and legal expenses associated with an income
tax credit study completed during fiscal 1999, and increased personnel, legal
and other administrative costs resulting from REMEC's growth. As a percentage of
net sales, SG&A expenses increased from 16% in fiscal 1998 to 18% in fiscal
1999, due to the factors discussed above.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 54% from $5.1 million during fiscal 1998 to $7.9 million during fiscal
1999. These expenditures are almost entirely attributable to the commercial
wireless business and reflect an increase in activity associated with product
development.
15
<PAGE>
GAIN ON SALE OF SUBSIDIARY. REMEC's results of operations for the year
ended January 31, 1998 includes the gain from the sale of REMEC's RFM
subsidiary. There was no similar gain in the current fiscal year.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
from $2.3 million during fiscal 1998 to $3.1 million during fiscal 1999. This
increase was due to the increased level of cash available for investment as a
result of the funds generated from REMEC's follow-on public offering which was
completed in March 1998.
PROVISION FOR INCOME TAXES. REMEC's effective tax rate declined from 37%
during fiscal 1998 to 17% during fiscal 1999. The decrease in the effective
income tax rate reflects the tax benefit of $1,992,000 related to the
recognition of research and experimentation tax credits pertaining to previously
filed tax returns. The reduction in the effective tax rate during fiscal 1999
also reflects the benefit of tax credits for certain capital expenditures and
the effect of tax exempt interest income.
FISCAL YEAR ENDED JANUARY 31, 1998 VS. FISCAL YEAR ENDED JANUARY 31, 1997
NET SALES. Net sales increased 32% from $118.6 million during fiscal 1997
to $156.1 million during fiscal 1998. The increase in sales was primarily
attributable to increased customer demand for REMEC's commercial wireless
products.
GROSS PROFIT. Gross profit increased 46% from $32.9 million in fiscal 1997
to $48.0 million in fiscal 1998. Consolidated gross margins increased from 28%
during fiscal 1997 to 31% during fiscal 1998. The increase in gross margins was
primarily the result of changes in the mix of products shipped and due to the
lower unit costs arising from improved overhead absorption attributable to the
increase in sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased 28% from $19.3 million during fiscal
1997 to $24.8 million during fiscal 1998. This increase was primarily
attributable to increased personnel, legal and other administrative costs
resulting from REMEC's growth, as well as approximately $1.1 million of direct
transaction costs associated with the Radian, C&S Hybrid and Q-bit mergers. As a
percentage of net sales, SG&A expenses declined from 17% in fiscal 1997 to 16%
in fiscal 1998, due to increased sales volume.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased 11% from $4.6 million during fiscal 1997 to $5.1 million during fiscal
1998. These expenditures are almost entirely attributable to the commercial
wireless business.
GAIN ON SALE OF SUBSIDIARY. REMEC's results of operations for the year
ended January 31, 1998 includes the gain from the sale of REMEC's RFM
subsidiary. There was no similar gain in the prior fiscal year.
INTEREST INCOME AND OTHER, NET. Interest income and other, net increased
from $48,000 during fiscal 1997 to $2.3 million during fiscal 1998. This
increase was due to the increased level of cash available for investment as a
result of the funds generated from REMEC's follow-on public offering which was
completed in January 1997.
PROVISION FOR INCOME TAXES. REMEC's effective tax rate declined from 45%
during fiscal 1997 to 37% during fiscal 1998. The decrease reflected the
pre-acquisition net income generated at REMEC's Q-bit subsidiary in fiscal 1998.
Prior to its acquisition by REMEC, Q-bit had operated as an S corporation for
federal and state income tax purposes and, accordingly, all taxable income
generated by Q-bit during the pre-acquisition period in fiscal 1998 was
allocated to the shareholders of Q-bit and included on their personal income tax
returns. Therefore, REMEC's effective tax rate in fiscal 1998 reflects no
provision for income taxes on Q-bit's pre-acquisition earnings. The reduction in
the effective tax rate in fiscal 1998 also reflects the benefit of tax credits
for certain capital expenditures.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, REMEC had $133.7 million of working capital which
included cash and cash equivalents totaling $82.3 million. REMEC also has $17.0
million available under two credit facilities consisting of a $9.0 million
revolving working capital line of credit and a $8.0 million revolving term loan.
The borrowing rate under both credit facilities is based on a fixed spread over
the London Interbank Offered Rate (LIBOR). The revolving working capital line of
credit terminates July 3, 2000. The revolving period under the term loan expires
July 1, 2000, at which time any loan amount outstanding converts to a term loan
to be fully amortized and paid in full by January 2, 2004. As of January 31,
1999, there were no borrowings under REMEC's credit facilities.
During fiscal 1999, net cash provided by operations totaled $9.5 million as
the cash flows from earnings and non-cash expenses (primarily depreciation and
amortization) more than offset the $3.5 million increase in inventories and the
$6.7 million repayment of trade accounts payable and other accrued expenses.
Inventories increased during this period due to requests by certain commercial
customers to delay delivery of previously announced requirements. Investing
activities utilized $19.0 million during fiscal 1999, primarily as a result of
capital expenditures of $17.4 million and deposits associated with the
acquisition of land and a manufacturing facility in Costa Rica of $1.5 million.
The bulk of the capital expenditures were associated with the expansion of
REMEC's commercial wireless telecommunications business. The above expenditures
were financed primarily by cash on hand. REMEC's future capital expenditures may
continue to be substantially higher than historical levels as a result of
commercial wireless telecommunications expansion requirements. Financing
activities generated approximately $49.8 million during fiscal 1999, principally
as a result of the net proceeds of $49.6 million from the follow-on offering and
the proceeds of $3.0 million generated by the issuance of shares in connection
with REMEC's Employee Stock Purchase Plan and from exercises of stock options,
net of $2.9 million utilized for the repurchase and retirement of Company common
stock.
REMEC's future capital requirements will depend upon many factors, including
the nature and timing of orders by OEM customers, the progress of REMEC's
research and development efforts, expansion of REMEC's marketing and sales
efforts, and the status of competitive products. REMEC believes that available
capital resources will be adequate to fund its operations for at least twelve
months from February 1, 1999.
INTEREST RATE RISK
REMEC is exposed to changes in interest rates to the extent of its
borrowings under its revolving working capital line of credit and revolving term
loan. At January 31, 1999, REMEC had no borrowings under these credit facilities
and, therefore, no exposure to interest rate movement on its debt. REMEC also
will be affected by changes in interest rates in its investments in certain
held-to-maturity securities. Under its current policies, REMEC does not use
interest rate derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point increase in interest rates in REMEC's
held-to-maturity securities would not materially effect the fair value of these
securities at January 31, 1999.
YEAR 2000 READINESS DISCLOSURE
GENERAL. Many currently available installed computer systems, software
products and equipment are coded to accept only two digit entries to recognize
years. These date-sensitive systems, products and equipment may not be able to
accurately recognize the year 2000. As a result, these systems, products and
equipment may need to be upgraded or replaced in order to become year 2000
ready.
REMEC's Vice President of Information Technology is responsible for
coordinating REMEC's efforts relating to year 2000 readiness. These efforts
include the following phases: (i) identification of potential year 2000
problems; (ii) assessment of the potential impact on and risks to REMEC's
business; (iii) determination of specific solutions; (iv) implementation of
solutions; and (v) evaluation of all of the
17
<PAGE>
foregoing. The Vice President of Information Technology reports to REMEC's
President and Chief Operating Officer on these matters. In addition, REMEC's
Audit Committee and Board of Directors provides supervisorial oversight of
REMEC's efforts relating to year 2000 readiness.
MANUFACTURING. REMEC utilizes various tools and equipment in connection
with the manufacture of its products which may have embedded technology that is
date sensitive. REMEC is testing substantially all of its critical tools and
equipment currently being utilized by REMEC in the manufacture of its products,
and continues to monitor year 2000 readiness in this area. Based on its efforts
to date, REMEC believes that its critical tools and equipment will be year 2000
ready on or before December 31, 1999. As a result, REMEC currently does not
anticipate significant interruption of its manufacturing capabilities due to the
failure of its tools and equipment to be year 2000 ready.
INFORMATION SYSTEMS. REMEC has various internal financial information and
reporting systems, human resources and payroll applications, procurement
requirements, customer billing applications, manufacturing monitoring systems,
communications systems, desktop computers and computer networks. REMEC is
testing all of these internal systems and applications and upgrading or
replacing software and hardware where needed. Based on its efforts to date,
REMEC currently does not anticipate significant interruption of its operations
due to the failure of its information systems to be year 2000 ready.
In addition to testing existing information systems for year 2000
compliance, REMEC is phasing in the installation of a new management information
system which will be used by REMEC and a majority of its operating subsidiaries
in connection with internal financial information and reporting, production
planning and manufacturing monitoring and procurement requirements. The purchase
and installation of this system is estimated to cost approximately $3.0 million
and will be paid for by REMEC out of existing funds when installed at the
various Company facilities. Although this system is not being purchased
exclusively to address year 2000 compliance issues, this management information
system is certified by the manufacturer to be year 2000 compliant. This system
has been implemented in two of REMEC's subsidiaries, is in the process of being
implemented in another subsidiary and is estimated to be completely installed
and operational in a majority of REMEC's facilities over the next two years. The
information systems in place at REMEC's remaining subsidiaries are being
upgraded to year 2000 compliance. This process will be completed by December 31,
1999 and is anticipated to cost approximately $250,000.
FACILITIES. REMEC is also testing all of its facilities and infrastructure
systems, including the heating/ ventilation/air conditioning (HVAC) systems,
security systems and health, safety and environment systems at each of its
facilities. REMEC currently has manufacturing operations or management personnel
in thirteen leased facilities. Based on its efforts to date, REMEC currently
does not anticipate significant interruption of its operations due to the
failure of its facilities and infrastructure systems to be year 2000 ready.
SUPPLIERS. REMEC is implementing a system to monitor the year 2000
readiness of its suppliers. The system will include awareness/notification
letters, warranties and a review of suppliers' web-site statements regarding
year 2000 readiness. If a supplier is identified as having a high risk of year
2000 non-readiness, REMEC will develop alternative sourcing plans to minimize
the year 2000 risks.
COSTS. REMEC estimates that the aggregate costs for its year 2000 readiness
program incurred by REMEC to date and anticipated to be incurred by REMEC
through December 31, 1999 is approximately $350,000. Approximately $125,000 of
the aggregate estimated costs relate to internal resources incurred or
anticipated to be incurred in connection with REMEC's readiness program. Through
December 31, 1999, REMEC estimates that it has incurred approximately $100,000
on internal and external costs relating to its year 2000 readiness program. No
information technology or other capital expenditure projects have been delayed
due to REMEC's year 2000 efforts and the costs relating thereto.
18
<PAGE>
WORST CASE SCENARIO: CONTINGENCY PLAN. The most reasonably likely worst
case year 2000 scenario which may affect REMEC is a significant disruption in
the business operations of REMEC's customers due to year 2000 problems. REMEC
manufactures components and systems for commercial customers and various
government agencies. To the extent that the customers' business is disrupted by
year 2000 problems, these customers may be unable to purchase or pay for REMEC's
products which may have a material adverse effect on REMEC's business, financial
condition and results of operation will be adversely effected.
UNCERTAINTIES. The above description of REMEC's year 2000 efforts contains
forward-looking statements, including: the expected state of readiness of
REMEC's manufacturing equipment, information systems and facilities; the future
impact of REMEC's business, financial condition and results of operation due to
its year 2000 readiness; the anticipated state of readiness of REMEC's
suppliers; the estimated costs associated with REMEC's year 2000 readiness
program; and REMEC's most reasonably likely worst case scenario. There are many
factors that could cause REMEC's actual results to differ materially from those
year 2000 related forward-looking statements.
Some of the factors that could affect the anticipated impact of REMEC's year
2000 readiness include the availability and cost of personnel trained in this
area, the ability of company personnel, vendors, customers and suppliers to
locate an correct all relevant computer codes; the reliability of statements of
third parties (customers, suppliers and vendors) regarding their own year 2000
readiness; and similar uncertainties. In addition, the anticipated costs of any
year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events. Many of these factors
and assumptions are beyond REMEC's control and no assurances can be given that
REMEC, its suppliers and customers will be able to resolve all of their year
2000 readiness problems in a timely manner to avoid a material adverse effect on
REMEC's business, financial condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included as a separate section following Item
14 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REMEC
Information pertaining to directors of REMEC is set forth under the caption
"Election of Directors-- Nominees" in REMEC's Proxy Statement (the "1999 Proxy
Statement") for the Annual Meeting of Shareholders expected to be held on June
4, 1999 and is incorporated by reference into this Annual Report on Form 10-K.
Information relating to compliance with Section 16(a) of the Securities Exchange
Act of 1934 is set forth in the 1999 Proxy Statement under the caption
"Management--Compliance with Section 16(a) of the Exchange Act" and is
incorporated by reference into this Annual Report on Form 10-K.
The executive officers of REMEC, and their ages as of March 5, 1999, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH REMEC
- ------------------------------------ --- -----------------------------------------------------------
<S> <C> <C>
Ronald E. Ragland................... 57 Chairman of the Board and Chief Executive Officer
Errol Ekaireb....................... 60 President, Chief Operating Officer and Director
Jack A. Giles....................... 57 Executive Vice President, President of REMEC Microwave and
Director
Joseph T. Lee....................... 44 Executive Vice President, President of Northern California
Operations and Director
Denny Morgan........................ 45 Senior Vice President, Chief Engineer and Director
Tao Chow............................ 47 Senior Vice President and President of C&S Hybrid and REMEC
Wireless
Michael McDonald.................... 45 Senior Vice President, Chief Financial Officer and
Secretary
James Mongillo...................... 60 Senior Vice President and President of REMEC Magnum
Justin Miller....................... 49 Vice President and President of REMEC Canada and Nanowave
H. Clark Hickock.................... 43 Senior Vice President, Business Operations
Jon E. Opalski...................... 36 Senior Vice President, Marketing and Strategic Planning
</TABLE>
MR. RAGLAND was a founder of REMEC and has served as Chairman of the Board
and Chief Executive Officer of REMEC since January 1983. Prior to joining REMEC,
he was General Manager of KW Engineering and held program management positions
with Ford Aerospace Communications Corp.,
E-Systems, Inc. and United Telecommunications, Inc. Mr. Ragland was a Captain in
the United States Army and holds a B.S.E.E. degree from Missouri University at
Rolla and an M.S.E.E. degree from St. Louis University.
MR. EKAIREB has served as President and Chief Operating Officer of REMEC
since 1990 and a director of REMEC since 1985. Mr. Ekaireb served as Vice
President of REMEC from 1984 to 1987 and as Executive Vice President and Chief
Operating Officer from 1987 to 1990. Prior to joining REMEC, he spent 23 years
with Ford Aerospace Communications Corp. Mr. Ekaireb holds B.S.E.E. and B.S.M.E.
degrees from West Coast University and has completed the University of
California, Los Angeles Executive Program.
MR. GILES joined REMEC in 1984. He was elected as a director in 1984, Vice
President in 1985, Executive Vice President in 1987 and was elected President of
REMEC Microwave in 1994. Prior to joining REMEC, he spent approximately 19 years
with Texas Instruments in program management and marketing. Mr. Giles
20
<PAGE>
holds a B.S.M.E. degree from the University of Arkansas and is a graduate of
Defense Systems Management College.
MR. LEE has been a director and Executive Vice President of REMEC since
September 1996 and was elected President of REMEC's Northern California
Operations in December 1997. Prior to the acquisition of Magnum Microwave
Corporation ("Magnum Microwave") by REMEC in August 1996, he was Chairman of the
Board, President and Chief Executive Officer of Magnum Microwave. Mr. Lee holds
a B.S.E.E. degree from the University of Michigan and M.S.E.E. and ENGINEER
degrees from Stanford University and is a graduate of the AEA Stanford Executive
Institute.
MR. MORGAN was a founder of REMEC and has served as Senior Vice President,
Chief Engineer and a director of REMEC since January 1983. Prior to joining
REMEC, he worked with KW Engineering, Micromega, General Dynamics Corporation
and Pacific Aerosystems, Inc. Mr. Morgan holds a B.S.E.E. degree from the
Massachusetts Institute of Technology and was the Four Year Chancellor's Intern
Fellowship Recipient at the University of California, Los Angeles.
MR. CHOW has served as the President and a director of C&S Hybrid and Senior
Vice President of REMEC since July 1997. Prior to the acquisition of C&S Hybrid
by REMEC, Mr. Chow was a founder of C&S Hybrid and has served as President and a
director of C&S Hybrid since September 1984. Mr. Chow has also served as a
director and the President and Chief Financial Officer of Custom Micro
Machining, Inc. since 1990, and as a director of Applied Thin-Film Products
since April 1995. Mr. Chow holds a B.S.E.E. degree from National Chiao-Tung
University in Taiwan and a M.S.E.E. degree from the University of California,
Los Angeles.
MR. MCDONALD was appointed Senior Vice President, Chief Financial Officer
and Secretary of REMEC in December 1997. Prior to the acquisition of Magnum
Microwave by REMEC, he had been Vice President and Chief Financial Officer of
Magnum Microwave. Prior to joining Magnum Microwave in 1984, he worked at
Watkins-Johnson Company. Mr. McDonald holds a B.S. degree from the University of
San Francisco and an M.B.A. degree from California Polytechnic State University
at San Luis Obispo.
MR. MONGILLO joined REMEC in February 1997 as part of the Radian Technology
acquisition. He is a Senior Vice President of REMEC, and is serving as President
of REMEC Magnum, Inc. Prior to the acquisition of Radian Technology, he was the
Chairman of the Board, President and Chief Executive Officer of Radian. Mr.
Mongillo holds a B.S.E.E. degree from Brown University.
DR. MILLER has served as President and director of Nanowave Technologies and
REMEC Canada and Vice President of REMEC since October 1997. Prior to the
Nanowave acquisition by REMEC, he was a founder of Nanowave and served as its
President and a director since 1992. Prior to that he served as Vice
President--Engineering of Microwave Technologies, a division of Lucas Industries
plc. Dr. Miller holds a Ph.D. from the University of Warwick.
MR. HICKOCK has served as Senior Vice President, Business Operations of
REMEC since 1998 and Vice President, Business Operations since 1994. Prior to
joining REMEC, he was with E-Systems Garland Division for 16 years. Mr. Hickock
holds a B.A. in Economics and Finance from the University of Texas.
MR. OPALSKI has served in a variety of positions with REMEC since 1984, most
recently as Senior Vice President, Marketing and Strategic Planning. He holds a
B.S.E.E. from Massachusetts Institute of Technology.
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation is set forth under the
caption "Management-- Executive Compensation" in the 1999 Proxy Statement and is
incorporated by reference into this Annual Report on Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of REMEC's Common Stock is set
forth under "Management--Security Ownership of Certain Beneficial Owners and
Management" in the 1999 Proxy Statement and is incorporated by reference into
this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions is
set forth under "Certain Relationships and Related Transactions" in the 1999
Proxy Statement and is incorporated by reference into this Annual Report on Form
10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets at January 31, 1999 and 1998
Consolidated Statements of Income for the years ended January 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity as of January 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended January
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedules or because the information required is included in the
Consolidated Financial Statements or Notes thereto.
22
<PAGE>
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- --------------------------------------------------------------------------------
<S> <C>
3.1(1) Restated Articles of Incorporation
3.2(1) By-Laws, as amended
10.1(1) Equity Incentive Plan
10.2(1) Employee Stock Purchase Plan
10.3(1) Form of Indemnification Agreements between Registrant and its officers and
directors
10.4(2) 1996 Nonemployee Directors Stock Option Plan
10.5(3) Second Amended and Restated Loan Agreement between REMEC and The Union Bank of
California, N.A., dated June 25, 1998, as amended
10.6(3) Participation Agreement dated as of August 25, 1998 among REMEC, Union Bank of
California N.A., and certain other parties identified therein
10.7(3) Master Lease dated as of August 25, 1998, between Union Bank of California,
N.A., as Certificate Trustee, and REMEC
10.8(3) Lessee Guarantee executed by REMEC dated as of August 25, 1998
21.1(3) Subsidiaries of REMEC
23.1(3) Consent of Ernst & Young LLP, Independent Auditors
23.2(3) Consent of Ireland San Filippo LLP, Independent Public Accountants
23.3(3) Consent of Bray, Beck & Koetter, Independent Auditors
24.1 Power of Attorney (included on Page S-1 of this Annual Report on Form 10-K)
27.1(3) Financial Data Schedule
</TABLE>
- ------------------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-1 (No. 333-80381) filed on
February 1, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-8 (No. 333-16687) filed on
November 25, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(3) Filed with this Annual Report on Form 10-K.
(b) Report on Form 8-K
There were no reports on Form 8-K filed in the fourth quarter of fiscal
1999.
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REMEC, INC.
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Report of Ireland San Filippo LLP, Independent Auditors.................................................... F-3
Report of Bray, Beck & Koetter, Independent Auditors....................................................... F-4
Consolidated Balance Sheets at January 31, 1999 and 1998................................................... F-5
Consolidated Statements of Income for the years ended January 31, 1999, 1998 and 1997...................... F-6
Consolidated Statements of Shareholders' Equity as of January 31, 1999, 1998 and 1997...................... F-7
Consolidated Statements of Cash Flows for the years ended January 31, 1999, 1998 and 1997.................. F-8
Notes to Consolidated Financial Statements................................................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
REMEC, Inc.
We have audited the accompanying consolidated balance sheets of REMEC, Inc.
as of January 31, 1999 and 1998, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended January 31, 1999. These financial statements are the responsibility
of REMEC's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of Radian Technology, Inc. and Q-bit Corporation, wholly-owned
subsidiaries, which statements reflect total assets constituting 8% in 1997, and
total revenues constituting 17% in 1997 of the related consolidated totals.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
Radian Technology, Inc. and Q-bit Corporation, is based solely on the reports of
the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of REMEC, Inc. at January 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended January 31, 1999 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
San Diego, California
February 26, 1999
F-2
<PAGE>
REPORT OF IRELAND SAN FILIPPO LLP, INDEPENDENT AUDITORS
To the Board of Directors
Radian Technology, Inc.
Santa Clara, California
We have audited the balance sheet of Radian Technology, Inc. (a California
corporation), as of December 27, 1996, and the related statements of income and
expense, stockholders' equity, and cash flows for each of the years ended
December 29, 1995, and December 27, 1996. These financial statements are the
responsibility of REMEC's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Radian Technology, Inc. as
of December 27, 1996, and the results of its operations and its cash flows for
each of the years ended December 29, 1995, and December 27, 1996, in conformity
with generally accepted accounting principles.
IRELAND SAN FILIPPO, LLP
March 6, 1997
F-3
<PAGE>
REPORT OF BRAY, BECK & KOETTER, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Q-bit Corporation
Palm Bay, Florida
We have audited the balance sheets of Q-bit Corporation (an S Corporation)
as of December 31, 1996 and the related statements of operations, retained
earnings (deficit) and cash flows for the years then ended December 31, 1995 and
1996. These financial statements are the responsibility of REMEC's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Q-bit Corporation as of
December 31, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information on pages 15
and 16 is presented for the purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
/s/ BRAY, BECK & KOETTER
Melbourne, Florida
February 28, 1997
F-4
<PAGE>
REMEC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................ $ 82,314,098 $ 41,937,101
Accounts receivable, net......................................................... 23,624,034 25,494,474
Inventories, net................................................................. 33,879,801 30,380,941
Deferred income taxes............................................................ 4,259,925 6,241,957
Prepaid expenses and other current assets........................................ 3,123,687 589,053
-------------- --------------
Total current assets......................................................... 147,201,545 104,643,526
Property, plant and equipment, net............................................... 42,159,384 31,988,934
Intangible and other assets...................................................... 17,224,432 17,232,241
-------------- --------------
$ 206,585,361 $ 153,864,701
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable................................................................. $ 5,031,923 $ 8,531,756
Accrued salaries, benefits and related taxes..................................... 5,246,418 5,999,248
Income taxes payable............................................................. -- 2,546,479
Accrued expenses................................................................. 3,241,898 3,070,515
-------------- --------------
Total current liabilities.................................................... 13,520,239 20,147,998
Deferred rent.................................................................... -- 104,236
Deferred income taxes............................................................ 4,131,534 5,117,933
Commitments
Shareholders' equity:
Preferred shares--$.01 par value, 5,000,000 shares authorized; none issued and
outstanding.................................................................... -- --
Common shares--$.01 par value, 70,000,000 shares authorized; issued and
outstanding shares--23,185,491 and 21,182,663 at January 31, 1999 and 1998..... 231,853 211,828
Paid-in capital.................................................................. 145,929,471 95,838,167
Retained earnings................................................................ 42,772,264 32,444,539
-------------- --------------
Total shareholders' equity....................................................... 188,933,588 128,494,534
-------------- --------------
$ 206,585,361 $ 153,864,701
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
REMEC, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales....................................................... $ 158,401,981 $ 156,056,929 $ 118,553,842
Cost of sales................................................... 113,012,547 108,052,891 85,658,524
-------------- -------------- --------------
Gross profit.................................................... 45,389,434 48,004,038 32,895,318
Operating expenses:
Selling, general & administrative............................... 28,206,291 24,773,466 19,349,733
Research and development........................................ 7,850,765 5,107,984 4,605,000
-------------- -------------- --------------
Total operating expenses........................................ 36,057,056 29,881,450 23,954,733
-------------- -------------- --------------
Income from operations.......................................... 9,332,378 18,122,588 8,940,585
Gain on sale of subsidiary...................................... -- 2,833,240 --
Interest income and other, net.................................. 3,110,820 2,280,329 48,405
-------------- -------------- --------------
Income before provision for income taxes........................ 12,443,198 23,236,157 8,988,990
Provision for income taxes...................................... 2,115,473 8,500,799 4,016,667
-------------- -------------- --------------
Net income...................................................... $ 10,327,725 $ 14,735,358 $ 4,972,323
-------------- -------------- --------------
-------------- -------------- --------------
Earnings per share:
Basic....................................................... $ .45 $ .71 $ .30
-------------- -------------- --------------
-------------- -------------- --------------
Diluted..................................................... $ .44 $ .68 $ .30
-------------- -------------- --------------
-------------- -------------- --------------
Shares used in computing earnings per share:
Basic....................................................... 23,028,000 20,841,000 16,517,000
-------------- -------------- --------------
-------------- -------------- --------------
Diluted..................................................... 23,482,000 21,534,000 16,828,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
REMEC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED SHARES COMMON SHARES
---------------------- -------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ----------- --------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996.... 718,607 $ 7,186 11,073,539 $ 110,736 $14,404,746 $12,724,563 $27,247,231
Issuance of common shares in
initial public offering.... -- -- 3,397,340 33,973 15,615,236 -- 15,649,209
Conversion of preferred
shares..................... (718,607) (7,186) 1,616,864 16,169 (8,983) -- --
Issuance of common shares for
cash....................... -- -- 443,467 4,435 1,872,140 -- 1,876,575
Issuance of common shares
under employee stock
purchase plan.............. -- -- 347,850 3,479 1,670,637 -- 1,674,116
Issuance of common shares
upon exercise of stock
options.................... -- -- 37,647 376 88,824 -- 89,200
Income tax benefits related
to employee stock purchase
plan and stock options
exercised.................. -- -- -- -- 209,399 -- 209,399
Issuance of common shares in
stock offering............. -- -- 3,618,750 36,188 51,935,687 -- 51,971,875
Net income................... -- -- -- -- -- 4,972,323 4,972,323
Adjustment for Magnum
activity for the duplicated
two months ended March 29,
1996....................... -- -- -- -- -- (135,272) (135,272)
--------- ----------- --------- --------- ----------- ---------- -----------
Balance at January 31, 1997.... -- -- 20,535,457 205,356 85,787,686 17,561,614 103,554,656
Issuance of common shares in
acquisitions............... -- -- 320,183 3,202 6,620,465 -- 6,623,667
Issuance of common shares
under employee stock
purchase plan.............. -- -- 150,023 1,500 2,143,385 -- 2,144,885
Issuance of common shares
upon exercise of stock
options.................... -- -- 177,000 1,770 751,618 -- 753,388
Income tax benefits related
to employee stock purchase
plan and stock options
exercised.................. -- -- -- -- 535,013 -- 535,013
Net income................... -- -- -- -- -- 14,735,358 14,735,358
Adjustment for net equity
activity of pooled
companies.................. -- -- -- -- -- 147,567 147,567
--------- ----------- --------- --------- ----------- ---------- -----------
Balance at January 31, 1998.... -- -- 21,182,663 211,828 95,838,167 32,444,539 128,494,534
Issuance of common shares in
stock offering............... -- -- 1,990,000 19,900 49,543,600 -- 49,563,500
Issuance of common shares
upon exercise of stock
options.................... -- -- 93,801 937 452,437 -- 453,374
Issuance of common shares
under employee stock
purchase plan.............. -- -- 245,900 2,457 2,300,570 -- 2,303,027
Issuance of common shares.... -- -- 39,627 396 355,854 -- 356,250
Purchase and retirement of
common shares.............. -- -- (366,500) (3,665) (2,847,741) -- (2,851,406)
Income tax benefits related
to employee stock purchase
plan and stock options
exercised.................. -- -- -- -- 286,584 -- 286,584
Net income................... -- -- -- -- -- 10,327,725 10,327,725
--------- ----------- --------- --------- ----------- ---------- -----------
Balance at January 31, 1999.... -- $ -- 23,185,491 $ 231,853 $145,929,471 $42,772,264 $188,933,588
--------- ----------- --------- --------- ----------- ---------- -----------
--------- ----------- --------- --------- ----------- ---------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
REMEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 10,327,725 $ 14,735,358 $ 4,972,323
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 8,827,248 5,380,811 3,647,507
Gain on sale of Subsidiary....................................... -- (2,833,240) --
Deferred income taxes............................................ 1,282,214 (2,407,832) (767,151)
Changes in operating assets and liabilities:
Accounts receivable............................................ 1,870,440 (6,525,349) (4,862,195)
Inventories.................................................... (3,498,860) (9,303,804) (2,539,276)
Prepaid expenses and other current assets...................... (2,534,634) 201,838 (256,477)
Accounts payable............................................... (3,499,833) 686,941 78,089
Accrued expenses, income taxes payable and deferred rent....... (3,232,162) 852,733 556,250
------------- ------------- -------------
Net cash provided by operating activities........................ 9,542,138 787,456 829,070
INVESTING ACTIVITIES:
Additions to property, plant and equipment......................... (17,400,506) (17,351,394) (7,362,734)
Payment for acquisitions, net of cash acquired..................... -- (5,066,075) (4,011,735)
Proceeds from sale of subsidiary................................... -- 5,000,000 --
Sale of short-term investments..................................... -- -- 1,482,565
Other assets....................................................... (1,589,380) 120,637 (133,320)
------------- ------------- -------------
Net cash used by investing activities............................ (18,989,886) (17,296,832) (10,025,224)
FINANCING ACTIVITIES:
Proceeds from credit facilities and long-term debt................. -- 12,212,858 1,100,000
Repayments on credit facilities and long-term debt................. -- (19,510,512) (3,412,956)
Purchase and retirement of common shares........................... (2,851,406) -- --
Proceeds from issuance of common shares............................ 52,676,151 2,898,273 71,260,975
Change in deferred offering costs.................................. -- -- 1,108,424
------------- ------------- -------------
Net cash provided (used) by financing activities................. 49,824,745 (4,399,381) 70,056,443
Increase (decrease) in cash and cash equivalents..................... 40,376,997 (20,908,757) 60,860,289
Cash and cash equivalents at beginning of year....................... 41,937,101 63,172,362 2,345,632
Adjustment for net cash activity of pooled companies................. -- (326,504) (33,559)
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 82,314,098 $ 41,937,101 $ 63,172,362
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest......................................................... $ -- $ 321,000 $ 414,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes..................................................... $ 4,661,000 $ 10,162,000 $ 3,091,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of noncash investing and financing
activities:
Assets acquired under capital leases and notes payable
obligations.................................................... $ -- $ -- $ 962,000
------------- ------------- -------------
------------- ------------- -------------
Common shares issued in connection with acquisitions............. $ -- $ 6,623,667 $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-8
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS AND BASIS OF PRESENTATION
REMEC, Inc. was incorporated in the State of California in January 1983.
REMEC is engaged in a single business segment consisting of the research,
design, development and manufacture of microwave and radio frequency (RF)
components and subsystems and precision instruments for control and measurement
systems. Prior to fiscal 1996, the majority of REMEC's sales were to prime
contractors to various agencies of the U.S. Department of Defense and to foreign
governments. In May 1995, REMEC incorporated REMEC Wireless, Inc. (a wholly
owned subsidiary) to research, design, develop and manufacture products based on
microwave technologies for commercial customers. In fiscal 1997, REMEC acquired
Magnum Microwave Corporation, a manufacturer of microwave components and
subsystems, in a transaction accounted for as a pooling of interests. During
1997, REMEC also acquired RF Microsystems, Inc. ("RFM"), a satellite
communications engineering company, in a transaction accounted for as a
purchase. During fiscal 1998, REMEC acquired Radian Technology, Inc., C&S
Hybrid, Inc., and Q-bit Corporation, in a series of transactions accounted for
as poolings of interests. REMEC's consolidated financial statements for all
periods prior to these acquisitions have been restated to include each of the
acquired company's financial position, results of operations and cash flows.
During fiscal 1998, REMEC also acquired Verified Technical Corporation and
Nanowave Technologies Inc. in transactions which were accounted for as purchases
and sold its RFM subsidiary.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of REMEC and its
wholly owned subsidiaries REMEC Microwave, Inc., REMEC Wireless, Inc., Humphrey,
Inc., RF Microsystems, Inc., REMEC Magnum, Inc., Verified Technical Corporation,
C&S Hybrid, Inc., Nanowave Technologies Inc., Q-bit Corporation and REMECINC
S.A. All intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
REMEC considers all highly liquid investments with an original maturity of
three months or less at the date of acquisition to be cash equivalents. REMEC
evaluates the financial strength of institutions at which significant
investments are made and believes the related credit risk is limited to an
acceptable level.
REMEC has adopted Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), "Accounting for Certain Investments in Debt and Equity Securities."
SFAS No. 115 requires companies to record certain debt and equity security
investments at market value. At January 31, 1999 and 1998, the cost of cash
equivalents and short-term investments approximated fair value.
CONCENTRATION OF CREDIT RISK
Accounts receivable are principally from U.S. government contractors,
companies in foreign countries and domestic customers in the telecommunications
industry. Credit is extended based on an evaluation of the customer's financial
condition and generally collateral is not required. REMEC performs periodic
credit evaluations of its customers and maintains reserves for potential credit
losses.
F-9
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventories are stated at the lower of weighted average cost or market. In
accordance with industry practice, REMEC has adopted a policy of capitalizing
general and administrative costs as a component of the cost of government
contract related inventories to achieve a better matching of costs with the
related revenues.
PROGRESS PAYMENTS
Progress payments received from customers are offset against inventories
associated with the contracts for which the payments were received.
LONG-LIVED ASSETS
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets which range from three to thirty years.
Leasehold improvements are amortized using the straight-line method over the
shorter of their estimated useful lives or the lease period. Substantially all
long-lived assets are held within the United States, except for the assets held
in Costa Rica (see Note 6).
Intangible assets in the accompanying balance sheets are primarily comprised
of goodwill and acquired technology recorded in connection with the acquisitions
of Humphrey, Inc. (in February 1994), RF Microsystems, Inc., Verified Technical
Corporation and Nanowave Technologies Inc. (See Note 2). These assets are being
amortized using the straight-line method over the estimated useful lives of the
relevant intangibles ranging from nine to fifteen years, respectively.
Amortization expense related to intangible assets totaled $1,597,189, $766,616
and $345,531 for fiscal years 1999, 1998 and 1997, respectively.
Effective February 1, 1996, REMEC adopted Statement of Financial Accounting
Standard No. 121 "Accounting for Long-Lived Assets and Long-Lived Assets to be
Disposed Of" which established standards for recording the impairment of
long-lived assets, including property, equipment and leasehold improvements,
intangible assets and goodwill.
In accordance with this Statement, REMEC reviews the carrying value of
property, equipment and leasehold improvements for evidence of impairment
through comparison of the undiscounted cash flows generated from those assets to
the related carrying amounts of those assets. The carrying value of intangible
assets are evaluated for impairment through comparison of the undiscounted cash
flows derived from those assets to the carrying value of the related
intangibles.
REVENUE RECOGNITION
Revenues from commercial contracts are recognized upon shipment of product
and transfer of title to customers. Revenues on long-term fixed-price contracts
with prime contractors to U.S. Government Agencies are recognized using the
units of delivery method. Revenues associated with the performance of
non-recurring engineering and development contracts are recognized when earned
under the terms of the related contract. Revenues for cost-reimbursement
contracts are recorded as costs are incurred and includes estimated earned fees
in the proportion that costs incurred to date bears to estimated costs.
F-10
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prospective losses on long-term contracts are based upon the anticipated excess
of inventoriable manufacturing costs over the selling price of the remaining
units to be delivered. Actual losses could differ from those estimated due to
changes in the ultimate manufacturing costs and contract terms.
RESEARCH AND DEVELOPMENT
Research and development costs incurred by REMEC are expensed in the period
incurred.
NET INCOME PER SHARE
REMEC calculates earnings per share in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings per Share." Basic earnings per
share is computed using the weighted average shares outstanding for each period
presented. Diluted earnings per share is computed using the weighted average
shares outstanding plus potentially dilutive common shares using the treasury
stock method at the average market price during the reporting period. The
calculation of net income per share reflects the historical information for
REMEC and its acquired subsidiaries and the conversion of the common shares of
those companies acquired in pooling of interests transactions into REMEC shares
as stipulated in the respective acquisition agreements. (See Note 2.)
The following table reconciles the shares used in computing basic and
diluted earnings per share in the respective fiscal years:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding used in basic
earnings per share calculation.............................. 23,028,000 20,841,000 16,517,000
Effect of dilutive stock options.............................. 454,000 693,000 311,000
------------ ------------ ------------
Shares used in diluted earnings per share calculation......... 23,482,000 21,534,000 16,828,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
On June 6, 1997, REMEC's Board of Directors approved a three-for-two stock
split of REMEC's common stock in the form of a 50% stock dividend payable on
June 27, 1997 to shareholders of record as of June 20, 1997. All share and per
share related data in the consolidated financial statements have been adjusted
to reflect the stock dividend for all periods presented.
STOCK OPTIONS
REMEC has elected to follow APB 25 and related Interpretations in accounting
for its employee stock options because the alternative fair value accounting
provided for under Statement of Financial Accounting Standard No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation" requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of REMEC's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions about the future that affect the amounts
F-11
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported in the consolidated financial statements. These estimates include
assessing the collectibility of accounts receivable, the usage and
recoverability of inventories and long-lived assets and the incurrence of losses
on long term contracts and warranty costs. The markets for REMEC's products are
extremely competitive and are characterized by rapid technological change, new
product development, product obsolescence and evolving industry standards. In
addition, price competition is intense and significant price erosion generally
occurs over the life of a product. As a result of such factors, actual results
could differ from the estimates used by management.
NEW ACCOUNTING STANDARDS
During 1998, REMEC adopted Statement of Financial Accounting Standard No.
130 ("SFAS No.130"), "Reporting Comprehensive Income" and Statement of Financial
Accounting Standard No. 131 ("SFAS No.131"), "Segment Information." SFAS 130
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are recognized.
Comprehensive income is defined as a change in equity during a period from
transactions and other events and circumstances from non-owner sources. Net
income and other comprehensive income, including foreign currency translation
adjustments and unrealized gains and losses on investments, are required to
reported, net of their related tax effect, to arrive at comprehensive income.
Comprehensive income is not materially different from net income. SFAS No.131
amends the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments. Operating
segments, as defined in SFAS No.131, are components of an enterprise for which
separate financial information is available and is evaluated regularly by REMEC
in deciding how to allocate resources and in assessing performance. The
financial information is required to be reported on the basis that is used
internally for evaluating this segment performance. REMEC operates in one
business and operating segment only, and therefore adoption of this standard did
not have a material impact on REMEC's financial statements.
2. ACQUISITION TRANSACTIONS
Q-BIT CORPORATION
In October 1997, REMEC acquired all of the outstanding shares of common
stock of Q-bit, a manufacturer of amplifier based microwave components and
multi-function modules, in exchange for 1,047,482 shares of REMEC's common
stock. Prior to the combination, Q-bit's fiscal year ended on December 31, 1996.
In recording the business combination, Q-bit's financial statements for the
fiscal years ended December 31, 1995 and 1996 were combined with REMEC's for the
fiscal years ended January 31, 1996 and 1997, respectively. Q-bit's net sales
and net income for the one month period ended January 31, 1997 were $1,295,557
and $103,610, respectively. In accordance with Accounting Principles Board
Opinion No. 16 ("APB No. 16"), Q-bit's results of operations and cash flows for
the one-month period ended January 31, 1997 have been added directly to the
retained earnings and cash flows of REMEC and excluded from reported fiscal 1998
results of operations and cash flows. Q-bit's revenues and net income for the
period from February 1, 1997 through the date of acquisition totalled
$12,315,818 and $1,578,333, respectively.
F-12
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION TRANSACTIONS (CONTINUED)
C&S HYBRID
In June 1997, REMEC acquired all of the outstanding shares of common stock
of C&S Hybrid, a manufacturer of transmitter and receiver hardware assemblies
("transceivers") that are integrated by C&S Hybrid's customers into
terrestrial-based point-to-point microwave radios primarily for use in
commercial applications, in exchange for 1,290,000 shares of REMEC's common
stock. Prior to the combination, C&S Hybrid's fiscal year ended on December 27,
1996. In recording the business combination, C&S Hybrid's financial statements
for the fiscal years ended December 22, 1995 and December 27, 1996 were combined
with REMEC's for the fiscal years ended January 31, 1996 and 1997, respectively.
C&S Hybrid's net sales and net income for the one month ended January 31, 1997
were $1,569,129 and $53,976, respectively. In accordance with APB No. 16, C&S
Hybrid's results of operations and cash flows for the one-month period ended
January 31, 1997 have been added directly to the retained earnings and cash
flows of REMEC and excluded from reported fiscal 1998 results of operations and
cash flows. C&S Hybrid's revenues and net income for the period from February 1,
1997 through the date of acquisition totalled $8,033,729 and $357,249,
respectively.
RADIAN TECHNOLOGY, INC.
On February 28, 1997, REMEC issued 950,024 shares of its common stock in
exchange for all of the outstanding shares of common stock of Radian, a
manufacturer of microwave components and subsystems. Prior to the combination,
Radian's fiscal year ended on the Friday closest to December 31. In recording
the business combination, Radian's financial statements for the fiscal years
ended December 29, 1995 and December 27, 1996 were combined with REMEC's for the
fiscal years ended January 31, 1996 and 1997, respectively. Radian's net sales
and net loss for the one month period ended January 31, 1997 were $299,000 and
$10,019, respectively. In accordance with APB No. 16, Radian's results of
operations and cash flows for the one-month period ended January 31, 1997 have
been added directly to the retained earnings and cash flows of REMEC and
excluded from reported fiscal 1998 results of operations and cash flows.
Radian's revenues and net income for the period from February 1, 1997 through
the date of acquisition totalled $731,089 and $141,888, respectively.
MAGNUM MICROWAVE CORPORATION
On August 26, 1996, REMEC issued 1,612,399 shares of its common stock in
exchange for all of the outstanding shares of common stock of Magnum, a
manufacturer of microwave components and subsystems. Immediately prior to the
acquisition, Magnum issued 197,187 equivalent shares of stock for cash of
approximately $1,500,000. Prior to the combination, Magnum's fiscal year ended
on the Friday closest to March 31. In recording the business combination,
Magnum's financial statements for the 1996 fiscal year were combined with
REMEC's for the fiscal year ended January 31, 1996. Consolidated operating
results and the net change in consolidated cash and cash equivalents for the
year ended January 31, 1997 include Magnum's results of operations and change in
cash flows for the two months ended March 29, 1996. Magnum's net sales and net
income for the two month period ended March 29, 1996 were $1,743,000 and
$135,000, respectively. Included in general and administrative expenses in the
consolidated statement of income for the year ended January 31, 1997 are costs
of $424,000 related to the acquisition of Magnum.
F-13
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION TRANSACTIONS (CONTINUED)
VERIFIED TECHNICAL CORPORATION
On March 31, 1997, REMEC acquired all of the outstanding common stock of
Veritek in exchange for cash consideration of $1,000,000 and 138,000 shares of
REMEC's common stock with a fair value of approximately $2.0 million and the
assumption of liabilities totaling $1.1 million. The acquisition has been
accounted for as a purchase, and accordingly, the total purchase price has been
allocated to the acquired assets and liabilities assumed at their estimated fair
values in accordance with the provisions of APB No. 16. The excess of the
purchase price over the net assets acquired of $2,406,000 has been recorded as
an intangible asset, and is being amortized over an estimated life of 15 years.
The pro forma results of operations of REMEC and Veritek assuming Veritek was
acquired on the first day of REMEC's 1997 fiscal year would not be materially
different from reported results.
NANOWAVE TECHNOLOGIES INC.
In October 1997, REMEC formed REMEC Canada (as a wholly owned subsidiary)
for the purpose of facilitating the acquisition of Canadian companies, including
the then contemplated acquisition of Nanowave, a manufacturer of amplifier based
microwave and millimeter wave components and multi-function modules. Effective
October 29, 1997, REMEC Canada acquired all of the outstanding common stock of
Nanowave in exchange for cash consideration of $4,025,000 and 182,183 Dividend
Access Shares with a fair value of $4,646,000 which was equal to the fair value
of an equivalent number of common shares of REMEC on the date of acquisition.
These Dividend Access Shares are convertible at any time into an equivalent
number of shares of REMEC Common Stock at the option of the security holder. The
acquisition has been accounted for as a purchase, and accordingly, the total
purchase price has been allocated to the acquired assets and liabilities assumed
at their estimated fair values in accordance with the provisions of APB No. 16.
The excess of the purchase price over the net assets acquired of $11,130,000 has
been recorded as intangible assets (acquired technology, trademarks, assembled
workforce and goodwill), and will be amortized over periods ranging from 9 to 15
years.
Assuming that the acquisition of Nanowave had occurred on the first day of
REMEC's fiscal year ended January 31, 1997, pro forma condensed consolidated
results of operations would have been as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED JANUARY
31,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $ 160,581 $ 124,434
Net income.................................................. 14,288 4,441
Earnings per share:
Basic................................................... $ .68 $ .27
Diluted................................................. $ .66 $ .26
</TABLE>
RF MICROSYSTEMS, INC.
Effective April 30, 1996, REMEC acquired all of the outstanding common stock
of RFM and certain other assets in exchange for cash consideration of
approximately $4,066,000. RFM provided satellite communications engineering
services to agencies of the U.S. Government. The acquisition was accounted for
as a purchase, and accordingly, the total purchase price was allocated to the
acquired assets and
F-14
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION TRANSACTIONS (CONTINUED)
liabilities assumed at their estimated fair values in accordance with the
provisions of APB No. 16. The excess of the purchase price over the net assets
acquired of $3,559,000 was recorded as intangible assets, and was being
amortized over an estimated life of 15 years. Upon completion of the
acquisition, certain tangible and intangible assets associated with the design
and production of commercial wireless products with a fair value of
approximately $3.8 million were transferred to another subsidiary of REMEC. On
August 26, 1997, REMEC sold its RFM subsidiary in exchange for cash
consideration of $5.0 million. The sale resulted in an after-tax gain of
$1,728,000 or $.08 per share. REMEC's consolidated financial statements include
the results of RFM from April 30, 1996 through August 26, 1997.
3. FINANCIAL STATEMENT DETAILS
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Raw Materials.................................................. $ 19,750,063 $ 16,087,158
Work in progress............................................... 14,224,169 14,968,767
------------- -------------
33,974,232 31,055,925
Less unliquidated progress payments............................ (94,431) (674,984)
------------- -------------
$ 33,879,801 $ 30,380,941
------------- -------------
------------- -------------
</TABLE>
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,076,000 at January 31, 1999 and 1998, respectively.
REMEC had a reserve for obsolete and unusable inventory of $3,341,000 and
$2,941,000 as of January 31, 1999 and 1998, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Land, building and improvements............................... $ 3,361,097 $ 3,293,776
Machinery and equipment....................................... 69,899,873 54,574,755
Furniture and fixtures........................................ 4,153,572 3,270,147
Leasehold improvements........................................ 4,173,772 3,049,130
-------------- --------------
81,588,314 64,187,808
Less accumulated depreciation and amortization................ (39,428,930) (32,198,874)
-------------- --------------
$ 42,159,384 $ 31,988,934
-------------- --------------
-------------- --------------
</TABLE>
F-15
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL STATEMENT DETAILS (CONTINUED)
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Acquired technology........................................... $ 8,358,556 $ 8,358,556
Goodwill...................................................... 7,775,775 7,775,775
Trademarks and other intangible assets........................ 2,250,000 2,250,000
-------------- --------------
18,384,331 18,384,331
Less accumulated amortization................................. (2,988,645) (1,391,456)
-------------- --------------
15,395,686 16,992,875
Other assets.................................................. 1,828,746 239,366
-------------- --------------
$ 17,224,432 $ 17,232,241
-------------- --------------
-------------- --------------
</TABLE>
4. BANK REVOLVING TERM CREDIT FACILITY AND LINE-OF-CREDIT
REMEC has a $9,000,000 working capital line-of-credit with a bank, which
expires July 3, 2000. Interest is due monthly on advances at a fixed spread over
the London Interbank Offered Rate (6.2% at January 31, 1999). At January 31,
1999, there were no outstanding borrowings on the facility.
REMEC also has a $8,000,000 term credit facility with the bank which is
available until July 1, 2000. Outstanding borrowings at July 1, 2000 under this
facility automatically convert into a term note payable in 42 monthly
installments. Interest is due monthly on advances under the facility at a fixed
spread over the London Interbank Offered Rate. At January 31, 1999, there were
no outstanding borrowings on the facility.
Advances under these agreements are secured by substantially all assets of
REMEC. The agreements also contain covenants which require REMEC to maintain
certain financial ratios, achieve specified levels of profitability, restrict
the incurrence of additional debt, limit the payment of cash dividends, and
include certain other restrictions. As of January 31, 1999, REMEC was in
compliance with all covenants specified.
5. SHAREHOLDERS' EQUITY
EQUITY OFFERINGS
In March 1998, REMEC issued in a public offering an additional 1,990,000
shares of common stock. The net proceeds from this offering were $49,563,500.
Certain shareholders also sold 1,000,000 shares of REMEC common stock as part of
this offering.
In January 1997, REMEC issued in a public offering an additional 3,618,750
shares of common stock. The net proceeds from this offering were $51,971,875.
Certain shareholders also sold 1,125,000 shares as part of this offering.
In February 1996, REMEC completed an initial public offering of its common
stock in which REMEC issued a total of 3,397,340 shares of common stock. The net
proceeds from the offering were $15,649,209. Concurrent with the closing of
REMEC's initial public offering, all of the then outstanding shares of
F-16
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
REMEC's preferred stock were converted into 1,616,864 shares of common stock. In
connection with REMEC's initial public offering, certain shareholders also sold
1,777,660 shares as part of the offering.
STOCK OPTION PLANS
REMEC's 1995 Equity Incentive Plan provides for the grant of incentive stock
options, non-qualified stock options, restricted stock awards, stock purchase
rights or performance shares to employees of REMEC. During fiscal 1998, REMEC's
shareholders approved an increase in the number of shares available for issuance
under the Plan by 2,250,000 shares to a total of 3,375,000 shares of common
stock. The exercise price of the incentive stock options must at least equal the
fair market value of the common stock on the date of grant, and the exercise
price of non-qualified options may be no less than 85% of the fair market value
of the common stock on the date of grant. Options granted under the plans vest
over a period of three to four years and expire from four and one-half years to
nine years from the date of grant.
REMEC also maintains the 1996 Nonemployee Directors Stock Option Plan under
which 300,000 common shares have been reserved for non-qualified stock option
grants to nonemployee directors of REMEC. Under the Plan, option grants are
automatically made on an annual basis at the fair market value of the stock on
the date of grant. Options granted under the Plan vest over three to four years
and expire four and one-half to nine years from the date of grant.
REMEC had maintained previous stock option plans prior to the inception of
the 1995 Equity Incentive Plan. These incentive plans were terminated upon the
closing of REMEC's initial public offering in February 1996 and all outstanding
options remain exercisable in accordance with their original terms.
A summary of REMEC's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year................. 1,690,974 $ 16.86 928,538 $ 7.71 305,380 $ 2.25
Granted...................................... 1,141,120 15.99 1,024,214 22.42 668,012 9.90
Exercised.................................... (93,801) 4.85 (170,965) 4.37 (37,649) 2.37
Forfeited.................................... (362,822) 25.44 (90,813) 10.17 (7,205) 6.79
--------- ----------- --------- ----------- --------- -----
Outstanding--end of year....................... 2,375,471 $ 15.60 1,690,974 $ 16.86 928,538 $ 7.71
--------- ----------- --------- ----------- --------- -----
--------- ----------- --------- ----------- --------- -----
</TABLE>
F-17
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes by price range the number, weighted average
exercise price and weighted average life (in years) of options outstanding and
the number and weighted average exercise price of exercisable options as of
January 31, 1999:
<TABLE>
<CAPTION>
TOTAL OUTSTANDING TOTAL EXERCISABLE
------------------------------------ ----------------------
WEIGHTED AVERAGE WEIGHTED
NUMBER ------------------------ NUMBER AVERAGE
OF EXERCISE OF EXERCISE
PRICE RANGE SHARES PRICE LIFE SHARES PRICE
- ----------------------------------------------------- ---------- ----------- --- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.61-$ 7.40........................................ 128,497 $ 2.21 1.4 103,269 $ 2.28
$ 7.41-$11.10........................................ 995,750 $ 9.41 6.3 184,235 $ 9.59
$11.11-$14.80........................................ 319,051 $ 14.03 2.6 137,821 $ 14.07
$14.81-$22.20........................................ 486,383 $ 20.84 1.4 154,994 $ 20.40
$22.21-$25.90........................................ 191,125 $ 25.35 3.7 47,662 $ 25.47
$25.91-$37.00........................................ 254,665 $ 30.97 4.8 50,100 $ 32.90
---------- ---------
Total Plan........................................... 2,375,471 $ 15.60 4.5 678,081 $ 14.70
---------- ---------
---------- ---------
</TABLE>
At January 31, 1999, options for 863,985 shares of REMEC common stock were
available for future grant.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if REMEC has accounted for
its employee stock options and employee stock purchase plan shares under the
fair value method of that statement. The fair value of these options or employee
stock purchase rights was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rates of 6.0%; dividend yields
of 0%; volatility factors of the expected market price of REMEC's common stock
of 76.0%, 71.3% and 90.9%, a weighted-average life of the option of 3.2 years;
and a weighted-average life of the stock purchase rights of three months.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because REMEC's employee stock options and rights under the employee stock
purchase plan have characteristics significantly different from those of trade
options, and because changes in the subjective assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair market value of its
employee stock options or the rights granted under the employee stock purchase
plan.
For purposes of pro forma disclosures, the estimated fair value of the
options and the shares granted under the employee stock purchase plan is
amortized to expense over their respective vesting or option periods. The
effects of applying SFAS No. 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net income in future
years because they do not take into
F-18
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
consideration pro forma compensation expense related to grants made prior to
1996. REMEC's pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Net income:
As reported.............................................. $ 10,327,725 $ 14,735,358 $ 4,972,323
Pro forma................................................ 3,891,411 10,603,372 2,083,189
Earning per share:
As reported--
Basic.................................................. $ .45 $ .71 $ .30
Diluted................................................ .44 .68 .30
Pro forma--
Basic.................................................. $ .17 $ .51 $ .13
Diluted................................................ .17 .49 .12
Weighted average fair value of options granted during the
year..................................................... $ 12.92 $ 11.48 $ 5.09
</TABLE>
STOCK PURCHASE PLAN
REMEC's Employee Stock Purchase Plan provides for the issuance of shares of
REMEC's common stock to eligible employees. During fiscal 1998, REMEC's
shareholders approved an increase in the number of shares available for issuance
under the Employee Stock Purchase Plan by 825,000 shares to a total of 1,200,000
shares of common stock. The price of the common shares purchased under the
Employee Stock Purchase Plan will be equal to 85% of the fair market value of
the common shares on the first or last day of the offering period, whichever is
lower. As of January 31, 1999, 456,227 shares of REMEC common stock remain
available for issuance under the Purchase Plan.
6. COMMITMENTS
DEFERRED SAVINGS PLAN
REMEC has established a Deferred Savings Plan for its employees, which
allows participants to make contributions by salary reduction pursuant to
section 401(k) of the Internal Revenue Code. REMEC matches contributions up to
$100 per quarter, per employee, subject to the attainment of certain quarterly
profit levels by REMEC. Employees vest immediately in their contributions and
company contributions vest over a two-year period. REMEC has charged to
operations contributions of approximately $272,000, $399,000 and $218,000 for
the years ended January 31, 1999, 1998 and 1997, respectively.
REMEC's Canadian subsidiary maintains a separate defined contribution
retirement savings plan for substantially all of its employees. Participants may
contribute a portion of their annual salaries subject to statutory annual
limitations. REMEC matches a percentage of the employees contributions as
specified in the plan agreement. Contributions by REMEC totalled $49,000 and
$19,000 in 1999 and 1998, respectively.
REMEC's C&S Hybrid subsidiary maintained a separate defined contribution
401(k) retirement plan for substantially all of its employees. C&S Hybrid made
contributions to this plan of $42,000 for fiscal 1997. This plan was merged into
the REMEC plan in February 1998.
F-19
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS (CONTINUED)
Prior to its acquisition in fiscal 1998, REMEC's Q-bit subsidiary maintained
a separate defined contribution 401(k) retirement plan for substantially all of
its employees. Q-bit made contributions to this plan of $95,000 for fiscal 1997.
This plan was merged into the REMEC plan in April 1998.
LEASES
REMEC leases offices and production facilities under noncancelable
agreements classified as operating leases. At January 31, 1999, future minimum
payments under these operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-------------
<S> <C>
2000................................................................. $ 2,678,000
2001................................................................. 2,373,000
2002................................................................. 2,144,000
2003................................................................. 2,160,000
2004................................................................. 1,538,000
Thereafter........................................................... 413,000
-------------
Total minimum lease payments......................................... $ 11,306,000
-------------
-------------
</TABLE>
Certain of these lease agreements include renewal options.
Rent expense totaled $3,254,000, $3,186,000, and $2,717,000 during fiscal
1999, 1998 and 1997, respectively.
CAPITAL EXPENDITURE
REMEC has entered into an agreement for the purchase of land and a
manufacturing facility in Costa Rica with a purchase price of $2,566,000.
Deposits totalling $1,486,000 have been made in connection with this agreement.
Such deposits are included in other assets in REMEC's consolidated balance sheet
as of January 31, 1999.
7. INCOME TAXES
For financial reporting purposes, income before taxes includes the following
components:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Pretax income:
United States................................ $ 11,475,003 $ 22,369,180 $ 8,988,990
Foreign...................................... 968,195 866,977 --
------------- ------------- ------------
$ 12,443,198 $ 23,236,157 $ 8,998,990
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
F-20
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Significant components of REMEC's deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.............................................. $ 4,132,000 $ 4,270,000
Inventory costs capitalization.......................................... 1,037,000 846,000
Other................................................................... 36,000 2,000
------------ ------------
5,205,000 5,118,000
------------ ------------
Deferred tax assets:
Inventory and other reserves............................................ 3,493,000 3,696,000
Deferred rent........................................................... -- 65,000
Accrued expenses........................................................ 1,588,000 1,623,000
Other................................................................... 252,000 858,000
------------ ------------
Total deferred tax assets................................................... 5,333,000 6,242,000
------------ ------------
Net deferred tax assets..................................................... $ 128,000 $ 1,124,000
------------ ------------
------------ ------------
</TABLE>
The provision for taxes based on income consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------------------------
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 1,165,000 $ 7,933,000 $ 3,910,000
Foreign.................................................. 260,000 308,000 --
State.................................................... (306,000) 1,634,000 874,000
Deferred:
Federal.................................................. 1,085,000 (1,188,000) (646,000)
Foreign.................................................. 13,000 -- --
State.................................................... (102,000) (186,000) (121,000)
------------ ------------- ------------
$ 2,115,000 $ 8,501,000 $ 4,017,000
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
F-21
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
A reconciliation of the effective tax rates and the statutory Federal income
tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
--------------------------------------------------------------------------
1998 1997
1999 ----------------------- -----------------------
------------------------ % %
AMOUNT % AMOUNT -- AMOUNT --
------------- --- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Tax at Federal rate............................... $ 4,355,000 35% $ 8,115,000 35% $ 3,146,000 35%
State income tax net of federal................... 747,000 6% 941,000 4 605,000 7
Tax Credits....................................... (2,987,000) (24%) -- -- -- --
Loss (Earnings) distributed to S Corporation
shareholders.................................... -- -- (642,000) (2) 438,000 5
Other............................................. -- -- 87,000 -- (172,000) (2)
-- -- --
------------- ------------ ------------
$ 2,115,000 17% $ 8,501,000 37% $ 4,017,000 45%
-- -- --
-- -- --
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
Approximately $2.0 million of the above tax credits are related to the
recognition of research and development tax credits pertaining to previously
filed tax returns.
Prior to its acquisition by REMEC in October 1997, Q-bit Corporation had
elected to be treated as an "S corporation" for income tax purposes and,
accordingly, any liability for income taxes was that of the shareholders and not
Q-bit.
8. SIGNIFICANT CUSTOMERS AND EXPORT SALES
During fiscal 1999, two customers accounted for 14% and 11%, of REMEC's net
sales. During fiscal 1998 and 1997, respectively, one customer accounted for 14%
and 13% of REMEC's net sales.
Export sales were 6%, 7% and 7% of net sales for fiscal 1999, 1998 and 1997,
respectively.
9. RELATED PARTY TRANSACTIONS
An officer of REMEC holds certain interests in various suppliers to one of
REMEC's subsidiaries. Amounts paid to these suppliers in fiscal 1999, 1998 and
1997 totaled $1,122,000, $2,667,000 and $1,054,000, respectively.
10. SUBSEQUENT EVENT
On February 26, 1999, REMEC announced its plan to acquire Airtech plc in
exchange for common stock with a value of approximately $32.0 million.
Completion of the transaction is contingent upon the approval of the
shareholders of Airtech plc. The acquisition will be accounted for as a pooling
of interests.
F-22
<PAGE>
REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT (CONTINUED)
Assuming that the acquisition of Airtech plc had occurred on the first day
of REMEC's fiscal year ended January 31, 1998, unaudited pro forma condensed
consolidated results of operations would be as follows (in thousands except per
share amounts):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales............................................................. $ 179,215 $ 191,008
Net income (loss)..................................................... (4,831) 14,754
Earnings (loss) per share:
Basic............................................................. $ (.20) $ .65
Diluted........................................................... $ (.20) $ .63
</TABLE>
F-23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, REMEC has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1999.
<TABLE>
<S> <C> <C>
REMEC, INC.
By: /s/ RONALD E. RAGLAND
-----------------------------------------
Ronald E. Ragland
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
POWERS OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ronald E. Ragland, Errol Ekaireb and Michael D.
McDonald, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of REMEC and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman of the Board and
/s/ RONALD E. RAGLAND Chief Executive Officer
- ------------------------------ (Principal Executive March 25, 1999
Ronald E. Ragland Officer)
/s/ ERROL EKAIREB
- ------------------------------ President, Chief Operating March 25, 1999
Errol Ekaireb Officer and Director
Executive Vice President,
/s/ JACK A. GILES President of REMEC
- ------------------------------ Microwave Division and March 25, 1999
Jack A. Giles Director
/s/ DENNY MORGAN Director, Senior Vice
- ------------------------------ President and Chief March 25, 1999
Denny Morgan Engineer
/s/ JOSEPH T. LEE
- ------------------------------ Executive Vice President March 25, 1999
Joseph T. Lee and Director
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Financial Officer,
/s/ MICHAEL E. MCDONALD Senior Vice President
- ------------------------------ and Secretary (Principal March 25, 1999
Michael E. McDonald Financial and Accounting
Officer)
/s/ ANDRE R. HORM
- ------------------------------ Director March 25, 1999
Andre R. Horn
/s/ JEFFREY M. NASH
- ------------------------------ Director March 25, 1999
Jeffrey M. Nash
/s/ THOMAS A. CORCORAN
- ------------------------------ Director March 25, 1999
Thomas A. Corcoran
- ------------------------------ Director March , 1999
William H. Gibbs
</TABLE>
S-2
<PAGE>
SCHEDULE II
REMEC, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
CONTRACT LOSS RESERVE PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended January 31, 1997...................... $ 1,370,000 $ 821,991 $ (620,000) $ 1,571,991
Year ended January 31, 1998...................... 1,571,991 478,009 -- 2,050,000
Year ended January 31, 1999...................... 2,050,000 (345,781) (754,219) 950,000
</TABLE>
<TABLE>
<CAPTION>
RESERVE FOR BALANCE AT CHARGED TO BALANCE
OBSOLETE AND BEGINNING OF COSTS AND AT END
UNUSABLE INVENTORY PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------------------------------------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Year ended January 31, 1997.................... $ 1,357,000 $ 655,000 $ (126,000) $ 1,886,000
Year ended January 31, 1998.................... 1,886,000 1,353,000 (298,000) 2,941,000
Year ended January 31, 1999.................... 2,941,000 1,479,000 (1,079,000) 3,341,000
</TABLE>
<PAGE>
REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGES
- ------------- ---------------------------------------------------------------------------------------- -------------
<C> <S> <C>
3.1(1) Restated Articles of Incorporation
3.2(1) By-Laws, as amended
10.1(1) Equity Incentive Plan
10.2(1) Employee Stock Purchase Plan
10.3(1) Form of Indemnification Agreements between REMEC and its officers and directors
10.4(2) 1996 Nonemployee Directors Stock Option Plan
10.5(3) Second Amended and Restated Loan Agreement between REMEC and The Union Bank of
California, N.A., dated June 25, 1998, as amended
10.6(3) Participation Agreement dated as of August 25, 1998 among REMEC, Union Bank of
California, N.A., and certain other parties identified therein
10.7(3) Master Lease dated as of August 25, 1998, between Union Bank of California, N.A., as
Certificate Trustee, and REMEC
10.8(3) Lessee Guarantee executed by REMEC dated as of August 25, 1998
21.1(3) Subsidiaries of REMEC
23.1(3) Consent of Ernst & Young LLP, Independent Auditors
23.2(3) Consent of Ireland San Filippo LLP, Independent Public Accountants
23.3(3) Consent of Bray, Beck & Koetter, Independent Auditors
24.1 Power of Attorney (included on Page S-1 of this Annual Report on Form 10-K)
27.1(3) Financial Data Schedule
</TABLE>
- ------------------------
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-1 (No. 333-80381) filed on
February 1, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to REMEC's Registration Statement on Form S-8 (No. 333-16687) filed on
November 25, 1996 and incorporated by reference into this Annual Report on
Form 10-K.
(3) Filed with this Annual Report on Form 10-K.
<PAGE>
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT
("Agreement") is made and entered into as of June 25, 1998 by and between
REMEC, Inc., a California corporation ("Borrower"), and UNION BANK OF
CALIFORNIA, N.A. ("Bank"). This Agreement amends and restates in its
entirety that certain Amended and Restated Loan Agreement dated January 17,
1997 between Bank and Borrower, as amended.
SECTION 1. THE LOAN
1.1.1 THE REVOLVING LOAN. Bank will loan to
Borrower an amount not to exceed Nine Million Dollars ($9,000,000)
outstanding in the aggregate at any one time (the "Revolving Loan").
Borrower may borrow, repay and reborrow all or part of the Revolving Loan in
amounts of not less than Ten Thousand Dollars ($10,000) in accordance with
the terms of the Revolving Note. All borrowings of the Revolving Loan must
be made before July 3, 2000 at which time all unpaid principal and interest
of the Revolving Loan shall be due and payable. The Revolving Loan shall be
evidenced by a promissory note (the "Revolving Note") on the standard form
used by Bank for commercial loans. Bank shall enter each amount borrowed and
repaid in Bank's records and such entries shall be deemed to be the amount of
the Revolving Loan outstanding. Omission of Bank to make any such entries
shall not discharge Borrower of its obligation to repay in full with interest
all amounts borrowed.
1.1.1.1 THE STANDBY L/C SUBLIMIT. As a sublimit
to the Revolving Loan, Bank shall issue, for the account of Borrower, one or
more irrevocable standby letters of credit (individually, an "L/C" and
collectively, the "L/Cs"). All such L/Cs shall be drawn on such terms and
conditions as are acceptable to Bank. The aggregate amount available to be
drawn under all outstanding L/Cs and the aggregate amount of unpaid
reimbursement obligations under drawn L/Cs shall not exceed Five Hundred
Thousand Dollars ($500,000) and shall reduce, dollar for dollar, the maximum
amount available under the Revolving Loan. No L/C shall have an expiry date
more than twelve months from its date of issuance and each L/C shall be
governed by the terms of (and Borrower agrees to execute) Bank's standard
form of standby letter of credit application and reimbursement agreement. No
L/C shall expire after July 3, 2000.
1.1.2 THE REVOLVER-TO-TERM LOAN. Bank will loan
to Borrower an amount not to exceed Eight Million Dollars ($8,000,000)
outstanding in the aggregate at any one time (the "Revolver-To-Term Loan").
Borrower may borrow, repay and reborrow all or part of the Revolver-To-Term
Loan in amounts of not less than One Hundred Thousand Dollars ($100,000) in
accordance with the terms of the Revolver-To-Term Note. All borrowings of
the Revolver-To-Term Loan must be made before July 1, 2000, at which time all
unpaid principal under the Revolver-To-Term Loan shall be converted to a
fully amortizing term loan as set forth in Section 1.1.3. The
Revolver-To-Term Loan shall be evidenced by a promissory note (the
"Revolver-To-Term Note") on the standard form used by Bank for commercial
loans. Bank shall enter each amount borrowed and repaid in Bank's records
and such entries shall be deemed to be the amount of the Revolver-To-Term
Loan outstanding. Omission of Bank to make any such entries shall not
discharge Borrower of its obligation to repay in full with interest all
amounts borrowed.
1.1.3 THE TERM LOAN. Solely to repay the
Revolver-To-Term Loan, Bank will loan to Borrower the sum outstanding at the
maturity of the Revolver-To-Term Loan in one disbursement on or before July
1, 2000 (the "Term Loan"). In the event of a prepayment of principal and
payment of any resulting fees, any prepaid amounts shall be applied to the
scheduled principal payments in the reverse order of their maturity. The
Term Loan shall be evidenced by a promissory note (the "Term Note") on the
standard form used by Bank for commercial loans.
1.2 TERMINOLOGY.
As used herein the word "Loan" shall mean,
collectively, all the credit facilities described above.
As used herein the word "Note" shall mean,
collectively, all the promissory notes described above and all reimbursement
agreements entered into with respect to L/Cs.
As used herein, the words "Loan Documents" shall
mean all documents executed in connection with this Agreement.
1.3 PURPOSE OF LOAN. The proceeds of the Revolving Loan
shall be used only for general working capital purposes, and the proceeds of
the Revolver-To-Term Loan shall be used only for general business purposes,
including the purchase of plant, property and equipment, or the acquisition
of other businesses. The proceeds of the Term Loan shall be used only for
the purpose specified in Section 1.1.3.
- 1 -
<PAGE>
1.4 INTEREST. The unpaid principal balance of the
Revolving Loan, the Revolver-to-Term Loan and the Term Loan shall bear
interest at the rates provided in the Revolving Note, the Revolver-to-Term
Note and the Term Note, respectively, and selected by Borrower. Such loans
may be prepaid in full or in part only in accordance with the terms of such
notes and any such prepayment shall be subject to the prepayment fee provided
for therein.
1.5 UNUSED COMMITMENT FEE. Borrower shall pay to Bank a
fee on the unutilized portions of the Revolving Loan and the
Revolver-to-Term Loan ("Non-utilization Fee") calculated and payable annually
in arrears, based on the combined unutilized amount of such loans, at a rate
of 9 basis points per annum, not to exceed $15,000 per annum.
1.6 L/C FEES. All fees in connection with L/Cs shall be
in accordance with Bank's standard schedule of fees as published from time to
time, except that the issuance/maintenance fee for each L/C shall be one
percent (1%) per annum (minimum $150), payable annually in advance on the
date such L/C is issued and on each anniversary of such date.
1.7 BALANCES. Borrower shall maintain its major
depository accounts with Bank until the Note and all sums payable pursuant to
this Agreement have been paid in full.
1.8 DISBURSEMENT. Following execution hereof, Bank
shall disburse the proceeds of the Loan as provided in Bank's standard form
Authorization executed by Borrower.
1.9 CONTROLLING DOCUMENT. In the event of any
inconsistency between the terms of this Agreement and any Note or any of the
other Loan Documents, the terms of such Note or other Loan Documents will
prevail over the terms of this Agreement.
SECTION 2. CONDITIONS PRECEDENT
Bank shall not be obligated to disburse all or any portion of the
proceeds of the Loan unless at or prior to the time for the making of such
disbursement, the following conditions have been fulfilled to Bank's
satisfaction:
2.1 COMPLIANCE. Borrower shall have performed and
complied with all terms and conditions required by this Agreement to be
performed or complied with by it prior to or at the date of the making of
such disbursement and shall have executed and delivered to Bank the Note and
other documents deemed necessary by Bank.
2.2 GUARANTIES. Humphrey, Inc., REMEC Microwave,
Inc., Radian Technology, Inc., Remec Wireless, Inc., Magnum Microwave
Corporation, Verified Technical Corporation, Q-Bit Corporation, and REMEC
Canada, Inc. ("Guarantors") shall have executed and delivered to Bank their
respective continuing guaranties in form and amount satisfactory to Bank.
2.3 BORROWING RESOLUTION. Borrower shall have
provided Bank with certified copies of resolutions duly adopted by the Board
of Directors of Borrower, authorizing this Agreement and the Loan Documents.
Such resolutions shall also designate the persons who are authorized to act
on Borrower's behalf in connection with this Agreement and to do the things
required of Borrower pursuant to this Agreement.
2.4 CONTINUING COMPLIANCE. At the time any
disbursement is to be made, there shall not exist any event, condition or act
which constitutes an event of default under Section 6 hereof or any event,
condition or act which with notice, lapse of time or both would constitute
such event of default; nor shall there be any such event, condition, or act
immediately after the disbursement were it to be made.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
3.1 BUSINESS ACTIVITY. The principal business of
Borrower is the manufacture of microwave electronic components and
subsystems.
3.2 AFFILIATES AND SUBSIDIARIES. Borrower's
affiliates and subsidiaries (those entities in which Borrower has either a
controlling interest or at least a 25% ownership interest ("Subsidiaries" and
"Affiliates, respectively)) and their addresses, and the names of Borrower's
principal shareholders, are as provided on a schedule delivered to Bank on or
before the date of this Agreement.
3.3 AUTHORITY TO BORROW. The execution, delivery and
performance of this Agreement, the Note and all other agreements and
instruments required by Bank in connection with the Loan are not in
contravention of any of the terms of any indenture, agreement or undertaking
to which Borrower is a party or by which it or any of its property is bound
or affected.
3.4 FINANCIAL STATEMENTS. The financial statements of
Borrower, including both a balance sheet at January 31, 1998, together with
supporting schedules, and an income statement for the twelve (12) months ended
January 31,
- 2 -
<PAGE>
1998, have heretofore been furnished to Bank, and are true and complete and
fairly represent the financial condition of Borrower during the period
covered thereby. Since January 31, 1998, there has been no material adverse
change in the financial condition or operations of Borrower.
3.5 TITLE. Except for assets which may have been
disposed of in the ordinary course of business, Borrower has good and
marketable title to all of the property reflected in its financial statements
delivered to Bank and to all property acquired by Borrower since the date of
said financial statements, free and clear of all liens, encumbrances,
security interests and adverse claims except those specifically referred to
in said financial statements.
3.6 LITIGATION. There is no litigation or proceeding
pending or threatened against Borrower or any of its property which is
reasonably likely to affect the financial condition, property or business of
Borrower in a materially adverse manner or result in liability in excess of
Borrower's insurance coverage.
3.7 DEFAULT. Borrower is not now in default in the
payment of any of its material obligations, and there exists no event,
condition or act which constitutes an event of default under Section 6 hereof
and no condition, event or act which with notice or lapse of time, or both,
would constitute such an event of default.
3.8 ORGANIZATION. Borrower is duly organized and
existing under the laws of the state of its organization, and has the power
and authority to carry on the business in which it is engaged and/or proposes
to engage.
3.9 POWER. Borrower has the power and authority to
enter into this Agreement and to execute and deliver the Note and all of the
other Loan Documents.
3.10 AUTHORIZATION. This Agreement and all things
required by this Agreement have been duly authorized by all requisite action
of Borrower.
3.11 QUALIFICATION. Borrower is duly qualified and in
good standing in any jurisdiction where such qualification is required.
3.12 COMPLIANCE WITH LAWS. Borrower is not in
violation with respect to any applicable laws, rules, ordinances or
regulations which materially affect the operations or financial condition of
Borrower.
3.13 ERISA. Any defined benefit pension plans as
defined in the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), of Borrower meet, as of the date hereof, the minimum funding
standards of Section 302 of ERISA, and no Reportable Event or Prohibited
Transaction as defined in ERISA has occurred with respect to any such plan.
3.14 REGULATION U. No action has been taken or is
currently planned by Borrower, or any agent acting on its behalf, which would
cause this Agreement or the Note to violate Regulation U or any other
regulation of the Board of Governors of the Federal Reserve System or to
violate the Securities and Exchange Act of 1934, in each case as in effect
now or as the same may hereafter be in effect. Borrower is not engaged in
the business of extending credit for the purpose of purchasing or carrying
margin stock as one of its important activities and none of the proceeds of
the Loan will be used directly or indirectly for such purpose.
3.15 CONTINUING REPRESENTATIONS. These
representations shall be considered to have been made again at and as of the
date of each disbursement of the Loan and shall be true and correct as of
such date or dates.
SECTION 4. AFFIRMATIVE COVENANTS
Until the Note and all sums payable pursuant to this Agreement or
any other of the Loan Documents have been paid in full, unless Bank waives
compliance in writing, Borrower agrees that:
4.1 USE OF PROCEEDS. Borrower will use the proceeds
of the Loan only as provided in Section 1.3, above.
4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and
discharge promptly all taxes, assessments and other governmental charges and
claims levied or imposed upon it or its property, or any part thereof,
provided, however, that Borrower shall have the right in good faith to
contest any such taxes, assessments, charges or claims and, pending the
outcome of such contest, to delay or refuse payment thereof provided that
adequately funded reserves are established by it to pay and discharge any
such taxes, assessments, charges and claims.
4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain
and preserve its existence and assets and all rights, franchises, licenses
and other authority necessary for the conduct of its business and will
maintain and preserve its property, equipment and facilities in good order,
condition and repair. Bank may, at reasonable times, visit and inspect any
of the properties of Borrower.
- 3 -
<PAGE>
4.4 RECORDS. Borrower will keep and maintain full
and accurate accounts and records of its operations according to generally
accepted accounting principles and will permit Bank to have access thereto,
to make examination and photocopies thereof, and to make audits during
regular business hours. Costs for such audits shall be paid by Borrower.
4.5 INFORMATION FURNISHED. Borrower will furnish to
Bank:
(a) Within forty-five (45) days after the
close of each fiscal quarter, except for the final quarter of each fiscal
year, Borrower's and each Pledgor's unaudited balance sheets as of the close
of such fiscal quarter, and unaudited income and expense statements with
supportive schedules and statements of retained earnings for such fiscal
quarter, in each case prepared in accordance with generally accepted
accounting principles and accompanied by a consolidating schedule;
(b) Within ninety (90) days after the close
of each fiscal year, a copy of Borrower's consolidated statement of financial
condition including at least its balance sheet as of the close of such fiscal
year, and its income and expense statement and retained earnings statement
for such fiscal year, examined and prepared on an audited basis by
independent certified public accountants selected by Borrower and reasonably
satisfactory to Bank in accordance with generally accepted accounting
principles applied on a basis consistent with that of previous years,
accompanied by an unaudited consolidating schedule;
(c) As soon as available, copies of such
financial statements and reports as Borrower may file with any state or
federal agency, including its 10-K and 10-Q reports;
(d) Such other financial statements and
information as Bank may reasonably request from time to time;
(e) In connection with each financial
statement provided hereunder, a statement executed by the president or chief
financial officer of Borrower certifying that no default has occurred and no
event exists which with notice or the lapse of time, or both, would result in
a default hereunder;
(f) In connection with each fiscal year-end
statement required hereunder, any management letter of Borrower's certified
public accountants;
(g) Within forty-five (45) days after each
fiscal quarter, a certification of compliance with all covenants under this
Agreement, executed by Borrower's chief financial officer or other duly
authorized officer of Borrower, in form acceptable to Bank;
(h) Prompt written notice to Bank of all
events of default under any of the terms or provisions of this Agreement or
of any other agreement, contract, document or instrument entered or to be
entered into with Bank, any litigation in excess of One Million Dollars
($1,000,000) which, if decided adversely to Borrower, would have a material
adverse effect on Borrower's financial condition, and any other matter which
has resulted in, or is likely to result in, a material adverse change in
Borrower's financial condition or operations;
(i) Prior written notice to Bank of any
changes in Borrower's officers and other senior management, Borrower's name,
and the location of Borrower's and each Pledgor's assets, principal place of
business or chief executive office; and
4.6 QUICK RATIO. Borrower shall maintain at all
times a ratio of cash, accounts receivable and marketable securities to
current liabilities of not less than 1.5:1.0, as such terms are defined by
generally accepted accounting principles.
4.7 TANGIBLE NET WORTH. Borrower will at all times
maintain a Tangible Net Worth of not less than the sum of (a) One Hundred
Fifty-Five Million Dollars ($155,000,000), (b) fifty percent (50%) of
Borrower's net profit after taxes for each fiscal year of Borrower ending
after January 31, 1998 and on or before the date of computation, and (c) one
hundred percent (100%) of the net proceeds of any equity securities issued by
Borrower on or after July 1, 1998. "Tangible Net Worth" shall mean net worth
increased by indebtedness of Borrower subordinated to Bank and decreased by
patents, licenses, trademarks, trade names, goodwill and other similar
intangible assets, organizational expenses, and monies due from affiliates
(including officers, shareholders and directors).
4.8 LIQUIDITY. Borrower will at all times maintain a
ratio of Liquid Assets to the unsecured portion of the Lease Balance of not
less than 1.5:1.0. "Liquid Assets" shall mean cash and short investments
consisting of commercial paper, U.S. Treasury Bills, Corporate Bonds and
Notes, and Municipal Bonds and Notes, all with maturities of less than 12
months. "Lease Balance" shall mean the aggregate liability for which
Borrower is liable pursuant to that certain financing obligation undertaken
in connection with the acquisition of real property.
4.9 FIXED CHARGE COVERAGE RATIO. Borrower will
maintain a ratio of EBITDA, plus lease payments, to Fixed Charges of not less
than 2.0:1.0. "EBITDA" shall mean income from operations after deducting all
expenses other than interest, taxes, depreciation, and amortization. "Fixed
Charges" shall mean the sum of (I) that portion of term obligations
(including principal and interest), (ii) lease payments on real property,
(iii) income taxes and (iv) dividends, all during the twelve
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<PAGE>
(12) months preceding the date of calculation. Compliance with this
subsection shall be measured as of the end of each of Borrower's fiscal
quarters, for the immediately preceding twelve (12) month period.
4.10 FUNDED DEBT TO EBITDA RATIO. Borrower will
maintain at all times a ratio of Funded Debt to EBITDA of not more than
1.5:1.0. "Funded Debt" shall mean all borrowed funds including loans and
capital leases, whether senior or subordinated, plus the Lease Balance.
4.11 INSURANCE. Borrower will keep all of its
insurable property, real, personal or mixed, insured by good and responsible
companies against fire and such other risks as are customarily insured
against by companies conducting similar business with respect to like
properties. Borrower will maintain adequate worker's compensation insurance
and adequate insurance against liability for damages to persons and property.
4.12 ADDITIONAL REQUIREMENTS. Borrower will promptly,
upon demand by Bank, take such further action and execute all such additional
documents and instruments in connection with this Agreement as Bank in its
reasonable discretion deems necessary, and promptly supply Bank with such other
information concerning its affairs as Bank may request from time to time.
4.13 LITIGATION AND ATTORNEYS' FEES. Borrower will
pay promptly to Bank upon demand, reasonable attorneys' fees (including but
not limited to the reasonable estimate of the allocated costs and expenses of
in-house legal counsel and legal staff) and all costs and other expenses paid
or incurred by Bank in collecting, modifying or compromising the Loan or in
enforcing or exercising its rights or remedies created by, connected with or
provided for in this Agreement or any of the Loan Documents, whether or not
an arbitration, judicial action or other proceeding is commenced. If such
proceeding is commenced, only the prevailing party shall be entitled to
attorneys' fees and court costs.
4.14 BANK EXPENSES. Borrower will pay or reimburse
Bank for all costs, expenses and fees incurred by Bank in preparing and
documenting this Agreement and the Loan, and all amendments and modifications
thereof, including but not limited to all filing and recording fees, costs of
appraisals, insurance and attorneys' fees, including the reasonable estimate
of the allocated costs and expenses of in-house legal counsel and legal staff.
4.15 REPORTS UNDER PENSION PLANS. Borrower will
furnish to Bank, as soon as possible and in any event within 15 days after
Borrower knows or has reason to know that any event or condition with respect
to any defined benefit pension plans of Borrower described in Section 3 above
has occurred, a statement of an authorized officer of Borrower describing
such event or condition and the action, if any, which Borrower proposes to
take with respect thereto.
SECTION 5. NEGATIVE COVENANTS
Until the Note and all other sums payable pursuant to this
Agreement or any other of the Loan Documents have been paid in full, unless
Bank waives compliance in writing, Borrower agrees that:
5.1 ENCUMBRANCES AND LIENS. Borrower and Guarantors
will not create, assume or suffer to exist any mortgage, pledge, security
interest, encumbrance, or lien (other than for taxes not delinquent and for
taxes and other items being contested in good faith) on property of any kind,
whether real, personal or mixed, now owned or hereafter acquired, or upon the
income or profits thereof, except to Bank and except for minor encumbrances
and easements on real property which do not affect its market value, and
except for existing liens on Borrower's personal property and future purchase
money security interests encumbering only the personal property purchased.
5.2 BORROWINGS. Borrower will not sell, discount or
otherwise transfer any account receivable or any note, draft or other
evidence of indebtedness, except to Bank or except to a financial institution
at face value for deposit or collection purposes only and without any fee
other than fees normally charged by the financial institution for deposit or
collection services. Borrower will not borrow any money, become contingently
liable to borrow money, nor enter any agreement to directly or indirectly
obtain borrowed money, except pursuant to agreements made with Bank.
5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower
will neither liquidate nor dissolve nor enter into any consolidation, merger,
partnership or other combination, nor convey, nor sell, nor lease all or the
greater part of its assets or business, nor purchase or lease all or the
greater part of the assets or business of another where the total purchase
price exceeds Thirty Million Dollars ($30,000,000) or where the cash
consideration exceeds Fifteen Million Dollars ($15,000,000).
5.4 LOANS, ADVANCES AND GUARANTIES. Borrower will
not, except in the ordinary course of business as currently conducted, make
any loans or advances, become a guarantor or surety, pledge its credit or
properties in any manner or extend credit; provided, however, loans or
advances to Affiliates or Subsidiaries may be made in amounts not to exceed
Ten Million Dollars ($10,000,000) for property, plant and equipment.
5.5 INVESTMENTS. Borrower will not purchase the debt
or equity of another person or entity except for savings accounts and
certificates of deposit of Bank, direct U.S. Government obligations and
commercial paper issued by
- 5 -
<PAGE>
corporations with the top ratings of Moody's or Standard & Poor's, provided
all such permitted investments shall mature within one year of purchase.
5.6 CHANGES/MERGERS. Borrower will not changes its
name; liquidate or dissolve, or enter into any consolidation, merger,
partnership, joint venture or other combination; redeem, purchase, retire or
otherwise acquire any shares of any class of capital stock of Borrower in
excess of Ten Million Dollars ($10,000,000); prepay any subordinated debt,
debt for borrowed money, or debt secured by any permitted Lien, or enter into
or modify any agreement as a result of which the terms of payment of any such
debt are waived or modified.
5.7 TRANSACTIONS WITH RELATED PERSONS. Borrower will
not directly or indirectly enter into any transaction with or for the benefit
of a Related Person on terms more favorable to the Related Person than would
have been obtainable in an arms length dealing. "Related Person" shall mean
any Affiliate of Borrower, or any officer, employee, director or shareholder
of Borrower or any Affiliate, or a relative of any of the foregoing.
5.8 LOSSES. Borrower will not incur a cumulative net
loss, after provision for income taxes, for an amount in excess of Five
Hundred Thousand Dollars ($500,000) for any two or more consecutive fiscal
quarters, nor incur a net loss for any fiscal year.
SECTION 6. EVENTS OF DEFAULT
The occurrence of any of the following events ("Events of Default")
shall terminate any obligation on the part of Bank to make or continue the
Loan and automatically, unless otherwise provided under the Note, shall make
all sums of interest and principal and any other amounts owing under the Loan
immediately due and payable, without notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor, or any other
notices or demands:
6.1 Borrower shall default in the due and punctual
payment of the principal of or the interest on the Note or any of the other
Loan Documents; or
6.2 Any default shall occur under the Note; or
6.3 Borrower shall default in the due performance or
observance of any covenant or condition of the Loan Documents; or
6.4 Any guaranty or subordination agreement now or
hereafter required hereunder is breached or becomes ineffective, or any
guarantor or subordinating creditor dies, disavows or attempts to revoke or
terminate such guaranty or subordination agreement.
SECTION 7. MISCELLANEOUS PROVISIONS
7.1 ADDITIONAL REMEDIES. The rights, powers and
remedies given to Bank hereunder shall be cumulative and not alternative and
shall be in addition to all rights, powers and remedies given to Bank by law
against Borrower or any other person, including but not limited to Bank's
rights of set off or banker's lien.
7.2 NONWAIVER. Any forbearance or failure or delay
by Bank in exercising any right, power or remedy hereunder shall not be
deemed a waiver thereof and any single or partial exercise of any right,
power or remedy shall not preclude the further exercise thereof. No waiver
shall be effective unless it is in writing and signed by an officer of Bank.
7.3 INUREMENT. The benefits of this Agreement shall
inure to the successors and assigns of Bank and the permitted successors and
assigns of Borrower, and any assignment by Borrower without Bank's consent
shall be null and void.
7.4 APPLICABLE LAW. This Agreement and all other
agreements and instruments required by Bank in connection herewith shall be
governed by and construed according to the laws of the State of California.
7.5 SEVERABILITY. Should any one or more provisions
of this Agreement be determined to be illegal or unenforceable, all other
provisions nevertheless shall be effective. In the event of any conflict
between the provisions of this Agreement and the provisions of any Note or
reimbursement agreement evidencing any indebtedness hereunder, the provisions
of such Note or reimbursement agreement shall prevail.
7.6 INTEGRATION CLAUSE. Except for documents and
instruments specifically referenced herein, this Agreement constitutes the
entire agreement between Bank and Borrower regarding the Loan and all prior
communications, verbal or written, between Borrower and Bank shall be of no
further effect or evidentiary value.
- 6 -
<PAGE>
7.7 CONSTRUCTION. The section and subsection
headings herein are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.
7.8 AMENDMENTS. This Agreement may be amended only
in writing signed by all parties hereto.
7.9 COUNTERPARTS. Borrower and Bank may execute one
or more counterparts to this Agreement, each of which shall be deemed an
original, but when together shall constitute one and the same instrument.
SECTION 8. SERVICE OF NOTICES
8.1 Any notices or other communications provided for
or allowed hereunder shall be effective only when given by one of the
following methods and addressed to the respective party at its address given
with the signatures at the end of this Agreement and shall be considered to
have been validly given: (a) upon delivery, if delivered personally; (b)
upon receipt, if mailed, first class postage prepaid, with the United States
Postal Service; (c) on the next business day, if sent by overnight courier
service of recognized standing; and (d) upon telephoned confirmation of
receipt, if telecopied.
8.2 The addresses to which notices or demands are to
be given may be changed from time to time by notice delivered as provided
above.
THIS AGREEMENT is executed on behalf of the parties by duly
authorized officers as of the date first above written.
UNION BANK OF CALIFORNIA, N.A. REMEC, INC.
By: /s/ Kent McBeth By: /s/ Ronald Ragland
------------------------------------ --------------------------------
Title Vice President Title Chairman & CEO
---------------------------------- ------------------------------
By: [ILLEGIBLE] By: /s/ Michael D. McDonald
------------------------------------ --------------------------------
Title: Vice President Title: SVP, CFO & Secretary
---------------------------------- -----------------------------
Address: 530 "B" Street, Fourth Floor Address: 9404 Chesapeake Drive
San Diego, CA 92186-5324 San Diego, CA 92123
Attention: Kent McBeth Attention: Ronald Ragland
----------------------------- -------------------------
Telecopier: (619) 230-3377 Telecopier: (619) 560-4512
---------------------------- ------------------------
Telephone: (619) 230-3766 Telephone: (619) 560-1301
---------------------------- ------------------------
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<PAGE>
PARTICIPATION AGREEMENT
(REMEC, Inc. Trust 1998-A)
Dated as of August 25, 1998
Among
REMEC, INC., as Lessee,
UNION BANK OF CALIFORNIA, N.A.,
not in its individual capacity except as expressly
stated herein, but solely as Certificate Trustee,
THE PERSONS NAMED ON SCHEDULE I-A,
as Certificate Purchasers,
THE PERSONS NAMED ON SCHEDULE I-B,
as Lenders,
and
UNION BANK OF CALIFORNIA, N.A.,
as Agent,
Arranged by
UNION BANK OF CALIFORNIA, N.A.
<PAGE>
Participation Agreement
TABLE OF CONTENTS
(Participation Agreement)
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE II EFFECTIVENESS; ACQUISITION AND LEASE; GENERAL PROVISIONS. . . . . . . . . . . . . .1
SECTION 2.1. Effectiveness of Agreement. . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 2.2. Acquisition of Leased Property; Grants of Liens . . . . . . . . . . . . . .2
SECTION 2.3. Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
SECTION 2.4. Application of Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SECTION 2.5. Advance Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
SECTION 2.6. Lender Commitments and Notations of Fundings. . . . . . . . . . . . . . . .4
SECTION 2.7. Participants' Instructions to Certificate Trustee and Payments to
Participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
SECTION 2.8. Nature of Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SECTION 2.9. Amounts Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SECTION 2.10. Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
SECTION 2.11. Determination of Interest Rate and Yield Rate . . . . . . . . . . . . . . .6
SECTION 2.12. Obligations Several . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
SECTION 2.13. Highest Lawful Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
SECTION 2.14. Extension of Lease Expiration Date and Final Maturity Date. . . . . . . . .8
SECTION 2.15. Collateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ARTICLE III CONDITIONS TO ADVANCE AND COMPLETION . . . . . . . . . . . . . . . . . . . . . . .9
SECTION 3.1. Conditions to the Advance . . . . . . . . . . . . . . . . . . . . . . . . .9
ARTICLE IV REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.1. Representations and Warranties of Lessee. . . . . . . . . . . . . . . . . 14
SECTION 4.2. Representations and Warranties of each Participant. . . . . . . . . . . . 19
SECTION 4.3. Representations and Warranties of Certificate Trustee . . . . . . . . . . 20
SECTION 4.4. Representations and Warranties of Agent . . . . . . . . . . . . . . . . . 22
ARTICLE V COVENANTS OF LESSEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 5.1. Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 5.2. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5.3. Change of Name or Address . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5.4. Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5.5. Investigation and Litigation. . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5.6. Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5.7. Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 5.8. Tangible Net Worth. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 5.9. Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.10. Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.11. Funded Debt to EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.12. Supplemental Environmental Information. . . . . . . . . . . . . . . . . . 26
SECTION 5.13. Lease Defaults, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.14. Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
i
<PAGE>
SECTION 5.15. Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 5.16. Conduct of Business and Maintenance of Existence. . . . . . . . . . . . . 26
SECTION 5.17. Inspection of Property, Books and Records . . . . . . . . . . . . . . . . 27
SECTION 5.18. Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.19. Loans, Advances and Guaranties. . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.20. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.21. Changes/Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.22. Transactions With Related Persons . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.23. Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VI OTHER COVENANTS AND AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 6.1. Cooperation with Lessee . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 6.2. Restrictions on and Effect of Transfer. . . . . . . . . . . . . . . . . . 28
SECTION 6.3. Participations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 6.4. Covenants of Certificate Trustee, Agent and the Participants. . . . . . . 30
SECTION 6.5. Enforcement of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VII INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 7.1. General Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 7.2. General Tax Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 7.3. Withholding Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.4. Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.5. Funding Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.6. Gross Up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 7.7. LIBO Rate Illegal, Unavailable or Impracticable . . . . . . . . . . . . . 39
SECTION 7.8. Leased Property Indemnity . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 7.9. Environmental Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE VIII AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.1. Appointment of Agent; Powers and Authorization to Take Certain Actions. . 42
SECTION 8.2. Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 8.3. Action Upon Instructions Generally. . . . . . . . . . . . . . . . . . . . 43
SECTION 8.4. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 8.5. Independent Credit Investigation. . . . . . . . . . . . . . . . . . . . . 44
SECTION 8.6. Refusal to Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.7. Resignation or Removal of Agent; Appointment of Successor . . . . . . . . 45
SECTION 8.8. Separate Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 8.9. Termination of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 8.10. Compensation of Agency . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 8.11. Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE IX MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 9.1. Survival of Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 9.2. No Broker, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 9.3. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 9.4. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.5. Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 9.6. Headings, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
ii
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SECTION 9.7. Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 9.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 9.9. Payment of Transaction Costs and Other Costs. . . . . . . . . . . . . . . 49
SECTION 9.10. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 9.11. Limited Liability of Certificate Trustee. . . . . . . . . . . . . . . . . 50
SECTION 9.12. Liabilities of the Participants . . . . . . . . . . . . . . . . . . . . . 50
SECTION 9.13. Submission to Jurisdiction; Waivers . . . . . . . . . . . . . . . . . . . 50
SECTION 9.14. Reproduction of Documents . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 9.15. Consideration for Consents to Waivers and Amendments. . . . . . . . . . . 51
SECTION 9.16. Role of UBOC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 9.17. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
</TABLE>
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<TABLE>
<S> <C>
APPENDIX 1 Definitions
APPENDIX 2 Conditions Precedent to Document Closing Date
SCHEDULE I-A Certificate Purchaser Commitments
SCHEDULE I-B Lender Commitments
SCHEDULE II Addresses For Notice; Wire Instructions
SCHEDULE 4.1A Filings and Recordings
SCHEDULE 4.1B Governmental Actions
EXHIBIT A Form of Lease
Exhibit A - Legal Description
Exhibit B-1 - Form of Land Supplement
Exhibit B-2 - Form of Improvements Supplement
EXHIBIT B Form of Advance Request
EXHIBIT C Form of Loan Agreement
EXHIBIT D Form of Deed of Trust
EXHIBIT E Form of Trust Agreement
EXHIBIT F Form of Lessee Guarantee
EXHIBIT G-1 Form of Opinion of Special California Counsel for
Certificate Trustee
EXHIBIT G-2 Form of Opinion of Lessee's Counsel
EXHIBIT H-1 Form of Officer's Certificate of Lessee
EXHIBIT H-2 Form of Officer's Certificate of Certificate Trustee
EXHIBIT I Form of Hazardous Substances Undertaking and Unsecured
Indemnity
EXHIBIT J Form of Investor's Letter
EXHIBIT K Form of Assignment of Sublease
EXHIBIT L Form of Estoppel Certificate
</TABLE>
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THIS PARTICIPATION AGREEMENT (REMEC, Inc. Trust 1998-A) dated as of
August 25, 1998 (this "AGREEMENT" or "PARTICIPATION AGREEMENT"), is among
REMEC, INC., a California corporation, as Lessee; UNION BANK OF CALIFORNIA,
N.A., not in its individual capacity except as expressly stated herein but
solely as Certificate Trustee; the Persons named on SCHEDULE I-A hereto
(together with their respective permitted successors, assigns and
transferees), as Certificate Purchasers; the Persons listed on SCHEDULE I-B
hereto (together with their respective permitted successors, assigns and
transferees), as Lenders; and UNION BANK OF CALIFORNIA, N.A., as Agent.
PRELIMINARY STATEMENT
- Lessee desires to enter into the Overall Transaction for the
purpose of financing the Purchase Price of the Leased Property and certain of
the Transaction Costs.
- Subject to the terms and conditions of this Participation
Agreement and the other Operative Documents, on the Advance Date, Certificate
Trustee will: (i) acquire record title to the Leased Property, and (ii) lease
the Leased Property to Lessee pursuant to the Lease for the Lease Term.
- Subject to the terms and conditions of this Participation
Agreement and the other Operative Documents, Participants are willing to
advance funds for the financing described herein.
D. To secure the payment of the Certificate Amounts, the Loans
and other amounts due and payable to the Participants, Agent, on behalf of
the Participants, will have the benefit of a Lien on the Leased Property,
Lessor's interest in the Lease, the other Lease Collateral and the Trust
Estate.
NOW, THEREFORE, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
ARTICLE I
DEFINITIONS
Unless the context shall otherwise require, capitalized terms used and
not defined herein shall have the meanings assigned thereto in APPENDIX 1
hereto for all purposes hereof; and the rules of interpretation set forth in
APPENDIX 1 hereto shall apply to this Participation Agreement.
ARTICLE II
EFFECTIVENESS; ACQUISITION AND LEASE; GENERAL PROVISIONS
SECTION 2.1 EFFECTIVENESS OF AGREEMENT. This Agreement shall be
effective as of the Document Closing Date.
SECTION 2.2 ACQUISITION OF LEASED PROPERTY; GRANTS OF LIENS. Subject
to the terms and
<PAGE>
conditions of this Participation Agreement: (i) on the Document Closing Date,
Certificate Trustee and Lessee will enter into the Operative Documents
including the Lease pursuant to which Certificate Trustee shall lease to
Lessee and Lessee shall lease from Certificate Trustee the Leased Property,
and (ii) on the Advance Date: (A) Agent shall make the Advance, the proceeds
of which shall be used to pay the Purchase Price and the Transaction Costs,
(B) Certificate Trustee shall acquire such Leased Property and (C)
Certificate Trustee and Lessee shall enter into and record the Lease
Supplements, the Deed of Trust and the Financing Statements.
SECTION 2.3 FUNDING.
(a) AMOUNT OF FUNDINGS. Subject to the terms and
conditions of this Agreement and in reliance on the representations and
warranties of each of the parties hereto contained herein or made pursuant
hereto, upon receipt of the Advance Request, on the proposed Advance Date
specified therein, each Certificate Purchaser shall acquire its interest in
the Trust Estate and each Lender shall make its Loan to Fund the Advance by
making available to Certificate Trustee (in accordance with Certificate
Trustee's payment instructions set forth on SCHEDULE II) an amount in
immediately available funds on the proposed Advance Date equal to such
Participant's Commitment Percentage of the aggregate amount of the requested
Advance (up to such Participant's Loan Commitment) to be used and applied
pursuant to SECTION 2.4.
(b) NOTES AND CERTIFICATES. Each Lender's Loan shall be
evidenced by a Note issued by Certificate Trustee, as Borrower, to such
Lender and repayable in accordance with and with interest accruing pursuant
to the terms for the Loan set forth in the Loan Agreement. The amounts made
available by each Certificate Purchaser on the Advance Date shall be
evidenced by a Certificate issued by Certificate Trustee to each Certificate
Purchaser. Each Certificate shall accrue Yield at the Yield Rate on the
Certificate Amount thereof, payable as more fully set forth in the Trust
Agreement.
(c) LIMITATIONS ON DISBURSEMENTS. The aggregate amount
Funded by the Participants hereunder on the Advance Date shall not exceed
$17,057,000, which shall include not more than $16,639,118.57 to finance the
Purchase Price and not more than $417,881.43 for Transaction Costs. The
proceeds of all amounts Funded by the Participants on the Advance Date shall
be used solely for the acquisition of the Leased Property and the payment or
reimbursement of Transaction Costs. Notwithstanding anything in this
Agreement to the contrary, none of Certificate Trustee, Agent or any
Participant shall be obligated to make any Funding or the Advance pursuant to
this Agreement, the Trust Agreement, or the Loan Agreement after 1:00 p.m.
Los Angeles, California time, on September 1, 1998, and no Advance shall
occur following such date and time.
(d) ADVANCES. Certificate Trustee hereby directs and the
parties acknowledge that all amounts to be Funded by the Participants to
Certificate Trustee and to be advanced by Certificate Trustee to Lessee or
any third party as herein provided shall be Funded by the Participants to
Agent, and Agent shall make such Advance on behalf of Certificate Trustee as
required herein and as directed in the Advance Request.
SECTION 2.4 APPLICATION OF FUNDS. Subject to the terms and
conditions of this Agreement, on the Advance Date, Certificate Trustee shall:
(i) based on a purchase price of $13,155,957.03 under the Transcontinental
Acquisition Agreement, pay $7,006,886.98 to the seller, pay $5,949,070.05 to
the lender holding a first priority lien on the property to be
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<PAGE>
purchased and sold under the Transcontinental Acquisition Agreement to pay
off the loan secured by such lien plus $1,324.53 for each day after September
1, 1998 until such loan repayment occurs, and pay $200,000.00 to Lessee to
reimburse Lessee for its good faith deposit under the Transcontinental
Acquisition Agreement, (ii) based on a purchase price of $3,496,061.84 under
the Montpelier Acquisition Agreement, pay $356,250.00 to Lessee to reimburse
Lessee for its good faith deposit in the escrow established under the
Montpelier Acquisition Agreement, and pay $3,139,811.84 to the lender holding
a first priority lien on the property to be purchased and sold under the
Montpelier Acquisition Agreement to pay off the loan secured by such lien
plus $800.38 for each day after August 31, 1998 until such loan repayment
occurs, (iii) acquire the Leased Property from Sellers, and (iv) advance
funds as directed by Lessee to pay certain Transaction Costs, in each case
from funds made available by the Participants through the Agent pursuant to
SECTION 2.3 and pursuant to the directions set forth in the Advance Request,
whereupon Lessor shall lease to Lessee the Leased Property and Lessee shall
accept transfer and delivery of and lease from Lessor the Leased Property
pursuant to the Lease.
SECTION 2.5 ADVANCE DATE.
(a) NOTICE AND CLOSING. At least two (2) Business Days
prior to the proposed Advance Date, Lessee shall deliver to Agent,
Certificate Trustee and each of the Participants an irrevocable written
notice substantially in the form of EXHIBIT B-1 (the "ADVANCE REQUEST"),
setting forth:
(i) the proposed Advance Date;
(B) a statement of the amount of the requested Advance and an
allocation of such amount among the Purchase Price and the Transaction
Costs;
(ii) in the case of Transaction Costs, a general description of the
types or categories of Transaction Costs, being paid with the Advance; and
(iii) wire transfer instructions for the disbursement of funds to
Lessee, Sellers and any third party payee to whom Transaction Costs are
due and payable.
The delivery by Lessee of the Advance Request shall be deemed a certification
by Lessee that such Advance complies with the limitations and conditions set
forth at SECTION 2.3(c). All documents and instruments required to be
delivered on the Advance Date pursuant to this Agreement shall be delivered
at the offices of Mayer, Brown & Platt, 350 South Grand Avenue, Los Angeles,
California 90071, or at such other location as the Required Participants and
Lessee may agree. On the scheduled Advance Date, and subject to the terms
and conditions of this Agreement, and upon receipt of funds by Agent from the
Participants sufficient therefor, Agent shall make the requested Advance.
(b) POSTPONEMENT OF ADVANCE DATE. If the Participants are
instructed to make the Funding requested pursuant to the Advance Request and
the Advance shall not occur for any reason whatsoever on the date specified
in the Advance Request, Lessee shall pay Agent, for the benefit of each
Participant which has funded, interest on the amount funded by each Lender at
the Interest Rate and Yield on the amount funded by each Certificate
Purchaser at the Yield Rate, less any interest earned on behalf of the
Participants by investing such funded
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<PAGE>
amounts; PROVIDED, that this provision shall not be construed to place any
liability on Agent to invest such funds in interest-bearing accounts. Such
interest and Yield payable by Lessee shall be due and payable by Lessee upon
the consummation of the postponed Advance Date and such payment shall be an
additional condition precedent to such Advance; PROVIDED, HOWEVER, that no
additional Advance Request shall be required to be given if such Advance is
consummated on the Business Day immediately following the Advance Date
proposed in the Advance Request; PROVIDED, FURTHER, that if such Advance Date
shall not have occurred on the Business Day immediately following the Advance
Date proposed in the Advance Request, then all such interest and Yield shall
be due and payable as of the close of business on such date, and Agent shall
refund to each Participant all amounts funded by such Participant together
with all accrued interest and Yield, as the case may be, allocable to such
Participant. If the Agent wire transfers funds to the Title Insurance
Company, then the Advance Date shall be deemed to have occurred, whether or
not the conditions set forth in SECTIONS 3.1(i) and 3.1(l) shall have been
satisfied; PROVIDED, HOWEVER, that if such conditions are not satisfied
within one (1) Business Day after the funds are so wire transferred, then a
Lease Event of Default shall be deemed automatically to have occurred,
without any further action, notice or opportunity to cure, and the Agent
shall be entitled to exercise all rights and remedies as if a Lease Event of
Default of the type described in CLAUSE (g) or (h) of Article XVI of the
Lease shall have occurred.
SECTION 2.6 LENDER COMMITMENTS AND NOTATIONS OF FUNDINGS.
(a) Subject to compliance by Lessee with the terms of this
Participation Agreement and the other Operative Documents and the
satisfaction or waiver of the conditions set forth in this ARTICLE II and in
ARTICLE III, the Participants shall disburse the respective amounts of their
Commitments in accordance with the requirements of this Participation
Agreement. No amounts paid or prepaid with respect to any Advance or any
Note or Certificate shall be reborrowed or readvanced.
(b) Each Participant is hereby authorized to record the
date and amount of the Funding by it, each payment or repayment of principal
or Certificate Amount (as the case may be) and the length of each Payment
Period with respect thereto, on the grid annexed to and constituting a part
of each Note and/or Certificate held by such Participant, and any such
recordation, shall constitute, in the absence of manifest error, rebuttable
presumptive evidence of the accuracy of the information so recorded;
PROVIDED, that the failure to make any such recordation or any errors in such
recordation shall not affect the actual obligation of Certificate Trustee
under such instrument or the corresponding actual obligation of Lessee to pay
Rent (including any Lease Balance).
SECTION 2.7 PARTICIPANTS' INSTRUCTIONS TO CERTIFICATE TRUSTEE AND
PAYMENTS TO PARTICIPANTS.
(a) Each Participant agrees that the making of its monies
available pursuant to SECTION 2.3 shall constitute, without further act,
authorization and direction by such Participant to Certificate Trustee to
take the actions specified in Section 1.1 of the Trust Agreement.
(b) The parties to this Participation Agreement hereby
agree that any payment required to be made to the Participants by Certificate
Trustee pursuant to any Operative Document may be made directly to the
Participants by Agent from amounts received from Lessee and, except as
specifically provided for in the Operative Documents, all payments
4
<PAGE>
required to be made by Lessee shall be made directly to Agent for the benefit
of the Participants, in lieu of the corresponding payment required to be made
by Lessee to Certificate Trustee pursuant to any Operative Document. Such
payment by Lessee to Agent shall be deemed to constitute the required payment
from Lessee to Certificate Trustee and the corresponding payment by
Certificate Trustee to the Participants.
SECTION 2.8 NATURE OF TRANSACTION. It is the intention of the
parties that:
(a) the Overall Transaction constitutes an operating lease
from Certificate Trustee to Lessee for purposes of Lessee's financial
reporting;
(b) for federal and state income tax, bankruptcy (including
the substantive law upon which bankruptcy proceedings are based), and real
estate, commercial law and UCC purposes:
(i) the Overall Transaction constitutes a financing by Participants to
Lessee and preserves beneficial ownership in the Leased Property in
Lessee, and the obligations of Lessee to pay Basic Rent shall be treated
as payments of interest to the Participants, and the payment by Lessee of
any amounts in respect of the Lease Balance shall be treated as payments
of principal to the Participants; and
(ii) the Deeds together with the Lease create a Lien in the Leased
Property and the other Lease Collateral in favor of Lessor, and the Deed
of Trust creates a lien and a security interest in the Mortgaged Property
defined therein in favor of Agent for the benefit of all of the
Participants.
Nevertheless, Lessee acknowledges and agrees that none of Certificate
Trustee, Agent, Arranger or any Participant has made any representations or
warranties concerning the tax, accounting or characterization of: (i) the
Operative Documents, (ii) the tax treatment for any of Lessee, Certificate
Trustee or the Seller thereunder of the transaction described in the
Montpelier Acquisition Agreement, which Montpelier Acquisition Agreement was
negotiated by and is the sole responsibility of Lessee and the Seller
thereunder, or (iii) any aspect of the Overall Transaction; and that Lessee
has obtained and relied upon such tax, accounting, and legal advice from its
own advisors concerning the Operative Documents and the Overall Transaction
as it deems appropriate.
SECTION 2.9 AMOUNTS DUE. Anything else herein or elsewhere to the
contrary notwithstanding, it is the intention of Lessee, Lessor, and
Participants that: (i) the amount and timing of installments of Basic Rent
due and payable from time to time from Lessee under the Lease shall be equal
to the aggregate payments due and payable in respect of interest accrued on
the Notes and Yield accrued on the Certificates on each Payment Date; (ii) if
Lessee becomes obligated to purchase all of the Leased Property under the
Lease, the principal of the Notes, the Certificate Amounts, all interest and
Yield thereon and all other obligations of Lessee owing to Participants,
Agent and Lessor shall be paid in full by Lessee in accordance with all of
Article XX of the Lease; (iii) if Lessee properly elects the Sale Option and
markets the Leased Property in accordance with ARTICLE XXI of the Lease,
Lessee shall only be required to pay an amount (not to exceed the Lease
Balance) equal to the sum of (a) the Sale Proceeds, (b) the Sale Recourse
Amount, and (c) any amounts due pursuant to SECTION 7.8 and Section 22.3 of
5
<PAGE>
the Lease (which aggregate amounts may be less than the Lease Balance); and
(iv) upon a Lease Event of Default resulting in an acceleration of Lessee's
obligation to purchase the Leased Property under the Lease, the amounts then
due and payable by Lessee under the Lease shall include all amounts necessary
to pay in full the outstanding principal under the Notes, the Certificate
Amounts and all accrued interest and Yield thereon, plus all other amounts
then payable by Lessee to Participants, Agent and Lessor under the Operative
Documents.
SECTION 2.10 COMPUTATIONS. For all purposes under the Operative
Documents and except as specifically provided for at SECTION 7.7 and Section
2.6 of the Loan Agreement, all computations of interest, Yield, and other
accrued amounts (including the Overdue Rate) shall be made on the basis of 30
day months, a 360-day year and the actual days elapsed.
SECTION 2.11 DETERMINATION OF INTEREST RATE AND YIELD RATE. The
amount of principal outstanding on the Notes shall accrue interest at the per
annum rate equal to the Interest Rate. The amount of Certificate Amounts
outstanding from time to time shall accrue Yield at the per annum rate equal
to the Yield Rate. Accrued interest and Yield shall be due and payable by
Lessee as Basic Rent on each applicable Payment Date and on the Lease
Expiration Date. If all or any portion of the principal under the Notes, the
Certificate Amounts, any interest or Yield payable thereon or any other
amount payable hereunder, shall not be paid when due (whether at stated
maturity, the acceleration or otherwise), such overdue amount shall bear
interest at a rate per annum which is equal to the Overdue Rate and shall be
payable from time to time on demand as Supplemental Rent. If at any time the
rate at which interest accrues cannot be determined by reference to a London
interbank offered rate, or if such rate becomes unavailable or illegal, then
such rate shall be determined by the Alternate Base Rate as provided at
SECTION 7.7.
SECTION 2.12 OBLIGATIONS SEVERAL. The obligations of the Participants
hereunder or elsewhere in the Operative Documents shall be several and not
joint; and no Participant shall be liable or responsible for the acts or
defaults of any other party hereunder or under any other Operative Document.
SECTION 2.13 HIGHEST LAWFUL RATE. It is the intention of the parties
hereto to conform strictly to Applicable Laws regarding usury and, anything
herein to the contrary notwithstanding, the obligations of: (x) Lessee to
Lessor under this Participation Agreement and the Lease, (y) Certificate
Trustee to the Certificate Purchasers under the Trust Agreement and the
Certificates and to the Lenders under the Loan Agreement and the Notes, and
(z) of either Lessee or Certificate Trustee or any other party under any
other Operative Document, shall be subject to the limitation that payments of
interest or of other amounts constituting interest under Applicable Laws
shall not be required to the extent that receipt thereof would be in excess
of the Highest Lawful Rate (as defined below), or otherwise contrary to
provisions of law applicable to the recipient limiting rates of interest
which may be charged or collected by the recipient. Accordingly, if the
transactions or the amount paid or otherwise agreed to be paid for the use,
forbearance or detention of money under this Participation Agreement, the
Lease, the Trust Agreement, the Certificates, the Loan Agreement, the Notes
or any other Operative Document would exceed the Highest Lawful Rate or
otherwise be usurious under Applicable Laws (including the federal and state
laws of the United States of America, or of any other jurisdiction whose laws
may be mandatorily applicable) with respect to the recipient of any such
amount, then, notwithstanding anything to the contrary in this Participation
Agreement, the Lease, the
6
<PAGE>
Trust Agreement, the Certificates, the Loan Agreement, the Notes or any other
Operative Document, it is agreed as follows as to the recipient of any such
amount:
(a) the provisions of this SECTION 2.13 shall govern and
control over any other provision in this Participation Agreement, the Lease,
the Trust Agreement, the Certificates, the Loan Agreement, the Notes and any
other Operative Document and each provision set forth therein is hereby so
limited;
(a) the aggregate of all consideration which constitutes
interest under Applicable Laws that is contracted for, charged or received
under this Participation Agreement, the Lease, the Trust Agreement, the
Certificates, the Loan Agreement, the Notes or any other Operative Document
shall under no circumstances exceed the maximum amount of interest allowed by
Applicable Laws (such maximum lawful interest rate, if any, with respect to
such recipient herein called the "HIGHEST LAWFUL RATE"), and all amounts owed
under this Participation Agreement, the Lease, the Trust Agreement, the
Certificates, the Loan Agreement, the Notes and any other Operative Document
shall be held subject to reduction and: (i) the amount of interest which
would otherwise be payable to the recipient hereunder and under the Lease,
the Trust Agreement, the Certificates, the Loan Agreement, the Notes and any
other Operative Document, shall be automatically reduced to the amount
allowed under Applicable Laws, and (ii) any unearned interest paid in excess
of the Highest Lawful Rate shall be credited to the payor by the recipient
(or, if such consideration shall have been paid in full, refunded to the
payor);
(c) all sums paid, or agreed to be paid for the use,
forbearance and detention of the money under this Participation Agreement,
the Lease, the Trust Agreement, the Certificates, the Loan Agreement, the
Notes or any other Operative Document shall, to the extent permitted by
Applicable Laws be amortized, prorated, allocated and spread throughout the
full term of such indebtedness until payment in full so that the actual rate
of interest is uniform throughout the full term thereof;
(d) if at any time the interest, together with any other
fees, late charges and other sums payable pursuant to or in connection with
this Participation Agreement, the Lease, the Trust Agreement, the
Certificates, the Loan Agreement, the Notes and any other Operative Document
executed in connection herewith or therewith, and deemed interest under
Applicable Laws exceeds that amount which would have accrued at the Highest
Lawful Rate, the amount of interest and any such fees, charges and sums to
accrue to the recipient of such interest, fees, charges and sums pursuant to
the Operative Documents shall be limited, notwithstanding anything to the
contrary in the Operative Documents to that amount which would have accrued
at the Highest Lawful Rate for the recipient, but any subsequent reductions,
as applicable, shall not reduce the interest to accrue pursuant to the
Operative Documents below the recipient's Highest Lawful Rate until the total
amount of interest payable to the recipient (including all consideration
which constitutes interest) equals the amount of interest which would have
been payable to the recipient (including all consideration which constitutes
interest), PLUS the amount of fees which would have been received but for the
effect of this SECTION 2.13.
SECTION 2.14 EXTENSION OF LEASE EXPIRATION DATE AND FINAL MATURITY DATE.
(a) Subject to the satisfaction of the conditions and
requirements set forth in this SECTION 2.14 including the receipt of the
consent of the Participants, Lessee may request in writing (an "EXTENSION
OPTION REQUEST") to the Agent, Certificate Trustee and each of the
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Participants that each of the Participants agrees that Lessee may extend the
Lease Term (the "EXTENSION OPTION") for one (1) additional period of up to
five (5) years commencing on the last day of the then Base Term (the "RENEWAL
TERM") and that the Final Maturity Date be correspondingly extended to the
extended Lease Expiration Date. The Extension Option Request must be
delivered in writing to Certificate Trustee, Agent and each Participant not
later than 270 days nor more than 360 days prior to the expiration of the
then current Lease Term. Each Participant will notify the Agent in writing
of whether or not it has consented to such Extension Option Request not later
than 45 days after receipt of the Extension Option Request (the "EXTENSION
OPTION RESPONSE DATE"). Any Participant who does not so notify Agent by the
Extension Option Response Date will be deemed to have not consented to such
Extension Option Request. Any Participant that has notified the Certificate
Trustee that it has not consented to an Extension Option Request or that is
deemed not to have consented, as provided in the preceding sentence, shall be
deemed a "NON-CONSENTING PARTICIPANT". Each Participant's determination with
respect to an Extension Option Request shall be a new credit determination
and within such Participant's sole and absolute discretion and may be
conditioned on different pricing, modification of the Sale Recourse Amount
and receipt of such financial information, documentation or other information
or conditions as may be requested by such Participant including satisfactory
appraisals of the Leased Property.
The Extension Option contemplated by the Extension Option
Request shall become effective as of the first date (the "EXTENSION OPTION
EFFECTIVE DATE") on or after the Extension Response Date on which all of the
Participants (other than Non-Consenting Participants who have been replaced
by Replacement Participants in accordance with SECTION 2.14(b)) and
Replacement Participants shall have consented to such Extension Request;
PROVIDED that on both the date of the Extension Option Request
and the Extension Option Effective Date: (w) each of the
representations and warranties made by the Certificate Trustee and
Lessee in or pursuant to the Operative Documents shall be true and
correct in all material respects as if made on and as of each such
date, (x) Lessee shall not have elected or been deemed to have elected
the Purchase Option or Sale Option, (y) no Lease Default or Lease
Event of Default shall have occurred and be continuing, and (z) the
Certificate Trustee shall have received a certificate of Lessee as to
the matters set forth in CLAUSES (w),(x) AND (y) above; and
PROVIDED FURTHER that in no event shall the Extension Option
Effective Date occur unless each of the Participants (other than
Non-Consenting Participants who have been replaced in accordance with
SECTION 2.14(b)) and the Replacement Participants shall have consented
to the Extension Option Request on or before the expiration of the
then current Lease Term.
(b) At any time after the Extension Option Response Date
and up to 90 days before the then current Lease Expiration Date, Lessee shall
be permitted to elect to replace any Non-Consenting Participant with a
replacement bank or other financial institution (a "REPLACEMENT
PARTICIPANT"); PROVIDED that: (i) such replacement does not conflict with any
Applicable Laws and Regulations, (ii) such Non-Consenting Participant shall
sell (without recourse) to the Replacement Participant all Loans and
Certificate Amounts of such Non-Consenting Participant for an amount equal to
the aggregate outstanding principal amount of such Loans and Certificate
Amounts plus accrued interest and Yield to (but not including) the date of
sale, (iii) the Lessee shall pay to such Non-Consenting Participant any
amounts arising under SECTION 7.5 if any Loan or Certificate Amount owing to
such Non-Consenting Participant
8
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shall be purchased other than on the last day of the Payment Period relating
thereto, (iv) such replacement shall be made in accordance with the
provisions of SECTION 6.3 (PROVIDED that the relevant Replacement Participant
or Lessee shall be obligated to pay the transaction costs arising in
connection therewith), (v) the Replacement Participant shall have agreed to
be subject to all of the terms and conditions of the Operative Documents, and
(vi) such replacement must be consummated no later than thirty (30) days
prior to the expiration of the then current Lease Term. A Non-Consenting
Participant's rights under the indemnification provisions of the Operative
Documents shall survive any sale of its Loans and Certificate Amounts to a
Replacement Participant.
(c) If the Participants (including any Replacement
Participants) have not approved the Extension Option Request by at least 30
days prior to the then current Lease Expiration Date, Lessee shall be deemed
to have elected the Purchase Option.
SECTION 2.15 COLLATERALIZATION. Lessee shall have the right to elect
to collateralize the outstanding principal amounts of the Notes and thereby
reduce the Applicable Margin by pledging Liquid Assets pursuant to a
Custodial Agreement.
ARTICLE III
CONDITIONS TO ADVANCE AND COMPLETION
SECTION 3.1 CONDITIONS TO THE ADVANCE. The obligation of each
Participant to perform its obligations on the Advance Date shall be subject
to the satisfaction of (including, with respect to writings, such writings
being in form and substance reasonably satisfactory to the addressee or
beneficiary thereof), or the waiver in writing by, such Participant of the
conditions precedent set forth in this SECTION 3.1 on or prior to the Advance
Date (except that the obligation of any party hereto shall not be subject to
such party's own performance or compliance):
(a) ADVANCE REQUEST. Lessee shall have delivered the
Advance Request conforming with the requirements of SECTION 2.5 in respect of
the Advance Date.
(b) PERFORMANCE. Each party to any Operative Document
shall have performed and complied with all agreements and conditions
contained herein and in any other Operative Document to which it is a party
required to be performed or complied with by it on or prior to the Advance
Date.
(c) CONSENTS AND APPROVALS. All Governmental Actions and
other approvals and consents required to be taken, given or obtained, as the
case may be, by or from any Authority or another Person, or by or from any
trustee or holder of any Indebtedness or obligation of Lessee, that are
necessary or, in the reasonable opinion of any Participant or counsel to such
Participant, advisable in connection with the execution, delivery and
performance of the Operative Documents shall have been taken, given or
obtained as the case may be, shall be in full force and effect.
(d) REPRESENTATIONS AND WARRANTIES TRUE; ABSENCE OF
DEFAULTS AND MATERIAL ADVERSE EFFECT. Each representation and warranty of
Lessee contained herein or in any other Operative Document shall be true and
correct in all material respects as though made on and as of the Advance
Date, except that any such representation or warranty which is expressly made
only as of a specified date need be true only as of such date. No Lease
Default or Lease Event
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of Default shall have occurred and be continuing. Since May 1, 1998, no
change or changes, effect or effects or condition or conditions has occurred
that individually or in the aggregate are or are likely to have a Material
Adverse Effect.
(e) TRANSACTION COSTS. Lessee shall have paid and/or
Lessee shall have requested that the Advance include a Funding for all
Transaction Costs invoiced through the Business Day immediately preceding the
date of the Advance. Such payments shall be made by wire transfer of
immediately available funds.
(f) PROCEEDINGS SATISFACTORY, ETC. All proceedings taken
in connection with the Advance Date and all documents relating thereto shall
be reasonably satisfactory to each Participant and its counsel, and each
Participant and its counsel shall have received copies of such documents as
such Participant or its counsel may reasonably request in connection
therewith, all in form and substance reasonably satisfactory to such
Participant and its counsel.
(g) TAXES. All taxes, charges, fees and costs, if any,
payable in connection with the execution, delivery, recording and filing of
the Operative Documents and the transactions contemplated to be consummated
on the Advance Date shall have been paid in full by Lessee (it being
understood such amounts may be paid with the Advance, subject to the
limitations herein and to the extent such amounts constitute Transaction
Costs), or arrangements for such payment shall have been made by Lessee to
the satisfaction of the Participants.
(h) APPRAISAL AND IMPROVEMENTS MATTERS. Prior to the
Advance Date, the Participants shall have obtained an appraisal for the
Leased Property in form and substance satisfactory to each of the
Participants (the "APPRAISALS") which shall establish (by the use of
appraisal methods satisfactory to the Participants) or in the case of item
(iii) provide a statement from Appraiser: (i) the individual and combined
Fair Market Value of the Leased Property as of the Advance Date, (ii) the
separate valuations of the land and improvements for the Leased Property,
and (iii) assuming no change in current conditions, that the appraiser does
not expect the combined Fair Market Value of the Leased Property will
decrease from the current combined Fair Market Value as of the last day of
the Lease Term. The portion of the Appraisals establishing Fair Market Value
for the Leased Property as of the Advance Date shall be prepared in
accordance with FIRREA and be performed by an independent appraisal company
chosen by the Arranger.
(i) FILINGS AND RECORDINGS. Certificate Trustee and Agent
shall have received evidence reasonably satisfactory that all filings or
recordings enumerated and described in SCHEDULE 4.1A including the Deeds, the
Lease Supplements and the Deed of Trust, as well as all other filings and
recordings necessary or advisable, including precautionary financing
statements and mortgage and deed of trust filings, in the opinion of counsel
to the Participants, to perfect the rights, titles and interests of
Certificate Trustee, the Participants and Agent intended to be created by the
Operative Documents shall have been or are being recorded in the offices of
the appropriate Authorities, including any recordings and filings necessary
to create, perfect, preserve and protect: (i) Certificate Trustee's interest
in the Leased Property, the other Lease Collateral and any other property and
interests included in the Trust Estate, (ii) a first deed of trust Lien and
deed of trust of record on the Mortgaged Property, subject to Permitted
Exceptions, and (iii) a first priority perfected security interest in the
Lease Collateral, subject to Permitted Exceptions. All recording and filing
fees and taxes with respect to
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any recordings or filings made pursuant to this SECTION 3.1(i) shall have
been paid in full by Lessee, and satisfactory evidence thereof shall have
been delivered to Certificate Trustee and Agent, or arrangements for such
payment shall have been made by Lessee to the satisfaction of the
Participants.
(j) OPINIONS OF COUNSEL. Certificate Trustee, Agent and
the Participants shall have received opinions of counsel dated the Advance
Date substantially in the forms of EXHIBITS H-1 and H-2 with respect to the
Operative Documents executed and delivered in connection with the Advance
Date and the perfection and validity of Agent's Liens in the Leased Property
and the other Lease Collateral.
(k) SURVEY. Lessee shall have delivered, or shall have
caused to be delivered, to Certificate Trustee, Agent and to the Title
Insurance Company an ALTA survey of the Leased Property in a form
satisfactory to the Title Insurance Company (and including any applicable
flood zone designation (with property annotations based on Federal Flood
Insurance Rate Maps or the local equivalent) by scaled map location and
graphic plotting) in order to issue the Title Policies and showing no state
of facts unsatisfactory to any Participant.
(l) TITLE AND TITLE INSURANCE. Certificate Trustee shall
have received from the Title Insurance Company an ALTA 1970 owner's policy of
title insurance (or an irrevocable commitment for the issuance thereof),
acceptable in form and substance to each Participant (the "OWNER'S POLICY"),
insuring that Certificate Trustee has good and marketable title to the Leased
Property, subject to the Lease and such other exceptions to title as are
acceptable to each Participant. Agent, for the benefit of the Participants,
shall have received from the Title Insurance Company (or an irrevocable
commitment for the issuance thereof), an ALTA 1970 form of loan policy of
title insurance (the "LENDER'S POLICY"; together with the Owner's Policy, the
"TITLE POLICIES"), acceptable in form and substance to the Participants,
insuring the creation under the Deed of Trust in favor of Agent of valid
first priority Liens against the Mortgaged Property, subject to such
exceptions to title as are acceptable to the Participants. Each Title Policy
shall be in an amount equal to the aggregate Commitments, together with
complete, legible copies of all encumbrances, maps, surveys, and plats of
record. The Title Policies shall be dated as of the Advance Date and, to the
extent permitted under Applicable Laws, shall (w) contain affirmative
endorsements as to mechanics' liens, doing business, usury, Form 3.0 zoning,
easements and rights-of-way, Form B-1 comprehensive coverage, encroachments,
the nonviolation of covenants and restrictions, rights of access and survey
matters, (x) delete the creditors' rights and survey exclusions, (y) contain
endorsements regarding the effect of recharacterization, and (z) contain such
other endorsements reasonably requested by the Required Participants.
(m) ENVIRONMENTAL REVIEW. Prior to the Advance Date, each
Participant, Lessor and Agent shall have received the Environmental Audit for
the Leased Property, each of which shall be dated not earlier than June 1,
1998, and addressed to Lessor, Agent and each Participant and which shall
have been approved by Lessor and each Participant in each of their sole and
absolute discretion.
(n) LEASE SUPPLEMENTS. Each Participant and Lessor shall
receive an original counterpart of the Lease Supplement for the Land and
another for the Improvements executed by Lessee and Lessor with respect to
such Land and Improvements; PROVIDED, that
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only Agent shall receive the copies thereof marked as the sole original
counterparts for UCC purposes.
(o) PROPERTY ACQUISITION MATTERS. Lessor shall receive:
(i) an assignment of lease in the form of EXHIBIT L ("ASSIGNMENT OF
SUBLEASE") executed by Lessee to Lessor with respect to the Standard
Industrial Lease -Multi-Tenant dated September 12, 1994, by and between
Transcontinental Realty Investors, a California business trust, as lessor,
and West Capital Financial Services Corp., a California corporation (the
"SUBLEASE"); (ii) an estoppel certificate in the form of EXHIBIT M ("ESTOPPEL
CERTIFICATE") from West Capital Financial Services Corp., the tenant under
the Sublease who occupies all of the improvements located at 5775 Roscoe
Court, San Diego, California, addressed to Lessor showing no defaults by
landlord or tenant thereunder or defenses to the payment of rent and
otherwise setting forth such details concerning the status of West Capital
Financial Services Corp.'s occupancy under the Sublease as of the Document
Closing Date as are acceptable to Lessor; (iii) pay-off demands from the
lenders holding first priority liens on the Leased Property setting forth the
total amount required to pay off the loans secured by such first priority
liens in full, including all interest, principal, prepayment penalties, fees,
expenses and other amounts of any kind or description due and payable
thereunder as of the Document Closing Date, together with per diem amounts
for a payoff up to and including August 20, 1998; and (iv) a statement from
Lessee of the amount required to reimburse Lessee for the value of the
capital stock of Lessee deposited in the escrow established pursuant to the
Montpelier Purchase Agreement.
(p) NO CASUALTY OR CONDEMNATION. No Casualty and no
Condemnation shall have occurred. No action shall be pending or threatened
by an Authority to initiate a Condemnation.
(q) LITIGATION. No action or proceeding shall have been
instituted or threatened nor shall any Governmental Action be instituted or
threatened before any Authority, nor shall any order, judgment or decree have
been issued or proposed to be issued by any Authority, to set aside,
restrain, enjoin or prevent the performance of this Agreement or any
transaction contemplated hereby or by any other Operative Document or which
is reasonably likely, in the sole opinion of the Required Participants to
have a Material Adverse Effect.
(r) LEGALITY. In the opinion of each Participant or its
counsel, the transactions described in the Operative Documents shall not
violate any Applicable Laws and no change shall have occurred or been
proposed in Applicable Laws that would make it uneconomic or illegal for any
party to any Operative Document to participate in any of the transactions
described in the Operative Documents or otherwise would prohibit the
consummation of any transaction described in the Operative Documents or
expand the duties, obligations and risks of such Participant.
(s) ARRANGEMENT FEE. Lessee shall have paid to Arranger
the Arrangement Fee which may be paid by Lessee out of the Advance.
(t) FIRPTA AFFIDAVIT. Lessee shall have caused each of
the Sellers of the Leased Property to deliver to Certificate Trustee and
Agent with respect to the Leased Property either: (i) a FIRPTA Affidavit in
customary form executed by each Seller, or (ii) if any Seller is a "foreign
person" as defined in Section 1445 of the Code, evidence that a portion of
the Purchase
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Price to be paid to such Seller has been withheld, if so required, in
accordance with the provisions of the Code and Regulations.
(u) CALIFORNIA FORM 590-RE. Lessee shall have caused each
of the Sellers of the Leased Property to deliver to Certificate Trustee and
Agent with respect to the Leased Property either: (i) a California Form
590-RE executed by each Seller, or (ii) if any Seller is not a "California
resident" or otherwise exempt, evidence that a portion of the Purchase Price
to be paid to such Seller has been withheld, as required in accordance with
Applicable Laws.
(v) ACQUISITION DOCUMENTS. The Required Participants shall
be reasonably satisfied with: (i) the documents which grant Certificate
Trustee the right to acquire, or which designate Certificate Trustee as the
party to take title to, the Leased Property on the Advance Date, (ii) the
escrow instructions or other arrangement for the repayment of the first
priority liens on the Leased Property it being understood that the portion of
the Advance to be used for such purpose will be deposited into the escrow on
the Advance Date and used by the escrow holder to repay (x) on the Advance
Date, the loan secured by a first priority lien on the real property to be
purchased and sold under the Transcontinental Acquisition Agreement and (y)
on the first Business Day immediately following the Advance Date, the loan
secured by a first priority lien on the real property to be purchased and
sold under the Montpelier Acquisition Agreement, and (iii) the escrow
instructions or other arrangement for the payment to Lessee for the capital
stock of Lessee issued to the Seller as part of the consideration to be paid
the Seller under the Montpelier Acquisition Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 REPRESENTATIONS AND WARRANTIES OF LESSEE. As of the date
of its execution of this Agreement and the Advance Date, Lessee makes the
representations and warranties set forth in this SECTION 4.1 to each of the
other parties hereto.
(a) DUE ORGANIZATION, ETC. It is a corporation duly
organized, validly existing and in good standing under the laws of the State
of California and each has all corporate powers and all material governmental
licenses, authorizations, consents and approvals required to carry on its
business as presently conducted, to own or hold under lease its properties,
to enter into and perform its obligations under the Operative Documents to
which it is or is to be a party and each other agreement, instrument and
document to be executed and delivered by it on or before the Document Closing
Date and the Advance Date in connection with or as described in each such
Operative Document to which it is or is to be a party. It is duly qualified
as a foreign corporation authorized to do business in every jurisdiction in
which a failure to be so qualified in each such other jurisdiction could have
a Material Adverse Effect.
(b) AUTHORIZATION; NO CONFLICT. The execution, delivery
and performance by it of each of the Operative Documents to which it is or is
to be a party and the performance by it of its obligations under such
Operative Documents are within its corporate powers, have been duly
authorized by all necessary corporate action (including any necessary
stockholder, policyholder or member action) on the part of it and do not and
will not: (i) contravene any Applicable Laws currently in effect applicable
to or binding on it or the Leased Property; (ii) violate any provision of its
charter, bylaws or other governing documents; (iii) result in a breach of or
constitute a
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default under any indenture, loan or credit agreement, or any other agreement
or instrument to which it is a party or by which it or its properties is
bound or affected, except where any such breach or default would not
reasonably be likely to result in a Material Adverse Effect; (iv) result in,
or require, the creation or imposition of any Lien of any nature upon or with
respect to the Leased Property or the other Lease Collateral (other than the
Liens created pursuant to the Operative Documents) or any other property now
owned or hereafter acquired by it or any of its Subsidiaries; or (v) require
any Governmental Action by any Authority, except for: (A) the filings and
recordings listed on SCHEDULE 4.1A to perfect the rights of Certificate
Trustee and Agent on behalf of the Participants intended to be created by the
Operative Documents, and (B) those Governmental Actions required with respect
to it (which are all described in SCHEDULE 4.1B), each of which have been
duly effected and are, or on the Advance Date will be, in full force and
effect; and it is not in default under or in violation of its charter, bylaws
or other governing documents.
(c) ENFORCEABILITY, ETC. This Agreement constitutes the
legal, valid and binding agreement of it, and each Operative Document to
which it is a party, if and when executed and delivered in accordance with
this Agreement, will constitute its legal, valid and binding obligation,
enforceable against it in accordance with the terms thereof, except as such
enforceability may be limited by applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and by general equitable
principles.
(d) LITIGATION. There is no action, suit, proceeding or
investigation pending against or (to its Actual Knowledge) threatened which
questions the validity of the Operative Documents to which it is a party or
any action taken or to be taken pursuant to the Operative Documents to which
it is a party, and there is no action, proceeding or investigation pending or
(to its Actual Knowledge) threatened which, if adversely determined, could
reasonably be expected to have a Material Adverse Effect.
(e) TAXES. Lessee and its Subsidiaries have filed or
caused to be filed all United States Federal and all other material tax
returns that are required to be filed by it, and it has paid or caused to be
paid all taxes shown to be due and payable on such returns or on any
assessment received by it to the extent that such taxes have become due and
payable except to the extent that taxes due, but unpaid, are being contested
in good faith by it by appropriate action or proceeding and, to the extent
(if any) that such taxes are not due and payable, it has established or
caused to be established reserves that are adequate for the payment thereof
in accordance with GAAP.
(f) RIGHTS IN RESPECT OF THE LEASED PROPERTY. The
Acquisition Documents are in full force and effect and permit Lessee to
assign to Lessor the right to acquire the Leased Property as described in
this Participation Agreement. Except for the Acquisition Documents, Lessee
is not a party to any other contract or agreement to sell, transfer or
encumber any interest in the Lease Collateral or any part thereof other than
pursuant to this Agreement and the Lease. Lessor will assume no obligations
under the Acquisition Agreements.
(g) NO LEASE DEFAULT, LOSS, ETC. No Lease Default, Lease
Event of Default, Condemnation or Casualty has occurred and is continuing;
there is no action pending or, to the best of its knowledge, threatened by an
Authority to initiate a Condemnation. No condition exists that constitutes,
or with the giving of notice or lapse of time or both would constitute an
event of default by it under any indenture, mortgage, chattel mortgage, deed
of trust, lease,
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conditional sales contract, loan or credit arrangement or other material
agreement or instrument to which it is a party or by which it or any of its
properties or the Leased Property is bound, which is reasonably likely to
result in a Material Adverse Effect.
(h) SUBJECTION TO GOVERNMENT REGULATION. Neither
Certificate Trustee, Agent nor any Participant will become: (i) solely by
reason of entering into the Operative Documents or consummation of the
transactions contemplated thereby (other than Lessor upon the exercise by
Lessor of remedies under the Lease) subject to ongoing regulation of its
operations by an Authority; or (ii) except for banking regulations and for
regulation the applicability of which depends upon the existence of facts in
addition to the ownership of, or the holding of any interest in, the Leased
Property or any interest therein upon the exercise of remedies under the
Lease, subject to ongoing regulation of its operations by any Authority.
(i) CHIEF EXECUTIVE OFFICE OF LESSEE. Its principal place
of business and chief executive office, as such terms are used in Section
9-103(3) of the UCC, is located at 9404 Chesapeake Drive, San Diego,
California, 92123.
(j) INVESTMENT COMPANY ACT. It is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
(k) PRIVATE OFFERING. The issuance, sale and delivery of
the Certificates, the Notes and the interests in the Operative Documents
under the circumstances contemplated hereby do not require the registration
or qualification of such Certificates, Notes or interests under the
Securities Act, any state securities laws, or the Trust Indenture Act of 1939.
(l) PUBLIC UTILITY HOLDING COMPANY. It is not subject to
regulation as a "holding company," an "affiliate" of a "holding company", or
a "subsidiary company" of a "holding company," within the meaning of the
Public Utility Holding Company Act of 1935, as amended, or otherwise subject
to any regulatory scheme which restricts its ability to incur debt.
(m) LICENSES, REGISTRATIONS AND PERMITS. All material
licenses, approvals, authorizations, consents, permits (including building,
demolition and environmental permits, licenses, approvals, authorizations and
consents), easements and rights-of-way, including proof and dedication,
required for the use and occupancy of the Leased Property and for the
operation thereof have either been obtained from the appropriate Authorities
having jurisdiction or from private parties, as the case may be, or will be
obtained from the appropriate Authorities having jurisdiction or from private
parties, as the case may be, prior to commencing any such construction or use
and operation, as applicable.
(n) NATURE, CONDITION AND USE OF THE LEASED PROPERTY.
Lessee's principal purpose for the Leased Property is to conduct the
administrative, marketing, research, and development and manufacturing
activities of Lessee and its Subsidiaries. The Leased Property, and any
present use and presently anticipated future use thereof by Lessee and its
agents, assignees, employees, invitees, lessees, licensees and tenants comply
with all Applicable Laws (including zoning and land use laws and
Environmental Laws) and insurance requirements, except for such instances of
non-compliance that could not have, individually or in the aggregate, a
Material Adverse Effect. No notices, complaints or orders of violation or
non-compliance or liability have been issued or, to the best of Lessee's
knowledge, threatened by
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any Person with respect to the Leased Property or the present or intended
future use thereof, except for such violations and instances of
non-compliance as could not have, individually or in the aggregate, a
Material Adverse Effect, and Lessee is not aware of any circumstances which
could give rise to the issuance of any such notices, complaints or orders.
(o) TITLE TO LEASED PROPERTY; SECURITY. On the Advance
Date, except for the filings and recordings listed in SCHEDULE 4.1A (which
filings or recordings shall have been duly made on the Advance Date, or shall
have been arranged to be made promptly thereafter (including the payment of
any fees or taxes relating to any of the foregoing) in a manner satisfactory
to each Participant), no other filings or recordings are necessary to validly
and effectively convey to Certificate Trustee good and marketable title to
the Leased Property, and Agent has a valid and enforceable first priority
Lien for the benefit of the Participants on the Leased Property and the other
Lease Collateral free and clear of all other Liens, other than Permitted
Liens. Neither it nor its Affiliates has taken or caused to be taken any
action which would have an adverse effect on Certificate Trustee's title to
the Leased Property as described in the Operative Documents and, in the case
of the Leased Property, from that indicated in the Owner's Policy to be
delivered pursuant to SECTION 3.1(l). Neither Lessee nor any of its
Affiliates has created, consented to, incurred or suffered to exist any Lien
upon the Leased Property other than Permitted Liens.
(p) INSURANCE. It carries insurance with reputable
insurers in respect of its material assets, in such manner, in such amounts
and against such risks as is customarily maintained by other Persons of
similar size engaged in similar business.
(q) FLOOD HAZARD AREAS. Except as otherwise identified on
the applicable survey delivered pursuant to SECTION 3.1(k), no portion of the
Leased Property is located in an area identified as a special flood hazard
area by the Federal Emergency Management Agency or other applicable
Authority. If the Leased Property is located in an area identified as a
special flood hazard area by the Federal Emergency Management Agency or other
applicable Authority, then, to the extent required by Applicable Law, flood
insurance has been obtained for the Leased Property in accordance with the
National Flood Insurance Act of 1968, as amended.
(r) FEDERAL RESERVE REGULATIONS. Neither it nor its
Affiliates will, directly or indirectly, use any of the proceeds from the
Funding made by the Participants with respect to the issuance of the
Certificates and the Notes or the Advance for the purpose of purchasing or
carrying any "margin stock" or "margin security" within the meaning of
Regulation T, U or X of the Board of Governors of the Federal Reserve System
or to extend credit to others for such purpose or for any purpose which
violates or which would be inconsistent with, the provisions of Regulation T,
U or X of the Board of Governors of the Federal Reserve System.
(s) DISCLOSURE. All information in any exhibit, report,
certificate or written statement heretofore furnished by it and any of its
Affiliates (including any Person authorized or employed by any such Person as
agent or otherwise) to the Participants for purposes of or in connection with
the negotiation and preparation of the Operative Documents and the
transactions contemplated thereby, when taken as a whole with all other
written disclosures to such parties, do not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading; PROVIDED, HOWEVER, that the foregoing
representation and warranty shall be deemed limited to Lessee's Actual
Knowledge to the extent it relates to
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information prepared by an independent third party and which is not the
subject of any other representation and warranty made by Lessor in this
Agreement.
(t) APPRAISAL DATA. Taken as a whole, the information
provided or to be provided by it and its Affiliates to the Appraiser and
forming the basis for the conclusions set forth in each Appraisal was or when
provided will be true and correct in all material respects and did not or
when provided will not omit any information known to it regarding the title,
physical condition, or use of the Leased Property which it or any of its
Affiliates knew or should reasonably have known was necessary to make the
information provided not materially misleading; PROVIDED, HOWEVER, that the
foregoing representation and warranty shall be deemed limited to Lessee's
Actual Knowledge to the extent it relates to information prepared by an
independent third party and which is not the subject of any other
representation and warranty made by Lessor in this Agreement.
(u) SOLVENCY. The consummation by it of the transactions
described in the Operative Documents does and will not render it insolvent,
nor was it made in contemplation of its insolvency; the value of its assets
and properties at fair valuation and at their then present fair salable value
is and, immediately following the Advance, will be greater than its total
liabilities, including contingent liabilities and liabilities incurred
pursuant to the Operative Documents, as they become due; and the property
remaining in its hands was not and, immediately following the Advance, will
not be an unreasonably small amount of capital.
(v) ENVIRONMENTAL MATTERS. Lessee has reasonably concluded
that the liabilities and costs associated with the effect of Environmental
Laws on its business, operations and properties and its Subsidiaries
(including any capital or operating expenditures required for clean-up or
closure of properties presently or previously owned, any capital or operating
expenditures required to achieve or maintain compliance with environmental
protection standards imposed by law or as a condition of any license, permit
or contract, any related constraints on operating activities, including any
periodic or permanent shutdown of any facility or reduction in the level of
or change in the nature of operations conducted thereat, any costs or
liabilities in connection with off-site disposal of wastes or Hazardous
Materials, and any actual or potential liabilities to third parties,
including employees, and any related costs and expenses) could not reasonably
be expected to have a Material Adverse Effect.
(w) TITLE TO PROPERTIES. Lessee and its Consolidated
Subsidiaries have good and marketable title to all of their material assets
reflected on the balance sheets referred to in CLAUSE (y) of this SECTION
4.1, except for such assets as have been disposed of in the ordinary course
of business. Lessee has such trademarks, trademark rights, trade names,
trade name rights, franchises, copyrights, patents, patent rights and
licenses as to allow it to conduct its business as now operated, without
known conflict with the rights of others, except to the extent that such
conflicts would not have a Material Adverse Effect.
(x) ERISA.
(A) Each member of the ERISA Group has fulfilled its obligations
under the minimum funding standards of ERISA and the Code with respect
to each Plan and is in compliance in all material respects with the
presently applicable provisions of ERISA and the Code with respect to
each Plan, except if no Material Adverse Effect could reasonably be
expected to result therefrom. No member of the ERISA Group has: (i)
sought a waiver of the minimum funding standards under Section 412 of
the Code in respect of any Plan, (ii) failed to make
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any contribution or payment to any Plan or Multiemployer Plan or in
respect of any Benefit Arrangement, or made any amendment to any Plan
or Benefit Arrangement which has resulted or could result in the
imposition of a Lien or the posting of a bond or other security under
ERISA or the Code or (iii) incurred any liability under Title IV of
ERISA other than a liability to the PBGC for premiums under Section
4007 of ERISA, except if no Material Adverse Effect could reasonably be
expected to result therefrom.
(B) The execution and delivery of the Operative Documents,
including the issuance and sale of the Certificates and Notes and the
consummation of the transactions contemplated hereby and thereby under
the Operative Documents, will not involve any prohibited transactions,
within the meaning of Section 406 of ERISA or in connection with which a
tax could be imposed pursuant to Section 4975 of the Code.
(y) FINANCIAL INFORMATION.
(A) The consolidated balance sheet of Lessee and its Consolidated
Subsidiaries as of January 31, 1998, and the related consolidated
statements of operations and cash flows for the fiscal year then ended,
reported on by Ernst & Young, a copy of which has been delivered to each
of the Participants, fairly present, in conformity with GAAP, the
consolidated financial position of Lessee and its Consolidated
Subsidiaries as of such date and cash flows for such fiscal year.
(B) The unaudited consolidated balance sheet of Lessee and its
Consolidated Subsidiaries as of May 1, 1998, and the related unaudited
consolidated statements of operations and cash flows for the portion of
Lessee's fiscal year ended at the end of such quarter, a copy of which
has been delivered to each of the Participants, fairly present, in
conformity with GAAP, the consolidated financial position of Lessee and
its Consolidated Subsidiaries as of such date and their consolidated
results of operations and cash flows for such fiscal quarter.
(C) Since May 1, 1998, no change or changes, effect or effects, or
condition or conditions (financial or otherwise) have occurred that
individually or in the aggregate are or could have a Material Adverse
Effect.
(z) YEAR 2000. Lessee has developed and is presently
implementing a comprehensive, detailed program to address on a timely
basis the "Year 2000 Problem" (that is, the risk that computer
applications used by Lessee and its Subsidiaries may be unable to
recognize and perform properly date-sensitive functions involving
certain dates prior to and any date after December 31, 1999) and
reasonably anticipates that it will successfully resolve the Year 2000
Problem on a timely basis for all material computer applications used
by it.
SECTION 4.2 REPRESENTATIONS AND WARRANTIES OF EACH PARTICIPANT.
As of the date of its execution of this Agreement, each Participant
represents and warrants severally and only as to itself to each of the
other parties hereto as follows:
(a) DUE ORGANIZATION, ETC. It is duly organized and
validly existing under the laws of the jurisdiction of its organization
and has full corporate power and authority to enter into and perform
its obligations as either a Lender or a Certificate Purchaser (as the
case may be) under each Operative Document to which it is or is to be a
party and each other agreement,
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instrument and document to be executed and delivered by it on or before
the Advance Date in connection with or as described in each such
Operative Document to which it is or is to be a party.
(b) LESSOR LIENS. The Leased Property is free and clear of
all Lessor Liens attributable to it and no act or omission by it has occurred
which would cause a Lessor Lien attributable to it.
(c) ERISA. It is purchasing its interest in the
Certificate(s) and the Notes with assets that are either: (i) not
assets of any Plan (or its related trust) which is subject to Title I
of ERISA or Section 4975 of the Code; or (ii) assets of any Plan (or
its related trust) which is subject to Title I of ERISA or Section 4975
of the Code, but there is available an exemption from the prohibited
transaction rules under Section 406(a) of ERISA and Section 4975 of the
Code and such exemption is immediately applicable to each transaction
described in the Operative Documents to the extent that any other party
to such transaction is a "party in interest" as defined in Section
3(14) of ERISA with respect to such plan assets.
(d) INVESTMENT IN NOTES AND CERTIFICATES. It is
acquiring its interest in the Note(s) and/or Certificate(s) and the
Operative Documents for its own account for investment and not with a
view to any distribution (as such term is used in Section 2(11) of the
Securities Act) thereof, and if in the future it should decide to
dispose of its interest in the Notes and/or Certificates and the
Operative Documents, it understands that it may do so only in
compliance with the Securities Act and the rules and regulations of the
SEC thereunder and any applicable state securities laws. Each
Participant is aware that the Notes and Certificates and its interests
in the Operative Documents have not been registered under the
Securities Act or qualified or registered under any state or other
jurisdiction's securities laws. Neither it nor anyone authorized to
act on its behalf has taken or will take any action which would subject
the issuance or sale of any Note or Certificate or any interest in the
Operative Documents or the Leased Property, the Trust Estate, the Lease
Collateral, the Mortgaged Property or the Lease to the registration
requirements of Section 5 of the Securities Act. No representation or
warranty contained in this SECTION 4.2(d) shall include or cover any
action or inaction of Lessee or any Affiliate thereof whether or not
purportedly on behalf of any Participant, Agent, Certificate Trustee or
any of their Affiliates. Notwithstanding the foregoing, but subject to
the provisions of Article V of the Trust Agreement and of ARTICLE VI,
it is understood among the parties that the disposition of each
Participant's property shall be at all times within its control. Each
Participant and its respective agents and representatives have such
knowledge and experience in financial and business matters as to enable
them to utilize the information made available to them in connection
with the transactions contemplated hereby, to evaluate the merits and
risk of an investment in Notes and/or Certificates and the Operative
Documents and to make an informed decision with respect thereto and
such an evaluation and informed decision have been made.
Each Participant understands and agrees that the Certificates
and Notes will bear a legend that shall read substantially as follows:
"THIS [CERTIFICATE] [NOTE] HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES OR "BLUE SKY" LAW, AND MAY
NOT BE TRANSFERRED, SOLD OR OFFERED FOR SALE IN
VIOLATION OF SUCH ACT OR LAWS."
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SECTION 4.3 REPRESENTATIONS AND WARRANTIES OF CERTIFICATE TRUSTEE. As
of the date of its execution of this Agreement and as of the Advance Date,
Certificate Trustee, in its individual capacity, represents and warrants to each
of the other parties hereto as follows:
(a) CORPORATE TRUST OFFICE. The Corporate Trust
Office and principal place of business and the place where the
documents, accounts and records relating to the Overall Transaction are
kept is located at 120 South San Pedro Street, Los Angeles, California
90012.
(b) DUE ORGANIZATION, ETC. Certificate Trustee is a
national banking association duly organized and validly existing in
good standing under the laws of the United States and has full power
and authority to execute, deliver and perform its obligations: (i) in
its individual capacity under the Trust Agreement and, to the extent it
is a party hereto in its individual capacity, this Agreement, and (ii)
acting as Certificate Trustee under the Trust Agreement, under this
Agreement and each other Operative Document to which it is or will be a
party as Certificate Trustee.
(c) DUE AUTHORIZATION; ENFORCEABILITY, ETC. This
Agreement and the Trust Agreement have been or will be duly authorized,
executed and delivered by or on behalf of Certificate Trustee, in its
individual capacity, and are, or upon execution and delivery will be,
legal, valid and binding obligations of Certificate Trustee, in its
individual capacity enforceable against it in accordance with their
respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws affecting creditors'
rights generally and by general equitable principles.
(d) NO CONFLICT. The execution and delivery by: (a)
Certificate Trustee, in its individual capacity, of the Trust Agreement
and this Agreement, and (b) Certificate Trustee, of each other
Operative Document to which it is or will be a party, in its capacity
as Certificate Trustee, are not and will not be, and the performance by
Certificate Trustee, and to the extent it is to be a party thereto in
its individual capacity, in its individual capacity, of its obligations
under each are not and will not be inconsistent with the articles of
association or by-laws of Certificate Trustee, do not and will not
contravene any Applicable Laws of the United States of America or the
State of California relating to the banking or trust powers of
Certificate Trustee, and to the extent it is to be a party thereto in
its individual capacity, in its individual capacity, and, to the best
knowledge of Certificate Trustee, and to the extent it is to be a party
thereto in its individual capacity, in its individual capacity, do not
and will not contravene any provision of, or constitute a default
under, any indenture, mortgage, chattel mortgage, deed of trust, lease,
conditional sales contract, loan or credit arrangement or other
agreement or instrument to which Certificate Trustee, and to the extent
it is to be a party thereto in its individual capacity, in its
individual capacity, is a party or by which Certificate Trustee, and to
the extent it is to be a party thereto in its individual capacity, in
its individual capacity, or its properties may be bound or affected.
(e) NO APPROVALS, ETC. Neither the execution and
delivery by Certificate Trustee, and to the extent it is to be a party
thereto in its individual capacity, in its individual capacity, under
the Trust Agreement or (assuming the due authorization, execution and
delivery of the Trust Agreement by each Certificate Purchaser) as
Certificate Trustee under the Participation Agreement, as the case may
be, of any of the Operative Documents to which Certificate Trustee is a
party requires the consent or approval of, or the giving of notice to
or
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registration with, or the taking of any other action in respect of, any
Authority or other United States of America or California body governing its
banking practices.
(f) LITIGATION. There is no action, proceeding or
investigation pending or, to its knowledge, threatened against Certificate
Trustee, and to the extent it is to be a party thereto in its individual
capacity, in its individual capacity, which questions the validity of the
Operative Documents, and there is no action, proceeding or investigation served
and pending or threatened which is likely to result, either in any case or in
the aggregate, in any material adverse change in the ability of Certificate
Trustee, and to the extent it is to be a party thereto in its individual
capacity, in its individual capacity, to perform its obligations (in either
capacity) under the Operative Documents to which Certificate Trustee, and to the
extent it is to be a party thereto in its individual capacity, in its individual
capacity, is a party.
(g) LESSOR LIENS. The Leased Property is free and clear of
all Lessor Liens attributable to Certificate Trustee (in its individual
capacity) and no act or omission by Certificate Trustee has occurred which would
cause a Lessor Lien.
(h) SECURITIES ACT. Neither Certificate Trustee (in its
individual capacity or as a Certificate Trustee) nor anyone authorized to act on
Certificate Trustee's behalf has, directly or indirectly, in violation of
Section 5 of the Securities Act or any state securities laws, offered or sold
any interest in the Certificates, the Notes, the Leased Property, the Lease, or
any of the other Operative Documents or in any security or lease the offering of
which, for purposes of the Securities Act or any state securities laws, would be
deemed to be part of the same offering as the offering of the aforementioned
securities or leases, or solicited any offer to acquire any of the
aforementioned securities or leases.
(i) TAXES. There are no taxes payable by Certificate Trustee
imposed by the State of California or any political subdivision thereof or by
the United States of America in connection with the execution and delivery by
Certificate Trustee of this Participation Agreement, the other Operative
Documents to be delivered on the Document Closing Date solely because
Certificate Trustee is a national banking association with its principal place
of business in the State of California and performs certain of its duties as
Certificate Trustee in the State of California and there are no taxes payable by
Certificate Trustee imposed by the State of California or any political
subdivision thereof or by the United States of America in connection with the
acquisition of its interest in the Trust Estate, and its execution, delivery and
performance of the Trust Agreement and any other Operative Document (other than
franchise or other taxes based on or services rendered in connection with the
transactions contemplated hereby), solely because Certificate Trustee is a
national banking association with its principal place of business in the State
of California and performs certain of its duties as Certificate Trustee in the
State of California.
SECTION 4.4 REPRESENTATIONS AND WARRANTIES OF AGENT. Agent, in its
individual capacity, hereby represents and warrants to the Participants as set
forth in this SECTION 4.4.
(a) ORGANIZATION AND AUTHORITY. Agent is a national banking
association duly organized and validly existing in good standing under the laws
of the United States and has the power and authority to enter into and perform
its obligations under the Operative Documents.
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(b) AUTHORIZATION; BINDING EFFECT. The Operative Documents
to which Agent is or will be a party have been or will be, on the date required
to be delivered hereby, duly authorized, executed and delivered by Agent, and
this Participation Agreement is, and such other Operative Documents are, or,
when so executed and delivered by Agent will be, valid, legal and binding
agreements of Agent, enforceable against Agent in accordance with their
respective terms, except as enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity.
(c) NON-CONTRAVENTION. Neither the execution and delivery by
Agent of the Operative Documents to which it is or will be a party, either in
its individual capacity, as Agent, or both, nor compliance with the terms and
provisions thereof, conflicts with, results in a breach of, constitutes a
default under (with or without the giving of notice or lapse of time or both),
or violates any of the terms, conditions or provisions of: (i) the articles of
association or by-laws of Agent; (ii) any bond, debenture, note, mortgage,
indenture, agreement, lease or other instrument to which Agent, either in its
individual capacity, as Agent, or both, is now a party or by which it or its
property, either in its individual capacity, as Agent, or both, is bound or
affected, where such conflict, breach, default or violation would be reasonably
likely to materially and adversely affect the ability of Agent, either in its
individual capacity, as Agent or both, to perform its obligations under any
Operative Document to which it is or will be a party, either in its individual
capacity, as Agent, or both; or (iii) any of the terms, conditions or provisions
of any Applicable Laws of the United States of America or California relating to
its banking or trust powers or any order, injunction or decree of any Authority
applicable to it in its individual capacity, as Agent, or both, where such
conflict, breach, default or violation would be reasonably likely to materially
and adversely affect the ability of Agent, either in its individual capacity, as
Agent or both, to perform its obligations under any Operative Document to which
it is or will be a party.
(d) ABSENCE OF LITIGATION, ETC. There is no litigation
(including derivative actions), arbitration or governmental proceedings pending
or, to the best knowledge of Agent, threatened against it which would be
reasonably likely to adversely affect Agent's ability to perform its obligations
under the Operative Documents to which it is party.
(e) CONSENTS, ETC. No authorization, consent, approval,
license or formal exemption from, nor any filing, declaration or registration
with, any Authority of the United States of America or California governing its
banking practices, is or will be required in connection with the execution and
delivery by Agent of the Operative Documents to which it is party or the
performance by Agent of its obligations under such Operative Documents.
ARTICLE V
COVENANTS OF LESSEE
SECTION 5.1 FURTHER ASSURANCES. Lessee, at its own cost and expense,
will cause to be promptly and duly taken, executed, acknowledged and delivered
all such further acts, documents and assurances as Certificate Trustee, Agent or
any Participant reasonably may request from time to time in order to carry out
more effectively the intent and purposes of this Agreement, the other Operative
Documents and the Overall Transaction. In connection with any deliveries made
to Certificate Trustee or Agent, Lessee shall, at Lessee's sole cost and
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expense, provide sufficient copies of such delivered item such that copies are
available to distribute to each Participant. Lessee, at its own cost and
expense, will cause all financing statements (including precautionary financing
statements), fixture filings, mortgages, deeds of trust and other documents, to
be recorded or filed at such places and times in such manner, and will take all
such other actions or cause such actions to be taken, as may be necessary or as
may be reasonably requested by Agent, any Participant or Certificate Trustee in
order to establish, preserve, protect and perfect the title and Lien of
Certificate Trustee and/or Agent in the Leased Property and the other Lease
Collateral and such parties' rights under this Agreement and the other Operative
Documents.
SECTION 5.2 LIENS. Lessee will not create, assume or suffer to exist
any mortgage, pledge, security interest, encumbrance, or lien (other than for
taxes not delinquent and for taxes and other items being contested in good
faith) on property of any kind, whether real, personal or mixed, now owned or
hereafter acquired, or upon the income or profits thereof, except for minor
encumbrances and easements on real property which do not affect its market
value, and except for existing liens on Lessee's personal property and future
purchase money security interests encumbering only the personal property
purchased. Notwithstanding the foregoing, Lessee shall not incur or suffer to
exist any Lien on the Leased Property or other Lease Collateral other than
Permitted Liens.
SECTION 5.3 CHANGE OF NAME OR ADDRESS. Lessee shall provide Agent and
Certificate Trustee thirty (30) days' prior written notice of any change in
name, identity or the address of its chief executive office and principal place
of business or the office where it keeps its records concerning its accounts and
the Leased Property.
SECTION 5.4 COMPLIANCE WITH LAW. Lessee shall comply and shall cause
each of the Subsidiaries to comply with all Applicable Laws in respect to the
conduct of its business, the ownership of its properties or which otherwise
affect the Leased Property, except: (i) where such noncompliance is not
reasonably likely to result in a Material Adverse Effect, or (ii) where
compliance is being contested by Lessee pursuant to a Permitted Contest.
SECTION 5.5 INVESTIGATION AND LITIGATION. Lessee shall deliver a
written notice to Agent and Certificate Trustee promptly upon Lessee's receiving
notice or Actual Knowledge of (x) the intent by an Authority to take an action
which would constitute a Condemnation, investigate the Leased Property for a
material violation of any Applicable Laws on or at the Leased Property,
including any Environmental Law, under which liability may be imposed upon
Certificate Trustee, Agent, any Participant or Lessee, or investigate the Leased
Property (other than routine fire, life-safety and similar inspections) for any
violation of Applicable Laws under which criminal liability may be imposed upon
Certificate Trustee, Agent, any Participant, or Lessee, or (y) the commencement
of, or any adverse development with respect to, any litigation, action,
proceeding or labor controversy affecting or which could have a Material Adverse
Effect or result in a Significant Condemnation.
SECTION 5.6 INFORMATION. Lessee will deliver to Agent on behalf of
Lessor and each of the Participants:
(a) Within forty-five (45) days after the close of each
fiscal quarter, except for the final quarter of each fiscal year, Lessee's
unaudited balance sheets as of the close of such fiscal quarter, and unaudited
income and expense statements with supportive schedules and
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statements of retained earnings for such fiscal quarter, in each case
prepared in accordance with GAAP and accompanied by a consolidating schedule;
(b) Within ninety (90) days after the close of each fiscal
year, a copy of Lessee's consolidated state of financial condition including at
least its balance sheet as of the close of such fiscal year, and its outcome and
expense statement and retained earnings statement for such fiscal year, examined
and prepared on an audited basis by independent certified public accountants
selected by Lessee and reasonably satisfactory to Agent in accordance with GAAP,
accompanied by an unaudited consolidating schedule;
(c) As soon as available, copies of such financial statements
and reports as Lessee may file with any state or federal agency, including its
10-K and 10-Q reports;
(d) Such other financial statements and information as Agent
may reasonably request from time to time;
(e) In connection with each financial statement provided
hereunder, a statement executed by the president or chief financial officer of
Lessee certifying that no Lease Default or Lease Event of Default has occurred;
(f) In connection with each fiscal year-end statement
required hereunder, any management letter of Lessee's certified public
accountants;
(g) Within forty-five (45) days after each fiscal quarter, a
certification of compliance with all covenants under the Operative Documents,
executed by Lessee's chief financial officer or other duly authorized officer of
Lessee, in form acceptable to Agent;
(h) Prompt written notice to Agent of any Lease Default or
Lease Event of Default or any default or event of default under any other
agreement, contract, document or instrument entered or to be entered into with
any financial institution (including the Credit Agreement), any litigation in
excess of One Million Dollars ($1,000,000) which, if decided adversely to
Lessee, would have a Material Adverse Effect, and any other matter which has
resulted in, or is likely to result in, a material adverse change in Lessee's
financial condition or operations; and
(i) Prior written notice to Agent of any changes in Lessee's
officers and other senior management.
(j) Lessee will furnish to Agent, as soon as possible and in
any event within fifteen (15) days after Lessee knows or has reason to know that
any event or condition with respect to any defined benefit pension plans of
Lessee described in SECTION 4.1(x) has occurred, a statement by the president or
chief financial officer of Lessee describing such event or condition and the
action, if any, which Lessee proposes to take with respect thereto.
SECTION 5.7 QUICK RATIO. Lessee shall maintain at all times a ratio of
cash, accounts receivable and marketable securities to current liabilities of
not less than 1.5:1.0, as such terms are defined by GAAP.
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SECTION 5.8 TANGIBLE NET WORTH. Lessee will at all times maintain a
Tangible Net Worth of not less than the sum of (a) One Hundred Fifty-Five
Million Dollars ($155,000,000), (b) fifty percent (50%) of Lessee's net profit
after taxes for each fiscal year of Lessee ending after January 31, 1998, and on
or before the date of computation, and (c) one hundred percent (100%) of the net
proceeds of any equity securities issued by Lessee on or after July 1, 1998.
SECTION 5.9 LIQUIDITY. Lessee will at all times maintain a ratio of
Liquid Assets to the unsecured portion of the Lease Balance of not less than
1.5:1.0.
SECTION 5.10 FIXED CHARGE COVERAGE RATIO. Lessee will maintain a ratio
of EBITDA, plus Rent and all operating and capital lease payments for real
property, to Fixed Charges of not less than 2:1. Compliance with this SECTION
5.10 shall be measured as of the end of each of Lessee's fiscal quarters, for
the immediately preceding twelve (12) month period then ending.
SECTION 5.11 FUNDED DEBT TO EBITDA. Lessee will maintain at all times a
ratio of Funded Debt to EBITDA of not more than 1.5:1.0.
SECTION 5.12 SUPPLEMENTAL ENVIRONMENTAL INFORMATION. Promptly upon
receipt thereof, Lessee shall deliver to Agent copies of all updates, if any, to
the Environmental Audit.
SECTION 5.13 LEASE DEFAULTS, ETC. As soon as practicable, but in any
event within three (3) Business Days after Lessee becomes aware of the existence
of any Lease Default, Lease Event of Default, Event of Loss, Condemnation,
Casualty or any development that would result in a Material Adverse Effect
(other than developments that affect the economy of the United States generally
or the insurance industry generally), Lessee shall notify Certificate Trustee,
Agent and each Participant by telephone or facsimile of such event and the
anticipated effect thereof, and within two (2) Business Days thereafter, Lessee
shall furnish to Certificate Trustee, Agent and each Participant an Officer's
Certificate of Lessee signed by a Responsible Officer of Lessee which such
certificate shall describe such Lease Default, Lease Event of Default, Event of
Loss, Condemnation, Casualty or development in reasonable detail, with a
statement of Lessee's action with respect thereto taken or proposed to be taken.
SECTION 5.14 SECURITIES. Lessee shall not, nor shall it permit anyone
authorized to act on its behalf to, take any action which would subject the
issuance or sale of the Notes or Certificates, the Leased Property or the
Operative Documents, or any security or lease the offering of which, for
purposes of the Securities Act or any state securities laws, would be deemed to
be part of the same offering as the offering of the aforementioned securities or
leases to the registration requirements of Section 5 of the Securities Act, any
state securities laws, or the Trust Indenture Act of 1939. Lessee makes no
covenant with respect to any actions of Certificate Trustee, Agent or any
Participant.
SECTION 5.15 RATES. With respect to each determination of Interest and
Yield pursuant to this Agreement, the Loan Agreement, the Trust Agreement and
Basic Rent under the Lease, Lessee agrees to be bound by Sections 2.5 and 2.6 of
the Loan Agreement, Sections 2.4 and 2.5 of the Trust Agreement, and SECTIONS
2.10 and 2.11 and the applicable definitions in APPENDIX 1.
SECTION 5.16 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. Lessee
will continue to engage in business in the same industry or industries as the
industry or industries which the
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business now conducted by Lessee is in, and will preserve, renew and keep in
full force and effect its corporate existence and its rights, privileges and
franchises necessary or desirable in the normal conduct of business.
SECTION 5.17 INSPECTION OF PROPERTY, BOOKS AND RECORDS. Lessee will
keep, and will cause each Subsidiary to keep, proper books or records and
accounts in which full, true and correct entries shall be made of all dealings
and transactions in relation to its business and activities; and will permit,
and will cause each Subsidiary to permit, representatives of any Participant at
such Participant's expense to visit and inspect any of their respective
properties, to examine and make abstracts from any of their respective books and
records and to discuss their respective affairs, finances and accounts with
their respective officers, employees and independent public accountants, all at
such reasonable times during normal business hours and as often as may
reasonably be desired; provided so long as no Lease Event of Default has
occurred, each such Participant shall not exercise the right of inspection
granted pursuant to this Section more than once in any consecutive twelve month
period.
SECTION 5.18 BORROWINGS. Lessee will not sell, discount or otherwise
transfer any account receivable or any note, draft or other evidence of
indebtedness, except to UBOC or a financial institution at face value for
deposit or collection purposes only and without any fee other than fees normally
charged by the financial institution for deposit or collection services. Lessee
will not borrow any money, become contingently liable to borrow money, nor enter
any agreement to directly or indirectly obtain borrowed money, except pursuant
to agreements made with UBOC.
SECTION 5.19 LOANS, ADVANCES AND GUARANTIES. Lessee will not, except in
the ordinary course of business as currently conducted, make any loans or
advances, become a guarantor or surety, pledge its credit or properties in any
manner or extend credit except up to an aggregate maximum of $10,000,000 of
loans or extensions of credit may be made by Lessee to its Affiliates or
Subsidiaries for property, plant and equipment.
SECTION 5.20 INVESTMENTS. Lessee will not purchase the debt or
equity of another person or entity except for savings accounts and
certificates of deposit of UBOC, direct U.S. Government obligations and
commercial paper issued by corporations with the top ratings of Moody's or
Standard & Poor's, provided all such permitted investments shall mature
within one year of purchase.
SECTION 5.21 CHANGES/MERGERS. Lessee will not: change its name;
liquidate or dissolve; enter into any consolidation, merger, partnership, joint
venture or other combination; redeem, purchase, retire or otherwise acquire any
shares of any class of capital stock of Lessee in excess of Ten Million Dollars
($10,000,000); prepay any subordinated debt, debt for borrowed money, or debt
secured by any permitted Lien, or enter into or modify any agreement as a result
of which the terms of payment of any such debt are waived or modified.
SECTION 5.22 TRANSACTIONS WITH RELATED PERSONS. Lessee will not
directly or indirectly enter into any transaction with or for the benefit of
a Related Person on terms more favorable to the Related Person than would
have been obtainable in an "arms length" dealing.
SECTION 5.23 LOSSES. Lessee will not incur a cumulative net loss, after
provision for income taxes, for an amount in excess of Five Hundred Thousand
Dollars ($500,000) for any two or more consecutive fiscal quarters, nor incur a
net loss for any fiscal year.
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ARTICLE VI
OTHER COVENANTS AND AGREEMENTS
SECTION 6.1 COOPERATION WITH LESSEE. Certificate Trustee, Agent and
each Participant shall, to the extent reasonably requested by Lessee (but
without assuming additional liability or obligation on account thereof), at
Lessee's expense, cooperate to allow Lessee to: (a) perform its covenants
contained in ARTICLE V including at any time and from time to time, upon the
reasonable request of Lessee, to promptly and duly execute and deliver any and
all such further instruments, documents and financing statements (and
continuation statements related thereto) as Lessee may reasonably request in
order to property perform such covenants, and (b) fulfill Lessee's requirements
as lessee of the Leased Property, including to file any statement with respect
to any tax abatements or other requirements. Each Participant hereby expressly
authorizes the Certificate Trustee to execute and deliver the waiver forms and
releases as may be requested by Lessee pursuant to the last sentence of Article
III of the Lease.
SECTION 6.2 RESTRICTIONS ON AND EFFECT OF TRANSFER. No Participant
shall assign, convey or otherwise transfer all or any portion of its right,
title or interest in, to or under any Note or Certificate without the prior
written consent of Agent (who may condition its approval upon the satisfaction
of any or all of the conditions of subsections (a) through (g) below), and, so
long as no Lease Event of Default exists, Lessee, except that without the prior
written consent of Agent or Lessee, (w) any Participant may pledge or encumber
its interest in all or any portion of a Note or a Certificate to another Person;
PROVIDED, that no transfer upon a foreclosure pursuant to such a pledge or
encumbrance may occur unless the other provisions of this Section are complied
with, (x) any Participant may transfer all or any portion of its interest to a
member of its Consolidated Group, (y) any Participant may transfer all or any
portion of its interest to any other existing Participant or to a Prequalified
Transferee upon compliance with SUBSECTIONS (a), (b), (c), (d), and (e) below,
and (z) any Participant may transfer its interest upon compliance with
SUBSECTIONS (a) through (e) below; and PROVIDED, FURTHER, that the restrictions
set forth in this SECTION 6.2 shall not apply to a Participation, with respect
to which SECTION 6.3 shall apply:
(a) REQUIRED NOTICE AND EFFECTIVE DATE. Upon a transfer
pursuant to which this SECTION 6.2(a) applies, the Participant desiring to
effect a transfer of all or any portion of its interest shall give written
notice of such proposed transfer to Lessee, Agent and each other Participant at
least ten (10) days prior to such proposed transfer, setting forth the name of
such proposed transferee, the percentage or interest to be retained by such
Participant, if any, and the date on which such transfer is proposed to become
effective. Any expenses incurred by the transferee in connection with the
transfer of a Participant's interest shall be borne by such transferee or the
relevant Participant, as they may determine, but shall not be considered costs
and expenses which Lessee is obligated to pay or reimburse under SECTION 9.9,
except in the case of a transfer made pursuant to SECTION 9.9(c)(v).
(b) ASSUMPTION OF OBLIGATIONS. Any transferee with respect
to a transfer to which this SECTION 6.2(b) applies shall have executed and
delivered to Certificate Trustee and Agent the investor's letter (the
"INVESTOR'S LETTER") substantially in the form of EXHIBIT K with appropriate
insertions, and from and after such date the obligations of the transferring
Participant under the Operative Documents shall be proportionately released and
reduced to the extent of such transfer. Upon any such transfer as above
provided, the transferee shall be
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deemed to be bound by all obligations (whether or not yet accrued) under, and
to have become a party to, all Operative Documents to which its transferor
was a party, shall be deemed the pertinent "Participant" for all purposes of
the Operative Documents and shall be deemed to have made that portion of the
payments pursuant to this Agreement previously made or deemed to have been
made by the transferor represented by the interest being conveyed; and each
reference herein and in the other Operative Documents to the pertinent
"Participant" shall thereafter be deemed a reference to the transferee, to
the extent of such transfer, for all purposes. Upon any such transfer,
Certificate Trustee shall deliver to Agent, each "Participant" and Lessee an
amended SCHEDULE I-A and SCHEDULE I-B to the Participation Agreement, revised
to reflect the relevant information for such new Participant and the
commitment of such new Participant (and the revised Commitment of the
transferor Participant if it shall not have transferred its entire interest).
(c) EMPLOYEE BENEFIT PLANS. No Participant may make any such
assignment, conveyance or transfer to or in connection with any arrangement or
understanding in any way involving any employee benefit plan (or its related
trust), as defined in Section 3(3) of ERISA, or with the assets of any such plan
(or its related trust), as defined in Section 4975(e)(1) of the Code (other than
a governmental plan, as defined in Section 3(32) of ERISA), with respect to
which Lessee or such Participant or any of their Affiliates is a party in
interest within the meaning of ERISA or a "disqualified person" within the
meaning of the Code.
(d) REPRESENTATIONS AND WARRANTIES. Notwithstanding anything
to the contrary set forth above, no Participant may assign, convey or transfer
its interest to any Person unless such Person shall have delivered to
Certificate Trustee and Lessee a certificate (with a copy to Agent) confirming
the accuracy of the representations and warranties set forth in SECTION 4.2 of
the Participation Agreement with respect to such Person (other than as such
representation or warranty relates to the execution and delivery of Operative
Documents).
(e) FINANCIAL CONDITION OF TRANSFEREE. No transfer by a
Participant shall be effective against the other parties to this Agreement
unless the transferee represents in writing to Agent that it is: (A) a bank or
other financial institution with a combined capital, surplus and undivided
profits (or its equivalent) of at least $50,000,000, OR (B) any subsidiary of
such a bank, financial institution or corporation, PROVIDED that such bank,
financial institution or corporation furnishes a guaranty with respect to the
transferee's obligations as a Participant.
(f) TRANSFEREE INDEMNITIES. Each transferee shall be
entitled to the benefits of ARTICLE VII with respect to its Notes or
Certificates or participation in the Notes or Certificates outstanding from time
to time.
(g) FUTURE PARTICIPANTS. Each Participant by its acceptance
of its Note and/or Certificate, shall be deemed to be bound by and, upon
compliance with the applicable requirements of SECTION 6.3, will be entitled to
all of the benefits of the provisions of this Agreement.
SECTION 6.3 PARTICIPATIONS. Each Participant may sell, transfer or
assign a participation in all or a portion of the interests represented by its
Notes and Certificates or any right to payment thereunder (a "PARTICIPATION") to
any Person (a "PARTICIPATION HOLDER"). Upon any such sale by a Participant of a
Participation to a Participation Holder, such obligations under this
Participation Agreement and under the other Operative Documents shall remain
unchanged,
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such Participant shall remain solely responsible for the performance thereof,
such Participant shall remain the holder of its Note and Certificate for all
purposes under this Participation Agreement and under the other Operative
Documents, and Certificate Trustee and Agent shall continue to deal solely
and directly with such Participant in connection with such Participation
Holder's rights and obligations under this Trust Agreement and under the
other Operative Documents. In connection with any Participation, the
Participant shall obtain from such Participation Holder, if such
Participation Holder is not an Affiliate, a certificate containing the
following representations and warranties from such Participation Holder:
(a) The Participation Holder satisfies one of the criteria
for a transferee in ITEMS (A), (B) or (C) of SECTION 6.2(e). It is acquiring
the Participation for its own account for investment and not with a view to any
distribution (as such term is used in Section 2(11) of the Securities Act)
thereof and if in the future it should decide to dispose of its interest in the
Participation, it understands that it may do so only in compliance with the
Securities Act and the rules and the regulations of the SEC thereunder and any
applicable state securities laws, if applicable. It is aware that the
Participation has not been registered under the Securities Act or qualified or
registered under any state or other jurisdiction's securities laws.
(b) The Participant understands and agrees that any
documentation providing for the Participation will contain a paragraph that
shall read substantially as follows:
THIS PARTICIPATION HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES OR "BLUE SKY" LAW, AND MAY NOT
BE TRANSFERRED, SOLD OR OFFERED FOR SALE IN VIOLATION OF SUCH ACT OR
LAWS.
SECTION 6.4 COVENANTS OF CERTIFICATE TRUSTEE, AGENT AND THE
PARTICIPANTS.
(a) DISCHARGE OF LIENS. Each of the Participants covenants
as to itself, and not jointly with any other Participant, that it will not
create or permit to exist at any time, and will, at its own cost and expense,
promptly take such action as may be necessary duly to discharge, or to cause to
be discharged, all Lessor Liens attributable to it and will cause restitution to
be made to the Trust Estate in the amount of any diminution of the value thereof
as a result of its failure to comply with its obligations under this SECTION
6.4(a). Certificate Trustee, in its individual capacity or in its trust
capacity, will not create or permit to exist at any time, and will promptly take
such action as may be necessary duly to discharge, or to cause to be discharged,
all Lessor Liens attributable to it and will cause restitution to be made to the
Trust Estate in the amount of any diminution of the value thereof as a result of
its failure to comply with its obligations under this SECTION 6.4(a). Agent, in
its individual capacity, will not create or permit to exist at any time, and
will, at its own cost and expense, promptly take such action as may be necessary
duly to discharge, or to cause to be discharged, all Lessor Liens attributable
to it and will cause restitution to be made to the Trust Estate in the amount of
any diminution of the value thereof as a result of its failure to comply with
its obligations under this SECTION 6.4(a). Notwithstanding the foregoing, none
of the Participants, Certificate Trustee, in its individual capacity or in its
trust capacity, or Agent shall be required to so discharge any such Lessor Lien
while the same is being contested in good faith by appropriate proceedings
diligently prosecuted so long as such proceedings shall not involve any
meaningful danger of the sale, forfeiture or loss of, and shall not interfere
with the use or disposition of, any part of the Leased Property, the Lease or
the Trust Estate or title thereto or any interest therein or the payment of
Rent;
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PROVIDED, HOWEVER, that each Participant, Agent, and Certificate Trustee, in
its individual capacity or in its trust capacity, shall discharge any such
Lessor Lien attributable to it, whether or not subject to contest as provided
above, upon the purchase of the Leased Property, by Lessee pursuant to the
Lease or a sale pursuant to the Sale Option.
(b) TRUST AGREEMENT. Without prejudice to any right under
the Trust Agreement of Certificate Trustee to resign, or the Certificate
Purchasers' right under the Trust Agreement to remove Certificate Trustee, each
of the Certificate Purchasers and Certificate Trustee hereby agrees with Lessee:
(i) except as permitted by the Trust Agreement, not to terminate or revoke the
trust created by the Trust Agreement prior to the Lease Expiration Date, (ii)
not to amend, supplement, terminate or revoke or otherwise modify any provision
of the Trust Agreement prior to the Lease Expiration Date in such a manner as to
materially and adversely affect the rights of any such party, (iii) except as
otherwise expressly authorized under the Operative Documents, not to withdraw
from the Trust Estate any funds other than amounts payable to it by Certificate
Trustee as distributions of Basic Rent and Supplemental Rent without the prior
written consent of each such party and (iv) to comply with all of the terms of
the Trust Agreement applicable to it the nonperformance of which would adversely
affect such party.
(c) SUCCESSOR CERTIFICATE TRUSTEE. Certificate Trustee or
any successor may resign or be removed by the Certificate Purchasers as
Certificate Trustee, a successor Certificate Trustee may be appointed, and a
corporation may become Certificate Trustee under the Trust Agreement, only in
accordance with the provisions of ARTICLE IV of the Trust Agreement.
(d) INDEBTEDNESS; OTHER BUSINESS. Certificate Trustee on
behalf of the Trust shall not contract for, create, incur or assume any
indebtedness, or enter into any business or other activity, other than pursuant
to or under and in accordance with the Operative Documents and, for the benefit
of Lessee, agrees to be bound by Section 1.2(b) of the Trust Agreement.
(e) CHANGE OF PRINCIPAL PLACE OF BUSINESS. Certificate
Trustee shall give prompt notice to the Participants and Lessee, if Certificate
Trustee's principal place of business or chief executive office, or the office
where the records concerning the accounts or contract rights relating to the
Leased Property or the Overall Transaction are kept, shall cease to be located
at its address in Los Angeles, California set forth on SCHEDULE II or if it
shall change its name or identity.
(f) DEPRECIATION. Prior to the Lease Expiration Date,
neither Certificate Trustee nor any Participant shall claim any federal or state
tax attributes or benefits (including depreciation) relating to the Leased
Property unless required to do so by an appropriate taxing authority or after a
clearly applicable change in Applicable Laws or as a protective response to a
proposed adjustment by an Authority; PROVIDED, HOWEVER, that if an appropriate
taxing authority shall require Certificate Trustee or any Participant to claim
any such federal or state tax attributes or benefits, such Person shall promptly
notify Lessee thereof and shall permit Lessee to contest such requirement in a
manner similar to the contest rights provided in, and subject to any applicable
limitation to a context contained in, SECTION 7.2(b).
(g) ADDITIONAL COVENANTS. Other than distributions
specifically permitted by the Loan Agreement and Trust Agreement, Certificate
Trustee shall not make any distributions.
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SECTION 6.5. ENFORCEMENT OF REMEDIES. Notwithstanding any provision in
any Operative Document to the contrary, no Participant shall exercise, or
attempt to exercise any cause of action or remedy against Lessee, Certificate
Trustee, UBOC, in its individual capacity, or any Affiliate of any thereof
(including any right of setoff, banker's lien, or the like), against any deposit
account or property of the Lessee or any of its Affiliates held or maintained by
such Participant without the prior written consent of the Agent at the written
direction of the Required Participants.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1. GENERAL INDEMNIFICATION. Lessee agrees, whether or not
any of the transactions contemplated hereby shall be consummated, to assume
liability for, and to indemnify, protect, defend, save and keep harmless each
Indemnitee from and against any and all Claims that may be imposed on,
incurred by or asserted against such Indemnitee (whether because of action or
omission by such Indemnitee or otherwise), whether or not such Indemnitee
shall also be indemnified as to any such Claim by any other Person and
whether or not such Claim arises or accrues prior to the Document Closing
Date, the Advance Date or after the Lease Expiration Date, in any way
relating to or arising out of: (a) any of the Operative Documents or any of
the transactions contemplated thereby or any investigation, litigation or
proceeding in connection therewith, and any amendment, modification or waiver
in respect thereof; or (b) the Leased Property or any part thereof or
interest therein; or (c) the acquisition, mortgaging, design, construction,
preparation, installation, inspection, delivery, non-delivery, acceptance,
rejection, purchase, ownership, possession, rental, lease, sublease,
repossession, maintenance, repair, alteration, modification, addition or
substitution, storage, transfer or title, redelivery, use financing,
refinancing, operation, condition, sale (including any sale or other transfer
pursuant to Articles XIV, XX or XXI of the Lease), return or other
disposition of all or any part of any interest in the Leased Property or the
imposition of any Lien (or incurring of any liability to refund or pay over
any amount as a result of any Lien) thereon, including: (i) Claims or
penalties arising from any violation of law or in tort (strict liability or
otherwise), (ii) loss of or damage to the environment (including
investigation costs, cleanup costs, response costs, remediation and removal
costs, costs of corrective action, costs of financial assurance, and all
other damages, costs, fees and expenses, fines and penalties, including
natural resource damages), or death or injury to any Person, and all expenses
associated with the protection of wildlife, aquatic species, vegetation,
flora and fauna, and any mitigative action required by or under any
Environmental Laws, (iii) latent or other defects, whether or not
discoverable, (iv) any Claims resulting from the existence or Release of any
Hazardous Materials at or from the Leased Property, and (v) any Claim for
patent, trademark or copyright infringement; (d) the offer, issuance, sale,
transfer or delivery of the Notes or Certificates; (e) the breach or alleged
breach by Lessee of any representation or warranty made by it or deemed made
by it in any Operative Document; (f) the transactions contemplated hereby or
by any other Operative Document, in respect of the application of Parts 4 and
5 of Subtitle B of Title I of ERISA and any prohibited transaction described
in Section 4975(c) of the Code, (g) any repayment or refinancing of the
Loans, (h) any Claim of Sellers or any third party arising with any
obligation undertaken by Lessor under the Acquiition Documents, including (i)
any claim by the Seller under the Montpelier Acquisition Agreement that the
tax treatment such Seller desired was not available or was adversely affected
by any action or failure to act of Lessor, Agent or any Participant, or (ii)
any claim related in any way to the capital stock of Lessee issued to such
Seller under the
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Montpelier Acquisition Agreement, including, without limitation, the
issuance, sale or conveyance of such capital stock, or (i) any other
agreement entered into or assumed by Lessee in connection with the Leased
Property (including, in connection with each of the matters described in this
SECTION 7.1 to which this indemnity shall apply, matters based on or arising
from the negligence of any Indemnitee); PROVIDED, HOWEVER, Lessee shall not
be required to indemnify under this SECTION 7.1 for (1) as to an Indemnitee,
any Claim to the extent resulting from the willful misconduct or gross
negligence of such Indemnitee (or, with respect to Certificate Trustee or
Agent only, the negligent mishandling of funds) (it being understood that no
Indemnitee shall be deemed to be negligent, grossly negligent or to have
acted with wilful misconduct, and the parties acknowledge that this indemnity
shall apply fully, in connection with any Claim of Sellers for a breach or
liability of the Acquisition Documents if Certificate Trustee fails to
purchase the Leased Property upon the failure of any condition set forth in
ARTICLE III), (2) any Claims in respect of Taxes (such Claims to be subject
to SECTION 7.2), other than a payment necessary to make payments under this
SECTION 7.1 on an after-tax basis; PROVIDED, that the exclusion set forth in
this CLAUSE (2) does not apply to any taxes or penalties included in Claims
against which the Indemnitee is provided an indemnification under CLAUSE (f)
of this SECTION 7.1, (3) as to any Indemnitee, any Claim resulting from
Lessor Liens which such Indemnitee is responsible for discharging under the
Operative Documents, (4) as to any Indemnitee, any Claim to the extent
resulting from any written misrepresentation, breach of written warranty or
breach of written covenant by such Indemnitee, and (5) as to any Indemnitee,
any Claim against such Indemnitee by another Indemnitee if such Claim is not
related or connected in any way with any action, inaction, breach or omission
of or caused by Lessee or its Affiliates or any Claim by or against Lessee or
its Affiliates or for which Lessee is otherwise liable under the Operative
Documents.
SECTION 7.2. GENERAL TAX INDEMNITY.
(a) TAX INDEMNITY. Lessee shall pay on an after-tax basis,
and on written demand shall indemnify and hold each Indemnitee harmless from and
against, any and all Taxes, howsoever imposed, on or with respect to any
Indemnitee, the Leased Property or any portion thereof, any Operative Document
or Lessee or any sublessee or user of the Leased Property, by the United States
or by any state or local government or other taxing authority in the United
States, or by any taxing authority outside the United States, in connection with
or in any way relating to: (i) the acquisition, mortgaging, design,
construction, preparation, installation, inspection, delivery, non-delivery,
acceptance, rejection, purchase, ownership, possession, rental, lease, sublease,
repossession, maintenance, repair, alteration, modification, addition or
substitution, storage, transfer of title, redelivery, use, financing,
refinancing, operation, condition, purchase, repurchase, sale, return or other
application or disposition of all or any part of the Leased Property or the
imposition of any Lien (or incurrence of any liability to refund or pay over any
amount as a result of any Lien) thereon, (ii) Basic Rent or Supplemental Rent or
the receipts or earnings arising from or received with respect to the Leased
Property or any part thereof, or any interest therein or any applications or
dispositions thereof, (iii) any other amount paid or payable pursuant to the
Certificates or any other Operative Documents, the property or the income or
other proceeds with respect to the property held in the Trust Estate, (iv) the
Leased Property or any part thereof or any interest therein, (v) all or any of
the Operative Documents, any other documents contemplated thereby and any
amendments and supplements thereto, and (vi) otherwise with respect to or in
connection with the transactions described in the Operative Documents or the
enforcement thereof; PROVIDED, HOWEVER, that the indemnification obligation of
this first sentence of SECTION 7.2(a) shall not apply to (1) Taxes which are
based upon or
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measured by the Indemnitee's net income (except (x) that Lessee shall pay or
reimburse, and indemnify and hold harmless, any Indemnitee which is not
incorporated under the laws of the United States, or a state thereof, and
which has complied with SECTION 7.3, from any deduction or withholding of any
United States Federal income tax, and (y) to the extent necessary that
payments under this SECTION 7.2 are made to an Indemnitee on a grossed-up
basis within the meaning of SECTION 7.6, and (z) Lessee shall pay or
reimburse and indemnify and hold Indemnitee harmless against taxes imposed by
a state taxing jurisdiction solely as a result of: (A) the operating,
registration, location, presence or use of the Leased Property or any part
thereof in such jurisdiction, or (B) the place of incorporation, principal
office, corporate domicile or the activities of Lessee in such jurisdiction),
(2) Taxes characterized under local law as franchise, net worth, or
shareholder's capital (excluding, however, any value-added, sales, use,
rental, license, property or similar Taxes); (3) Taxes based upon the
voluntary transfer, assignment or disposition by Lessor or any Participant of
any interest in the Leased Property (other than a transfer pursuant to the
exercise of remedies under the Operative Documents, transfers pursuant to the
exercise of the Sale Option or Purchase Option, a transfer to Lessee or
otherwise pursuant to the Lease); and (4) Taxes imposed on an Indemnitee to
the extent that such Taxes would not have been imposed on such Indemnitee but
for the willful misconduct or gross negligence of such Indemnitee. Lessee
shall pay or reimburse and indemnify and hold harmless any Indemnitee for any
Taxes or any increase in Taxes imposed on such Indemnitee net of any decrease
in Taxes realized by such Indemnitee, to the extent that such tax increase or
decrease would not have occurred if on the Advance Date the Participant had
advanced funds to Lessee in the form of a loan to Lessee secured by the
Leased Property in an amount equal to the Advance funded on such date, with
the interest component of debt service for such loan equal to the Basic Rent
payable on each scheduled Payment Date and a principal balance at the
maturity of such loan in an amount equal to the then outstanding amount of
the Certificate Amounts and Loans at the end of the term of the Lease.
(b) CONTESTS. Lessee shall pay on or before the time or
times prescribed by law any Taxes (except any Taxes excluded by the proviso to
SECTION 7.2(a)). If any claim or claims is or are made against any Indemnitee
solely for any Tax which is subject to indemnification as provided in
SECTION 7.2(a), Indemnitee shall as soon as practicable, but in no event more
than 30 days after receipt of formal written notice of the Tax or proposed
Tax, notify Lessee and if, in the reasonable opinion of Lessee and (in the
case of any Tax which may reasonably be expected to exceed $50,000 in the
aggregate) tax counsel acceptable to the Indemnitee, there exists a
reasonable basis to contest such Tax which satisfies the requirements of ABA
Formal Opinion 85-352 (and if the PROVISOS of the definition of "Permitted
Contest" continue to be satisfied and so long as no Lease Event of Default
exists), Lessee at its expense may, to the extent permitted by applicable
law, contest such Tax, in the appropriate administrative and legal forums;
PROVIDED, that in all other circumstances, upon notice from Lessee to such
Indemnitee that there exists a reasonable basis to contest any such Tax which
satisfies the requirements of ABA Formal Opinion 85-352 (as supported by an
opinion of tax counsel to Lessee reasonably acceptable to the Indemnitee),
the Indemnitee, at Lessee's expense, shall contest any such Tax (so long as
the PROVISOS of the definition of "Permitted Contest" continue to be
satisfied and so long as no Lease Event of Default exists). Lessee shall pay
all expenses incurred by the Indemnitee in contesting any such Tax (including
all reasonable attorneys' and accountants' fees, including the reasonable
allocated costs of internal counsel), upon demand by the Indemnitee. Lessee
shall have the right to participate in the conduct of any proceedings
controlled by the Indemnitee to the extent that such participation by such
Person does not interfere with the Indemnitee's control of such contest and
Lessee shall in
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all events be kept informed, to the extent practicable, of material
developments relative to such proceedings. The Indemnitee shall have the
right to participate in the conduct of any proceedings controlled by Lessee
and the Indemnitee shall in all events be kept informed, to the extent
practicable, of material developments relative to such proceedings. The
Indemnitees agree that a contested claim for which Lessee would be required
to make a reimbursement payment hereunder will not be settled or compromised
without Lessee's prior written consent (which consent shall neither be
unreasonably delayed nor withheld), unless the PROVISOS of the definition of
"Permitted Contest" would not continue to be satisfied. Indemnitee shall
endeavor to settle or compromise any such contested claim in accordance with
written instructions received from Lessee; PROVIDED, that (x) Lessee on or
before the date the Indemnitee executes a settlement or compromise pays the
contested Tax to the extent agreed upon or makes an indemnification payment
to the Indemnitee in an amount acceptable to the Indemnitee; and (y) the
settlement or compromise does not, in the reasonable opinion of the
Indemnitee materially adversely affect the right of Lessor or such Indemnitee
to receive Rent or the Lease Balance or any other payment pursuant to the
Operative Documents, or involve a material risk of sale, forfeiture or loss
of the Leased Property or any interest therein or any matter described in the
PROVISOS to the definition of "Permitted Contest". The failure of an
Indemnitee to contest timely a claim against such Indemnitee for any Tax
which is subject to indemnification under SECTION 7.2(a) and for which such
Indemnitee has an obligation to Lessee to contest under this SECTION 7.2(b)
in the manner required by Applicable Laws where Lessee has timely requested
that such Indemnitee contest such claim shall relieve Lessee of its
obligations to such Indemnitee under SECTION 7.2(a) with respect to such
claim only to the extent such failure results in the loss of an effective
contest. If Applicable Laws require the payment of a contested Tax as a
condition to, or regardless of, its being contested, and Lessee chooses to
contest such Tax or to direct the Indemnitee to contest such Tax in
accordance with this Section, then Lessee shall provide the Indemnitee with
the funds to pay such Tax, such provision of funds to be deemed a
non-interest bearing loan by Lessee to the Indemnitee to be repaid by any
recovery of such Tax from such contest and any remaining unpaid amount not
recovered to offset Lessee's obligation to indemnify the Indemnitee for such
Tax. Lessee shall indemnify the Indemnitee on a grossed-up basis in
accordance with SECTION 7.6 for and against any adverse consequences of any
such interest-free loan. If the Indemnitee receives a refund (or like
adjustment) in respect of any Tax for which the Indemnitee has been
reimbursed by Lessee, the Indemnitee shall promptly remit the amount of such
refund (or like adjustment) to Lessee, net of all costs and expenses incurred
by such Indemnitee; PROVIDED, HOWEVER, that the Indemnitee shall not be
required to remit any amount pursuant to this sentence in excess of the
amounts previously paid by Lessee to, or on behalf of, such Indemnitee with
respect to such Tax pursuant to this ARTICLE VII.
(c) PAYMENTS. Any Tax indemnifiable under SECTION 7.2(a)
shall be paid by Lessee directly when due to the applicable taxing authority
if direct payment is practicable and permitted. If direct payment to the
applicable taxing authority is not permitted or is otherwise not made, any
amount payable to an Indemnitee pursuant to SECTION 7.2(a) shall be paid
within thirty (30) days after receipt of a written demand therefor from such
Indemnitee accompanied by a written statement describing in reasonable detail
the amount so payable, but not before the date that the relevant Taxes are
due. Any payments made pursuant to SECTION 7.2(a) directly to the Indemnitee
entitled thereto or Lessee, as the case may be, shall be made in immediately
available funds at such bank or to such account as specified by the payee in
written directions to the payor, or, if no such direction shall have been
given, by check of the payor payable to the order of the payee by certified
mail, postage prepaid at its address as set forth in this Participation
Agreement. Upon the request of any Indemnitee with respect to a Tax that
Lessee
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is required to pay, Lessee shall furnish to such Indemnitee the original or a
certified copy of a receipt for Lessee's payment of such Tax or such other
evidence of payment as is reasonably acceptable to such Indemnitee.
(d) REPORTS. If any report, return or statement is required
to be filed with respect to any Taxes that are subject to indemnification
under SECTION 7.2(a), Lessee shall, if Lessee is permitted by Applicable
Laws, timely prepare and file such report, return or statement; PROVIDED,
HOWEVER, that if Lessee is not permitted by Applicable Laws to file any such
report, return or statement, Lessee will promptly so notify the appropriate
Indemnitee, in which case the Indemnitee, at Lessee's expense, may file any
such report after preparation thereof by Lessee.
SECTION 7.3. WITHHOLDING TAX EXEMPTION. At least five (5) Business
Days prior to the first date on which any payment is due under any Note or
Certificate for the account of any Participant not organized or incorporated
under the laws of the United States or a state thereof, such Participant
agrees that it will have delivered to each of Lessee, Certificate Trustee and
Agent, two duly completed copies of United States Internal Revenue Service
Form 1001 or 4224, certifying in either case that such Participant is
entitled to receive payments of interest or Yield, as applicable under the
Operative Documents without deduction or withholding of any United States
Federal income taxes. Each Participant which so delivers a Form 1001 or 4224
further undertakes to deliver to each of Lessee, Certificate Trustee, and
Agent, two additional copies of such form (or a successor form) on or before
the date that such form expires (currently, three successive calendar years
for Form 1001 and one calendar year for Form 4224) or becomes obsolete or
after the occurrence of any event requiring a change in the most recent forms
so delivered by it, and such amendments thereto or extensions or renewals
thereof as may be reasonably requested by Lessee, Certificate Trustee and
Agent, in each case certifying that such Participant is entitled to receive
payments of interest or Yield, as applicable, under the Operative Documents
without deduction or withholding of any United States Federal income taxes,
unless an event (including any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent
such Participant from duly completing and delivering any such form with
respect to it and such Participant advises Lessee, Agent and Certificate
Trustee that it is not capable of receiving payments without any withholding
of United States Federal income tax.
SECTION 7.4. INCREASED COSTS. If any change in, adoption,
effectiveness, interpretation, reinterpretation or phase-in of, any law or
regulation, directive, guideline, decision or request (whether or not having
the force of law) of any court, central bank, regulator or other Authority
("CHANGE IN LAW") imposes, modifies, affects or deems applicable any reserve,
special deposit, capital adequacy or other requirement required or expected
to be maintained by any Participant directly or by its parent company or by
its principal bank Affiliate (including any reserve requirements specified
under regulations issued from time to time by the Board of Governors of the
Federal Reserve System and then applicable to assets or liabilities
consisting of and including "Eurocurrency Liabilities" as defined in
Regulation D of such Board of Governors), or shall impose on any Participant
or its principal bank Affiliate (or the LIBOR Office of either) or on the
London interbank market any other condition or any tax, duty or other charge
with respect to or otherwise affecting the maintenance of its Loan principal
or Certificate Amounts on a LIBO Rate basis, and such Participant determines
(in its sole and absolute discretion) that the rate of return on its, its
parent's or its principal bank Affiliate's capital as a consequence of the
Funding made by such Participant hereunder to pay its share of the Advance is
reduced to a level below
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that which such Participant, principal bank Affiliate or parent could have
achieved but for the occurrence of any such circumstances, then, in any such
case, upon written notification from time to time by such Participant to
Certificate Trustee and Lessee, Lessee shall, within fifteen (15) days
following receipt of the statement referred to in the next sentence, pay to
Certificate Trustee, as Supplemental Rent, additional amounts sufficient to
compensate such Participant or its parent for such reduction in rate of
return (on an after-tax basis), which amounts shall thereupon be paid
directly by Certificate Trustee to such Participant. A statement of a
Participant as to any such additional amount or amounts (including
calculations thereof in reasonable detail) shall, in the absence of manifest
error, be conclusive and binding on Lessee, provided that such calculations
are made in good faith. In determining such amount, each Participant shall
use any method of averaging or attribution that it (in its reasonable
discretion) shall deem applicable. Each Participant will notify Lessee, as
soon as practicable after it has Actual Knowledge thereof, of any event
occurring after the date hereof that would entitle such Participant to
compensation pursuant to this SECTION 7.4; PROVIDED, HOWEVER that so long as
the foregoing notice is provided to Lessee within ninety (90) days after such
Participant has obtained Actual Knowledge thereof, any failure to provide
earlier notice shall not affect such Participant's rights to such
compensation and shall not relieve Lessee of its obligations hereunder; and
provided, further, that in all events such Participant shall be entitled to
whatever compensation it is otherwise entitled to hereunder from the date it
provides notice of any event entitling such Participant to compensation
pursuant to this SECTION 7.4.
Each Participant shall use reasonable efforts (including reasonable
efforts to change its LIBOR Office) to avoid or minimize any amounts which
might otherwise be payable pursuant to this SECTION 7.4; PROVIDED, HOWEVER,
that such efforts shall not be deemed by such Participant, in its good faith
determination, to be disadvantageous to it. If such efforts are insufficient
to avoid or minimize such amounts that might be payable pursuant to this
SECTION 7.4, then such Participant (the "AFFECTED PARTICIPANT") shall use its
reasonable efforts to transfer to any other Participant (which itself is not
then an Affected Participant) its Notes and Certificates in compliance with
the restrictions on transfer in this Agreement; PROVIDED, HOWEVER, that such
transfer shall not be deemed by such Affected Participant, in its good faith
determination, to be disadvantageous to it (other than the economic
disadvantage of ceasing to be a Participant). If the Affected Participant is
unable so to transfer its rights and obligations, Lessee may designate an
alternate financial institution to purchase the Affected Participant's Notes
and Certificates and, subject to the provisions of SECTIONS 7.5 and 6.3, the
Affected Participant shall transfer its rights and obligations to such
alternate financial institution and such alternate financial institution
shall become a Participant hereunder; PROVIDED that the reasonable costs of
such transfer to either another Participant or an alternate financial
institution shall be borne by Lessee.
SECTION 7.5. FUNDING LOSSES. Lessee shall pay to Certificate
Trustee, as Supplemental Rent, such amounts as may be necessary to reimburse
any Participant for any loss or reasonable expense (including any
administration costs) incurred (including any loss or expense incurred by
reason of the liquidation or reemployment of deposits or other funds acquired
by such Participant to make, continue or maintain any portion of its
investment in any Note or Certificate on a LIBO Rate basis) as a result of:
(i) the failure of the Advance Date to occur on the date specified therefor
in the Advance Request, or (ii) any payment of all or any portion of the
Lease Balance for any reason on a date other than a Payment Date, including
by reason of acceleration (the amount of such loss or expense is called the
"BREAK FUNDING AMOUNT"). Any Participant shall promptly notify Certificate
Trustee and Agent in writing of the amount of any claim under this SECTION 7.5,
the reason or reasons therefor and the additional amount required
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fully to compensate such Participant for such loss or expense. Such written
notice (which shall include calculations in reasonable detail) shall, in the
absence of manifest error, be conclusive and binding on Lessee, provided such
calculations are made in good faith.
SECTION 7.6. GROSS UP. If an Indemnitee shall not be entitled to a
corresponding and equal deduction with respect to any payment or Tax which
Lessee is required to pay or reimburse under any other provision of this
ARTICLE VII (each such payment or reimbursement under this ARTICLE VII, an
"original payment") and which original payment constitutes income to such
Indemnitee when accrued or received, then Lessee shall pay to such Indemnitee
on demand the amount of such original payment on a grossed-up basis such
that, after subtracting all Taxes imposed on such Indemnitee with respect to
such grossed-up payment by Lessee (including any Taxes otherwise excluded by
SECTION 7.2(b) and assuming for this purpose that such Indemnitee was subject
to taxation at the highest Federal and applicable, state and local marginal
rates applicable to widely held for-profit corporations for the year in which
such income is taxable and at an assumed state and local income tax rate of
12.8%) such amount (i.e., the grossed-up payment minus the taxes thereon)
shall be equal to the original payment to be received or reimbursed (net of
any credits, deductions or other tax benefits then actually recognized that
arise from the payment by such Indemnitee of any amount, including taxes, for
which the payment to be received is made).
SECTION 7.7. LIBO RATE ILLEGAL, UNAVAILABLE OR IMPRACTICABLE.
(a) If at any time:
(i) any Participant shall determine in good faith (which
determination shall, upon notice thereof to Lessee, be conclusive and
binding on Lessee) that:
(A) a Change in Law makes it unlawful, or the central
bank or other Authority asserts that it is unlawful, for such
Participant or its principal bank Affiliate to make, continue or
maintain any amount of such Participant's investment in the Notes
or Certificates on a LIBO Rate basis, or
(B) deposits in Dollars (in the applicable amounts)
are not being offered to such Participant or its principal bank
Affiliate in the relevant market for the applicable Payment
Period, or that, by reason of circumstances affecting the
interbank Eurodollar market, adequate and reasonable means do not
exist for ascertaining the applicable LIBO Rate, OR
(ii) Agent determines in good faith (which determination shall,
upon notice thereof to Lessee, be conclusive and binding upon Lessee)
that the LIBO Rate, as determined by Agent, will not adequately and
fairly reflect the cost to any Participant or its principal bank
Affiliate of maintaining or funding its investments for the applicable
Payment Period, or that the making or funding of such Participant's
investment hereunder on a LIBO Rate basis has become impracticable as a
result of an event occurring after the date of this Lease which in the
opinion of such Participant materially changes such investment, or
(iii) A Loan Event of Default shall have occurred and be continuing,
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then the obligations of such Participant to make, continue or maintain any
such investment shall, upon such determination, forthwith be suspended until
such Participant shall notify Lessee that such circumstances no longer exist,
and all Basic Rent (or interest and Yield) allocable to such Participant
shall automatically be determined on an Alternate Base Rate basis beginning
on the next immediately succeeding Payment Date with respect thereto or
sooner, if required by such law, assertion or determination.
(b) During such time as the Alternate Base Rate determined by
reference to the Reference Rate applies to any of the Notes or Certificates,
interest in respect of such Notes and Yield in respect of such Certificates
shall be calculated on the basis of a 365 (or 366, as applicable) day year and
the actual days elapsed. During such time as the Alternate Base Rate determined
by reference to the Federal Funds Effective Rate applies to any of the Notes or
Certificates, interest in respect of such Notes and Yield in respect of such
Certificates shall be calculated on the basis of a 360-day year, the actual days
elapsed and the Applicable Margin.
SECTION 7.8. LEASED PROPERTY INDEMNITY. In the event that (a)
Lessee elects the Sale Option; and (b) after paying to Certificate Trustee,
for the benefit of the Participants, any amounts due under Article XXI of the
Lease, the Lease Balance shall not have been reduced to zero, then Lessee
shall promptly pay over to Lessor on the Lease Expiration Date the shortfall
unless Lessee delivers a report from an Appraiser using appraisal methods
satisfactory to the Required Participants, which establishes that the reasons
for the actual Fair Market Value of the Leased Property as of the Lease
Expiration Date being less than the Fair Market Value anticipated for such
date in the Appraisal delivered pursuant to SECTION 3.1(h) was not due to any
of the following events, circumstances or conditions, whether or not
permitted under the Lease (i) the failure to maintain and use the Leased
Property or any portion thereof as required by the Lease and the other
Operative Documents, and to keep the Leased Property or any portion thereof
in at least as good a condition as it was in on the Advance Date, ordinary
wear and tear excepted; (ii) the carrying out of or the failure to undertake
any modifications, improvements or alterations whether or not permitted
pursuant to the Operative Documents; (iii) the existence of any environmental
condition at or affecting the Leased Property whether or not such condition
existed on the Advance Date; (iv) any defect, exception, easement,
restriction or other encumbrance on or title to for the Leased Property or
any portion thereof whether or not created or existing on the Advance Date;
(v) the dependence of the Leased Property on any improvement or facility not
fully located on the Leased Property; (vi) the existence of any sublease of
the Leased Property or any portion thereof, whether or not permitted under
the Operative Documents; or (vii) any other cause or condition within the
power of Lessee to control or affect other than ordinary wear and tear.
SECTION 7.9. ENVIRONMENTAL INDEMNITY. Without limitation of the
other provisions of this ARTICLE VII, Lessee hereby agrees to indemnify, hold
harmless and defend each Indemnitee from and against any and all Claims
(including third party claims for personal injury or real or personal
property damage), losses, damages, liabilities, fines, penalties, charges,
administrative and judicial proceedings (including informal proceedings) and
orders, judgments, remedial action, requirements, enforcement actions of any
kind, and all reasonable and documented costs and expenses incurred in
connection therewith (including reasonable and documented attorneys' and/or
paralegals' fees and expenses), including all costs incurred in connection
with any investigation or monitoring of Leased Property conditions or any
clean-up, remedial, removal or restoration work by any federal, state or
local government agency, arising in whole or in part, out of
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(a) the presence on, under or around the Leased Property or
any portion thereof of any Hazardous Materials, or any releases or
discharges of any Hazardous Materials on, under, from, onto or around
the Leased Property or any portion thereof,
(b) any activity, including construction, carried on or
undertaken on or off the Leased Property or any portion thereof, and
whether by Lessee or any of its Affiliates or any predecessor in title
or any employees, agents, sublessees, contractors or subcontractors of
Lessee, any of its Affiliates or any predecessor in title, or any
other Persons (including such Indemnitee), in connection with the
handling, treatment, removal, storage, decontamination, clean-up,
transport or disposal of any Hazardous Materials that at any time are
located or present on, under or around or that at any time migrate,
flow, percolate, diffuse or in any way move onto or under the Leased
Property or any portion thereof,
(c) loss of or damage to any property or the environment arising
from or in any way related to the Leased Property or Lessee or any of
its Affiliates (including clean-up costs, response costs, remediation
and removal costs, cost of corrective action, costs of financial
assurance, fines and penalties and natural resource damages), or death
or injury to any Person, and all expenses associated with the protection
of wildlife, aquatic species, vegetation, flora and fauna, and any
mitigative action required by or under Environmental Laws, in each case
arising from or in any way related to the Leased Property, Lessee, any
of its Affiliates or the Overall Transaction or any portion thereof,
(d) any claim concerning lack of compliance with Environmental
Laws, or any act or omission causing an environmental condition that
requires remediation or would allow any Authority to record a Lien
against the Leased Property or any portion thereof, or
(e) any residual contamination on or under any of the Leased
Property, or affecting any natural resources, and any contamination of
any property or natural resources arising in connection with the
generation, use, handling, storage, transport or disposal of any such
Hazardous Materials, in each case arising from or in any way related to
the Leased Property, Lessee, any of its Affiliates, or the Overall
Transaction or any portion thereof, and irrespective of whether any of
such activities were or will be undertaken in accordance with applicable
laws, regulations, codes and ordinances;
PROVIDED, HOWEVER, that Lessee shall not be required to indemnify any Indemnitee
under this SECTION 7.9 for any Claim to the extent resulting from the willful
misconduct or gross negligence of such Indemnitee.
ARTICLE VIII
AGENT
SECTION 8.1. APPOINTMENT OF AGENT; POWERS AND AUTHORIZATION TO TAKE
CERTAIN ACTIONS.
(a) Each Participant irrevocably appoints and authorizes
Agent, to act as its agent hereunder, with such powers as are specifically
delegated to Agent by the terms hereof, together with such other powers as are
reasonably incidental thereto. Each Participant authorizes and directs Agent
to, and Agent agrees for the benefit of the Participant, that, on the Document
Closing Date and each Advance Date it will accept the documents described in
ARTICLE III. Agent accepts the agency hereby created applicable to it and
agrees to receive all
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payments and proceeds pursuant to the Operative Documents and disburse such
payments or proceeds in accordance with the Operative Documents. Agent shall
have no duties or responsibilities except those expressly set forth in the
Loan Agreement and this Participation Agreement. Agent shall not be
responsible to any Participant (or to any other Person): (i) for any
recitals, statements, representations or warranties of any party contained in
the Loan Agreement, this Participation Agreement, or in any certificate or
other document referred to or provided for in, or received by any of them
under, the Operative Documents, other than the representations and warranties
made by Agent in SECTION 4.4, or (ii) for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of the Mortgaged Property or the
title thereto (subject to Agent's obligations under SECTION 4.4) or of the
Loan Agreement or any other document referred to or provided for therein or
(iii) for any failure by any Lessee, Lessor or any other third party (other
than Agent) to perform any of its obligations under any Operative Document.
Agent may employ agents, trustees or attorneys-in-fact, may vest any of them
with any property, title, right or power deemed necessary for the purposes of
such appointment and shall not be responsible for the negligence or
misconduct of any of them selected by it with reasonable care. Except as
provided for at SECTION 8.1(c) below, neither Agent nor any of its directors,
officers, employees or agents shall be liable or responsible for any action
taken or omitted to be taken by it or them hereunder, or in connection
herewith.
(b) Agent shall not have any duty or obligation to manage,
control, use, operate, store, lease, sell, dispose of or otherwise deal with
the Leased Property, any Mortgaged Property or any lease, or to otherwise
take or refrain from taking any action under, or in connection with, this
Participation Agreement or any related document to which Agent is a party,
except as expressly provided by the terms hereof, and no implied duties of
any kind shall be read into any Operative Document against Agent. The
permissive right of Agent to take actions enumerated in this Participation
Agreement or any other Operative Document shall never be construed as a duty,
unless Agent is instructed or directed to exercise, perform or enforce one or
more rights by the Required Participants (provided that Agent has received
indemnification reasonably satisfactory to it). Subject to SECTION 8.1(c)
below, no provision of the Operative Documents shall require Agent to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its obligations under the Operative Documents, or in
the exercise of any of its rights or powers thereunder. It is understood and
agreed that the duties of Agent are ministerial in nature.
(c) Except as specifically provided herein, Agent is acting
hereunder solely as agent and, except as specifically provided herein, is not
responsible to any party hereto in its individual capacity, except with
respect to any claim arising from Agent's gross negligence or willful
misconduct, or its negligence in the handling of funds or any breach of a
representation or covenant made in its individual capacity.
(d) Agent may accept deposits from, lend money to and
otherwise deal with Lessee or any of its Affiliates with the same rights as
it would have if it were not the named Agent hereunder.
SECTION 8.2. RELIANCE. Agent may rely upon, and shall not be bound
or obligated to make any investigation into the facts or matters stated in,
any certificate, notice or other communication (including any communication
by telephone, telecopy, telex, telegram or cable) reasonably believed by it
to be genuine and correct and to have been made, signed or sent by or on
behalf of the proper Person or Persons, and upon advice and statements of
legal counsel,
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independent accountants and other experts selected by Agent with due care
(including any expert selected by Agent to aid Agent in any calculations
required in connection with its duties under the Operative Documents).
SECTION 8.3 ACTION UPON INSTRUCTIONS GENERALLY. Subject to SECTIONS
8.4 and 8.6, upon written instructions of the Required Participants, Agent
shall, on behalf of the Participants, give such notice or direction, exercise
such right, remedy or power hereunder or in respect of the Leased Property,
and give such consent or enter into such amendment to any document to which
it is a party as Agent as may be specified in such instructions. Agent shall
deliver to each Participant and to the Certificate Trustee a copy of each
notice, report and certificate received by Agent pursuant to the Operative
Documents. Agent shall have no obligation to investigate or determine
whether there has been a Lease Event of Default or a Lease Default. Agent
shall not be deemed to have notice or knowledge of a Lease Event of Default
or Lease Default unless a Responsible Officer of Agent is notified in writing
of such Lease Event of Default or Lease Default; PROVIDED that Agent shall be
deemed to have been notified in writing of any failure of Lessee to pay Rent
in the amounts and at the times set forth in Article IV of the Lease. If
Agent receives notice of a Lease Event of Default, Agent shall give prompt
notice thereof, at Lessee's expense, to each Participant. Subject to
SECTIONS 8.4, 8.6 and 9.5, Agent shall take action or refrain from taking
action with respect to such Lease Event of Default as directed by the
Required Participants or, in the case of a Payment Default, as directed by
any Participant; PROVIDED that, unless and until Agent receives such
directions, Agent may refrain from taking any action with respect to such
Lease Event of Default or Payment Default. Prior to the date the Lease
Balance shall have become due and payable by acceleration pursuant to Section
17.1 of the Lease, the Required Participants may deliver written instructions
to Agent to waive, and Agent shall waive pursuant thereto, any Lease Event of
Default and its consequences; PROVIDED that in the absence of written
instructions from all Participants, Agent shall not waive any: (i) Payment
Default or (ii) covenant or provision which, under SECTION 9.5, cannot be
modified or amended without the consent of all Participants. As to any
matters not expressly provided for by this Participation Agreement, Agent
shall in all cases be fully protected in acting, or in refraining from
acting, hereunder in accordance with instructions signed by the Required
Participants and such instructions of the Required Participants and any
action taken or failure to act pursuant thereto shall be binding on each
Participant.
SECTION 8.4 INDEMNIFICATION. Each Participant shall reimburse and
hold Agent harmless, ratably in accordance with its Commitment at the time
the indemnification is required to be given, (but only to the extent that any
such indemnified amounts have not in fact been paid to Agent by, or on behalf
of, Lessee in accordance with SECTION 7.1) from any and all claims, losses,
damages, obligations, penalties, liabilities, demands, suits, judgments, or
causes of action, and all legal proceedings, and any reasonable costs or
expenses in connection therewith, including allocated charges, costs and
expenses of internal counsel of Agent and all other reasonable attorneys'
fees and expenses incurred by Agent, in any way relating to or arising in any
manner out of: (i) any Operative Document, the enforcement hereof or thereof
or the consummation of the transactions contemplated thereby, or (ii)
instructions from the Required Participants (including the costs and expenses
that Lessee is obligated to and does not pay hereunder, but excluding normal
administrative costs and expenses incident to the performance by Agent of its
agency duties hereunder other than materially increased administrative costs
and expenses incurred as a result of a Lease Event of Default); PROVIDED that
no Participant shall be liable for any of the foregoing to the extent they
arise from: (a) the gross negligence or willful misconduct of Agent, (b) the
inaccuracy of any representation or
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warranty or breach of any covenant given by Agent in SECTION 4.4 or in the
Loan Agreement, (c) in the case of Agent's handling of funds, the failure to
act with the same care as Agent uses in handling its own funds, (d) any
taxes, fees or other charges payable by Agent based on or measured by any
fees, commissions or compensation received by it for acting as Agent in
connection with the transactions described in the Operative Documents or (e)
any other matter as to which Lessee is not obligated to indemnify Agent
hereunder.
SECTION 8.5 INDEPENDENT CREDIT INVESTIGATION. Each Participant by
entering into this Participation Agreement agrees that it has, independently
and without reliance on Agent or Arranger or any other Participant and based
on such documents and information as it has deemed appropriate, made its own
credit analysis of Lessee and its own decision to enter into this
Participation Agreement and each of the other Operative Documents to which it
is a party and that it will, independently and without reliance upon Agent,
Arranger or any other Participant and based on such documents and information
as it shall deem appropriate at the time, continue to make its own analysis
and decisions in taking action under this Participation Agreement and any
related documents to which it is a party. Agent shall not be required to
keep itself informed as to the performance or observance by Lessee of any
other document referred to (directly or indirectly) or provided for herein or
to inspect the properties or books of Lessee. Except for notices or
statements which Agent is expressly required to give under this Participation
Agreement and for notices, reports and other documents and information
expressly required to be furnished to Agent alone (and not also to each
Participant and the Certificate Trustee, it being understood that Agent shall
forward copies of same to each Participant and the Certificate Trustee)
hereunder or under any other Operative Document, Agent shall not have any
duty or responsibility to provide any Participant with copies of notices or
with any credit or other information concerning the affairs, financial
condition or business of Lessee (or any of its Affiliates) that may come into
the possession of Agent or any of its Affiliates.
SECTION 8.6 REFUSAL TO ACT. Except for notices and actions expressly
required of Agent hereunder and except for the performance of its covenants
in SECTION 4.4, Agent shall in all cases be fully justified in failing or
refusing to act unless: (a) it is indemnified to its reasonable satisfaction
by the Participants against any and all liability and reasonable expense
which may be incurred by it by reason of taking or continuing to take any
such action (provided that such indemnity shall be subject to each of the
limitations set forth at SECTION 8.4, including CLAUSES (a) through (d) of
SECTION 8.4, it being understood that no action taken by Agent in accordance
with the instructions of the Required Participants shall be deemed to
constitute any such matter), and (b) it is reasonably satisfied that such
action is not contrary to any Operative Document or to any Applicable Law.
SECTION 8.7 RESIGNATION OR REMOVAL OF AGENT; APPOINTMENT OF
SUCCESSOR. Subject to the appointment and acceptance of a successor Agent as
provided below, Agent may resign at any time by giving notice thereof to each
Lessor and Lessee or may be removed at any time by written notice from the
Required Participants. Upon any such resignation or removal, the Required
Participants at the time of the resignation or removal shall have the right
with the consent of Lessee so long as no Lease Event of Default exists (which
consent shall not be unreasonably withheld or delayed) to appoint a successor
Agent which shall be an Eligible Assignee Agent. If, within 30 calendar days
after the retiring Agent's giving of notice of resignation or receipt of a
written notice of removal, a successor Agent is not so appointed and does not
accept such appointment, then the retiring or removed Agent after consulting
with Lessee and the Participants may appoint a successor Agent and transfer
to such successor
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Agent all rights and obligations of the retiring Agent. Such successor Agent
shall be an Eligible Assignee Agent. Upon the acceptance of any appointment
as Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and
duties of the retiring or removed Agent and the retiring or removed Agent
shall be discharged from duties and obligations as Agent thereafter arising
hereunder and under any related document. If the retiring Agent does not or
is not able to appoint a successor, any Participant, and in the case where
the retiring Agent is unable to appoint a successor, Agent, shall be entitled
to apply to a court of competent jurisdiction for such appointment, and such
court may thereupon appoint a successor to act until such time, if any, as a
successor shall have been appointed as above provided.
SECTION 8.8 SEPARATE AGENT. The Required Participants may, and if
they fail to do so at any time when they are so required, Agent may, for the
purpose of meeting any Federal, state or local legal requirements of any
jurisdiction in which the Leased Property or Mortgaged Property may be
located, appoint one or more individuals or corporations either to act as
co-agent jointly with Agent or to act as separate agent of all or any part of
the Mortgaged Property, and vest in such individuals or corporations, in such
capacity, such title to such Mortgaged Property or any part thereof, and such
rights or duties as Agent may consider necessary or desirable. Agent shall
not be required to qualify to do business in any jurisdiction where it is not
now so qualified. Agent shall execute, acknowledge and deliver all such
instruments as may be required by any such co-agent or separate agent more
fully confirming such title, rights or duties to such co-agent or separate
agent. Upon the acceptance in writing of such appointment by any such
co-agent or separate agent, it, she or he shall be vested with such interest
in the Mortgaged Property or any part thereof, and with such rights and
duties, not inconsistent with the provisions of the Operative Documents, as
shall be specified in the instrument of appointment, jointly with Agent
(except insofar as Applicable Laws makes it necessary for any such co-agent
or separate agent to act alone), subject to all terms of the Operative
Documents. Any co-agent or separate agent, to the fullest extent permitted
by legal requirements of the relevant jurisdiction, at any time, by an
instrument in writing, shall constitute Agent its attorney-in-fact and agent,
with full power and authority to do all acts and things and to exercise all
discretion on its behalf and in its name. If any co-agent or separate agent
shall die, become incapable of acting, resign or be removed, the interest in
the Mortgaged Property and all rights and duties of such co-agent or separate
agent shall, so far as permitted by law, vest in and be exercised by Agent,
without the appointment of a successor to such co-agent or separate agent.
SECTION 8.9 TERMINATION OF AGENCY. The agency created hereby shall
terminate upon the final disposition by Agent of all Mortgaged Property at
any time subject hereto and the final distribution by Agent of all monies or
other property or proceeds received pursuant to the Lease in accordance with
their terms; PROVIDED, that at such time Lessee shall have complied fully
with all the terms hereof.
SECTION 8.10 COMPENSATION OF AGENCY. Lessee shall pay Agent its
reasonable fees, costs and expenses for the performance of Agent's
obligations hereunder in connection with any amendments, modifications, or
waivers requested by Lessee under any of the Operative Documents.
SECTION 8.11 LIMITATIONS. It is expressly understood and agreed by
and among the parties hereto that, except as otherwise provided herein or in
the other Operative Documents: (a) this Participation Agreement and the
other Operative Documents to which Agent is a party
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are executed by Agent, not in its individual capacity (except with respect to
the representations and covenants of Agent in SECTION 4.4), but solely as
Agent under the Operative Documents in the exercise of the power and
authority conferred and vested in it as such Agent; (b) each and all of the
undertakings and agreements herein made on the part of Agent are each and
every one of them made and intended not as personal undertakings and
agreements by Agent, or for the purpose or with the intention of binding
Agent personally, but are made and intended for the purpose of binding only
the Mortgaged Property unless expressly provided otherwise; (c) actions to be
taken by Agent pursuant to its obligations under the Operative Documents may,
in certain circumstances, be taken by Agent only upon specific authority of
the Participants; (d) except as set forth in the proviso below, nothing
contained in the Operative Documents shall be construed as creating any
liability on Agent, individually or personally, or any incorporator or any
past, present or future subscriber to the capital stock of, or stockholder,
officer or director, employee or agent of, Agent to perform any covenants
either express or implied contained herein, all such liability, if any, being
expressly waived by the other parties hereto and by any Person claiming by,
through or under them; and (e) so far as Agent, individually or personally,
is concerned, the other parties hereto and any Person claiming by, through or
under them shall look solely to the Mortgaged Property and Lessee for the
performance of any obligation under any of the instruments referred to
herein; PROVIDED, HOWEVER, that nothing in this SECTION 8.11 shall be
construed to limit in scope or substance the general corporate liability of
Agent in respect of its gross negligence or willful misconduct, negligence in
the handling of funds or for those representations, warranties and covenants
of Agent in its individual capacity set forth herein or in any of the other
agreements contemplated hereby.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 SURVIVAL OF AGREEMENTS. The representations, warranties,
covenants, indemnities and agreements of the parties provided for in the
Operative Documents, and the parties' obligations under any and all thereof,
shall survive the execution and delivery and the termination or expiration of
this Agreement and any of the Operative Documents, the transfer of the
interest in the Leased Property as provided herein or in any other Operative
Documents (and shall not be merged into any deed, ground lease or any other
conveyance or transfer document), any disposition of any interest of
Certificate Trustee in the Leased Property, the purchase and sale of the
Notes or Certificates, payment therefor and any disposition thereof and shall
be and continue in effect notwithstanding any investigation made by any party
hereto or to any of the other Operative Documents and the fact that any such
party may waive compliance with any of the other terms, provisions or
conditions of any of the Operative Documents.
SECTION 9.2 NO BROKER, ETC. Except for Lessee's dealing with UBOC,
as Arranger, each of the parties hereto represents to the others that it has
not retained or employed any arranger, broker, finder or financial advisor to
act on its behalf in connection with this Agreement, nor has it authorized
any arranger, broker, finder or financial adviser retained or employed by any
other Person so to act, nor has it incurred any fees or commissions to which
Certificate Trustee, Agent or any Participant might be subjected by virtue of
their entering into the transactions described in this Agreement. UBOC's
sole compensation for acting hereunder other than as an Arranger is the
receipt of the amounts, including reimbursement of expenses, provided for in
the Operative Documents, and the Arrangement Fee. Any party who is in breach
of this representation shall
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indemnify and hold the other parties harmless from and against any liability
arising out of such breach of this representation.
SECTION 9.3 NOTICES. Unless otherwise specified herein, all notices,
requests, demands or other communications to or upon the respective parties
hereto shall be deemed to have been given: (i) in the case of notice by
letter, the earlier of when delivered to the addressee by hand or courier if
delivered on a Business Day and, if not delivered on a Business Day, the
first Business Day thereafter or on the third Business Day after depositing
the same in the mails, registered or certified mail, postage prepaid, return
receipt requested, and (ii) in the case of notice by facsimile or bank wire,
when receipt is confirmed if delivered on a Business Day and, if not
delivered on a Business Day, the first Business Day thereafter, addressed as
provided on SCHEDULE II hereto, or to such other address as any of the
parties hereto may designate by written notice.
SECTION 9.4 COUNTERPARTS. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute but one and the same agreement.
SECTION 9.5 AMENDMENTS. No Operative Document nor any of the terms
thereof may be terminated, amended, supplemented, waived or modified without
the written agreement or consent of Certificate Trustee, Agent, Lessee and
the Required Participants; PROVIDED, HOWEVER, that SECTION 3.1(s) and SECTION
9.16 may not be terminated, amended, supplemented, waived or modified without
the written agreement or consent of the Arranger; and PROVIDED, FURTHER, that
such termination, amendment, supplement, waiver or modification shall require
the written agreement or consent of each Participant if such termination,
amendment, supplement, waiver or modification would:
(a) modify any of the provisions of this SECTION 9.5, change the
definition of "Required Participants", or modify or waive any provision
of any Operative Document requiring action by any of the foregoing, or
release any collateral (except as otherwise specifically provided in any
Operative Document);
(b) reduce the amount or change the time of payment of any
amount of principal owing or payable under any Note, Certificate or
interest or Yield owing or payable on any Note or Certificate, or modify
any of the provisions of Article III of the Loan Agreement or Article
III of the Trust Agreement;
(c) modify, amend, waive or supplement any of the provisions of
Articles XI, XIII, XVI and XVII of the Lease;
(d) modify, amend, waive or supplement any of the provisions of
the Guarantee;
(e) reduce, modify, amend or waive any indemnities in favor of any
Participant, or increase any of the duties, obligations or liabilities
of any Participant;
(f) reduce the amount or change the time of payment of Rent, the
Lease Balance or the Applicable Margin;
(g) modify or change the definition of the Sale Recourse Amount;
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<PAGE>
(h) modify any provision of any Operative Document that expressly
requires the unanimous consent of the Participants;
(i) consent to modification, amendment or waiver releasing Lessee
from its obligations to pay Rent, the Lease Balance, Sale Proceeds, the
Applicable Margin or changing the absolute and unconditional character
of such obligations; or
(j) permit the creation of any Lien on the Trust Estate or any
part thereof except as described in the Operative Documents, or deprive
any Participant of the benefit of the security interest and lien secured
by the Mortgaged Property or the Trust Estate.
SECTION 9.6 HEADINGS, ETC. The Table of Contents and headings of the
various Articles and Sections of this Agreement are for convenience of
reference only and shall not modify, define, expand or limit any of the terms
or provisions hereof.
SECTION 9.7 PARTIES IN INTEREST. Except as set forth in SECTION 9.16
and as otherwise expressly provided herein, none of the provisions of this
Agreement is intended for the benefit of any Person except the parties
hereto, their successors and permitted assigns.
SECTION 9.8 GOVERNING LAW. THIS AGREEMENT HAS BEEN DELIVERED IN, AND
SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF, THE STATE OF CALIFORNIA.
SECTION 9.9 PAYMENT OF TRANSACTION COSTS AND OTHER COSTS.
(a) TRANSACTION COSTS. Whether or not the transactions
described in this Agreement and by the other Operative Documents are
consummated, as and when any portion of Transaction Costs becomes due and
payable, Lessee shall promptly pay such costs following its receipt of an
invoice therefor directly or furnish Agent funds sufficient to, and Agent
shall promptly make payment of such portion to the Person or Persons entitled
to payment upon presentation to Agent of bills or invoices for the amount of
such payment. The Arrangement Fee shall be paid by Lessee to the Arranger on
the Advance Date.
(b) CONTINUING EXPENSES. The continuing fees, expenses and
disbursements (including reasonable counsel fees) of Certificate Trustee, as
lessor under the Lease and as trustee under the Trust Agreement with respect
to the administration of the Trust Estate and Agent under the Operative
Documents shall be paid by Lessee as Supplemental Rent.
(c) AMENDMENTS, SUPPLEMENTS AND APPRAISAL. Without
limitation of the foregoing, Lessee agrees to pay to the Participants,
Certificate Trustee and Agent all out-of-pocket and internally allocated
costs and expenses (including reasonable legal fees and expenses of local
counsel, special counsel and allocated costs of internal counsel to Agent and
Certificate Trustee and the document counsel for the Participants) incurred
by any of them in connection with: (i) the considering, evaluating,
investigating, negotiating and entering into or giving or withholding of any
amendments or supplements or waivers or consents with respect to any
Operative Document; (ii) any Casualty, Condemnation, or termination of the
Lease or any other Operative Document; (iii) the negotiation and
documentation of any restructuring or "workout," whether or not consummated,
of any Operative Document; (iv) the enforcement of the rights or remedies
under the Operative Documents; or (v) any transfer by Certificate Trustee
46
<PAGE>
or a Participant of any interest in the Operative Documents during the
continuance of a Lease Event of Default.
SECTION 9.10 SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other jurisdiction.
SECTION 9.11 LIMITED LIABILITY OF CERTIFICATE TRUSTEE. The parties
hereto agree that Certificate Trustee, in its individual capacity, shall have
no personal liability whatsoever to Lessee, Agent, the Participants or any of
their respective successors and assigns for any Claim based on or in respect
of this Agreement or any of the other Operative Documents or arising in any
way from the transactions contemplated hereby or thereby; PROVIDED, HOWEVER,
that Certificate Trustee shall be liable in its individual capacity: (a) for
its own willful misconduct or gross negligence (or negligence in the handling
of funds) and, to each Participant for the breach of its obligations to the
Participants in respect of the Trust Agreement and the Trust Estate to the
extent provided in the Trust Agreement, (b) for liabilities that may result
from the incorrectness of any representation or warranty expressly made by it
in its individual capacity in SECTION 4.3 or from the failure of the UBOC to
perform the covenants and agreements set forth in ARTICLE VI, (c) for any Tax
based on or measured by any fees, commission or compensation received by it
for actions described in the Operative Documents, or (d) breach of SECTION
9.17. The parties hereby acknowledge that any provision of the Operative
Documents requiring a determination or approval to be made by Certificate
Trustee or Lessor may be made by Certificate Trustee based upon a
determination of the Required Participants. In no event shall Certificate
Trustee, in its individual capacity, be liable for any indirect, special,
consequential, incidental or punitive damages.
SECTION 9.12 LIABILITIES OF THE PARTICIPANTS. No Participant shall
have any obligation to any other Participant or to Lessee, Certificate
Trustee or Agent with respect to the transactions described in the Operative
Documents except those obligations of such Participant expressly set forth in
the Operative Documents or except as set forth in the instruments delivered
in connection therewith, and no Participant shall be liable for performance
by any other party hereto of such other party's obligations under the
Operative Documents except as otherwise so set forth.
SECTION 9.13 SUBMISSION TO JURISDICTION; WAIVERS.
(a) Each party hereto irrevocably and unconditionally:
(i) submits for itself and its property in any legal action
or proceeding relating to this Agreement or any other Operative Document, or
for recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction of the United States District Court for
the Southern District of California and of any California state court sitting
in San Diego, County, and appellate courts from any thereof;
(ii) consents that any such action or proceedings may be
brought to such courts, and waives any objection that it may now or hereafter
have to the venue of any such action or
47
<PAGE>
proceeding in any such court or that such action or proceeding was brought in
an inconvenient court and agrees not to plead or claim the same;
(iii) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage prepaid,
to such party at its address set forth on SCHEDULE II or at such other
address of which the other parties hereto shall have been notified pursuant
to SECTION 9.3; and
(iv) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction.
(b) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THE
OPERATIVE DOCUMENTS AND FOR ANY COUNTERCLAIM THEREIN.
SECTION 9.14 REPRODUCTION OF DOCUMENTS. This Agreement, all
documents constituting an Appendix, Schedule or Exhibit hereto, and all
documents relating hereto received by a party hereto, including: (a)
consents, waivers and modifications that may hereafter be executed; (b)
documents received by the Participants, or Certificate Trustee in connection
with the receipt and/or acquisition of the Leased Property; and (c) financial
statements, certificates, and other information previously or hereafter
furnished to Certificate Trustee, Agent or any Participant may be reproduced
by the party receiving the same by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. Each of the
parties hereto agrees and stipulates that, to the extent permitted by law,
any such reproduction shall be admissible in evidence as the original itself
in any judicial or administrative proceeding (whether or not the original is
in existence and whether or not such reproduction was made by such party in
the regular course of business) and that, to the extent permitted by law, any
enlargement, facsimile, or further reproduction of such reproduction shall
likewise be admissible in evidence.
SECTION 9.15 CONSIDERATION FOR CONSENTS TO WAIVERS AND AMENDMENTS.
Lessee hereby agrees that it will not, and that it will not permit any of its
Affiliates to, offer or give any consideration or benefit of any kind
whatsoever to any Participant in connection with, in exchange for, or as an
inducement to, such Participant's consent to any waiver in respect of, any
modification or amendment of, any supplement to, or any other consent or
approval under, any Operative Document unless such consideration or benefit
is offered ratably to all Participants.
SECTION 9.16 ROLE OF UBOC. Each party hereto acknowledges hereby
that it is aware of the fact that UBOC has acted as an "arranger" with
respect to the transactions described in the Operative Documents and that, as
of the Document Closing Date, it or its affiliate will be a Participant.
Each party releases UBOC and its Affiliates from any liability as a result of
its acting simultaneously as "arranger" (on the one hand) and as a
Participant (on the other hand) and waives any potential conflict of interest
arising therefrom. The parties hereto acknowledge and agree that Arranger has
not made any representations or warranties concerning, and that they have not
relied upon Arranger as to, the tax, accounting or legal characterization or
validity of: (i) the Operative Documents or (ii) any aspect of the Overall
Transaction. The parties hereto acknowledge and agree that Arranger has no
duties, express or implied, under the Operative Documents in its capacity as
Arranger. The parties hereto further agree that SECTION 2.8, the
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<PAGE>
second sentence of SECTION 3.1(h), SECTION 3.1(s), SECTION 8.5, SECTION 9.2,
the first proviso in the first sentence of SECTION 9.5, SECTION 9.9(a) and
this SECTION 9.16 are for the express benefit of Arranger, and Arranger shall
be entitled to rely thereon as if it were a party hereto.
SECTION 9.17 CONFIDENTIALITY. Certificate Trustee, Agent and each
Participant each agree to take normal and reasonable precautions and exercise
due care to maintain the confidentiality of all nonpublic information
provided to it by or on behalf of Lessee or any Subsidiary in connection with
this Agreement or any other Operative Document, and agree not to use any such
information for any purpose or in any manner other than pursuant to the terms
described in this Agreement; PROVIDED, HOWEVER, that Certificate Trustee,
Agent or any Participant may disclose such information: (i) to its directors,
employees, affiliates and agents and to its auditors, counsel and other
professional advisors (provided that such Persons have been made aware by
Certificate Trustee, Agent or such Participant of the nonpublic and
confidential nature of such information and of the restrictions herein
against such disclosure thereof), (ii) at the demand or request of any bank
regulatory authority, or any court or other Authority having or asserting
jurisdiction over Certificate Trustee, Agent or such Participant as may be
required pursuant to subpoena or other legal process, or otherwise in order
to comply with any Applicable Laws (provided that notice of any such subpoena
or other legal process shall be furnished to Lessee unless such notice is
legally prohibited or such Authority requests that such notice not be
furnished to Lessee), (iii) in connection with any proceeding to enforce its
rights hereunder or other litigation or proceeding related hereto, (iv) to
either Certificate Trustee, Agent or any other Participant, (v) to the extent
the same has become publicly available other than as a result of a breach of
this Agreement, (vi) pursuant to and in accordance with the provisions of
SECTION 6.5, and (vii) to any potential transferee or Participation Holder,
PROVIDED that, prior to any such disclosure, each Participant shall require
any such potential transferee or Participation Holder receiving a disclosure
of nonpublic information to agree in writing to be bound by this SECTION 9.17.
[SIGNATURES ON NEXT PAGE]
49
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
LESSEE: REMEC, INC., as Lessee
By: /s/ Michael McDonald
----------------------------------
Name Printed: Michael McDonald
Title: Chief Financial Officer
50
<PAGE>
CERTIFICATE TRUSTEE: UNION BANK OF
CALIFORNIA, N.A., not in its individual
capacity except as expressly stated
herein, but solely as Certificate Trustee
By: /s/ Andrew R. Ball
---------------------------------
Name Printed: Andrew R. Ball
Title: Vice President
51
<PAGE>
AGENT: UNION BANK OF CALIFORNIA, N.A.,
not in its individual capacity except as
expressly stated herein, but solely as
Agent
By: /s/ Kent McBeth
---------------------------------
Name Printed: Kent McBeth
Title: Vice President
52
<PAGE>
CERTIFICATE PURCHASER: BANKERS
COMMERCIAL CORPORATION, as Certificate
Purchaser
By: /s/ Lance B. Markowitz
---------------------------------
Name Printed: Lance B. Markowitz
Title: President
53
<PAGE>
LENDER: UNION BANK OF CALIFORNIA, N.A.,
not in its individual capacity except as
expressly stated herein, but solely as
Lender
By: /S/ Kent McBeth
---------------------------------
Name Printed: Kent McBeth
Title: Vice President
54
<PAGE>
APPENDIX 1
to
PARTICIPATION AGREEMENT
(REMEC, Inc. Trust 1998-A)
In the Participation Agreement and each other Operative Document, unless
the context otherwise requires:
(a) any term defined below by reference to another instrument or
document shall continue to have the meaning ascribed thereto whether or not
such other instrument or document remains in effect;
(b) words importing the singular include the plural and vice versa;
(c) words importing a gender include any gender;
(d) a reference to a part, clause, section, article, exhibit or
schedule is a reference to a part, clause, section and article of, and
exhibit and schedule to, such Operative Document;
(e) a reference to any statute, regulation, proclamation, ordinance or
law includes all statutes, regulations, proclamations, ordinances or laws
amending, supplementing, supplanting, varying, consolidating or replacing
them, and a reference to a statute includes all regulations, proclamations
and ordinances issued or otherwise applicable under that statute;
(f) a reference to a document includes any amendment or supplement to,
or replacement or novation of, that document;
(g) a reference to a party to a document includes that party's
successors and permitted assigns;
(h) financial concepts and terms not otherwise defined herein shall
have the meanings commonly understood for such terms under GAAP; and
(i) references to "including" means including without limiting the
generality of any description preceding such term and for purposes hereof the
rule of EJUSDEM GENERIS shall not be applicable to limit a general statement
followed by or referable to an enumeration of specific matters to matters
similar to those specifically mentioned.
Further, each of the parties to the Operative Documents and their
counsel have reviewed and revised the Operative Documents, or requested
revisions thereto, and the usual rule of construction that any ambiguities
are to be resolved against the drafting party shall be inapplicable in
construing and interpreting the Operative Documents.
"ACQUISITION AGREEMENTS" shall mean:(a) the Agreement for Purchase and
Sale and Joint Escrow Instructions dated as of June 12, 1998, amended as of
July 17, 1998 and August 14, 1998, by and between Transcontinental Chesapeake
Corporation and REMEC, Inc., with respect to the property commonly known as
the Chesapeake Ridge Business Park, San Diego, California 92123 (the
"TRANSCONTINENTAL ACQUISITION AGREEMENT"), and (b) the Agreement for Purchase
and Sale and Joint Escrow Instructions dated as of August 26, 1998, amended
as of August 26, 1998, by and between
App. 1-1
<PAGE>
Montpelier Pacific, Inc. and REMEC, Inc., with respect to the property
commonly known as 9404 Chesapeake Drive, San Diego, California 92123 (the
"MONTPELIER ACQUISITION AGREEMENT").
"ACQUISITION DOCUMENTS" shall mean the Acquisition Agreements and all
other documents to be assigned to or executed by Lessor in connection with
the consummation of the acquisitions described in the Transcontinental
Acquisition Agreement and the Montpelier Acquisition Agreement, respectively,
together with any such instruments of assignment.
"ACTUAL KNOWLEDGE" shall mean, as to any matter with respect to any
Person, the actual knowledge of such matter by a Responsible Officer of such
Person or, in the case of the Certificate Trustee, by an Authorized Officer
of the Certificate Trustee.
"ADDITIONAL COSTS" shall mean (i) the amounts payable pursuant to
Sections 7.4, 7.5 and 7.6 of the Participation Agreement and (ii) any other
amounts due and payable by Lessee under any Operative Document or the Trust
Agreement other than Basic Rent.
"ADVANCE" shall mean the advance of funds to pay the Purchase Price and
the Transaction Costs by Certificate Trustee pursuant to Article II of the
Participation Agreement.
"ADVANCE DATE" shall mean the actual date on which the Advance occurs.
"ADVANCE REQUEST" shall have the meaning provided in Section 2.5(a) of
the Participation Agreement.
"AFFECTED PARTICIPANT" shall have the meaning provided in Section 7.4 of
the Participation Agreement.
"AFFILIATE" of any Person shall mean any other Person directly or
indirectly controlling, controlled by or under common control with such
Person. For purposes of this definition, the term "control" (including the
correlative meanings of the terms "controlling," "controlled by," and "under
common control with") as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities or by contract or otherwise; PROVIDED (but
without limiting the foregoing) that no pledge of voting securities of any
Person without the current right to exercise voting rights with respect
thereto shall by itself be deemed to confer control over such Person upon the
pledgee.
"AGENT" shall mean UBOC.
"ALTERATIONS" shall have the meaning provided in Section 9.2(a) of the
Lease.
"ALTERNATE BASE RATE" shall mean, for any period, an interest rate per
annum equal to the higher of (A) the Federal Funds Effective Rate most
recently determined by Agent plus the Applicable Margin and (B) the Reference
Rate. If either of the aforesaid rates or equivalent changes from time to
time after the Document Closing Date, the Alternate Base Rate shall be
automatically increased or decreased, if appropriate and as the case may be,
without notice to Lessee or Borrower, as of the effective time of each change.
"APPLICABLE LAWS" shall mean as of any date all applicable laws, rules,
regulations (including Environmental Laws), statutes, treaties, codes,
ordinances, permits, certificates, orders and licenses of and interpretations
by, any Authority, and applicable judgments, decrees, injunctions, writs,
orders or like action of any court, arbitrator or other administrative,
judicial or quasi-judicial tribunal or agency of competent jurisdiction
(including those pertaining to health, safety or the environment and those
pertaining to the construction, use, occupancy or subdivision of the Leased
Property) and any restrictive covenant or deed restriction or easement of
record affecting the Leased Property.
App. 1-2
<PAGE>
"APPLICABLE MARGIN" means, at any time the Interest Rate is determined
by reference to the LIBO Rate or to the Federal Funds Effective Rate, a
margin determined from time-to-time during any Payment Period in accordance
with the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Lessee's Notes
Funded Debt/EBDITA (basis points/annum)
- ------------------------------------------------------------------------------
<S> <C>
.50 or less : 1 115
- ------------------------------------------------------------------------------
.51 to 1.00 : 1 125
- ------------------------------------------------------------------------------
1.01 to 1.50 : 1 150
- ------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, for any day during an Interest Period with
respect to the portion of the outstanding principal amount of the Notes
which, on such day, are collateralized pursuant to the Pledge Agreement or
the Custodial Agreement with Liquid Assets acceptable to Agent, the
Applicable Margin for such day shall be 0.75% (75 basis points). For
purposes of the foregoing sentence, the "portion of the outstanding principal
amount of the Notes" which Lessee has "collateralized with Liquid Assets" for
each Lender shall be deemed to equal 95% of such Lender's Commitment
Percentage of the Value (as defined in the Custodial Agreement) of Securities
Collateral or 100% of the Cash (as defined in the Custodial Agreement)
pledged by Lessee pursuant to the Pledge Agreement as of the applicable
Payment Date.
"APPRAISALS" shall have the meaning provided in Section 3.1(h) of the
Participation Agreement.
"APPRAISER" shall mean (i) with respect to the Appraisals to be
delivered prior to the Advance, Walter J. Stevens, MAI, of Lipman, Stevens,
Marshall & Thene, Inc., and (ii) with respect to any other appraisal, a
reputable appraiser selected by Lessor and satisfactory to the Required
Participants.
"APPURTENANT RIGHTS" shall have the meaning provided in the Deed of
Trust.
"ARRANGEMENT FEE" shall mean the fee payable to Arranger pursuant to
that certain letter agreement between Arranger and Lessee dated August 25,
1998.
"ARRANGER" shall mean UBOC.
"ASSIGNMENT OF LEASE" shall mean that certain Assignment of Lease dated
as of August 25, 1998, from Certificate Trustee to Agent.
"ASSIGNMENT OF SUBLEASES" shall mean that certain Assignment of Sublease
dated as of August 25, 1998, from Lessee to Agent.
"AUTHORITY" shall mean any applicable foreign, Federal, state, county,
municipal or other government or governmental, quasi-governmental or
regulatory authority, agency, board, body, commission, instrumentality, court
or tribunal, or any political subdivision of any thereof, or arbitrator or
panel of arbitrators.
"AUTHORIZED OFFICER" shall mean, as to Certificate Trustee, any officer
in the Corporate Trust Department who shall be duly authorized to execute the
Operative Documents.
"BANKRUPTCY CODE" shall mean the Bankruptcy Reform Act of 1978.
"BASE TERM" shall mean the initial five-year period of the term of the
Lease commencing on the Advance Date and ending on the day preceding the
fifth (5th) anniversary of the Advance Date.
App. 1-3
<PAGE>
"BASIC RENT" shall mean for any Payment Date with regard to a Payment
Period then ended, an amount equal to the sum of (A) the aggregate amount of
interest payable on such Payment Date on the Notes, plus (B) the aggregate
amount of Yield payable on such Payment Date on the Certificates.
"BENEFICIARY" shall have, in respect of either Guarantee, the meaning
provided in Section 1 of such Guarantee.
"BENEFIT ARRANGEMENT" shall mean at any time an employee benefit plan
within the meaning of Section 3(3) of ERISA which is not a Plan or a
Multiemployer Plan and which is maintained or otherwise contributed to by any
member of the ERISA Group.
"BENEFITTED LENDER" shall have the meaning provided in Section 7.4 of
the Loan Agreement.
"BOARD OF DIRECTORS" shall mean, with respect to a corporation, either
the board of directors or any duly authorized committee of that board of
directors which, pursuant to the by-laws of such corporation, has the same
authority as that board of directors as to the matter at issue.
"BORROWER" shall have the meaning provided in the preamble to the Loan
Agreement.
"BORROWER LIABILITIES" shall have the meaning provided in Section 1 to
the Guarantee.
"BREAK FUNDING AMOUNT" shall have the meaning provided in Section 7.5
of the Participation Agreement.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other
day on which commercial banks in Los Angeles, California and solely with
respect to the definition of LIBO Rate, London, England are authorized or
required by law to close.
"CASUALTY" shall mean an event of damage or casualty relating to any
portion or all of the Improvements.
"CERTIFICATE" shall have the meaning provided in Section 2.1(a) of the
Trust Agreement.
"CERTIFICATE AMOUNT" shall mean, with respect to any Certificate
Purchaser as of any date of determination, the aggregate amount advanced by
such Certificate Purchaser for the purchase of Certificates pursuant to
Section 2.3 of the Participation Agreement, net of any distributions (other
than distributions of Yield) with respect thereto.
"CERTIFICATE PURCHASER" shall have the meaning provided in the preamble
to the Trust Agreement.
"CERTIFICATE PURCHASER COLLATERAL" shall mean any collateral granted to
the Certificate Purchaser pursuant to the Lease.
"CERTIFICATE REGISTER" shall have the meaning provided in Section 2.8(a)
of the Trust Agreement.
"CERTIFICATE TRUSTEE" shall mean UBOC, not in its individual capacity
but solely as trustee under the Trust Agreement, together with any individual
trustee or co-trustee appointed pursuant to the terms of the Trust Agreement.
"CERTIFICATES" shall mean those certain certificates issued to the
Certificate Purchasers pursuant to the Trust Agreement, substantially in the
form of Exhibit A thereto, and any and all Certificates issued in replacement
or exchange therefor.
App. 1-4
<PAGE>
"CHANGE IN CONTROL" means any of the following: (a) any person or group
(within the meaning of Rule 13d-5 of the SEC as in effect on the date hereof)
shall acquire ownership directly or indirectly, beneficially or of record, of
shares representing in excess of 50% of the aggregate ordinary voting power
represented by the issued and outstanding capital stock of the Guarantor; or
(b) a majority of the seats (other than vacant seats) on the board of
directors of the Guarantor shall at any time become occupied by persons who
were neither (i) nominated by the management of the Guarantor, nor (ii)
appointed by directors so nominated.
"CHANGE IN LAW" shall have the meaning provided in Section 7.4 of the
Participation Agreement.
"CLAIMS" shall mean liabilities, obligations, damages, losses, demands,
penalties, fines, claims, actions, suits, judgments, settlements, utility
charges, costs, fees, expenses and disbursements (including legal fees and
expenses and costs of investigation which, in the case of counsel or
investigators retained by an Indemnitee, shall be reasonable) of any kind and
nature whatsoever.
"CODE" shall mean the Internal Revenue Code of 1986.
"COMMITMENT" shall mean as to any Certificate Purchaser or Lender, its
obligation to make Certificate Amounts or Loans available to the Certificate
Trustee in an aggregate amount not to exceed at any one time outstanding the
amount set forth opposite such Certificate Purchaser's or Lender's name on
Schedule I-A and Schedule I-B, as amended from time to time, to the
Participation Agreement.
"COMMITMENT PERCENTAGE" shall mean as to any Participant, at a
particular time, the percentage of the aggregate Commitments in effect at
such time represented by such Participant's Commitment, as such percentage is
shown on Schedule I-A or Schedule 1-B, as amended from time to time, to the
Participation Agreement.
"CONDEMNATION" shall mean any condemnation, requisition, confiscation,
seizure or other taking or sale of the use, occupancy or title to the Leased
Property or any part thereof in, by or on account of any eminent domain
proceeding or other action by any Authority or other Person under the power
of eminent domain or otherwise or any transfer in lieu of or in anticipation
thereof. A Condemnation shall be deemed to have "occurred" on the earliest
of the dates that use, occupancy or title is taken.
"CONSOLIDATED GROUP" shall mean, as to any Participant, all those other
Persons (whether now existing or hereafter acquired), the financial
statements of which shall be (or should have been) consolidated with the
financial statements of such Participant in accordance with GAAP.
"CONSOLIDATED SUBSIDIARY" shall mean, at any date, any Subsidiary or
other entity the accounts of which would be consolidated with those of Lessee
in its consolidated financial statements if such statements were prepared as
of such date.
"CONTRACTUAL REQUIREMENTS" shall mean all terms and conditions of any
contract affecting the Leased Property to which Lessee is a party (other than
the Operative Documents).
"CORPORATE TRUST DEPARTMENT" shall mean the principal corporate trust
office of UBOC, located at 120 South San Pedro Street, 4th Floor, Los
Angeles, California 90012, Attn.: Corporate Trust Dept. or at such other
office at which the corporate trust business of Certificate Trustee shall be
administered which shall have been specified by notice in writing to Lessee
and each Participant.
"CREDIT AGREEMENT" shall mean that certain Second Amended and Restated
Loan Agreement dated as of June 25, 1998, among REMEC, Inc. and UBOC.
"CUSTODIAL AGREEMENT" shall mean a Custodial Agreement among Lessee,
Agent, the custodian thereunder, and the Participants in form and substance
satisfactory to Agent and the Participants under
App. 1-5
<PAGE>
which Lessee pledges Liquid Assets to collateralize the Lease Balance and
thereby reduce the Applicable Margin.
"DEED" shall mean any of the deeds and assignments from Sellers to
Certificate Trustee conveying the Leased Property.
"DEED OF TRUST" shall mean, with respect to the Leased Property, a Deed
of Trust, Security Agreement and Fixture Filing Statement executed by Lessor
and Lessee, as trustor, to Title Insurance Company, as trustee, in favor of
Agent for the ratable benefit of the Participants, as beneficiary,
substantially in the form of Exhibit D to the Participation Agreement.
"DOCUMENT CLOSING DATE" shall mean the earliest date on or prior to
September 1, 1998, on which all of the conditions precedent thereto set forth
in Appendix 2 hereto have been satisfied or waived by the applicable parties
as set forth therein.
"DOLLARS" or "$" shall mean United States Dollars.
"EBITDA" shall mean income from operations after deducting all expenses
other than interest, taxes, depreciation, and amortization.
"ELIGIBLE ASSIGNEE AGENT" shall mean (i) a commercial bank organized
under the laws of the United States of America, or any state thereof, and
having a combined capital and surplus of at least $75,000,000; (ii) a
commercial bank organized under the laws of any other country which is a
member of the Organization for Economic Cooperation and Development (the
"OECD"), or a political subdivision of any such country, and having a
combined capital and surplus of at least $75,000,000; PROVIDED that such bank
is acting through a branch or agency located in the country in which it is
organized or another country which is also a member of OECD; or (iii) a
Person that is primarily engaged in the business of commercial banking and
that is (A) a Subsidiary of a Participant, (B) a Subsidiary of a Person of
which a Participant is a Subsidiary or (C) a Person of which a Participant is
a Subsidiary.
"EMERGENCY" shall mean a condition or event creating an imminent threat
to human health and safety or imminent threat of loss, damage or destruction
to the real or personal property of any Person.
"EMPLOYEE BENEFIT PLAN" shall mean an employee benefit plan (within the
meaning of Section 3(3) of ERISA, including any multiemployer plan (within
the meaning of Section 3(37)(A) of ERISA)), or any "plan" as defined in
Section 4975(e)(1) of the Code and as interpreted by the Internal Revenue
Service and the Department of Labor in rules, regulations, releases or
bulletins in effect at the time of any determination under the Operative
Documents. The assets of an Employee Benefit Plan shall be determined using
the foregoing criteria, including on the date hereof the Department of Labor
plan asset regulation (29 C.F.R. Section 2510.3-101).
"ENVIRONMENTAL AUDIT" shall mean a Phase One Environmental Site
Assessment (the scope and performance of which meets or exceeds ASTM Standard
Practice E1527-93 Standard Practice for Environmental Site Assessments:
Phase One Environmental Site Assessment Process) for the Leased Property and
any additional environmental assessments requested by the Required
Participants in good faith, including a Phase II Environmental Site
Assessment if recommended by the Phase I Environmental Site Assessment.
"ENVIRONMENTAL LAWS" shall mean and include the Resource Conservation
and Recovery Act of 1976, (RCRA) 42 U.S.C. Sections 6901-6987, as amended by
the Hazardous and Solid Waste Amendments of 1984, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended by the
Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. Sections
9601-9657, (CERCLA), the Hazardous Materials Transportation Act of 1975, 49
U.S.C. Sections 1801-1812, the Toxic Substances Control Act, 15 U.S.C.
Sections 2601-2671, the Clean Air Act, 42 U.S.C. Sections 7401 et seq., the
Federal Insecticide,
App. 1-6
<PAGE>
Fungicide and Rodenticide Act, 7 U.S.C. Sections 136 et seq. and all similar
federal, state and local environmental laws, ordinances, rules, orders,
statutes, decrees, judgments, injunctions, codes and regulations, and any
other federal, state or local laws, ordinances, rules, codes and regulations,
and any other federal, state or local laws, ordinances, rules, codes and
regulations relating to the environment, human health or natural resources or
the regulation or control of or imposing liability or standards of conduct
concerning human health, the environment, Hazardous Materials or the clean-up
or other remediation of the Leased Property, or any part thereof.
"ENVIRONMENTAL PERMITS" shall mean all permits, licenses,
authorizations, registrations, certificates and approvals of Authorities
required by Environmental Laws.
"ENVIRONMENTAL VIOLATION" shall mean an activity, occurrence or
condition that violates or results in non-compliance with any Environmental
Laws.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
and any rule or regulation issued therefrom.
"ERISA GROUP" shall mean Lessee, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with Lessor or any
Subsidiary, are treated as a single employer under Section 414 of the Code.
"ESTOPPEL CERTIFICATE" shall mean that certain Estoppel Certificate to
be executed by the tenant occupying the 5775 Roscoe Court, San Diego,
California 92123 dated as of August 25, 1998, from such Tenant to Certificate
Trustee.
"EXCESS CASUALTY/CONDEMNATION PROCEEDS" shall mean the excess, if any,
of: (x) the aggregate of all awards, compensation and/or insurance proceeds
payable in connection with a Casualty or Condemnation MINUS (y) the portion
of the Lease Balance paid by Lessee pursuant to Article XIV of the Lease with
respect to such Casualty or Condemnation, and MINUS (z) any Rent due and
payable.
"EXCLUDED AMOUNTS" shall mean:
(a) all indemnity payments and expenses to which Certificate
Trustee or Agent in their respective individual capacities or any
Participant (or any of their respective successors, assigns, agents,
officers, directors or employees) is entitled pursuant to the Operative
Documents;
(b) any amounts payable under any Operative Documents to
reimburse Certificate Trustee or Agent or any Participant (including the
reasonable expenses incurred in connection with any such payment) for
performing or complying with any of the obligations of Lessee under and
as permitted by any Operative Document;
(c) any insurance proceeds (or payments with respect to
policy deductibles) under liability policies payable to Certificate
Trustee or Agent in their respective individual capacities or any
Participant (or their respective successors, assigns, agents, officers,
directors or employees);
(d) any insurance proceeds under policies maintained by
Certificate Trustee, Agent or any Participant and not required to be
maintained by Lessee under the Lease;
(e) any amount payable to Certificate Trustee, Agent, or the
Participants pursuant to Section 9.9 of the Participation Agreement; and
App. 1-7
<PAGE>
(f) any payments of interest or yield on payments referred to
in CLAUSES (a) through (e) above.
"EXISTING LEASE" shall mean the Standard Industrial Lease - Multi-Tenant
dated September 12, 1994, by and between Transcontinental Realty Investors, a
California business trust, as lessor, and West Capital Financial Services
Corp., a California corporation with respect to the 5775 Roscoe Site existing
on the Advance Date, so long as such Existing Lease is not amended or
modified in any way.
"EXTENSION OPTION" shall have the meaning provided in Section 2.14(a) of
the Participation Agreement.
"EXTENSION OPTION EFFECTIVE DATE" shall have the meaning provided in
Section 2.14(a) of the Participation Agreement.
"EXTENSION OPTION RESPONSE DATE" shall have the meaning provided in
Section 2.14(a) of the Participation Agreement.
"FAIR MARKET VALUE" shall mean with respect to the Leased Property or
any portion thereof, as of the date of the determination, the fair market
value (which in any event shall not be less than zero) as determined by an
independent appraiser chosen by Lessor (at the direction of the Required
Participants) that would be obtained in an arm's-length transaction between
an informed and willing buyer (other than a buyer currently in possession)
and an informed and willing seller, under no compulsion to buy or sell, and
neither of which is related to Certificate Trustee, Agent or Lessee or any
Affiliate thereof, for the purchase of the Leased Property. Such fair market
value shall be calculated as the value for the use of the Leased Property,
assuming, in the determination of such fair market value (including for
purposes of Section 21.4 of the Lease), that the Leased Property is in the
condition and repair required to be maintained by the terms of the Lease
(unless such fair market value is being determined for purposes of the
Appraisal to be delivered prior to the Advance Date or for evaluating the
items described in the indemnity set forth in Section 21.4 of the lease or
the appraiser's report required pursuant to Section 7.8 of the Participation
Agreement, in which case this assumption shall not be made).
"FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any day, the rate set
forth in the weekly statistical release designated as H.15(519), or any
successor publication, published by the Federal Reserve Bank of New York
(including any such successor, "H.15(519)") on the preceding Business Day
opposite the caption "Federal Funds (Effective)"; or, if for any relevant day
such rate is not so published on any such preceding Business Day, the rate
for such day will be the arithmetic mean as determined by the Agent of the
rate for the last transaction in the overnight Federal funds arranged prior
to 9:00 a.m. (New York City time) on that day by each of three leading
brokers of Federal funds transactions in New York City selected by Agent.
"FINAL MATURITY DATE" shall mean the day immediately preceding the fifth
anniversary of the Advance Date, or if extended pursuant to Section 2.14 of
the Participation Agreement, the day immediately preceding the tenth
anniversary of the Advance Date.
"FINANCING STATEMENTS" shall mean all such UCC-1 Financing Statements
required by Agent or Certificate Trustee to be executed by Lessee or
Certificate Trustee in connection with the perfection of any security
interests granted by Certificate Trustee or Lessee, as the case may be, under
the Operative Documents.
"FIRPTA AFFIDAVIT" shall mean an affidavit delivered by a transferor of
real property interests in accordance with Section 1445 of the Code to inform
the transferee of such real property interest that the withholding of tax
pursuant to Section 1445 of the Code will not be required.
"FIRREA" shall mean The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.
App. 1-8
<PAGE>
"FIXED CHARGES" shall mean the sum of: (i) that portion of term
obligations (including principal and interest), (ii) and capital lease
payments on real property, (iii) income taxes and (iv) dividends, all during
the twelve (12) months preceding the date of calculation.
"FUND," "FUNDED" or "FUNDING" shall mean a funding by a Participant of
the principal under any Note or its Certificate Amount (as the case may be)
constituting a portion of an Advance as described in Article II of the
Participation Agreement.
"FUNDED DEBT" shall mean all funds borrowed by Lessee and its
consolidated Subsidiaries, including loans and capital leases, whether senior
or subordinated, plus the Lease Balance.
"GAAP" shall mean generally accepted accounting principles in the United
States as in effect from time to time consistently applied.
"GOVERNMENTAL ACTION" shall mean all applicable permits, authorizations,
registrations, consents, approvals, waivers, exceptions, variances, orders,
judgments, decrees, licenses, exemptions, publications, filings, notices to
and declarations of or with, or required by, any Authority, or required by
any Applicable Laws, and shall include, all citings, Environmental Permits
and operating permits and licenses that are required for the use, occupancy,
zoning and operation of the Leased Property.
"HAZARDOUS MATERIAL" shall mean any substance, waste or material which
is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous by listing characteristic or
definition under any Environmental Law, including petroleum, crude oil or any
fraction thereof, petroleum derivatives, by-products and other hydrocarbons
and is or becomes regulated by any Authority, including any agency,
department, commission, board or instrumentality of the United States or the
State of California or any political subdivision of either of the foregoing
and also including asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls ("PCBS") and radon gas.
"HAZARDOUS SUBSTANCES UNDERTAKING AND UNSECURED INDEMNITY" shall mean
that certain Hazardous Substances Undertaking and Unsecured Indemnity dated
as of August 25, 1998, made by Lessee substantially in the form of Exhibit J
to the Participation Agreement.
"HIGHEST LAWFUL RATE" shall have the meaning provided in Section 2.13 of
the Participation Agreement.
"IMPROVEMENTS" shall mean any and all buildings, fixtures and
improvements located on the Land from time to time, including improvements
hereinafter constructed on the Land by Lessee as permitted by the Operative
Documents and including mechanical, electrical, HVAC and other building
systems attached to any buildings or improvements presently existing or to be
constructed on the Land, but shall not include personal property not
incorporated into the buildings located on the Land.
"IMPROVEMENTS BALANCE" means the product obtained by multiplying the
Lease Balance as of any date of determination by the Improvements Percentage.
"IMPROVEMENTS LEASE SUPPLEMENT" shall mean the Improvements Lease
Supplement substantially in the form of Exhibit B-2 to the Lease.
"IMPROVEMENTS PERCENTAGE" means the percentage of the Fair Market Value
of the Leased Property attributable to the Improvements related thereto, as
specified in the Appraisal delivered pursuant to Section 3.1(h) of the
Participation Agreement.
"IMPROVEMENTS PROCEEDS" means the product obtained by multiplying the
Net Sale Proceeds by the Improvements Percentage.
App. 1-9
<PAGE>
"INDEMNITEE" shall mean each Participant, Certificate Trustee (in its
individual capacity and as trustee), Agent (in its individual capacity and as
Agent), Arranger, any additional, separate or co-trustee or co-agent
appointed in accordance with the terms of the Trust Agreement or the
Participation Agreement, and the respective Affiliates, successors, permitted
assigns, permitted transferees, employees, officers, directors, partners,
representatives and agents of each of the foregoing Persons; PROVIDED,
HOWEVER, that in no event shall Lessee or its Affiliates be an Indemnitee.
"INSOLVENCY EVENT" shall mean with respect to any Person, any event
pursuant to which such Person makes an assignment for the benefit of
creditors, files or has filed against it a petition in bankruptcy, petitions
or applies to or suffers any petition or application to any tribunal for the
appointment of a custodian, receiver or any trustee for it or for a
substantial part of its property, commences or has commenced against it any
proceeding under any bankruptcy, reorganization, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction, whether
now or hereafter in effect, consents or acquiesces in the filing of any such
petition, application, proceeding or appointment of or taking possession by
the custodian, receiver, liquidator, assignee, trustee or sequestrator (or
other similar official) of such Person or any substantial part of its
property, or admits its inability to pay its debts generally as they become
due, or authorizes any of the foregoing to be done or taken on behalf of such
person.
"INSPECTING PARTIES" shall have the meaning provided in Section 9.8 of
the Lease.
"INSURANCE REQUIREMENTS" shall mean all terms and conditions of any
insurance policy required by the Lease to be maintained by Lessee and all
requirements of the issuer of any such policy.
"INTEREST RATE" shall mean with respect to each Loan for any Payment
Period and subject to Section 7.7 of the Participation Agreement, the sum of
the LIBO Rate for such Payment Period plus the Applicable Margin in effect
from time-to-time during such Payment Period PROVIDED that the Interest Rate
for the initial Payment Period commencing on the Advance Date shall be a rate
per annum equal to the Reference Rate.
"INVESTOR'S LETTER" shall have the meaning provided in Section 6.3(b) of
the Participation Agreement.
"INVOICE" shall have the meaning provided in Section 4.1 of the Lease.
"LAND" means the real property described on Schedule 1 to the Land Lease
Supplement, excluding any Improvements.
"LAND BALANCE" means the product obtained by multiplying the Lease
Balance as of any date of determination by the Land Percentage.
"LAND LEASE SUPPLEMENT" shall mean the Land Supplement substantially in
the form of Exhibit B-1 to the Lease.
"LAND PERCENTAGE" means the percentage of the Fair Market Value of the
Leased Property attributable to the Land, as specified in the Appraisal
delivered pursuant to Section 3.1(h) of the Participation Agreement.
"LAND PROCEEDS" means the product obtained by multiplying the Net Sale
Proceeds by the Land Percentage.
App. 1-10
<PAGE>
"LEASE" shall mean that certain Master Lease dated as of August 25,
1998, between Lessor and Lessee, substantially in the form of Exhibit A to
the Participation Agreement, including each Lease Supplement entered into
pursuant thereto.
"LEASE BALANCE" shall mean, as of any date of determination, an amount
equal to the aggregate sum of the outstanding principal amount of the Loans
of all of the Lenders, and the outstanding Certificate Amounts of all of the
Certificate Purchasers.
"LEASE COLLATERAL" shall mean all of Lessee's right, title and interest
in the Leased Property together with replacements and substitutes thereof and
the proceeds thereof.
"LEASE DEFAULT" or "DEFAULT" shall mean any event, condition or failure
which, with notice or lapse of time or both, would become a Lease Event of
Default.
"LEASE EVENT OF DEFAULT" shall mean any event, condition or failure
designated as a "Lease Event of Default" in Article XVI of the Lease.
"LEASE EXPIRATION DATE" shall have the meaning provided in Section
2.3(a) of the Lease.
"LEASED PROPERTY" shall mean, collectively, the Land and the
Improvements.
"LEASE SUPPLEMENT" shall mean either the Land Supplement substantially
in the form of Exhibit B-1 to the Lease or the Improvement Supplement
substantially in the form of Exhibit B-2 to the Lease.
"LEASE TERM" shall have the meaning provided in Section 2.3 of the Lease.
"LENDERS" shall mean the holders of the Notes.
"LENDER'S POLICY" shall have the meaning provided in Section 3.1(l) of
the Participation Agreement.
"LESSEE" shall mean REMEC, Inc., a California corporation.
"LESSEE AFFILIATE" shall mean Lessee or any of its Subsidiaries.
"LESSEE GUARANTEE" shall mean that certain Guarantee dated as of August
25, 1998, made by Lessee substantially in the form of Exhibit G to the
Participation Agreement.
"LESSOR" shall mean Certificate Trustee.
"LESSOR LIENS" shall mean Liens on or against the Leased Property, the
Lease, the Trust Estate or any payment of Rent (a) which result from any act
of, or any Claim against Lessor (in its individual capacity or in its trust
capacity), Agent, or any Participant, in either case, unrelated to the
transactions contemplated by the Operative Documents or (b) which result from
any tax owed by Lessor (in its individual capacity), Agent, or any
Participant, except any Tax for which Lessee is obligated to indemnify.
"LIBO RATE" shall mean the applicable London interbank offered rate for
deposits in U.S. dollars appearing on Telerate Page 3750 as of 11:00 a.m.
(London time) two (2) Business Days prior to the first day of such Payment
Period, and having a maturity approximately equal to such Payment Period; or
if no London interbank offered rate of such maturity then appears on Telerate
Page 3750, then the rate equal to the London interbank offered rate for
deposits in U.S. dollars maturing immediately before or immediately after
such maturity, whichever is higher, as determined by the Agent from Telerate
Page 3750; or if Telerate Page 3750 is not available, the applicable LIBO
Rate for the relevant Payment Period shall be the rate determined by Agent to
be the arithmetic mean (rounded upward to the next 1/16 of 1%)
App. 1-11
<PAGE>
of the values of interest per annum at which deposits in U.S. dollars are
offered by UBOC's London Branch to first-class banks in the London interbank
market at approximately 11:00 a.m. (London time) two (2) Business Days prior
to the first day of such Payment Period, in the approximate amount of the
UBOC's or its Affiliate's portion of the aggregate outstanding principal
amount of the Notes and Certificate Amounts and having a maturity
approximately equal to such Payment Period.
"LIBOR OFFICE" shall mean initially, the funding office of each
Participant (or the principal bank Affiliate of such Participant) designated
as such in Schedule II to the Participation Agreement; and thereafter, such
other office of such Participant (or the principal bank Affiliate of such
Participant), if any, which shall be making or maintaining such Participant's
investment in Certificates and Notes.
"LIEN" shall mean, with respect to any asset, any lien, mortgage, deed
of trust, encumbrance, pledge, charge, lease, easement, servitude, right of
others or security interest of any kind, including any thereof arising under
any conditional sale, capital lease or other title retention agreement.
"LIQUID ASSETS" shall mean cash and short term investments consisting of
commercial paper, U.S. Treasury Bills, corporate bonds and notes, and
municipal bonds and notes, all with maturities of less than 12 months.
"LOAN" shall have the meaning provided in Section 2.1 of the
Participation Agreement..
"LOAN AGREEMENT" shall mean the Loan Agreement dated as of August 25,
1998, among Certificate Trustee, Agent and the Lenders, substantially in the
form of Exhibit C to the Participation Agreement.
"LOAN DEFAULT" shall mean any event, condition or failure which, with
notice or lapse of time or both, would become a Loan Event of Default.
"LOAN DOCUMENTS" shall mean the Loan Agreement, the Notes, the Deed of
Trust, UCC financing statements, the Assignment of Lease and all documents
and instruments executed and delivered in connection with each of the
foregoing.
"LOAN EVENT OF DEFAULT" shall mean any event, condition or failure
designated as a "Loan Event of Default" in Section 6.1 of the Loan Agreement.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, operations, property, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries, taken as a whole, (ii) the
transactions contemplated by the Operative Documents, (iii) the validity or
enforceability of any of the Operative Documents or (iv) any rights or
remedies of the Administrative Agent or the Lenders under any thereof.
"MATERIAL INDEBTEDNESS" shall mean (i) the Credit Agreement and (ii) any
other indebtedness aggregating at least $500,000.
"MATERIAL PLAN" shall mean at any time one or more Plan or Plans having
aggregate Unfunded Liabilities in excess of $1,000,000.
"MATERIAL SUBSIDIARY" shall mean, at any time, a Subsidiary of Lessee
(or any group of Subsidiaries of Lessee who are parties to the same contract,
commitment or agreement): (i) to which more than fifteen percent (15%) of
Lessee's consolidated revenues in the prior fiscal year are attributable, or
(ii) whose assets constitute more than fifteen percent (15%) of Lessee's
consolidated assets as of the end of the most recent fiscal quarter, in each
case determined in accordance with GAAP.
App. 1-12
<PAGE>
"MINIMUM AMOUNT" shall have the meaning provided in Section 5.14 of the
Participation Agreement.
"MORTGAGED PROPERTY" shall mean, as applicable, the property and rights
and interests defined as "Mortgaged Property" in the Deed of Trust.
"MULTIEMPLOYER PLAN" shall mean at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions, including for
those purposes any Person which ceased to be a member of the ERISA Group during
such five-year period.
"NET CASUALTY PROCEEDS" shall mean all amounts paid in connection with
any Casualty, and all interest earned thereon, less the expense of claiming
and collecting such amounts, including all costs and expenses in connection
therewith.
"NET CASUALTY/CONDEMNATION PROCEEDS" shall mean Net Casualty Proceeds or
Net Condemnation Proceeds, as applicable.
"NET SALE PROCEEDS" shall mean the Sale Proceeds less the costs of such
sale approved by Lessor as provided in Section 21.1 of the Lease.
"NET CONDEMNATION PROCEEDS" shall mean all amounts paid in connection
with any Condemnation, and all interest earned thereon, less the expense of
claiming and collecting such amounts, including all costs and expenses in
connection therewith.
"NON-CONSENTING PARTICIPANT" shall have the meaning provided in Section
2.14(a) of the Participation Agreement.
"NON-PARTY" shall mean any Person other than a Party.
"NONSEVERABLE" shall describe an alteration or part of an alteration
which cannot be readily removed from the Leased Property without causing
material damage to or materially impairing the value of the Leased Property.
"NOTE" shall mean a note evidencing a Loan issued by Borrower under the
Loan Agreement and denominated as such, substantially in the form of Exhibit
A to the Loan Agreement, and any and all Notes issued in replacement or
exchange therefor in accordance with the provisions thereof.
"OFFICER'S CERTIFICATE" of a Person shall mean a certificate signed by
the Chairman of the Board of Directors or the President or any Executive Vice
President or any Senior Vice President or any other Vice President of such
Person signing with the Treasurer or any Assistant Treasurer or the
Controller or any Assistant Controller, Cashier, Assistant Cashier or the
Secretary or any Assistant Secretary of such Person, or by any Vice President
who is also Controller, Treasurer or Cashier signing alone.
"OPERATIVE DOCUMENTS" shall mean the Participation Agreement, the Lease,
the Lease Supplements, each of the Loan Documents, the Lessee Guarantee, the
Certificates, the Trust Agreement, the Hazardous Substances Undertaking and
Unsecured Indemnity and each other agreement executed and delivered by Lessee
in connection with the consummation of the Overall Transaction.
"OVERALL TRANSACTION" shall mean all the transactions and activities
referred to or described in the Operative Documents, including the purchase
of the Leased Property and the transactions described in the Acquisition
Documents.
App. 1-13
<PAGE>
"OVERDUE RATE" shall mean the lesser of (a) the highest interest rate
permitted by Applicable Laws and (b) an interest rate per annum equal to, in
the case of the Notes, the rate of interest otherwise payable with respect
thereto PLUS 2% and, in the case of the Certificates, the Yield Rate PLUS 2%.
"OWNER'S POLICY" shall have the meaning provided in Section 3.1(l) of
the Participation Agreement.
"PARTICIPANTS" shall mean the Certificate Purchasers and the Lenders,
collectively.
"PARTICIPATION" shall have the meaning provided in Section 6.3 of the
Participation Agreement.
"PARTICIPATION AGREEMENT" shall mean the Participation Agreement dated
as of August 25, 1998, among Lessee, Certificate Trustee, Agent, and the
Participants.
"PARTICIPATION HOLDER" shall have the meaning provided in Section 6.3 of
the Participation Agreement.
"PARTY" shall mean Lessor, Agent and/or any Participant, as applicable.
"PAYMENT DATE" shall mean with respect to the payment of interest or
Yield on the Loans or on Certificate Amounts, the last day of each applicable
Payment Period.
"PAYMENT DEFAULT" shall mean a Lease Event of Default described in
clause (a) of Article XVI of the Lease.
"PAYMENT PERIOD" shall mean with respect to any Loan or Certificate
Amount:
(a) initially, the period commencing on the Advance Date and ending on
the third (3rd) Business Day thereafter; and
(b) thereafter, each period commencing on the last day of the next
preceding Payment Period and ending one, three, six, nine or twelve months
thereafter,
PROVIDED that, the foregoing provisions relating to Payment Periods are
subject to the following:
(i) if any Payment Period would otherwise end on a day
that is not a Business Day, such Payment Period shall be extended
to the next succeeding Business Day unless the result of such
extension would be to carry such Payment Period into another
calendar month in which event such Payment Period shall end on
the immediately preceding Business Day;
(ii) any Payment Period that would otherwise extend
beyond the Final Maturity Date shall end on the Final maturity
Date; and
(iii) not more than one Payment Period shall exist at
the same time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"PERIL" shall have the meaning provided in Section 11.1(b) of the Lease.
"PERMITTED CONTEST" shall mean actions taken by a Person to contest in
good faith, by appropriate proceedings initiated timely and diligently
prosecuted, the legality, validity, amount or applicability to the Leased
Property or any interest therein of any Person of: (a) any law, regulation,
rule, judgment, order, or
App. 1-14
<PAGE>
other legal provision or judicial or administrative requirements; (b) any
term or condition of, or any revocation or amendment of, or other proceeding
relating to, any Governmental Action; or (c) any Lien or Tax; PROVIDED that
the initiation and prosecution of such contest: (A) stays the enforcement,
application or any foreclosure proceeding of or with respect to any such
matter described in clauses (a) through (c) above, and (B) would not, in the
reasonable opinion of the Required Participants: (i) result in, or
materially increase the risk of, the imposition of any criminal liability on
any Indemnitee; (ii) materially and adversely affect the security interests
created by the Operative Documents or the right, title or interest of Lessor
in or to the Leased Property or the right of Lessor, or any Participant to
receive payment of the Certificate Amount of or Yield on any Certificate, the
principal of or interest on any Note, Rent, the Lease Balance, or any
interest therein; or (iii) materially and adversely affect the Fair Market
Value, utility or remaining useful life of the Leased Property or any
interest therein or the continued economic operation thereof; and PROVIDED
FURTHER that in any event adequate reserves in accordance with GAAP are
maintained against any adverse determination of such contest.
"PERMITTED EXCEPTIONS" shall mean, with respect to the Leased Property,
the exceptions set forth in the Owner's Policy and the Lender's Policy on the
Advance Date and accepted by the Participants pursuant to Section 3.1(l) of
the Participation Agreement.
"PERMITTED INVESTMENTS" shall mean (i) full faith and credit obligations
of the United States of America, or fully guaranteed as to interest and
principal by the full faith and credit of the United States of America,
maturing in not more than one year from the date such investment is made,
(ii) certificates of deposit having a final maturity of not more than one
year after the date of issuance thereof of a Participant or of any other
commercial bank incorporated under the laws of the United States of America
or any state thereof or the District of Columbia, which bank is a member of
the Federal Reserve System and has a combined capital and surplus of not less
than $500,000,000 and with a senior unsecured debt credit rating of at least
"A" by Moody's Investors Service, Inc. and "A" by Standard & Poor's Ratings
Group, (iii) commercial paper of companies, banks, trust companies or
national banking associations (in each case excluding Lessee and its
Affiliates) incorporated or doing business under the laws of the United
States or one of the States thereof, in each case having a remaining term
until maturity of not more than 180 days from the date such investment is
made and rated at least "P-1" by Moody's Investors Service, Inc. or at least
"A-1" by Standard & Poor's Ratings Group, (iv) repurchase agreements maturing
within one year with any financial institution having combined capital and
surplus of not less than $500,000,000 with any of the obligations described
in CLAUSES (I) through (III) as collateral so long as title to the underlying
obligations pass to Agent and such underlying securities shall be segregated
in a custodial or trust account for the benefit of Agent, and (v) money
market funds which invest solely in the investments described in CLAUSES (I)
and (IV) including any such funds advised, managed or sponsored by the
Certificate Trustee or an affiliate.
"PERMITTED LIENS" shall mean: (a) the respective rights and interests of
Lessee, the Participants, Agent and Certificate Trustee, as provided in the
Operative Documents, (b) Lessor Liens, (c) Liens for Taxes either not yet due
or being contested in good faith and by appropriate proceedings diligently
conducted and in any event constituting a Permitted Contest, so long as: (i)
no Lease Event of Default shall have occurred and be continuing, (ii) such
proceedings shall not involve any meaningful risk of the sale, forfeiture or
loss of any part of the Leased Property, the Trust Estate, title thereto or
any interest therein and shall not interfere with the use or disposition of
the Leased Property, the Trust Estate or the payment of Rent, and (iii) any
reserve or other appropriate provision required by GAAP shall have been made
in respect of the Lien, (d) materialmen's, mechanics', workers', repairmen's,
employees' or other like Liens arising in the ordinary course of business for
amounts either not yet due or being contested in good faith and by
appropriate proceedings and which in the aggregate do not exceed $50,000 so
long as: (i) no Lease Event of Default shall have occurred and be continuing,
(ii) such proceedings shall not involve any meaningful risk of the sale,
forfeiture or loss of any part of the Leased Property, the Trust Estate,
title thereto or any interest therein and shall not interfere with the use or
disposition of the Leased Property, the Trust Estate, or the payment of Rent,
and (iii) any reserve or other appropriate provision required by GAAP shall
have been made in respect of the Lien, (e) Liens arising after the Advance
Date
App. 1-15
<PAGE>
out of judgments or awards not otherwise constituting a Lease Event of
Default under clause (i) of Article XVI of the Lease and with respect to
which at the time an appeal or proceeding for review is being prosecuted in
good faith and either have been bonded to the satisfaction of Lessor and the
Required Participants or the enforcement of such Lien has been stayed pending
such appeal or revew, and (f) Permitted Exceptions.
"PERSON" shall mean an individual, corporation, partnership, joint
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization or Authority.
"PLAN" shall mean at any time an employee pension benefit plan (other
than a Multiemployer Plan) which is covered by Title IV of ERISA or subject
to the minimum funding standards under Section 412 of the Code and either (i)
is maintained, or contributed to, by any member of the ERISA Group or (ii)
has at any time within the preceding five years been maintained, or
contributed to, by any Person which was at such time a member of the ERISA
Group for employees of any Person which was at such time a member of the
ERISA Group.
"PREQUALIFIED TRANSFEREE" shall mean any financial institutions or
institutions approved of in writing by Lessee prior to the Advance Date.
"PROHIBITED TRANSACTION" shall mean a transaction that is prohibited
under Code Section 4975 or ERISA Section 406 and not exempt under Code
Section 4975 or ERISA Section 408.
"PURCHASE AMOUNT" shall mean, as of any date of determination, (a) the
Lease Balance, PLUS (b) all accrued but unpaid Rent, PLUS (c) all other sums
then due and payable under the Operative Documents by Lessee or any of its
Affiliates, including the Break Funding Amount and any other amounts due and
owing pursuant to Article VII of the Participation Agreement.
"PURCHASE OPTION" shall have the meaning provided in Section 20.1(b) of
the Lease.
"PURCHASE PRICE" shall mean the aggregate cash amounts to be paid to
Sellers, the aggregate cash paid in respect of repayment of loans secured by
liens on the Leased Property, and the aggregate cash paid in respect of
other consideration delivered to Sellers to acquire all of the Leased
Property pursuant to the Acquisition Documents, as follows: $7,206,886.98 to
the seller under the Transcontinental Acquisition Agreement, $5,949,070.05 to
the lender holding a first priority lien on the property to be purchased and
sold under the Transcontinental Acquisition Agreement to pay off the loan
secured by such lien plus $1,324.53 for each day after August 31, 1998 until
such loan repayment occurs, $200,000.00 to Lessee to reimburse Lessee for its
good faith deposit under the Transcontinental Acquisition Agreement,
$356,250.00 to Lessee to reimburse Lessee for its good faith deposit in the
escrow established under the Montpelier Acquisition Agreement, and
$3,139,811.84 to the lender holding a first priority lien on the property to
be purchased and sold under the Montpelier Acquisition Agreement to pay off
the loan secured by such lien plus $800.38 for each day after August 31, 1998
until such loan repayment occurs.
"RATE DETERMINATION DATE" shall mean with respect to any Payment Period,
the date which is two (2) Business Days prior to the Payment Date of the
Payment Period immediately preceding such Payment Period.
"REFERENCE RATE" shall mean the rate of interest most recently announced
by UBOC in the United States from time to time as its "reference rate" or
corporate base rate for calculating interest on certain loans, which need not
be the lowest interest rate charged by UBOC.
App. 1-16
<PAGE>
"REGULATIONS" shall mean the income tax regulations promulgated from
time to time under and pursuant to the Code.
"RELATED PERSON" shall mean any Affiliate of Lessee, or any officer,
employee, director or shareholder of Lessee or any Affiliate, or a relative of
any of the foregoing.
"RELEASE" shall mean the release, deposit, disposal or leak of any
Hazardous Material into or upon or under any land or water or air, or otherwise
into the environment, including by means of burial, disposal, discharge,
emission, injection, spillage, leakage, seepage, leaching, dumping, pumping,
pouring, escaping, emptying, placement and the like.
"RENEWAL TERM" shall mean the additional five-year period of the term of
the Lease, commencing, if the Extension Option Request is approved by the
Participants in accordance with Section 2.14 of the Participation Agreement and
a Renewal Option is exercised in accordance with Section 20.1 of the Lease, on
the fifth anniversary of the Advance Date and ending on the day preceding the
tenth anniversary of the Advance Date.
"RENT" shall mean Basic Rent and Supplemental Rent, collectively.
"REPLACEMENT PARTICIPANT" shall have the meaning provided at Section
2.14(b) of the Participation Agreement.
"REPORTABLE EVENT" shall mean a "reportable event" described in Section
4043(b) of ERISA and the regulations thereunder.
"REQUIRED CERTIFICATE PURCHASERS" shall mean, as of any date of
determination, Certificate Purchasers having unpaid Certificate Amounts equal to
at least sixty-six and two-thirds percent (66-2/3%) of the aggregate unpaid
Certificate Amounts.
"REQUIRED LENDERS" shall mean, as of the date of the determination,
Lenders having aggregate investments in the Overall Transaction (as measured by
the outstanding principal amount of the Loans then outstanding) equal to at
least sixty-six and two-thirds percent (66-2/3%)of all such investments.
"REQUIRED PARTICIPANTS" shall mean, as of the date of the determination,
Lenders (and, so long as no Loan Event of Default not arising from a Lease Event
of Default shall have occurred and be continuing, Certificate Purchasers) having
aggregate investments in the Overall Transaction (as measured by the outstanding
principal amount of the Notes then outstanding and, so long as no Loan Event of
Default not arising from a Lease Event of Default shall have occurred and be
continuing, the Certificate Amounts then outstanding) equal to at least
sixty-six and two-thirds percent (66-2/3%) of the aggregate total of all such
investments.
"RESPONSIBLE OFFICER" of any Person shall mean the Chairman or Vice
Chairman of the Board of Directors, the Chairman or Vice Chairman of the
Executive Committee of the Board of Directors, the President, any Senior Vice
President or Executive Vice President, any Vice President, any Assistant Vice
President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant
Treasurer or Comptroller.
"SALE OPTION" shall have the meaning provided in Section 20.1(c) of the
Lease.
App. 1-17
<PAGE>
"SALE PROCEEDS" shall mean the gross sale proceeds from a sale of all of
the Leased Property pursuant to Article XXI of the Lease.
"SALE RECOURSE AMOUNT" shall mean, as of any date of determination, the
product obtained by multiplying: (i) the aggregate sum of the amounts Funded by
the Participants on the Advance Date by (ii) the Improvements Percentage, and by
(iii) seventy-five percent (75%).
"SEC" shall mean the United States Securities and Exchange Commission.
"SECURITIES" shall mean common and preferred stock, partnership units
and participations, certificates of equity contribution, notes, bonds,
debentures, surplus debentures or notes, trust receipts and other obligations,
instruments or evidences of indebtedness, including debt instruments of public
and private issuers and tax-exempt securities (including warrants, rights, put
and call options and other options relating thereto or any combination thereof),
guarantees of indebtedness, chooses in action, other property or interests
commonly regarded as securities or any form of interest or participation therein
(whether certificated or uncertificated) or any instruments convertible into any
of the foregoing. Except where otherwise expressly indicated, references to
"Securities of" any Person or such Person's Securities shall mean Securities
issued by such Person.
"SECURITIES ACT" shall mean the Securities Act of 1933.
"SECURITIES EXCHANGE ACT" shall mean the Securities Exchange Act of
1934.
"SELLERS" shall mean (a) Transcontinental Chesapeake Corporation, with
respect to the property commonly known as the Chesapeake Ridge Business Park,
San Diego, California, 92123, and (b) Montpelier Pacific, Inc., with respect to
the property commonly known as 9404 Chesapeake Drive, San Diego, California,
92123.
"SETTLEMENT ACTIONS" shall have the meaning provided in Section 6.2 of
the Trust Agreement.
"SIGNIFICANT CASUALTY" shall mean a Casualty that in the reasonable,
good faith judgment of the Required Participants: (i) renders the Leased
Property unsuitable for continued use as a property of the type of the Leased
Property immediately prior to such Condemnation, or (ii) is so substantial in
nature that restoration of the related property to substantially its condition
as it existed immediately prior to such Casualty would be impracticable or
impossible.
"SIGNIFICANT CONDEMNATION" shall mean (a) a Condemnation that involves a
taking of the Lessor's entire title to the Leased Property, or (b) a
Condemnation that in the reasonable, good faith judgment of the Required
Participants (i) renders the Leased Property unsuitable for continued use a
property of the type of the Leased Property immediately prior to such
Condemnation, or (ii) is so substantial in nature that restoration of the
related property to substantially its condition as it existed immediately prior
to such Condemnation would be impracticable or impossible.
"SITES" or "SITE" shall mean the Land and Improvements constituting: (a)
that certain real property commonly known as 5788 Roscoe Court, San Diego,
California 92123, together with the Improvements located thereon, (b) that
certain real property commonly known as 5785
App. 1-18
<PAGE>
Roscoe Court Drive, San Diego, California 92123, together with the
Improvements located thereon, (c) that certain real property commonly known
as 5775 Roscoe Court, San Diego, California 92123, together with the
Improvements located thereon, and (d) that certain real property commonly
known as 9404 Chesapeake Drive, San Diego, California 92123, together with
the Improvements located thereon, all of which are more particularly
described on Exhibit A to the Lease.
"STOCK" shall mean all shares, options, interests or other equivalents
(howsoever designated) of or in a corporation, whether voting or non-voting,
including common stock, warrants, preferred stock, convertible debentures and
all agreements, instruments and documents convertible, in whole or in part,
into any one or more of all of the foregoing. Except where otherwise expressly
indicated, references to "Stock of" any Person or such Person's Stock shall mean
Stock issued by such Person.
"SUBLEASE" shall have the meaning provided at Section 3.1(o) of the
Participation Agreement.
"SUBSIDIARY" shall mean for any Person any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions are at the time directly or indirectly owned by such Person. Unless
otherwise specified, "SUBSIDIARY" means a Subsidiary of Lessee.
"SUPPLEMENTAL RENT" shall mean any and all amounts, liabilities and
obligations other than Basic Rent which Lessee assumes or agrees or is otherwise
obligated to pay under the Lease or any other Operative Document (whether or not
designated as Supplemental Rent) to Certificate Trustee, Agent, any Participant,
or any other Person, including Purchase Amount, Break Funding Amounts,
Additional Costs, indemnities and damages for breach of any covenants,
representations, warranties or agreements.
"TANGIBLE NET WORTH" shall mean net worth, as defined under GAAP,
decreased by patents, licenses, trademarks, trade names, goodwill and other
similar intangible assets, organizational expenses, and monies due from
affiliates (including officers, shareholders and directors), all in accordance
with GAAP.
"TAXES" and "TAX" shall mean any and all fees (including documentation,
recording, license and registration fees), taxes (including income (whether net,
gross or adjusted gross), gross receipts, sales, rental, use, turnover,
value-added, property, excise and stamp taxes), levies, imposts, duties,
charges, assessments or withholdings of any nature whatsoever, together with any
penalties, fines or interest thereon or additions thereto.
"TERMINATION DATE" shall have the meaning provided at Sections 14.2 and
17.1(d) of the Lease.
"TERMINATION NOTICE" shall have the meaning provided at Section 14.1 of
the Lease.
"TITLE INSURANCE COMPANY" shall mean Chicago Title Insurance Company and
its successors and assigns.
App. 1-19
<PAGE>
"TITLE POLICIES" shall have the meaning provided at Section 3.1(l) of
the Participation Agreement.
"TRANSACTION COSTS" shall mean (a) transaction costs and expenses
incurred by Arranger, Certificate Trustee and Agent in connection with the
consummation of the transactions described in the Operative Documents, and the
preparation, negotiation, execution and delivery of the Operative Documents,
including: (1) the reasonable fees, expenses and disbursements of Mayer, Brown &
Platt, document counsel; (2) the allocated costs (including allocated internal
costs) of internal counsel to Arranger; (3) costs of title insurance; (4) the
initial and ongoing fees and reasonable expenses of Certificate Trustee, Agent
and their special counsel; (5) all appraisal fees and reasonable expenses; (6)
all recording and filing fees incurred in connection with the filing of the
Deeds, the Lease Supplements, the Deed of Trust, all financing statements and
any other documents, including fees and expenses of the Title Insurance Company;
(7) costs (including allocated internal costs) and expenses for the review of
the environmental condition of the Leased Property;(8) all costs and expenses of
each company engaged to survey the Leased Property; (9) all real estate broker's
fees arising from the purchase of the Leased Property, and (10) all transfer
taxes arising from the purchase of the Leased Property.
"TRUST" shall mean the trust created by the Trust Agreement.
"TRUST AGREEMENT" shall mean the Trust Agreement, dated as of even date
with the Lease, between Certificate Trustee and the Certificate Purchasers,
substantially in the form of Exhibit F to the Participation Agreement.
"TRUSTEE" shall have the meaning provided in Section 17.1(j) of the
Lease.
"TRUST ESTATE" shall mean all estate, right, title and interest of
Certificate Trustee in, to and under the Leased Property, the Lease Collateral,
the Trust Agreement, the Lease, and all of the other Operative Documents,
including (i) all amounts (other than Excluded Amounts) of Rent and other
payments due or to become due of any kind for or with respect to the Leased
Property or payable under any of the foregoing, (ii) any or all payments or
proceeds received by Certificate Trustee after the termination of the Lease with
respect to the Leased Property as the result of the sale, lease or other
disposition thereof and (iii) proceeds of the investments in the Certificates
together with any other moneys, proceeds or property at any time received by
Certificate Trustee under or in connection with the Operative Documents.
"UBOC" shall mean Union Bank of California, a national banking
association, and its successors and assigns.
"UCC" shall mean the Uniform Commercial Code of California or any other
applicable jurisdiction.
"UNFUNDED LIABILITIES" shall mean, with respect to any Plan, at any
time, the amount, if any, by which (i) the value of all benefit liabilities
under such Plan, determined on a plan termination basis using the assumptions
prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the
fair market value of all such Plan assets allocable to such liabilities under
Title IV of ERISA (excluding any accrued but unpaid contributions), all
determined as of the then most recent valuation date for such Plan, but only to
the extent that such excess
App. 1-20
<PAGE>
represents a potential liability of a member of the ERISA Group to the PBGC
or any other Person under Title IV of ERISA.
"YIELD" shall mean with respect to each Payment Period (a) the Yield
Rate for such Payment Period multiplied by (b) the aggregate Certificate Amounts
outstanding.
"YIELD RATE" shall mean, with respect to each Payment Period, the
applicable rate at which Yield shall accrue and be payable from time to time on
the Certificates, which rate shall be the rate per annum equal to the sum of (i)
the Interest Rate for such Payment Period plus (ii) an additional 100 basis
points.
"5775 ROSCOE SITE" shall mean the Site commonly known as 5775 Roscoe
Court, San Diego, California and included within the real property legally
described on Exhibit A to the Lease.
App. 1-21
<PAGE>
- -------------------------------------------------------------------------------
MASTER LEASE
(REMEC, Inc. Trust 1998-A)
dated as of August 25, 1998
between
UNION BANK OF CALIFORNIA, N.A.,
not in its individual capacity, but solely as Certificate Trustee and as Lessor,
and
REMEC, INC.,
as Lessee
- -------------------------------------------------------------------------------
Lease Financing of Real Estate
Located in San Diego, California
- -------------------------------------------------------------------------------
This Lease (which includes two Lease Supplements) is encumbered by a lien in
favor of Union Bank of California, as Agent (the "AGENT") under a Loan Agreement
dated as of August 18, 1998 among Lessor, the Lenders, and Agent, as amended or
supplemented from time to time. This Lease has been executed in several
counterparts. To the extent, if any, that this Lease constitutes chattel paper
(as such term is defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction), no lien on this Lease may be created through the
transfer or possession of any counterpart other than the original counterpart
containing the receipt therefor executed by Agent on the signature page hereof.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I DEFINITIONS; INTERPRETATION; FULL RECOURSE ............... 1
ARTICLE II LEASE OF LEASED PROPERTY; TERM ........................... 1
2.1 Acceptance and Lease of Leased Property .................. 1
2.2 Acceptance Procedure for Leased Property ................. 2
2.3 Term ..................................................... 2
2.4 Title .................................................... 2
ARTICLE III OTHER PROPERTY ........................................... 2
ARTICLE IV RENT ..................................................... 3
4.1 Basic Rent ............................................... 3
4.2 Supplemental Rent ........................................ 3
4.3 Method and Amount of Payment ............................. 3
4.4 Late Payment ............................................. 3
ARTICLE V NET LEASE ................................................ 4
ARTICLE VI UTILITY CHARGES .......................................... 5
ARTICLE VII CONDITION OF LEASED PROPERTY ............................. 5
ARTICLE VIII NON-INTERFERENCE ......................................... 6
8.1 Non-Interference ......................................... 6
8.2 Certain Duties and Responsibilities of Lessor ............ 6
ARTICLE IX MAINTENANCE AND REPAIR; ALTERATIONS AND ADDITIONS ........ 7
9.1 Maintenance and Repair; Compliance With Law............... 7
9.2 Improvements and Alterations to Leased Property .......... 7
9.3 Title to Alterations ..................................... 9
9.4 Maintenance and Repair Reports ........................... 9
9.5 Permitted Contests ....................................... 9
9.6 Warranty of Title ........................................ 10
9.7 Inspection ............................................... 10
9.8 Reports .................................................. 10
9.9 Liens .................................................... 11
ARTICLE X USE ...................................................... 11
ARTICLE XI INSURANCE ................................................ 11
11.1 Required Coverages ....................................... 11
11.2 Delivery of Insurance Certificates ....................... 13
ARTICLE XII ASSIGNMENT AND SUBLEASING ................................ 13
12.1 Assignment by Lessee ..................................... 13
12.2 Subletting ............................................... 13
ARTICLE XIII CASUALTY AND CONDEMNATION; ENVIRONMENTAL MATTERS ......... 14
13.1 Event of Loss; Condemnation or Casualty .................. 14
13.2 Application of Payments Relating to an Event of Loss ..... 14
13.3 Application of Certain Payments Relating to a Condemnation 15
13.4 Casualty ................................................. 15
13.5 Negotiations ............................................. 15
13.6 Environmental Matters .................................... 16
13.7 Notice of Environmental Matters .......................... 16
ARTICLE XIV [Intentionally Left Blank] ............................... 16
i
<PAGE>
ARTICLE XV OWNERSHIP, GRANT OF LIEN AND FURTHER ASSURANCES .......... 17
15.1 Grant of Lien and Security Interest....................... 17
15.2 Attorney-in-Fact ......................................... 17
ARTICLE XVI LEASE EVENTS OF DEFAULT .................................. 18
ARTICLE XVII ENFORCEMENT .............................................. 21
17.1 Remedies ................................................. 21
17.2 Proceeds of Sale; Deficiency ............................. 24
17.3 Deed of Trust Remedies ................................... 24
17.4 Remedies Cumulative; No Waiver; Consents.................. 25
ARTICLE XVIII RIGHT TO PERFORM FOR LESSEE 25
ARTICLE XIX EARLY TERMINATION OPTION AND OBLIGATION TO PURCHASE ...... 26
19.1 Early Termination Option ................................. 26
19.2 Required Purchase ........................................ 26
ARTICLE XX END OF TERM OPTIONS ...................................... 26
20.1 End of Term Options ...................................... 26
20.2 Election of Options ...................................... 27
ARTICLE XXI SALE OPTION .............................................. 27
21.1 Sale Option Procedures ................................... 27
21.3 Application of Net Sale Proceeds and Recourse Payments ... 29
21.4 Appraisal ................................................ 30
ARTICLE XXII MISCELLANEOUS ............................................ 30
22.1 Binding Effect; Successors and Assigns; Survival ......... 30
22.2 Severability ............................................. 30
22.3 Notices .................................................. 30
22.4 Amendment; Complete Agreements ........................... 30
22.5 Headings ................................................. 31
22.6 GOVERNING LAW ............................................ 31
22.7 Discharge of Lessee's Obligations by its Affiliates ...... 31
22.8 Liability of Lessor Limited .............................. 31
22.9 Estoppel Certificates .................................... 32
22.10 No Joint Venture ......................................... 32
22.11 No Accord and Satisfaction ............................... 32
22.12 No Merger ................................................ 32
22.13. Successor Lessor ......................................... 33
22.14. Survival ................................................. 33
22.15. Transfer of Leased Property .............................. 33
22.16. Enforcement of Certain Warranties ........................ 34
22.17. Security Interest in Funds ............................... 34
22.18. Recording of Deed of Trust and Memorandum of Lease ....... 34
22.19. Nature of Transaction .................................... 35
</TABLE>
Exhibit A - Legal Description of the Leased Property
Exhibit B-1 - Form of Land Supplement
Exhibit B-2 - Form of Improvements Supplement
ii
<PAGE>
MASTER LEASE
This MASTER LEASE dated as of August 25, 1998 (including all Lease
Supplements from time to time executed and delivered, this "LEASE"), between
UNION BANK OF CALIFORNIA, N.A., not in its individual capacity, but solely as
Certificate Trustee, as Lessor, and REMEC, INC., a California corporation, as
Lessee.
W I T N E S S E T H:
A. Lessor will, subject to the terms and conditions of the
Participation Agreement, purchase the Leased Property (legally described in
EXHIBIT A) on the Advance Date.
B. Lessor desires to lease to Lessee, and Lessee desires to lease
from Lessor, the Leased Property.
NOW, THEREFORE, in consideration of the foregoing, and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS; INTERPRETATION; FULL RECOURSE
For all purposes hereof, the capitalized terms used herein and not
otherwise defined shall have the meanings assigned thereto in Appendix 1 to
that certain Participation Agreement dated as of even date herewith, among
Lessee, Lessor, Agent and the Participants identified therein (the
"PARTICIPATION AGREEMENT"). The rules of interpretation set forth in such
APPENDIX 1 shall also apply to this Lease. All obligations imposed on the
"Lessee" in this Lease shall be the full recourse liability of Lessee;
subject to the limitation on such recourse set forth in SECTION 21.3.
ARTICLE II
LEASE OF LEASED PROPERTY; TERM
2.1. ACCEPTANCE AND LEASE OF LEASED PROPERTY. On the Advance Date,
Lessor, subject to the satisfaction or waiver of the conditions set forth in
Article III of the Participation Agreement, hereby agrees to accept delivery
on such date of fee title to the Leased Property pursuant to the terms of the
Participation Agreement and the Lease Supplements and simultaneously to lease
to Lessee for the Lease Term, Lessor's interest in the Leased Property
together with Lessor's interest in any Alterations which thereafter may be
constructed thereon pursuant to this Lease, and Lessee hereby agrees to lease
commencing on the Advance Date from Lessor for the Lease Term, Lessor's
interest in the Leased Property together with Lessor's interest in any
Alterations which thereafter may be constructed thereon pursuant to this
Lease and the Operative Documents.
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2.2. ACCEPTANCE PROCEDURE FOR LEASED PROPERTY. Lessor hereby authorizes
one or more employees of Lessee, to be designated by Lessee, as the
authorized representative or representatives of Lessor to accept delivery on
behalf of Lessor of fee title to the Leased Property. Lessee hereby agrees
that such acceptance of delivery by such authorized representative or
representatives on the Advance Date and the execution and delivery by Lessee
of the Lease Supplements (in the form of EXHIBITS B-1 and B-2, appropriately
completed) with respect to the Leased Property shall, without further act,
constitute the irrevocable acceptance by Lessee of the Leased Property for
all purposes of this Lease and the other Operative Documents on the terms set
forth therein and herein.
2.3. TERM. The term of this Lease (the "LEASE TERM") shall begin on
the Advance Date and shall end on the date (such date, the "LEASE EXPIRATION
DATE") which is the earlier of: (i) the day preceding the fifth (5th)
anniversary of the Advance Date or, if the Lease Term is renewed in
accordance with ARTICLE XX hereof, the day preceding the tenth (10th)
anniversary of the Advance Date, (ii) the date on which this Lease is
terminated in accordance with the provisions hereof, or (iii) the Final
Maturity Date.
2.4. TITLE. The Leased Property is leased to Lessee without any
representation or warranty, express or implied, by Lessor, Agent, Arranger or
any Participant and subject to the rights of parties in possession, the
existing state of title (including the Permitted Exceptions), and all
Applicable Laws. Lessee shall not have any recourse against Lessor for any
defect in or exception to title to the Leased Property other than resulting
from Lessor Liens.
ARTICLE III
OTHER PROPERTY
Lessee may from time to time own or hold under lease from Persons other
than Lessor, furniture, trade fixtures, equipment and other tangible personal
property (including software) located on or about the Leased Property and
which personal property is not subject to this Lease. Lessor acknowledges
Lessee's right to finance and to secure under the UCC inventory, furnishings,
furniture, equipment, machinery, leasehold improvements and other personal
property located at the Leased Property so long as such UCC filings are not
recorded against the Leased Property and by their terms specifically exclude
any interest in the Leased Property. Lessor shall from time to time, upon
the reasonable request, and at the sole cost and expense of Lessee, which
request shall be accompanied by such supporting information and documents as
Lessor may reasonably require, promptly acknowledge in writing to Lessee or
other Persons that the particular items of furniture, trade fixtures and
equipment in question and which are located on the Leased Property are not
part of the Leased Property and that, subject to the rights of Lessor under
any other Operative Documents, Lessor does not own or have any other right or
interest in or to such furniture, trade fixtures and equipment. Lessor
agrees to execute as reasonably requested by Lessee in writing and at the
sole cost of Lessee, such waiver forms and releases from Lessor Liens (which
shall contain customary indemnities for the benefit of Lessor and other
protections including the right to treat such property as abandoned if not
timely removed by Lessee) in favor of any purchase money seller, lessor or
lender which has financed or is in the process of consummating such financing
of such personal property items.
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ARTICLE IV
RENT
4.1. BASIC RENT. Lessee shall pay to Lessor Basic Rent: (i) on each
Payment Date, (ii) on any date required under SECTIONS 14.1 or 20.1 or
ARTICLE XIX, and (iii) on any date on which this Lease terminates or upon
demand following a Lease Event of Default pursuant to SECTION 17.1.
4.2. SUPPLEMENTAL RENT. Lessee shall pay to Lessor (or if to a
Non-Party to such Person as shall be entitled thereto as expressly provided
herein or in any other Operative Document, and Lessor hereby directs Lessee,
on behalf of Lessor, to so pay any such Non-Party), any and all Supplemental
Rent promptly as the same shall become due and payable and, upon any failure
on the part of Lessee to pay any Supplemental Rent, Lessor shall have all
rights, powers and remedies provided for herein or by law or in equity or
otherwise in the case of nonpayment of Basic Rent. Lessee hereby reaffirms
that its obligation to pay Supplemental Rent shall include (i) the payment of
any and all Additional Costs, and (ii) all amounts determined to be due and
payable or otherwise subject to distribution pursuant to Article III of the
Loan Agreement in accordance with its terms. The expiration or other
termination of Lessee's obligations to pay Basic Rent hereunder shall not
limit or modify the obligations of Lessee with respect to Supplemental Rent.
Unless expressly provided otherwise in this Lease, upon any failure on the
part of Lessee to pay and discharge any Supplemental Rent as and when due,
Lessee shall also promptly pay and discharge any fine, penalty, interest or
cost which may be assessed or added under any agreement with a third party
for nonpayment or late payment of such Supplemental Rent, all of which shall
also constitute Supplemental Rent.
4.3. METHOD AND AMOUNT OF PAYMENT. Basic Rent and Supplemental Rent
due any Party shall be paid by a wire transfer to Lessor at such place as
Lessor shall specify in writing to Lessee pursuant to Schedule II to the
Participation Agreement or Section 9.3 of the Participation Agreement;
PROVIDED, HOWEVER, that, so long as the Notes remain outstanding, Lessor
directs Lessee to pay Rent directly to the Agent. In lieu of such wire
transfer of Basic Rent and Supplemental Rent, Lessee may, subject to the
Required Participant's approval, provide for payment of such installments of
Basic Rent and Supplemental Rent by internal transfers of funds from accounts
maintained by Lessee with Agent into an account maintained by Agent for the
receipt of Basic Rent and Supplemental Rent hereunder. Each payment of Basic
Rent due any Party shall be made by Lessee prior to 1:00 p.m. Los Angeles,
California time (and payments made after such time shall be deemed to have
been made on the next day) at the place of payment in funds consisting of
lawful currency of the United States of America which shall be immediately
available on the scheduled date when such payment shall be due. Supplemental
Rent due any Non-Party shall be paid as provided in the Operative Documents,
or if no specific requirement is set forth in the Operative Documents, as
required by such Non-Party, but in any event before the delinquency date for
such payment.
4.4. LATE PAYMENT. If any Basic Rent shall not be paid when due,
Lessee shall pay to Lessor, or if any Supplemental Rent payable to a Party,
or any Indemnitee is not paid when due, Lessee shall pay to such Person as
shall be entitled thereto, in each case as Supplemental
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Rent, interest at the Overdue Rate (to the maximum extent permitted by
Applicable Laws) on such overdue amount from and including the due date
thereof (without regard to any applicable grace period) to but excluding the
Business Day of payment thereof.
ARTICLE V
NET LEASE
This Lease shall constitute a net lease and, notwithstanding any other
provision of this Lease, it is intended that Basic Rent, Supplemental Rent,
the Lease Balance and all other amounts due and payable under the Operative
Documents shall be paid without counterclaim, setoff, deduction or defense of
any kind and without abatement, suspension, deferment, diminution or
reduction of any kind, and Lessee's obligation to pay all such amounts
throughout the Lease Term is absolute and unconditional. The obligations and
liabilities of Lessee hereunder shall in no way be released, discharged or
otherwise affected for any reason, including, to the maximum extent permitted
by Applicable Laws: (a) any defect in the condition, merchantability, design,
construction, quality or fitness for use of any portion of the Leased
Property, or any failure of the Leased Property to comply with all Applicable
Laws, including any inability to occupy or use the Leased Property by reason
of such non-compliance; (b) any damage to, abandonment, loss, contamination
of or Release from or destruction of or any requisition or taking of the
Leased Property or any part thereof, including eviction; (c) any restriction,
prevention or curtailment of or interference with any use of the Leased
Property or any part thereof, including eviction; (d) any defect in title to
or rights to the Leased Property or any Lien on such title or rights or on
the Leased Property; (e) any change, waiver, extension, indulgence or other
action or omission or breach in respect of any obligation or liability of or
by Any Party; (f) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceedings relating to
Lessee, any Party or any other Person, or any action taken with respect to
this Lease by any trustee or receiver of Lessee, any Party or any other
Person, or by any court, in any such proceeding; (g) any claim that Lessee
has or might have against any Person, including Lessor or any other Party;
(h) any failure on the part of Lessor to perform or comply with any of the
terms of this Lease, any other Operative Document or of any other agreement
whether or not related to the Overall Transaction; (i) any invalidity or
unenforceability or disaffirmance against or by Lessee of this Lease or any
provision hereof or any of the other Operative Documents or any provision of
any thereof; (j) the impossibility of performance by Lessee, Lessor or both;
(k) any action by any court, administrative agency or other Authority; any
restriction, prevention or curtailment of or any interference with any use of
the Leased Property or any part thereof; (l) the failure of Lessee to achieve
any accounting or tax benefits or the characterization of the transaction
intended by SECTION 22.19 of this Lease and Section 2.7 of the Participation
Agreement; or (m) any other occurrence whatsoever, whether similar or
dissimilar to the foregoing, whether or not Lessee shall have notice or
knowledge of any of the foregoing. Except as specifically set forth in
ARTICLE XIV, ARTICLE XIX or SECTION 20.1, this Lease shall be non-terminable
and noncancellable by Lessee for any reason whatsoever, and Lessee, to the
extent permitted by Applicable Laws, waives all rights now or hereafter
conferred by statute or otherwise to quit, terminate or surrender this Lease,
or to any diminution, abatement or reduction of Rent payable by Lessee
hereunder. If for any reason whatsoever this Lease shall be terminated in
whole or in part by operation of law or otherwise,
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except as expressly provided in ARTICLE XIV, Lessee shall, unless prohibited
by Applicable Laws, nonetheless pay to Lessor (or, in the case of
Supplemental Rent due to any Non-Party, to such Person as shall be entitled
thereto) an amount equal to each Rent payment (including the Lease Balance or
any other amount due and payable under any Operative Documents) at the time
and in the manner that such payment would have become due and payable under
the terms of this Lease if it had not been terminated in whole or in part.
Each payment of Rent and any payment of the Lease Balance made by Lessee
hereunder shall be final and, absent manifest error in the computation of the
amount thereof, Lessee shall not seek or have any right to recover all or any
part of such payment from any Party or any other party to any agreements
related thereto for any reason whatsoever. Lessee assumes the sole
responsibility for the condition, use, operation, maintenance, and management
of the Leased Property and Lessor shall have no responsibility in respect
thereof and shall have no liability for damage to the property of Lessee or
any subtenant of Lessee on any account or for any reason whatsoever other
than by reason of Lessor's willful misconduct or gross negligence or
negligence in the handling of funds; PROVIDED, HOWEVER, any liability of
Lessor with respect to any such willful misconduct or gross negligence or
negligence in the handling of funds shall not limit or affect Lessee's
absolute obligations as set forth in this ARTICLE V. Without affecting
Lessee's obligation to pay Basic Rent, Supplemental Rent, the Lease Balance
and all other amounts due and payable under the Operative Documents, or to
perform its obligations under the Operative Documents, Lessee may seek
damages or any other remedy at law or equity against Lessor for a breach by
Lessor of its obligations under this Lease or the Participation Agreement.
ARTICLE VI
UTILITY CHARGES
Lessee shall pay or cause to be paid all charges for electricity, power,
gas, oil, water, telephone, sanitary sewer service and all other rents and
utilities used in or on the Leased Property during the Lease Term. Lessee
shall be entitled to receive any credit or refund with respect to any utility
charge paid by Lessee and the amount of any credit or refund received by
Lessor on account of any utility charges paid by Lessee, net of the costs and
expenses reasonably incurred by Lessor in obtaining such credit or refund,
shall be promptly paid over to Lessee. All charges for utilities imposed
with respect to the Leased Property for a billing period during which this
Lease expires or terminates (except pursuant to ARTICLE XIX SECTION 20.1(b)
hereof, in which case Lessee shall be solely responsible for all such
charges) shall be adjusted and prorated on a daily basis between Lessee and
any purchaser of the Leased Property, and each party shall pay or reimburse
the other for each party's pro rata share thereof; PROVIDED, that Lessor
shall not have any liability therefor.
ARTICLE VII
CONDITION OF LEASED PROPERTY
LESSEE ACKNOWLEDGES AND AGREES THAT, ALTHOUGH LESSOR WILL OWN AND HOLD
RECORD TITLE TO THE LEASED PROPERTY, LESSEE IS SOLELY
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RESPONSIBLE FOR THE LEASED PROPERTY AND ANY ALTERATIONS. The Leased Property
is let by Lessor "AS IS" in its present condition, subject to (a) any rights
of any parties in possession thereof, (b) the state of the title thereto
existing at the time Lessor acquired its interest in the Leased Property, (c)
any state of facts which an accurate survey or physical inspection might show
(including any survey delivered on or prior to the Advance Date), (d) all
Applicable Laws, and (e) any violations of Applicable Laws which may exist at
the commencement of the Lease Term. Lessee has examined the Leased Property
and (insofar as Lessor is concerned) has found the same to be satisfactory.
NONE OF LESSOR, AGENT, ARRANGER NOR ANY PARTICIPANT HAS MADE OR SHALL BE
DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR
SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE TO THE
LEASED PROPERTY OR TO THE VALUE, MERCHANTABILITY, HABITABILITY, CONDITION, OR
FITNESS FOR USE OF THE LEASED PROPERTY, OR ANY PART THEREOF, OR ANY OTHER
REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO
THE LEASED PROPERTY, OR ANY PART THEREOF, AND NONE OF LESSOR, AGENT, ARRANGER
NOR ANY PARTICIPANT SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT
THEREIN OR THE FAILURE OF THE LEASED PROPERTY, OR ANY PART THEREOF, TO COMPLY
WITH ANY APPLICABLE LAWS, except that Lessor hereby represents and warrants
that the Leased Property, is and shall be free of Lessor Liens. Lessee has
been afforded full opportunity to inspect the Leased Property, is satisfied
with the results of its inspections and is entering into this Lease solely on
the basis of the results of its own inspections, and all risks incident to
the matters discussed in the preceding sentence, as between Lessor, Agent,
Arranger and the Participants, on the one hand, and Lessee, on the other, are
to be borne by Lesse. The provisions of this ARTICLE VII have been
negotiated, and, except to the extent otherwise expressly stated, the
foregoing provisions are intended to be a complete exclusion and negation of
any representations or warranties by any of Lessor, Agent, Arranger or the
Participants, express or implied, with respect to the Leased Property (or any
interest therein), that may arise pursuant to any law now or hereafter in
effect or otherwise.
ARTICLE VIII
NON-INTERFERENCE
8.1. NON-INTERFERENCE. Except as provided for at ARTICLE XVIII and so
long as no Lease Event of Default has occurred and is continuing, Lessor
covenants that it will not interfere in Lessee's or any of its permitted
subtenants' use of the Leased Property in accordance with this Lease during
the Lease Term; it being agreed that Lessee's remedies for breach of the
foregoing covenant shall be limited to a claim for damages or the
commencement of proceedings to enjoin such breach. Such right is independent
of and shall not affect Lessee's obligations hereunder and under the other
Operative Documents or Lessor's or any other Person's rights otherwise to
initiate legal action to enforce the obligations of Lessee under this Lease.
8.2. CERTAIN DUTIES AND RESPONSIBILITIES OF LESSOR. Lessor undertakes
to perform such duties and only such duties as are specifically set forth
herein and in the other Operative
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Documents, and no implied covenants or obligations shall be read into this
Lease against Lessor, and Lessor agrees that it shall not, nor shall it have
a duty to, manage, control, use, sell, maintain, insure, register, lease,
operate, modify, dispose of or otherwise deal with the Leased Property or any
other part of the Trust Estate in any manner whatsoever, except as required
by the terms of the Operative Documents and as otherwise provided herein.
ARTICLE IX
MAINTENANCE AND REPAIR; ALTERATIONS AND ADDITIONS
9.1. MAINTENANCE AND REPAIR; COMPLIANCE WITH LAW. Lessee, at its own
expense, shall at all times (a) maintain the Leased Property in at least its
current condition, subject to ordinary wear and tear, and in any event at
least as good as the condition of similar buildings owned or leased by Lessee
or its Affiliates and in good repair and condition and free from nuisance;
(b) except to the extent SECTION 9.5 shall apply, maintain, manage and
monitor the Leased Property in accordance with all Applicable Laws and
Regulations, whether or not such maintenance requires structural
modifications; (c) comply with the Insurance Requirements which are in effect
at any time with respect to the Leased Property or any part thereof; (d)
maintain, manage and monitor the Leased Property in accordance with all
applicable contracts, including service contracts and insurance contracts;
(e) conduct all scheduled maintenance of the Leased Property in conformity
with maintenance and repair guidelines comparable to guidelines of Lessee or
its Affiliates for similar properties owned by Lessee and/or its Affiliates;
(f) use the buildings located on the Land only as administrative, marketing,
research, and development and manufacturing buildings and cause the Leased
Property to have at all times the capacity and functional ability to be used,
on a continuing basis and in commercial operation, as administrative,
marketing, research, and development and manufacturing buildings; (g) make
all necessary or appropriate repairs, replacements and renewals of the Leased
Property or any part thereof which may be required to keep the Leased
Property in the condition required by the preceding CLAUSES (a) through (f),
whether interior or exterior, structural or nonstructural, ordinary or
extraordinary, foreseen or unforeseen, and including, without limitation,
repairs, replacements and renewals that would constitute capital expenditures
under GAAP if incurred by an owner of property; and (h) procure, maintain and
comply in all material respects with all material licenses, permits, orders,
approvals, consents and other authorizations required for the construction,
use, maintenance and operation of the Leased Property and for the use,
operation, maintenance, repair and restoration of the Improvements. Lessee
waives any right that it may now have or hereafter acquire to (x) require
Lessor to maintain, repair, replace, alter, remove or rebuild all or any part
of the Leased Property or (y) make repairs at the expense of Lessor pursuant
to any Applicable Laws and Regulations or other agreements.
9.2. IMPROVEMENTS AND ALTERATIONS TO LEASED PROPERTY.
(a) (i) Lessee, at Lessee's own cost and expense, shall make
alterations, improvements and additions to the Leased Property and/or any
part thereof and substitutions and replacements therefor (collectively,
"ALTERATIONS") which are: (A) necessary to repair or maintain the Leased
Property in the condition required by SECTION 9.1; (B) necessary in order for
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the Leased Property to be in compliance with Applicable Laws; or (C)
necessary to restore the Leased Property to its condition existing prior to a
Casualty or Condemnation to the extent required pursuant to ARTICLE XIII; and
(ii) so long as no Lease Event of Default or Lease Default has occurred and
is continuing, Lessee, at Lessee's own cost and expense, may undertake
Alterations on the Leased Property so long as such Alterations comply with
Applicable Laws and with SECTION 9.1 and SUBSECTION (B) of this SECTION 9.2.
(b) The making of any Alterations must be in compliance with the
following requirements:
(i) No such Alterations with a cost exceeding $500,000
shall be made or undertaken except upon not less than thirty
days' prior written notice to Lessor.
(ii) Lessee shall not make any Alterations in violation of
the terms of any restriction, easement, condition or covenant or
other matter affecting title to the Leased Property.
(iii) No Alterations shall be undertaken until Lessee shall
have procured and paid for, so far as the same may be required
from time to time, all permits and authorizations relating to
such Alterations of all municipal and other Authorities having
jurisdiction over the Leased Property. Lessor, at Lessee's
expense, shall join in the application for any such permit or
authorization and execute and deliver any document in connection
therewith, whenever such joinder is necessary or advisable.
(iv) The Alterations shall be expeditiously completed in a
good and workmanlike manner and in compliance with all Applicable
Laws and Regulations then in effect and the standards imposed by
any insurance policies required to be maintained hereunder.
(v) All Alterations shall, when completed, be of such a
character as to not materially adversely affect the fair market
value, utility, remaining economic useful life or residual value
of the Leased Property from their fair market value, utility,
remaining economic useful life or residual value immediately
prior to the making thereof or, in the case of Alterations being
made by virtue of a Casualty or Condemnation, immediately prior
to the occurrence of such Casualty or Condemnation. If requested
by Required Participants, Lessor may engage an appraiser of
nationally recognized standing, at Lessee's sole cost and
expense, to determine (by appraisal methods satisfactory to the
Required Participants) the projected Fair Market Value of the
Leased Property following completion of the Alterations relating
thereto.
(vi) Lessee shall have made adequate arrangements for
payment of the cost of all Alterations when due so that the
Leased Property shall at all times be free of Liens for labor and
materials supplied or claimed to have been supplied to the Leased
Property, other than Permitted Liens; PROVIDED, that Lessee shall
have the right to engage in Permitted Contests in accordance with
SECTION 9.5.
(vii) The Alterations must be located solely on the Land.
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9.3. TITLE TO ALTERATIONS. Title to the following described
Alterations shall without further act vest in Lessor and shall be deemed to
constitute a part of the Leased Property and be subject to this Lease:
(a) Alterations that are Nonseverable; and
(b) Alterations that are required to be made pursuant to the
terms of SECTION 9.1 or 9.2(a)(i) hereof.
(c) Alterations that are in replacement of or in substitution
for a portion of any Improvements existing on the date of this Lease.
Lessee, at Lessor's request, shall execute and deliver any deeds, bills
of sale, assignments or other documents of conveyance reasonably necessary to
evidence the vesting of title in and to such Alterations to Lessor.
If such Alterations are not within any of the categories set forth in
CLAUSES (a),(b) and (c) of this SECTION 9.3, then title to such Alterations
shall vest in Lessee and such Alterations shall not be deemed to be
Alterations which are part of the Leased Property.
All Alterations to which Lessee shall have title may, so long as removal
thereof shall not result in the violation of any Applicable Laws and no Lease
Event of Default or Lease Default is continuing, be removed at any time by
Lessee. Lessee agrees to notify Lessor in writing at least 30 days before it
removes any Alterations and Lessee shall at its expense repair any damage to
the Leased Property caused by the removal of such Alterations. Lessor (or
the purchaser of the Leased Property) may purchase from Lessee Alterations
(if not already owned by Lessor) which Lessee notifies Lessor that Lessee
intends to remove from the Leased Property prior to the return of the Leased
Property to Lessor or sale of the Leased Property, which purchase shall be at
the fair market value of such Alterations as determined by the Appraiser at
the time of such purchase. Title to any Alterations shall vest in Lessor (or
the purchaser of the applicable Leased Property) if not removed from the
Leased Property by Lessee prior to the return of the Leased Property to
Lessor or sale of the Leased Property.
9.4. MAINTENANCE AND REPAIR REPORTS. Lessee shall keep reports in
sufficient detail, and as customary for owners of commercial real estate, to
indicate the nature and date of major work done. Such reports shall be made
available at Lessee's office to Lessor upon reasonable request. Lessee shall
give notice to Lessor of any Condemnation or Casualty, the cost to repair
which is reasonably expected by Lessee to exceed $500,000, promptly after
Lessee has knowledge thereof.
9.5. PERMITTED CONTESTS. If, to the extent and for so long as: (a)
Lessee prosecutes a Permitted Contest for review of any Applicable Laws or
any Governmental Action relating to the Leased Property or to the operation
or maintenance thereof, or (b) compliance with such Applicable Laws or such
Governmental Action shall have been excused or exempted by a valid
nonconforming use permit, waiver, extension or forbearance, Lessee shall not
be required to comply with such Applicable Laws or such Governmental Action
but only if and so long as such test, challenge, appeal, proceeding or
noncompliance shall in the reasonable opinion of Lessor,
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acting at the direction of the Required Participants, constitute a Permitted
Contest. Lessor will not be required to join in any Permitted Contest
pursuant to this SECTION 9.5 unless a provision of any Applicable Laws
requires, or, in the good faith opinion of Lessee, it is helpful to Lessee,
that such proceedings be brought by or in the name of Lessor; and in that
event, Lessor will join in the proceedings or permit them or any part thereof
to be brought in its name if and so long as no Lease Event of Default is
continuing and Lessee pays all related out-of-pocket expenses and reasonable
allocated internal costs of Lessor and provides to Lessor adequate
indemnification.
9.6. WARRANTY OF TITLE.
(a) Lessee agrees that, except as otherwise provided herein and
subject to the terms of SECTION 9.5 relating to Permitted Contests, Lessee
shall not directly or indirectly create or allow to remain, and shall
promptly discharge at its sole cost and expense, any Lien, defect,
attachment, levy, title retention agreement or claim upon the Leased Property
or any Alterations to the Leased Property, or any Lien, attachment, levy or
claim with respect to the Rent or with respect to any amounts held by Agent
pursuant to the Loan Agreement or the other Loan Documents, other than
Permitted Liens and Lessor Liens.
(b) Nothing contained in this Lease shall be construed as
constituting the consent or request of Lessor, expressed or implied, to or
for the performance by any contractor, mechanic, laborer, materialman,
supplier or vendor of any labor or services or for the furnishing of any
materials for any construction, alteration, addition, repair or demolition of
or to any of the Leased Property or any part thereof.
9.7. INSPECTION. Upon five (5) Business Days prior notice to Lessee,
Lessor or its authorized representatives (the "INSPECTING PARTIES") may
inspect (a) the Leased Property and (b) the books and records of Lessee
relating to the Leased Property and make copies and abstracts therefrom. All
such inspections shall be at the expense of the Inspecting Parties, except
that if a Lease Event of Default or Lease Default has occurred and is
continuing, Lessee shall reimburse the Inspecting Parties for the reasonable
costs of such inspections. Lessee shall furnish to the Inspecting Parties
statements accurate in all material respects regarding the condition and
state of repair of the Leased Property, at such times and as may be
reasonably requested. No inspection shall unreasonably interfere with
Lessee's operations or the operations of any permitted sublessee of the
Leased Property. None of the Inspecting Parties shall have any duty to make
any such inspection or inquiry. None of the Inspecting Parties shall incur
any liability or obligation by reason of making any such inspection or
inquiry unless and solely to the extent such Inspecting Party causes damage
to the Leased Property or any property of Lessee or any other Person during
the course of such inspection, and then only to the extent of the actual cost
to repair such damage.
9.8. REPORTS. To the extent permissible under Applicable Laws, Lessee
shall prepare and file in timely fashion, or, where Lessor shall be required
to file, Lessee shall prepare and make available to Lessor within a
reasonable time prior to the date for filing and Lessor shall file, any
reports with respect to the condition or operation of the Leased Property
that shall be required to be filed with any Authority.
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9.9. LIENS. Lessee will not directly or indirectly create, incur,
assume or suffer to exist any Lien (other than Permitted Liens) on or with
respect to (i) any of the Leased Property or any portion of thereof,
Lessor's title thereto, or any interest therein, or (ii) this Lease or any of
Lessor's, Agent's, or any Participant's interest in all or any portion of the
Leased Property, their respective interests in this Lease or the Overall
Transaction. Lessee, at its own expense, will promptly pay, satisfy and
otherwise take such actions as may be necessary to keep this Lease free and
clear of, and duly to discharge, eliminate or bond in a manner reasonably
satisfactory to Lessor, Agent and the Required Participants, any such Lien
not accepted above if the same shall arise at any time. Lessee will notify
Lessor in writing promptly upon becoming aware of any Tax or other Lien
(other than any Permitted Lien) that shall attach to the Leased Property,
Lessor's, Agent's, or any Participant's interest in all or any portion of the
Leased Property or their respective interests in this Lease or the Overall
Transaction and the full particulars thereof.
ARTICLE X
USE
The Leased Property shall be used only as administrative, marketing,
research, and development and manufacturing buildings. Lessee shall not use
the Leased Property or any part thereof for any purpose or in any manner that
would materially adversely affect the Fair Market Value, utility, remaining
useful life or residual value of the Leased Property or that would create a
materially increased risk of environmental liability or that would violate or
conflict with, or constitute or result in a violation or default under (a)
any Applicable Laws whether now existing or hereafter in effect, foreseen or
unforeseen, except to the extent permitted by SECTION 9.5, (b) the Insurance
Requirements, or (c) any Operative Document. Lessee will cause each of its
guests and invitees acting upon the Leased Property to exercise reasonable
care and prudence. Lessee shall pay, or cause to be paid, all charges and
costs required in connection with the use of the Leased Property as
contemplated by this Lease and the Participation Agreement. Lessee shall
not, and shall not permit any other Person to, use or develop the Leased
Property or any portion thereof for residential uses. Lessee shall not
commit or permit any waste of the Leased Property or any part thereof or take
any act or fail to take any act which would cause or permit a nuisance to
exist or occur upon the Leased Property.
ARTICLE XI
INSURANCE
11.1. REQUIRED COVERAGES. Lessee will keep insured all property
of a character usually insured by corporations engaged in the same or
similar business similarly situated against loss or damage of the kinds
and in the amounts customarily insured against by such corporations, and
carry such other insurance as is usually carried by such corporations;
PROVIDED, that in any event Lessee will maintain:
(a) COMPREHENSIVE GENERAL LIABILITY INSURANCE. Combined single
limit insurance against claims for third-party bodily injury, including death
and third-party property
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damage occurring on, in or about the Leased Property (including adjoining
streets and sidewalks) at least equal to $1,000,000 per occurrence and a
minimum of $5,000,000 excess of such coverage. Such coverage may be subject
to deductibles or self-insured retentions up to an amount that is customarily
carried by a company of similar size and engaged in business similar to
Lessee and shall be otherwise acceptable to the Required Participants.
(b) PROPERTY INSURANCE. Insurance against loss or damage
covering the Improvements or any portion thereof by reason of any Peril (as
defined below) in an amount (subject to such deductibles in such minimum
amounts as is carried by corporations owning and/or operating similar
properties) otherwise acceptable to the Required Participants; PROVIDED,
HOWEVER, that at no time shall the amount of such coverage be less than the
replacement cost of the Improvements, including any costs that may be
required to cause the Improvements to be reconstructed to then current
Applicable Laws. The term "PERIL" shall mean, collectively, fire, lightning,
flood (to the extent required by law), windstorm, hail, explosion, vandalism
and malicious mischief, damage from aircraft, vehicles and smoke and all
other perils covered by the "all risk endorsement" then in use in the State
of California. Alternatively, at Lessee's election, such insurance shall be
on a coverage form reasonably available in the commercial insurance market at
the time of the most recent policy reviewed.
(c) WORKERS' COMPENSATION INSURANCE. Lessee shall, in the
construction of any Alterations and the operation of the Leased Property,
comply with the Applicable Laws regarding workers' compensation and protect
each Party against any liability under such Applicable Laws arising out of
injury to employees of Lessee or its construction contractors. Lessee is not
hereby obligated to insure or indemnify against such liability as described
in this SECTION 11.1(c) for injury to employees of any Party.
(d) GENERAL REQUIREMENTS. Such insurance shall be written by
reputable insurance companies that are financially sound and solvent and
otherwise reasonably appropriate considering the amount and type of insurance
being provided by such companies. Any insurance company selected by Lessee
shall be rated in A.M. Best's Insurance Guide or any successor thereto (or if
there be none, an organization having a similar national reputation) and
shall have a general policyholder rating of "A" (or comparable rating for a
rating by an organization other than A.M. Best) and a financial rating of at
least "X" (or comparable rating for a rating by an organization other than
A.M. Best) or be otherwise acceptable to the Required Participants. In the
case of liability insurance maintained by Lessee, it shall name Lessor (both
in its individual capacity and as trustee), Agent, and each of the
Participants, as additional insureds and, in the case of property insurance
maintained by Lessee, it shall name Agent, as mortgagee and loss payee. The
insurance coverages required under this Section may be obtained under one or
more blanket policies covering Lessee and its Subsidiaries and/or covering
properties of Lessee and its Subsidiaries in addition to the Leased Property
and may be provided by a combination of primary insurance policies and excess
liability ("umbrella") insurance policies otherwise in compliance with this
SECTION 11.1. Each policy referred to in this SECTION 11.1 shall provide
that: (i) it will not be canceled, materially modified or its limits
reduced, or allowed to lapse without renewal, except after not less than 30
days' prior written notice to Lessor; (ii) the interests of the Parties shall
not be invalidated by any act or negligence of or breach of warranty or
representation by Lessee or any Person having an interest in the Leased
Property; (iii) such insurance is primary with respect to any other insurance
carried by or
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available to any Party; (iv) the insurer shall waive any right of
subrogation, setoff, counterclaim, or other deduction, whether by attachment
or otherwise, against Lessor; and (v) such policy shall contain a
cross-liability clause providing for coverage of each Party, as if separate
policies had been issued to each of them. Lessee will notify Lessor promptly
of any policy cancellation, reduction in policy limits, modification or
amendment.
11.2. DELIVERY OF INSURANCE CERTIFICATES. On or before the Advance
Date, Lessee shall deliver to Lessor certificates of insurance satisfactory
to Lessor evidencing the existence of all insurance required to be maintained
hereunder and setting forth the respective coverages, limits of liability,
carrier, policy number and period of coverage. Thereafter, throughout the
Lease Term, at the time each of Lessee's insurance policies is renewed (but
in no event less frequently than once each year on or before December 31 of
each year) or upon written request by Lessor following a Lease Event of
Default, Lessee shall deliver to Lessor certificates of insurance evidencing
that all insurance required by SECTION 11.1 to be maintained by Lessee with
respect to the Leased Property is in effect.
ARTICLE XII
ASSIGNMENT AND SUBLEASING
12.1. ASSIGNMENT BY LESSEE. Lessee may not assign this Lease or any of
its rights or transfer or delegate any of its obligations hereunder in whole
or in part to any Person, except that Lessee may sublease any of the Leased
Property or any portion thereof as permitted under SECTION 12.2.
12.2. SUBLETTING. Lessee may not assign, mortgage or pledge to any
Person, including an Affiliate of Lessee, at any time, in whole or in
part, any of its right, title or interest in, to or under this Lease or
any portion of the Leased Property and any such assignment, mortgage or
pledge shall be void. Lessee may from time to time, sublease, in whole
or in part, any of its right, title or interest in, to or under this
Lease or any portion of the Leased Property (including the Existing
Lease) to any Person and extend, modify or renew any sublease without
the approval of Lessor or Agent; PROVIDED, HOWEVER, that: (a) no
sublease or other relinquishment of possession of the Leased Property
shall in any way discharge or diminish any of Lessee's obligations to
Lessor hereunder, nor release or discharge, in whole or in part, Lessee
from any such obligations, and Lessee shall remain directly and
primarily liable under this Lease as to the Leased Property, or portion
thereof, so sublet; (b) each sublease shall expressly be made subject to
and subordinate to this Lease and to the rights of Lessor hereunder; (c)
each sublease shall expressly provide for the surrender of the
applicable Leased Property or portion thereof by the applicable
sublessee at the election of the Required Participants or Lessor (as
applicable) after the occurrence of a Lease Event of Default or upon the
expiration or termination of this Lease; (d) each sublease provides for
a fair market lease term and a fair market rental rate as of the date
such sublease was executed, and (e) Lessee pledges its entire interest
in any such Sublease, including the right to receive rent or other
payments thereunder, to lessor pursuant to SECTION 15.1.. With respect
to any sublease permitted under this ARTICLE XII, Lessee shall not
sublease any portion of the Leased Property to, or permit the sublease
of any portion of the Leased Property to, or permit the sublease of any
portion of the Leased
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Property by, any Person (a) who, to the knowledge of any Responsible
Officer of Lessee with operational responsibility, after reasonable
inquiry, shall then be in default with respect to the payments of money
under any instrument evidencing indebtedness or with respect to any
liability for borrowed money or for the deferred purchase price of
property if the aggregate amount of all such indebtedness, liabilities
and purchase prices under or with respect to which such Person is then
in default exceeds one-half of one percent (0.50%) of such Person's net
worth or capital and surplus, or (b) who shall then be engaged in any
proceedings for relief under any bankruptcy or insolvency law or laws
relating to the relief of debtors.
All of Lessee's right, title and interest in, to and under each sublease
is hereby pledged by Lessee to Lessor, as collateral for Lessee's obligations
under this Lease and shall be further assigned to Agent pursuant to the
Assignment of Lease and the Assignment of Subleases, and Lessee shall, at its
expense, do any further act and execute, acknowledge, deliver, file, register
and record any further documents which Agent or any Participant may
reasonably request in order to create, perfect, preserve and protect Lessor's
and Agent's security interest in such sublease. Lessee shall, within fifteen
(15) days after execution of any sublease to a Person which is not a
wholly-owned Subsidiary of Lessee, deliver to Agent a fully executed copy of
such sublease.
ARTICLE XIII
CASUALTY AND CONDEMNATION; ENVIRONMENTAL MATTERS
13.1. EVENT OF LOSS; CONDEMNATION OR CASUALTY.
(a) If a Significant Casualty or a Significant Condemnation
shall occur, Lessee shall give Lessor prompt written notice of such
occurrence and the date thereof and Lessee shall purchase the Leased Property
from Lessor on the next succeeding Payment Date after the date such
Significant Casualty or Significant Condemnation shall have occurred at a
purchase price equal to the Purchase Amount. In the case of a Significant
Condemnation which is deemed to have occurred because of a requisition which
is not scheduled to last beyond the Lease Expiration Date but which in fact
is continuing on the Lease Expiration Date, the foregoing purchase price
shall be paid on the Lease Expiration Date.
(b) Upon payment in full of all amounts payable pursuant to
SECTION 13.1(a): (i) the Lease Term shall end with respect to the Leased
Property and (ii) the obligations of Lessee hereunder with respect to the
Leased Property (other than any obligations expressed herein or any other
Operative Document as surviving termination of this Lease) shall terminate as
of the date of such payment. Lessor shall thereupon transfer its right,
title and interest in the Leased Property to Lessee in accordance with
SECTION 22.15(a).
13.2. APPLICATION OF PAYMENTS RELATING TO AN EVENT OF LOSS. All Net
Casualty/Condemnation Proceeds received at any time by Lessee from any
Authority or other Person with respect to any Significant Condemnation or
Significant Casualty shall be promptly remitted to Lessor and, upon the
purchase of the Leased Property by Lessee pursuant to SECTION 13.1(a) and the
payment by Lessee of the Purchase Amount payable by Lessee
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pursuant to SECTION 13.1(a), any such Net Casualty/Condemnation Proceeds and
property insurance proceeds remaining thereafter shall be paid over to, or
retained by, Lessee, or as Lessee may direct.
13.3. APPLICATION OF CERTAIN PAYMENTS RELATING TO A CONDEMNATION. In
case of a requisition for temporary use of all or a portion of the Leased
Property which is not a Significant Condemnation, this Lease shall remain in
full force and effect, without any abatement or reduction of Rent, and the
proceeds received from any Authority relating to a Condemnation for the
affected portion of the Leased Property shall, so long as no Lease Default or
Lease Event of Default exists, be paid to Lessee for use by Lessee to the
extent applicable to repair and restore the Leased Property to the condition
required by SECTION 9.1. Notwithstanding anything herein to the contrary, any
portion of such proceeds that is awarded with respect to the time period
after the expiration or termination of the Lease Term (unless Lessee shall
have exercised an option to purchase the Leased Property and consummated such
purchase) shall be paid to Lessor; PROVIDED, that if Lessee has paid the
Purchase Amount, such proceeds (or the portion of such proceeds in excess of
the portion thereof applied as set forth above) shall be paid over to Lessee.
13.4. CASUALTY. Upon any Casualty with respect to any portion of the
Leased Property the cost of repair of which would exceed $500,000, Lessee
shall give to Lessor written notice thereof. As soon as practicable after a
Casualty, but in any event prior to the Lease Expiration Date, Lessee shall
repair and rebuild the affected portions of the Leased Property suffering
such Casualty (or cause such affected portions to be repaired and rebuilt) to
the condition required to be maintained by SECTION 9.1 hereof; PROVIDED, that
the value and functional capability of such item as restored is at least
equivalent to the value and functional capability of such item as in effect
immediately prior to the occurrence of such Casualty. Any insurance proceeds
in excess of $500,000 received with respect to any Casualty shall be paid
over to or retained by Lessor until, subject to SECTION 14.2, Lessee repairs
and rebuilds (or causes to be repaired and rebuilt) the affected portions of
the Leased Property in accordance with the conditions set forth in this
SECTION 13.4; PROVIDED, that such proceeds may be distributed to Lessee
(subject to SECTION 22.17) from time to time in reimbursement for funds
expended by Lessee in repairing and rebuilding, subject to customary
practices and procedures for disbursements under a construction loan facility.
13.5. NEGOTIATIONS. If any part of the Leased Property becomes subject
to condemnation or requisition proceedings, Lessee shall give notice thereof
to Lessor promptly after Lessee has knowledge thereof and, to the extent
permitted by any Applicable Laws, Lessee shall control the negotiations with
the relevant Authority unless a Lease Event of Default exists, in which case
Lessor may control such negotiations; PROVIDED, that in any event Lessor may
participate at Lessor's expense (or if a Lease Event of Default exists, at
Lessee's expense) in such negotiations. In all cases, no settlement of the
amount of Condemnation and/or Casualty Proceeds will be made without Lessor's
prior written consent, not to be unreasonably withheld. At no cost to
Lessor, Lessee shall give to Lessor such information, and copies of such
documents, which relate to proceedings or negotiations to determine the
amount of Condemnation and/or Casualty Proceeds, or which relate to the
settlement of amounts due in connection with any Condemnation and/or
Casualty, and are in the possession of Lessee, as
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are reasonably requested by Lessor. Nothing contained in this SECTION 13.5
shall diminish Lessor's rights with respect to Net Casualty/Condemnation
Proceeds under SECTION 14.2.
13.6. ENVIRONMENTAL MATTERS. Promptly upon Lessee's knowledge of the
existence of an Environmental Violation with respect to the Leased Property,
Lessee shall notify Lessor in writing of such Environmental Violation. If
Lessor elects not to terminate this Lease with respect to the Leased Property
pursuant to SECTION 14.1, at Lessee's sole cost and expense, Lessee shall
promptly and diligently commence any response, clean up, remedial or other
action necessary to remove, clean up or remediate the Environmental Violation
in accordance with the terms of ARTICLE IX. Lessee shall, upon completion of
remedial action by the Lessee, cause to be prepared by an environmental
consultant reasonably acceptable to Lessor a report describing the
Environmental Violation and the actions taken by Lessee (or its agents) in
response to such Environmental Violation, and a statement by the consultant
that the Environmental Violation has been remedied in compliance in all
material respects with applicable Environmental Laws. Each such
Environmental Violation shall be remedied prior to the Lease Expiration Date
unless the Leased Property with respect to which an Environmental Violation
has occurred but has not been remedied has been purchased by Lessee in
accordance with ARTICLE XIX or SECTION 20.1(b). Nothing in this ARTICLE XIII
shall reduce or limit Lessee's obligations under Article VII of the
Participation Agreement.
13.7. NOTICE OF ENVIRONMENTAL MATTERS. Promptly, but in any event
within sixty (60) days from the date Lessee has Actual Knowledge thereof,
Lessee shall provide to Lessor written notice of any pending or threatened
claim, action or proceeding involving any Environmental Laws or any Release
on or in connection with the Leased Property. All such notices shall
describe in reasonable detail the nature of the claim, action or proceeding
and Lessee's proposed response thereto. In addition, Lessee shall provide to
Lessor, promptly following receipt, copies of all written communications with
any Authority relating to any Environmental Violation in connection with the
Leased Property. Lessee shall also promptly provide such detailed reports of
any such material environmental claims as may reasonably be requested by
Lessor or Agent. If Lessor receives written notice of any pending or
threatened claim, action or proceeding involving any Environmental Laws or
any Release on or in connection with the Leased Property, Lessor shall
promptly give notice thereof to Lessee. For purposes of this paragraph,
"ACTUAL KNOWLEDGE" of Lessee shall mean the actual knowledge of Richard
Marino, Facilities/Safety Manager, or any successor who has substantially
similar duties or who is primarily responsible for the day to day operation
of the Leased Property.
ARTICLE XIV
[Intentionally left blank]
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ARTICLE XV
OWNERSHIP, GRANT OF LIEN AND FURTHER ASSURANCES
15.1. GRANT OF LIEN AND SECURITY INTEREST. Title to the Leased Property
is held by and shall remain in Lessor, as security for the obligations of
Lessee hereunder and under each of the other Operative Documents to which it
is a party until such time as Lessee shall have fulfilled all of its
obligations hereunder and under such other Operative Documents. Lessee
hereby mortgages, grants, conveys, assigns, warrants, transfers, sets over
and pledges to Lessor for the benefit of the Participants a mortgage and Lien
against all of Lessee's right, title and interest, whether now or hereafter
existing or acquired, in the Leased Property and the other Lease Collateral
to secure the payment and performance of all obligations of Lessee now or
hereafter existing under this Lease or any other Operative Document, TO HAVE
AND TO HOLD the Lease Collateral and the rights and privileges hereby
mortgaged unto Lessor, its successors and assigns for the uses and purposes
set forth, until all the obligations hereunder and under such other Operative
Documents are paid, performed and satisfied in full. Lessee shall, at its
expense, do any further act and execute, acknowledge, deliver, file, register
and record any further documents (including the Deed of Trust) which Lessor
or Agent may reasonably request in order to protect its title to and
perfected Lien in the Leased Property and the other Lease Collateral, subject
to no Liens other than Permitted Liens, and Lessor's rights and benefits
under this Lease. Lessee shall promptly and duly execute and deliver to
Lessor such documents and assurances (including the Deed of Trust) and take
such further actions as Lessor or Agent may from time to time reasonably
request in order to carry out more effectively the intent and purpose of this
Lease and the other Operative Documents, to establish and protect the rights
and remedies created or intended to be created in favor of Lessor hereunder
and thereunder, and to establish, perfect and maintain the right, title and
interest of Lessor in and to the Leased Property and the other Lease
Collateral, subject to no Lien other than Permitted Liens, or of such Deed of
Trust, financing statements or fixture filings or other documents with
respect hereto as Lessor or Agent may from time to time reasonably request,
and Lessee agrees to execute and deliver promptly such of the foregoing Deed
of Trust, financing statements and fixture filings or other documents as may
require execution by Lessee. To the extent permitted by Applicable Laws,
Lessee hereby authorizes any such Deed of Trust, financing statements and
fixture filings to be filed without the necessity of the signature of Lessee,
and Lessor agrees to provide Lessee with copies of any such documents so
filed. Lessor shall at such time as all of the obligations of Lessee under
this Lease or any other Operative Documents have been paid or performed in
full (other than Lessee's contingent obligations, if any, under Article VII
of the Participation Agreement) execute and deliver termination statements,
cancellations of lease or memoranda, quit claim deeds and other appropriate
documentation reasonably requested by Lessee, all at Lessee's expense, to
evidence Lessor's release of its Lien against the Lease Collateral.
15.2. ATTORNEY-IN-FACT. Lessee hereby irrevocably appoints Lessor as
Lessee's attorney-in-fact, with full authority in the place and stead of
Lessee and in the name of Lessee or otherwise, from time to time in Lessor's
discretion, to execute any instrument and/or to take any action (including
any action that Lessee is entitled to take), which, in either case, Lessor
may deem necessary or advisable to accomplish the purposes of this Lease
(subject to any limitations set forth in the Operative Documents), including,
without limitation:
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(1) to ask, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for money due and to become due
under or in connection with the Leased Property and the other Lease
Collateral;
(2) to receive, endorse and collect any drafts or other
instruments, documents and chattel paper in connection with the foregoing
CLAUSE (a);
(3) to file any claim or take any action or institute any
proceedings which Lessor may deem to be necessary or advisable for the
collection thereof or to enforce compliance with the terms and conditions of
the Lease; and
(4) to perform any affirmative obligations of Lessee hereunder,
including the execution of mortgages, financing statements and other
documents.
Lessee hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this SECTION 15.2 is irrevocable and coupled with an
interest. Notwithstanding anything contained herein to the contrary, the
rights and powers presently granted Lessor by this SECTION 15.2 may be
exercised by Lessor only upon the occurrence and during the continuance of a
Lease Event of Default and the exercise of any remedy pursuant to ARTICLE
XVIII.
ARTICLE XVI
LEASE EVENTS OF DEFAULT
The occurrence of any one or more of the following events, whether any
such event shall be voluntary or involuntary or come about or be effected by
operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any administrative or
governmental body, shall constitute a "LEASE EVENT OF DEFAULT":
(a) Lessee shall fail to make any payment of (i) Base Rent
when due, (ii) any Supplemental Rent when due and such failure
shall continue for two (2) Business Days after written demand
therefor, or (iii) amounts payable pursuant to the exercise of
the Sale Option when due, or (iv) amounts payable pursuant to
ARTICLES XIV or XIX, SECTION 20.1(b) or SECTION 21.3 when due; or
(b) the failure to pay when due any amount under any
Material Indebtedness of Lessee or any of its Material
Subsidiaries; or the default or breach by Lessee or any of its
Material Subsidiaries under any agreement under which any such
Material Indebtedness was created or is governed arising with
respect to any covenant concerning the maintenance of financial
ratios or amounts of indebtedness, or restricting investments,
payments, dividends, distributions, or the incurrence of Liens;
or any Material Indebtedness of Lessee or any of its Material
Subsidiaries shall be declared to be due and payable or required
to be prepaid or repurchased (other than by a regularly scheduled
payment) prior to the stated maturity thereof; or
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(c) Lessee shall default in the performance or observance
of any term, covenant, condition or agreement on its part to be
performed or observed under SECTIONS 11.1 or 12.1 hereof or
SECTIONS 5.7 THROUGH 5.11, INCLUSIVE, 5.14, 5.16 AND 5.18 THROUGH
5.24, INCLUSIVE of the Participation Agreement; or
(d) Subject to Lessee's rights under SECTION 21.4, Lessee
shall fail to offer the Leased Property for sale in accordance
with and satisfy each of the terms, covenants, conditions and
agreements set forth at ARTICLES XX and XXI in connection with
and following its exercise of the Sale Option, including each of
Lessee's obligations at SECTIONS 21.1 and 21.2;
(e) Any representation or warranty by Lessee in any
Operative Document or in any certificate or document delivered to
any Party pursuant to any Operative Document shall have been
incorrect in any material respect when made, deemed made or
reaffirmed, as the case may be;
(f) Lessee shall fail in any material respect to timely
perform or observe any covenant, condition or agreement (not
included in any other clause of this ARTICLE XVI) to be performed
or observed by Lessee hereunder or under any other Operative
Document and such failure shall continue for a period of 30 days
(but not later than the Lease Expiration Date) after the earlier
to occur of: (i) written notice thereof from any Party, or (ii) a
Responsible Officer of Lessee has knowledge thereof, PROVIDED,
HOWEVER, in the case of a failure to comply with the requirements
of SECTION 9.1(a), (b), (d), (e), or (f) or SECTION 9.2 of this
Lease, if such failure cannot in Lessor's reasonably exercised
judgment be cured in 30 days but can in Lessor's reasonably
exercised judgment be cured in 90 days, Lessee may have an
additional 60 days in which to cure such failure provided that
Lessee begins to cure such failure within 30 days following
notice or knowledge thereof as provided above and thereafter
continues diligent efforts to cure such failure;
(g) (i) Lessee shall generally fail to pay, or admit in
writing its general inability to pay, its debts as they become
due, or shall voluntarily commence any case or proceeding or file
any petition under any bankruptcy, insolvency or similar law or
seeking dissolution, liquidation or reorganization or the
appointment of a receiver, trustee, custodian or liquidator for
itself or a substantial portion of its property, assets or
business or to effect a plan or other arrangement with its
creditors, or shall file any answer admitting the jurisdiction of
the court and the material allegations of any involuntary
petition filed against it in any bankruptcy, insolvency or
similar case or proceeding, or shall be adjudicated bankrupt, or
shall make a general assignment for the benefit or creditors, or
shall consent to, or acquiesce in the appointment of, a receiver,
trustee, custodian or liquidator for itself or a substantial
portion of its property, assets or business, or (ii) corporate
action shall be taken by Lessee for the purpose of effectuating
any of the foregoing;
(h) involuntary proceedings or an involuntary petition
shall be commenced or filed against Lessee under any bankruptcy,
insolvency or similar law or seeking the dissolution, liquidation
or reorganization of any such Person or the appointment of a
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receiver, trustee, custodian or liquidator for Lessee or of a
substantial part of the property, assets or business of any such
Person, or any writ, judgment, warrant of attachment, execution
or similar process shall be issued or levied against a
substantial part of the property, assets or business of Lessee
and such proceedings or petition shall not be dismissed, or such
writ, judgment, warrant of attachment, execution or similar
process shall not be released, vacated or fully bonded, within 60
days after commencement, filing or levy, as the case may be;
(i) any one or more judgments, writs or warrants of
attachment, executions or similar processes involving an
aggregate amount in excess of $1,000,000 (after taking into
account the actual amounts of third party insurance recoveries,
offsets and contributions received, and amounts thereof not yet
received but which the insurer thereon has acknowledged in
writing its obligation to pay, without material conditions) shall
be entered or filed against Lessee or its Subsidiaries, and all
such judgments and processes shall not be dismissed, vacated,
stayed, discharged or bonded for a period of forty-five (45)
days;
(j) any member of the ERISA Group shall fail to pay when
due an amount or amounts aggregating in excess of $1,000,000
which it shall have become liable to pay under Title IV of ERISA;
or notice of intent to terminate a Material Plan shall be filed
under Title IV of ERISA by any member of the ERISA Group, any
plan administrator or any combination of the foregoing; or the
PBGC shall institute proceedings under Title IV of ERISA to
terminate, to impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or to cause a trustee to be
appointed to administer any Material Plan; or a condition shall
exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any Material Plan must be terminated; or
there shall occur a complete or partial withdrawal from, or a
default, within the meaning of Section 4219(c)(5) of ERISA, with
respect to, one or more Multiemployer Plans which could cause one
or more members of the ERISA Group to incur a current payment
obligation in excess of $50,000,000;
(k) any Operative Document to which Lessee is a party or
the security interest and lien granted under this Lease (except
in accordance with its terms), in whole or in part, terminates,
ceases to be effective or ceases to be the legal, valid and
binding enforceable obligation of Lessee or the security interest
or lien securing Lessee's obligations under the Operative
Documents, in whole or in part, ceases to be a perfected first
priority security interest and lien, in each case unless due to
any act or failure to act on the part of Lessor or Agent or
Lessee or any of its affiliates shall directly or indirectly
contest the effectiveness, validity, binding nature or
enforceability of any Operative Document or any Lien granted
under any Operative Document; or
(l) a Change of Control occurs.
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MASTER LEASE
ARTICLE XVII
ENFORCEMENT
17.1. REMEDIES. Upon the occurrence of any Lease Event of Default and the
declaration thereof (but a Lease Event of Default shall be automatically deemed
to occur, and no declaration thereof shall be required, upon the occurrence of a
Lease Event of Default pursuant to CLAUSE (g) or (h) of ARTICLE XVI), the Lease
Balance due hereunder without further act shall be accelerated and be deemed to
be due and payable hereunder, and at any time thereafter, the Lessor may, and so
long as such Lease Event of Default is continuing, do one or more of the
following as Lessor in its sole discretion shall determine, without limiting any
other right or remedy Lessor may have on account of such Lease Event of Default.
(a) By notice to Lessee, Lessor may terminate Lessee's
right to possession of the Leased Property subject to Lessee's
right to purchase the Leased Property under SECTION 19.1 of this
Lease; PROVIDED, HOWEVER (i) no reletting, reentry or taking of
possession of the Leased Property (or any portion thereof) by
Lessor will be construed as an election on Lessor's part to
terminate this Lease unless a written notice of such intention is
given to Lessee, (ii) notwithstanding any reletting, reentry or
taking of possession, Lessor may at any time thereafter elect to
terminate this Lease for a continuing Lease Event of Default and
(iii) no act or thing done by Lessor or any of its agents,
representatives or employees and no agreement accepting a
surrender of the Leased Property shall be valid unless the same
be made in writing and executed by Lessor. A notice given in
connection with unlawful detainer proceedings specifying a time
within which to cure a default shall terminate Lessee's right to
possession if Lessee fails to cure the default within the time
specified in the notice. Upon termination of Lessee's right to
possession and without further demand or notice, Lessee shall
surrender possession and vacate the Leased Property and deliver
possession thereof, and Lessor may re-enter the Leased Property
and remove any persons in possession thereof. Upon such
termination of Lessee's right to possession, the Lease shall
terminate and Lessor may recover from Lessee:
(i) The worth at the time of award of the unpaid Rent
under the Lease (including Basic Rent, the Purchase Amount
and all other Supplemental Rent) which had been earned at
the time of termination;
(ii) The worth at the time of award of the amount by
which the unpaid Rent under the Lease (including Basic Rent,
the Purchase Amount and all other Supplemental Rent) which
would have been earned after termination until the time of
award exceeds the amount of such rental loss that Lessee
proves could have been reasonably avoided;
(iii) The worth at the time of award of the amount by
which the unpaid Rent (including Basic Rent, the Purchase
Amount and all other Supplemental Rent) for the balance of
the Term after the time of award exceeds the amount of such
rental loss that Lessee proves could be reasonably avoided;
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(iv) Any other amount necessary to compensate Lessor
for all the detriment proximately caused by Lessee's failure
to perform Lessee's obligation under the Lease or which in
the ordinary course of things would be likely to result
therefrom, including the costs and expenses (including
reasonable attorneys' fees, advertising costs and brokers'
commissions) of recovering possession of the Leased
Property, removing persons or property therefrom, placing
the Leased Property in good order, condition, and repair,
preparing and altering the Leased Property for reletting,
and all other costs and expenses of reletting; and
(v) Such other amounts in addition to or in lieu of
the foregoing as may be permitted from time to time by
applicable California law.
The "worth at the time of award" of the amounts referred to in
clauses (i) and (ii) above, is computed by allowing interest at
the Overdue Rate. The "worth at the time of award" of the amount
referred to in clause (iii) above is computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%);
(b) Subject to Lessee's right to purchase pursuant to
SECTION 19.1, as more fully set forth in each Lease Supplement,
Lessor may sell all or any portion of the Leased Properties at
public or private sale, as Lessor maydetermine;
(c) Lessor may, at its option, elect not to terminate this
Lease with respect to the Leased Property and continue to collect
all Basic Rent, Supplemental Rent, and all other amounts due to
Lessor (together with all costs of collection) and enforce
Lessee's obligations under this Lease as and when the same become
due, or are to be performed, and at the option of Lessor, upon
any abandonment of the Leased Property by Lessee or re-entry of
same by Lessor, Lessor may enforce, by suit or otherwise, all
other covenants and conditions hereof to be performed or complied
with by Lessee hereunder and to exercise all other remedies
permitted by Section 1951.4 of the California Civil Code or any
amendments thereof or any successor laws which replace such
Section 1951.4;
(d) Unless all of the Leased Property has been sold in its
entirety, Lessor may, whether or not Lessor shall have exercised
or shall thereafter at any time exercise any of its rights under
CLAUSE (b), (c) or (d) of this SECTION 17.1 with respect to the
Leased Property or any portion thereof, demand, by written notice
to Lessee specifying a date (a "TERMINATION DATE") not earlier
than five (5) days after the date of such notice, that Lessee
purchase, on such Termination Date for a price equal to the
Purchase Amount, the Leased Property subject to this Lease, in
accordance with the provisions of SECTION 19.2;
(e) Lessor may exercise any other right or remedy that may
be available to it under Applicable Laws, including any and all
rights or remedies under any other Operative Document, or proceed
by appropriate court action (legal or equitable) to enforce the
terms hereof or to recover damages for the breach hereof.
Separate suits may be brought to collect any such damages for any
period(s), and such suits shall not
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in any manner prejudice Lessor's right to collect any such
damages for any subsequent period(s), or Lessor may defer any
such suit until after the expiration of the Lease Term, in which
event such suit shall be deemed not to have accrued until the
expiration of the Lease Term;
(f) Lessor may retain and apply against the Lease Balance
or any other amounts payable under the Operative Documents all
sums which Lessor would, absent such Lease Event of Default, be
required to pay to, or turn over to, Lessee pursuant to the terms
of this Lease; or
(g) If a Lease Event of Default shall have occurred
and be continuing, Lessor, to the extent permitted by Applicable
Laws, as a matter of right and with notice to Lessee, shall have
the right to apply to any court having jurisdiction to appoint a
receiver or receivers of the Leased Property or any portion
thereof, and Lessee hereby irrevocably consents to any such
appointment. Any such receiver(s) shall have all of the usual
powers and duties of receivers in like or similar cases and all
of the powers and duties of Lessor in case of entry, and shall
continue as such and exercise such powers until the date of
confirmation of the sale of such Property unless such
receivership is sooner terminated.
(h) To the maximum extent permitted by Applicable Laws,
Lessee hereby waives the benefit of any appraisement, valuation,
stay, extension, reinstatement and redemption laws now or
hereafter in force and all rights of marshaling upon any sale of
the Leased Property, any portion thereof or any interest therein.
(i) Lessor shall be entitled to enforce payment of the
indebtedness and performance of the obligations secured hereby
and to exercise all rights and powers under this instrument or
under any of the other Operative Documents or other agreement or
any Applicable Laws now or hereafter in force, notwithstanding
some or all of the obligations secured hereby may now or
hereafter be otherwise secured, whether by mortgage, security
agreement, pledge, lien, assignment or otherwise. Neither the
acceptance of this instrument nor its enforcement, shall
prejudice or in any manner affect Lessor's right to realize upon
or enforce any other security now or hereafter held by Lessor, it
being agreed that Lessor shall be entitled to enforce this
instrument and any other security now or hereafter held by Lessor
in such order and manner as Lessor may determine in its absolute
discretion. No remedy herein conferred upon or reserved to
Lessor is intended to be exclusive of any other remedy herein or
by law provided or permitted, but each shall be cumulative and
shall be in addition to every other remedy given hereunder or now
or hereafter existing at law or in equity or by statute. Every
power or remedy given by any of the Operative Documents to Lessor
or to which Lessor may otherwise be entitled, may be exercised,
concurrently or independently, from time to time and as often as
may be deemed expedient by Lessor. In no event shall Lessor, in
the exercise of the remedies provided in this Lease (including in
connection with the assignment of rents to Lessor, or the
appointment of a receiver and the entry of such receiver onto the
Leased Property or any portion thereof), be deemed a "mortgagee
in possession", and the Lessor shall not in any way be made
liable for any act, either of commission or omission, in
connection with the exercise of such remedies, except for
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the exercise of the remedies set forth SECTIONS 17.1(c) and
(j), within thirty (30) days after the declaration of the
occurrence of a Lease Event of Default in contravention of
Lessee's purchase right set forth in SECTION 19.1.
(j) FORECLOSURE; POWER OF SALE. Lessee hereby grants to
Chicago Title Company, as trustee (together with all successor
trustees, the "TRUSTEE"), IN TRUST for the benefit of Lessor as
security for the obligations hereunder A SECURITY INTEREST AND
LIEN against the Leased Property WITH POWER OF SALE, and that,
upon the occurrence of any Lease Event of Default, Lessor shall
have the power and authority, to the extent provided by
Applicable Laws, after proper notice and lapse of such time as
may be required by Applicable Laws, to cause the Trustee to sell
the Leased Property, or any portion thereof, at the time and
place of sale fixed by Lessor in said notice of sale, either as a
whole, or in separate lots or parcels or items and in such order
as Lessor may elect, at auction to the highest bidder for cash in
lawful money of the United States payable at the time of sale;
accordingly, it is acknowledged that A POWER OF SALE HAS BEEN
GRANTED IN THIS INSTRUMENT; A POWER OF SALE MAY ALLOW LESSOR TO
TAKE THE APPLICABLE LEASED PROPERTY AND SELL IT WITHOUT GOING TO
COURT IN A FORECLOSURE ACTION UPON DEFAULT BY LESSEE UNDER THIS
INSTRUMENT, and (ii) upon the occurrence of a Lease Event of
Default, Lessor, in lieu of or in addition to exercising any
power of sale hereinabove given, may proceed by a suit or suits
in equity or at law, whether for a foreclosure hereunder, or for
the sale of the Leased Property, or against Lessee on a recourse
basis for the Lease Balance and all accrued and unpaid interest
on the Loans, all accrued and unpaid Yield on the Certificate
Amounts, and all other amounts owing by Lessee under the
Operative Documents with respect to such Leased Property, or for
the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted,
or for the appointment of a receiver pending any foreclosure
hereunder or the sale of the Leased Property, or for the
enforcement of any other appropriate legal or equitable remedy.
Lessee acknowledges and agrees that upon the declaration of a Lease Event of
Default the amount due and owing by it to Lessor hereunder shall be the Lease
Balance and that to the maximum extent permitted by Applicable Laws, Lessee
waives any right to contest the Lease Balance as the liquidated sum due upon
acceleration of this Lease.
17.2. PROCEEDS OF SALE; DEFICIENCY. All payments received and amounts
held or realized by Lessor at any time when a Lease Event of Default shall
exist and after the Lease Balance shall have been accelerated pursuant to
this ARTICLE XVII as well as all payments or amounts then held or thereafter
received by Lessor and the proceeds of sale pursuant to SECTION 17.1(j) or
pursuant to either Lease Supplement shall be distributed forthwith upon
receipt by Lessor in accordance with Article III of the Loan Agreement.
17.3. DEED OF TRUST REMEDIES. Without limiting any other remedies set
forth in this Lease, Lessor and Lessee agree that upon the occurrence of a
Lease Event of Default (irrespective of whether a Loan Event of Default has
occurred or is occurring), Lessor and Agent shall have all the rights and may
pursue any of the remedies provided to Agent in the Deed of
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Trust, the terms and provisions of which Deed of Trust are incorporated
herein by this reference.
17.4. REMEDIES CUMULATIVE; NO WAIVER; CONSENTS. To the extent
permitted by, and subject to the mandatory requirements of, Applicable Laws,
each and every right, power and remedy herein specifically given to Lessor or
otherwise in this Lease shall be cumulative and shall be in addition to every
other right, power and remedy herein specifically given or now or hereafter
existing at law, in equity or by statute, and each and every right, power and
remedy whether specifically herein given or otherwise existing may be
exercised from time to time and as often and in such order as may be deemed
expedient by Lessor, and the exercise or the beginning of the exercise of any
power or remedy shall not be construed to be a waiver of the right to
exercise at the same time or thereafter any other right, power or remedy.
Without limiting the foregoing, Lessee acknowledges that Lessor may proceed
against all or any part of the Leased Property in exercising any remedies in
respect of real property or personal property, or both. No delay or omission
by Lessor in the exercise of any right, power or remedy or in the pursuit of
any remedy shall impair any such right, power or remedy or be construed to be
a waiver of any default on the part of Lessee or be an acquiescence therein.
Lessor's consent to any request made by Lessee shall not be deemed to
constitute or preclude the necessity for obtaining Lessor's consent, in the
future, to all similar requests. No express or implied waiver by Lessor of
any Lease Event of Default shall in any way be, or be construed to be, a
waiver of any future or subsequent Lease Default or Lease Event of Default.
To the extent permitted by Applicable Laws and subject to the provisions of
SECTION 17.1, Lessee hereby waives any rights now or hereafter conferred by
statute or otherwise that may require Lessor to sell, lease or otherwise use
the Leased Property, the other Lease Collateral or any part thereof in
mitigation of Lessor's damages upon the occurrence of a Lease Event of
Default or that may otherwise limit or modify any of Lessor's rights or
remedies under this ARTICLE XVII.
ARTICLE XVIII
RIGHT TO PERFORM FOR LESSEE
If Lessee shall fail to perform or comply with any of its agreements
contained herein and in Lessor's reasonably exercised judgment Lessee is not
acting diligently and appropriately to perform or comply with such agreements,
Lessor may, but shall not be obligated to, on five (5) Business Days' prior
notice to Lessee (except that in the case of an Emergency, Lessee shall permit
Lessor so to perform or comply on less than five (5) Business Days' notice
unless Lessee has a good faith reason not to permit Lessor to do so), perform or
comply with such agreement, and Lessor shall not thereby be deemed to have
waived any default caused by such failure, and the amount of such payment and
the amount of the out-of-pocket and reasonably allocated internal expenses of
Lessor (including reasonable attorneys' fees and expenses) incurred in
connection with such payment or the performance of or compliance with such
agreement, as the case may be, together with interest thereon at the Overdue
Rate, shall be deemed Supplemental Rent, payable by Lessee to Lessor upon
demand.
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ARTICLE XIX
EARLY TERMINATION OPTION AND OBLIGATION TO PURCHASE
19.1. EARLY TERMINATION OPTION. Without limitation of Lessee's purchase
obligation pursuant to SECTION 19.2, on any Business Day, Lessee may, at its
option, purchase all of the Leased Property (the "EARLY TERMINATION OPTION") at
a price equal to the Purchase Amount; Lessee's right to purchase all the Leased
Property pursuant to this SECTION 19.1 shall terminate automatically upon: (i)
occurrence of a Lease Event of Default pursuant to CLAUSES (g) or (h) of ARTICLE
XVI, or (ii) the occurrence of any other Lease Event of Default, unless in the
case of a Lease Event of Default described in this SECTION 19.1(II) Lessee
delivers a written notice of its election to exercise this option to purchase
all of the Leased Property not less than five (5) days prior to the date of the
purchase and consummates the purchase within thirty (30) days following the
occurrence and declaration of such Lease Event of Default described in this
SECTION 19.1(ii) (except that if a Lease Event of Default pursuant to CLAUSE (g)
or (h) of ARTICLE XVI has also occurred, then such 30 Business Day period shall
be deemed to commence on the earlier of (x) the date of the entry of order for
relief or (y) the date of such declaration). In order to exercise its option to
purchase all or a portion of the Leased Property pursuant to this SECTION 19.1
and except as provided for in ITEM (ii) of the foregoing sentence, Lessee shall
give to Lessor not less than thirty (30) days' prior written notice of such
election to exercise, which election shall become irrevocable if not revoked or
extended by written notice to Lessor not later than ten (10) days prior to the
end of such thirty (30) day period. Upon receipt of the Purchase Amount, Lessor
shall transfer the Leased Property to Lessee, or its assigns, pursuant to
SECTION 22.15, on the date set forth in the written notice delivered by Lessee
pursuant to this SECTION 19.1.
19.2. REQUIRED PURCHASE. Lessee shall be obligated to purchase for the
Purchase Amount all of Lessor's interest in the Leased Property: (a)
automatically and without notice upon the occurrence of any Lease Event of
Default specified in CLAUSES(g) or (h) of ARTICLE XVI, or (b) immediately upon
written demand of Lessor upon: (i) the occurrence of any other Lease Event of
Default pursuant to and for the amount described in SECTION 17.1(d), or (ii) any
Significant Condemnation or Significant Casualty occurs with respect to the
Leased Property.
ARTICLE XX
END OF TERM OPTIONS
20.1. END OF TERM OPTIONS. At least 270 days before the last day of the
Lease Term, Lessee shall, by delivery of written notice to Lessor and Agent,
exercise one of the following options:
(a) Renew this Lease with respect to all, but not less than all, of
the Leased Property for a Renewal Term of up to five (5) years (the "RENEWAL
OPTION") on the terms and conditions set forth herein and in the other Operative
Documents; PROVIDED, HOWEVER, such Renewal Option shall be available only at the
end of the Base Term and only if the conditions to the Extension Option set
forth in Section 2.14 of the Participation Agreement are satisfied; or
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(b) Purchase for cash for the Purchase Amount all, but not less than
all, of the Leased Property then subject to the Lease on the Lease Expiration
Date (the "PURCHASE OPTION"); and if Lessee shall have elected to purchase the
Leased Property, Lessor shall, upon the payment to Lessor of the Purchase Amount
then due and payable by Lessee under the Operative Documents, transfer all of
Lessor's right, title and interest in and to the Leased Property pursuant to
SECTION 22.15; or
(c) Sell on behalf of Lessor for cash to a purchaser all, but not
less than all, of the Leased Property then subject to the Lease (the "SALE
OPTION"). Lessee's right to sell the Leased Property pursuant to the Sale
Option shall be conditioned upon and subject to the fulfillment by Lessee of
each of the terms and conditions set forth in ARTICLE XXI.
20.2. ELECTION OF OPTIONS. If Lessee fails to make a timely election
pursuant to SECTION 20.1 at the end of the Lease Term, Lessee shall be deemed to
have elected the Purchase Option. In addition, the Sale Option shall
automatically be revoked if there exists a Lease Event of Default or Significant
Condemnation at any time after the Sale Option is properly elected or Lessee
fails to comply with any of the terms and conditions set forth at ARTICLE XXI
and Lessor shall be entitled to exercise all rights and remedies provided in
ARTICLE XVII. Lessee may not elect the Sale Option if there exists on the date
the election is made: (i) a Lease Default, Lease Event of Default or a
Significant Condemnation or Significant Casualty, or (ii) any sublease with
respect to any of the Leased Property.
ARTICLE XXI
SALE OPTION
21.1. SALE OPTION PROCEDURES. If Lessee elects the Sale Option, Lessee
shall use its best commercial efforts as nonexclusive agent for Lessor to obtain
the highest all cash purchase price for the purchase of all of the Leased
Property then subject to the Lease, and if Lessee receives any bid, Lessee
shall, within five (5) Business Days after receipt thereof, certify to Lessor in
writing the amount and terms of such bid (who shall not be Lessee or any
Affiliate of Lessee or any Person with whom Lessee has an understanding or
arrangement regarding the future use of the Leased Property by or for Lessee,
but who may be Lessor or a Participant, any Affiliate thereof, or any Person
contacted by any Participant) and the name and address of the party submitting
such bid. Unless pursuant to the terms of the bid submitted, the Net Sale
Proceeds shall exceed the aggregate outstanding Lease Balance as of the Lease
Expiration Date, any Participant may submit an all-cash bid to Lessee not later
than five (5) Business Days prior to expiration of the Lease Term. All costs and
expenses in connection with any such bidding and sale process pursuant to this
SECTION 21.1 shall be paid out of the Sale Proceeds; provided, however, that
Lessee shall obtain Lessor's consent for any costs of sale to the extent such
costs exceed 5% of the anticipated Sale Proceeds. All costs and expenses
incurred by any party (including a buyer or potential buyer) to place the Leased
Property in the condition required by SECTION 9.1 shall be paid by Lessee.
After Lessee shall have certified to Lessor all bids received, if all bids
received on an all cash basis are for less than the aggregate outstanding Lease
Balance as of the Lease Expiration Date, any Participant, any Affiliate thereof,
or any Person contacted by any Participant may submit a further all-cash bid or
bids to
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Lessee not later than five (5) Business Days prior to the Lease Expiration
Date. On or before the Lease Expiration Date, so long as no Lease Event of
Default shall have occurred and be continuing: (i) Lessee shall transfer all
of Lessee's right, title and interest in the Leased Property, or cause the
Leased Property to be transferred, to the bidder, if any, which shall have
submitted the highest all cash bid therefor at least twenty (20) (or in the
case of a Participant, any Affiliate thereof or Person contacted by a
Participant, five (5)) Business Days prior to such Lease Expiration Date, in
the same manner and in the same condition and otherwise in accordance with
all of the terms of this Lease; (ii) subject to the prior or current payment
by Lessee of all amounts due under CLAUSE (iii) of this sentence, Lessor
shall comply with any conditions to transfer set forth in SECTION 21.2 and
the transfer provisions of SECTION 22.15 in order to transfer Lessor's right,
title and interest in and to the Leased Property for cash to such bidder,
such transfer to be made on the Lease Expiration Date with respect to any bid
accepted prior to such date or on the date provided for at SECTION 21.4; and
(iii) Lessee shall pay to Lessor on the earlier of the Lease Expiration Date
or immediately prior to such sale all of the amounts required pursuant to
SECTION 21.3. All costs related to a sale and delivery pursuant to this
SECTION 21.1, including the cost of sales agents retained by Lessee, delivery
of documents, filing and documentary transfer fees, Taxes relating to or
arising as a result of such transfer, title insurance, certification and
testing of the Leased Property, environmental audits, legal costs, costs of
notices, any advertisement or other similar costs shall be borne entirely by
Lessee, without regard to whether such costs were incurred by Lessor, Lessee
or any potentially qualified buyer. No Party shall have any responsibility
for procuring or financing any purchaser.
21.2. SALE. Lessee shall, on the Lease Expiration Date at Lessee's own
expense, transfer the Leased Property to the independent purchaser(s) thereof
free and clear of all Liens other than Permitted Exceptions, in as good
condition as it was on the Document Closing Date, ordinary wear and tear
excepted, and in compliance with all Applicable Laws and Regulations (and in any
event without (x) any asbestos installed or maintained in any part of the Leased
Property, (y) any polychlorinated biphenyls (PCBs) in, on or used, stored or
located at the Leased Property, and (z) any other Hazardous Materials). As a
condition to Lessee's rights hereunder, Lessee shall obtain and make all
necessary Governmental Actions required by Lessee or Lessor in connection with
any third party sale. Lessee shall cooperate with the independent purchaser of
the Leased Property in order to facilitate the ownership and operation of the
Leased Property by such purchaser after the date of the sale or transfer,
including providing all books, reports and records regarding the maintenance,
repair and ownership of the Leased Property and granting or assigning all
licenses necessary for the operation of the Leased Property and cooperating in
seeking and obtaining all necessary Governmental Action. As a further
condition to Lessee's rights hereunder, Lessee shall pay the total cost for the
completion of all alterations commenced prior to the Lease Expiration Date. All
alterations shall be completed prior to the date of Lessee's election of the
Sale Option. Prior to the Lease Expiration Date, Lessee shall furnish to the
Certificate Trustee, the Agent, the Participants and the independent purchaser
hereunder a reasonably current Environmental Audit dated no earlier than 45 days
prior to the Lease Expiration Date and addressed to each such party in form and
substance satisfactory in the sole discretion of such purchaser, the Certificate
Trustee, the Agent and the Required Participants. The obligations of Lessee
under this SECTION 21.2 shall survive the expiration or termination of this
Lease. Unless Lessee shall have exercised or been deemed to have exercised its
Purchase Option, Lessor shall at Lessee's expense be entitled to perform such
investigation, including obtaining reports of engineers and other experts
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as to the condition and state of repair and maintenance of the Leased
Property required by this SECTION 21.2 and as to the compliance of the Leased
Property with Applicable Laws and Regulations including Environmental Laws,
as it deems appropriate. Lessee, at its sole cost and expense, shall cause
the repair or other remediation of any discrepancies between the actual
condition of the Leased Property and the condition required under this Lease,
such repair or remediation to be completed not later than the Lease
Expiration Date.
21.3. APPLICATION OF NET SALE PROCEEDS AND RECOURSE PAYMENTS. In
connection with the exercise of the Sale Option.
(a) On the Lease Expiration Date, Lessee shall pay to Lessor all
Rent then due and then apply the Land Proceeds and Improvements Proceeds and
make such payments as set forth below:
(i) Lessee shall pay to Lessor, as Supplemental Rent,
from the Land Proceeds the Land Balance as of the Lease
Expiration Date (as determined after the payment of all Rent due
on such date). If the Land Proceeds are less than the Land
Balance, Lessee shall pay or shall cause to be paid to Lessor, as
Supplemental Rent, on the Lease Expiration Date, in addition to
the Land Proceeds an additional amount equal to the amount by
which the Land Balance exceeds the Land Proceeds. If the Land
Proceeds exceed the Land Balance as of the Lease Expiration Date,
Lessee shall retain the portion of the Land Proceeds in excess
thereof.
(ii) Lessee shall pay to Lessor, as Supplemental Rent,
the Improvements Proceeds (but not in excess of the Improvements
Balance as of the Lease Expiration Date (as determined after the
payment of all Rent due on such date)) which payment shall be
applied to reduce the Improvement Balance. If the Improvements
Proceeds are less than the Improvements Balance (prior to the
application of the Improvements Proceeds thereto), Lessee shall
pay or shall cause to be paid to Lessor, as Supplemental Rent, on
the Lease Expiration Date, in addition to the Improvements
Proceeds, an amount equal to the lesser of the Sale Recourse
Amount and the Improvements Balance (after taking into account
all payments of Rent and the application of the Improvements
Proceeds against the aggregate outstanding Improvement Balance on
the Lease Expiration Date). If the Improvements Proceeds exceed
the Improvements Balance (prior to the application of the
Improvements Proceeds thereto), Lessee will retain the portion of
the Improvements Proceeds in excess thereof.
(b) The obligation of Lessee to pay the amounts determined pursuant
to SECTION 21.3(a)(i) and 21.3(a)(ii) shall be a recourse obligation of Lessee,
and such payments by Lessee shall not limit any other obligation of Lessee under
the Operative Documents, including pursuant to Article VII of the Participation
Agreement. In no event shall any Land Proceeds in excess of the Land Balance be
applied to reduce the Improvements Balance, nor shall any Improvements Proceeds
in excess of the Improvements Balance be applied to reduce the Land Balance, it
being understood that any such excess Land Proceeds or Improvements Proceeds
shall be paid over to and be retained by Lessee.
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21.4. APPRAISAL. If the sum of the Land Balance and the aggregate
outstanding Improvements Proceeds plus the Sale Recourse Amount will be less
than the outstanding Lease Balance, Lessor (upon direction from any Participant)
shall engage one or more appraisers, at Lessee's sole cost and expense, to
determine (by appraisal methods satisfactory to the Required Participants) the
Fair Market Value of the Leased Property. Such Appraisal may also be prepared
for the purposes of the indemnities set forth at Section 7.8 of the
Participation Agreement. If the Appraisal concludes that the Fair Market Value
of the Leased Property is in excess of the Sale Proceeds received therefor,
Lessee shall promptly pay to Agent, as Supplemental Rent, an amount equal to the
product of such excess multiplied by the Improvements Percentage, which together
with the Improvements Proceeds and the Sale Option Recourse Amount so paid to
Agent shall not exceed the Improvements Balance determined immediately before
the application of the foregoing amounts.
ARTICLE XXII
MISCELLANEOUS
22.1. BINDING EFFECT; SUCCESSORS AND ASSIGNS; SURVIVAL. The terms and
provisions of this Lease, and the respective rights and obligations hereunder of
Lessor, Arranger and the Parties shall be binding upon them and their respective
successors, legal representatives and assigns (including, in the case of Lessor,
any Person to whom Lessor may transfer the Leased Property or any interest
therein in accordance with the provisions of the Operative Documents), and inure
to their benefit and the benefit of their respective permitted successors, legal
representatives and assigns.
22.2. SEVERABILITY. Any provision of this Lease that shall be
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof and any
such prohibition or unenforceability in any jurisdiction shall not invalidate
or render unenforceable such provision in any other jurisdiction, and Lessee
shall remain liable to perform its obligations hereunder except to the extent
of such unenforceability. To the extent permitted by Applicable Laws, Lessee
hereby waives any provision of law that renders any provision hereof
prohibited or unenforceable in any respect.
22.3. NOTICES. Unless otherwise specified herein, all consents,
notices, requests, demands or other communications to or upon the respective
parties hereto shall be in writing and shall be delivered and shall be deemed
to have been given in accordance with Section 9.3 of the Participation
Agreement.
22.4. AMENDMENT; COMPLETE AGREEMENTS. Neither this Lease nor any of the
terms hereof may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by the party against which
the enforcement of the termination, amendment, supplement, waiver or
modification shall be sought. This Lease, together with the
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other Operative Documents, is intended by the parties as a final expression
of their agreement and as a complete and exclusive statement of the terms
thereof, all negotiations, considerations and representations between the
parties having been incorporated herein and therein. No course of prior
dealings between the parties or their officers, employees, agents or
Affiliates shall be relevant or admissible to supplement, explain, or vary
any of the terms of this Lease or any other Operative Document. Acceptance
of, or acquiescence in, a course of performance rendered under this or any
prior agreement between the parties or their Affiliates shall not be relevant
or admissible to determine the meaning of any of the terms of this Lease or
any other Operative Document. No representations, undertakings, or
agreements have been made or relied upon in the making of this Lease other
than those specifically set forth in the Operative Documents.
22.5. HEADINGS. The Table of Contents and headings of the various
Articles and Sections of this Lease are for convenience of reference only and
shall not modify, define or limit any of the terms or provisions hereof.
22.6. GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ALL
RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF,
THE STATE OF CALIFORNIA.
22.7. DISCHARGE OF LESSEE'S OBLIGATIONS BY ITS AFFILIATES. Lessor agrees
that performance of any of Lessee's obligations hereunder by one or more of its
Affiliates or one or more sublessees of the Leased Property or any part thereof
shall constitute performance by Lessee of such obligations to the same extent
and with the same effect hereunder as if such obligations were performed by
Lessee, but no such performance shall excuse Lessee from any obligation not
performed by it or on its behalf under the Operative Documents.
22.8. LIABILITY OF LESSOR LIMITED. The parties hereto agree that
Lessor in its individual capacity shall have no personal liability whatsoever
to Lessee or its respective successors and assigns for any Claim based on or
in respect of this Lease or any of the other Operative Documents or arising
in any way from the transactions contemplated hereby or thereby; PROVIDED,
HOWEVER, that Lessor shall be liable in its individual capacity (1) for its
own willful misconduct or gross negligence (or negligence in the handling of
funds), (2) for liabilities that may result from the incorrectness of any
representation or warranty expressly made by Lessor in its individual
capacity in Section 4.3 of the Participation Agreement or from the failure of
Lessor to perform Lessor's covenants and agreements set forth in Section 6.4
of the Participation Agreement, or (3) for any Tax based on or measured by
any fees, commission or compensation received by Lessor for acting as Bank as
contemplated by the Operative Documents. It is understood and agreed that,
except as provided in the preceding proviso: (a) Lessor shall have no
personal liability under any of the Operative Documents as a result of acting
pursuant to and consistent with any of the Operative Documents; (b) all
obligations of Lessor to Lessee are solely nonrecourse obligations except to
the extent that Lessor has received payment from others; (c) all such
personal liability of Lessor is expressly waived and released as a condition
of, and as consideration for, the execution and delivery of the Operative
Documents by Lessor; and (d) this Lease is executed and delivered by Lessor
solely in the exercise of the powers expressly conferred upon Lessor as
Certificate Trustee under the Trust
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Agreement. In no event shall Lessor, in its individual capacity, be liable
for any indirect, special, consequential, incidental or punitive damages.
22.9. ESTOPPEL CERTIFICATES. Each party hereto agrees that at any time
and from time to time during the Lease Term, it will promptly, but in no
event later than thirty (30) days after request by the other party hereto,
execute, acknowledge and deliver to such other party or to any prospective
purchaser (if such prospective purchaser has signed a commitment letter or
letter of intent to purchase the Leased Property or any part thereof or to
purchase any Note or Certificate), assignee or mortgagee or third party
designated by such other party, a certificate stating (a) that this Lease is
unmodified and in force and effect (or if there have been modifications, that
this Lease is in force and effect as modified, and identifying the
modification agreements); (b) the date to which Basic Rent has been paid; (c)
in the case of an estoppel certificate to be given by Lessee, whether or not
there is any existing default by Lessee in the payment of Basic Rent or any
other sum of money hereunder, and whether or not there is any other existing
Lease Default or Lease Event of Default with respect to which a notice of
default has been served, and, if there is any such default, specifying the
nature and extent thereof; (d) in the case of an estoppel certificate to be
given by Lessee, whether or not, to the knowledge of Lessee after due inquiry
and investigation, there are any purported setoffs, defenses or counterclaims
against enforcement of the obligations to be performed hereunder existing in
favor of Lessee; and (e) other items that may be reasonably requested;
PROVIDED, that no such certificate may be requested unless the requesting
party has a good faith reason for such request. In addition, Lessee,
promptly, but in no event later than thirty (30) days after request by any
other party hereto, shall obtain and deliver to such other party or to any
prospective purchaser (if such prospective purchaser has signed a commitment
letter or letter of intent to purchase the Leased Property or any part
thereof or to purchase any Note or Certificate), assignee, mortgagee or third
party designated by such other party, an estoppel certificate from each
subtenant under each sublease containing such items as reasonably requested
by the party requesting the same; PROVIDED, that no such certificate may be
requested unless the requesting party has a good faith reason for such
request.
22.10. NO JOINT VENTURE. Any intention to create a joint venture or
partnership relation hereunder or pursuant to any other Operative Document
between Lessor and Lessee is hereby expressly disclaimed.
22.11. NO ACCORD AND SATISFACTION. The acceptance by Lessor of any
sums from Lessee (whether as Basic Rent or otherwise) in amounts which are
less than the amounts due and payable by Lessee hereunder is not intended,
nor shall be construed, to constitute an accord and satisfaction of any
dispute between Lessor and Lessee regarding sums due and payable by Lessee
hereunder, unless the Required Participants specifically deem it as such in
writing.
22.12. NO MERGER. In no event shall the leasehold estate of Lessee
hereunder or the rights and interests of the holder of any Notes or
certificates secured by a Lien in this Lease, merge with any interests,
estates or rights of Lessor in or to the Leased Property, it being understood
that such leasehold estate of Lessee hereunder and, the rights and interests
of the holder of any Notes or certificates secured by a Lien in this Lease,
shall be deemed to be separate and distinct from Lessor's interests, estates
and rights in or to the Leased Property,
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notwithstanding that any such interests, estates or rights shall at any time
or times be held by or vested in the same Person.
22.13. SUCCESSOR LESSOR. Lessee agrees that, in the case of the
appointment of any successor certificate trustee pursuant to the Trust
Agreement, such successor certificate trustee shall, upon written notice by
such successor certificate trustee to Lessee, succeed to all the rights,
powers and title of Lessor hereunder and shall be deemed to be Lessor for all
purposes hereof and without in any way altering the terms of this Lease or
Lessee's obligations hereunder.
22.14. SURVIVAL. The obligations of Lessee: (i) to be performed under
this Lease prior to the Lease Expiration Date, (ii) pursuant to SECTIONS 4.1,
4.2, 4.4, ARTICLE V, ARTICLE VI (the last sentence thereof), ARTICLE XVII,
ARTICLE XVIII, ARTICLE XX, ARTICLE XXI and ARTICLE XXII hereof and (iii) under
the other Operative Documents which by their terms survive, shall survive the
expiration or termination of this Lease. The extension of any applicable
statute of limitations by Lessee, any Party or any other Indemnitee shall not
affect such survival.
22.15. TRANSFER OF LEASED PROPERTY.
(a) Whenever pursuant to any provision of this Lease Lessor is
required to transfer the Leased Property to Lessee or to an independent third
party, such transfer shall be made at Lessee's expense by the transfer by a deed
without covenants or warranties of title, except for matters arising by, through
or under Lessor, of all of Lessor's interest in and to the Leased Property on an
"as is, where is, with all faults" basis free and clear of all Lessor Liens and
otherwise without recourse, representation or warranty of any kind, and together
with the due assumption by Lessee (or such third party) of, and due release of
Lessor from, all obligations relating to the Leased Property or any of the
Operative Documents. In connection with any transfer to an independent third
party, Lessee shall execute and deliver such customary and reasonable documents,
certificates and estoppels as may be required to facilitate the transfer of the
Leased Property. Any provision in this Lease or any other Operative Document to
the contrary notwithstanding, Lessor shall not be obligated to make any such
transfer until Lessor and the Participants have received all Rent and other
amounts due and owing hereunder and under the other Operative Documents
including any Break Funding Amount. At or subsequent to the transfer or return
of the Leased Property, Lessee will provide Lessor with such lien and title
searches as Lessor may reasonably request to demonstrate to Lessor's
satisfaction that the Leased Property is subject to no Liens for which Lessor
would be liable under any warranties of title.
(b) Lessee may assign to another Person its right, upon a purchase by
Lessee, to take title to the Leased Property pursuant to SECTION 20.1(b);
PROVIDED, that (i) Lessee shall exercise any option, (ii) such assignee shall be
bound by the provisions of SECTION 20.1(b), (iii) Lessee shall have represented
by an instrument in writing and delivered to Lessor that all necessary
Governmental Actions with respect to such transfer, including the purchase of
the Leased Property by any other Person as contemplated herein, have been
obtained or made, as applicable, and (iv) no such assignment shall release
Lessee from its obligations under the Operative Documents, and Lessee shall
remain personally liable to Lessor for the payment of all amounts due under any
such Section and this SECTION 22.15.
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22.16. ENFORCEMENT OF CERTAIN WARRANTIES.
(a) Unless a Lease Event of Default shall have occurred and be
continuing, Lessor authorizes Lessee (directly or through agents), at Lessee's
expense, to assert, during the Lease Term, all of Lessor's rights (if any) under
any applicable warranty and any other claim that Lessee or Lessor may have under
the warranties provided to Lessor in connection with the Leased Property and
Lessor agrees to cooperate, at Lessee's expense, with Lessee and its agents in
asserting such rights. Any amount recovered by Lessee under any such warranties
shall be paid to Lessee, subject to SECTION 22.17.
(b) Notwithstanding the foregoing provisions of this SECTION 22.16,
so long as a Lease Event of Default or Lease Default shall have occurred and be
continuing, any amount that would otherwise be retained by Lessee pursuant to
SECTION 22.16(a), shall be paid to Lessor as security for the obligations of
Lessee under this Lease, shall be invested by Lessor in accordance with SECTION
23.17 in Permitted Investments and, if a Lease Event of Default is continuing,
may be applied to the obligations of Lessee hereunder, and, at such time
thereafter as no Lease Event of Default or Lease Default shall be continuing,
such amount and gain thereon shall be paid promptly to Lessee to the extent not
previously applied in accordance with the terms of this Lease.
22.17. SECURITY INTEREST IN FUNDS. As long as a Lease Event of Default or
Lease Default shall have occurred and be continuing, any amount that would
otherwise be payable to Lessee under the Operative Documents shall be paid to or
retained by Lessor (including amounts to be paid to Lessee pursuant to ARTICLE
XIII or SECTION 22.16) as security for the performance by Lessee in full of its
obligations under this Lease and the other Operative Documents and, if a Lease
Event of Default is continuing, it may be applied to the obligations of Lessee
hereunder and under the other Operative Documents. At such time as no Lease
Event of Default or Lease Default shall be continuing, such amounts, net of any
amounts previously applied to Lessee's obligations hereunder or under any other
Operative Documents, shall be paid to Lessee. Any such amounts which are held
pending payment to Lessee or application hereunder shall be invested by Lessor
as directed from time to time in writing by Lessee (PROVIDED, HOWEVER, that if a
Lease Event of Default has occurred and is continuing, it will be directed by
Agent), and at the expense and risk of Lessee, in Permitted Investments. Any
gain (including interest received) realized as the result of any such investment
(net of any fees, commissions and other expenses, if any, incurred in connection
with such investment) shall be applied from time to time in the same manner as
the principal invested. Lessee will promptly pay to Lessor on demand, the
amount of any loss realized as the result of any such investment (together with
any fees, commissions and other expenses, if any, incurred in connection with
such investment), such amount to be held, paid and applied in the same manner as
other amounts subject to this SECTION 22.17.
22.18. RECORDING OF DEED OF TRUST AND MEMORANDUM OF LEASE. Concurrently
with the execution and delivery of this Lease, Lessor and Lessee shall
execute, acknowledge and cause to be recorded a Memorandum of Lease and Deed
of Trust for the Leased Property in the official records of San Diego County,
California and in such other places as Lessor deems necessary to perfect the
Liens granted pursuant to this Lease and the other Operative Documents.
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22.19. NATURE OF TRANSACTION. Lessor and Lessee acknowledge and agree
that the intent of the parties with respect to the nature of the transaction is
as set forth in Section 2.7 of the Participation Agreement.
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IN WITNESS WHEREOF, the undersigned have each caused this Lease to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the day and year first above written.
UNION BANK OF CALIFORNIA, N.A., not in its
individual capacity except as expressly stated
herein, but solely as Certificate Trustee
By: /s/ Andrew R. Ball
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Name Printed: Andrew R. Ball
Title: Vice President
S-1
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REMEC, INC., as Lessee
By: /s/ Michael McDonald
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Name Printed: Michael McDonald
Title: Chief Financial Officer
S-2
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SCHEDULE I
TO LEASE SUPPLEMENT
LEGAL DESCRIPTION OF LAND
Name: 9404 Chesapeake Drive
Legal Description: LOT 45 OF HAZARD COMMERCIAL PARK, IN THE CITY OF SAN DIEGO,
COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP
THEREOF NO. 8503, FILED IN THE OFFICE OF THE COUNTY
RECORDER OF SAN DIEGO COUNTY ON FEBRUARY 25, 1977.
Name: 5775, 5785, and 5788 Roscoe Court
Legal Description: LOT 46 AND 47 OF HAZARD COMMERCIAL PARK, IN THE CITY OF SAN
DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING
TO MAP THEREOF NO. 8503, FILED IN THE OFFICE OF THE COUNTY
RECORDER OF SAN DIEGO COUNTY ON FEBRUARY 25, 1977.
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LESSEE GUARANTEE
This Lessee Guarantee (REMEC, Inc. Trust 1998-A), dated as of August 25,
1998 ("LESSEE GUARANTEE"), is made by REMEC, INC., a California corporation (in
such capacity, the "LESSEE") in favor of the Beneficiaries.
W I T N E S E T H:
WHEREAS, REMEC, Inc., as Lessee, Union Bank of California, N.A., as
Certificate Trustee, as Agent, and as Borrower, the Certificate Purchasers named
therein, as Certificate Purchasers, and the Lenders named therein, have entered
into that certain Participation Agreement, dated as of August 25, 1998 (as it
may be modified, amended or restated from time to time as and to the extent
permitted thereby, the "PARTICIPATION AGREEMENT"); and, unless otherwise defined
herein or the context hereof otherwise requires, terms which are defined or
defined by reference in the Participation Agreement (including Appendix 1
thereto) shall have the same meanings when used herein as such terms have
therein, and the rules of interpretation set forth in Appendix 1 to the
Participation Agreement shall apply to this Lessee Guarantee); and
WHEREAS, it is a condition precedent to the consummation by Participants of
the transactions to be consummated on the Document Closing Date and the Advance
Date that Lessee execute and deliver this Lessee Guarantee; and
WHEREAS, Lessee has reviewed and approved the Operative Documents and is
fully informed of (a) the extent of the Borrower Liabilities and (b) the
remedies Beneficiaries may pursue thereunder, with or without notice to Lessee;
and
WHEREAS, it is in the best interests of Lessee that the Overall Transaction
and the Advance Date occur; and
WHEREAS, this Lessee Guarantee, and the execution, delivery and performance
hereof, have been duly authorized by all necessary corporate action of Lessee;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by Lessee, Lessee hereby agrees as follows:
SECTION 1. GUARANTEE. Lessee hereby irrevocably and unconditionally
guarantees to Agent (both individually and in its capacity as Agent), each
Participant, and their respective Indemnitees, successors and assigns
(individually a "BENEFICIARY" and collectively the "BENEFICIARIES") the full
and prompt payment when due, whether by acceleration or otherwise, and at all
times thereafter, and the full and prompt performance of all of the Borrower
Liabilities (as hereinafter defined), including interest and yield on any
Borrower Liabilities, whether accruing before or after any Insolvency Event
involving Lessee or any other Person,
<PAGE>
and, if interest or yield on any portion of such obligations ceases to accrue
by operation of law by reason of the commencement of such case or proceeding,
including such interest and yield as would have accrued on any such portion
of such obligations if such case or proceeding had not commenced, and further
agrees to pay all expenses (including attorneys' fees, legal expenses and
allocated costs of internal counsel) paid or incurred by any Beneficiary in
endeavoring to collect the Borrower Liabilities, or any part thereof, and in
enforcing this Lessee Guarantee; PROVIDED, HOWEVER, if Lessee duly and timely
exercises and consummates the Sale Option pursuant to the Lease and provided
that a Lease Event of Default has not occurred, the amount guaranteed above
with respect to the Certificate Amounts, Yield accrued thereon, principal of
the Notes, and interest accrued thereon shall not exceed the aggregate
amounts required to be paid and set over by Lessee pursuant to the Lease and
other Operative Documents in connection with such exercise and sale. The
foregoing limitation shall not apply to any Claim under any indemnity in any
Operative Document. The term "BORROWER LIABILITIES", as used herein, shall
mean all of the following, in each case howsoever created, arising or
evidenced, whether direct or indirect, joint or several, absolute or
contingent, or now or hereafter existing, or due or to become due: (i) all
principal of the Notes and interest accrued thereon, (ii) all of the
Certificate Amounts and Yield accrued thereon; (iii) all additional amounts
and other sums (other than Basic Rent) at any time due and owing, and
required to be paid by Borrower under the terms of the Loan Agreement, the
Notes, the Trust Agreement, the Certificates, the Deeds of Trust or any other
Operative Document (including Section 7.5 of the Participation Agreement and
whether or not Lessee or any other Person shall be released or relieved from
any or all liability or obligation to Borrower under any Operative Document).
In any action or proceeding involving any state corporate law, or any
state or federal bankruptcy, insolvency, reorganization or any other law
affecting the rights of creditors generally, if the obligations of Lessee
under this Lessee Guarantee would otherwise be held or determined to be void,
invalid or unenforceable, or subordinated to the claims of any other
creditors, on account of the amount of its liability under this Lessee
Guarantee, then, notwithstanding any other provision hereof to the contrary,
the amount of such liability shall, without any further action by Lessee or
any other Person, be automatically limited and reduced to the highest amount
which is valid and enforceable and not subordinated to the claims of other
creditors as determined in such action or proceeding.
Lessee agrees that, in the event of an Insolvency Event with respect to
Borrower or Lessee, or the inability or failure of Borrower or Lessee to pay
debts as they become due, or an assignment by Borrower or Lessee for the
benefit of creditors, or the commencement of any case or proceeding in
respect of Borrower or Lessee under any bankruptcy, insolvency or similar
laws, and if such event shall occur at a time when any of the Borrower
Liabilities may not then be due and payable, Lessee will pay to Agent
forthwith the full amount which would be payable hereunder by Lessee if all
Borrower Liabilities were then due and payable. Notwithstanding any
modification, discharge or extension of any of the Borrower Liabilities or
any amendment, modification, stay or cure of the rights or remedies of any
Beneficiary which may occur in any bankruptcy or reorganization case or
proceeding concerning Borrower or any other Person, whether permanent or
temporary and whether assented to by any Beneficiary, Lessee hereby agrees
that it shall be obligated hereunder to pay and perform
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the Borrower Liabilities thereof and discharge its other obligations
hereunder and under the Operative Documents in accordance with the terms
thereof and the terms of this Lessee Guarantee in effect on the date
immediately prior to such case or proceeding (including the obligation to
perform and pay the portion of Borrower Liabilities consisting of interest or
yield accruing or as would have accrued after the commencement of such
bankruptcy or reorganization case or proceeding). Lessee understands and
acknowledges that by virtue of this Lessee Guarantee, it has specifically
assumed any and all risks of a bankruptcy or reorganization case or
proceeding concerning Borrower or any other Person.
To secure all of the obligations of Lessee hereunder, each Beneficiary
shall have a lien upon and security interest in (and may, without demand or
notice of any kind, at any time and from time to time when any amount shall
be due and payable by Lessee hereunder, appropriate and apply toward the
payment of such amount, in such order of application as Agent may elect in
accordance with the Loan Agreement and the Trust Agreement) any and all
balances, credits, deposits, accounts or moneys of or in the name of Lessee
or any of its Affiliates now or hereafter, for any reason or purpose
whatsoever, in the possession or control of, or in transit to, Agent,
Certificate Trustee or any Participant or any agent or bailee for Agent,
Certificate Trustee or any Participant. Prior to the time any amount shall
be due and payable hereunder, Lessee shall have the use and enjoyment of all
such balances, credits, deposits, accounts and monies, including the right to
withdraw the same. Notwithstanding the foregoing, no Beneficiary shall
exercise, or attempt to exercise, any right of setoff, banker's lien, or the
like, against any deposit account or property of the Lessee or any of its
Affiliates held or maintained by such Beneficiary without the prior written
consent of the Agent at the written direction of the Required Participants.
This Lessee Guarantee shall in all respects be an absolute and
unconditional guaranty of payment and performance (and not of collection),
and shall remain in full force and effect (notwithstanding, without
limitation, the dissolution of Lessee). This Lessee Guarantee is made for
the benefit of and shall be enforceable by each Beneficiary as its interests
may appear, or by Agent on behalf of the Beneficiaries.
Agent on behalf of itself and the Participants, and the Participants
each may, from time to time at its discretion and without notice to Lessee
(except for notices specifically required under the Participation Agreement),
take any or all of the following actions: (a) retain or obtain a lien upon
or a security interest in any property to secure any of the Borrower
Liabilities or any guaranteed obligation hereunder; (b) retain or obtain the
primary or secondary obligation of any obligor or obligors, in addition to
Lessee, with respect to any of the Borrower Liabilities; (c) extend or renew
for one or more periods (regardless of whether longer than the original
period), alter or exchange any of the Borrower Liabilities, or release or
compromise (or cause Lessee to release or compromise) any obligation of
Lessee hereunder or any obligation of any nature of any other obligor
(including, without limitation, Borrower) with respect to any of the Borrower
Liabilities; (d) release or fail to perfect its lien upon or security
interest in, or impair, surrender, release or permit any substitution or
exchange for, all or any part of any property securing any of the Borrower
Liabilities or any obligation hereunder, or extend or renew for one or more
periods (regardless of whether longer than the original period) or release,
compromise, alter or exchange any obligations of
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any nature of any obligor with respect to any such property; and (e) resort
to Lessee for payment of any of the Borrower Liabilities, regardless of
whether Agent or any other Person shall have resorted to any other property
securing any of the Borrower Liabilities or any obligation hereunder or shall
have proceeded against any other obligor primarily or secondarily obligated
with respect to any of the Borrower Liabilities (all of the actions referred
to in this paragraph being hereby expressly waived by Lessee).
SECTION 2. LESSEE'S OBLIGATIONS UNCONDITIONAL. Lessee's obligations
hereunder are independent of the obligations of Borrower or any other Person,
and each Beneficiary may enforce any of its rights hereunder independently of
any other right or remedy that it may at any time hold with respect to the
Borrower Liabilities or any security or other guaranty therefor. Such
obligations shall be absolute and unconditional, shall not be subject to any
counterclaim, setoff, deduction, diminution, abatement, recoupment,
suspension, deferment, reduction or defense (other than full and strict
compliance by Lessee with its obligations hereunder), whether based upon any
claim that Borrower, Lessee, any Beneficiary, or any other Person may have
against any Beneficiary or any other Person or otherwise, independent of any
obligations of Lessee under any other guarantee, and shall remain in full
force and effect without regard to, and shall not be released, discharged or
in any way affected by, any circumstance or condition whatsoever (whether or
not Lessee, Borrower or any other Person shall have any knowledge or notice
thereof) including:
(A) any amendment, modification, addition, deletion, supplement or renewal
to or of or other change in the Borrower Liabilities or any Operative
Document or any of the agreements referred to in any thereof, or any
other instrument or agreement applicable to any Operative Document or
any of the parties to such agreements, or to the Leased Property, or
any assignment, mortgage, encumbrance or transfer thereof or of any
interest therein, or any furnishing or acceptance of additional
security for, guaranty of or right of offset with respect to, any of
the Borrower Liabilities; or the failure of any security or the
failure of any Beneficiary to perfect or insure any interest in any
collateral;
(B) any failure, omission or delay on the part of Borrower, any
Beneficiary or any other Person to conform or comply with any term of
any instrument or agreement referred to in CLAUSE (A) above;
(C) any waiver, consent, extension, indulgence, compromise, release or
other action or inaction under or in respect of any instrument,
agreement, guaranty, right of offset or security referred to in CLAUSE
(A) above or any obligation or liability of Borrower or any
Beneficiary, or any exercise or non-exercise by any Beneficiary of any
right, remedy, power or privilege under or in respect of any such
instrument, agreement, guaranty, right of offset or security or any
such obligation or liability;
(D) any Insolvency Event with respect to Borrower, any Beneficiary, Lessee
or any other Person or any of their respective properties or
creditors, or any action taken by any trustee, receiver or court in
any such proceeding;
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(E) any limitation on the liability or obligations of any Person
(including Borrower or Lessee) under any Operative Document
(including, without limitation, any limitation on the liability of, or
recourse to, Certificate Trustee, whether pursuant to Section 9.11 of
the Participation Agreement or otherwise), the Borrower Liabilities,
any collateral security for the Borrower Liabilities, any other
guaranty of the Borrower Liabilities or any discharge, termination,
cancellation, frustration, irregularity, invalidity or
unenforceability, in whole or in part, of any of the foregoing or any
other agreement, instrument, guaranty or security referred to in
CLAUSE (A) above or any term of any thereof;
(F) any defect in the title, compliance with specifications, condition,
design, operation or fitness for use of, or any damage to or loss or
destruction of, or any interruption or cessation in the use of the
Leased Property by Lessee or any other Person for any reason
whatsoever (including, without limitation, any governmental
prohibition or restriction, condemnation, requisition, seizure or any
other act on the part of any governmental or military authority, or
any act of God or of the public enemy) regardless of the duration
thereof (even though such duration would otherwise constitute a
frustration of a lease), whether or not resulting from accident and
whether or not without fault on the part of Lessee, Lessor or any
other Person;
(G) any merger or consolidation of Borrower or Lessee into or with any
other Person, or any sale, lease or transfer of any of the assets of
Borrower or Lessee to any other Person;
(H) any change in the ownership of any shares of capital stock or other
interests in Borrower or Lessee or any corporate change in Borrower or
Lessee; or
(I) any other occurrence or circumstance whatsoever, whether similar or
dissimilar to the foregoing, and any other circumstance that might
otherwise constitute a legal or equitable defense or discharge of the
Borrower Liabilities of a Lessee or surety or that might otherwise
limit recourse against Lessee.
The obligations of Lessee set forth herein constitute the full recourse
obligations of Lessee enforceable against it to the full extent of all its
assets and properties, notwithstanding any provision in the Participation
Agreement or any other Operative Document or other agreements limiting the
liability of Borrower, or any Beneficiary or any other Person.
Lessee waives any and all notice of the creation, renewal, extension or
accrual of any of the Borrower Liabilities and notice of or proof of reliance
by any Beneficiary upon this Lessee Guarantee or acceptance of this Lessee
Guarantee, and the Borrower Liabilities, and any of them, shall conclusively
be deemed to have been created, contracted or incurred in reliance upon this
Lessee Guarantee. Lessee unconditionally waives, to the extent permitted by
Applicable Laws: (a) acceptance of this Lessee Guarantee and proof of
reliance by any Beneficiary hereon; (b) notice of any of the matters referred
to in CLAUSES (A) through (I)
-5-
<PAGE>
above, or any right to consent or assent to any thereof; (c) all notices that
may be required by statute, rule of law or otherwise, now or hereafter in
effect, to preserve intact any rights against Lessee, including, without
limitation, any demand, presentment, protest, proof or notice of nonpayment
under any Operative Document, and notice of default or any failure on the
part of Borrower or Lessee to perform and comply with any covenant,
agreement, term or condition of any Operative Document; (d) any right to the
enforcement, assertion or exercise against Borrower or Lessee of any right,
power, privilege or remedy conferred in any Operative Document or otherwise;
(e) any requirement of diligence on the part of any Person; (f) any
requirement of any Beneficiary to take any action whatsoever, to exhaust any
remedies or to mitigate the damages resulting from a default by any Person
under any Operative Document; (g) any notice of any sale, transfer or other
disposition by any Person of any right under, title to or interest in any
Operative Document or the Leased Property; and (h) any other circumstance
whatsoever that might otherwise constitute a legal or equitable discharge,
release or defense of a Lessee or surety, or that might otherwise limit
recourse against Lessee. Notwithstanding the foregoing, none of the waivers
of notice or rights to consent or assent set forth in this paragraph shall be
deemed to be a waiver of the obligation of any Person to give the notices to
Lessee, or a waiver of the right of Lessee to consent or assent, which are
specifically required by or granted in any other Operative Document.
Lessee agrees that this Lessee Guarantee shall be automatically
reinstated if and to the extent that for any reason any payment by or on
behalf of Borrower is rescinded or must be otherwise restored by any
Beneficiary whether as a result of any Insolvency Event or otherwise.
Lessee further agrees that, without limiting the generality of this
Lessee Guarantee, if a Loan Event of Default shall have occurred and be
continuing and any Beneficiary is prevented by Applicable Laws from
exercising its remedies under the Operative Documents, such Beneficiary shall
be entitled to receive hereunder from Lessee, upon demand therefor, the sums
which would have otherwise been due from Borrower had such remedies been
exercised.
SECTION 3. WAIVER OF SUBROGATION. Until the prior indefeasible
payment, in full and in cash, of all Borrower Liabilities, Lessee hereby
irrevocably waives any claim or other rights which it may now or hereafter
acquire against Borrower arising from the existence, payment, performance or
enforcement of Lessee's obligations under this Lessee Guarantee or any other
Operative Document, including any right of subrogation, reimbursement,
contribution, exoneration or indemnification, any right to participate in any
claim or remedy of any Beneficiary against Lessee or any property or assets
now or hereafter constituting part of the Trust Estate, whether or not such
claim, remedy or right arises in equity, or under contract, statute or common
law, including the right to take or receive from Lessee, directly or
indirectly, in cash or other property, or by setoff or any other manner,
payment or security on account of such claim or other rights. If any amount
shall be paid to Lessee in violation of the preceding sentence and the
Borrower Liabilities shall not have been indefeasibly paid in cash, such
amount shall be deemed to have been paid to Lessee for the benefit of, and
held in trust for, the Beneficiaries, and shall forthwith be paid to Agent,
to be credited and applied pursuant to the terms of the Operative Documents.
Lessee acknowledges that it will receive
-6-
<PAGE>
direct and indirect benefits from the financing arrangements contemplated by
the Participation Agreement and that the waiver set forth in this paragraph
is knowingly made in contemplation of such benefits. Lessee hereby
absolutely, unconditionally and irrevocably waives and agrees not to assert
or take advantage of any defense based upon an election of remedies by any
Beneficiary, including an election to proceed by nonjudicial rather than
judicial foreclosure, which destroys or impairs any right of subrogation of
Lessee or the right of Lessee to proceed against any Person for
reimbursement, or both.
SECTION 4. MORTGAGE ON REAL PROPERTY; ADDITIONAL WAIVERS.
(a) Lessee authorizes each Beneficiary at its sole option, without
notice or demand and without affecting the liability of Lessee hereunder, to
release and reconvey (with or without the receipt of any consideration) any
Lien against any or all real or personal property security for the Borrower
Liabilities, to foreclose any or all deeds of trust, mortgages, security
agreements or other instruments or agreements by judicial or nonjudicial
sale, and to exercise any other remedy against Borrower or any security, all
without affecting the liability of Lessee hereunder.
(b) Lessee waives any defenses or benefits that may be derived from
California Code of Civil Procedure Sections 580a, 580b, 580d or 726, or
comparable provisions of the laws of the State of California or any other
jurisdiction, and all other suretyship defenses it would otherwise have under
California law or the laws of any other jurisdiction. Lessee waives any
right to receive notice of any judicial or nonjudicial sale or foreclosure of
any real property, and the failure of Lessee to receive such notice shall not
impair or affect Lessee's liability hereunder.
(c) Lessee waives all rights and defenses that Lessee may have because
Borrower's debt is secured by real property including, without limitation,
arising out of an election of remedies by any Beneficiary, even though that
election of remedies, such as nonjudicial foreclosure with respect to
security for a guaranteed obligation, has destroyed Lessee's rights of
subrogation and reimbursement against Lessee or any other principal by
operation of Section 580d of the Code of Civil Procedure or otherwise. This
means, among other things:
(1) Beneficiaries may collect from Lessee without first foreclosing
on any real or personal property collateral pledged by Borrower;
(2) If Beneficiaries foreclose on any real property collateral
pledged by Borrower:
(A) The amount of the debt may be reduced only by the price for
which such collateral is sold at the foreclosure sale, even if the
collateral is worth more than the sale price, and
-7-
<PAGE>
(B) Beneficiaries may collect from Lessee even if Agent and
Participant, by foreclosing on the real property collateral, have
destroyed any right Lessee may have to collect from Borrower.
This is an unconditional and irrevocable waiver of any rights and defenses
Lessee may have because Borrower's debt is secured by real property. These
rights and defenses include any rights or defenses based upon Section 580a,
580b, 580d or 726 of the California Code of Civil Procedure.
(d) Lessee acknowledges that it has, in this Lessee Guarantee, waived
any and all rights of subrogation and reimbursement and any other rights and
defenses available to Lessee by reason of Sections 2787 to 2855, inclusive,
and Sections 2899 and 3433 of the California Civil Code, including, without
limitation, (i) any defenses Lessee may have to its guaranty obligations by
reason of an election of remedies by any Beneficiary and (ii) any rights or
defenses Lessee may have by reason of protection afforded to Lessee or any
other principal with respect to the obligation so guaranteed pursuant to the
antideficiency or other laws of the State of California limiting or
discharging Borrower's indebtedness, including Section 580a, 580b, 580d, or
726 of the California Code of Civil Procedure.
SECTION 5. REASONABLENESS AND EFFECT OF WAIVERS. Lessee warrants and
agrees that each of the waivers set forth in this Lessee Guarantee is made
with full knowledge of its significance and consequences and that, under the
circumstances, the waivers are reasonable and not contrary to public policy
or law. If any of such waivers are determined to be contrary to any
Applicable Laws or public policy, such waivers shall be effective only to the
maximum extent permitted by law.
SECTION 6. TRANSFERS BY BENEFICIARIES. Subject to the restrictions on
transfer set forth in the Participation Agreement, each Beneficiary may, from
time to time, whether before or after any discontinuance of this Lessee
Guarantee, at its sole discretion and without notice to or consent of Lessee,
assign or transfer any or all of its portion of the Borrower Liabilities or
any interest therein; and, notwithstanding any such assignment or transfer or
any subsequent assignment or transfer thereof, such Borrower Liabilities
shall be and remain Borrower Liabilities for the purposes of this Lessee
Guarantee, and each and every immediate and successive assignee or transferee
of any of the Borrower Liabilities or of any interest therein shall, to the
extent of such assignee's or transferee's interest in the Borrower
Liabilities, be entitled to the benefits of this Lessee Guarantee to the same
extent as if such assignee or transferee were such Beneficiary.
SECTION 7. NO WAIVER BY BENEFICIARIES. No delay in the exercise of any
right or remedy shall operate as a waiver thereof, and no single or partial
exercise of any right or remedy shall preclude other or further exercise
thereof or the exercise of any other right or remedy; nor shall any
modification or waiver of any of the provisions of this Lessee Guarantee be
binding upon any Beneficiary except as expressly set forth in a writing duly
signed and delivered on its behalf. No action permitted hereunder shall in
any way affect or impair any Beneficiary's rights or Lessee's obligations
under this Lessee Guarantee. For the purposes of this Lessee Guarantee,
Borrower Liabilities shall include all of the obligations
-8-
<PAGE>
described in the definition thereof, notwithstanding any right or power of
Borrower or any other Person to assert any claim or defense as to the
invalidity or unenforceability of any such obligation, and no such claim or
defense shall affect or impair the obligations of Lessee hereunder. Lessee's
obligations under this Lessee Guarantee shall be absolute and unconditional
irrespective of any circumstance whatsoever which might constitute a legal or
equitable discharge or defense of Lessee. Lessee hereby acknowledges that
there are no conditions to the effectiveness of this Lessee Guarantee.
SECTION 8. SUCCESSORS AND ASSIGNS. This Lessee Guarantee shall be
binding upon Lessee and upon Lessee's successors and assigns; and all
references herein to Lessee shall be deemed to include any successor or
successors, whether immediate or remote, to such Person.
SECTION 9. SEVERABILITY. Wherever possible, each provision of this
Lessee Guarantee shall be interpreted in such manner as to be effective and
valid under Applicable Laws, but if any provision of this Lessee Guarantee
shall be prohibited by or invalid thereunder, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of
this Lessee Guarantee.
SECTION 10. SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. LESSEE:
(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING
RELATING TO THIS LESSEE GUARANTEE, OR FOR RECOGNITION AND ENFORCEMENT OF ANY
JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE
UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF CALIFORNIA AND OF
ANY CALIFORNIA STATE COURT SITTING IN SAN DIEGO COUNTY, AND APPELLATE COURTS
FROM ANY THEREOF; (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDINGS MAY BE
BROUGHT TO SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER
HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT
SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT
TO PLEAD OR CLAIM THE SAME; (c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH
ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED
OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE
PREPAID, TO IT AT ITS ADDRESS SET FORTH AT SCHEDULE II TO THE PARTICIPATION
AGREEMENT OR AT SUCH OTHER ADDRESS OF WHICH THE OTHER PARTIES TO THE
PARTICIPATION AGREEMENT SHALL HAVE BEEN NOTIFIED PURSUANT TO SECTION 9.3 OF
THE PARTICIPATION AGREEMENT; AND (d) AGREES THAT NOTHING HEREIN SHALL AFFECT
THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW
OR SHALL LIMIT THE RIGHT OF ANY BENEFICIARY TO SUE IN ANY OTHER JURISDICTION.
SECTION 11. NOTICES. All notices, demands, declarations, consents,
directions, approvals, instructions, requests and other communications
required or permitted by this Lessee Guarantee shall be in writing and shall
be deemed to have been duly given when addressed to the appropriate Person
and delivered in the manner specified in Section 9.3 of the Participation
Agreement.
-9-
<PAGE>
SECTION 12. GOVERNING LAW; WAIVER OF JURY TRIAL. THIS LESSEE GUARANTEE
HAS BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF, THE STATE OF CALIFORNIA.
LESSEE HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY
LEGAL ACTION OR PROCEEDING RELATING TO THIS LESSEE GUARANTEE OR ANY OTHER
OPERATIVE DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
[SIGNATURE PAGES FOLLOW]
-10-
<PAGE>
IN WITNESS WHEREOF, Lessee has caused this Lessee Guarantee to be executed
and delivered as of the date first above written.
REMEC, INC.
By: /s/ Michael McDonald
----------------------------------
Name: Michael McDonald
Title: Chief Financial Officer
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
- --------------------------------------------------------------------- -----------------------
<S> <C>
REMEC Microwave, Inc. ............................................... California
REMEC Wireless, Inc. ................................................ California
Humphrey, Inc. ...................................................... California
REMEC Magnum, Inc. .................................................. California
Verified Technical Corporation ...................................... California
C&S Hybrid, Inc. .................................................... California
Q-bit Corporation.................................................... Florida
REMEC Canada Incorporated............................................ Nova Scotia, Canada
REMECINC S.A. ....................................................... Costa Rica
REMEC Foreign Sales Corporation...................................... Barbados
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements
on Form S-8 (No.'s 333-04224, 333-27353 and 333-37191) and Form S-3 (No.'s
333-25437, 333-30803, 333-45353, 333-45595 and 333-46891) of our report dated
February 26, 1999, with respect to the consolidated financial statements and
schedule of REMEC, Inc., included in the Annual Report (Form 10-K) for the year
ended January 31, 1999.
Our audits also included the financial statement schedule of REMEC, Inc.
listed in Item 14(a). This schedule is the responsibility of REMEC, Inc.'s
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
March 25, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the registration statements on Form S-8 and Form S-3 of REMEC, Inc.
of our report dated March 6, 1997, with respect to the financial statements of
Radian Technology, Inc. as of December 31, 1996, and for the three years then
ended, included in the consolidated financial statements of REMEC, Inc. in its
Annual Report on Form 10-K for the year ended January 31, 1999.
IRELAND SAN FILIPPO LLP
March 25, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF BRAY, BECK & KOETTER, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements
on Form S-8 and Form S-3 of REMEC, Inc. of our report dated February 28, 1997,
with respect to the financial statements of Q-bit Corporation as of December 31,
1996, and for the two years then ended, included in the consolidated financial
statements of REMEC, Inc. in its Annual Report on Form 10-K for the year ended
January 31, 1999.
BRAY, BECK & KOETTER
Melbourne, Florida
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 82,314,098
<SECURITIES> 0
<RECEIVABLES> 24,379,131
<ALLOWANCES> 755,097
<INVENTORY> 33,879,801
<CURRENT-ASSETS> 147,201,545
<PP&E> 81,588,314
<DEPRECIATION> 39,428,930
<TOTAL-ASSETS> 206,585,361
<CURRENT-LIABILITIES> 13,520,239
<BONDS> 0
0
0
<COMMON> 231,853
<OTHER-SE> 188,701,735
<TOTAL-LIABILITY-AND-EQUITY> 206,585,361
<SALES> 158,401,981
<TOTAL-REVENUES> 158,401,981
<CGS> 113,012,547
<TOTAL-COSTS> 113,012,547
<OTHER-EXPENSES> 36,057,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,443,198
<INCOME-TAX> 2,115,473
<INCOME-CONTINUING> 10,327,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,327,725
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.44
</TABLE>
