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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-14224
IFR SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 48-0777904
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation of organization)
10200 WEST YORK STREET, WICHITA, KANSAS 67215
(Address and zip code of principal executive offices)
Registrant's telephone number, including area code: (316) 522-4981
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by nonaffiliates of
the Registrant as of September 8, 1997: Common stock, $.01 par value,
$149,227,076.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of September 8, 1997: Common stock, $.01 par value, 5,453,769
shares.
DOCUMENTS INCORPORATED BY REFERENCE:
(1) Portions of the Registrant's annual report to shareholders for the
year ended June 30, 1997 are incorporated by reference into Parts I and II of
this Form 10-K.
(2) Portions of the Registrant's proxy statement for the November 5, 1997
annual meeting of shareholders are incorporated by reference into Part III of
this Form 10-K.
The exhibit index to this Form 10-K is located on pages 9 through 11.
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PART I
ITEM 1. BUSINESS
IFR Systems, Inc. ("IFR" or the "Company") is a Delaware corporation with
its principal offices in Wichita, Kansas. IFR designs, manufactures, and
markets communications, test and measurement, avionics, and fiber optic test
instruments. These products are used to test radio products, aircraft avionics
systems and optical fiber. IFR has been engaged in this general industry
directly, and through a predecessor corporation, in the same general type of
business since 1968, and its initial public offering of common stock was made in
1986. IFR's fiber optics test equipment products are manufactured by its wholly
owned subsidiaries, Photon Kinetics, Inc. ("PK") and York Technology Ltd.
("York")
IFR's communications service monitors are used to test and maintain radio
products, including pagers, scanners, military comm-transceivers, and cellular,
land mobile, marine and citizens band radios. Service monitors test mobile
radio equipment for proper frequency transmission, signal modulation and power
output. The principal end users of communications service monitors are original
equipment manufacturers, service and repair companies, government agencies, and
users of mobile radio equipment.
IFR's portable spectrum analyzers (test and measurement) measure the
amplitude of various frequency components in transceivers and other radio
frequency devices. IFR targets these products for original equipment
manufacturers, service and repair companies, and educational institutions.
IFR's avionics test instruments consist of portable and stationary
precision simulators which duplicate airborne conditions to test the
communications, weather radar, and instrument landing and navigational systems
installed in aircraft and ground stations. IFR's precision simulators are used
to test the avionics electronics systems in commercial, military, and general
aviation aircraft. The principal end users of such precision simulators are
general aviation service and repair companies, commercial airlines,
manufacturing firms, and the federal government.
IFR's fiber optic test instruments consist of portable and stationary units
which are used to test and verify specific parameters of optical fibers. These
products are used by telephone companies, installers of voice/data
communications networks, cable television operators, utilities, contractors,
fiber manufacturers, and the military.
IFR also manufactures certain machine parts and purchases electronic
components for assembly into finished test instruments.
IFR is engaged in research and development in order to update and replace
products with new models and to develop additional products. Research and
development expenditures were $9,990,000, $7,374,000 and $7,892,000 for 1997,
1996, and 1995, respectively. IFR's product development is directed toward
identifying and filling niche markets and toward the product markets where IFR
believes better growth opportunities exist, as well as providing for periodic
introduction of new or enhanced products for all markets served by IFR's
products.
IFR is not engaged in any significant customer-sponsored research and
development. IFR owns no significant patents or product licenses and believes
these are not significant factors in its business or the test and measurement
industry generally. Although IFR believes alternative sources of supply could be
developed, certain components are presently available from only one supplier.
During the past year, supplies were generally adequate and lead times
acceptable.
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MARKETING AND COMPETITION
IFR operates in one dominant industry segment--the electronic test and
measurement industry. IFR's product line includes approximately 40 separate
product models which are marketed through agencies throughout the world. General
demand for electronics test and measurement products is not considered to be
highly seasonal. However, test instruments generally are a capital budget
expenditure for commercial and government agency customers, and purchases may
be foregone or postponed during periods of economic slump and tight budgets.
In addition to general economic conditions, economic conditions affecting
particular industries may affect demand for IFR's products. The group of
products manufactured by IFR's subsidiaries, PK and York, for fiber optics
testing are used primarily in the telecommunications industry, and sales are
affected by capital acquisitions budget priorities of telecommunications
companies, such as the regional Bell telephone companies.
IFR has maintained a portion of its business in military contracting. Over
the past 5 years the percentage of total revenues from sales to the military
have ranged from a high of 21.6% in 1995 to a low of 13.1% in 1994. The Company
completed a significant military contract during fiscal 1997 with the U.S. Army
to supply test instruments and instruction manuals for the Single Channel Ground
and Airborne Radio System ("SINCGARS"). SINCGARS is a technically sophisticated
radio system designed to prevent enemy interception and monitoring of Army field
communications. Total sales of this contract was approximately $46.9 million and
took place over the last six years. Military contracts generally provide an
opportunity to diversify the customer base, but typically involve lower margins
than commercial sales to private industry. IFR expects to continue to make
military sales on a selective basis but has no present plans to materially
increase its military contracting.
IFR's products are marketed to a diverse customer base and no single
product line is a predominant factor in determining revenues and profits.
Backlog orders are not material because most orders are in smaller quantities or
on terms that allow the customer to cancel or delay delivery without significant
penalty. IFR typically is able to meet its delivery schedules without
maintaining large inventories of completed goods and its customers generally do
not require extended payment terms. The ability to fund working capital
requirements for inventory and receivables financing is not a material factor
affecting competition in the industry.
IFR competes with numerous companies, foreign and domestic, many of which
have greater financial, marketing, and technical resources than IFR. The
principal competitors are domestic U.S. companies and competition is based
primarily on product quality, technological innovation, and customer service,
and IFR believes it is an effective competitor in these areas.
Financial information concerning export sales is incorporated herein by
reference from Note 7 of the "Notes to Consolidated Financial Statements"
contained on page 26 of IFR's annual report to shareholders for the year ended
June 30, 1997.
EMPLOYEES
IFR presently employs approximately 800 persons, approximately 610 of whom
are employed at the corporate offices and manufacturing plant in Wichita,
Kansas, and approximately 119 of whom are employed at Photon Kinetics' offices
and manufacturing plant in Beaverton, Oregon. Approximately 65 persons are
employed at York Technology's office and manufacturing plant in England and
approximately 6 persons are employed at York Technology's office and
manufacturing plant in New Jersey. Management believes employee relations are
satisfactory. None of IFR's employees are currently represented by any
collective bargaining unit.
3
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REGULATION
IFR is subject to laws and regulations affecting manufacturers and
employers generally and to certain Federal Communications Commission regulations
that affect equally all suppliers of similar products, and are not considered a
material factor in the Company's competitive position. Compliance with federal,
state, and local provisions which have been enacted or adopted regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment should not have a material effect upon IFR's
capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
IFR occupies facilities appropriate for electronic assembly operations. IFR
occupies 156,000 square feet on a fifteen acre plant site near Wichita, Kansas,
including a pre-engineered metal building containing 80,000 square feet which
was constructed in 1989. The plant addition and approximately nine acres of the
plant site upon which it is situated are leased, as described more fully in Note
3 of the "Notes to Consolidated Financial Statements" contained on pages 23 and
24 of IFR's annual report to shareholders for the year ended June 30, 1997,
incorporated herein by reference. IFR owns a metal building system containing
76,000 square feet and six acres of the Wichita, Kansas plant site.
IFR also occupies a 46,000 square feet plant site located in Beaverton,
Oregon, which is leased through an operating lease arrangement which expires in
December 31, 1999, a 24,000 square feet plant site located in Chandlers Ford,
England and a 5,000 square feet plant site located in Princeton, New Jersey,
which is leased through an operating lease arrangement which expires on August
31, 1998.
IFR believes that at June 30, 1997, its present facilities are adequate,
with the capability to meet its capacity demand for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
IFR is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of IFR's security holders during the
fiscal quarter ended June 30, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The market information and the approximate number of holders of IFR's
common stock required by Item 5 are incorporated herein by reference from
"Market Price Data" contained on page 16 of IFR's annual report to shareholders
for the year ended June 30, 1997.
No cash dividends were paid during the fiscal years ended June 30, 1997 and
June 30, 1996. On August 14, 1997 the Company's Board of Directors authorized a
$.05 per share dividend payable on September 12, 1997. The Board of Directors
will review the appropriateness of future dividend payments on a quarterly
basis, based on IFR's cash requirements and performance.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference from
the "Performance Highlights" contained on page 1 of IFR's annual report to
shareholders for the year ended June 30, 1997.
4
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference from
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 14 through 16 of the IFR's annual report to
shareholders for the year ended June 30, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of IFR, included at pages
17 through 28 in IFR's annual report to shareholders for the year ended June 30,
1997, are incorporated herein by reference:
Consolidated Balance Sheets as of June 30, 1997 and 1996.
Consolidated Statements of Income for the years ended June 30, 1997, 1996,
and 1995.
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1996, and 1995.
Notes to Consolidated Financial Statements.
Report of Independent Auditors
The supplementary financial information required by Item 8 is incorporated
herein by reference from "Quarterly Financial Data" contained on page 14 of
IFR's annual report to shareholders for the year ended June 30, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of all executive officers of IFR and all positions and
offices held by each of them are as follows:
Name and Age Position
------------ ---------
Alfred H. Hunt, III, 61 Vice Chairman, President and
Chief Executive Officer
Friedel E. Arnold, 60 Vice President and General Manager
Jeffrey A. Bloomer, 40 Treasurer and Chief Financial Officer
Iain M. Robertson, 56 President, Photon Kinetics, Inc.
Managing Director, York Technology Ltd.
Each of said officers serves for a term of one year or until his successor
has been duly elected by the Board of Directors. There are no family
relationships between said officers and/or any director of the Company, and
there are no arrangements or understandings between any officer and any other
person pursuant to which he was elected as an officer.
5
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The business experience during the last five years of each of said
executive officers of the IFR is as follows:
Alfred H. Hunt, III has been President and Chief Executive Officer of IFR
since 1983. He became Vice Chairman of IFR in 1990. He was the Vice
President and General Manager of IFR from 1971 through 1983.
Friedel E. Arnold has been the General Manager of IFR since January 1995
and the Vice President since January 1996. During the period 1987 through
1994 he was the President of Dorne and Margolin, an aerospace manufacturing
company.
Jeffrey A. Bloomer has been the Treasurer and Chief Financial Officer of
IFR since November, 1995. He held the position of Director of Finance with
IFR from 1994 through 1995. During the period 1989 through 1993 he was
General Manager of Pawnee Industries, Inc. a plastics manufacturing
company.
Iain M. Robertson has been President of Photon Kinetics, Inc. and Managing
Director of York Technology Ltd. since July 1995. During the period 1992
through 1995 he was a consultant and President of York Ltd. York Ltd. was
the parent corporation of York Technology Ltd., prior to the purchase by
IFR.
The other information required by Item 10, concerning directors of IFR, is
incorporated herein by reference from "Election of Directors" contained in IFR's
proxy statement for the November 5, 1997 annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from "Election of Directors" and "Compensation of Executive Officers"
contained in IFR's proxy statement for the November 5, 1997 annual meeting of
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from "Outstanding Shares" and "Election of Directors" contained in IFR's proxy
statement for the November 5, 1997 annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from "Certain Relationships" contained in IFR's proxy statement for the November
5, 1997 annual meeting of shareholders.
6
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements of IFR, included in IFR's annual
report to shareholders for the year ended June 30, 1997, are incorporated by
reference in Item 8 of this report:
Consolidated Balance Sheets as of June 30, 1997 and 1996
Consolidated Statements of Income for the years ended June 30, 1997, 1996,
and 1995
Consolidated Statements of Shareholders' Equity for the years ended June
30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
1996, and 1995
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) The supplementary financial information included in IFR's annual
report to shareholders for the year ended June 30, 1997 under the caption
"Quarterly Financial Data" is incorporated by reference in Item 8 of this
report. The following financial statement schedules of IFR are included in this
report in response to Item 14(d):
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
(a)(3) See Exhibit Index
(b) No Form 8-K was filed during the fourth quarter of the fiscal year
ended June 30, 1997.
7
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IFR Systems, Inc.
(Registrant)
Date: September 22, 1997 By /s/ Alfred H. Hunt, III
-------------------------------------
Alfred H. Hunt, III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: September 22, 1997 By /s/ Alfred H. Hunt, III
-------------------------------------
Alfred H. Hunt, III,
Director, President, and Chief
Executive Officer (Principal Executive
Officer)
Date: September 22, 1997 By /s/ Ralph R. Whitney, Jr.
-------------------------------------
Ralph R. Whitney, Jr.,
Chairman of the Board of Directors
Date: September 22, 1997 By /s/ Wilton W. Cogswell, III
-------------------------------------
Wilton W. Cogswell, III,
Director
Date: September 22, 1997 By /s/ Donald L. Graf
-------------------------------------
Donald L. Graf,
Director
Date: September 22, 1997 By /s/ John V. Grose
-------------------------------------
John V. Grose
Director
Date: September 22, 1997 By /s/ Oscar L. Tang
-------------------------------------
Oscar L. Tang,
Director
Date: September 22, 1997 By /s/ Jeffrey A. Bloomer
-------------------------------------
Jeffrey A. Bloomer
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
8
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
<S> <C> <C>
3.1 Certificate of Amendment of Certificate of Incorporation *
of IFR Systems, Inc. (the "Company") dated February 27,
1989. (Incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year
ended June 30, 1989, File No. 0-14224).
3.2 Certificate of Amendment of Certificate of Incorporation *
of the Company dated January 15, 1987. (Incorporated by
reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the year ended June 30, 1987,
File No. 0-14224).
3.3 Certificate of Incorporation of the Company. (Incorporated *
by reference to Exhibit 3.1 to the company's Registration
Statement on Form S-1 filed December 12, 1985,
Reg. No. 33-2122).
3.4 By-Laws of the Company. (Incorporated by reference to *
Exhibit 3.3 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1987, File No. 0-14224).
3.5 Amendment to By-Laws of the Company adopted *
January 26, 1990. (Incorporated by reference to Exhibit
3.5 to the Company's Annual Report on Form 10-K for the
year ended June 30, 1990, File No. 0-14224).
4.1 Specimen certificate representing common stock of the *
Company. (Incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to the Company's Registration Statement
on Form S-1 filed January 17, 1986, Reg. No 33-2122).
4.2 Article II of the Certificate of Incorporation of the *
Company, as amended by the Certificate of Amendment
of Certificate of Incorporation of the Company dated
January 15, 1987. (Included in Exhibit 3.2).
4.3 Articles I, III, and VII of the Certificate of Incorporation *
of the Company, (Included in Exhibits 3.1 and 3.3).
4.4 Articles 2, 3, and 5 of the By-Laws of the Company. *
(Included in Exhibit 3.4).
4.5 Rights Agreement between the Company and *
Harris Trust & Savings Bank dated as of February 28,
1989. (Incorporated by reference to Exhibit 4.5 to the
Company's Annual Report on Form 10-K for the year
ended June 30, 1989, File No. 0-14224).
4.6 Form of Rights Certificate of the Company. *
(Included in Exhibit 4.5).
9
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<CAPTION>
Sequentially
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
<S> <C> <C>
4.7 IFR Systems, Inc. 1992 Nonqualified Stock Option *
Plan (Incorporated by reference to Exhibit 4(a) to the
Company's Registration Statement on Form S-8
filed January 8, 1993, Reg. No. 33-56862).
4.8 Form of Option Agreement for IFR Systems, Inc. 1992 *
Nonquailified Stock Option Plan (Incorporated by
reference to Exhibit 4(b) to the Company's Registration
Statement on Form S-8 filed January 8, 1993,
Reg. No. 33-56862).
10.1 Description of Incentive Bonus Plan for Management *
of the Company. (Incorporated by reference from page
8 of the 1996 Proxy Statement as filed on September
23, 1996, File No. 0-14224).
10.2 Form of Termination Agreement between the Company *
and Alfred H. Hunt, III.
10.3 Form of Termination Agreement between the Company *
and Friedel E. Arnold.
10.4 IFR Systems, Inc. Employees' Profit Sharing Plan *
(Incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended June 30,
1990, File No. 0-14224).
10.5 Restricted Stock Grant Plan of the Company. (Incorporated *
by reference to Exhibit 10.6 to the Company's Annual Report
on Form 10-K for the Year ended June 30, 1989,
File No. 0-14224).
10.6 1988 Incentive Stock Option Plan of the Company. *
(Incorporated by reference to Exhibit 10.7 to the
company's Annual Report on Form 10-K for the year ended
June 30, 1989, File No. 0-14224).
10.7 1996 Incentive Stock Option Plan of the Company *
(Incorporated by reference from Exhibit A of the 1996 Proxy
Statement as filed on September 23, 1996, File No. 0-14224)
10
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<CAPTION>
Sequentially
Exhibit No. Description of Exhibit Numbered Page
- ----------- ---------------------- -------------
<S> <C> <C>
10.8 Form of Indemnity Agreement entered into between *
the Company and its directors and certain of its
officers as of February 27, 1989. (Incorporated by
reference to Exhibit 10.8 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1989,
File No. 0-14224).
10.9 IFR Systems, Inc. Outside Director Compensation, Stock *
Option, and Retirement Plan. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1990, File No. 0-14224).
10.10 Lease between the Company and the City of Goddard,
Kansas dated as of March 15, 1997
11.0 Statement re: computation of per share earnings
13.0 The Company's 1997 Annual Report to Shareholders
21.0 Subsidiaries of the Registrant
23.0 Consent of Ernst & Young LLP
27.0 Financial Data Schedule
</TABLE>
* Document has been previously filed with the Securities and Exchange
Commission and is incorporated herein by reference and made a part hereof.
11
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL C. COL. D COL. E
ADDITIONS
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Charged to Charged to Balance
Beginning Costs Other Accounts Deductions-- at End
DESCRIPTION of Period and Expenses -- Describe Describe (1) of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30,1997:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) $430,924 $87,293 -- $18,221 $499,996
Year ended June 30,1996:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) $472,381 $106,547 -- $148,004 $430,924
Year ended June 30,1995:
Allowance for doubtful accounts
(deducted in balance sheet from
accounts receivable) $240,722 $280,000 -- $48,341 $472,381
</TABLE>
<PAGE>
HINKLE, EBERHART & ELKOURI, L.L.C.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LEASE AGREEMENT
BY AND BETWEEN
CITY OF GODDARD, KANSAS
AND
IFR SYSTEMS, INC.
DATED MARCH 15, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
Parties ............................................................ 1
Recitals ........................................................... 1
ARTICLE I
Section 1.1 Definitions of Words and Terms ................................2
Section 1.2 Rules of Interpretation ......................................12
Section 1.3 Representations and Covenants by Tenant ......................12
Section 1.4 Representations and Covenants by Issuer ......................17
ARTICLE II
Section 2.1 Granting of Leasehold ........................................17
ARTICLE III
Section 3.1 Basic Rent ...................................................18
Section 3.2 Acquisition of Bonds .........................................18
Section 3.3 Additional Rent ..............................................18
Section 3.4 Rent Payable Without Abatement or Setoff .....................18
Section 3.5 Prepayment of Basic Rent .....................................19
Section 3.6 Deposit of Rental Payments by Trustee ........................19
Section 3.7 Absolute Obligation to Pay Rent ..............................19
ARTICLE IV
Section 4.1 Disposition of Original Proceeds; Project Fund................20
Section 4.2 Allocation of Proceeds of Multipurpose Issue .................20
ARTICLE V
Section 5.1 Acquisition of Land and Improvements .........................20
Section 5.2 Project Contracts ............................................21
Section 5.3 Payment of Project Costs for Buildings
and Improvements............................................21
Section 5.4 Payment of Project Costs for Machinery
and Equipment...............................................22
Section 5.5 Completion of Project ........................................22
Section 5.6 Deficiency of Project Fund ...................................22
Section 5.7 Surplus in Project Fund ......................................22
Section 5.8 Right of Entry by Issuer .....................................23
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Section 5.9 Machinery and Equipment Purchased by Tenant ..................23
Section 5.10 Project Property of Issuer ...................................23
Section 5.11 Kansas Retailers' Sales Tax ..................................23
ARTICLE VI
Section 6.1 Insurance as a Condition to Disbursement .....................23
Section 6.2 Insurance After Completion ...................................24
Section 6.3 General Insurance Provisions .................................25
Section 6.4 Title Insurance ..............................................26
ARTICLE VII
Section 7.1 Impositions ..................................................26
Section 7.2 Receipted Statements .........................................26
Section 7.3 Issuer May Not Sell ..........................................26
Section 7.4 Contest of Impositions .......................................26
Section 7.5 Ad Valorem Taxes .............................................27
ARTICLE VIII
Section 8.1 Use of Project ...............................................28
Section 8.2 Environmental Provisions .....................................28
ARTICLE IX
Section 9.1 Sublease by Tenant ...........................................30
Section 9.2 Assignment by Tenant .........................................31
Section 9.3 Release of Tenant ............................................31
Section 9.4 Mergers, Consolidations and Sale of Assets ...................31
Section 9.5 Covenant Against Other Assignments ...........................32
ARTICLE X
Section 10.1 Repairs and Maintenance ......................................32
Section 10.2 Removal, Disposition and Substitution of
Machinery and Equipment ....................................32
ARTICLE XI
Section 11.1 Alteration of Project ........................................34
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ARTICLE XII
Section 12.1 Additional Improvements ......................................34
ARTICLE XIII
Section 13.1 Securing of Permits and Authorizations .......................34
Section 13.2 Mechanics' Liens .............................................34
Section 13.3 Contest of Liens .............................................35
Section 13.4 Utilities ....................................................35
ARTICLE XIV
Section 14.1 Indemnity ....................................................36
ARTICLE XV
Section 15.1 Access to Project ............................................36
ARTICLE XVI
Section 16.1 Option to Extend Term ........................................37
ARTICLE XVII
Section 17.1 Option to Purchase Project ...................................37
Section 17.2 Quality of Title and Purchase Price
for Project ................................................37
Section 17.3 Closing of Purchase of Project ...............................38
Section 17.4 Effect of Failure to Complete Purchase
of Project .................................................39
Section 17.5 Application of Condemnation Awards if
Tenant Purchases Project ...............................39
Section 17.6 Option to Purchase Unimproved Portions
of Land ....................................................40
Section 17.7 Quality of Title and Purchase Price
for Unimproved Portions of Land ............................40
Section 17.8 Closing of Purchase of Unimproved Portions
of Land ....................................................41
Section 17.9 Effect on Lease of Purchase of Unimproved
Portions of Land ...........................................41
Section 17.10 Effect of Failure to Complete Purchase
of Unimproved Portions of Land .............................41
-iii-
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ARTICLE XVIII
Section 18.1 Damage and Destruction .......................................42
Section 18.2 Condemnation .................................................43
ARTICLE XIX
Section 19.1 Termination by Reason of Change of
Circumstances ..............................................44
ARTICLE XX
Section 20.1 Remedies on Default ..........................................44
Section 20.2 Survival of Obligations ......................................45
Section 20.3 No Remedy Exclusive ..........................................45
ARTICLE XXI
Section 21.1 Performance of Tenant's Obligations by Issuer.................46
ARTICLE XXII
Section 22.1 Surrender of Possession ......................................46
ARTICLE XXIII
Section 23.1 Notices ......................................................47
ARTICLE XXIV
Section 24.1 Net Lease ....................................................47
Section 24.2 Funds Held by Trustee After Payment of Bonds .................47
ARTICLE XXV
Section 25.1 Rights and Remedies ..........................................47
Section 25.2 Waiver of Breach .............................................47
Section 25.3 Issuer Shall Not Unreasonably Withhold
Consents and Approvals .....................................48
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ARTICLE XXVI
Section 26.1 Financial Reports ............................................48
Section 26.2 Quiet Enjoyment and Possession ...............................48
ARTICLE XXVII
Section 27.1 Investment Tax Credit; Depreciation ..........................48
ARTICLE XXVIII
Section 28.1 Amendments ...................................................49
Section 28.2 Granting of Easements ........................................49
Section 28.3 Security Interests ...........................................50
Section 28.4 Construction and Enforcement .................................50
Section 28.5 Invalidity of Provisions of Lease ............................50
Section 28.6 Covenants Binding on Successors and Assigns ..................50
Section 28.7 Section Headings .............................................50
Section 28.8 Execution of Counterparts ....................................51
Signatures, Seals & Acknowledgments ................................52
Schedule I - Property Subject to Lease
Schedule II- Allocation of 1997 Bond
Principal Amount
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LEASE AGREEMENT
This Lease Agreement, dated as of March 15, 1997 (the "Lease"), by and
between the City of Goddard, Kansas, a municipal corporation of the State of
Kansas (the "Issuer" or "City"), and IFR Systems, Inc., a corporation organized
under the laws of the State of Delaware and duly qualified to do business in the
State of Kansas (the "Tenant");
W I T N E S S E T H:
WHEREAS, Issuer is a municipal corporation duly organized and existing
under the laws of the State of Kansas, with full, lawful power and authority to
enter into this Lease, by and through its governing body; and
WHEREAS, the Issuer is authorized by K.S.A. 12-1740 to 12-1749d, inclusive,
and K.S.A. 10-116a, all as amended (the "Act"), to acquire, construct, improve
and equip certain facilities (as defined in the Act) for commercial, industrial
and manufacturing purposes, and to enter into leases and lease-purchase
agreements with any person, firm or corporation for said facilities, to issue
revenue bonds for the purpose of paying the cost of any such facilities, and to
refund any revenue bonds previously issued; and
WHEREAS, Issuer previously issued its Industrial Revenue Bonds, Series A,
1989 (IFR Systems, Inc.) (the "1989 Bonds") pursuant to the Act, for the purpose
of paying the costs of constructing, improving and equipping an addition to an
existing manufacturing facility located in unincorporated territory within
Sedgwick County, Kansas, and outside the three mile radius surrounding the
corporate limits of the City of Goddard, Kansas (the "1989 Project"); and
WHEREAS, the 1989 Project originally was leased to IFR Systems, Inc. (the
"Tenant"); and
WHEREAS, for the purpose of financing the costs of refunding, redeeming and
retiring the Issuer's outstanding 1989 Bonds, and purchasing, acquiring,
constructing and equipping certain improvements and additions to the 1989
Project (the "1997 Additions") (the 1989 Project and the 1997 Additions,
together with the previously existing manufacturing facilities, being referred
to herein collectively at the "Project"), the Issuer intends to issue and sell
its Industrial Revenue Refunding and Improvement Bonds, Series 1997 (IFR
Systems, Inc.) in the amount of $3,940,000 (the "1997 Bonds"); and
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WHEREAS, Issuer, in furtherance of the purposes and pursuant to the
provisions of the laws of the State, including the Act, and in order to provide
for the industrial and commercial development and welfare of the City of
Goddard, Kansas, and its environs, and to provide employment opportunities for
its citizens and to promote the economic stability of the State of Kansas, has
proposed and does hereby propose that it shall:
(a) Provide for the refunding, redeeming and retirement of the Issuer's
outstanding 1989 Bonds;
(b) Provide for the purchase, acquisition, construction and installment of
the 1997 Additions;
(c) Lease the Project, including the 1997 Additions, to the Tenant for the
rentals and upon the terms and conditions hereinafter set forth; and
(d) Issue, for the foregoing purposes, the 1997 Bonds under and pursuant
to and subject to the provisions of the Act and a Trust Indenture (as
hereinafter defined), said Trust Indenture being incorporated herein
by reference and authorized by and ordinance of the governing body of
the Issuer; and
WHEREAS, the Tenant, pursuant to the foregoing proposals of Issuer, desires
to lease the Project from Issuer for the rentals and upon the terms and
conditions hereinafter set forth; and
WHEREAS, the 1997 Bonds shall be secured by a pledge of the Project and by
a pledge of all rentals under this Lease;
NOW, THEREFORE, in consideration of the premises, of other good and
valuable considerations, and of the mutual benefits, covenants and agreements
herein contained, the parties hereto hereby make this Lease and agree as
follows:
ARTICLE I
Section 1.1 DEFINITIONS OF WORDS AND TERMS. In addition to the words
and terms defined elsewhere in this Lease, and in the Indenture, the following
words and terms as used in this Lease shall have the following meanings, unless
some other meaning is plainly intended:
"Act" means K.S.A. 12-1740 to 12-1749d, inclusive, and K.S.A. 10-116a, all
as amended.
"Additional Bonds" means any Bonds issued in addition to the 1997 Bonds
pursuant to Section 209 of the Indenture.
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"Additional Rent" means all fees, charges and expenses of the Trustee, all
Impositions, all amounts required to be rebated to the United States pursuant to
the Indenture, all amounts necessary to provide for the timely redemption of
Outstanding Bonds pursuant to Section 302(a) or 302(b) of the Indenture, all
amounts required under Article XXIV hereof, all other payments of whatever
nature which Tenant has agreed to pay or assume under the provisions of this
Lease and all expenses (including reasonable attorney's fees) incurred by Issuer
in connection with the enforcement of any rights under this Lease or the
Indenture. The fees, charges and expenses of the Trustee shall include all
costs incurred in connection with the issuance, transfer, exchange,
registration, redemption or payment of the Bonds except (a) the reasonable fees
and expenses in connection with the replacement of a Bond or Bonds mutilated,
stolen, lost or destroyed or (b) any tax or other government charge imposed in
relation to the transfer, exchange, registration, redemption or payment of the
Bonds.
"Additional Term" shall mean that term commencing on the last day of the
Basic Term and terminating Five (5) years thereafter.
"Authorized Issuer Representative" means the duly elected and acting Mayor
of the Issuer, or such other person at the time designated to act on behalf of
the Issuer as evidenced by written certificate furnished to the Tenant and the
Trustee containing the specimen signature of such person and filed on behalf of
the Issuer by its Mayor and City Clerk.
"Authorized Tenant Representative" means Jeffrey A. Bloomer, Chief
Financial Officer and Treasurer of the Tenant or any such other person at the
time designated to act on behalf of the Tenant as evidenced by a written
certificate furnished to the Issuer and the Trustee containing the specimen
signature of such person and signed on behalf of the Tenant by its President or
any Vice President. Such certificate may designate an alternate or alternates,
each of whom shall be entitled to perform all duties of the Authorized Tenant
Representative.
"Bankruptcy Code" means Title 11 of the United States Code, as amended.
"Basic Rent" means the quarterly pro rata amount which, when added to Basic
Rent Credits, is sufficient to pay, on the next occurring Payment Date, all
principal of, redemption premium, if any, and interest on the Bonds which is due
and payable on such Payment Date.
"Basic Rent Credits" means all funds on deposit in the Principal and
Interest Payment Account and available for the payment of the principal of,
redemption premium, if any, and interest on the 1997 Bonds and Additional Bonds
on any Payment
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Date, including any accrued interest received at the time of issuance and
delivery of the Bonds and deposited in the Principal and Interest Payment
Account pursuant to the terms of the Indenture.
"Basic Rent Payment Date" means the date which is three (3) Business Days
prior to August 1, 1997, and three (3) Business Days prior to the first day of
each February, May, August and November thereafter until the principal of,
redemption premium, if any, and interest on the Bonds have been fully paid or
provision made for their payment in accordance with the provisions of the
Indenture.
"Basic Term" means that term commencing as of the date of this Lease and
ending on May 1, 2012, subject to prior termination as specified in this Lease,
but to continue thereafter until all of the principal of, redemption premium, if
any, and interest on all outstanding Bonds shall have been paid in full or
provision made for their payment in accordance with the provisions of the
Indenture.
"Bond Counsel" means the firm of Hinkle, Eberhart & Elkouri, L.L.C., or any
other attorney or firm of attorneys acceptable to the Issuer, the Trustee and
the Tenant.
"Bondowner" means the registered owner of any fully registered Bond.
"Bond" or "Bonds" means the fully registered 1997 Bonds and any Additional
Bonds.
"Business Day" means a day which is not a Saturday, Sunday or any day
designated as a holiday by the Congress of the United States or by the
Legislature of the State and on which Banks in the State are not authorized to
be closed.
"Certificate of Completion" means a written certificate signed by the
Authorized Tenant Representative stating that (i) the Project has been completed
in accordance with the plans and specifications prepared or approved by Issuer
or Tenant, as the case may be; (ii) the Project has been completed in a good and
workmanlike manner; (iii) no mechanic's or materialmen's liens have been filed,
nor is there any basis for the filing of such liens, with respect to the
Project; (iv) all Improvements initially constituting a part of the Project are
located or installed upon the Land; and (v) if required by an ordinance duly
adopted by Issuer or by applicable building codes, that an appropriate
certificate of occupancy has been issued with respect to the Project.
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"Completion Date" means the date of completion of the acquisition,
purchase, construction and installation of the 1997 Additions.
"Construction Period" means the period from the beginning of the
acquisition and construction of the 1997 Additions to the Completion Date.
"Costs of Issuance" means any and all expenses of whatever nature incurred
in connection with the issuance and sale of the Bonds, including but not limited
to underwriting fees and expenses, underwriting discount, bond and other
printing expenses, and legal fees and expenses of counsel.
"Default" means any event or condition the occurrence of which, with the
lapse of time or the giving of notice or both, constitutes an Event of Default.
"Escrow Trust Account" means that account authorized and established with
the 1989 Trustee pursuant to the Escrow Trust Agreement and designated "City of
Goddard, Kansas, Escrow Trust Account (IFR Systems, Inc.)".
"Escrow Trust Agreement" means that Escrow Trust Agreement by and between
the Issuer, the Tenant and the 1989 Trustee, dated as of March 15, 1997,
authorized by Section 501 of the Indenture.
"Event of Bankruptcy" means an event whereby the Tenant shall (i) admit in
writing its inability to pay its debts as they become due; or (ii) file a
petition in bankruptcy or for reorganization or for the adoption of an
arrangement under the Bankruptcy Code as now or in the future amended, or file a
pleading asking for such relief; or (iii) make an assignment for the benefit of
creditors; or (iv) consent to the appointment of a trustee or receiver for all
or a major portion of its property; or (v) be finally adjudicated as bankrupt or
insolvent under any federal or state law; or (vi) suffer the entry of a final
and nonappealable court order under any federal or state law appointing a
receiver or trustee for all or a major part of its property or ordering the
winding-up or liquidation of its affairs, or approving a petition filed against
it under the Bankruptcy Code, which order, if the Tenant has not consented
thereto, shall not be vacated, denied, set aside or stayed within Sixty (60)
days after the day of entry; or (vii) suffer a writ or warrant of attachment or
any similar process to be issued by any court against all or any substantial
portion of its property, and such writ or warrant of attachment or any similar
process is not contested, stayed, or is not released within Sixty (60) days
after the final entry, or levy or after any contest is finally adjudicated or
any stay is vacated or set aside.
"Event of Default" means any one of the following events:
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(1) Failure of Tenant to make any payment of Basic Rent at the time and in
the amount required hereunder; or
(2) Failure of Tenant to make any payment of Additional Rent at the times
and in the amounts required hereunder, or failure to observe or
perform any other covenant, agreement, obligation or provision of this
Lease on the Tenant's part to be observed or performed, and the same
is not remedied within Thirty (30) days after the Issuer or the
Trustee has given the Tenant written notice specifying such failure
(or such longer period as shall be reasonably required to correct such
default, provided that the (i) Tenant has commenced such correction
within said 30-day period, and (ii) Tenant diligently prosecutes such
correction to completion); or
(3) An Event of Bankruptcy; or
(4) The Tenant abandons the Project.
Notwithstanding the foregoing, if, by reason of FORCE MAJEURE, the Tenant
is unable to perform or observe any agreement, term or condition hereof which
would give rise to an Event of Default under subsection (2) above, the Tenant
shall not be deemed in default during the continuance of such inability.
However, the Tenant shall promptly give notice to the Trustee and the Issuer of
the existence of an event of FORCE MAJEURE and shall use its best efforts to
remove the effects thereof; provided that the settlement of strikes or other
industrial disturbances shall be entirely within its discretion.
"Full Insurable Value" means the full actual replacement cost less physical
depreciation as determined from time to time upon the request of Issuer, Tenant
or the Trustee (but not more frequently than once in every 24 months) by an
architect, appraiser, appraisal company or one of the insurers, selected and
paid by Tenant.
"Guarantor" means the Tenant and any other person or entity, if any, who,
or which, execute and deliver the Guaranty Agreement.
"Guaranty Agreement" means the separate Guaranty Agreement, dated as of
March 15, 1997, by the Tenant and in favor of the Trustee for the benefit of the
Owners of the 1997 Bonds.
"Hazardous Substances" means and includes those elements or compounds which
are contained in the list of hazardous substances adopted by the EPA or the list
of toxic pollutants designated by Congress or the EPA or which are defined as
hazardous, toxic, pollutant, infectious or radioactive by any other federal, or
applicable state or local statute, law, ordinance, code, rule, regulation, order
or decree regulating, relating to, or imposing
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liability or standards of conduct concerning, any hazardous, toxic or
dangerous waste, substance or material, as now or at any time hereafter in
effect.
"Impositions" means all taxes and assessments, general and special, which
may be lawfully taxed, charged, levied, assessed or imposed upon or against or
payable for or in respect of the Project or any part thereof, or any
improvements at any time thereon or Tenant's interest therein, including any new
lawful taxes and assessments not of the kind enumerated above to the extent that
the same are lawfully made, levied or assessed in lieu of or in addition to
taxes or assessments now customarily levied against real or personal property,
and further including all water and sewer charges, assessments and other
governmental charges and impositions whatsoever, foreseen or unforeseen, which
if not paid when due would encumber Issuer's title to the Project.
"Improvements" means the buildings, structures, facilities, machinery,
equipment and other property more specifically described in Paragraph II of
Schedule I attached hereto.
"Indenture" means the Trust Indenture, dated as of March 15, 1997, as from
time to time amended and supplemented by Supplemental Indentures in accordance
with the provisions of Article XI of the Indenture.
"Interest Payment Date" means May 1 and November 1 in each year thereafter,
commencing as of November 1, 1997, and terminating when the principal of,
redemption premium, if any, and interest on the 1997 Bonds has been fully paid.
"Issuer" means the City of Goddard, Kansas, a municipal corporation duly
organized and existing under the laws of the State of Kansas, and its successors
and assigns.
"Land" means the real property more specifically described in Paragraph I
of Schedule I attached hereto and made a part hereof.
"Lease" means this Lease Agreement by and between the City, as Issuer or
Landlord, and the Tenant, dated March 15, 1997, as from time to time amended and
supplemented in accordance with the provisions thereof and of Article XII of the
Indenture.
"Net Proceeds" means, when used with respect to any insurance or
condemnation award with respect to the Project, the proceeds from the insurance
or condemnation award remaining after the payment of all expenses (including
attorneys' fees and any extraordinary expenses of the Trustee) incurred in the
collection of such proceeds.
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"1989 Bonds" means the City of Goddard, Kansas Industrial Revenue Bonds,
Series A, 1989 (IFR Systems, Inc.), dated as of May 1, 1989 and issued in the
original principal amount of $3,500,000, of which $2,330,000 currently remains
outstanding.
"1989 Debt Service Reserve Fund" means the "City of Goddard, Kansas, Debt
Service Reserve Fund for Industrial Revenue Bonds (IFR Systems, Inc.)" created
pursuant to the 1989 Indenture.
"1989 Indenture" means the Trust Indenture dated as of May 1, 1989 by and
between the Issuer and the 1989 Trustee.
"1989 Ordinance" means Ordinance No. 397 adopted by the Issuer's governing
body on May 18, 1989, and authorizing the issuance of the 1989 Bonds.
"1989 Principal and Interest Payment Account" means the "City of Goddard,
Kansas, Principal and Interest Payment Account for Industrial Revenue Bonds (IFR
Systems, Inc.)" created pursuant to the 1989 Indenture.
"1989 Project" means and includes the Issuer's interest in the Land, as
well as the Improvements, as described in the 1989 Indenture and as otherwise
acquired, constructed or installed with proceeds of the 1989 Bonds.
"1989 Trustee" means Boatmen's National Bank (successor in interest to BANK
IV Wichita, National Association), Wichita, Kansas, its successors and assigns.
"1997 Additions" means and includes the Issuer's interest in the Land, as
well as the Improvements acquired with the proceeds of the 1997 Bonds, as more
fully described in Schedule I attached hereto.
"1997 Bonds" means the City of Goddard, Kansas, Industrial Revenue
Refunding and Improvement Bonds, Series 1997 (IFR Systems, Inc.) dated March 15,
1997, and authorized pursuant to the Indenture.
"1997 Ordinance" means Ordinance No. 492, adopted by the governing body of
the Issuer on March 17, 1997, which authorizes the issuance of the 1997 Bonds.
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The term "Notice Address" shall mean:
(1) With respect to the Tenant:
IFR Systems, Inc.
10200 West York Street
Wichita, Kansas 67215
Attn: Treasurer
(2) With respect to the Issuer:
City of Goddard, Kansas
City Hall - 118 North Main
Goddard, Kansas 67052
Attn: City Clerk
(3) With respect to the Trustee:
The Southwest National Bank of Wichita
P. O. Box 1401
Wichita, Kansas 67201
Attn: Corporate Trust Department
(4) With respect to the Underwriters:
Davidson Securities, Inc.
245 North Waco, Suite 525
Wichita, Kansas 67202
Attn: President
George K. Baum & Company
100 North Main, Suite 810
Wichita, Kansas 67202
Attn: Senior Vice President-Public Finance
"Notice Representative" means:
(1) With respect to the Tenant, any executive officer thereof;
(2) With respect to the Issuer, its duly appointed City Clerk;
(3) With respect to the Trustee, any trust officer thereof.
(4) With respect to the Underwriters, its President or Senior Vice
President-Public Finance, respectively.
"Official Action Date" means February 18, 1997, the date on which the
governing body of the Issuer adopted a Resolution indicating an intent to issue
the 1997 Bonds.
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"Original Proceeds" means all proceeds, including accrued interest, derived
from the sale of the 1997 Bonds to the Underwriter.
"Owner" means the registered owner of any fully registered 1997 Bond.
"Paying Agent" means the Trustee.
"Payment Date" means any date on which the principal of or interest on any
Bonds is payable.
"Principal and Interest Payment Account" means the "City of Goddard,
Kansas, Principal and Interest Payment Account (IFR Systems, Inc.)" created
pursuant to Section 601 of the Indenture.
"Principal Payment Date" means May 1 in each year commencing as of May 1,
1998, during which the principal of and redemption premium, if any, on the 1997
Bonds remains Outstanding and unpaid.
"Project" means and includes the interest of the Issuer in the Land and
Improvements (as more specifically described in Schedule I attached hereto),
together with any future Project Additions.
"Project Additions" means any additional improvements, machinery or
equipment acquired, constructed or installed from proceeds of any additional
series of Bonds authorized and issued pursuant to the Indenture.
"Project Costs" means those costs incurred in connection with the 1997
Additions and the Project generally, including:
(a) all costs and expenses necessary or incident to the acquisition
of such of the 1997 Additions as are acquired, constructed or in progress
at the date of such acquisition;
(b) fees and expenses of architects, appraisers, surveyors and
engineers for estimates, surveys, soil borings and soil tests and other
preliminary investigations and items necessary to the commencement of
construction, preparation of plans, drawings and specifications and
supervision of construction, as well as for the performance of all other
duties of architects, appraisers, surveyors and engineers in relation to
the construction, furnishing and equipping of the 1997 Additions or the
issuance of the Bonds;
(c) all costs and expenses of every nature incurred in constructing,
acquiring or equipping the 1997 Additions;
(d) payment of interest actually incurred on any interim financing
obtained from a lender unrelated to the Tenant for
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performance of work on the 1997 Additions prior to the issuance of
the Bonds;
(e) the cost of the title insurance policies and the cost of any
insurance and performance and payment bonds maintained during the
Construction Period in accordance with Section 6.3 and 6.4 of this Lease,
respectively;
(f) interest accruing on the Bonds prior to the Completion Date.
"Project Fund" means the "City of Goddard, Kansas, Project Fund (IFR
Systems, Inc.)" created pursuant to Section 501 of the Indenture.
"Project Replacement Fund" means the "City of Goddard, Kansas, Project
Replacement Fund (IFR Systems, Inc.)", created pursuant to Section 601 of the
Indenture.
"Related Person" means a related person as defined in Section 147(a) and
144(a)(3) of the Code.
"Rental Payments" means the aggregate of the Basic Rent and Additional Rent
payments provided for pursuant to this Lease.
"State" means the State of Kansas.
"Substantial User" means a substantial user of the Project as defined in
Section 147(a) of the Code.
"Tenant" means IFR Systems, Inc., its successors and assigns.
"Term" means, collectively, the Basic Term and any Additional Term of this
Lease.
"Trust Estate" means the Trust Estate described in the Granting Clauses of
the Indenture.
"Trustee" means The Southwest National Bank of Wichita, in the City of
Wichita, Kansas, in its capacity as trustee, bond registrar, fiscal agent and
insurance trustee and its successor or successors and any other corporation or
association which at the time may be substituted in its place pursuant to and at
the time serving as Trustee under this Indenture.
"Underwriters" mean Davidson Securities, Inc. and George K. Baum & Company.
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Section 1.2 RULES OF INTERPRETATION.
(a) Words of the masculine gender shall be deemed and construed to include
correlative words of the feminine and neuter genders. Unless the context shall
otherwise indicate, the words importing the singular number shall include the
plural and vice versa, and words importing persons shall include firms,
associations and corporations, including public bodies, as well as natural
persons.
(b) Wherever in this Lease it is provided that either party shall or will
make any payment or perform or refrain from performing any act or obligation,
each such provision shall, even though not so expressed, be construed as an
express covenant to make such payment or to perform, or not to perform, as the
case may be, such act or obligation.
(c) All references in this instrument to designated "Articles", "Sections"
and other subdivisions are, unless otherwise specified, to the designated
Articles, Sections and subdivisions of this instrument as originally executed.
The words "herein", "hereof", "hereunder" and other words of similar import
refer to this Lease as a whole and not to any particular Article, Section or
subdivision.
(d) The Table of Contents and the Article and Section headings of this
Lease shall not be treated as a part of this Lease or as affecting the true
meaning of the provisions hereof.
Section 1.3 REPRESENTATIONS AND COVENANTS BY TENANT. The Tenant makes
the following covenants and representations as the basis for the undertakings on
its part herein contained:
(A) REPRESENTATIONS AND COVENANTS RELATING TO THE CODE.
(1) It will not use or cause or allow more than 25 percent of the
Sale Proceeds (less Costs of Issuance) to be used or applied to provide a
facility the primary purpose of which is retail food and beverage services,
automobile sales or service, or the provision of recreation or
entertainment.
(2) It will not use or cause or allow any portion of the Sale
Proceeds to be used or applied to provide any private or commercial golf
course, country club, massage parlor, tennis club, skating facility
(including roller skating, skateboard and ice skating), racquet sports
facility (including any handball or racquetball court), hot tub facility,
suntan facility, racetrack, airplane, skybox or other private luxury box,
any health club facility, any facility primarily used for gambling, or any
store the principal business of which is the sale of alcoholic beverages
for consumption off premises.
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(3) At least 95% of the Sale Proceeds, less Costs of Issuance, will
be expended to refund the 1989 Bonds and to pay Project Costs paid or
incurred subsequent to the Official Action Date.
(4) It will not make or cause or permit to be made, whether by the
Trustee or otherwise, any use of the proceeds (as defined in the Code) of
the Bonds which, if such use had been reasonably expected on the date of
issuance of the Bonds, would have caused the Bonds to be "arbitrage bonds"
within the meaning of Section 148 of the Code and further covenants and
agrees that it will comply with and will take all action reasonably
required to insure that the Trustee complies with all applicable
requirements of said Section 148 and the rules and regulations of the
United States Treasury Department thereunder until all of the Bonds,
including interest thereon and any applicable redemption premium, have
been paid.
(5) The weighted average maturity of the Bonds, (determined in
accordance with Section 147(b) of the Code), does not exceed 120 percent of
the average reasonably expected economic life of the Project (as determined
in accordance with Section 147(b) of the Code).
(6) Tenant covenants and agrees to furnish to Issuer prior to
issuance and delivery of the Bonds, all information necessary for Issuer to
comply with Section 149(e) of the Code, including a fully completed
Internal Revenue Service Form 8038 (or such other applicable information
reporting form of the IRS) with respect to the Bonds. Tenant acknowledges
and agrees that it shall principally be responsible, as between or among
any preparers, for such information.
(7) Tenant covenants and agrees to file or cause to be filed such
periodic supplemental statements or notices with the Internal Revenue
Service or such other designated governmental agency as may now or
hereafter be required by applicable statutes or regulations, in order to
comply with Section 144(a)(4) of the Code and for the exemption from
Federal income taxation of the interest on the Bonds to continue in full
force and effect. Tenant further covenants and agrees to do such other
acts as may be necessary from time to time to assure the continued tax
exempt status of the Bonds, and to refrain from any or all acts, including
without limitation, the making of capital expenditures with respect to the
Project or otherwise, which may at anytime adversely affect or threaten the
tax exempt status of the Bonds.
(8) The Project, and each portion thereof, constitutes either land
or property of a character subject to the allowance for depreciation
required by Section 144(a) of the
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Code. Not more than 25% of the proceeds of the Bonds will be used to
acquire the Land in accordance with Section 147(c) of the Code. Except
for costs associated with the issuance of the Bonds, all expenditures for
and costs of the Project have been or will be items of Project Costs as
defined herein.
(9) Other than the 1989 Bonds, as of the date of issuance of the
Bonds or any Additional Bonds, there are not outstanding any obligations
(other than the Bonds) the interest on which is exempt from Federal income
tax by virtue of the provisions of Section 144(a) of the Code and the
proceeds of which were to be used with respect to the Project or with
respect to other facilities located within the boundaries of Issuer, or
facilities contiguous to, or integrated with, the Project or any such
facilities, and the principal user (as defined in the Code) of which is or
will be the Tenant or any other Principal User.
(10) The Tenant will not request or authorize any disbursement by the
Trustee pursuant to the Lease (other than for costs associated with the
issuance of the Bonds) which would result in less than 95% of the proceeds
of the Bonds, including any income thereon, being used to provide land or
property of a character subject to the allowance for depreciation under the
Code (other than any such proceeds or income used for costs associated with
the issuance of the Bonds).
(11) The Tenant will comply with all the limitations and requirements
of Section 148 of the Code and the regulations promulgated thereunder.
(12) As of the date of issuance of the Bonds or any Additional Bonds,
the amount of the Bonds and Additional Bonds allocated to any test-period
beneficiary (when increased by the tax-exempt, facility-related bonds
allocated to such test period beneficiary) does not exceed $40,000,000, all
as defined and set out in Section 144(a)(10) of the Code.
(13) Tenant covenants that not more than 2% of the aggregate
principal amount of the Bonds will be expended for Costs of Issuance as
permitted by Section 147(g) of the Code.
(14) Tenant covenants that no portion of the Original Proceeds of the
Bonds will be used to acquire any property (or any interest therein) unless
the first use of such property is pursuant to such acquisition unless
appropriate rehabilitation expenditures are made to such property in
accordance with Section 147(d) of the Code.
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(15) Tenant covenants that no property acquired or to be acquired
from proceeds of the 1997 Bonds and constituting a part of the 1997
Additions was placed in service more than eighteen months before the date
of issue of the Bonds, nor was any expenditure made in connection with any
portion of the 1997 Additions more than three years in advance of the date
of issue of the 1997 Bonds.
(16) Tenant covenants that no non-exempt user of the 1997 Additions
within the five years preceding the issuance of the Bonds, who will also be
a user of the 1997 Additions after the issuance of the Bonds, will receive
directly or indirectly an amount equal to 5% or more of the face amount of
the Bonds in payment for his interest in the 1997 Additions.
(17) Tenant covenants that its Capital Expenditures within the
meaning of Section 144(a)(4) of the Code for the six year period commencing
three years prior to the date of issuance of the 1989 Bonds, including the
principal amount of the 1989 Bonds, did not exceed $10,000,000 and that
said Capital Expenditures for the six year period commencing three years
prior to the date of issuance of the 1997 Bonds, including the
approximately $2,000,000 principal amount of the 1997 Bonds attributable to
the 1997 Additions, will not exceed $10,000,000 contained in Section
144(a)(4) of the Code.
The Issuer and the Tenant agree to amend the covenants contained in this
Subsection in such manner as shall be set forth in an opinion of Bond Counsel as
being necessary to maintain the exclusion of the interest on the Bonds from the
recipients gross income for purposes of federal income taxation. The special
covenants contained in this Section may be amended at any time, with the consent
of the Trustee, by a written agreement executed by the Issuer and the Tenant
pursuant to this Subsection without notice to or the consent of any Owners of
the Bonds.
(B) GENERAL REPRESENTATION AND COVENANTS.
(1) The Tenant is a Delaware corporation, duly authorized and
qualified to do business in the State of Kansas, with lawful
power and authority to enter into this Lease, acting by and
through its duly authorized officers.
(2) The Tenant shall (i) maintain and preserve its existence and
organization as a corporation and its authority to do business
in the State and to operate the Project; (ii) shall not initiate
any proceedings of any kind whatsoever to dissolve or liquidate
without (a) securing the prior written consent thereto of the
Issuer, and (b) making
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provision for the payment in full of the principal of and
interest and redemption premium, if any, on the Bonds; and
(iii) shall take appropriate steps to extend its corporate
existence if necessary by reason of an impending expiration
of its corporate existence while the Bonds are Outstanding.
(3) Neither the execution or delivery of this Lease or the
consummation of the transactions contemplated thereby or by the
Indenture, nor the fulfillment of or compliance with the terms
and conditions of this Lease, contravenes any provisions of
Tenant's Certificate of Incorporation, or Bylaws or conflicts
with or results in a breach of the terms, conditions or
provisions of any mortgage, debt, agreement, indenture or
instrument to which the Tenant is a party or by which it is
bound, or to which it or any of its properties is subject, or
would constitute a default (without regard to any required
notice or the passage of any period of time) under any of the
foregoing, or would result in the creation or imposition of any
lien, charge or encumbrance whatsoever upon any of the property
or assets of the Tenant under the terms of any mortgage, debt,
agreement, indenture or instrument, or violates any existing
law, administrative regulation or court order or consent decree
to which the Tenant is subject.
(4) This Lease constitutes a legal, valid and binding obligation of
the Tenant enforceable in accordance with its terms.
(5) The Tenant agrees to operate and will operate the Project, or
cause the Project to be operated, as a facility, as such term is
contemplated in the Act, from the date of Issuer's acquisition
of the Project to the end of the Lease Term.
(6) The Tenant has obtained or will obtain any and all permits,
authorizations, licenses and franchises to enable it to operate
and utilize the Project for the purposes for which it is leased
by the Tenant under this Lease.
(7) The estimated total cost of refunding the 1989 Bonds, when
combined with Project Costs to be financed by the Bonds, plus
interest on the Bonds during acquisition, construction and
installation of the 1997 Additions, and expenses anticipated to
be incurred in connection with the issuance of the
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Bonds, will not be less than the face amount of the Bonds.
(8) The Board of Directors of Tenant has approved the 1997 Additions
and the issuance of the 1997 Bonds.
Section 1.4. REPRESENTATIONS AND COVENANTS BY ISSUER. The Issuer makes
the following representations and covenants as the basis for the undertakings on
its part herein contained:
(A) It is a municipal corporation existing under the Constitution and laws
of the State. Under the provisions of the Act, Issuer has the power
to enter into and perform the transactions contemplated by this Lease
and the Indenture and to carry out its obligations hereunder and
thereunder.
(B) It will execute and cause the completed Internal Revenue Service Form
8038 with respect to the 1997 Bonds to be timely submitted by Bond
Counsel to the Internal Revenue Service.
(C) It has not, in whole or in part, assigned, leased, hypothecated or
otherwise created any other interest in, or disposed of, or caused or
permitted any lien, claim or encumbrance to be placed against, the
Project, except for this Lease and the pledge of the Project pursuant
to the Indenture.
(D) Except as otherwise provided herein or in the Indenture, it will not
during the Basic Term or the Additional Term, in whole or in part,
assign, lease, hypothecate or otherwise create any other interest in,
or dispose of, or cause or permit any lien, claim or encumbrance to be
placed against, the Project, except this Lease and the pledge of the
Project pursuant to the Indenture.
(E) It has duly authorized the execution and delivery of this Lease and
the Indenture and the issuance, execution and delivery of the 1997
Bonds.
ARTICLE II
Section 2.1 GRANTING OF LEASEHOLD. The Issuer by these presents hereby
rents, leases and lets unto Tenant and Tenant hereby rents, leases and hires
from Issuer, for the rentals and upon and subject to the terms and conditions
hereinafter set forth, the Project for the Basic Term.
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ARTICLE III
Section 3.1 BASIC RENT. The Issuer reserves and the Tenant covenants
and agrees to pay to the Trustee hereinafter and in the Indenture designated,
for the account of Issuer and during the Basic Term, for deposit in the
Principal and Interest Payment Account hereinafter and in the Indenture
established, on each Basic Rent Payment Date, Basic Rent in immediately
available funds.
Section 3.2 ACQUISITION OF BONDS. In the event Tenant acquires any
Outstanding Bonds, it may present the same to Issuer for cancellation, and upon
such cancellation, Tenant's obligation to pay Basic Rent shall be reduced
accordingly, but in no event shall Tenant's obligation to pay Basic Rent be
reduced in such a manner that the Trustee shall not have on hand in the
Principal and Interest Payment Account funds sufficient to pay the maturing
principal of, redemption premium, if any, and interest on the Bonds as and when
the same shall become due and payable in accordance with the provisions of the
Indenture.
Section 3.3 ADDITIONAL RENT. Within Thirty (30) days after receipt of
written notice thereof, Tenant shall pay any Additional Rent required to be paid
pursuant to this Lease. The Tenant agrees to pay any Additional Rent for
required rebatable arbitrage in the amounts at the times required and entirely
in accordance with the provisions of Section 148(f) of the Code and the
Arbitrage Rebate Compliance Agreement.
Section 3.4 RENT PAYABLE WITHOUT ABATEMENT OR SETOFF. The Tenant
covenants and agrees with and for the express benefit of the Issuer and the
Owners that all payments of Basic Rent and Additional Rent shall be made by
Tenant as the same become due, and that Tenant shall perform all of its
obligations, covenants and agreements hereunder without notice or demand and
without abatement, deduction, setoff, counterclaim, recoupment or defense or any
right of termination or cancellation arising from any circumstance whatsoever,
whether now existing or hereafter arising, and irrespective of whether the
Improvements shall have been acquired, started or completed, or whether Issuer's
title to the Project or any part thereof is defective or non-existent, and
notwithstanding any failure of consideration or commercial frustration of
purpose, the eviction or constructive eviction of Tenant, any Change of
Circumstances, any change in the tax or other laws of the United States of
America, the State, or any municipal corporation of either, any change in
Issuer's legal organization or status, or any default of Issuer hereunder, and
regardless of the invalidity of any action of Issuer or any other event or
condition whatsoever, and regardless of the invalidity of any portion of this
Lease, and Tenant hereby waives the provisions of any statute or other law now
or hereafter in effect contrary to any of its obligations, covenants or
agreements under this Lease or which
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releases or purports to release Tenant therefrom. Nothing in this Lease
shall be construed as a waiver by Tenant of any rights or claims Tenant may
have against Issuer under this Lease or otherwise, but any recovery upon such
rights and claims shall be had from Issuer separately, it being the intent of
this Lease that Tenant shall be unconditionally and absolutely obligated to
perform fully all of its obligations, agreements and covenants under this
Lease (including the obligation to pay Basic Rent and Additional Rent) for
the benefit of the Owners.
Section 3.5 PREPAYMENT OF BASIC RENT. Tenant may at any time prepay all
or any part of the Basic Rent.
Section 3.6 DEPOSIT OF RENTAL PAYMENTS BY TRUSTEE. The Trustee shall
deposit, use and apply all payments of Basic Rent and Additional Rent in
accordance with the provisions of this Lease and the Indenture.
Section 3.7 ABSOLUTE OBLIGATION TO PAY RENT. Until the obligation of
the Tenant to pay Basic Rent, Additional Rent and other payments required
hereunder shall be satisfied and terminated, the obligation of Tenant to pay the
Basic Rent remaining unpaid and to pay the Additional Rent shall be absolute and
unconditional and shall not be abated, rebated, set-off, reduced, abrogated,
waived, diminished or otherwise modified in any manner or to any extent
whatsoever, regardless of any rights of set-off, recoupment or counterclaim that
the Tenant might otherwise have against the Issuer or the Trustee or any other
party or parties and regardless of any contingency, act of God, event or cause
whatsoever and notwithstanding any circumstance of occurrence that may arise or
take place before, during or after the completion of the Project, including, but
without limiting the generality of the foregoing:
(A) Any damage to or destruction of any part or all of the Project;
(B) The taking or damaging of any part or all of the Project by any public
authority or agency in the exercise of the power of eminent domain or
otherwise;
(C) The termination of the Lease Term pursuant to the provisions hereof;
(E) Any failure of the Issuer to perform or observe any agreement or
covenant, whether express or implied, or any duty, liability or
obligation arising out of or in connection with this Lease or the
Indenture;
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(F) Any change or delay in the time available of the 1997 Additions for
use or delays in construction of the 1997 Additions;
(G) The failure to complete or to maintain satisfactory progress in the
construction or acquisition of the 1997 Additions, whether due to the
fault or negligence of the Tenant, or Issuer or any other cause or
reason;
(H) Any acts or circumstances that may constitute an eviction or
constructive eviction from any part of the Project; or
(I) Any change in the tax or other laws of the United States or of any
state or other governmental authority.
Notwithstanding the foregoing, the Tenant may, at its own cost and expense
and in its name or in the name of the Issuer, prosecute or defend any action or
proceeding or take any other action which the Tenant may deem reasonably
necessary in order to secure or protect its right of use and occupancy and other
rights hereunder. Furthermore, except to the extent provided in and subject to
the second paragraph of this Section, nothing contained herein shall be
construed to prevent or restrict the Tenant from asserting any rights which it
may have under this Lease or under any provisions of law against the Issuer or
the Trustee, or any other party or parties for whom the Trustee is acting
pursuant to this Lease.
ARTICLE IV
Section 4.1 DISPOSITION OF ORIGINAL PROCEEDS; PROJECT FUND. The
Original Proceeds shall be paid over to the Trustee for the account of Issuer as
directed by Section 509 of the Indenture and such Original Proceeds shall be
used and applied as provided in this Lease and the Indenture.
Section 4.2 ALLOCATION OF PROCEEDS OF MULTIPURPOSE ISSUE. The Tenant and
the Issuer acknowledge that the 1997 Bonds are being issued for the multiple
purpose of refunding the 1989 Bonds and financing the 1997 Additions. In
accordance with and pursuant to the pertinent provisions of the Code (including
but not limited to Treas. Reg. 1.148-9(h)), the Tenant has elected to allocate
the aggregate principal amount of the 1997 Bonds as set forth in Schedule II
hereof, the same being fully incorporated hereby and as if fully set forth
herein.
ARTICLE V
5.1 ACQUISITION OF 1997 ADDITIONS. The Tenant shall, prior to or
concurrently with the issuance of the 1997 Bonds, convey or cause to be conveyed
to the Issuer such of the 1997 Additions as
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are then completed, installed or in progress. The Tenant shall also
concurrently with such conveyance make provisions for the discharge of any
liens or encumbrances incurred by it in connection with the construction,
installation or development of the 1997 Additions.
Section 5.2 PROJECT CONTRACTS. It is recognized by the parties hereto
that prior to the execution hereof Tenant may have entered into certain
contracts with respect to the acquisition and/or construction of the 1997
Additions, and that after the execution hereof, Tenant will enter into certain
future contracts with respect to the acquisition and/or construction of the 1997
Additions. All of said contracts are hereinafter referred to as the "Project
Contracts". Prior to the execution hereof, certain work has been or may have
been performed on the Project pursuant to said Project Contracts or otherwise.
Tenant hereby conveys, transfers and assigns to Issuer all of Tenant's interest
in the Project Contracts and Issuer hereby designates Tenant as Issuer's agent
for the purpose of executing and performing the Project Contracts. After the
execution hereof, Tenant shall cause the Project Contracts to be fully performed
by the contractor(s) thereunder in accordance with the terms thereof, and Tenant
covenants to cause the 1997 Additions to be acquired, constructed and/or
completed in accordance with the Project Contracts. Tenant warrants that the
construction and/or acquisition of the 1997 Additions in accordance with said
Project Contracts will result in the 1997 Additions being suitable for use by
Tenant for its purposes. Any and all amounts received by Issuer, Trustee or
Tenant from any of the contractors or other suppliers by way of breach of
contract, refunds or adjustments shall become a part of and be deposited in the
Project Fund.
Section 5.3 PAYMENT OF PROJECT COSTS FOR 1997 ADDITIONS. Subject to
certain conditions precedent set forth in Section 6.1 and elsewhere in this
Lease, the Issuer hereby agrees to pay for the purchase, acquisition and
construction of the 1997 Additions, but solely from the Project Fund, and hereby
authorizes and directs the Trustee to pay for the same, but solely from the
Project Fund, from time to time, upon receipt by the Trustee of a certificate
signed by the Authorized Tenant Representative in the form set forth in
Schedule III to the Indenture; provided, however, that the Trustee shall not be
obligated to make any payments hereunder if an Event of Default hereunder has
occurred and is continuing.
The sole obligation of the Issuer under this paragraph shall be to
cause the Trustee to make such disbursements upon receipt of such certificates.
The Trustee may rely fully on any such directions and shall not be required to
make any investigation in connection therewith, except that the Trustee shall
investigate requests for reimbursements directly to the Tenant and shall
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require such supporting evidence as would be required by a reasonable and
prudent trustee.
Section 5.4 PAYMENT OF PROJECT COSTS FOR MACHINERY AND EQUIPMENT. The
Issuer hereby agrees to pay for the purchase and acquisition of any machinery
and equipment constituting a part of the 1997 Additions, but solely from the
Project Fund, from time to time, upon receipt by the Trustee of a certificate
signed by the Authorized Tenant Representative in the form set forth in
Schedule III to the Indenture, and accompanied by the following specific
information (i) name of seller, (ii) name of the manufacturer, (iii) common
descriptive name of machinery or equipment, (iv) manufacturer's or seller's
technical description of machinery or equipment, (v) capacity or similar
designation, (vi) serial number, if any, and (vii) model number, if any.
The sole obligation of Issuer under this Section shall be to cause the
Trustee to make such disbursements upon receipt of said certificates. The
Trustee may rely fully on any such certificate and shall not be required to make
any independent investigation in connection therewith, except that the Trustee
shall investigate requests for reimbursements directly to Tenant and shall
require such supporting evidence as would be required by a reasonable and
prudent trustee. All machinery, equipment and/or personal property acquired, in
whole or in part, from funds deposited in the Project Fund pursuant to this
section shall be and become a part of the Project.
Section 5.5 COMPLETION OF 1997 ADDITIONS. The Tenant warrants that the
1997 Additions, when completed, will be necessary or useful in their
development. Issuer and Tenant each covenant and agree to proceed diligently to
complete the 1997 Additions on or before March 1, 1999. Upon completion of the
1997 Additions, Tenant shall cause the Authorized Tenant Representative to
deliver a Certificate of Completion to the Trustee.
Section 5.6 DEFICIENCY OF PROJECT FUND. If the Project Fund shall be
insufficient to pay fully all Project Costs and to fully complete the 1997
Additions, lien free, Tenant covenants to pay the full amount of any such
deficiency by making payments directly to the contractors and to the suppliers
of materials, machinery, equipment, property and services as the same shall
become due, and Tenant shall save Issuer whole and harmless from any obligation
to pay such deficiency and indemnify Issuer for any costs, expenses and fees,
including reasonable attorney's fees incurred by Issuer associated therewith or
arising therefrom.
Section 5.7 SURPLUS IN PROJECT FUND. Any amount remaining in the
Project Fund after the Certificate of Completion has been delivered to the
Trustee, shall be transferred by the Trustee into the Principal and Interest
Payment Account and used and applied by
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Trustee for the purposes and at the times authorized by the Indenture.
Section 5.8 RIGHT OF ENTRY BY ISSUER. The duly authorized agents of
Issuer shall have the right at any reasonable time prior to the completion of
the Project to have access to the Project or any parts thereof for the purpose
of inspecting and supervising the acquisition, installation or construction
thereof.
Section 5.9 MACHINERY AND EQUIPMENT PURCHASED BY TENANT. If no part of
the purchase price of an item of machinery, equipment or personal property is
paid from funds deposited in the Project Fund pursuant to the terms of this
Lease, then such item of machinery, equipment or personal property shall not be
deemed a part of the Project.
Section 5.10 PROJECT PROPERTY OF ISSUER. All buildings, improvements and
work constituting a part of the Project, all work and materials on the Project
as such work progresses, and the Project as fully completed, anything under this
Lease which becomes, is deemed to be, or constitutes a part of the Project, and
the Project as repaired, rebuilt, rearranged, restored or replaced by Tenant
under the provisions of this Lease, except as otherwise specifically provided
herein, shall immediately when erected or installed become the absolute property
of Issuer.
Section 5.11 KANSAS RETAILERS' SALES TAX.
(A) The parties have entered into this Lease in contemplation that, under
the existing provisions of K.S.A. 79-3606(d) and other applicable laws, sales of
tangible personal property or services purchased in connection with construction
of the 1997 Additions are entitled to exemption from the tax imposed by the
Kansas Retailers' Sales Tax Act. The parties agree that Issuer shall, with
Tenant's assistance, promptly obtain from the State and furnish to the
contractors and suppliers an exemption certificate for the construction of the
Project. Tenant covenants that said exemption shall be used only in connection
with the purchase of tangible personal property or services becoming a part of
the Project. In the event such statutory exemption from payment of tax pursuant
to the Kansas Retailer's Sales Tax Act shall be deemed inapplicable for any
reason and no other suitable exemption shall be available, the Tenant shall, as
between the parties, be principally responsible for paying any such applicable
tax.
ARTICLE VI
Section 6.1 INSURANCE AS A CONDITION TO DISBURSEMENT. As a condition
precedent to disbursement of funds from the Project Fund pursuant to Article V
hereunder, the following policies of insurance shall be in full force and
effect:
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(A) General accident and public liability insurance (including coverage
for all losses whatsoever arising from the ownership, maintenance, use or
operation of any automobile, truck or other vehicle in or upon the Project)
under which Issuer, Tenant and Trustee shall be named as insureds or additional
named insured, in an amount not less than the then maximum liability of a
governmental entity for claims arising out of a single occurrence as provided by
the Kansas tort claims act or other similar future law (currently $500,000 per
occurrence); which policy shall provide that such insurance may not be canceled
by the issuer thereof without at least Thirty (30) days' advance written notice
to Issuer, Tenant and Trustee, such insurance to be maintained throughout the
life of this Lease;
(B) Workers' Compensation Insurance;
(C) With regard to buildings and improvements constituting a part of the
Project, builder's risk-completed value form insurance insuring the Project
against fire, lightning and all other risks covered by the broadest form
extended coverage endorsement then and from time to time thereafter in use in
the State to the Full Insurable Value of the Project. Such policy or policies
of insurance shall name Issuer, Tenant and the Trustee as insureds, as their
respective interests may appear, and all payments received under such policy or
policies by Issuer or Tenant shall be paid over to the Trustee and be deposited
in the Project Fund; and
(D) With regard to buildings and improvements constituting a part of the
Project, performance and labor and material payment bonds and statutory bonds
with respect to the Project Contracts and in the full amount of the Project
Contracts, made by the contractors thereunder as the principals and a surety
company or companies qualifies to do business in Kansas as surety. Said
performance and labor and material payment bonds shall name Issuer, Tenant and
the Trustee as obligees. The Tenant shall cause the statutory bond to be filed
with the Clerk of the Sedgwick County District Court and evidence of the filing
to be furnished to the Trustee. All payments received by Issuer, Tenant and/or
the Trustee under said bonds shall become a part of and be deposited in the
Project Fund. Notwithstanding the foregoing, in substitution for such labor and
material payment bonds and statutory bonds, the general contractor may provide
written lien waivers, and certifications of payment in such form as shall be
acceptable to the Trustee.
Section 6.2 INSURANCE AFTER COMPLETION. The Tenant shall and covenants
and agrees that it will, prior to or simultaneously with the expiration of the
insurance provided for in the preceding section and throughout the Basic Term at
its sole cost and expense, keep the Project constantly insured against loss or
damage by fire, lightning and all other risks covered by the broadest form
extended
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coverage insurance endorsement then in use in the State in an amount equal to
the Full Insurable Value thereof in such insurance company or companies as it
may select and shall at all times maintain general accident and public
liability insurance required pursuant to Section 6.1(a).
Section 6.3 GENERAL INSURANCE PROVISIONS.
(A) Not less than Thirty (30) days prior to the expiration dates of the
expiring policies, originals or certificates or acceptable binders of the
policies provided for in this Article, each bearing notations evidencing payment
of the premiums or other evidence of such payment satisfactory to Issuer, shall
be delivered by Tenant to the Trustee. All policies of such insurance and all
renewals thereof shall name Issuer, Tenant and Trustee as insureds as their
respective interests may appear, shall contain a provision that such insurance
may not be canceled or amended by the issuer thereof without at least Thirty
(30) days' written notice to Issuer, Tenant and the Trustee and shall be payable
to the Trustee. Issuer and Tenant each hereby agree to do anything necessary,
be it the endorsement of checks or otherwise, to cause any such payment to be
made to the Trustee, as long as such payment is required by this Lease to be
made to the Trustee. Any charges made by the Trustee for its services shall be
paid by Tenant.
(B) Each policy of insurance hereinabove referred to shall be issued by a
nationally recognized responsible insurance company qualified under the laws of
the state to assume the risks covered therein.
(C) The initial premium on the policies of insurance herein required shall
be paid by Tenant prior to or concurrently with the issuance of the Bonds, or at
such later date as such policies of insurance may be required to be in force
under the terms of this Article, and evidence of such insurance shall be filed
with the Trustee at such time.
(D) Each policy of insurance hereinabove referred to may be subject to a
reasonable deductible in an amount approved by the Trustee.
(E) Each policy of insurance required herein may be provided through
blanket policies maintained by Tenant.
(F) Anything in this Lease to the contrary notwithstanding, Tenant shall
be liable to Issuer and Tenant agrees to indemnify and hold the Issuer harmless
pursuant to the provisions of this Lease or otherwise, arises from or related to
any loss or damage which may have been occasioned by the negligence of Tenant,
its agents or employees.
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Section 6.4 TITLE INSURANCE. Tenant acknowledges that concurrently with
issuance of the 1989 Bonds, Tenant obtained and delivered to the Issuer a policy
of title insurance, insuring fee simple title to the 1989 Project in Issuer.
Issuer and Tenant agree that any and all proceeds received from title insurance
during the Basic Term (i) if received before the completion of the 1997
Additions shall be paid into and become a part of the Project Fund, (ii) if
received thereafter but before the Bonds and interest thereon have been paid in
full, shall be paid into and become a part of the Principal and Interest Payment
Account, and (iii) if received after the Bonds, redemption premium, if any, and
interest thereon have been paid in full, shall belong and be paid to Tenant.
ARTICLE VII
Section 7.1 IMPOSITIONS. Tenant shall, during the life of this Lease,
bear, pay and discharge, before the delinquency thereof, any and all
Impositions. In the event any Impositions may be lawfully paid in installments,
Tenant shall be required to pay only such installments thereof as become due and
payable during the life of this Lease as and when the same become due and
payable. Issuer covenants that without Tenant's written consent it will not,
unless required by law, take any action which may reasonably be construed as
tending to cause or induce the levying or assessment of any Imposition (other
than special assessments levied on account of special benefits or other
Impositions for benefits or services uniformly imposed) which Tenant would be
required to pay under this Article and that should any such levy or assessment
be threatened or occur Issuer shall, at Tenant's request, fully cooperate with
Tenant in all reasonable ways to prevent any such levy or assessment.
Section 7.2 RECEIPTED STATEMENTS. Unless Tenant exercises its right to
contest any Impositions in accordance with Section 7.4 hereof, Tenant shall,
within Thirty (30) days after the last day for payment, without penalty or
interest, of an Imposition which Tenant is required to bear, pay and discharge
pursuant to the terms hereof, deliver to Issuer a photostatic or other suitable
copy of the statement issued therefor duly receipted to show the payment
thereof.
Section 7.3 ISSUER MAY NOT SELL. Issuer covenants that, unless Tenant
is in default under this Lease it will not, without Tenant's written consent,
unless required by law, sell or otherwise part with or encumber its fee or other
ownership interest in the Project at any time during the Term of this Lease.
Section 7.4 CONTEST OF IMPOSITIONS. Tenant shall have the right, in its
own or Issuer's name or both, to contest the validity or amount of any
Imposition by appropriate legal proceedings
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instituted at least Ten (10) days before the Imposition complained of becomes
delinquent if, and provided, Tenant (i) before instituting any such contest,
shall give Issuer written notice of its intention to do so and, if requested
in writing by Issuer, shall deposit with the Trustee a surety bond of a
surety company acceptable to Issuer as surety, in favor of Issuer, or cash,
in a sum of at least the amount of the Imposition so contested, assuring the
payment of such contested Impositions together with all interest and
penalties to accrue thereon and costs of suit, and (ii) shall diligently
prosecute any such contest and at all times effectively stays or prevents any
official or judicial sale therefor, under execution or otherwise, and (iii)
promptly pays any final judgment enforcing the Imposition so contested and
thereafter promptly procures record release or satisfaction thereof. Tenant
shall hold Issuer whole and harmless from any costs and expenses Issuer may
incur related to any such contest.
Section 7.5. AD VALOREM TAXES.
(A) The parties acknowledge that under the existing provisions of K.S.A.
79-201a, as amended, the property constructed or purchased with the proceeds of
the 1989 Bonds is entitled to exemption from ad valorem taxation for a period of
Ten (10) calendar years after the calendar year in which the 1989 Bonds were
issued. Issuer covenants that it will not voluntarily take any action which may
reasonably be construed as tending to cause or induce the levy or assessment of
ad valorem taxes on the 1989 Project so long as any of the 1997 Bonds are
outstanding and unpaid or for said Ten (10) year period, whichever shall be the
shorter time and should any such levy or assessment be threatened or occur,
Issuer shall, at Tenant's request, fully cooperate with Tenant in all reasonable
ways to prevent any such levy or assessment. Issuer further covenants that it
will make all necessary filings regarding the application for such ad valorem
tax exemption on or before March 1 in each calendar year, and will renew said
application from time to time and take any other action as may be necessary to
maintain such ad valorem tax exemption in full force and effect, in accordance
with K.S.A. 79-210 et. seq. and the State Department of Revenue.
(B) The parties further acknowledge that, under the existing provisions of
K.S.A. 79-201a, as amended, the 1997 Additions constructed or purchased with the
proceeds of the 1997 Bonds are entitled to exemption from ad valorem taxation
for a period of Ten (10) calendar years after the calendar year in which the
1997 Bonds are issued, provided proper application is made therefore. Issuer
covenants that it will not voluntarily take any action which may reasonably be
construed as tending to cause or induce the levy or assessment of ad valorem
taxes on the 1997 Additions so long as any of the 1997 Bonds are outstanding and
unpaid or for said Ten (10) year period, whichever shall be the shorter time and
should any
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such levy or assessment be threatened or occur, Issuer shall, at Tenant's
request, fully cooperate with Tenant in all reasonable ways to prevent any
such levy or assessment. Issuer further covenants that it will make all
necessary filings regarding the application for such ad valorem tax exemption
on or before March 1 in the calendar year following the calendar year in
which the 1997 Bonds were issued, and will renew said application from time
to time and take any other action as may be necessary to maintain such ad
valorem tax exemption in full force and effect, in accordance with K.S.A.
79-210 ET SEQ. and the State Department of Revenue.
ARTICLE VIII
Section 8.1 USE OF PROJECT. Subject to the provisions of this Lease,
Tenant shall have the right to use the Project for any and all purposes allowed
by law and contemplated by the Constitution of the State and the Act. Tenant
shall comply with all statutes, laws, resolutions, orders, judgments, decrees,
regulations, directions and requirements of all federal, state, local and other
governments or governmental authorities, now or hereafter applicable to the
Project or to any adjoining public ways, as to the manner of use or the
condition of the Project or of adjoining public ways. Tenant shall comply with
the mandatory requirements, rules and regulations of all insurers under the
policies required to be carried under the provisions of this Lease. Tenant
shall pay all costs, expenses, claims, fines, penalties and damages that may in
any manner arise out of, or be imposed as a result of, the failure of Tenant to
comply with the provisions of this Article.
Section 8.2 ENVIRONMENTAL PROVISIONS.
(A) The Tenant hereby covenants that it will not cause or permit any
Hazardous Substances (as defined herein) to be placed, held, located or disposed
of, on, under or at the Project site, other than in the ordinary course of
business and in compliance with all applicable laws.
(B) In furtherance and not in limitation of any indemnity elsewhere
provided to the Issuer hereunder and in the Indenture, the Tenant hereby agrees
to indemnify and hold harmless the Issuer, the Trustee, and the Bondowners from
and against any and all losses, liabilities, including strict liability,
damages, injuries, expenses, including reasonable attorneys' fees, costs of any
settlement or judgment and claims of any and every kind whatsoever paid,
incurred or suffered by, or asserted against, the Issuer, the Trustee, or the
Bondowners by any person or entity for, with respect to , or as a direct or
indirect result of, the presence on or under, or the escape, seepage, leakage,
spillage, discharge,
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emission, discharging or release from the Project site of any Hazardous
Substance (including, without limitation, any losses, liabilities, reasonable
attorneys' fees, costs of any settlement or judgment or claims asserted or
arising under the Comprehensive Environmental Response, Compensation and
Liability Act, any federal, state or local so-called "Superfund" or "Super
lien" laws, or any other applicable statute, law, ordinance, code, rule,
regulation, order or decree regulating, relating to or imposing liability,
including strict liability, or standards of conduct concerning, any Hazardous
Substance) regardless of whether or not caused by or within the control of
the Tenant.
(C) If the Tenant receives any notice of (i) the happening of any event
involving the use, other than in the ordinary course of business and in
compliance with all applicable laws, spill, release, leak, seepage, discharge or
cleanup of any Hazardous Substance on the Project site or in connection with the
Tenant's operations thereon or (ii) any complaint, order, citation or notice
with regard to air emissions, water discharges, or any other environmental,
health or safety matter affecting the Tenant (an "Environmental Complaint") from
any Persons (including, without limitation, the United States Environmental
Protection Agency (the "EPA")), and the Kansas Department of Health and
Environment ("KDHE") then the Tenant shall immediately notify the Issuer, the
Trustee, and the Trustee in writing of said notice.
(D) The Issuer shall have the right, but not the obligation, and without
limitation of the Issuer's other rights under this Agreement, to enter the
Project or to take such other actions as deemed necessary or advisable to
inspect, clean up, remove, resolve or minimize the impact of, or to otherwise
deal with, any Hazardous Substance or Environmental Complaint following receipt
of any notice from any Person, including, without limitation, the EPA or KDHE,
asserting the existence of any Hazardous Substance or an Environmental Complaint
pertaining to the Project or any part thereof which, if true, could result in an
order, suit or other action against the Tenant and/or which, in the reasonable
judgment of the Issuer, could jeopardize its interests under this Lease. All
reasonable costs and expenses incurred by the Issuer in the exercise of any such
rights and shall be payable by the Tenant upon demand.
(E) If an Event of Default shall have occurred and be continuing, the
Tenant at the request of the Issuer or Trustee shall periodically perform (at
the Tenant's expense) an environmental audit and, if reasonably deemed necessary
by the Issuer, an environmental risk assessment, (each of which must be
reasonably satisfactory to the Issuer, of the Project, or the hazardous waste
management practices and/or hazardous waste disposal sites used by the Tenant
with respect to the Project. Said audit and/or risk assessment shall be
conducted by an environmental
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consultant satisfactory to the Issuer or Trustee. Should the Tenant fail to
perform any such environmental audit or risk assessment within Thirty (30)
days of the written request of the Issuer or Trustee, the Issuer or Trustee
shall have the right, but not the obligation, to retain an environmental
consultant to perform any such environmental audit or risk assessment. All
costs and expenses incurred by the Issuer in the exercise of such rights
shall be payable by the Tenant on demand.
(F) The Tenant shall not install nor permit to be installed in the Project
friable asbestos or any substance containing asbestos and deemed hazardous by
federal or state regulations applicable to the Project and respecting such
material, and with respect to any such material currently present in the
Project, shall promptly either (i) remove any material which such applicable
regulations deem hazardous and require to be removed or (ii) otherwise comply
with such applicable federal and state regulations, at the Tenant's expense. If
the Tenant shall fail to so remove or otherwise comply, the Issuer may declare
in Event of Default and/or do whatever is necessary to eliminate said substances
from the Project or otherwise comply with the applicable law, regulation, or
order, and the costs thereof shall be payable by the Tenant on demand. The
Tenant shall defend, indemnify, and save the Issuer, Trustee and the Trustee
harmless from all costs and expenses (including consequential damages) asserted
or proven against the Tenant by any Person, as a result of the presence of said
substances, and any removal or compliance with such regulations. The foregoing
indemnification shall be a recourse obligation of the Tenant and shall survive
the termination of this Lease.
(G) The provisions of this Section shall survive the termination of this
Lease, except with respect to obligations which would arise hereunder as a
result of the use, spill, release, leak, seepage or discharge of Hazardous
Substances on the Project site after the Project are no longer occupied by the
Tenant.
ARTICLE IX
Section 9.1 SUBLEASE BY TENANT. Tenant may sublease the Project to a
single party or entity, with the prior written consent of Issuer. Tenant may
sublease portions of the Project for use by others in the normal course of
its business without Issuer's prior consent or approval. In the event of any
such subleasing, Tenant shall remain fully liable for the performance of its
duties and obligations hereunder, and no such subleasing and no dealings or
transactions between Issuer or the Trustee and any such subtenant shall
relieve Tenant of any of its duties and obligations hereunder. Any such
subleases shall include the following provisions:
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(A) No subtenant shall be permitted to use more than Ten percent (10%) of
the Project or any part thereof, without the prior written consent of Tenant and
the Trustee, for retail food and beverage service, automobile sales or service,
or the provision of recreation or entertainment;
(B) No subtenant shall be permitted to use any portion of Project for any
private or commercial golf course, country club, massage parlor, tennis club,
skating facility (including roller skating, skateboard and ice skating), racquet
sports facility (including any handball or racquetball court), hot tub facility,
suntan facility, or racetrack.
Any such sublease shall be subject and subordinate in all respects to the
provisions of this Lease.
Section 9.2 ASSIGNMENT BY TENANT. Tenant may assign its interest in
this Lease with the prior written consent of Issuer. In the event of any such
assignment, Tenant shall remain fully liable for the performance of its duties
and obligations hereunder, except to the extent hereinafter provided, and no
such assignment and no dealings or transactions between Issuer or the Trustee
and any such assignee shall relieve Tenant of any of its duties and obligations
hereunder, except as may be otherwise provided in the following section.
Section 9.3 RELEASE OF TENANT. If, in connection with an assignment by
Tenant of its interests in this Lease, (i) the Issuer and the Owners of Ninety
percent (90%) in aggregate principal amount of the Outstanding Bonds (including
any Additional Bonds) file with the Trustee and the Underwriter their prior
written consent to such assignment, and (ii) the proposed assignee shall
expressly assume and agree to perform all of the obligations of Tenant under
this Lease; then and in such event Tenant shall be fully released from all
obligations accruing hereunder after the date of such assignment.
Section 9.4 MERGERS, CONSOLIDATIONS AND SALE OF ASSETS. Notwithstanding
the provisions of Section 9.2, if Tenant shall assign its interests in this
Lease in connection with a transaction involving the merger or consolidation of
Tenant with or into, or a sale, lease or other disposition of all or
substantially all of the property of Tenant as an entirety to another person,
association, corporation or other entity, and (i) Issuer files with the Trustee
its prior written consent to such assignment, (ii) the proposed assignee shall
expressly assume and agree to perform all of the obligations of Tenant under
this Lease and the Guaranty Agreement with regard to the Bonds, and (iii) Tenant
shall furnish the Trustee and Issuer with evidence in the form of financial
statements accompanied by the certificate of an independent certified public
accountant of recognized standing establishing
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that the net worth of such proposed assignee immediately following such
assignment will be at least equal to the net worth of Tenant as shown by the
most recent financial statement of Tenant furnished to Trustee pursuant to
this Lease, then and in such event Tenant shall be fully released from all
obligations accruing hereunder after the date of such assignment.
Section 9.5 COVENANT AGAINST OTHER ASSIGNMENTS. Tenant will not assign
or in any manner transfer its interests under this Lease, nor will it suffer or
permit any assignment thereof by operation of law, except in accordance with the
limitations, conditions and requirements herein set forth.
ARTICLE X
Section 10.1 REPAIRS AND MAINTENANCE. The Tenant covenants and agrees
that it will, during the Term of this Lease, keep and maintain the Project and
all parts thereof in good condition and repair, including but not limited to the
furnishing of all parts, mechanisms and devices required to keep the machinery,
equipment and personal property constituting a part of the Project in good
mechanical and working order, and that during said period of time it will keep
the Project and all parts thereof free from filth, nuisance or conditions
unreasonably increasing the danger of fire.
Section 10.2 REMOVAL, DISPOSITION AND SUBSTITUTION OF MACHINERY AND
EQUIPMENT. The Tenant shall have the right, provided Tenant is not in default
in the payment of Basic Rent and Additional Rent, to remove and sell or
otherwise dispose of any machinery and equipment which constitute a part of the
Project and which are no longer used by Tenant or, in the opinion of Tenant, are
no longer useful to Tenant in its operations (whether by reason of changed
processes, changed techniques, obsolescence, depreciation or otherwise),
subject, however, to the following conditions:
(A) With respect only to each item of machinery and equipment that
originally cost $25,000 or more, to the following:
(1) Prior to any such removal, Tenant shall deliver to the Trustee a
certificate signed by the Authorized Tenant Representative (i)
containing a complete description, including the make, model and
serial numbers, if any, of any machinery and equipment
constituting a part of the Project which it proposes to remove,
(ii) stating the reason for such removal, (iii) stating what
disposition, if any, of the machinery and equipment is to be
made by Tenant after such removal and the names of the party or
parties to whom such disposition is to be
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made and the consideration to be received by Tenant therefor,
if any, and (iv) setting forth the original cost and the fair
market value of such machinery and equipment; provided, however,
that in no event shall the fair market value of such machinery
and equipment be less than the consideration to be received by
Tenant upon the disposition thereof.
(2) Prior to any such removal, Tenant shall pay the fair market
value of such machinery and equipment as set forth in said
certificate to the Trustee and the Trustee shall deposit such
amount in the Principal and Interest Payment Account and apply
the same to the payment of the principal of Outstanding Bonds.
(3) The Tenant may remove any machinery and equipment constituting a
part of the Project without first complying with the provisions
of subparagraph (2) above; provided, however, that Tenant shall
promptly replace any such machinery and equipment so removed
with machinery and equipment of the same or a different kind but
which are capable of performing the same function, efficiently,
as the machinery and equipment so removed, and the machinery and
equipment so acquired by Tenant to replace such machinery and
equipment shall be deemed a part of the Project. Within Thirty
(30) days after any such replacement by Tenant, Tenant shall
deliver to the Trustee a certificate of the Authorized Tenant
Representative setting forth a complete description, including
make, model and serial numbers, if any, of the machinery and
equipment which Tenant has acquired to replace the machinery and
equipment so removed by Tenant, the cost thereof and that said
machinery and equipment have been installed.
(B) With respect to such items of machinery and equipment that originally
cost less than $25,000, Tenant shall deliver to the Trustee a certificate
setting forth the facts provided for in subparagraph (A)(1) above. In no event
shall Tenant pursuant to this subsection (B) remove items of machinery and
equipment having an aggregate original cost of more than $50,000.
All machinery and equipment constituting a part of the Project and removed
by Tenant pursuant to this Section shall become the absolute property of Tenant
and may be sold or otherwise disposed of by Tenant without accounting to Issuer
with respect thereto. In all cases, Tenant shall pay all the costs and expenses
of any such
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removal and shall immediately repair at its expense all damage caused
thereby. Tenant's rights under this Article to remove machinery and
equipment constituting a part of the Project is intended only to permit
Tenant to maintain an efficient operation by the removal of such machinery
and equipment no longer suitable to Tenant's use for any of the reasons set
forth in this paragraph and such right is not to be construed to permit a
removal under any other circumstances and shall not be construed to permit
the wholesale removal of such machinery and equipment by Tenant.
ARTICLE XI
Section 11.1 ALTERATION OF PROJECT. Tenant shall have and is hereby
given the right, at its sole cost and expense, to make such additions, changes
and alterations in and to any part of the Project as Tenant from time to time
may deem necessary or advisable; provided, however, Tenant shall not make any
major addition, change or alteration which will adversely affect or alter the
intended use and operations or structural strength of any part of the Project;
provided further, Tenant shall not make any additions, changes or alterations
costing in excess of $50,000 without prior written approval of the authorized
Issuer Representatives. All additions, changes and alterations made by Tenant
pursuant to the authority of this Article shall (i) be made in a workmanlike
manner and in strict compliance with all laws and resolutions applicable
thereto, (ii) when commenced, be prosecuted to completion with due diligence,
and (iii) when completed, shall be deemed a part of the Project; provided,
however, that additions of machinery, equipment and/or personal property of
Tenant, not purchased or acquired from funds deposited with the Trustee
hereunder and not constituting a part of the Project shall remain the separate
property of Tenant and may be removed by Tenant prior to expiration of the Term
of this Lease; provided further, however, that all such additional machinery,
equipment and/or personal property which remain in the Project after the
termination of this Lease for any cause other than the purchase of the Project
pursuant to Article XVII hereof shall, upon and in the event of such
termination, become the separate and absolute property of Issuer.
ARTICLE XII
Section 12.1 ADDITIONAL IMPROVEMENTS. Tenant shall have and is hereby
given the right, at its sole cost and expense, to construct on the Land or
within areas occupied by the Improvements, or in airspace above the Project,
such additional buildings and improvements as Tenant from time to time may deem
necessary or advisable; provided further, Tenant shall not make any additional
improvements and buildings costing in excess of $50,000 without prior written
approval of the of the Authorized Issuer
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Representative. All additional buildings and improvements constructed by
Tenant pursuant to the authority of this Article shall, during the Basic Term
and any Additional Term, remain the property of Tenant and may be added to,
altered or razed and removed by Tenant at any time during the Term hereof.
Tenant covenants and agrees (i) to make all repairs and restorations, if any,
required to be made to the Project because of the construction of, addition
to, alteration or removal of, said additional buildings or improvements, (ii)
to keep and maintain said additional buildings and improvements in good
condition and repair, ordinary wear and tear excepted, (iii) to promptly and
with due diligence either raze and remove from the Land, in a good,
workmanlike manner, or repair, replace or restore such of said additional
buildings or improvements as may from time to time be damaged by fire or
other casualty, and (iv) that all additional buildings and improvements
constructed by Tenant pursuant to this Article which remain in place after
the termination of this Lease for any cause other than the purchase of the
Project pursuant to Article XVII hereof shall, upon and in the event of such
termination, become the separate and absolute property of Issuer.
ARTICLE XIII
Section 13.1 SECURING OF PERMITS AND AUTHORIZATIONS. Tenant shall not do
or permit others under its control to do any work in or in connection with the
Project or related to any repair, rebuilding, restoration, replacement,
alteration of or addition to the Project, or any part thereof, unless all
requisite municipal and other governmental permits and authorizations shall have
first been procured and paid for. All such work shall be done in a good and
workmanlike manner and in compliance with all applicable building, zoning and
other laws, resolutions, governmental regulations and requirements and in
accordance with the requirements, rules and regulations of all insurers under
the policies required to be carried under the provisions of this Lease.
Section 13.2 MECHANICS' LIENS. Tenant shall not do or suffer anything to
be done whereby the Project, or any part thereof, may be encumbered by any
mechanics' or other similar lien and if, whenever and so often as any mechanics'
or other similar lien is filed against the Project, or any part thereof, Tenant
shall discharge the same of record within Thirty (30) days after the date of
filing. Notice is hereby given that Issuer does not authorize or consent to and
shall not be liable for any labor or materials furnished to Tenant or anyone
claiming by, through or under Tenant upon credit, by contract or otherwise, and
that no mechanics' or similar lien for any such labor, services or materials
shall attach to or affect the reversionary or other estate of Issuer in and to
the Project, or any part thereof.
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Section 13.3 CONTEST OF LIENS. Tenant, notwithstanding the above, shall
have the right to contest any such mechanics' or other similar lien if within
said Thirty (30) day period stated above it (i) notifies Issuer in writing of
its intention so to do, and if requested by Issuer, deposits with the Trustee a
surety bond issued by a surety company acceptable to Issuer as surety, in favor
of Issuer or cash, in the amount of the lien claim so contested, indemnifying
and protecting Issuer from and against any liability, loss, damage, cost and
expense of whatever kind or nature growing out of or in any way connected with
said asserted lien and the contest thereof, and (ii) diligently prosecutes such
contest, at all times effectively staying or preventing any official or judicial
sale of the Project or any part thereof or interest therein, under execution or
otherwise, and (iii) promptly pays or otherwise satisfies any final judgment
adjudging or enforcing such contested lien claim and thereafter promptly
procures record release or satisfaction thereof.
Section 13.4 UTILITIES. All utilities and utility services used by
Tenant in, on or about the Project shall be contracted for by Tenant in Tenant's
own name and Tenant shall, at its sole cost and expense, procure any and all
permits, licenses or authorizations necessary in connection therewith.
ARTICLE XIV
Section 14.1 INDEMNITY. Tenant shall and hereby covenants and agrees to
indemnify, protect, defend and save Issuer and the Trustee harmless from and
against any and all claims, demands, liabilities and costs, including attorneys'
fees, arising from damage or injury, actual or claimed, of whatsoever kind or
character, to property or persons, occurring or allegedly occurring in, on or
about the Project during the Term hereof, and upon timely written notice from
Issuer or the Trustee, Tenant shall defend Issuer and the Trustee in any action
or proceeding brought thereon; provided, however, that nothing contained in this
Section shall be construed as requiring Tenant to indemnify Issuer or the
Trustee for any claim resulting from any act or omission of Issuer or the
Trustee, or their respective agents and employees.
ARTICLE XV
Section 15.1 ACCESS TO PROJECT. Issuer, for itself and its duly
authorized representatives and agents, including Trustee, reserves the right to
enter the Project at all reasonable times during usual business hours throughout
the Basic Term and the Additional Term for the purpose of (i) examining and
inspecting the same, (ii) performing such work made necessary by reason of
Tenant's default under any of the provisions of this Lease, and
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(iii) while an Event of Default is continuing hereunder, for the purpose of
exhibiting the Project to prospective purchasers, lessees or mortgagees.
Issuer may, during the progress of said work mentioned in (ii) above, keep
and store on the Project all necessary materials, supplies and equipment and
shall not be liable for necessary inconvenience, annoyances, disturbances,
loss of business or other damage suffered by reason of the performance of any
such work or the storage of such materials, supplies and equipment.
ARTICLE XVI
Section 16.1 OPTION TO EXTEND TERM. Tenant shall have and is hereby
given the right and option, to extend the term of this Lease for the Additional
Term provided that (i) Tenant shall give Issuer written notice of its intention
to exercise each such option at least Thirty (30) days prior to the expiration
of the Basic Term, and (ii) Tenant is not in default hereunder in the payment of
Basic Rent or Additional Rent the time it gives Issuer such notice or at the
time the Additional Term commences. In the event Tenant exercises any of such
options, the terms, covenants, conditions and provisions set forth in this Lease
shall be in full force and effect and binding upon Issuer and Tenant during the
Additional Term except that Tenant covenants and agrees that the Basic Rent
during any extended term herein provided for shall be the sum of $100.00 per
year, payable in advance on the first Business Day of such Additional Term.
ARTICLE XVII
Section 17.1 OPTION TO PURCHASE PROJECT. Subject to the provisions of
Sections 17.1 through 17.5, inclusive, of this Article, the Tenant shall have
the right and option to purchase the Issuer's interest in the Project at any
time during the Term hereof. The Tenant shall exercise its aforesaid option by
giving the Issuer written notice of Tenant's election to exercise its option and
specifying the date, time and place of closing, which date (the "Closing Date")
shall neither be earlier than Thirty (30) days nor later than One Hundred Eighty
(180) days after the notice is given. The Tenant may not, however, exercise its
said option if it is in default hereunder on the Closing Date.
Section 17.2 QUALITY OF TITLE AND PURCHASE PRICE FOR PROJECT. If a
notice of election to purchase the Project be given as provided by Section 17.1,
the Issuer shall and covenants and agrees to sell and convey its interests in
and to the Project to the Tenant on the Closing Date free and clear of all liens
and encumbrances whatsoever except (i) those to which the title was
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subject on the date of the Tenant's conveyance of the Project to the Issuer,
or to which title became subject with Tenant's written consent, or which
resulted from any failure of the Tenant to perform any of its covenants or
obligations under this Lease, (ii) taxes and assessments, general and
special, if any, and (iii) the rights, titles and interests of any party
having condemned or who is attempting to condemn title to, or the use for a
limited period of, all or any part of the Project, for the price and sum as
follows (which Tenant shall and covenants and agrees to pay in cash at the
time of delivery of the Issuer's deed or other instrument or instruments of
transfer to the Project to Tenant as hereinafter provided):
(1) The full amount which is required to provide the Issuer and the
Trustee with funds sufficient, in accordance with the provisions
of the Indenture, to pay at maturity or to redeem and pay in
full (i) the principal of all of the Outstanding Bonds, (ii) all
interest due thereon to the date of maturity or redemption,
whichever first occurs, and (iii) all costs, expenses, including
reasonable attorney's fees, and premiums incident to the
redemption and payment of said Bonds in full, plus
(2) The sum of $100.00
Nothing in Sections 17.1 through 17.5 of this Article shall release or discharge
the Tenant from its duty or obligation under this Lease to make any payment of
Basic Rent or Additional Rent which, in accordance with the terms of this Lease,
becomes due and payable prior to the Closing Date, or its duty and obligation to
fully perform and observe all those Lease obligations and duties required to be
performed and observed by the Tenant prior to the Closing Date.
Section 17.3 CLOSING OF PURCHASE OF PROJECT. On the Closing Date, the
Issuer shall deliver to the Tenant its special warranty deed or other
appropriate instrument or instruments of conveyance or assignment, properly
executed and conveying the Issuer's interest in the Project to the Tenant free
and clear of all liens and encumbrances whatsoever except as set forth in the
preceding Section 17.2, or conveying such other title to the Project as may be
acceptable to the Tenant, and then and there Tenant shall pay the full purchase
price for the Project as follows (i) the amount specified in clause (1) of
Section 17.2 shall be paid to the Trustee who shall deposit the same in the
Principal and Interest Payment Account and shall use the same to pay or redeem
the Bonds and the interest thereon as provided in the Indenture, and (ii) the
amount specified in clause (2) of said Section 17.2 shall be paid to the Issuer;
provided, however, nothing herein shall require the
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Issuer to deliver its said special warranty deed or other appropriate
instrument or instruments of assignment or conveyance to the Tenant until
after all duties and obligations of the Tenant under this Lease to the date
of such delivery have been fully performed and satisfied. Upon the delivery
to the Tenant of the Issuer's said special warranty deed or other appropriate
instrument or instruments of assignment or conveyance and payment of the
purchase price by the Tenant, this Lease shall, IPSO FACTO, terminate.
Section 17.4 EFFECT OF FAILURE TO COMPLETE PURCHASE OF PROJECT. If, for
any reason whatsoever, the purchase of the Project by the Tenant pursuant to
valid notice of election to purchase given as provided by Section 17.1 is not
effected on the Closing Date, this Lease shall be and remain in full force and
effect according to its terms the same as though no notice of election to
purchase had been given, except that:
(A) If such purchase is not effected on the Closing Date because of the
failure or refusal of the Tenant to fully perform and observe all of
the covenants and conditions herein contained on Tenant's part to be
performed or observed to the Closing Date, the Tenant shall be deemed
to be in default under this Lease and the Issuer shall have such
rights and the Tenant shall have such duties and obligations as are
stated in Article XX hereof with like effect as though written notice
of default had been given and any grace period for the correction of
such default had expired and said default remains unsatisfied.
(B) If such purchase is not effected on the Closing Date because on said
date the Issuer does not have and is unable to convey to the Tenant
such title to the Project as Tenant is required to accept, the Issuer
shall use its best efforts to cure any such defect in its title to the
Project. In the event the Issuer is unable to cure such defect in its
title to the Project, the Tenant shall have the right to cancel this
Lease forthwith if, but only if, the principal of and interest on the
Bonds and all costs incident to the redemption and payment of the
Bonds have been paid in full.
Section 17.5 APPLICATION OF CONDEMNATION AWARDS IF TENANT PURCHASES
PROJECT. The right of the Tenant to exercise its option to purchase the Project
under the provisions of Sections 17.1 through 17.5, inclusive, of this Article
shall remain unimpaired notwithstanding any condemnation of title to, or the use
for a limited period of, all or any part of the Project. If the Tenant shall
exercise its said option and pay the purchase price as provided in Section 17.2,
all of the condemnation awards received by the Issuer after the payment of said
purchase price, less all
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attorneys' fees and other expenses and costs incurred by the Issuer in
connection with such condemnation, shall belong and be paid to the Tenant.
Section 17.6 OPTION TO PURCHASE UNIMPROVED PORTIONS OF LAND. The Tenant
shall have and is hereby given the right and option to purchase at any time and
from time to time during the term of this Lease a vacant part or vacant parts of
the unimproved Land constituting a part of the Project; provided, however, the
Tenant shall furnish the Issuer with a certificate of the Authorized Tenant
Representative, dated not more than Thirty (30) days prior to the date of the
purchase, stating that, in the opinion of the Authorized Tenant Representative
(i) the portion of the Land with respect to which the option is exercised is not
needed for the operation of the Project for the purposes herein stated, and (ii)
the purchase will not impair the usefulness or operating efficiency of the
Project, or materially impair the value of the Project and will not destroy or
materially impair the means of ingress thereto and egress therefrom. The Tenant
shall exercise this option by giving the Issuer written notice of Tenant's
election to exercise its option and specifying the legal description of the
portion of the Land sought to be purchased, the date, time and place of closing,
which date shall neither be earlier than Forty-five (45) days nor later than
Sixty (60) days after the notice is given, and specifying the appraised current
fair market value of the portions of the Land with respect to which Tenant's is
exercising its option as determined by an independent, qualified appraiser whose
report shall be furnished to the Trustee together with Tenant's notice of
election to purchase and shall include a certificate signed by the chief
executive or chief financial officer of Tenant stating that no event has
occurred and is continuing which, with notice or lapse of time or both, would
constitute an Event of Default hereunder. The Tenant may not exercise the
option granted by this Section if there has occurred and is continuing any event
which, with notice or lapse of time or both, would constitute an Event of
Default at the time said notice is given and may not purchase said real property
on the specified closing date if any such event has occurred and is continuing
on said date. The option hereby given shall include the right to purchase a
perpetual easement for right-of-way to and from the public roadway and the right
to purchase such land as is necessary to assure that there will always be access
between the real property purchase pursuant to this Section and the public
roadway.
Section 17.7 QUALITY OF TITLE AND PURCHASE PRICE FOR UNIMPROVED PORTIONS
OF LAND. If a notice of election to purchase is given as provided by
Section 17.6, the Issuer shall sell and convey the real property described in
Tenant's said notice to the Tenant on the specified date free and clear of all
liens and encumbrances whatsoever except (i) those to which the title was
subject on the date of commencement of the term of this Lease, or
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to which title became subject with Tenant's written consent, or which
resulted from any failure of Tenant to perform any of its agreements or
obligations under this Lease, (ii) taxes and assessments, general or special,
if any, and (iii) the rights, titles and interests of any party having
condemned or who is attempting to condemn title to, or the use for a limited
period of, all or any part of the Project, for an amount equal to the then
current fair market value thereof, as determined with reference to the
independent appraiser's report furnished to the Trustee.
Section 17.8 CLOSING OF PURCHASE OF UNIMPROVED PORTIONS OF LAND. If the
Issuer has title to the real property free and clear of all liens and
encumbrances whatsoever except as stated above or has such other title to the
real property as may be acceptable to the Tenant, then on the specified date,
the Issuer shall deliver to the Tenant its special warranty deed, properly
executed and conveying the real property of Tenant free and clear of all liens
and encumbrances whatsoever except as stated above, and then and there Tenant
shall pay the aforesaid purchase price for the real property, said purchase
price to be paid to the Trustee for the account of the Issuer and deposited by
the Trustee in the Principal and Interest Payment Account for the benefit of the
Owners of the Bonds and used to pay or redeem the Bonds on the date the Bonds
are first subject to redemption as provided in the Indenture; provided, however,
nothing herein shall require the Issuer to deliver such special warranty deed to
the Tenant until after all of the duties and obligations of the Tenant under
this Lease to the date of such delivery have been fully performed and satisfied.
Section 17.9 EFFECT ON LEASE OF PURCHASE OF UNIMPROVED PORTIONS OF LAND.
The exercise by Tenant of the option granted under Section 17.6 and the purchase
and sale and conveyance of a portion or portions of the Land constituting a part
of the Project pursuant hereto shall in no way whatsoever affect this Lease, and
all of the terms and provisions hereof shall remain in full force and effect the
same as though no notice of election to purchase had been given, and
specifically, but not in limitation of the generality of the foregoing, exercise
of such option shall not affect, alter, diminish, reduce or abate Tenant's
obligations to pay all Basic Rent and Additional Rent required hereunder.
Section 17.10 EFFECT OF FAILURE TO COMPLETE PURCHASE OF UNIMPROVED
PORTIONS OF LAND. If, for any reason whatsoever, the purchase by the Tenant of
the real property described in the notice required to be given by Section 17.6
is not effected on the specified date, this Lease shall be and remain in full
force and effect according to its terms the same as though no notice of election
to purchase had been given.
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ARTICLE XVIII
Section 18.1 DAMAGE AND DESTRUCTION.
(A) If, during the Basic Term, the Project is damaged or destroyed, in
whole or in part, by fire or other casualty, the Tenant shall promptly notify
the Issuer and the Trustee in writing as to the nature and extent of such damage
or loss and whether it is practicable and desirable to rebuild, repair, restore
or replace such damage or loss.
(B) If the Tenant shall determine that such rebuilding, repairing,
restoring or replacing is practicable and desirable, so long as the Tenant is
not in default hereunder, the Tenant shall forthwith proceed with and complete
with reasonable dispatch such rebuilding, repairing, restoring or replacing. In
such case, any Net Proceeds of casualty insurance required by this Lease and
received with respect to any such damage or loss to the Project shall be paid to
the Trustee and shall be deposited in the Project Replacement Fund and shall be
used and applied for the purpose of paying the cost of such rebuilding,
repairing, restoring or replacing such damage or loss. Any amount remaining in
the Project Replacement Fund after such rebuilding, repairing, restoring or
replacing shall be deposited into the Principal and Interest Payment Account and
used to pay a like amount of principal of the Bonds on their next available call
date.
(C) If the Tenant shall be in default hereunder or otherwise determine
that rebuilding, repairing, restoring or replacing the Project are not
practicable and desirable, any Net Proceeds of casualty insurance required by
this Lease and received with respect to any such damage or loss to the Project
shall be paid into the Principal and Interest Payment Account and used to pay a
like amount of principal of the Bonds on their next available call date. The
Tenant agrees that it shall be reasonable in exercising its judgment pursuant to
this subsection.
(D) The Tenant shall not, by reason of its inability to use all or any
part of the Project during any period in which the Project is damaged or
destroyed, or is being repaired, rebuilt, restored or replaced nor by reason of
the payment of the costs of such rebuilding, repairing, restoring or replacing,
be entitled to any reimbursement or any abatement or diminution of the Basic
Rent or Additional Rent payable by the Tenant under this Lease nor of any other
obligations of the Tenant under this Lease except as expressly provided in this
Section.
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Section 18.2 CONDEMNATION.
(A) If, during the Basic Term title to, or the temporary use of, all or
any part of the Project shall be condemned by any authority exercising the power
of eminent domain, the Tenant shall, within Ninety (90) days after the date of
entry of a final order in any eminent domain proceedings granting condemnation,
notify the Issuer and the Trustee in writing as to the nature and extent of such
condemnation and whether it is practicable and desirable to acquire or construct
substitute improvements.
(B) If the Tenant shall determine that such substitution is practicable
and desirable, so long as the Tenant is not in default hereunder, the Tenant
shall forthwith proceed with and complete with reasonable dispatch the
acquisition or construction of such substitute improvements. In such case, any
Net Proceeds received from any award or awards with respect to the Project or
any part thereof made in such condemnation or eminent domain proceeds shall be
paid to the Trustee and shall be deposited in the Project Replacement Fund and
shall be used and applied for the purpose of paying the cost of such
substitution. Any amount remaining in the Project Replacement Fund after such
acquisition or construction shall be deposited into the Principal and Interest
Payment Account and used to pay a like amount of principal of the Bonds on their
next available call date.
(C) If the Tenant shall be in default hereunder or otherwise determine
that it is not practicable and desirable to acquire or construct substitute
improvements, any Net Proceeds of condemnation awards received by the Tenant
shall be paid into the Principal and Interest Payment Account and used to pay a
like amount of principal of the Bonds on their next available call date. The
Tenant agrees that it shall be reasonable in exercising its judgment pursuant to
this subsection.
(D) The Tenant shall not, by reason of its inability to use all or any
part of the Project during any such period of restoration or acquisition nor by
reason of the payment of the costs of such restoration or acquisition, be
entitled to any reimbursement or any abatement or diminution of the Basic Rent
or Additional Rent payable by the Tenant under this Lease nor of any other
obligations hereunder except as expressly provided in this Section.
(E) The Issuer shall cooperate fully with the Tenant in the handling and
conduct of any prospective or pending condemnation proceedings with respect to
the Project or any part thereof. In no event will the Issuer voluntarily settle
or consent to the settlement of any prospective or pending condemnation
proceedings with respect to the Project or any part thereof without the written
consent of the Tenant.
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ARTICLE XIX
Section 19.1 TERMINATION BY REASON OF CHANGE OF CIRCUMSTANCES. If, at
any time during the Basic Term, a Change of Circumstances occurs or the Bonds
are called for redemption and payment upon the occurrence of a Determination of
Taxability, then and in such event Tenant shall have the option to purchase the
Project pursuant to Article XVII hereof or option to terminate this Lease by
giving Issuer notice of such termination within Ninety (90) days after Tenant
has actual knowledge of the event giving rise to such option; provided, however,
that such termination shall not become effective unless and until none of the
Bonds are Outstanding.
ARTICLE XX
Section 20.1 REMEDIES ON DEFAULT. Whenever any Event of Default shall
have happened and be continuing, the Issuer may take any one or more of the
following remedial actions:
(A) By written notice to the Tenant upon acceleration of maturity of the
Bonds as provided in the Indenture, the Trustee may declare the aggregate amount
of all unpaid Basic Rent or Additional Rent then or thereafter required to be
paid under this Lease by the Tenant to be immediately due and payable as
liquidated damages from the Tenant, whereupon the same shall become immediately
due and payable by the Tenant;
(B) Give Tenant written notice of intention to terminate this Lease on a
date specified therein, which date shall not be earlier than Ten (10) days after
such notice is given and, if all defaults have not then been cured on the date
so specified, Tenant's rights to possession of the Project shall cease, and this
Lease shall thereupon be terminated, and Issuer may re-enter and take possession
of the Project as of Issuer's former estate; or
(C) Without terminating the term hereof, or this Lease, re-enter the
Project or take possession thereof pursuant to legal proceedings or pursuant to
any notice provided for by law, and having elected to re-enter or take
possession of the Project without terminating the term or this Lease, Issuer
shall use reasonable diligence to relet the Project, or parts thereof, for such
term or terms and at such rental and upon such other terms and conditions as
Issuer may deem advisable, with the right to make alterations and repairs to the
Project, and no such re-entry or taking of possession of the Project by Issuer
shall be construed as an election on Issuer's part to terminate this Lease, and
no such re-entry or taking of possession by Issuer shall relieve Tenant of its
obligation to pay Basic Rent or Additional Rent (at the time or times provided
herein), or of any of its other obligations under
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this Lease, all of which shall survive such re-entry or taking of possession,
and Tenant shall continue to pay the Basic Rent and Additional Rent provided
for in this Lease until the end of the Term, whether or not the Project shall
have been relet, less the net proceeds, if any, of any reletting of the
Project after deducting all of Issuer's expenses incurred in connection with
such reletting, including without limitation, all repossession costs,
brokerage commissions, legal expenses, expenses of employees, alteration
costs and expenses of preparation of the Project for reletting.
Net proceeds of any reletting shall be deposited in the Principal and
Interest Payment Account. Having elected to re-enter or take possession of the
Project pursuant to subsection (C) hereunder, Issuer may (subject, however, to
any restrictions against termination of this Lease in the Indenture), by notice
to Tenant given at any time thereafter while Tenant is in default in the payment
of Basic Rent or Additional Rent or in the performance of any other obligation
under this Lease, elect to terminate this Lease in accordance with subsection
(B) hereunder If, in accordance with any of the foregoing provisions of this
Article, Issuer shall have the right to elect to re-enter and take possession of
the Project, Issuer may enter and expel Tenant and those claiming through or
under Tenant and remove the property and effects of both or either (forcibly if
necessary) without being guilty of any manner of trespass and without prejudice
to any remedies for arrears of Basic Rent or Additional Rent or preceding breach
of covenant.
(D) Notwithstanding any other provision herein contained, neither the
Issuer nor the Trustee shall be required to take any action permitted by this
Article which either the Issuer or Trustee believes could subject it to any
environmental liability.
Section 20.2 SURVIVAL OF OBLIGATIONS. Tenant covenants and agrees with
Issuer and the Owners that until the Bonds and the interest thereon and
redemption premium, if any, are paid in full or provision made for the payment
thereof in accordance with the Indenture, its obligations under this Lease shall
survive the cancellation and termination of this Lease, for any cause, and that
Tenant shall continue to pay Basic Rent and Additional Rent and perform all
other obligations provided for in this Lease, all at the time or times provided
in this Lease.
Section 20.3 NO REMEDY EXCLUSIVE. No remedy herein conferred upon or
reserved to the Issuer is intended to be exclusive of any other available remedy
or remedies, but each and every such remedy shall be cumulative and shall be in
addition to every other remedy given under this Lease or now or hereafter
existing at law or in equity or by statute, subject to the provisions of the
Indenture. No delay or omission to exercise any
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right or power accruing upon any Event of Default shall impair any such right
or power, or shall be construed to be a waiver thereof, but any such right or
power may be exercised from time to time and as often as may be deemed
expedient. In order to entitle the Issuer to exercise any remedy reserved to
it in this Article, it shall not be necessary to give any notice, other than
notice required herein.
ARTICLE XXI
Section 21.1 PERFORMANCE OF TENANT'S OBLIGATIONS BY ISSUER. If Tenant
shall fail to keep or perform any of its obligations as provided in this Lease,
then Issuer may (but shall not be obligated to do so) upon the continuance of
such failure on Tenant's part for Ninety (90) days after notice of such failure
is given Tenant by Issuer or the Trustee and without waiving or releasing Tenant
from any obligation hereunder, as an additional but not exclusive remedy, make
any such payment or perform any such obligation, and Tenant shall reimburse
Issuer for all sums so paid by Issuer and all necessary or incidental costs and
expenses incurred by Issuer in performing such obligations through payment of
Additional Rent. If such Additional Rent is not so paid by Tenant within Ten
(10) days of demand, Issuer shall have the same rights and remedies provided for
in Article XX in the case of default by Tenant in the payment of Basic Rent.
ARTICLE XXII
Section 22.1 SURRENDER OF POSSESSION. Upon accrual of Issuer's right of
re-entry as the result of Tenant's default hereunder or upon the cancellation or
termination of this Lease by lapse of time or otherwise, Tenant shall peacefully
surrender possession of the Project to Issuer in good condition and repair,
ordinary wear and tear excepted; provided, however, Tenant shall have the right,
prior to or within Sixty (60) days after the termination of this Lease, to
remove from or about the Project the buildings, improvements, machinery,
equipment, personal property, furniture and trade fixtures which do not
constitute an integral part of the Project, which Tenant owns under the
provisions of this Lease and not constituting a part of the Project. All
repairs to and restorations of the Project required to be made because of such
removal shall be made by and at the sole cost and expense of Tenant. All
buildings, improvements, machinery, equipment, personal property, furniture and
trade fixtures owned by Tenant and which are not so removed from or about the
Project prior to or within Sixty (60) days after the termination of this Lease
shall become the separate and absolute property of Issuer.
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ARTICLE XXIII
Section 23.1 NOTICES. All notices required or desired to be given
hereunder shall be in writing and shall be delivered in person to the Notice
Representative or mailed by registered or certified mail to the Notice Address.
All notices given by certified or registered mail as aforesaid shall be deemed
duly given as of the date they are so mailed.
ARTICLE XXIV
Section 24.1 NET LEASE. The parties hereto agree (i) that this Lease is
intended to be a net lease, (ii) that the payments of Basic Rent and Additional
Rent are designed to provide Issuer and the Trustee with funds adequate in
amount to pay all principal of and interest on the Bonds as the same become due
and payable, and (iii) that to the extent that the payments of Basic Rent and
Additional Rent are not adequate to provide Issuer and the Trustee with funds
sufficient for the purposes aforesaid, Tenant shall be obligated to pay, and it
does hereby covenant and agree to pay, upon demand therefor, as Additional Rent,
such further sums of money as may from time to time be required for such
purposes.
Section 24.2 FUNDS HELD BY TRUSTEE AFTER PAYMENT OF BONDS. If, after the
principal of and interest on the Bonds and all costs incident to the payment of
Bonds have been paid in full, the Trustee holds unexpended funds received in
accordance with the terms hereof, such unexpended funds shall, except as
otherwise provided in this Lease and the Indenture and after payment therefrom
to Issuer of any sums of money then due and owing by Tenant under the terms of
this Lease, be the absolute property of and be paid over forthwith to Tenant.
ARTICLE XXV
Section 25.1 RIGHTS AND REMEDIES. The rights and remedies reserved by
Issuer and Tenant hereunder and those provided by law shall be construed as
cumulative and continuing rights. No one of them shall be exhausted by the
exercise thereof on one or more occasions. Issuer and Tenant shall each be
entitled to specific performance and injunctive or other equitable relief for
any breach or threatened breach of any of the provisions of this Lease,
notwithstanding the availability of an adequate remedy at law, and each party
hereby waives the right to raise such defense in any proceeding in equity.
Section 25.2 WAIVER OF BREACH. No waiver of any breach of any covenant
or agreement herein contained shall operate as a waiver of any subsequent breach
of the same covenant or agreement
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or as a waiver of any breach of any other covenant or agreement, and in case
of a breach by either party of any covenant, agreement or undertaking, the
non-defaulting party may nevertheless accept from the other any payment or
payments or performance hereunder without in any way waiving its right to
exercise any of its rights and remedies provided for herein or otherwise with
respect to any such default or defaults which were in existence at the time
such payment or payments or performance were accepted by it.
Section 25.3 ISSUER SHALL NOT UNREASONABLY WITHHOLD CONSENTS AND
APPROVALS. Wherever in this Lease it is provided that Issuer shall, may or must
give its approval or consent, or execute supplemental agreements, exhibits or
schedules, Issuer shall not unreasonably, arbitrarily or unnecessarily withhold
or refuse to give such approvals or consents or refuse to execute such
supplemental agreements, exhibits or schedules.
ARTICLE XXVI
Section 26.1. FINANCIAL REPORTS. So long as any Bonds are Outstanding and
unpaid and subject to the terms of the Indenture, Tenant shall furnish or cause
to be furnished to Trustee and the Underwriter, within One Hundred Twenty (120)
days of the last day of Tenant's preceding fiscal year, the Tenant's
consolidated financial statements accompanied by the audit report of an
independent certified public accountant, which financial statements shall
include as supplemental information a balance sheet and statements of income and
expense and supporting schedules with respect to the Project prepared on an
unconsolidated basis.
Section 26.2 QUIET ENJOYMENT AND POSSESSION. So long as Tenant shall not
be in default under this Lease, Tenant shall and may peaceably and quietly have,
hold and enjoy the Project.
ARTICLE XXVII
Section 27.1 INVESTMENT TAX CREDIT; DEPRECIATION. Tenant shall be
entitled to claim the full benefit of (i) any investment credit against federal
or state income tax allowable with respect to expenditures of the character
contemplated hereby under any federal or state income tax laws now or from time
to time hereafter in effect, and (ii) any deduction for depreciation with
respect to the Project from federal or state income taxes. Issuer agrees that
it will upon Tenant's request execute all such elections, returns or other
documents which may be reasonably necessary or required to more fully assure the
availability of such benefits to Tenant.
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ARTICLE XXVIII
Section 28.1 AMENDMENTS. This Lease may be amended, changed or modified
in the following manner:
(A) With respect to any amendment, change or modification which will
materially adversely affect the security or rights of the Owners, by an
agreement in writing executed by Issuer and Tenant and consented to in writing
by the owners of at least Sixty-six percent (66%) of the aggregate principal
amount of the Bonds then outstanding;
(B) With respect to any amendment, change or modification which reduces
the Basic Rent or Additional Rent due under this Lease, or any amendment which
reduces the percentage of Owners whose consent is required for any such
amendment, change or modification, by an agreement in writing executed by Issuer
and Tenant and consented to in writing by the owners of One Hundred percent
(100%) of the aggregate principal amount of the Bonds then outstanding; and
(C) With respect to all other amendments, changes, or modifications, by an
agreement in writing executed by Issuer and Tenant.
At least Thirty (30) days prior to the execution of any agreement pursuant to
(C) above, Issuer and Tenant shall furnish the Trustee and the Underwriter of
the Bonds with a copy of the amendment, change or modification proposed to be
made.
Section 28.2 GRANTING OF EASEMENTS. If no Event of Default under this
Lease shall have happened and be continuing, Tenant upon receipt of prior
written approval of the Authorized Issuer Representative may, at any time or
times, (i) grant easements, licenses and other rights or privileges in the
nature of easements with respect to any property included in the Project, free
from any rights of Issuer or the Owners, or (ii) release existing easements,
licenses, rights-of-way and other rights or privileges, all with or without
consideration and upon such terms and conditions as Tenant shall determine, and
Issuer agrees, to the extent that it may legally do so, that it will execute and
deliver any instrument necessary or appropriate to confirm and grant or release
any such easement, license, right-of-way or other right or privilege or any such
agreement or other arrangement, upon receipt by Issuer of (a) a copy of the
instrument of grant or release or of the agreement or other arrangement, (b) a
written application signed by the Authorized Tenant Representative requesting
such instrument and (c) a certificate executed by Tenant stating (1) that such
grant or release is not detrimental to the proper conduct of the business of
Tenant, and (2) that such grant or release will not impair the effective use or
interfere with the efficient and economical
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operation of the Project and will not materially adversely affect the
security of the Owners. If the instrument of grant shall so provide, any
such easement or right and the rights of such other parties thereunder shall
be superior to the rights of Issuer and the Bondowners and shall not be
affected by any termination of this Lease or default on the part of Tenant
hereunder. If no Event of Default shall have happened and be continuing, any
payments or other consideration received by Tenant for any such grant or with
respect to or under any such agreement or other arrangement shall be and
remain the property of Tenant, but, in the event of the termination of this
Lease or default of Tenant, all rights then existing of Tenant with respect
to or under such grant shall inure to the benefit of and be exercisable by
Issuer.
Section 28.3 SECURITY INTERESTS. Issuer and Tenant agree to execute and
deliver all instruments (including financing statements and statements of
continuation thereof) necessary for perfection of and continuance of the
security interest of Issuer in and to the Project. The Trustee shall file or
cause to be filed all such instruments required to be so filed and shall
continue or cause to be continued the liens of such instruments for so long as
the Bonds shall be Outstanding.
Section 28.4 CONSTRUCTION AND ENFORCEMENT. This Lease shall be construed
and enforced in accordance with the laws of the State. The provisions of this
Lease shall be applied and interpreted in accordance with the rules of
interpretation set forth in the Indenture. Wherever in this Lease it is
provided that either party shall or will make any payment or perform or refrain
from performing any act or obligation, each such provision shall, even though
not so expressed, be construed as an express covenant to make such payment or to
perform, or not to perform, as the case may be, such act or obligation.
Section 28.5 INVALIDITY OF PROVISIONS OF LEASE. If, for any reason, any
provision hereof shall be determined to be invalid or unenforceable, the
validity and effect of the other provisions hereof shall not be affected
thereby.
Section 28.6 COVENANTS BINDING ON SUCCESSORS AND ASSIGNS. The covenants,
agreements and conditions herein contained shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
Section 28.7 SECTION HEADINGS. The section headings hereof are for the
convenience of reference only and shall not be treated as a part of this Lease
or as affecting the true meaning of the provisions hereof. The reference to
section numbers herein or in the Indenture shall be deemed to refer to the
numbers preceding each section.
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Section 28.8 EXECUTION OF COUNTERPARTS. This Lease may be executed
simultaneously in multiple counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same
instrument.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
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IN WITNESS WHEREOF, the Issuer, being hereunto authorized by valid and
existing ordinances duly adopted by its Governing Body, has caused this Lease to
be executed and delivered in its name and behalf by and through its Mayor and
City Clerk, all the day and year first above written.
CITY OF GODDARD, KANSAS
By: /s/ B. J. Means
-----------------------
B. J. Means, Mayor
[SEAL]
ATTEST:
/s/ Regina Carpenter
- ----------------------------
Regina Carpenter, City Clerk
"ISSUER"
ACKNOWLEDGMENT
STATE OF KANSAS )
) SS:
COUNTY OF SEDGWICK )
BE IT REMEMBERED that on this 17th day of March, 1997, before me, a notary
public in and for said County and State, came B. J. Means, Mayor of the City of
Goddard, Kansas, a municipal corporation of the State of Kansas, and Regina
Carpenter, City Clerk of said City, who are personally known to me to be the
same persons who executed, as such officers, the within instrument on behalf of
said City, and such persons duly acknowledged the execution of the same to be
the act and deed of said City.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year last above written.
/s/ J. T. Klaus
-------------------------------
Notary Public in and for
said County and State
[SEAL]
My Appointment Expires:
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IN WITNESS WHEREOF, the Tenant, pursuant to valid and subsisting
resolutions of its Board of Directors, has caused this Lease to be executed and
delivered in its name and behalf by its officers thereunto duly authorized, all
the day and year first above written.
IFR SYSTEMS, INC.
as the "Tenant"
(Seal) By /s/ Alfred H. Hunt, III
------------------------------------
Alfred H. Hunt, III
President and Chief Executive Officer
ATTEST:
/s/ Jeffrey A. Bloomer
- -------------------------------------
Jeffrey A. Bloomer
Treasurer and Chief Financial Officer
ACKNOWLEDGMENT
STATE OF KANSAS )
) ss:
COUNTY OF SEDGWICK )
BE IT REMEMBERED that on this 17th day of March, 1997, before me, a notary
public in and for said County and State, came Alfred H. Hunt, III, President and
Chief Executive Officer of IFR Systems, Inc., a Delaware corporation duly
qualified to do business in the State of Kansas, and Jeffrey A. Bloomer,
Treasurer and Chief Financial Officer of said corporation, who are personally
known to me to be such officers, and who are personally known to me to be the
same persons who executed, as such officers, the within instrument on behalf of
said corporation, and such persons duly acknowledged the execution of the same
to be the act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal, the day and year last above written.
/s/ J. T. Klaus
-------------------------------
Notary Public in and for
said County and State
[SEAL]
My Appointment Expires:
-53-
<PAGE>
SCHEDULE I
SCHEDULE I TO THE INDENTURE OF TRUST OF THE CITY OF GODDARD, KANSAS
AND THE SOUTHWEST NATIONAL BANK OF WICHITA, AS TRUSTEE, DATED AS OF
MARCH 15, 1997 AND TO THE LEASE DATED AS OF MARCH 15, 1997 BY AND
BETWEEN SAID CITY AND IFR SYSTEMS, INC.
PROPERTY SUBJECT TO LEASE
I. THE LAND: The following described real estate located in Sedgwick
County, Kansas, to wit:
(1) Lot 1, Block B, Mid-Continent Industrial Park I,
Sedgwick County, Kansas.
(2) A part of Lot 1, Block A, Mid-Continent Industrial Park
II, Sedgwick County, Kansas described as: Beginning at the
Northwest Corner of Lot 1, Block A, said corner being at the
intersection of the East line of Maize Road and the
Southerly right-of-way line of the Atchison, Topeka and
Santa Fe Railway, thence Northeasterly along the Northerly
line of said Lot 1 a distance of 198.06 feet; thence
Southeasterly a distance of 686.83 feet to a point on the
North line of Midco Street and on the Southeasterly line of
said Lot 1; thence South-Southwesterly on the Northerly line
of Midco Street on a curve to the left having a radius of
676.62 feet a distance of 212.57 feet to a corner point of
said Lot 1; thence West-Northwest along the Southerly Line
of said Lot 1 a distance of 655.40 feet to the Southwest
Corner of said Lot 1; thence North along the West line of
said Lot 1 a distance of 279.33 feet to the point of
beginning.
said real property described constituting the "Land" as referred to in said
Lease.
II. THE IMPROVEMENTS: All buildings and improvements now constructed,
located or installed on the Land, together with and including such buildings,
improvements, machinery and equipment acquired, constructed or installed using
the proceeds of the 1989 Bonds or 1997 Bonds, the same constituting the
"Improvements" as referred to in said Lease and said Indenture, and more
specifically described as follows:
Schedule I - Page 1
<PAGE>
1989 PROJECT
An 80,000 square foot pre-engineered metal building system addition to
the Company's existing 76,000 square foot facility, which houses
assembly and testing facilities, inventory control, shipping and
receiving docks and a machine shop. In addition, additional parking
for 332 cars, a new service drive and new covered loading docks were
added.
1997 ADDITIONS
Computer-based manufacturing and manufacturing-support equipment, as
well as machinery and equipment used in fabricating metal component
parts of the Company's products. In addition, the 1997 Additions will
include building improvements to the Company's existing facility.
The property described in paragraphs (I) and (II) of this Schedule I,
together with any alterations or additional improvements properly deemed a part
of the Project pursuant to and in accordance with the provisions of Sections
11.1 and 12.1 of the Lease, constitute the "Project" as referred to in both the
Lease and the Indenture.
Schedule I - Page 2
<PAGE>
SCHEDULE II
Allocation of 1997 Bond Principal Amounts
Maturity 1989 Bond 1997 Addition Total
Date Refunding Financing Principal
- --------- ---------- ------------- ---------
05/01/98 $ 85,000 $ 90,000 $ 175,000
05/01/99 90,000 95,000 185,000
05/01/00 95,000 95,000 190,000
05/01/01 100,000 100,000 200,000
05/01/02 105,000 110,000 215,000
05/01/03 110,000 115,000 225,000
05/01/04 120,000 120,000 240,000
05/01/05 125,000 125,000 250,000
05/01/06 135,000 135,000 270,000
05/01/07 140,000 145,000 285,000
05/01/08 145,000 155,000 300,000
05/01/09 160,000 160,000 320,000
05/01/10 165,000 175,000 340,000
05/01/11 175,000 185,000 360,000
05/01/12 190,000 195,000 385,000
Schedule II - Page 1
<PAGE>
IFR SYSTEMS, INC.
EXHIBIT (11.0) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
(000'S OMITTED, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
PRIMARY:
Average shares outstanding 5,420 5,496 5,314
Net effect of dilutive stock
options-based on the treasury
stock method using average
market price 194 155 142
-------------- ------------- -------------
Totals 5,614 5,651 5,456
-------------- ------------- -------------
Net Income $ 6,646 $ 4,761 $ 2,251
-------------- ------------- -------------
Per Share Amount $ 1.18 $ 0.84 $ 0.41
-------------- ------------- -------------
FULLY DILUTED:
Average shares outstanding 5,420 5,496 5,314
Net effect of dilutive stock
options-based on the treasury
stock method using the period-
end market price, if greater
than average market price 250 178 212
Assumed conversion of 10%
convertible notes 3 13 119
-------------- ------------- -------------
Totals 5,673 5,687 5,645
-------------- ------------- -------------
-------------- ------------- -------------
Net Income $ 6,646 $ 4,761 $ 2,251
Add 10% convertible note interest,
net of federal income tax effect - 7 58
-------------- ------------- -------------
Totals $ 6,646 $ 4,768 $ 2,309
-------------- ------------- -------------
-------------- ------------- -------------
Per Share Amount $ 1.17 $ 0.84 $ 0.41
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
<PAGE>
IFR SYSTEMS, INC. -- 1997 ANNUAL REPORT
Performance Highlights
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income Statement Data
Sales $103,517 $89,997 $75,994 $65,073 $60,791
Operating Income 10,907 8,316 3,683 2,002 1,851
R & D Expense 9,990 7,374 7,892 7,505 6,107
Net Income 6,646 4,761 2,251 987 877
Balance Sheet Data
Total Assets $ 65,830 $60,713 $58,402 $51,232 $49,047
Working Capital 33,515 27,273 22,948 21,498 20,148
Shareholders' Equity 48,154 43,368 38,636 34,802 33,578
Long-term Debt and
Capital Lease
Obligations 3,765 2,755 4,981 3,419 4,058
Profitability Ratios
Gross Margin 40.8% 37.7% 37.5% 36.3% 34.4%
Net Income 6.4 5.3 3.0 1.5 1.4
Effective Income Tax Rate 39.6 39.5 35.6 41.6 50.5
Return on Assets 10.5 8.0 4.1 2.0 1.9
Return on Equity 14.5 11.6 6.1 2.9 2.6
Per Share
Net Income $1.18 $0.84 $ 0.41 $ 0.19 $ 0.17
Book Value 8.88 7.85 7.08 6.65 6.43
Dividends -- -- -- -- --
</TABLE>
1997 Sales By Principal Markets (in thousands)
U.S. Domestic - $37,282 -- 36%
Export - $39,091 -- 38%
U.S. Government - $21,084 -- 20%
Parts & Service - $6,060 -- 6%
Quarterly Financial Data
The following quarterly financial data summarizes the unaudited quarterly
results for the years ended June 30, 1997 and 1996. (Dollars in thousands
except net income per share.)
<TABLE>
<CAPTION>
Quarters Ended
Fiscal 1996 September 30, December 31, March 31, June 30,
1996 1996 1997 1997
<S> <C> <C> <C> <C>
Sales $23,258 $26,987 $26,238 $27,034
Gross Profit 8,864 10,702 10,933 11,722
Net Income 1,210 1,616 1,726 2,094
Net Income Per Share $ 0.21 $ 0.29 $ 0.30 $ 0.37
<PAGE>
<CAPTION>
Fiscal 1996 September 30, December 31, March 31, June 30,
1995 1995 1996 1996
<S> <C> <C> <C> <C>
Sales $19,857 $23,507 $22,802 $23,831
Gross Profit 7,075 8,635 8,658 9,532
Net Income 407 1,293 1,479 1,582
Net Income Per Share $ 0.07 $ 0.24 $ 0.26 $ 0.28
</TABLE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Fiscal 1997 vs. 1996
Sales for fiscal year 1997 were $103,517,000 compared to $89,997,000 in
fiscal year 1996, an increase of 15 percent. International sales increased
from $33,192,000, or 37 percent of sales in fiscal year 1996 to $39,091,000,
or 38 percent of sales in fiscal year 1997. The majority of the increase in
international sales took place in Europe. Sales of avionics test equipment
were up seven percent over fiscal year 1996. Test and measurement equipment
sales decreased 17 percent compared to the prior year. This decrease is
related to product line changes during the year, resulting in the
distribution base depleting their stock on hand before ordering new
inventory. Sales of communication test equipment were up 21 percent. This
increase was primarily driven by sales of SINCGARS equivalent test equipment
to the military. Sales of fiber optics test equipment increased 15 percent
over fiscal year 1996. The majority of this increase was in sales of
production and lab test equipment to fiber optic manufacturers.
Gross margin increased from 38 percent for fiscal year 1996 to 41 percent
for fiscal year 1997. This is primarily due to the increase in fiber optics
test equipment and communications test equipment sales. With the increase in
sales, the fixed portion of the cost of sales has decreased as a percent of
sales resulting in additional improvements in the gross margin.
Operating expenses increased as a percent of sales from 28 percent for
fiscal year 1996 to 30 percent for fiscal year 1997. Selling expenses
remained unchanged as a percent of sales. Engineering expenses increased one
percent as a percent of sales over the prior year. This increase was planned
and is intended to support the Company's long term growth plans.
Administrative expenses increased one percent as a percent of sales for
fiscal year 1997. This increase is related to recruiting costs associated
with hiring additional engineering professionals. Operating income as a
percent of sales increased from nine percent for fiscal year 1996 to 11
percent for fiscal year 1997.
Interest expense decreased $184,000 or 24 percent compared to the prior
year. Short-term bank borrowings decreased $2.7 million for the year. Other
income increased $303,000 over the prior year. This is primarily due to the
foreign exchange rate translation gains recorded in the books of York
Technology Ltd. for normal trading activity in the intercompany loan account.
The Company has recorded, for financial reporting purposes, a valuation
allowance for deferred tax assets aggregating $620,000, for capital loss
carryforwards and tax credit carryforwards related to the acquisition of
Photon Kinetics. When realized through a reduction in the valuation
allowance, the tax benefit from the tax credit carryforwards will be applied
to reduce goodwill. The Company evaluates the realizability of the deferred
tax assets quarterly. See Note 4 of the Notes to Consolidated Financial
Statements for further discussion.
The effective income tax rate was 39.5 percent for fiscal 1996 as compared
to 39.6 percent for fiscal year 1997.
No cash dividends were paid in fiscal year 1997 or fiscal year 1996. On
August 14, 1997, the Board of Directors authorized a $.05 per share dividend
payable on September 12, 1997. The Board of Directors will review quarterly
the appropriateness of future dividend payments taking into consideration
numerous factors including the Company's cash requirements and performance.
Fiscal 1996 vs. 1995
Sales for fiscal year 1996 were $89,997,000 compared to $75,994,000 in
fiscal year 1995, an increase of 18 percent. Sales of avionics test
equipment increased 36 percent over fiscal year 1995. Test and Measurement
sales increased 42 percent compared to fiscal year 1995. The majority of the
increase is related to the private label agreement with Marconi Instruments,
Ltd. The agreement was announced in October 1995 whereby Marconi has
exclusive rights to distribute IFR products under their name in Europe and
certain other countries. Sales of communications test equipment, excluding
the U.S. Government, were up 23 percent compared to fiscal year 1995. Sales
of communications service monitors to the U.S. Government decreased
$4,000,000, or 30 percent compared to fiscal year 1995. This decrease was a
planned decline in the shipping schedule as determined by the U.S.
Government. International sales increased from $25,681,000, or 34 percent of
sales in fiscal year 1995 to $33,192,000, or 37 percent of sales in fiscal year
1996. Gross margin remained unchanged at 37 percent for fiscal year 1996 as
compared to fiscal year 1995.
<PAGE>
Operating expenses increased three percent over fiscal year 1995. Fiscal
year 1995 operating expenses represented 28 percent of fiscal year 1996
sales, while fiscal year 1995 operating expenses were 32 percent of fiscal
year 1995 sales. Selling expenses increased $928,000, or 10 percent compared
to fiscal year 1995. This is due primarily to the higher sales commission
expense from the increase in sales. Administrative expenses increased
$1,294,000, or 23 percent compared to fiscal year 1995. This increase is
primarily related to the acquisition of York Technology, Ltd. and staff
additions at IFR Systems, Inc. On a percent of sales basis, administrative
expenses were unchanged at seven percent for fiscal year 1996 and fiscal year
1995. Engineering expenses decreased $1,421,000, or 14 percent compared to
fiscal year 1995. This decrease is related to cost reductions realized
from the integration of York Technology Companies and the funding of certain
research and development projects.
Interest expense increased $271,000, or 56 percent over fiscal year 1995.
This increase is related to the funding through notes payable for the York
acquisition at the beginning of fiscal year 1996. Short-term bank borrowings
decreased $2.5 million for the year.
The Company has recorded, for financial reporting purposes, deferred tax
assets aggregating $782,000, for net operating loss carryforwards and tax
credit carryforwards related to the acquisition of Photon. Realization of
the deferred tax assets is dependent upon Photon's ability to generate
taxable income in the future. Based on an analysis of Photon's existing
taxable temporary differences, the presence of significant non-deductible
acquisition costs and historical pretax operating results, a valuation
allowance of $800,000 was reserved at June 30, 1996 to offset the deferred
tax assets. The Company evaluates the realizability of the deferred tax
assets quarterly.
The effective income tax rate was 39.5 percent for fiscal year 1996
compared to 35.6 percent for fiscal year 1995. The increase in the rate is
due primarily to the elimination of the research and development credit for
fiscal year 1996.
No cash dividends were paid in fiscal year 1996 or fiscal year 1995. The
Board of Directors periodically reviews the appropriateness of dividend
payments, taking into consideration numerous factors including the Company's
cash requirements and performance.
Liquidity and Capital Resources
The Company maintains a strong financial position, with working capital of
$33,500,000 at June 30, 1997. The Company generated cash from operations of
$10,800,000 and $3,900,000 for fiscal year 1997 and fiscal year 1996. An
increase in accounts receivable of $3,200,000 was offset by a decrease in
inventory and accrued compensation expense for fiscal year 1997. Cash
generated from operations in fiscal year 1997 and fiscal year 1996 was more
than sufficient to support the Company's increase in sales. Net property and
equipment additions were $3,300,000, $1,600,000 and $1,300,000 for fiscal
year 1997, 1996 and 1995, respectively. These additions were funded through
a combination of cash flow from operations and borrowings on the lines of
credit. It is anticipated that fiscal year 1998 additions, estimated to be
$3.5 million, will be funded from operations.
On June 21, 1995, the Company acquired the assets of York Technology
Companies. The total adjusted purchase price of approximately $6.7 million
consisted of cash consideration of approximately $4.7 million, related
transaction costs and the issuance of a non-interest bearing term note in the
amount of $1.6 million. The note payment was satisfied on December 31, 1996
with a combination of the Company's common stock and cash. See Note 2 of the
Notes to Consolidated Financial Statements for further information concerning
this acquisition.
The Board of Directors has authorized the repurchase of up to 500,000
shares of the Company's common stock. The main purpose of the shares buyback
program is to offset stock options exercised from treasury stock and as a
utilization of the anticipated excess cash flow during the year. As of June
30, 1997, the Company had purchased an aggregate of 149,000 shares under the
program.
The Company has unsecured lines of credit for $15,000,000 which expire on
June 30, 1998. At June 30, 1997, available credit under these lines
aggregated $14,670,000. In the Company's opinion, these lines together with
cash generated from operations will be sufficient to meet the Company's
working capital needs in fiscal year 1998.
Inflation
Changes in product mix from year to year and highly competitive markets
make it very difficult to accurately define the impact of inflation on profit
margins. The Company believes that during the recent period of moderate
inflation it has been able to reduce inflationary effects by vendor
partnering arrangements and continuing expense control.
Market Price Data
The Company's common stock is traded on the national over-the-counter
market under the NASDAQ symbol IFRS. The approximate number of shareholders
of record as of September 8, 1997, was 1,661. The high and low sales prices
of the Company's common shares for the fiscal quarters for the past two years
are set forth below.
<PAGE>
Stock Price Per Share
<TABLE>
<CAPTION>
1997 1996
Quarters High Low High Low
<S> <C> <C> <C> <C>
First 16 10 3/4 12 1/4 9 3/4
Second 17 1/2 14 10 3/4 9
Third 19 1/8 15 13 3/4 9 1/4
Fourth 18 3/4 14 1/4 16 11 3/4
</TABLE>
Consolidated Statements of Income
Years ended June 30 (In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Sales $103,517 $89,997 $75,994
Cost of Products Sold 61,296 56,097 47,528
Gross Profit 42,221 33,900 28,466
Operating Expenses
Selling 11,400 10,102 9,174
Administrative 8,781 6,874 5,580
Engineering 11,133 8,608 10,029
31,314 25,584 24,783
Operating Income 10,907 8,316 3,683
Other Income (Expense)
Interest income 118 55 62
Interest expense (571) (755) (484)
Other, net 554 251 233
101 (449) (189)
Income Before Income Taxes 11,008 7,867 3,494
Income Taxes (Note 4) 4,362 3,106 1,243
Net Income $ 6,646 $ 4,761 $ 2,251
Net Income Per Common Share $ 1.18 $ 0.84 $ 0.41
Average Common Shares Outstanding 5,614 5,651 5,456
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 (Dollars in thousands) 1997 1996
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 2,379 $ 266
Accounts receivable, less allowance for doubtful accounts
of $500 in 1997 and $431 in 1996 19,707 16,494
Inventories:
Finished products 8,744 9,146
Work in process 6,517 7,167
Materials 7,144 7,513
22,405 23,826
Prepaid expenses and sundry 99 150
Deferred income taxes (Note 4) 2,191 1,032
Total current assets 46,781 41,768
Property and equipment
Land 55 55
Buildings 4,622 4,100
Machinery 13,554 11,332
Allowances for depreciation (deduction) (10,053) (8,115)
8,178 7,372
Property under capital lease (Note 3)
Building 2,676 2,545
Machinery 1,085 890
Allowances for depreciation (deduction) (1,278) (1,328)
2,483 2,107
Other assets (Note 2)
Cost in excess of net assets acquired, less accumulated
amortization of $2,329 in 1997 and $1,818 in 1996 8,177 8,647
Patents, trademarks and other intangibles, less accumulated
amortization of $1,782 in 1997 and $1,492 in 1996 25 315
Other 186 504
8,388 9,466
Total assets $65,830 $60,713
</TABLE>
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 (Dollars in thousands) 1997 1996
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities
Short-term bank borrowings (Note 3) $ 330 $ 3,065
Accounts payable 3,649 3,218
Accrued compensation and payroll taxes 5,634 4,207
Accrued warranty expense 862 612
Other liabilities and accrued expenses (Note 8) 1,360 954
Current maturities of capital lease obligations 175 249
Current maturities of long-term debt -- 1,649
State and local taxes 426 394
Federal income taxes 830 147
Total current liabilities 13,266 14,495
Capital lease obligations (Note 3) 3,765 2,110
Long-term debt (Note 3) -- 645
Deferred income taxes (Note 4) 645 95
Shareholders' equity (Note 6)
Preferred Stock, $.01 par value:
Authorized shares -- 1,000,000, none issued -- --
Common Stock, $.01 par value:
Authorized shares -- 50,000,000
Issued shares -- 6,177,500 62 62
Additional paid-in capital 6,400 6,135
Cost of common stock in treasury -- 753,343 shares in
1997 and 654,195 shares in 1996 (deduction) (8,040) (5,708)
Cumulative translation adjustment 58 (149)
Retained earnings 49,674 43,028
Total shareholders' equity 48,154 43,368
Total liabilities and shareholders' equity $65,830 $60,713
</TABLE>
See accompanying notes.
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Additional Cumulative
Stock Paid-in Treasury Stock Translation Retained
(in thousands) Shares Amount Capital Shares Amount Adjustments Earnings
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1994 6,178 $62 $6,574 (921) $(7,849) $ -- $36,016
Net income -- -- -- -- -- -- 2,251
Incentive stock options exercised -- -- (382) 93 791 -- --
Conversion of Photon notes -- -- (67) 129 1,096 -- --
Restricted stock grants (Note 6) -- -- 62 9 82 -- --
Balance at June 30, 1995 6,178 62 6,187 (690) (5,880) -- 38,267
Net income -- -- -- -- -- -- 4,761
Translation adjustments -- -- -- -- -- (149) --
Purchases for treasury -- -- -- (50) (565) -- --
Incentive stock options exercised -- -- (187) 78 668 -- --
Tax benefit from exercise
of stock options -- -- 140 -- -- -- --
Conversion of Photon Notes -- -- (5) 8 69 -- --
Balance at June 30, 1996 6,178 62 6,135 (654) (5,708) (149) 43,028
Net income -- -- -- -- -- -- 6,646
Translation adjustments -- -- -- -- -- 207 --
Purchases for treasury -- -- -- (312) (4,477) -- --
Incentive stock options exercised -- -- (318) 132 1,331 -- --
Tax benefit from exercise
of stock options -- -- 207 -- -- -- --
Payment of York Ltd. note -- -- 371 80 803 -- --
Restricted stock grants (Note 6) -- -- 5 1 11 -- --
Balance at June 30, 1997 6,178 $62 $6,400 (753) $(8,040) $ 58 $49,674
</TABLE>
See accompanying notes.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended June 30 (Dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
Operating activities
Net income $ 6,646 $ 4,761 $ 2,251
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property and equipment 2,263 2,115 2,020
Amortization of intangibles 801 837 792
Deferred income taxes (701) (718) (460)
Deferred compensation expense 16 -- 62
Utilization of acquired tax loss carryforwards 272 530 111
Changes in operating assets and liabilities
(net of effects of acquired businesses):
Accounts receivable (3,213) (4,675) 1,939
Inventories 1,421 235 (3,137)
Other current assets 51 146 (43)
Accounts payable and accrued liabilities 2,514 497 652
Other current liabilities 715 207 (325)
Net cash provided by
operating activities 10,785 3,935 3,862
<PAGE>
Investing activities
Payments for acquired businesses -- -- (4,728)
Purchases of property and equipment, net (3,334) (1,573) (1,253)
Sundry (32) 2 (19)
Net cash used in investing activities (3,366) (1,571) (6,000)
Financing activities
Purchases of capital stock for treasury (4,477) (565) --
Proceeds from bank term loan -- -- 720
Principal payments on convertible securities -- (34) (65)
Principal payments on capital lease obligations (2,009) (238) (235)
Principal payments on long-term debt (1,198) (22) --
Proceeds from exercise of common stock options 1,220 621 491
Proceeds from issuance of Industrial Revenue Bond 3,940 -- --
Proceeds from short-term bank borrowings 29,380 23,365 29,905
Principal payments on short-term bank borrowings (32,115) (25,845) (28,080)
Net cash provided by (used in)
financing activities (5,259) (2,718) 2,736
Effect of exchange rate changes on cash (47) (42) --
Increase (decrease) in cash
and cash equivalents 2,113 (396) 598
Cash and cash equivalents at beginning of year 266 662 64
Cash and cash equivalents at end of year $ 2,379 $ 266 $ 662
</TABLE>
See accompanying notes.
Note 1 -- Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all
subsidiaries after elimination of intercompany accounts and transactions.
Use of Estimates
Preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using the
exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the
period. The gains or losses resulting from such translation are included in
shareholders' equity. Gains or losses resulting from foreign currency
transactions are included in other income.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method)
or market.
Intangible Assets
The cost in excess of net assets acquired (goodwill) and the cost of
patents, trademarks and other intangible assets are amortized by the
straight-line method over periods ranging from 3 to 20 years.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed by
straight-line and double-declining methods.
<PAGE>
Property Under Capital Lease
Property under capital lease is recorded at the lower of the fair market
value of the leased property or the present value of the minimum lease
payments. Depreciation of leased property is computed by the straight-line
method over the useful life of the asset.
Revenue Recognition
Revenue from sales of products is recognized at the time products are
shipped or when services have been rendered to the customer. Sales and
cost of sales on long-term contracts are recorded as deliveries are made.
Estimates of cost to complete are revised periodically throughout the lives
of the contracts, and any estimated losses on contracts are recorded in the
accounting period in which the revisions are made.
Earnings Per Share
The Company's reported earnings per share is computed on the basis of the
weighted average number of shares outstanding during each year plus the
dilutive effect, if any, of outstanding common stock equivalents.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Accounting for Stock-Based Compensation
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. Under
SFAS 123, stock-based compensation expense is measured using either the
intrinsic value method, as prescribed by Accounting Principles Board
Opinion No. 25, or the fair value method described in SFAS 123. The Company
has elected to continue to measure compensation costs using the intrinsic
value method and comply with the pro forma disclosure requirements of SFAS
123 (see Note 6).
Recently Issued Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), Earnings per Share, which replaces the
presentation of primary earnings per share (EPS) with basic EPS and replaces
fully diluted EPS with diluted EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
components of the basic EPS computation to the components of the diluted EPS
computation. SFAS No. 128 is effective for both interim and annual periods
ending after December 15, 1997. Earlier adoption is not permitted. Upon
adoption, all prior-period EPS data presented will be restated. The Company
does not anticipate the adoption of SFAS No. 128 to have a significant effect
on EPS.
In July, 1997, the Financial Accounting Standards Board issued Statement
No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related
Information. Under SFAS 131, the Company will report financial and
descriptive information about its operating segments. SFAS 131 is effective
for fiscal years beginning after December 15, 1997. The Company plans to
adopt SFAS 131 on July 1, 1998. The Company has not yet evaluated the impact
of adoption of SFAS 131.
Note 2 -- Acquisition
On June 21, 1995, the Company consummated the acquisition of
substantially all of the assets of York Technology Limited, a company
incorporated in England ("York Tech Ltd."), and York Technology Inc., a New
Jersey corporation, as well as the real estate and building previously leased
by York Tech Ltd. The acquired businesses are involved in the research,
development, design, manufacture and sale of quality assurance testing
equipment for optical fibers. The original total purchase price, including
estimated direct costs of acquisition, was approximately $6,900,000 and
consisted of cash consideration of approximately $4,728,000, the issuance of
a non-interest bearing term note in the amount of $1,872,000 due December 31,
1996, and related transaction costs.
The purchase agreement specifies that the purchase price may be increased
or decreased by an amount not to exceed $425,000, based on the level of sales
achieved by the acquired businesses in fiscal 1996. During fiscal 1996, the
sales were below the agreed upon level requiring a favorable adjustment of
$245,559. This amount has been deducted from the term note as specified in
the agreement and is reflected as an adjustment to cost in excess of net
assets acquired. The note was satisfied in 1997 by the issuance of 80,000
shares of the Company's common stock and cash. In connection with the
purchase of the real estate and building, the Company obtained a term loan
with a bank in the amount of $720,000.
The acquisition has been accounted for as a purchase and, accordingly,
the net assets and results of operations are included in the consolidated
financial statements from the effective date of acquisition. The purchase
price has been allocated to the assets based on their estimated fair values
at the date of acquisition.
Allocation of the revised purchase price was as follows
(in thousands):
Inventories $1,791
Intangibles (net of adjustment) 3,507
Property and equipment 1,357
$6,655
<PAGE>
On an unaudited pro forma basis, sales, net income and net income per
share for the year ended June 30, 1995, were $82,991,000, $1,663,000 and
$.30, respectively. This pro forma data presents the consolidated results of
operations as if the acquisitions had occurred on July 1, 1994, after giving
effect to certain adjustments including amortization of intangibles,
increased interest expense and related income tax effects. The pro forma
results have been prepared for comparative purposes only and do not purport
to indicate the results of operations which would actually have occurred had
the acquisitions been in effect on the date indicated or which may occur in
the future.
Note 3 -- Debt and Lease Arrangements
Long-term debt consisted of the following (in thousands):
1997 1996
Term note payable to shareholders
of York Tech Ltd. (Note 2) $ -- $1,585
Term loan payable to bank, due
in 180 monthly installments of
principal and interest of $7,598,
interest at the bank's base rate
plus 3% (Note 2) -- 676
Convertible securities -- 33
-- 2,294
Less current maturities -- 1,649
$ -- $ 645
Term note payable to York Tech Ltd.: As per terms of the agreement,
final payment was made on December 31, 1996. The balance due, after
adjustments, was satisfied with cash of $166,000 and the Company's common
stock valued at $1,174,000.
Term loan payable to bank: In May 1997, the Company elected to pay off
the remaining balance of the loan.
Convertible Securities: In connection with the 1992 acquisition of Photon
Kinetics, Inc., a wholly-owned subsidiary (PK), the Company issued $1,225,185
in five year, 10 percent unsecured notes convertible into IFR Systems common
stock at a conversion rate of $8.00 per share. The notes were convertible in
whole or in part, at the option of the holder. Final payment was made on
April 1, 1997.
Capital Leases: In March 1997, the Company entered into a capital lease
to refund and redeem the industrial revenue bonds dated May 1, 1989 which
were issued in the original principal amount of $3,500,000 of which
$2,330,000 were outstanding; and to finance manufacturing support equipment
and building improvements to the existing facility. This lease was entered
into in connection with an issuance of industrial revenue bonds dated March
15, 1997 (the 97 Bonds) by the City of Goddard, Kansas (the City). The
transaction for the 97 bonds totalled $3,940,000. All remaining funds,
$1,594,000 at June 30, 1997, after the payoff of the May 1, 1989 Bond are
contractually restricted. The Company has guaranteed the future repayment of
all amounts due relating to the 97 Bonds. The City has retained title to the
facilities and related equipment. The Company has the option to purchase the
facilities and equipment for a nominal amount after repayment in full of all
amounts due relating to the 97 Bonds. Under the terms of the lease, the Company
is required to make quarterly payments in an amount sufficient to pay the
principal and interest installments of the 97 Bonds when due. The 97 Bonds
mature serially over a 15 year period which commenced May 1, 1997, and are
callable for early redemption by the Company on or after May 1, 2004. Upon the
occurrence of certain events, the 97 Bonds are subject to immediate redemption
at the option of each Bondholder.
These events include the acquisition or right to acquire beneficial
ownership of 25% of the outstanding Common Stock (unless waived by the Board
of Directors), the subsequent determination that the Bonds are taxable or
other specified events.
Future minimum lease payments, based upon scheduled redemptions of
the Bonds as of June 30, 1997, are as follows
(in thousands):
1998 $ 420
1999 403
2000 399
2001 399
2002 404
Thereafter 4,039
Total minimum lease payments 6,064
Amounts representing interest 2,124
Present value of minimum lease payments 3,940
Current maturities 175
Long-term portion $3,765
<PAGE>
Operating Leases: The Company also leases certain facilities and
equipment under operating leases which expire over the next one to five
years. The equipment leases provide the Company with the option after the
initial lease term to purchase the property at the then fair value, renew its
lease at the then fair rental value for a period of one year or return the
equipment to the lessor. Generally, management expects that after the initial
lease term the equipment will be purchased for the then fair value.
Minimum payments for operating leases having initial or remaining
noncancelable terms in excess of one year are as follows (in thousands):
1998 $ 797
1999 767
2000 335
2001 15
Total minimum lease payments $1,914
Total rent expense for all operating leases amounted to approximately
$825,000, $625,000, and $466,000 for 1997, 1996 and 1995, respectively.
Lines of Credit: The Company has available unsecured lines of credit
aggregating $15,000,000 which expire on June 30, 1998. As of June 30, 1997,
the Company has unused lines of credit aggregating $14,670,000. The interest
rate on the outstanding portion of the lines of credit is 3/4% below prime
(7.75% at June 30, 1997).
Interest Paid: Interest paid during 1997, 1996 and 1995 was approximately
$555,000, $730,000, and $495,000, respectively.
Note 4 -- Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of June 30 are as follows (in thousands):
1997 1996
Deferred tax liabilities:
Tax over book depreciation $ 539 $ 533
Amortization of intangibles 9 107
Other 113 --
Total deferred tax liabilities 661 640
Deferred tax assets:
Tax credit carryforwards 463 590
Capital loss carryforward 153 153
Net operating loss carryforwards -- 39
Inventory reserve 1,020 647
Accrued vacation 365 333
Warranty reserve 290 273
Other-net 536 342
Total deferred tax assets 2,827 2,377
Valuation allowance for
deferred tax assets (620) (800)
Net deferred tax assets 2,207 1,577
Net total deferred tax assets $1,546 $ 937
The composition of the provision for income taxes is as follows (in
thousands):
1997 1996 1995
Current:
Federal $3,623 $2,236 $1,271
State 810 545 321
Foreign 363 -- --
Total current 4,796 2,781 1,592
Benefit of tax
carryforwards 272 530 111
Deferred federal (817) (205) (460)
Deferred foreign 111 -- --
$4,362 $3,106 $1,243
<PAGE>
The effective income tax rate varied from the statutory federal income
tax rate as follows for the years ended June 30:
1997 1996 1995
Statutory federal
income tax rate 34.0% 34.0% 34.0%
Increases (decreases):
State income taxes,
net of federal tax
benefit 4.9 4.6 6.1
Amortization of
goodwill & intangibles 1.1 1.6 3.5
Research & development
tax credits (.8) -- (7.5)
Other .4 (.7) (.5)
39.6% 39.5% 35.6%
Income tax payments for 1997, 1996 and 1995 were approximately
$3,872,000, $2,749,000, and $1,463,000, respectively.
At June 30, 1997, the Company had unused research and development and
investment tax credits of $412,000 and $51,000, respectively, and an unused
capital loss carryforward of $450,000 that expire in years 1997 through 2006.
For financial reporting purposes, a valuation allowance has been recognized
to fully offset the deferred tax assets related to those carryforwards. When
realized through a reduction in the valuation allowance, the tax benefit from
the tax credit carryforwards of $463,000 will be applied to reduce goodwill
related to a prior acquisition. Such reduction was $180,000 in 1997.
Note 5 -- Research & Development Costs
Research and development costs were $9,990,000, $7,374,000 and $7,892,000
for 1997, 1996 and 1995, respectively.
Note 6 -- Shareholders' Equity
Incentive Stock Option Plans: The Company has three incentive stock
option plans - the 1985, 1988 and 1996 Plans (the Plans). The 1985 Plan
expired and has no options outstanding as of June 30, 1997. Under the 1988
and 1996 Plans, 300,000 shares and 400,000 shares, respectively, of Common
Stock have been reserved for issuance. The Plans permit the granting of
qualified stock options to officers and key employees. The option price per
share under the Plans is not to be less than the fair market value of a share
of Common Stock on the date of grant. All grants are made by the
Compensation Committee.
Nonqualified Stock Option Plan: In November 1992, shareholders of the
Company approved the 1992 Nonqualified Stock Option Plan whereby all
employees of the Company are eligible to be granted nonqualified stock
options. A total of 500,000 authorized but unissued or treasury shares of
the Company's Common Stock were reserved for grant under the plan. The
Compensation Committee determines the time or times at which options will be
granted, selects the employees to whom options will be granted, and
determines the number of shares covered by each option, purchase price, time
of exercise and other terms.
Outside Director Plan: In November 1989, an Outside Director
Compensation, Stock Option and Retirement Plan (Outside Director Plan) was
approved by the shareholders. The Outside Director Plan provides that each
director who is not an employee of the Company will be granted an option to
purchase 1,000 shares of the Company's Common Stock on the third business day
after the annual meeting of the shareholders in each of the next ten years,
commencing in 1989. The total number of shares to be issued under the
Outside Director Plan cannot exceed 60,000 shares. The option price under the
Outside Director Plan is not to be less than 100% of the fair market value of
a share of Common Stock on the date of grant.
The following table summarizes information concerning options outstanding
and exercisable at June 30, 1997 for all plans:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
$2 - $6 2,298 3.94 $ 2.97 2,298 $ 2.97
$6 - $8 167,767 5.90 $ 6.89 129,969 $ 6.86
$8 - $11 36,500 8.11 $ 9.52 29,500 $ 9.67
$11 - $13 191,367 7.42 $11.69 93,955 $11.83
$13 - $16 95,500 9.20 $15.67 6,000 $15.17
Shares exercisable at June 30, 1997 and 1996 were 261,722 and 270,893,
respectively.
Stock option activity during 1995-1997 is summarized below:
<PAGE>
Weighted
Average
Exercise
Shares Price
Unexercised at July 1, 1994 521,593 $ 7.39
Granted 245,500 10.25
Exercised (92,878) 6.83
Canceled or expired (31,075) 7.45
Unexercised at June 30, 1995 643,140 8.49
Granted 69,867 13.12
Exercised (77,928) 7.03
Canceled or expired (58,620) 8.07
Unexercised at June 30, 1996 576,459 9.35
Weighted
Average
Exercise
Shares Price
Granted 70,000 15.73
Exercised (132,077) 7.67
Canceled or expired (20,950) 10.84
Unexercised at June 30, 1997 493,432 $10.63
The Company accounts for stock option awards as prescribed by
Accounting Principles Board Opinion No. 25. Accordingly, no compensation
cost has been recognized in the Consolidated Statements of Income. Had the
Company recorded compensation expense for the fair value of the options
granted in fiscal 1997 and 1996, as provided by SFAS 123, the Company's net
income and net income per common share would have been as follows:
1997 1996
Net income (in thousands)
As reported $6,646 $4,761
Pro forma 6,479 4,726
Net income per common share
As reported $ 1.18 $ 0.84
Pro forma 1.15 0.84
Because SFAS 123 is applicable to options granted subsequent to June 30,
1995, and the options have vesting periods up to five years, the pro forma
effect will not be fully reflected until 2000.
In order to calculate the fair value at the date of grant, the Company
used the Black-Scholes option pricing model. The following assumptions were
used for both 1997 and 1996: expected option term -- 6 years, risk free
interest rate -- 6%, stock price volatility factor -- .45 and no dividend
yield. The weighted average fair value of options granted during 1997 was
$6.61.
Restricted Stock Grant Plan: On February 27, 1989, the shareholders
of the Company approved a restricted stock grant plan whereby officers and
key employees may be granted restricted shares of the Company's Common Stock.
The restrictions lapse over various vesting periods not to exceed ten years.
A total of 300,000 authorized but unissued or treasury shares of the
Company's Common Stock were reserved for grant under the plan. These
restricted shares may be granted at a price equal to par value. In 1997 and
1995, the Company made grants of 1,000 shares and 9,600 shares, respectively.
There were no grants made in 1996.
The market value of restricted shares granted is being amortized as
compensation expense over the vesting period. Total expense of $16,000 and
$62,000 was recognized in 1997 and 1995, respectively, in connection with the
restricted stock grant plan. The shares reserved for future grants are
84,694 as of June 30, 1997.Shareholder Rights Plan: The Board of Directors of
the Company adopted a Shareholder Rights Plan on February 28, 1989, whereby
common stock purchase rights (the Rights) were distributed as a dividend at
the rate of one Right for each share of the Company's Common Stock held as of
the close of business on March 10, 1989. The Rights will expire on February
27, 1999. Each Right entitles shareholders to buy one share of common stock
of the Company at an exercise price of $50 per share. The Rights are
exercisable only if a person or group acquires beneficial ownership of 20% or
more of the Company's Common Stock or announces a tender or exchange offer
upon consummation of which such person or group would beneficially own 20% or
more of the Common Stock.
Following the acquisition of 20% or more, but less than 50%, of the
Company's Common Stock by a person or group, the Board of Directors may
authorize the exchange of the Rights (except those owned by the acquirer), in
whole or in part, for shares of the Company's Common Stock at an exchange
ratio of one share for each Right.
<PAGE>
The Board of Directors of IFR will generally be able to redeem the Rights
at $.01 per Right at any time prior to the time that a 20% position in the
Company has been acquired. If a bidder who owns less than 5% of the Common
Stock offers to buy all of the Common Stock at a price which a nationally
recognized investment banker states in writing is fair and if the bidder has
full financing for the bid, the shareholders of the Company may cause the
Rights to be automatically redeemed immediately prior to the consummation of
the offer, provided that such offer or another offer is consummated within 60
days at a price per share that is not less than the price approved by the
shareholders.
Note 7 -- Industry Segments
The Company operates exclusively in one dominant industry segment, the
electronic test and measurement equipment industry. The primary use of its
products is for receiving, analyzing and transceiving video, voice and data
information.
Sales include $21,084,000, $12,400,000 and $16,400,000 in 1997, 1996 and
1995, respectively, to the United States government.
Export sales to unaffiliated customers by destination of sales are
summarized as follows (in thousands):
Years ended June 30
1997 1996 1995
Europe $14,631 $ 8,622 $ 5,184
Western Hemisphere 6,389 5,883 4,884
Pacific Rim 15,078 14,653 10,090
Other 2,993 4,034 5,523
$39,091 $33,192 $25,681
For fiscal 1997, sales and income before income taxes generated by the
Company's foreign operations were $15,739,000 and $1,458,000, respectively.
At June 30, 1997, identifiable assets of the foreign operations were
$10,604,000.
Note 8 -- Benefit Plans
Retirement Plan: The Company has a trusteed defined contribution
retirement plan for substantially all employees. Company contributions are
discretionary with respect to the plan. Employee benefits are based on
amounts accumulated from contributions and investment gains or losses.
Because it is a defined contribution plan, there are no unfunded past service
costs. Total retirement plan expenses for 1997, 1996 and 1995 were
$1,268,000, $1,083,000 and $1,036,000, respectively.
Directors Retirement Plan: The Company maintains an unfunded retirement
plan for nonemployee directors of the Company. Benefits are not to exceed a
maximum length of 10 years of service and are payable when the Plan's
requirements are satisfied. The estimated liability of $403,000 at June 30,
1997 is included in the balance sheet caption Other Liabilities and Accrued
Expenses.
Savings and Investment Plan: The Company has a savings and investment
plan for substantially all employees under Section 401(k) of the Internal
Revenue Code. Employees may contribute to the plan up to 12% of their
salary. Matching Company contributions are discretionary with respect to the
plan. During 1997, 1996 and 1995, the Company matched 50% of each employee's
contribution up to 4% of their salary. Company contributions charged to
expense in 1997, 1996 and 1995, were $345,000, $298,000 and $254,000,
respectively.
Incentive Bonus Plan: The Company has established a bonus plan payable to
all employees based on pre-established operating income goals approved by the
Board of Directors. Total bonus plan expenses for 1997 and 1996 were
$1,426,000 and $783,000, respectively. No expenses were incurred in 1995.
VEBA Trust: The Company has a voluntary employees' beneficiary
association (VEBA), which funds certain employee welfare plan benefits. The
Company is obligated to fund a trust as needed to provide for actual claims
and trust expenses incurred. Total VEBA expenses for 1997, 1996 and 1995 were
$1,378,000, $1,183,000 and $1,206,000, respectively.
<PAGE>
Responsibility for Financial Statements
The management of IFR Systems, Inc. is responsible for the preparation of
the financial statements, the Annual Report and for the integrity and
objectivity of the information presented. The financial statements have been
prepared in conformity with generally accepted accounting principles and
necessarily include amounts which are estimates and judgments. The fairness
of the presentation in these statements of the Company's financial position,
results of operations and cash flows is reported on by the independent
auditors.
To assist in carrying out the above responsibility, the Company has
internal systems which provide for selection of personnel, segregation of
duties and the maintenance of accounting policies, systems, procedures and
related controls.
Although no cost effective system can insure the elimination of errors,
the Company's systems have been designed to provide reasonable but not
absolute assurances that assets are safeguarded, that policies and procedures
are followed, and that the financial records are adequate to permit the
production of reliable financial statements.
The Audit Committee of the Board of Directors, which is composed of
directors who are not employees of the Company, meets regularly with Company
officers and independent auditors in connection with the adequacy and
integrity of the Company's financial reporting and internal controls.
Jeffrey A. Bloomer
Treasurer and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
Board of Directors
IFR Systems, Inc.
We have audited the accompanying consolidated balance sheets of IFR
Systems, Inc. as of June 30, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IFR
Systems, Inc. at June 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.
Indianapolis, Indiana
July 29, 1997
<PAGE>
IFR Systems, Inc.
Subsidiaries of the Registrant
Exhibit 21.0
IFR Systems, Inc. - Parent Delaware
Photon Kinetics, Inc. Oregon
York Technology Ltd. England
IFR Systems International, Inc. Barbados
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of IFR Systems, Inc. of our report dated July 29, 1997, included
in the 1997 Annual Report to Shareholders of IFR Systems, Inc.
Our audits also included the financial statements schedule of IFR Systems,
Inc. listed in Item 14 (a). This schedule is the responsibility of the
Company'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.
We also consent to the incorporation by reference in the Registration
Statement 33-5272 on Form S-8 of the Incentive Stock Option Plan dated April
29, 1986, Registration Statements 33-27329 on Form S-8 of the Restricted
Stock Grant Plan dated March 2, 1989, Registration Statement 33-27330 on Form
S-8 of the Incentive Stock Option Plan dated March 2, 1989, Registration
Statement 33-32060 on Form S-8 of the Outside Director Compensation, Stock
Option and Retirement Plan dated November 14, 1989, Registration Statement
33-56862 on Form S-8 of the Nonqualified Stock Option Plan dated January 8,
1993, and Registration Statement 333-18649 on Form S-3 relating to the
registration of common shares dated December 23, 1996 of our report dated
July 29, 1997, with respect to the consolidated financial statements and
schedule of IFR Systems, Inc. incorporated by reference in the Annual Report
on Form 10-K for the year ended June 30, 1997.
Indianapolis, Indiana
September 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM FORM
10-K FOR JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<PERIOD-START> JUL-01-1996
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,379
<SECURITIES> 0
<RECEIVABLES> 20,207
<ALLOWANCES> 500
<INVENTORY> 22,405
<CURRENT-ASSETS> 46,781
<PP&E> 21,992
<DEPRECIATION> 11,331
<TOTAL-ASSETS> 65,830
<CURRENT-LIABILITIES> 13,266
<BONDS> 3,765
0
0
<COMMON> 62
<OTHER-SE> 48,092
<TOTAL-LIABILITY-AND-EQUITY> 65,830
<SALES> 103,517
<TOTAL-REVENUES> 103,517
<CGS> 61,296
<TOTAL-COSTS> 61,296
<OTHER-EXPENSES> 31,314
<LOSS-PROVISION> 87
<INTEREST-EXPENSE> 571
<INCOME-PRETAX> 11,008
<INCOME-TAX> 4,362
<INCOME-CONTINUING> 6,646
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,646
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.17
</TABLE>
