<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
Commission File Number 0-22190
ELTRAX SYSTEMS, INC.
(Name of small business issuer as specified in its charter)
MINNESOTA 41-1484525
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
2000 TOWN CENTER
SUITE 690
SOUTHFIELD, MI 48075
(Address of principal executive offices)
(248) 358-1699
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $0.01 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 .
---- ----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
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-KSB or any amendment to this Form 10-KSB. [ ]
The registrant's revenues for the year ended December 31, 1997:
$49,934,139.
As of FEBRUARY 2, 1998, 10,847,771 shares of Common Stock of the
registrant were outstanding, and the aggregate market value of the Common
Stock of the registrant as of that date (based upon the last reported sale
price of the Common Stock reported on that date by the NASDAQ Small Cap
Market), excluding outstanding shares beneficially owned by directors and
officers, was $45,595,121.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Company's Proxy Statement for its Annual Meeting of Shareholders to be held
May 19, 1998 (the "1998 Proxy Statement").
Transitional Small Business Disclosure Format (check one): yes no X
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
INTRODUCTION
Eltrax Systems, Inc. (the "Company" or "Eltrax") is a nationwide managed
network services company, providing communications products and services for
enterprise wide networks. Eltrax designs and installs networking systems for
corporate and government customers. The Company also provides monitoring,
management, and maintenance services to support enterprise networks. Eltrax
has acquired several independent companies over the last two years, and these
acquisitions now comprise Eltrax's national network of regional operations.
The Company headquarters is located at 2000 Town Center, Suite 690,
Southfield, MI 48075 and its telephone number is (248) 358-1699. The Company
maintains a worldwide web address at www.eltrax.com.
HISTORY
The Company completed its initial public offering on December 8, 1992.
At that time, the Company was engaged in two businesses: 1) the distribution
of a high density magnetic stripe plastic cards to store information used in
patient admissions to health care facilities (the "Health Card Business");
and 2) a digital image archiving business, specializing in digitizing and
archiving X-ray film and other medical information images (the "Imaging
Business"). During the fiscal years ended March 31, 1994 and 1995, the
Company incurred aggregate net losses of approximately $2.26 million, due
primarily to expenditures on infrastructure, sales and marketing, and
research and development, which far exceeded the Company's revenues.
During the fiscal year ended March 31, 1996, several significant changes
took place at the Company; the Company received additional equity through a
private placement of stock and warrants in June 1995; the Company installed a
new management team in August 1995, to formulate a plan and strategy to enter
the data communications business; and the Company sold the Imaging Business
assets and business. During the nine month transition period ended December
31, 1996, several additional significant changes took place at the Company;
the Company acquired its first two data communication companies; the Company
sold the Health Card Business assets, thereby discontinuing all of its
pre-1996 business operations; and the Company changed its fiscal year-end to
a calendar year. During 1997, the Company made five additional acquisitions
expanding the Company's geographic coverage and adding new service offerings
in the data communications business.
During 1997, the Company began focusing its efforts on its end user
network systems business, as well as the Company's entry into the network
monitoring and management business. As a consequence, the Company has
decided to consolidate certain offices and to close other offices, which
specialize in the lower margin distribution of products to reseller
customers. This decision is being implemented during the first quarter of
1998 and is reflected in the write-down of certain intangible assets in 1997.
During late 1997, the Company began construction of its Network
Operating Center ("Center"), located in Reading, Pennsylvania. The Center is
capable of providing nationwide remote monitoring and management services for
enterprise wide networks.
(b) NARRATIVE DESCRIPTION OF BUSINESS
INDUSTRY OVERVIEW
Businesses have a seemingly endless need to exchange information, both
internally and externally, in a variety of increasingly complex fashions.
To exchange information, businesses are using methods such as client/server,
remote access, Intranets, the Internet, e-mail, video conferencing and
standard voice applications. The amount of data required to complete these
information exchanges has increased traffic and placed significant demand on
corporate networks. Furthermore, the technology employed on corporate
networks has become increasingly complex as large multi-vendor heterogeneous
networks have proliferated. The options available to businesses seeking to
build and manage networks to facilitate these information exchanges include
many rapidly developing,
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highly sophisticated, new technologies such as switches, routers, hubs,
inverse multiplexers, ATM, frame relay and VLANS. Amid this complex, rapidly
changing technological environment, companies are increasingly focused on
their core competencies and relying to a greater degree on network
professionals to help them manage their information exchange requirements.
STRATEGY
The Company's objective is to become the premier provider of data
communication network management services and products for enterprise wide
communication networks, serving private, public and government customers. To
achieve its objective, the Company is pursuing the following strategies:
EXPAND SERVICE OFFERINGS. The Company has continued to expand its
service offerings and anticipates services to comprise a growing portion of
revenues. Increasing the proportion of service revenue such as design,
consulting, network monitoring and maintenance should result in improved
operating margins.
STRATEGIC ACQUISITIONS. The Company intends to continue to pursue
acquisitions to expand within its existing markets, enter new markets,
increase the Company's range of services and to add technical expertise to
the Company.
BUILD AND STRENGTHEN EXISTING CLIENT RELATIONSHIPS. The Company
currently sells its equipment and services to over eight thousand end user
customers nationwide. The Company believes that by delivering dependable,
high-quality network services, it will strengthen its relationship with this
existing customer base, thus leading to increased repeat business.
FOCUS ON STRATEGIC VENDORS. With the consolidation of the recent
acquisitions and mergers made by the Company, a critical mass has been
achieved in its purchasing volumes with several key vendors. The Company
intends to pursue relationships with these key vendors including achieving
specialized service level recognition.
PRODUCTS AND SERVICES
The Company designs, installs and manages and maintains communications
networks. Equipment central to these operations includes modems, routers,
channel service units, digital service units, switches, hubs and multiplexers
used in communications networks. This type of equipment is used by customers
who need to (i) build and operate networks for remote access computing; (ii)
link local area networks together to form wide area networks; (iii) provide
secure and efficient access to the internet; (iv) operate as an internet
service provider; and (v) build and operate corporate intranets. Currently,
Eltrax purchases equipment directly from a number of manufacturers including
Adtran, Cisco, Micom, Motorola and 3Com.
An example of the Company's end-user customers are corporate and
governmental users who need to develop greater efficiencies by providing
telecommuting options to their employees. In addition, the Company's
end-user customers include corporate and governmental users with multiple
locations who require connections between those locations to accommodate
voice and data transmission. Further, the Company's customers include
Internet service providers and corporate and government users seeking secure
and efficient access to the Internet.
Eltrax derives service revenue by installing and maintaining certain
equipment it sells directly to end-users. The Company also offers a complete
line of network monitoring services.
SALES AND MARKETING
Eltrax sales activities are directed by a National Sales Director and
local management and consist of a sales force of approximately 60 sales
employees. The sales personnel are located in approximately 15 states and
generally concentrate their efforts in close proximity to their home
locations. Prior to its decision to focus on end-user sales, several inside
sales professionals covered the entire United States selling to other
value-added resellers. No single customer accounted for ten percent or more
of Eltrax's gross revenue during the last two fiscal periods.
The Company uses a variety of sales and marketing techniques including
hosting technical seminars, attending trade shows, publishing newsletters and
direct mailings. The majority of these marketing efforts are reimbursed by
manufacturers through co-op funding programs. Additionally, the Company
relies upon referrals from these manufacturers and from telecommunication
carriers for sales leads.
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COMPETITION
Eltrax focuses on the products of leading edge manufacturers to sell
and distribute. Eltrax is not limited to any single technology,
manufacturer or product line. The volume of purchasing that Eltrax has been
able to achieve from these leading edge manufacturers has allowed it to
achieve favorable price discounts from its essential manufacturer suppliers.
Competition for these products and services is intense. As technology
evolves, the historic products that Eltrax sells require a lower level of
technical expertise to sell and support. This leads manufacturers to sell
their products through large distributors who sell based upon price and
availability. A good example of this phenomenon is modems. Historically,
modems commanded high margins and required technical support to configure and
install correctly. Currently modems are a commodity product, which can be
installed correctly by virtually anyone. The challenge for Eltrax is to
continue to maintain a high degree of technical expertise to provide its
customers with leading edge technology.
At the end-user level, Eltrax competes with large systems integrators by
focusing on the communications aspect of the customer requirements. Eltrax
does not provide services related to the applications of the devices
operating on the networks, only on the communications networks required to
make the applications operate effectively. The competition for end-user
customers is intense, with many options available to customers. Eltrax
competes by building client relationships whereby the customer relies upon
Eltrax to be its key source of information regarding new technologies and
products.
MANUFACTURER RELATIONSHIPS
Eltrax currently purchases equipment directly from a number of
manufacturers including Adtran, Cisco, Micom, Motorola and 3Com on a purchase
order basis. Eltrax has cultivated relationships with these manufacturers
and they have become an essential ingredient in the Eltrax business plan.
Because these relationships are not based on long-term contracts, the
purchase and sale terms (and prices) are constantly changing. Any
modification to the discounts offered by the manufacturers or changes in
their distribution plans could have a material adverse effect on Eltrax's
results of operations. There can be no assurance that these relationships
will be maintained or that the discount levels currently offered by the
manufacturers will remain constant.
GOVERNMENT REGULATIONS
The Telecommunications Reform Act of 1996 is expected to result in
greater competition throughout the telecommunications industry. Greater
competition is expected to create more opportunities for corporate and
government end-users to utilize communication facilities, thus generating
increasing needs for the equipment and services that Eltrax provides. This
greater competition also creates uncertainties for the Company, in that
competitors with far greater resources could take market share away from the
Company.
RESEARCH AND DEVELOPMENT
The Company does not, nor does it intend to, perform research and
development activities. Accordingly, no such expenditures were made during
the year ended December 31, 1997. For the nine-month transition period ended
December 31, 1996, all research and development costs have been included in
discontinued operations.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 155 persons
on a full-time basis. The Company's employees are not covered by any
collective bargaining agreements and management believes its employee
relationships are good. The Company's ability to successfully offer
commercially marketable products and to establish a market position in view
of continuing technological developments will depend in part upon its ability
to attract and retain qualified technical personnel. Competition for such
personnel is intense.
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ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company's corporate headquarters is approximately 2,200 square feet
and located in Southfield, Michigan. The lease on this space currently
provides for monthly rent of $3,700 per month, including base rent and a pro
rata share of operating expenses and real estate taxes. This lease
terminates on May 31, 2001.
The Company's Southeast Region is located in Raleigh, North Carolina.
The facility is approximately 14,000 square feet, and approximately 4,000
square feet is used for offices, 3,000 square feet for technical operations
and 7,000 square feet for warehouse space. The lease on this space currently
provides for rent of $7,500 per month including base rent and a share of
operating expenses, and terminates in 2001. The lessors of this space
include two shareholders of the Company that have non-controlling interests
in the lease. The Region also has additional sales offices located
throughout the Southeastern United States.
The Company's Mid Atlantic Region's main facility is located in Reading,
Pennsylvania. The facility is approximately 20,000 square feet, with 8,000
square feet used for offices, 10,000 for technical space and 2,000 for the
Company's Network Operating Center. The lease on this space currently
provides for base rent of $6,833 per month, and terminates in 1998 unless
renewed. The Region also maintains sales offices in New Jersey and Virginia.
The Company's Midwest Region's main facility is located in North
Olmsted, Ohio. The facility is approximately 5,600 square feet, with 4,400
square feet used for offices, 600 for technical space and 600 for warehouse.
The two leases covering this space currently provide for base rent of $6,233
per month. The lessor of this space is a company owned by a shareholder of
the Company. These leases terminate in 2002 and 2006 unless renewed. The
Region also maintains several sales offices in Ohio and Michigan.
The Company's Southwest Region's main facility is located in Scottsdale,
Arizona. The facility is approximately 7,200 square feet, with 5,000 square
feet used for offices, 1,200 for technical space and 1,000 for warehouse
space. The lease on this space currently provides for base rent of $4,533 per
month, and terminates in 1999. The Region also maintains several sales
offices in the Southwestern United States.
The Company's Western Region's facility is located in Agoura Hills,
California, and consists of 2,250 square feet. Approximately 750 square feet
of this space is used for offices, 500 square feet for technical operations,
and 1,000 square feet for warehouse space. The lease on this space currently
provides for base rent of $1,300 per month, and terminates in 1999. The
Region also maintains a sales office in San Juan Capistrano, California.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal, governmental, administrative or
other proceedings to which the Company is a party or of which any of its
property is the subject.
During the fourth quarter of 1997, the Company settled the litigation
filed by Howard and Ruby Norton, which was discussed in the Company's second
quarter Form 10-QSB. The settlement consisted of a payment by the Nortons to
the Company of $20,000, a transfer of 100,000 shares of the Company's Common
Stock by the Nortons and the discontinuance of the employment contracts with
each of the Nortons.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, their ages and the offices held,
as of March 1, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- ---- --------
<S> <C> <C>
William P. O'Reilly 52 Chief Executive Officer of the Company
Edward C. Barrett 49 Executive Vice President and Chief Operating Officer
Clunet R. Lewis 51 Secretary and General Counsel
Nicholas J. Pyett 38 Chief Financial Officer and Treasurer
</TABLE>
Information regarding the business experience of the executive officers
is set forth below.
WILLIAM P. O'REILLY has been Chief Executive Officer of the Company
since January 1997, Chairman of the Board of Directors since August 1995 and
a director of the Company since July 1995. For the past 15 years, Mr.
O'Reilly has been a private investor and entrepreneur who has managed several
different successful business ventures. In 1989, Mr. O'Reilly formed a group
of investors to acquire Military Communications Center, Inc., where he served
as Chairman of the Board and Chief Executive Officer from 1989 to 1994. In
1986, Mr. O'Reilly founded Digital Signal, Inc., a provider of fiber optic
capacity to long distance carriers in the telecommunications industry, where
he served as Chief Executive Officer from 1986 to 1989. In 1981, Mr.
O'Reilly founded Lexitel Corporation, a long distance carrier (which was
subsequently acquired by ALC Communications, Inc.), where he served as
Chairman of the Board and Chief Executive Officer from 1980 to 1984. Mr.
O'Reilly is also currently a director of Charter Communications, Inc., a
builder and operator of international communication networks which provides
voice, video and data services, and World Access, Inc., a manufacturer and
value added reseller of telecommunications equipment.
CLUNET R. LEWIS has served as a director of the Company since August
1995. From April 1997 he has served as General Counsel and Secretary of the
Company. From September 1996 to the March 1997, Mr. Lewis has served as
Acting Chief Financial Officer of the Company. Mr. Lewis was a member of the
law firm of Jaffe, Raitt, Heuer & Weiss, P.C. for 20 years, ending in 1993.
From 1989 to 1994, Mr. Lewis acted as Secretary, General Counsel and director
of Military Communications Center, Inc. Since 1993, Mr. Lewis has also
served on the Board of Directors and the audit committee of Sun Communities,
Inc., a New York Stock Exchange real estate investment trust.
EDWARD C. BARRETT joined the Company in August 1997 with the acquisition
of Hi-Tech Connections, Inc. where he served as President for over thirteen
years. In October, 1997, Mr. Barrett assumed the responsibilities of Chief
Operating Officer and was elected an Executive Vice-President in February
1998.
NICHOLAS J. PYETT joined the Company in April 1997 as Chief Financial
Officer and Treasurer. Prior to joining the Company, Mr. Pyett had over 10
years experience in private industry, most recently as the Chief Financial
Officer of Arcadia Services, Inc., a national healthcare service company.
Mr. Pyett also has extensive public accounting experience with Arthur
Andersen & Company.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the national over-the-counter
market on the NASDAQ Small Cap Market under the symbol "ELTX". The following
table sets forth the quarterly high and low bid prices for the Company's Common
Stock for the year ended December 31, 1997, nine month transition period ended
December 31, 1996 and the fiscal year ended March 31, 1996 as reported by the
NASDAQ SmallCap Market. The prices set forth below do not include adjustments
for retail mark-ups, markdowns or commissions and represent inter-dealer and do
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997:
First Quarter......................................... $7.38 $4.75
Second Quarter........................................ $7.50 $5.50
Third Quarter......................................... $8.50 $5.00
Fourth Quarter........................................ $7.13 $3.88
NINE-MONTH TRANSITION PERIOD ENDED
DECEMBER 31, 1996:
First Quarter ........................................ $8.13 $3.00
Second Quarter........................................ $7.25 $4.75
Third Quarter......................................... $6.25 $5.00
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter......................................... $0.56 $0.31
Second Quarter........................................ $1.69 $0.31
Third Quarter......................................... $2.31 $1.38
Fourth Quarter........................................ $4.75 $1.44
</TABLE>
As of December 31, 1997, there were approximately 250 shareholders of
record. The Company estimates that an additional 2,400 shareholders own stock
held for their accounts at brokerage firms and financial institutions. The
Company has never paid cash dividends on any of its securities. The Company
currently intends to retain any earnings for use in its operations and does
not anticipate paying cash dividends in the foreseeable future.
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The following chart sets forth the information regarding all securities
issued by the Company during the year ended December 31, 1997, which were not
registered under the Securities Act:
<TABLE>
<CAPTION>
DATE OF EXEMPTION CONVERSION/EXERCISE
SECURITIES ISSUED(1) ISSUANCE PURCHASER CONSIDERATION CLAIMED PRICE
<S> <C> <C> <C> <C> <C>
138,000 shares 5/14/97 Edward J. and Common Stock of EJG 4(2) of the N/A
Common Stock Kathleen M. Gorlitz Techline, Incorporated (2),(6) Securities Act
92,000 shares 5/14/97 Colin E. and Diane Common Stock of EJG 4(2) of the N/A
Common Stock C. Quinn Techline, Incorporated (2),(6) Securities Act
166,667 shares 7/01/97 Robert A. Hughes Common Stock of Four 4(2) of the N/A
Common Stock Corners Technology, Inc. (3) Securities Act
166,667 shares 7/01/97 Joel J. Common Stock of Four 4(2) of the N/A
Common Stock Blickenstaff Corners Technology, Inc. (3) Securities Act
66,666 shares 7/01/97 David Noall Common Stock of Four 4(2) of the N/A
Common Stock Corners Technology, Inc. (3) Securities Act
89,187 shares 8/15/97 Edward C. Barrett Common Stock of Hi-Tech 4(2) of the N/A
Common Stock Connections, Inc. (4) Securities Act
13,246 shares 8/15/97 Daniel M. Christy Common Stock of Hi-Tech 4(2) of the N/A
Common Stock Connections, Inc. (4) Securities Act
5,268 shares 8/15/97 David R. Hurlbrink Common Stock of Hi-Tech 4(2) of the N/A
Common Stock Connections, Inc. (4) Securities Act
22,579 shares 8/15/97 David W. Spatz Common stock of Hi-Tech 4(2) of the N/A
Common Stock Connections, Inc. (4) Securities Act
16,182 shares 8/15/97 Raymond H. Melcher Common Stock of Hi-Tech 4(2) of the N/A
Common Stock Connections, Inc. (4) Securities Act
3,537 shares 8/15/97 Timothy E. Devlin Common Stock of Hi-Tech 4(2) of the N/A
Common Stock Connections, Inc. (4) Securities Act
20,000 shares 8/15/97 Ross Crossland Broker services (6) 4(2) of the N/A
Common Stock Weston & Co. Securities Act
Warrant to purchase 9/23/97 Morgan Q. Payne Consulting Services 4(2) of the Exercisable at
240,000 shares Securities Act $6.00 subject to
Common Stock certain vesting
requirements
1,050,000 units 10/03/97 Various $4.00 Per Unit 4(2) of the Warrant
consisting of one Accredited Securities Act Exercise
share of Common Investors Price of
Stock $6.25
and one Warrant
to purchase a share
of
Common Stock
497,000 shares 10/31/97 John M. Good Common Stock of DataComm 4(2) of the N/A
Common Stock Associates, Inc. and Midwest Securities Act
Telecom Associates, Inc. (5)
3,000 shares 10/31/97 Harold L. Madison Common Stock of Midwest 4(2) of the N/A
Common Stock Telecom Associates, Inc. (5) Securities Act
</TABLE>
(1) An aggregate of 129,709 shares of Common Stock were issued during the
year ended December 31, 1997 to individuals pursuant to the exercise of
stock options granted under the Company's Stock Incentive Plans. In April
1997, all shares issued under the stock options plans were registered on Form
S-8. The weighted average exercise price per share was $3.19. In issuing
such shares, the Company relied upon Section 4(2) of the Securities Act.
(2) For a description of the transaction, see the Company's Current Report on
Form 8-K dated May 15, 1997
(3) For a description of the transaction, see the Company's Current Report
on Form 8-K dated July 1, 1997. The original purchase price of 350,000
shares was adjusted to 400,000 shares subsequent to the filing of the Form
8-K.
(4) For a description of the transaction, see the Company's Current Report
on Form 8-K dated August 15, 1997. A total of 149,999 shares were issued on
August 15, 1997 and an additional 750,000 shares were issued in 1998 related
to an earnout provision contained in the purchase agreement.
(5) For a description of the transaction, see the Company's Current Report
on Form 8-K dated October 3, 1997
(6) On October 15, 1997 all or a portion of these shares were registered on
Form S-3.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain statements in this Form 10-KSB and in future filings by the
Company with the Securities and Exchange Commission and in the Company's
written and oral statements made by or with the approval of an authorized
executive officer constitute "forward-looking statements" within the meaning
of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended and the Company intends that such forward-looking statements
be subject to the safe harbors created thereby. The words "believe,"
"expect" and "anticipate" and similar expressions identify forward-looking
statements. These forward-looking statements reflect the Company's current
views with respect to future events and financial performance, but are
subject to many uncertainties and factors relating to the Company's
operations and business environment which may cause the actual results of the
Company to be materially different from any future results expressed or
implied by such forward-looking statements. Examples of such uncertainties
include, but are not limited to, changes in customer demand and requirements,
new product announcements, interest rate fluctuations, changes in federal
income tax laws and regulations, competition, industry specific factors and
world wide economic and business conditions. The Company undertakes no
obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events or otherwise.
CHANGE IN FISCAL YEAR END AND INFORMATION PRESENTED
In October 1996, the Company changed its fiscal year-end from March 31
to December 31, which resulted in a nine-month transition period ended
December 31, 1996. The decision to change the fiscal year-end was made for
more convenience in both internal and external communications. To facilitate
comparative analysis, the Company has elected to present the results of
operations for the years ended December 31, 1997, and December 31, 1996
(unaudited) along with the results of operations for the nine month
transition period ended December 31, 1996.
During 1996, the Company consummated a merger with Atlantic Network
Systems, Inc. ("ANS") and in 1997 merged with EJG Techline, Incorporated
("Techline"), both of which were accounted for as pooling-of-interests.
Accordingly, all periods presented have been restated for the effects of
these two transactions. The Company also acquired five companies in 1997 and
1996. The results of the acquired companies are included from their
respective dates of acquisition.
On January 31, 1997, the Company acquired certain assets of the MST
Distribution Business ("MST") from MRK Technologies, LTD.
The following information excludes the operations of the Company's
Health Card Business, which has been reflected as a discontinued operation in
the accompanying financial statements.
RESULTS OF OPERATIONS
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's financial statements and related notes thereto and
"Management's Discussion and Analysis or Plan of Operation". The statement
of operations data and the balance sheet data have been derived from the
consolidated financial statements of the Company. The historical results are
not necessarily indicative of future results.
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STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED
---------- NINE MONTH
DECEMBER 31, 1996 TRANSITION PERIOD
DECEMBER 31, 1997 (UNAUDITED) DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenue $ 49,934,000 $ 34,649,000 $29,731,000
Cost of Revenue 41,329,000 28,636,000 24,710,000
------------ ------------ ------------
Gross Profit 8,605,000 6,013,000 5,021,000
Operating Expenses 18,377,000 6,787,000 5,875,000
------------ ------------ ------------
Operating Loss (9,772,000) (774,000) (854,000)
Interest Income (Expense) (244,000) 14,000 (5,000)
------------ ------------ ------------
Pretax Loss from
Continuing Operations (10,016,000) (760,000) (859,000)
Income Taxes (1,316,000) - -
------------ ------------ ------------
Loss from Continuing Operations $(11,332,000) $ (760,000) $ (859,000)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)
Results for the year ended December 31, 1997 have been significantly
affected by the results of the Company's Datatech subsidiary. As the
subsidiary's operations deteriorated in the first quarter and its losses
increased in the second quarter, the Company undertook an evaluation of the
operation's management and performance. As a result, the Datatech management
team was removed; sales were consolidated under the Company's National Sales
Director; inventory was moved and consolidated with inventory at the
Southeastern Region in Raleigh, North Carolina and the back office functions
at Datatech were also consolidated at the Southeastern Region. Accordingly,
the year ended December 31, 1997, reflects significant expenses related to
this situation and includes related charges due to high levels of customer
returns, increased bad debt expenses, provisions to reduce inventory to
market value and severance costs. In addition, the evaluation resulted in
the adjustment of $2.5 million of Datatech goodwill, and the recording of a
valuation allowance against deferred income taxes of $1.3 million in the
second quarter of 1997. In the fourth quarter of 1997, the Company decided
to close the remaining Datatech operations and the remainder of the Datatech
goodwill of $1.9 million was written off.
Total revenue for the year ended December 31, 1997 increased by 44
percent or $15.3 million to $49.9 million when compared to total revenue of
$34.6 million for the year ended December 31, 1996. This increase is due to
the inclusion of the acquisitions made by the Company in both 1996 and 1997.
The four companies purchased in 1997 contributed approximately $10.4 million
of the increase, and sales resulting from the purchase of the MST assets were
approximately $6.2 million. Sales at ANS (Southeast Region) were also up
slightly over the prior year. These increases were offset by reduced sales
at Datatech, which decreased by approximately $2.0 million in 1997 compared
to 1996, in spite of the 1996 sales including only the seven months since the
date of acquisition.
The gross margin percentage decreased slightly to 17.2 percent in the
year ended December 31, 1997 from 17.4 percent in the year ended December 31,
1996. This decrease is due to lower Datatech margins partially offset by
higher margins at the businesses acquired during 1997 which include a higher
proportion of service revenue.
Operating expenses increased 171 percent to $18.4 million, or 36.8
percent of revenue in the year ended December 31, 1997, as compared to $6.8
million or 19.6 percent of revenue, in the year ended December 31, 1996. This
increase is due to several factors, including the significant goodwill
adjustments totaling $5.7 million that were made to reflect the closing of
the remainder of the Company's reseller business, as well as costs incurred
during the year at Datatech related to customer returns and bad debts.
Operating expenses also increased significantly due to the acquisitions in
both 1997 and 1996 as well as the cost of the Company's ongoing growth
activities. Amortization of intangibles contributed $.2 million of the
increase.
Interest expense increased significantly due to higher borrowings on the
Company's line of credit utilized to acquire MST and provide operating
capital.
10
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 AND NINE MONTH TRANSITION
PERIOD ENDED DECEMBER 31, 1996
Total revenue for the year ended December 31, 1997 increased by 68.0
percent to $49.9 million when compared to total revenue of $29.7 million for
the nine month transition period ended December 31, 1996. This increase is
due to the inclusion of the acquisitions made in 1997 and 1996 as well as the
full year effect in 1997.
The gross margin percentage increased slightly to 17.2 percent in the
year ended December 31, 1997 from 16.9 percent in the nine months ended
December 31, 1996 due to higher margins at the businesses acquired in 1997.
Operating expenses increased significantly to $18.4 million in the year
ended December 31, 1997, compared to $5.9 million in the nine months ended
December 31, 1996. This increase is primarily due to the factors relating to
goodwill adjustments, acquisitions, and Datatech related items discussed
above, as well as the full year effect in 1997 compared to the nine-month
period ending December 31, 1997.
Income tax expense in 1997 reflected the $1.3 million valuation
allowance recorded in the second quarter of 1997.
PRO FORMA FINANCIAL RESULTS
SELECTED PRO FORMA FINANCIAL DATA
The following selected unaudited pro forma financial data should be read
in conjunction with the Company's consolidated financial statements and
related notes thereto and "Management's Discussion and Analysis or Plan of
Operation." The unaudited pro forma consolidated statement of operations data
is derived from unaudited consolidated financial statements of the Company
that are not included herein. The pro forma results are not necessarily
indicative of future results.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA (UNAUDITED):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Revenue $ 61,194,000 $61,462,000
Cost of Revenue 49,315,000 48,810,000
------------ -----------
Gross Profit 11,879,000 12,652,000
Operating Expenses 21,696,000 13,087,000
------------ -----------
Operating Income Loss (9,817,000) (435,000)
Interest Expense (222,000) (9,000)
Pretax Loss from ------------ -----------
Continuing Operations (10,039,000) (444,000)
Income Taxes (1,325,000) (343,000)
------------ -----------
Net Loss from
Continuing Operations $(11,364,000) $ (787,000)
------------ -----------
------------ -----------
</TABLE>
COMPARISON OF PRO FORMA YEARS ENDED DECEMBER 31, 1997 AND 1996.
The following discussion describes the Company results, as if the 1997
and 1996 acquisitions had taken place as of the beginning of the years ended
December 31, 1996 and 1997.
11
<PAGE>
The pro forma revenue for the year ended December 31, 1997 showed very
little change at $61.2 million when compared to the pro forma revenue of
$61.5 million for the year ended December 31, 1996. This slight decrease is
primarily due to decreased revenue related to Datatech of approximately $10.0
million offset by revenue related to the MST operations of approximately $6.2
million and overall increased sales at the other regional operations.
The pro forma gross margin percentage decreased to 19.4 percent in
the year ended December 31, 1997 from 20.6 percent in the year ended December
31, 1996. The decrease is primarily attributed to the margin at Datatech,
which was significantly lower in 1997 than in 1996 reflecting the costs of
inventory adjustments.
The pro forma operating expenses of the Company increased 66 percent to
$21.7 million in the year ended December 31, 1997, compared to $13.1 million
in the year ended December 31, 1996. This increase is due to several
factors, including the significant goodwill adjustments made to reflect the
closing of the remainder of the Company's reseller business totaling $5.7
million as well as costs incurred during the year at Datatech related to
customer returns and bad debts. Operating expenses also increased due to
costs related to the Company's ongoing growth program. Amortization of
intangibles also contributed $.2 million of the increase.
LIQUIDITY AND CAPITAL RESOURCES
The level of cash, cash equivalents and short-term investments decreased
by $.3 million from $.7 million at December 31, 1996 to $.4 million at
December 31, 1997. The Company's short-term borrowings, under its bank line
at State Street increased by $4.2 million to $4.7 million at December 31,
1997.
Cash used for operations in 1997 of $6.9 million reflected the $11.3
million net loss recorded offset by approximately $7.6 million of non-cash
charges. $3.1 million of cash was utilized to reduce trade accounts payable
of companies acquired with large trade payable obligations as well as for
existing operations. The reduction in accounts payable brings the Company's
payment terms with vendors into a more reasonable range.
Cash used in investing activities of $2.0 million reflects primarily the
acquisition of the MST operations in January 1997 for $2.0 million. Cash
received in several of the acquisitions amounted to $.5 million, which offset
fixed asset purchases of $.5 million. Fixed asset purchases include $.2
million related to the construction of the Company's Network Operating Center.
Cash provided by financing activities of $8.6 million resulted from the
raising of approximately $4.0 million in a private equity offering of
1,050,000 common shares issued with warrants as well as increased borrowings
on the Company's credit line. These funds were utilized to fund operations
and the investing activities as discussed above.
The Company renegotiated its credit facility in October resulting in an
increase in the availability under the credit line to $8.0 million from $5.0
million, the modification of certain covenants, and the extension of the
agreement for an additional year to October 31, 1999. The availability under
the credit line is limited to the Company's borrowing base, which is a
function of certain accounts receivable and inventory. At December 1997, the
borrowing base was approximately $6.8 million. The Company believes that the
current credit line will be sufficient to fund current operations into 1998.
YEAR 2000 ISSUES
The Company is currently utilizing a number of primarily accounting
oriented systems to provide financial information as well as sales, order
entry, purchasing and inventory applications. The Company does not believe
that any of the current systems in use will be sufficient to handle the
Company's future needs. The Company intends to select new software to be
used company-wide in 1998 for implementation across the Company in 1998 and
1999. A critical factor in the selection of this software will be year 2000
compliance.
RECENT DEVELOPMENTS
In March 1998 the Company announced that it was focusing on the end user
segment and that it would close the remaining Datatech and MST operations
that sold products primarily to smaller value-added resellers. The remaining
goodwill associated with these operations was written-off in the fourth
quarter of 1997.
12
<PAGE>
IMPORTANT FACTORS TO CONSIDER
The following factors are important and should be considered carefully
in connection with any evaluation of the Company's business, financial
condition, results of operations and prospects.
HISTORY OF LOSSES; UNCERTAIN PROFITABILITY PROSPECTS. The Company has a
history of net losses. As of December 31, 1997, the Company had an
accumulated deficit of approximately $17,350,000. The ability of the Company
to achieve profitability will depend upon several factors, including: the
efficient consolidation of the recently acquired businesses and of future
acquisitions; the ability to achieve sufficient levels of product sales and
profit margins and network management services sales and profit margins; and
the ability to control operating costs and other expenses. There can be no
assurance that the Company will achieve profitability during 1998 or at any
time in the near future.
INTEGRATION OF ACQUISITIONS; MANAGEMENT OF EXPANDING OPERATIONS. During
the last two years, the Company has merged with or acquired seven network
products and services companies, and its annual revenue run rate has
increased from just over $1 million to the current annual revenue of
approximately $50 million. The Company intends to continue its rapid growth
through future acquisitions and through internal growth. This rapid growth
has placed, and will continue to place a significant strain on the Company's
administrative, operational, and financial resources and on the Company's
systems and controls. Management has expended, and expects to continue to
expend, significant time and effort in integrating the operations of its
acquisitions into the Company.
There can be no assurance that the Company's current systems, procedures
and controls will be adequate to support the Company's operations as they
expand. Any future growth will impose significant added responsibilities on
members of senior management, including the need to identify, recruit and
integrate new senior level managers and executives. There can be no
assurance that such additional management will be identified and retained by
the Company. If the Company is unable to manage growth effectively, customer
confidence could erode and demand for the Company's products and services
could deteriorate, which could materially and adversely affect the Company's
business and operating results.
FUTURE ACQUISITIONS. The Company continues to pursue acquisitions of
complementary businesses. Future acquisitions by the Company could result in
the dilutive issuance of equity securities, and the incurrence of additional
debt and amortization expenses related to goodwill and intangible assets that
could adversely affect the Company's profitability. Acquisitions also may
involve numerous other risks, including difficulties in the assimilation of
the operations and products of the acquired business, dependence on new
products and services, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience, the potential loss of key employees of the
acquired business and difficulties in attracting additional key employees
necessary to absorb added management responsibilities. No assurance can be
given as to the effect of any future acquisitions on the Company's business
or operating results.
NETWORK MANAGEMENT SERVICES. During the fourth quarter 1997, the
Company began offering network management services on a nationwide basis.
This effort is part of the Company's long-term strategic plan, and is
essentially a new line of business for the Company. This effort has required
significant capital expenditures and expenditures for management, sales, and
marketing personnel, and technical resources. The success of this new line
of business depends upon the Company's ability to successfully market and
deliver these services. While the Company believes that these investments
will yield a return in the near future, there can be no assurance of this
result.
DEPENDENCE ON SENIOR MANAGEMENT AND KEY EMPLOYEES. The Company is
highly dependent on the performance of its executive officers and other
essential personnel. The loss of the services of any of its executive
officers or other essential employees could have a material adverse effect on
the Company. The Company's future success will also depend in part upon its
ability to attract and retain highly skilled and qualified technical,
managerial and marketing personnel. Competition for such personnel in the
data communications industry is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
The loss of any of the Company's key management or the inability to hire or
retain qualified personnel could have a material adverse effect on the
Company. The Company has entered employment agreements with certain key
executive officers, which are described in the exhibits attached hereto.
13
<PAGE>
COMPETITION. Competition in the data communications industry is intense
and is expected to increase. The Company's current competitors include many
which have longer operating histories and significantly greater financial,
technical, research, marketing, sales, distribution and other resources, as
well as greater name recognition and a larger customer base, than the
Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the development, promotion, sale and support of
their products than the Company. Many also have long-standing customer
relationships with large enterprises that are part of the Company's target
market and these relationships may make it more difficult to complete sales
of the Company's products to these enterprises. The Company expects
increased competition, particularly in the networking market. Increased
competition could result in significant price competition, reduced profit
margins or loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete
successfully in the future.
GENERAL ECONOMIC CONDITIONS. Demand for the Company's products depends
in large part on the overall demand for communications and networking
products, which has in the past and may in the future fluctuate significantly
based on numerous factors, including capital spending levels and general
economic conditions, including interest rate fluctuations, economic
recessions and customer business cycles. There can be no assurance that the
Company will not experience a decline in demand for its products due to
general economic conditions. Any such decline could have a material adverse
effect on the Company's business, operating results and financial condition.
ADVERSE EFFECT ON PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Sales of a
substantial number of shares of the Company's common stock, or the perception
that such sales could occur, could adversely affect prevailing market prices
for the shares. The Company's officers and directors and former shareholders
of the Company's subsidiaries hold approximately 4,467,000 million shares of
common stock and warrants to purchase approximately 875,000 shares of the
common stock. These shares may be sold pursuant to registration rights
granted to the holders thereof in certain instances or pursuant to Rule 144
promulgated by the Commission pursuant to the Securities Act of 1933. No
prediction can be made regarding the effect that future sales will have on
the market price of the Company's common stock.
NEED FOR ADDITIONAL CAPITAL. The Company has developed a strategy to
grow through additional acquisitions. While the Company believes it will
continue to structure the payment of the purchase price of the majority of
its acquisitions with stock, the Company anticipates that cash may be
required to achieve this goal. The Company believes it has adequate access
to funding sources for its acquisitions in the short term, however, there can
be no assurances that cash will be available at acceptable levels when
required.
LACK OF DIVIDENDS. The Company has not paid dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future.
Distributions included on the statements of shareholders' equity reflected
distributions made by entities prior to their merger with the Company. The
Company intends to retain any earnings to finance the development of its
business. There can be no assurance that the Company will ever pay cash
dividends.
14
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
The following Consolidated Financial Statements and Independent
Accountants' Report are included herein on the pages indicated:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants............................................... 16
Consolidated Balance Sheets as of December 31, 1997 and 1996................... 17
Consolidated Statements of Operations for the year ended December 31, 1997
and the nine month transition period ended December 31, 1996.................. 18
Consolidated Statements of Shareholders' Equity for the year ended December
31, 1997 and the nine month transition period ended December 31, 1996........ 19
Consolidated Statements of Cash Flows for the year ended December 31, 1997
and the nine month transition period ended December 31, 1996................ 20
Notes to Consolidated Financial Statements for the year ended December 31,
1997and the nine month transition period ended December 31, 1996............. 21
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Eltrax Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Eltrax
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 1997 and the nine months ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Eltrax Systems, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for the
year ended December 31, 1997 and the nine months ended December 31, 1996, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
March 26, 1998
Detroit, Michigan
16
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996 (1)
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 366,364 $ 694,901
Accounts receivable, net of allowance for doubtful
accounts of $1,103,000 and $677,000 9,353,349 6,342,216
Inventories 4,298,794 3,153,123
Other current assets 602,062 287,798
------------ ------------
Total current assets 14,620,569 10,478,038
Furniture and equipment, net of accumulated depreciation and
amortization of $385,016 and $237,259 863,174 211,216
Deferred income taxes - 1,315,970
Goodwill, net of accumulated amortization
of $91,714 and $208,330 6,007,259 4,641,044
------------ ------------
Total assets $21,491,002 $16,646,268
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Line of credit $ 4,744,529 $ 588,539
Accounts payable 6,010,516 6,841,650
Accrued compensation 575,383 362,650
Accrued expenses 1,196,222 668,317
Unearned revenue 967,507 158,498
Income taxes payable 496,123 344,845
------------ ------------
Total current liabilities 13,990,280 8,964,499
Shareholders' equity
Common stock, $.01 par value, 50,000,000 shares authorized;
10,847,771 and 7,788,063 shares issued and outstanding 108,478 77,881
Additional paid-in capital 24,741,499 13,362,073
Accumulated deficit (17,349,255) (5,758,185)
------------ ------------
Total shareholders' equity 7,500,722 7,681,769
------------ ------------
Total liabilities and shareholders' equity $21,491,002 $ 16,646,268
------------ ------------
------------ ------------
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction,
see Note 3.
The accompanying notes are an integral part of
these consolidated financial statements.
17
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED DECEMBER 31,
1997 1996 (1)
------------------ --------------------
<S> <C> <C>
Revenue $ 49,934,139 $ 29,730,826
Cost of revenue 41,328,951 24,709,812
------------------ --------------------
Gross profit 8,605,188 5,021,014
Operating expenses:
Selling, general and administrative 12,227,954 5,666,575
Amortization of intangible assets 435,144 208,330
Goodwill adjustments 5,713,721 -
------------------ --------------------
Total operating expenses 18,376,819 5,874,905
------------------ --------------------
Operating loss (9,771,631) (853,891)
Interest expense, net 244,742 4,655
------------------ --------------------
Pretax loss from continuing operations (10,016,373) (858,546)
Income tax expense 1,315,970 -
------------------ --------------------
Loss from continuing operations (11,332,343) (858,546)
Loss from discontinued operations - (197,585)
Gain on disposal of discontinued operations - 57,030
------------------ --------------------
Loss from discontinued operations - (140,555)
------------------ --------------------
Net loss $ (11,332,343) $ (999,101)
------------------ --------------------
------------------ --------------------
Net loss per common share -basic and diluted:
Continuing operations $ (1.34) $ (0.11)
------------------ --------------------
------------------ --------------------
Discontinued operations $ - $ (0.02)
------------------ --------------------
------------------ --------------------
Net loss per share $ (1.34) $ (0.13)
------------------ --------------------
------------------ --------------------
Weighted average shares outstanding -basic 8,478,784 7,435,311
------------------ --------------------
------------------ --------------------
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction, see
Note 3.
The accompanying notes are an integral part of
these consolidated financial statements.
18
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
AND THE NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional
--------------------------------------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of
March 31, 1996, as
previously reported 4,000 $ 29,163 5,447,063 $ 54,471 $ 7,639,407 $ (4,607,204) $ 3,115,837
Effect of pooling-of-
interests transaction - - 230,000 2,300 3,020 9,919 15,239
Balance as of
March 31, 1996, as ----------------------------------------------------------------------------------------------------------
restated 4,000 $ 29,163 5,677,063 $ 56,771 $ 7,642,427 $ (4,597,285) $ 3,131,076
Net loss - - - - - (999,100) (999,100)
Conversion of
preferred shares
to common shares (4,000) (29,163) 40,000 400 28,763 - -
Distributions to
shareholders - - - - - (161,800) (161,800)
Exercise of stock options - - 103,000 1,030 206,861 - 207,891
Warrant charge (1) - - - - 10,000 - 10,000
Datatech acquisition - - 1,968,000 19,680 5,474,022 - 5,493,702
----------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1996 - $ - 7,788,063 $ 77,881 $13,362,073 $ (5,758,185)$ 7,681,769
Net loss - - - - - (11,332,343) (11,332,343)
Distributions to
shareholders - - - - - (258,727) (258,727)
Exercise of stock
options and warrants - - 289,709 2,897 940,466 - 943,363
Four Corners acquisition - - 400,000 4,000 1,881,000 - 1,885,000
Hi-Tech acquisition - - 919,999 9,200 3,082,765 - 3,091,965
DataComm acquisition - - 488,000 4,880 1,878,495 - 1,883,375
Telecom acquisition - - 12,000 120 46,191 - 46,311
Private placement, net - - 1,050,000 10,500 3,999,509 4,010,009
Retirement of shares received - - (100,000) (1,000) (449,000) - (450,000)
in litigation settlement ---------------------------------------------------------------------------------------------------------
BALANCE,
December 31, 1997 - $ - 10,847,771 $ 108,478 $24,741,499 $(17,349,255) $ 7,500,722
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Compensation related to the issuance of warrants in exchange for services.
The accompanying notes are an integral part of
these consolidated financial statements.
19
<PAGE>
ELTRAX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1997 1996 (1)
------------------ -------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (11,332,343) $ (999,101)
Adjustments to reconcile net loss to net cash used
for operating activities:
Amortization 435,144 208,330
Depreciation 153,190 36,690
Gain on sale of the health card business - (57,030)
Gains and losses on marketable securities, net - 1,262
Deferred income taxes - (275,000)
Warrants issued for service - 10,000
Goodwill adjustment 5,713,721 -
Settlement of lawsuit (450,000) -
Adjustment to deferred income tax valuation allowance 1,315,970 -
Changes in current operating items:
Accounts receivable, net (78,995) (1,089,299)
Inventories 313,963 1,391,651
Other current assets (26,993) 65,274
Accounts payable (3,102,858) 692,839
Accrued compensation and expenses (192,328) 597,339
Other current liabilities 359,462 (115,833)
-------------- ------------
Net cash provided by (used in) operating activities: (6,892,067) 467,122
-------------- ------------
INVESTING ACTIVITIES:
Cash paid in connection with acquisition of Datatech, net of
cash acquired of $750,490 - (695,549)
Cash received in acquisition of Four Corners, Hi-Tech,
DataComm and Telecom 456,801 -
Cash paid in connection with acquisition of MST (2,028,214) -
Proceeds from sales of short-term investments, net - 1,383,624
Purchases of furniture and equipment, net (502,692) (108,143)
Proceeds from sale of health card business - 32,000
-------------- ------------
Net cash provided by (used in) investing activities: (2,074,105) 611,932
-------------- ------------
FINANCING ACTIVITIES:
Distributions to shareholders (258,727) (161,800)
Proceeds (payment) on credit line, net 3,942,990 (1,099,136)
Proceeds from issuances of common stock and warrants, net 4,953,372 207,891
-------------- ------------
Net cash provided by (used in) financing activities: 8,637,635 (1,053,045)
-------------- ------------
Increase (decrease) in cash and cash equivalents (328,537) 26,009
-------------- ------------
CASH AND CASH EQUIVALENTS:
Beginning of period 694,901 668,892
-------------- ------------
End of period $ 366,364 $ 694,901
-------------- ------------
-------------- ------------
NON CASH INVESTING AND FINANCING ACTIVITIES:
Common stock consideration for acquisitions-
Datatech:
Original issuance of 2,068,000 shares $ 5,955,840
Return of 100,000 shares resulting from settlement
of escrowed shares (462,138)
------------
$ 5,493,702
------------
------------
Four Corners- issuance of 400,000 shares $ 1,885,000
Hi-Tech- issuance of 919,999 shares 3,091,965
DataComm- issuance of 488,000 shares 1,883,375
Telecom- issuance of 12,000 shares 46,311
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 304,202 $ 2,442
-------------- ------------
-------------- ------------
Income taxes paid $ 10,000 $ -
-------------- ------------
-------------- ------------
</TABLE>
(1) Amounts have been restated to reflect pooling-of-interests transaction,
See Note 3.
The accompanying notes are an integral part of
these consolidated financial statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Eltrax Systems, Inc. (the "Company" or "Eltrax"), through its wholly
owned subsidiaries, is a national value-added reseller of data communications
networking products and services. Eltrax designs and installs, maintains and
monitors, networking systems for end-user corporate and government customers,
and to a lesser extent, is a distributor of data communications equipment to
value-added resellers. The Company's products and services include data
communications equipment used in remote access and enterprise-wide
communications networks and the installation and maintenance of that
equipment. The Company also offers Network Management Services to
enterprise-wide network customers.
In October 1996, the Company changed its fiscal year-end from March 31
to December 31. Accordingly, the statements of operations, cash flows and
changes in stockholders' equity are for the nine months ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the Company's financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results may differ from these estimates.
CASH EQUIVALENTS
The Company considers all investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
consist primarily of short-term money market instruments that are recorded at
cost, which approximates market.
INVENTORIES
Inventories consist principally of purchased components and are stated
at the lower of cost or market. Cost is determined using the first-in,
first-out method.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is computed
using the straight-line method over estimated useful lives of two to seven
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the term of the related lease or its estimated useful life. Upon
retirement or disposal of furniture and equipment, the cost and accumulated
depreciation are removed from the accounts, and any gain or loss is included
in income.
21
<PAGE>
GOODWILL
Goodwill represents the excess of cost over the fair value of assets
acquired and is generally being amortized on a straight-line basis over its
estimated useful life of 15 years. Goodwill is evaluated for potential
impairment of value whenever events or changes in circumstances indicate that
full asset recoverability is questionable. Such evaluations consider current
as well as anticipated operating results measured on the basis of
undiscounted cash flows of the operation relative to the asset.
REVENUE RECOGNITION
Revenue from equipment sales is generally recognized upon shipment.
Revenue for services such as installation and consulting is recognized as the
service is performed. Revenue from maintenance contracts is recognized
ratably over the term of the service agreement.
NET INCOME (LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT
In March 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share". This statement modified the methodology for
calculating earnings per share, and was adopted by the Company effective
December 31, 1997. No restatement was required to prior loss per share data.
Income per share data is determined by dividing income by the weighted
average number of common and common equivalent shares outstanding. Loss per
share data is determined by dividing the loss by the weighted average number
of common shares outstanding. Common stock equivalents represent shares
issuable upon the assumed exercise of dilutive stock options and warrants.
Common Stock equivalents have been excluded from loss per share calculations
as their inclusion would be antidilutive.
3. MERGERS AND ACQUISITIONS
DATATECH
On May 17, 1996, the Company acquired 100% of the outstanding shares of
Nordata, Inc. and Rudata, Inc. (together doing business as Datatech).
Datatech configured, marketed, installed and maintained data communications
equipment for its customers' computer and telecommunications systems over
enterprise wide local area networks and wide area networks. Consideration
paid to the sellers included 1,883,000 unregistered shares of the Company's
common stock and $1,016,000 of cash. In addition, the Company paid broker
fees consisting of 85,000 unregistered shares of the Company's common stock
and $160,000 of cash. Other acquisition expenses approximated $450,000.
The Datatech acquisition was accounted for as a purchase and,
accordingly, the results of Datatech's operations are included in the
Company's consolidated financial statements from the date of acquisition.
The Company originally recorded goodwill of $4,849,000 in connection with the
acquisition, which was being amortized over 15 years.
As a result of events which occurred at the Company's Datatech
subsidiary in the second quarter of 1997, the Company determined that there
was a permanent impairment in the fair value of the goodwill recorded in
connection with the Datatech purchase. During the second quarter, the
Company made a determination that $2,458,000 of the Datatech goodwill should
be written off. The remaining goodwill of approximately $1,930,000 was
written off in the fourth quarter on 1997 reflecting the Company's decision
to change its focus from the remaining Datatech customer base and close the
Datatech facility in early 1998.
ANS
On October 31, 1996, the Company issued 950,000 shares of its
unregistered common stock in exchange for all of the outstanding common stock
of Atlantic Network Systems, Inc. (ANS). ANS provides data networking
products and services. The ANS merger has been accounted for as a
pooling-of-interests and, accordingly, the Company's consolidated financial
statements were restated in 1996 to include the accounts and operations of
ANS for all periods prior to the merger.
22
<PAGE>
MST
On January 31, 1997, ANS acquired certain assets of MST Distribution
("MST") from MRK Technologies, LTD. Acquired assets included inventory,
contracts, furniture and equipment and various intangibles. The purchase
price, including transaction costs, was approximately $2,028,000.
The acquisition has been accounted for as a purchase and, accordingly,
the results of MST's operations are included in the Company's consolidated
financial statements from January 31, 1997.
The Company recorded $1,412,000 of goodwill in connection with the
acquisition, which was being amortized over 15 years. The remaining goodwill
of approximately $1,326,000 was written off in the fourth quarter of 1997 due
to the Company's decision to focus on end user customers and to eliminate
sales to the majority of the MST customer base.
EJG TECHLINE, INCORPORATED
On May 14, 1997, the Company issued 230,000 unregistered shares of its
common stock in exchange for all of the outstanding common stock of EJG
Techline, Incorporated, ("Techline"). Techline provides data networking
products and services. The merger with Techline has been accounted for as a
pooling-of-interests and, accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of
Techline for all periods prior to the merger and to eliminate intercompany
sales prior to the merger.
The following table summarizes the combined and separate results of the
Company and Techline for the periods prior to the merger.
<TABLE>
<CAPTION>
FOR THE THREE MONTH FOR THE NINE MONTH
PERIOD ENDED PERIOD ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------- -------------------
<S> <C> <C>
Revenue:
Eltrax, as previously reported $ 9,748,911 $28,121,355
Intercompany Sales (154,648) (749,364)
Techline 667,931 2,358,835
----------- ------------
Revenue $10,262,194 $29,730,826
----------- ------------
----------- ------------
Net income (loss):
Eltrax, as previously reported $ (648,960) $(1,143,949)
Techline 151,159 144,848
----------- ------------
Total net loss $ (497,801) $ (999,101)
----------- ------------
----------- ------------
</TABLE>
FOUR CORNERS TECHNOLOGY, INC.
On July 1, 1997, the Company acquired the outstanding stock of Four
Corners Technology, Inc. ("Four Corners") for 400,000 shares of the Company's
common stock. Four Corners provides data networking products and services.
The acquisition has been accounted for as a purchase and, accordingly, the
results of Four Corners' operations are included in the Company's
consolidated financial statements from July 1, 1997. The initial purchase
price of 350,000 unregistered shares was subsequently increased by 50,000
shares in early 1998. These additional shares have been treated as being
outstanding at the purchase date. The Company recorded goodwill of
approximately $1,638,000 in connection with the acquisition, which is being
amortized over 15 years.
HI-TECH CONNECTIONS, INC.
Effective August 1, 1997, the Company acquired Hi-Tech Connections, Inc.
("Hi-Tech") for 169,999 shares of the Company's common stock (including
20,000 shares issued to a third party relating to certain expenses incurred
in the transaction). Hi-Tech provides data networking products and services.
Under the terms of the agreement, 750,000 unregistered additional shares were
issued in March 1998 based on the earnings generated by Hi-Tech during the
six month period ended December 31, 1997. The accompanying financial
statements have reflected the additional shares as if issued at December 31,
1997. The acquisition has been accounted for as a purchase and, accordingly,
the results of Hi-Tech operations are included in the Company's consolidated
financial
23
<PAGE>
statements from August 1, 1997. The Company recorded goodwill of
approximately $3,185,000 in connection with the acquisition, which is being
amortized over 15 years.
DATACOMM ASSOCIATES, INC. AND MIDWEST TELECOM ASSOCIATES, INC.
On October 31, 1997 the Company acquired the outstanding shares of
DataComm Associates, Inc. ("DataComm") and Midwest Telecom Associates, Inc.
("Telecom") for 500,000 unregistered shares of the Company's common stock.
DataComm provides data networking products and services. In addition, the
Company paid broker fees of $160,000. These acquisitions were accounted for
as purchases and, accordingly, the results of DataComm and Telecom are
included in the Company's financial statements from November 1, 1997. The
Company recorded goodwill of approximately $1,267,000 in connection with the
acquisitions, which is being amortized over 15 years.
PRO FORMA
Unaudited pro forma financial information as though all of the above
acquisitions had been effective as of the beginning of each period, is as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ -------------------------
<S> <C> <C>
Revenue $ 61,194,000 $ 47,236,000
Net loss from
continuing operations $ (11,364,000) $ (1,087,000)
Earnings per share from
continuing operations $ (1.24) $ (.12)
</TABLE>
4. DISCONTINUED OPERATIONS
On November 22, 1996, the Company sold its Health Card Business for
$32,000 in cash. The financial statements have been reclassified to present
the results of the Health Card Businesses as discontinued operations.
Revenue in 1996, from discontinued operations, was approximately $472,000.
5. SHAREHOLDERS' EQUITY
PRIVATE PLACEMENT
In September and October 1997, the Company issued 1,050,000 common
shares and warrants in a private placement offering to accredited investors.
The shares and warrants were sold for $4.00 a unit and were unregistered.
The warrants have an exercise price of $6.25, and can be called by the
Company at $0.25 per share if the Company's common stock trades above $8.25
for any ten consecutive days. Proceeds to the Company from the offering
after commissions and expenses, were approximately $4,000,000.
PREFERRED STOCK
The Company originally authorized 1,000,000 shares of preferred stock,
30,000 of which were designated as Series A convertible preferred stock (the
"Preferred" Stock). All 30,000 shares of the Preferred Stock have been
converted into 300,000 shares of Eltrax Common Stock. There were no
outstanding shares of the Preferred Stock at December 31, 1997 and 1996.
Currently, there are 970,000 shares of undesignated preferred stock which are
authorized but unissued.
24
<PAGE>
LITIGATION SETTLEMENT
During the fourth quarter of 1997, the Company settled its litigation
with the prior owners of Datatech. The settlement resulted in a payment of
$20,000 and 100,000 shares of the Company's Common Stock to the Company.
These shares have been reflected as retired in the accompanying financial
statements. The total payment, valued at $470,000, represented the
reimbursement by the prior owners of certain selling, general and
administrative expenses.
STOCK WARRANTS
In connection with various financing and acquisition transactions, and
related services provided to the Company, the Company has issued warrants to
purchase Common Stock of the Company (see "Private Placement" above). A
summary of warrants outstanding at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE
YEAR ISSUED OF WARRANTS PRICE EXPIRATION
- ----------- ----------- ------------ ----------
<S> <C> <C> <C>
Year ended March 31, 1988 1,785 $ 5.60 November 1998
Year ended March 31, 1995 500,000 $ 0.75-$1.00 June 2002
Year ended March 31, 1996 166,667 $ 2.25 February 2002
Nine months ended
December 31, 1996 275,000 $ 5.25-$6.00 October 2006
Year ended December 31, 1997 1,315,000 $ 5.00-$6.25 September 2002
---------
Total warrants outstanding 2,258,452
---------
---------
</TABLE>
All of the above warrants are vested as of December 31, 1997, except for
145,855 of the warrants issued in 1996, which vest periodically through
October 1999 and 240,000 warrants which will vest upon the attainment of
certain Common Stock prices and the continuance of services provided.
During 1997 100,000 of the warrants issued during the nine month period
ending December 31, 1996 were repriced from $6.00 to $5.25.
Warrants for 135,000 shares were exercised in 1997 resulting in proceeds
to the Company of $486,000.
6. STOCK OPTIONS
On May 15, 1997, the Company adopted the 1997 Stock Incentive Plan (the
"1997 Plan"), under which 1,100,000 additional shares of Common Stock of the
Company are available for various stock incentive awards. The 1997 Plan
supplemented the Company's 1995 and 1992 Stock Incentive Plans (collectively
the "Plans"). The 1995 and 1992 Plans will continue to exist until the
stated termination date of such plans. Any shares of the Company's Common
Stock available for issuance under the 1995 and 1992 Plans which have either
not been issued or have been issued but were forfeited, or which become
available for issuance due to forfeiture or expiration, will become available
for issuance under the 1997 Plan, in addition to the base number of 1,100,000
shares of Common Stock available under the 1997 Plan. At December 31, 1997,
381,279 options had not been granted. The 1997 Plan provides that certain
eligible individuals, including officers, employees, nonemployee directors,
agents and consultants, may be granted options for providing services to the
Company. The Plans are administered by a compensation committee (the
"Committee") consisting of two members of the board of directors. Options
are granted at per share amounts as determined by the Committee, but not less
than the fair market value, as defined in the 1997 Plan, at the date of the
grant. All outstanding options vest at various times, not to exceed 10
years, through 2007.
On October 19, 1997, approximately 550,000 options issued earlier in
1997 under both the 1997 and 1995 Plans were reissued at the exercise price
of $5.25, which was the market price on that date. The cancelled options
have been treated as expired.
25
<PAGE>
A summary of changes in options outstanding under the Plans during the
year ended December 31, 1997 and the nine months ended December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 546,684 1.95 497,590 $1.15
Granted 1,688,228 5.80 149,500 4.71
Exercised (129,709) 3.19 (78,000) 1.70
Expired/Cancelled (722,989) 6.11 (22,406) 3.35
--------- -------
Outstanding at end of year 1,382,214 4.36 546,684 1.95
--------- -------
--------- -------
Options exercisable at year-end 984,047 3.86 469,559 1.50
--------- -------
--------- -------
</TABLE>
The following table contains information about stock options outstanding at
December 31, 1997 under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE CONTRACTUAL NUMBER NUMBER
PRICE LIFE (Years) OUTSTANDING EXERCISABLE
-------- ------------ ----------- -----------
<S> <C> <C> <C>
$ .38-1.00 7.5 273,000 271,750
1.38-2.56 5.2 76,600 76,600
3.19-4.25 8.2 28,000 20,000
5.72-7.25 9.6 1,004,614 615,697
--------- -------
1,382,214 984,047
--------- -------
--------- -------
</TABLE>
In addition to options granted under the Plans, the Company has granted
10,000 nonqualified options at $1.63 which are fully vested and exercisable
at December 31, 1997. These options expire in August 2003.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, a new standard of accounting and
reporting for stock-based compensation plans. The Company adopted the
disclosure provisions of this new standard in 1996. The Company has
continued to measure compensation cost for its stock incentive and option
plans using the intrinsic value-based method of accounting it has
historically used and, therefore, the new standard has no effect on the
Company's operating results.
Had the Company used the fair value-based method of accounting for its
stock option and incentive plans beginning on April 1, 1996 and charged
compensation cost against income, over the vesting period, based on the fair
value of options at the date of grant, the net loss and net loss per common
share for the year ending December 31, 1997 and the nine month transition
period ended December 31, 1996 would have been increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------
<S> <C> <C>
Net Loss from Continuing Operations
As reported $(11,332,000) $ (859,000)
Pro forma (14,627,000) (1,044,000)
Net Loss per Common Share from
Continuing Operations
As reported $ (1.34) $ (.11)
Pro forma (1.73) (.14)
</TABLE>
26
<PAGE>
The pro forma information above only includes stock options granted in
the year ended December 31, 1997 and the nine month transition period ended
December 31, 1996. Compensation expense under the fair value-based method of
accounting will increase over the next few years as additional stock option
grants are considered.
The weighted average grant date fair value of options granted was $3.22
per option for the year ended December 31, 1997 and $2.98 per option for the
nine month period ended December 31, 1996. The weighted average grant date
fair value of options was determined using the fair value of each option
grant on the date of grant, utilizing the Black-Scholes option-pricing model
concepts and the following key assumptions:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------
<S> <C> <C>
Risk-free interest rate 6.3% 6.5%
Expected life 5 years 5 years
Expected volatility 55% 70%
</TABLE>
7. OPERATING LEASES
The Company leases office space and certain equipment under operating
leases, which expire at various dates through 2006 with some leases
containing options for renewal. Rent expense under these leases was $464,000
for the year ended December 31, 1997 and $275,000 for the nine months ended
December 31, 1996.
As of December 31, 1997, approximate future commitments under operating
leases in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 534,000
1999 392,000
2000 316,000
2001 209,000
2002 91,000
thereafter 345,000
----------
Total $1,887,000
----------
----------
</TABLE>
The Company leases a Raleigh, North Carolina facility from a lessor of
which two shareholders of the Company have a non-controlling interest. The
lease expense for this facility was approximately $90,000 for the year ending
December 31, 1997. The Company also leases a facility in Ohio from an entity
of which a shareholder has a controlling interest. The lease expense for
this facility was approximately $12,000 for the two months of 1997 subsequent
to the acquisition of DataComm.
8. INCOME TAXES
The significant components of income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------
<S> <C> <C>
Income Taxes
Currently Payable $ - $ 275,000
Deferred Tax Benefit 1,315,970 (275,000)
---------- ----------
Income Tax Expense $1,315,970 $ -
---------- ----------
---------- ----------
</TABLE>
27
<PAGE>
A reconciliation of the statutory U.S. federal income tax rate to the
Company's effective tax was as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------
<S> <C> <C>
Statutory U.S. rate (34.0)% (34.0)%
State income taxes
net of federal benefit 0.0 8.8
Non-deductible goodwill 16.1 7.2
Non-deductible merger costs 0.2 5.9
Non-deductible business meals 0.1 4.4
ANS deferred tax asset recognized
at date of merger 0.0 (6.1)
Provision for tax contingencies 0.0 13.8
Earnings of pooled entities
prior to merger (0.5) 0.0
Effect of Valuation allowance 31.2 0.0
----- -----
13.1 % 0.0 %
----- -----
----- -----
</TABLE>
Deferred income taxes are recognized to 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 assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets and
(liabilities):
Net operating loss
carryforwards $ 2,323,000 $1,207,300
Capital loss
carryforwards 224,000 205,100
Unearned revenue 133,000 54,600
Reserves not deductible 582,000 348,300
Cash to accrual adjustments (380,000) (388,200)
Other 168,000 94,000
Valuation allowance (3,050,000) (205,100)
----------- ----------
$ - $1,316,000
----------- ----------
----------- ----------
</TABLE>
At March 31, 1996, the Company had established a full valuation
allowance due to uncertainty as to the likelihood and timing of future
taxable income. This valuation allowance was reversed in connection with the
Company's acquisition of Datatech when it was determined that it was more
likely than not that the deferred tax assets would be realized in a future
period. During the second quarter of 1997 the Company again established a
full valuation allowance. At December 31, 1997, the Company had net operating
loss carryforwards of approximately $6,800,000 expiring at various dates
through 2011. In addition, the Company has capital loss carryforwards of
approximately $650,000.
28
<PAGE>
9. LINE OF CREDIT
During October of 1996, the Company negotiated a $5,000,000 line of
credit with its bank to be used for working capital purposes. In October
1997 the agreement was amended to increase the line of credit to $8,000,000
subject to a formula based on eligible accounts receivable and inventory, and
the agreement was extended until October 31, 1999. The collateral at
December 31, 1997 supported a total available line of approximately
$6,800,000. The variable interest rate is one half of one percent above the
bank's prime rate and the Company is charged a commitment fee of .25% on any
unborrowed amounts. As the rate charged is variable, the carrying value of
the debt approximates its fair value.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Amount outstanding $4,745,000 $ 589,000
Interest rate 8.75% 9%
</TABLE>
The agreement contains certain restrictive covenants, including,
maintaining a current ratio of at least 1.0:1.0, maintaining an indebtedness
ratio of no greater than 1.5:1.0, having positive quarterly earnings after
taxes, interest, and depreciation as well as certain reporting covenants.
Certain of these ratios change over the course of the agreement. As of
December 31, 1997, the Company was not in compliance with the quarterly
positive earnings covenant and a reporting covenant. Subsequent to year-end,
the Company was not in compliance with several additional covenants. At the
Company's request, the bank has waived their rights permanently related to
these events of non-compliance. The Company has classified these borrowings
as current as there is no assurance that they will comply with these
covenants in 1998.
Included in the December 31, 1997 amount outstanding is approximately
$560,000 of disbursements outstanding that were financed by the line of
credit as they were presented for payment after year-end.
10. SAVINGS AND RETIREMENT PLAN
The Company sponsors a 401(k) savings and retirement plan which is
available to all eligible employees. Under the plan, the Company may make a
discretionary matching contribution. Discretionary matching contributions
were approximately $52,000 for the year ended December 31, 1997 and $9,700 in
the nine months ended December 31, 1996.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
29
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
(c) DIRECTORS OF THE COMPANY
The information under the captions "Election of Directors Nomination",
"--Information About Nominees" and "-- Other Information About Nominees" in
the Company's 1998 Proxy Statement is incorporated herein by reference.
(d) EXECUTIVE OFFICERS OF THE COMPANY
The information concerning executive officers of the Company is included
in this Report under Item 4a, "Executive Officers of the Company".
(e) COMPLIANCE WITH SECTION 16(a)
The information under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1998 Proxy Statement is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information under the captions "Election of Directors -- Director
Compensation" and "Executive Compensation and Other Benefits" in the
Company's 1998 Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Principal Shareholders and Beneficial
Ownership of Management" in the Company's 1998 Proxy Statement is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Election of Directors - Information
about Nominees" and "Certain Transactions" in the Company's 1998 Proxy
Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. EXHIBITS
The exhibits to this Report are listed in the Exhibit Index on
pages E-1 to E-3 below.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a
shareholder of the Company as of April 2, 1998, upon receipt from
any such person of a written request for any such exhibit. Such
request should be sent to Eltrax Systems, Inc., 2000 Town Center,
Suite 690, Southfield, MI; Attn.: Nicholas J. Pyett.
2. MANAGEMENT CONTRACTS
The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an
exhibit to this Report on Form 10-KSB pursuant to Item 13(a):
A. Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-18 (File No. 33-51456)).
30
<PAGE>
B. Form on Non-Statutory Stock Option Agreement (incorporated
by reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-18 (File No. 33-51456)).
C. 1992 Stock Incentive Plan (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on
Form S-18 (File No. 33-51456)).
D. 1995 Stock Incentive Plan (incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-KSB
for the year ended March 31, 1995 (File No. 0-22190)).
E. Employment and Noncompetition Agreement dated as of May 17,
1996 by and between Nordata, Inc. and Howard B. Norton
(incorporated by reference to Exhibit 2.5 to the Company's
Current Report on Form 8-K filed June 3, 1996
(File No. 0-22190)).
F. Agreement dated as of May 17, 1996 by and among the Company,
William P. O'Reilly, Clunet R. Lewis, Mack V. Traynor, III
and Howard B. and Ruby Lee Norton (incorporated by reference
to Exhibit 99.1 to the Company's Current Report on Form 8-K
filed June 3, 1996 (File No. 0-22190)).
G. Consulting Agreement dated as of June 1, 1996 by and between
the Company and William P. O'Reilly (incorporated by
reference to Exhibit 10.10 to the Company's Annual Report on
10-KSB for the nine-month transition period ended
December 31, 1996).
H. Consulting Agreement dated as of June 1, 1996 by and between
the Company and Clunet R. Lewis (incorporated by reference
to Exhibit 10.9 to the Company's Annual Report on 10-KSB
for the nine-month transition period ended
December 31, 1996).
I. Employment and Noncompetition Agreement dated as of
October 31, 1996 by and between Atlantic Network Systems,
Inc. and Walter C. Lovett (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated November 12, 1996 (File No. 0-22190)).
J. Employment and Noncompetition Agreement dated as of
October 31, 1996 by and between Atlantic Network Systems,
Inc. and Douglas L. Roberson (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K
dated November 12, 1996 (File No. 0-22190)).
K. Warrant, dated as of October 31, 1996, to purchase 106,250
shares of Common Stock of the company granted to
Walter C. Lovett (incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K dated
November 12, 1996 (File No. 0-22190)).
L. Warrant, dated as of October 31, 1996, to purchase 106,250
shares of Common Stock of the Company granted to Douglas L.
Roberson (incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K dated November 12, 1996
(File No. 0-22190)).
M. Agreement dated as of October 31, 1996 by and among the
Company, William P. O'Reilly, Clunet R. Lewis,
Mack V. Traynor, III and Walter C. Lovett, Douglas L.
Roberson and B. Taylor Koonce (incorporated by reference to
Exhibit 10.7 to the Company's Current Report on Form 8-K
dated November 12, 1996 (File No. 0-22190)).
31
<PAGE>
N. 1997 Stock Incentive Plan (incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on 10-KSB for
the nine-month transition period ending December 31, 1996
(file No. 0-22190)).
O. Promissory Note dated January 21, 1997 by Gene A. Bier in
favor of the Company in the principal amount of $38,227
(incorporated by reference to Exhibit 10.21 to the
Company's Annual Report on 10-KSB for the nine-month
transition period ended December 31, 1996 (file No.
022190)).
P. Consulting Agreement dated January 21, 1997 by and between
the Company and Gene A. Bier (incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on
10-KSB for the nine-month transition period ended
December 31, 1996).
Q. Employment and Noncompetition Agreement dated as of May
14, 1997 by and between Eltrax Systems, Inc. and Edward J.
Gorlitz (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated May 15, 1997
(File No. 0-22190)).
R. Employment and Noncompetition Agreement dated as of May
14, 1997 by and between Eltrax Systems, Inc. and Colin E.
Quinn (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated May 15, 1997
(File No. 0-22190)).
S. Employment and Noncompetition Agreement dated as of
July 1, 1997 by and between Eltrax Systems, Inc. and Joel J.
Blickenstaff (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated July 1, 1997
(File No. 0-22190)).
T. Employment and Noncompetition Agreement dated as of
July 1, 1997 by and between Eltrax Systems, Inc. and Robert
A. Hughes (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated July 1, 1997
(File No. 0-22190)).
U. Employment and Noncompetition Agreement dated as of
August 15, 1997 by and between Eltrax Systems, Inc. and
Edward C. Barrett (incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated August 15,
1997 (File No. 0-22190)).
V. Employment and Noncompetition Agreement dated as of
August 15, 1997 by and between Eltrax Systems, Inc. and
Daniel M. Christy (incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K dated August 15,
1997 (File No. 0-22190)).
W. Employment and Noncompetition Agreement dated as of
August 15, 1997 by and between Eltrax Systems, Inc. and
David R. Hurlbrink (incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K dated
August 15, 1997 (File No. 0-22190)).
X. Employment and Noncompetition Agreement dated as of October
31, 1997 by and between Eltrax Systems, Inc. and John M.
Good (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed October 3, 1997
(File No. 0-22190)).
32
<PAGE>
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on October 3, 1997 reporting
the private placement of units consisting of Warrants and Common Stock, the
amendment of the Company's bank agreement and the acquisition of DataComm
Associates, Inc. and Midwest Telecom Associates, Inc.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ELTRAX SYSTEMS, INC.
By: /s/ William P. O'Reilly
-----------------------------------
William P. O'Reilly
Chief Executive Officer,
Chairman of the Board and Director
(principal executive officer)
March 27, 1998
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ William P. O'Reilly Chief Executive Officer, Chairman of the March 27, 1998
- ----------------------- Board and Director
William P. O'Reilly (Principal Executive Officer)
/s/ Mack V. Traynor, III Director March 27, 1998
- ------------------------
Mack V. Traynor, III
/s/ Patrick J. Dirk Director March 27, 1998
- ------------------------
Patrick J. Dirk
/s/ Clunet R. Lewis Secretary, General Counsel and Director March 27, 1998
- ------------------------
Clunet R. Lewis
/s/ Thomas F. Madison Director March 27,1998
- ------------------------
Thomas F. Madison
/s/ Stephen E. Raville Director March 27, 1998
- ------------------------
Stephen E. Raville
/s/ James Barnard Director March 27, 1998
- ------------------------
James Barnard
/s/ Nicholas J. Pyett Chief Financial Officer and Treasurer March 27, 1998
- ------------------------ (Principal Financial Officer)
Nicholas J. Pyett (Principal Accounting Officer)
</TABLE>
34
<PAGE>
ELTRAX SYSTEMS, INC.
EXHIBIT INDEX
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ITEM ITEM METHOD OF FILING
- ---- ---- ----------------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of May 14, 1996 by and among Eltrax 2.1 to the Company's Current Report
Systems, Inc., Rudata Acquisition on Form 8-K dated June 3, 1996 (File
Corporation, Nordata Acquisition No. 0-22190).
Corporation, Rudata, Inc., Nordata, Inc.
and Howard B. and Ruby Lee Norton,
as amended pursuant to that First
Amendment to Agreement and Plan of
Merger dated as of May 17, 1996 by
and among the same parties.
2.2 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of October 31, 1996 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., ANS Acquisition on Form 8-K dated November 12, 1996
Corporation, Atlantic Network (File No. 0-22190).
Systems, Inc. and Walter C. Lovett,
Douglas L. Roberson and B. Taylor
Koonce. (1)
2.3 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of May 14, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., EJG Techline on Form 8-K dated May 14, 1997
Acquiring Corporation, EJG Techline, (File No. 0-22190).
Incorporated and Edward J. and
Kathleen M. Gorlitz and Colin E. and
Diane C. Quinn. (1)
2.4 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of July 1, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., Four Corners on Form 8-K dated July 1, 1997
Acquiring Corporation, Four Corners (File No. 0-22190).
Technology, Inc. and Robert A. Hughes,
Joel J. Blickenstaff and David Noall. (1)
2.5 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of August 15, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., Hi-Tech Acquiring on Form 8-K dated August 15, 1997
Corporation, Hi-Tech Connections, Inc. (File No. 0-22190).
And Edward C. Barrett, Daniel M. Christy,
David R. Hurlbrink, David R. Spatz,
Raymond H. Melcher and Timothy E. Devlin. (1)
2.6 Agreement and Plan of Merger dated as Incorporated by reference to Exhibit
of October 31, 1997 by and among 2.1 to the Company's Current Report
Eltrax Systems, Inc., DataComm Acquiring on Form 8-K dated October 3, 1997
Corp., Midwest Acquiring Corp., DataComm (File No. 0-22190).
Associates, Inc., Midwest Telecom Associates,
Inc. and John M. Good, and Harold Madison. (1)
35
<PAGE>
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit
Incorporation of the Company, as 3.1 to the Company's Registration
amended. Statement on Form S-18 (File No. 33-51456).
3.2 Bylaws of the Company, as amended. Incorporated by reference to Exhibit
3.2 to the Company's Quarterly Report
4.1 Specimen Form of the Company's Incorporated by reference to Exhibit
Common Stock Certificate. 4.1 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
4.2 Warrant, dated as of October 31, 1996, Incorporated by reference to Exhibit
to purchase 106,250 shares of Common 10.4 to the Company's Current Report
Stock of the Company granted to on Form 8-K filed November 12, 1996
Walter C. Lovett. (File No. 0-22190).
4.3 Warrant, dated as of October 31, 1996, Incorporated by reference to Exhibit
to purchase 106,250 shares of Common 10.5 to the Company's Current Report
Stock of the Company granted to on Form 8-K filed November 12, 1996
Douglas L. Roberson. (File No. 0-22190).
4.4 Warrant, dated as of February 9, 1996 Filed herewith electronically
to purchase 166,667 shares of Common
Stock of the Company granted to
Morgan Q. Payne.
4.5 Warrant dated as of September 23, 1997 Filed herewith electronically
to purchase 240,000 shares of Common
Stock of the Company granted to
Morgan Q. Payne.
10.1 1992 Stock Incentive Plan. Incorporated by reference to Exhibit
10.4 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
10.2 Form of Incentive Stock Option Incorporated by reference to Exhibit
Agreement. 10.6 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
10.3 Form of Non-Statutory Option Incorporated by reference to Exhibit
Agreement. 10.7 to the Company's Registration
Statement on Form S-18 (File No. 33-51456).
10.4 Form of Non-Employees Director Stock Incorporated by reference to Exhibit
Option Agreement. 10.10 to the Company's Annual Report
on Form 10-KSB for the year ended March 31, 1993
(File No. 0-22190).
10.5 1995 Stock Incentive Plan. Incorporated by reference to Exhibit
10.12 to the Company's Annual Report
on Form 10-KSB for the year ended
March 31, 1995 (File No. 0-22190).
36
<PAGE>
10.6 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of May 17, 1996 2.5 to the Company's Current Report
by and between Nordata, Inc. and on Form 8-K filed June 3, 1996 (File
Howard B. Norton. No. 0-22190).
10.7 Consulting Agreement dated as of June Filed herewith electronically. Incorporated
1, 1996 by and between the Company by reference to Exhibit 10.9 to the
and Clunet R. Lewis. Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996
(File No. 0-22190).
10.8 Consulting Agreement dated as of June Incorporated by reference to Exhibit 10.10
1, 1996 by and between the Company to the Company's Annual Report on Form
and William P. O'Reilly. 10-KSB for the year ended December 31,
1996 (File No. 0-22190).
10.9 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of October 31, 1996 10.1 to the Company's Current Report
by and between Atlantic Network on Form 8-K filed November 12, 1996
Systems, Inc. and Walter C. Lovett. (File No. 0-22190).
10.10 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of October 31, 1996 10.2 to the Company's Current Report
by and between Atlantic Network on Form 8-K filed November 12, 1996
Systems, Inc. and Douglas L. (File No. 0-22190).
Roberson.
10.11 Agreement dated as of October 31, Incorporated by reference to Exhibit
1996 by and among the Company 10.7 to the Company's Current Report
William P. O'Reilly, Clunet R. Lewis, on Form 8-K filed November 12, 1996
Mack V. Traynor, III and Walter C. (File No. 0-22190).
Lovett, Douglas L. Roberson and B.
Taylor Koonce.
10.12 Employment and Noncompetion Incorporated by reference to Exhibit
Agreement dated as of May 14, 1997 10.2 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated May 15, 1997
and Edward J. Gorlitz. (File No. 0-22190).
10.13 Employment and Noncompetion Incorporated by reference to Exhibit
Agreement dated as of May 14, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated May 15, 1997
and Colin E. Quinn. (File No. 0-22190).
10.14 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of July 1, 1997 10.2 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated July 1, 1997
and Joel J. Blickenstaff. (File No. 0-22190).
10.15 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of July 1, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated July 1, 1997
and Robert A. Hughes. (File No. 0-22190).
10.16 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of August 15, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated August 15, 1997
and Edward C. Barrett. (File No. 0-22190).
37
<PAGE>
10.17 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of August 15, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated August 15, 1997
and Daniel M. Christy. (File No. 0-22190).
10.18 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of August 15, 1997 10.3 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated August 15, 1997
and David R. Hurlbrink. (File No. 0-22190).
10.19 Employment and Noncompetition Incorporated by reference to Exhibit
Agreement dated as of October 31, 1997 10.1 to the Company's Current Report
by and between Eltrax Systems, Inc. on Form 8-K dated October 3, 1997
and John M. Good. (File No. 0-22190).
10.20 Revolving Credit Agreement dated Incorporated by reference to Exhibit 10.9
October 31, 1996 between the to the Company's Quarterly Report on Form
Company, it subsidiaries and State 10-QSB for the quarter ended September 30,
Street Bank and Trust Company. (1) 1996 (File No. 0-22190)
10.21 Security Agreement dated October 31, Incorporated by reference to Exhibit 10.16
1996 between the Company and State to the Company's Annual Report on Form
Street Bank and Trust Company, as 10-KSB for the nine-month transition period
amended.(2) ended December 31, 1997
(File No. 0-22190).
10.22 First Amendment to the Revolving Filed herewith electronically.
Credit Agreement dated October 31, 1997
between the Company, its subsidiaries,
And State Street Bank and Trust
Company (1).
10.23 Second Amendment to the Revolving Filed herewith electronically.
Credit Agreement dated October 31, 1997
between the Company, its subsidiaries,
And State Street Bank and Trust
Company (1).
10.24 Asset Purchase Agreement effective Incorporated by reference to Exhibit 10.17
November 22, 1996 among Eltrax to the Company's Annual Report on Form
Health Card Solutions, LLC, EMX, 10-KSB for the nine-month transition period
LLC, Americas Tower Partners and the ended December 31, 1997.
Company. (1) (File No. 0-22190).
10.25 Promissory Note dated January 21, 1997 Incorporated by reference to Exhibit 10.20
by Gene A. Bier in favor of the Company to the Company's Annual Report on Form
in the principal amount of $38,227. 10-KSB for the nine-month transition
period ended December 31, 1997 (File No. 0-22190).
10.26 Consulting Agreement dated January 21, Incorporated by reference to Exhibit 10.21
1997 by and between the Company and to the Company's Annual Report on Form
Gene A. Bier. 10-KSB for the nine-month transition
period ended December 31, 1997 (File No. 0-22190).
38
<PAGE>
10.27 Asset Purchase Agreement dated as of Incorporated by reference to Exhibit
January 29, 1997 between Atlantic 99.1 to the Company's Current Report
Network Systems, Inc. and MRK on Form 8-K filed February 12, 1997
Technologies, LTD. (File No. 0-22190).
10.28 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 10.24
to the Company's Annual Report on Form
10-KSB for the nine-month transition period
ended December 31, 1997 (File No. 0-22190).
10.29 Real Estate Lease dated June 1, 1996 Incorporated by reference to Exhibit 10.11
between Walt Lovett, Doug and Lisa to the Company's Annual Report on Form
Roberson and Atlantic Network 10-KSB for the year ended December 31,
Systems, Inc. 1996 (File No. 0-22190).
10.30 Lease Agreement between Burgoe/Wyomissing Filed herewith electronically.
Partners and Hi-Tech Connections, Inc.
dated September 15, 1996.
10.31 Lease Agreement between JMG Development Filed herewith electronically.
Co. Ltd and DataComm Associates, Inc.
dated December 1, 1996.
10.32 Lease Agreement between Werner Palmquist Filed herewith electronically.
Investments and Four Corners Technology,
Inc. dated February 21, 1996.
21.1 Subsidiaries of the Registrant. Filed herewith electronically.
27.1 Financial Data Schedule. Filed herewith electronically.
</TABLE>
(1) Exhibits to these exhibits will be furnished upon request.
(2) All of the subsidiaries entered into identical Security Agreements, which
will be furnished upon request.
39
<PAGE>
WARRANT
TO PURCHASE UP TO 166,667 SHARES OF COMMON STOCK AT $2.25 PER SHARE
ELTRAX SYSTEMS, INC.
THIS CERTIFIES that Morgan Payne or any permitted successor or assign
(the "Holder") is entitled to purchase from Eltrax Systems, Inc. (the
"Company"), at any time during the period commencing on the date of this
Warrant and ending at 5:00 p.m., Minneapolis, Minnesota time, on February 9,
2002 (the "Expiration Date"), up to 166,667 fully paid and nonassessable
shares of the common stock of the Company, $.0l par value (the "Common
Stock"), or such greater or lesser number of such shares as may be determined
by application of the vesting and anti-dilution provisions of this Warrant
(such shares or other securities purchasable upon exercise of this Warrant
being herein called the "Shares"), at the purchase price of $2.25 per share.
The foregoing purchase price, as it may be adjusted pursuant to the
anti-dilution provisions of this Warrant, is referred to herein as the
"Purchase Price."
This Warrant is subject to the following provisions, terms and
conditions:
1. EXERCISE, TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised, in whole
or in part (but not as to a fractional share of Common Stock), after the date
first above written, in accordance with the vesting schedule set forth below
but in no instance after the Expiration Date of this Warrant, by surrendering
this Warrant, with the Purchase Form attached hereto (or a reasonable
facsimile) duly executed, at the principal office of the Company, and by
paying the Purchase Price in full for the Shares purchasable upon such
exercise in cash or by certified or official bank check payable to the order
of the Company, as follows:
(i) 55,556 shares of Common Stock may be purchased upon the closing
of the first transaction involving the Company's acquisition of, or
merger or consolidation with, another business entity or portion
thereof, which Morgan Payne introduced to the Company;
(ii) 55,556 shares of Common Stock upon successful closing of an
equity offering by the Company raising at least $2,000,000 of equity
capital; and
(iii) 55,555 shares of Common Stock on the date following 30
consecutive days of trading shares of Common Stock at $5.00 per share
or more (at least one trade each day) as reported by the NASDAQ
SmallCap Market System.
_______________________________________________________________________________
THIS WARRANT IS SUBJECT TO THE RESTRICTIONS ON TRANSFER SET FORTH AT THE BOTTOM
OF THE LAST PAGE HEREOF.
<PAGE>
If either the Company or Broadland Capital Partners terminates for any reason
the monthly retainer arrangement for investment banking advisory services
with Broadland Capital Services at any time, the unvested portion of this
Warrant will immediately lapse and the right to exercise this Warrant with
respect to the unvested portion thereof shall immediately terminate and cease
without any further action by any party.
(b) This Warrant may be transferred, or divided into two or more
Warrants of smaller denominations, subject to the conditions provided in
Paragraph 6 below that such transfer is not in violation of federal or state
securities laws.
(c) This Warrant is issued only as a registered Warrant and until it is
transferred on the records of the Company, the Company may treat the person
in whose name it is registered as the absolute owner of this Warrant for all
purposes, notwithstanding any notice to the contrary.
2. ISSUANCE OF SHARES.
The Company agrees that the Shares so purchased shall be and are deemed
to be issued as of the close of business on the date on which this Warrant
shall have been surrendered and payment made for such Shares. Certificates
for the Shares purchased shall be delivered to the Holder within twenty (20)
days after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing
the number of Shares, if any, with respect to which this Warrant has not been
exercised shall also be delivered to the Holder within such time.
Notwithstanding the foregoing, however, the Company shall not be required to
deliver any certificates for the Shares, except in accordance with the
provisions and subject to the limitations of Paragraph 6 below.
3. COVENANTS OF COMPANY.
The Company covenants and agrees that all Shares that may be issued upon
the exercise of this Warrant have been duly authorized and reserved for
issuance upon the exercise of this Warrant, and the Shares, when so issued,
delivered and paid for upon such exercise in accordance with the terms of
this Warrant, will be validly issued, fully paid and nonassessable, and free
from all taxes, hens and charges with respect to the issuance thereof The
Company further covenants and agrees that until expiration of this Warrant,
the Company will at all times have authorized, and reserved for the purpose
of issuance or transfer upon exercise of this Warrant, a sufficient number of
shares of Common Stock to provide for the exercise of this Warrant.
4. ANTI-DILUTION ADJUSTMENTS.
The foregoing provisions are, however, subject to the following:
(a) The Purchase Price shall be subject to adjustment from time to time
as hereinafter provided. Upon each adjustment of the Purchase Price, the
Holder of this Warrant shall
2
<PAGE>
thereafter be entitled to purchase, at the Purchase Price resulting from such
adjustment, the number of Shares obtained by multiplying the Purchase Price
in effect immediately prior to such adjustment by the number of Shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the Purchase Price resulting from such adjustment.
(b) In case the Company shall at any time subdivide the outstanding
shares of its Common Stock into a greater number of shares or declare a
dividend payable in Common Stock, the Purchase Price in effect immediately
prior to such subdivision shall be proportionately reduced, and conversely,
in case the outstanding shares of its Common Stock shall be combined into a
smaller number of shares, the Purchase Price in effect immediately prior to
such combination shall be proportionately increased.
(c) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of the Company's
Common Stock shall be entitled to receive stock, securities or assets with
respect to or in exchange for such Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, the Holder
of this Warrant shall have the right to purchase and receive on the basis and
on the terms and conditions specified in this Warrant and in lieu of the
shares of the Common Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby, such
shares of stock, securities or assets as would have been issued or delivered
to the Holder of this Warrant if the Holder had exercised this Warrant and
received upon exercise of this Warrant the Common Stock prior to such
reorganization, reclassification, consolidation, merger or sale. The Company
shall not effect any such consolidation, merger or sale unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing
such assets shall assume by written instrument executed and mailed to the
Holder at the last address of the Holder appearing on the books of the
Company the obligation to deliver to such Holder such shares of stock
securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to purchase.
(d) If the Company takes any other action, or if any other event
occurs, which does not come within the scope of the provisions of Paragraphs
4(b) or 4(c), but which should, in the Company's opinion, result in an
adjustment in the Purchase Price and/or the number of Shares subject to the
Warrant in order fairly to protect the rights of the Holder of this Warrant,
then the Company shall make an appropriate adjustment in the Purchase Price
or the number of Shares to be received upon exercise of this Warrant.
(e) No adjustment of the Purchase Price shall be made if the amount of
such adjustment is less than $.01 per share, but in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any other adjustment or adjustments so carried forward,
shall amount to not less than $.01 per share.
3
<PAGE>
(f) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but the Company shall pay a cash adjustment in
respect of any fraction of a share of Common Stock which would otherwise be
issuable in an amount equal to the same fraction of the market price per
share of Common Stock on the day of exercise as determined in good faith by
the Company.
(g) Upon any adjustment of the Purchase Price, the Company shall give
written notice thereof, by first-class mail, postage prepaid, addressed to
the registered Holder of this Warrant at the address of such Holder as shown
on the books of the Company, which notice shall state the Purchase Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts
upon which such calculation is based.
5. NO RIGHTS OF SHAREHOLDERS.
This Warrant shall not entitle the Holder to any voting rights or other
rights as a shareholder of the Company.
6. RESTRICTIONS ON TRANSFER.
The Holder, by acceptance hereof, represents and warrants that (a) it is
acquiring this Warrant for its own account for investment purposes only and
not with a view to its resale or distribution, and (b) it has no present
intention to resell or otherwise dispose of all or any part of this Warrant.
Other than pursuant to registration under federal and state securities laws
or an exemption from such registration, the availability of which shall be
determined by an opinion of counsel acceptable to the Company, (x) the
Company will not accept the exercise of this Warrant or issue certificates
for Shares, and (y) neither this Warrant nor any Shares may be sold, pledged,
assigned or otherwise disposed of (whether voluntarily or involuntarily).
The Company may condition such issuance or sale, pledge, assignment or other
disposition on the receipt from the party to whom this Warrant is to be so
transferred or to whom Shares are to be issued or so transferred of any
representations and agreements requested by the Company in order to permit
such issuance or transfer to be made pursuant to exemptions from registration
under federal and applicable state securities laws. Each certificate
representing the Warrant (or any part thereof) and any Shares shall be
stamped with the appropriate legends setting forth these restrictions on
transferability. The Holder, by acceptance hereof, agrees to give written
notice to the Company before exercising or transferring this Warrant or
transferring any Shares of the Holder's intention to do so, describing
briefly the manner of any proposed exercise or transfer. Within thirty (30)
days of receiving such written notice, the Company shall notify the Holder as
to whether such exercise or transfer may be effected.
7. REGISTRATION RIGHTS.
(a) If the Company, at any time after September 1, 1996 and ending on
December 31, 2002, proposes to register under the Securities Act of 1933, as
amended (the "1933 Act"), an
4
<PAGE>
offering of any of its securities (the "Other Securities"), the Company shall
give written notice as promptly as possible of such proposed registration to
all registered holders of this Warrant of the shares of Common Stock acquired
upon exercise of this Warrant. At the request of such holders made within
twenty (20) days after the giving of such notice, the Company will use all
reasonable efforts to cause the offering of such amount of this Warrant (and
the Common Stock issuable upon exercise of such amount of this Warrant), or
such amount of the Common Stock owned by such holders which was issued upon
the exercise of this Warrant, as such holders shall request to be included in
such registration, upon the same terms (including the method of distribution)
as any such offering by the Company; provided that (i) the Company shall only
be obligated to include this Warrant in any such registration where (A) the
Common Stock issuable upon the exercise of such Warrant is also included in
such registration, and (B) it is contemplated that such Warrant will be
exercised and such Common Stock will be offered in connection with such
registration; (ii) the Company shall not be required to give notice or
include this Warrant or the Common Stock issuable upon exercise of this
Warrant in any such registration if the proposed registration is not to be
made on Form SB-1 Form, SB-2 or Form S-3 under the 1933 Act (or any other
form then appropriate for the registration of shares of Common Stock) or is
primarily (A) a registration of a stock option or compensation plan or of
securities issued or issuable pursuant to any such plan, or (B) any
registration of securities proposed to be issued in exchange for securities
or assets of, or in connection with a merger or consolidation with, another
corporation; (iii) the Company may, in its sole discretion and without the
consent of any holder, withdraw such registration statement and abandon the
proposed offering in which any such holder had requested to participate;
provided, however, that if the Company determines not to proceed after the
filing of a registration statement and the Company's decision not to proceed
is based primarily on the anticipated offering price of the securities, the
Company shall promptly complete the registration for the benefit of those
holders who wish to proceed and who agree to bear all expenses incurred by
the Company as the result of such registration after the Company has decided
not to proceed; (iv) the Company shall not be required to include in any such
registration any shares of Common Stock previously duly registered under the
1933 Act upon original issuance; (v) if the offering to which the
registration statement relates is to be distributed by or through an
underwriter and a greater number of securities is offered for participation
in the proposed underwriting than in the opinion of the Company's underwriter
delivered to the holder in writing can be accommodated without significantly
adversely affecting the proposed underwriting, the amount of such securities
proposed to be offered for the accounts of all persons other than the Company
may be reduced pro rata, in accordance with the number of shares of Common
Stock proposed to be sold by each such holder, or eliminated from such
underwritten public offering entirely; provided, however, that upon the
request of such holders, any such shares excluded from the underwritten
offering shall be included in the registration statement but shall be
withheld from the market for such period of time, not to exceed ninety (90)
days, which the managing underwriter reasonably determines is necessary in
order to effect the underwritten public offering; and (vii) if the offering
to which the registration statement relates is to be distributed by or
through an underwriter, each such holder shall agree, as a condition to the
inclusion of such holder's securities in such registration, to sell
securities held by such holder through such underwriter on the same terms and
conditions as the underwriter agrees to sell securities on behalf of the
Company and not to sell transfer, pledge, assign or otherwise dispose of any
shares of Common Stock not sold by such holder in such offering for such
period (up to
5
<PAGE>
one hundred eighty [180] days after the effective date of the registration
statement) as may be required by the underwriter. The costs and expenses of
such offering, including but not limited to legal fees, special audit fees,
printing expenses, filing fees, fees and expenses relating to qualifications
under state securities or blue sky laws and the premiums for insurance, if
any, incurred by the Company in connection with any registration made
pursuant to this Paragraph 7(a) shall be borne entirely by the Company;
provided, however, that any holders participating in such registration shall
bear their own underwriting discounts and commissions and the fees and
expenses of their own counsel or accountants in connection with any such
registration.
(b) In the event of any registration of shares of Common Stock pursuant
to this Paragraph 7, the Company shall indemnify each such holder, its
officers and directors, and each person, if any, who controls such holder
within the meaning of Section 15 of the 1933 Act, against all losses, claims,
damages and liabilities caused by any untrue statement or alleged untrue
statement of material fact contained in any registration statement or
prospectus (and as amended or supplemented) relating to such registration, or
caused by any omission or alleged omission to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made unless
such statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by such holder expressly for
use therein. The obligations of the Company to register any of its
securities in accordance with the foregoing shall be subject to the condition
that each holder shall agree in writing to indemnify the Company, its
officers and directors, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act, and each underwriter of
such warrants or shares of Common Stock so registered, and each person, if
any, who controls such underwriter within the meaning of Section 15 of the
1933 Act, with respect to losses, claims, damages and liabilities caused by
any untrue statement or omission made in reliance upon and in conformity with
information furnished in writing by such holder to the Company expressly for
use in such registration statement, prospectus or offering circular.
(c) Upon the exercise of registration rights pursuant to this Paragraph
7, each holder agrees to supply the Company with such information as may be
required by the Company to register or qualify such warrants or shares of
Common Stock so registered.
8. SUCCESSORS AND ASSIGNS.
All the covenants and provisions of this Warrant by or for the benefit
of the Company or the Holder shall bind and inure to the benefit of their
respective successors and assigns.
9. MODIFICATION OF WARRANT.
Neither this Warrant nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed
by the party against which enforcement of the change, waiver, discharge or
termination is sought.
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<PAGE>
10. TERMINATION OF WARRANT.
Notwithstanding any provision in this Warrant to, the contrary, this
Warrant shall automatically terminate at 5:00 p.m., Minneapolis, Minnesota
time, on February 9, 2002. As of such date, this Warrant shall be void ab
initio, and in such case the Holder shall promptly deliver this Warrant
Agreement to the Company's legal counsel (as designated by the Company) for
cancellation. Further, if either the Company or Broadland Capital Partners
terminates for any reason the monthly retainer arrangement for investment
banking advisory services with Broadland Capital Services at any time, the
unvested portion of this Warrant will immediately lapse and the right to
exercise this Warrant with respect to the unvested portion thereof shall
immediately terminate and cease without any further action by any party.
IN WITNESS WHEREOF, Eltrax Systems, Inc. has caused this Warrant to be
signed and delivered by its duly authorized officer as of the 9th day of
February, 1996.
ELTRAX SYSTEMS, INC.
By: /s/ Mack Traynor
---------------------------------
Its: President and CEO
---------------------------------
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED
ASSIGNED OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE
MADE BY THE COMPANY OR IT'S TRANSFER AGENT, IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.
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<PAGE>
TO: ELTRAX SYSTEMS, INC.
PURCHASE FORM--To be executed by the Registered Holder in Order to Exercise
Warrants
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the attached Warrant for, and to purchase thereunder, ___
shares of Common Stock provided for therein, and request that certificates
for such shares be issued in the name of:
Please insert social security _______________________________
or other identifying number (Name)
of registered holder of
certificate _______________________________
(Address)
_______________________________
(Name)
_______________________________
(Address)
Date:__________________________ Signature(s):
_______________________________
_______________________________
and if such number of shares shall not be all of the shares purchasable
hereunder, that a new Warrant for the balance of the shares purchasable under
such Warrant be registered in the name of the undersigned Holder or his or
her Assignee as below indicated and delivered to the address stated below.
Name of Holder or Assignee:
_______________________________
(please print)
Address:
_______________________________
_______________________________
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<PAGE>
ASSIGNMENT FORM--To be executed by the Registered Holder in Order to Transfer
Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
___________ of the Warrants represented by the attached Warrant unto:
Please insert social security Please print or typewrite name
or other identifying number and address including zip code
of assignee of assignee
_______________________________
_______________________________
_______________________________
and does hereby irrevocably constitute and appoint ____________________
Attorney to transfer the Warrant on the records of the Company with full
power of substitution in the premises.
Date:_________________________ Signature(s):
_______________________________
_______________________________
* * * *
NOTICE--The signature(s) to the Purchase Form or the Assignment Form must
correspond to the name as written upon the face of the Warrant in every
particular without alteration or enlargement or any change whatsoever.
9
<PAGE>
Date of Issuance: September 23, 1997
THIS WARRANT AND THE WARRANT SHARES HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, NOR REGISTERED OR QUALIFIED
UNDER ANY STATE SECURITIES LAWS, AND MAY NOT
BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF UNLESS SO REGISTERED
OR AN EXEMPTION THEREFROM IS AVAILABLE
WARRANT TO PURCHASE COMMON STOCK
OF
ELTRAX SYSTEMS, INC.
THIS CERTIFIES THAT, for One and 00/100 Dollars ($1.00) and other good
and valuable consideration received, BROADLAND CAPITAL PARTNERS, L.P.
("BROADLAND"), the holder of this Warrant or his assigns (the "Holder"), is
entitled to purchase from Eltrax Systems, Inc., a Minnesota corporation (the
"Company"), at the per share exercise price (subject to adjustment as
provided in Section 6 hereof) of Six and 00/100 Dollars ($6.00) (the
"Exercise Price"), 240,000 shares (the "Warrant Shares") (subject to
adjustment as provided in Section 6 hereof) of the Company's common stock,
$0.01 par value (the "Common Stock").
SECTION 1. VESTING, TERM OF WARRANT, RESTRICTIONS ON TRANSFER,
EXERCISE OF WARRANT.
SECTION 1.1. VESTING. The right to purchase Warrant Shares under this
Warrant shall be subject to two separate vesting requirements, both of which
must be satisfied. The first vesting requirement is as follows:
a) When the closing price of the Common Stock for five (5) consecutive
trading days equals or exceeds an average price per share
(non-weighted) of Eight and 00/100 Dollars ($8.00), then the right
to purchase the first 60,000 of the Warrant Shares shall thereafter
meet the first vesting requirement.
b) When the closing price of the Common Stock for five (5) consecutive
trading days equals or exceeds an average price per share
(non-weighted) of Ten and 00/100 Dollars ($10.00), then the right
to purchase the second 60,000 of the Warrant Shares shall
thereafter meet the first vesting requirement.
c) When the closing price of the Common Stock for five (5) consecutive
trading days equals or exceeds an average price per share
(non-weighted) of Twelve and 00/100 Dollars ($12.00), then the
right to purchase the third 60,000 of the Warrant Shares shall
thereafter meet the first vesting requirement.
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<PAGE>
d) When the closing price of the Common Stock for five (5) consecutive
trading days equals or exceeds an average price per share
(non-weighted) of Fifteen and 00/100 Dollars ($15.00), then the
right to purchase the fourth 60,000 of the Warrant Shares shall
thereafter meet the first vesting requirement.
With respect to each of the 60,000 Warrant Shares referenced in Section 1.1 (a,
b, c, & d), the right to purchase 2,500 Warrant Shares shall meet the second
vesting requirement on the first day of each month, beginning October 1, 1997.
Notwithstanding the foregoing, in the event that the Company is a party to a
merger or consolidation, which has the effect of changing the control of the
Company's board of directors (or if any other company is the surviving
corporation of such merger or consolidation, control of the surviving
corporation's board of directors is not held by members of the Company's board
of directors), and if William P. O'Reilly is not the Chairman of the board of
directors of the surviving corporation, then the right to purchase all of the
Warrant Shares shall immediately vest. Notwithstanding the foregoing, in the
event that the letter agreement between the Company and Broadland, dated
February 9, 1996 is terminated by either party, for any reason whatsoever, then
the right to purchase any Warrant Shares which is not then fully vested shall
immediately terminate.
SECTION 1.2. TERM OF WARRANT. Subject to the terms of this Warrant, the
Holder shall have the right, at the Holder's option, which may be exercised in
whole or in part, at any time commencing at the time of the issuance of this
Warrant and until 5:00 p.m. Eastern Daylight Savings Time on September 30, 2002
(the "Warrant Expiration Date"), to purchase from the Company the number of
fully vested Warrant Shares that the Holder may at the time be entitled to
purchase on exercise of this Warrant. After such time, this Warrant will be
void.
SECTION 1.3. RESTRICTIONS ON TRANSFER. The Warrants and the Warrant
Shares will be restricted securities as defined under the Securities Act of
1933, as amended (the "Act") and therefore will not be transferable except in
compliance with applicable federal and state securities laws, including Rule 144
adopted under the Act. Unless Warrant Shares shall have been duly registered
under the Act and any applicable state securities laws, certificates
representing such shares shall bear a legend comparable to the legend on the
first page of this Warrant regarding restrictions on transfer. Unless the
transfer restrictions have been terminated pursuant to Section 8 hereof, the
Holder agrees to give written notice to the Company before offering for sale,
selling or otherwise disposing of any of the Warrants or Warrant Shares, except
when such offer, sale or other disposition is made pursuant to a registration
statement then in effect under the Act and any applicable state securities laws.
The notice shall describe briefly the manner of any proposed offer, sale or
other disposition and shall be accompanied by a written opinion of counsel for
such Holder, which counsel and opinion shall be reasonably satisfactory to the
Company to the effect that the proposed offer, sale or other disposition of such
Warrants or Warrant Shares may be effected without registration under the Act or
any applicable state securities laws.
2
<PAGE>
SECTION 1.4. EXERCISE OF WARRANT. This Warrant may be exercised upon
surrender hereof to the Company at its principal office, together with the
Purchase Form attached hereto duly filled in and signed, and upon payment to
the Company of an amount equal to the product of the Exercise Price and the
number of fully vested Warrant Shares being purchased (the "Aggregate
Exercise Price").
Subject to Section 1.3 and to Section 3 hereof, upon such surrender of
this Warrant and payment of the Aggregate Exercise Price, the Company shall
issue and cause to be delivered with all reasonable dispatch to or upon the
written order of the Holder and in such name or names as the Holder may
designate, a certificate or certificates for the number of full Warrant
Shares so purchased upon the exercise of this Warrant. Such certificate or
certificates shall be deemed to have been issued and any person so designated
to be named therein shall be deemed to have become a holder of record of such
Warrant Shares as of the date of the surrender of this Warrant and payment of
the Aggregate Exercise Price. If this Warrant shall have been exercised only
in part, the Company shall, at the time of delivery of such certificate or
certificates, deliver to the Holder or the Holder's designated nominee a new
Warrant evidencing the rights to purchase the remaining shares of Warrant
Shares called for by this Warrant, which new Warrant shall in all other
respects be identical to this Warrant.
SECTION 2. EXCHANGE OF WARRANT. Subject to Section 1.3 and Section
3 hereof, this Warrant may be exchanged for another Warrant or Warrants
entitling the Holder, or any designated transferee or transferees of the
Holder, to purchase a like aggregate number of Warrant Shares as this Warrant
then entitles such Holder to purchase. Any Holder desiring to exchange this
Warrant shall make such request in writing delivered to the Company, and
shall surrender this Warrant, properly endorsed. Thereupon, the Company
shall execute and deliver to the person entitled thereto a new Warrant or
Warrants, as the case may be, as so requested.
SECTION 3. PAYMENT OF TAXES. The Company will pay all documentary
stamp taxes, if any, attributable to the initial issuance of any Warrant
Shares upon the exercise of this Warrant; PROVIDED, HOWEVER, that the Company
shall not be required to pay any tax or taxes which may be payable in respect
of any transfer involved in the issue or delivery of any Warrant or
certificate for Warrant Shares in a name other than that of the Holder of
this Warrant as such name is then shown on the books of the Company.
SECTION 4. MUTILATED OR MISSING WARRANT. Upon receipt of evidence
satisfactory to the Company of the ownership of and the loss, theft,
destruction or mutilation of this Warrant and, in the case of any such loss,
theft or destruction, upon receipt of reasonably satisfactory indemnification
or, in the case of any such mutilation, upon surrender and cancellation of
such Warrant, the Company will make and deliver, in lieu of such lost,
stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and
representing the right to purchase the same aggregate number of Warrant
Shares. Any such new Warrant executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or not
the Warrant so lost, stolen, destroyed or mutilated shall be at any time
enforceable by anyone.
3
<PAGE>
SECTION 5. CERTAIN COVENANTS.
SECTION 5.1. RESERVATION OF WARRANT SHARES. There have been reserved,
and the Company shall at all times keep reserved, out of its authorized
Common Stock, a number of shares of Common Stock sufficient to provide for
the exercise of the rights of purchase represented by this Warrant. Any
transfer agent for the Common Stock and any successor transfer agent for the
Common Stock is hereby irrevocably authorized to cause to be issued from time
to time the share certificates required to honor this Warrant upon its
exercise in accordance with the terms hereof. The Company will supply any
such transfer agent with duly executed share certificates for such purpose.
SECTION 5.2. NO IMPAIRMENT. The Company shall not by any action,
including, without limitation, amending its Articles of Incorporation, any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms of this Warrant, but will
at all time in good faith assist in the carrying out of all such terms and in
the taking of all such action as may be necessary or appropriate to protect
the rights of the Holder against impairment. Without limiting the generality
of the foregoing, the Company will (a) take all such action as may be
necessary or appropriate in order that the Company may validly issue fully
paid and nonassessable Common Stock upon the exercise of this Warrant and (b)
obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof as may be necessary to enable the
Company to perform its obligations under this Warrant.
SECTION 5.3. LISTING. If the Company shall list any of its Common
Stock on any securities exchange or automated quotation system, it will, at
its expense, list thereon, maintain and, when necessary, increase such
listing of, all of its Common Stock issued or, to the extent permissible
under the applicable securities exchange or quotation system rules, issuable
upon the exercise of this Warrant so long as any of its Common Stock shall be
so listed.
SECTION 6. ANTI-DILUTION AND OTHER ADJUSTMENT PROVISIONS.
SECTION 6.1. COMMON STOCK DIVIDENDS, SUBDIVISIONS, COMBINATIONS. If
the Company shall: (a) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of Common Stock, (b) subdivide, split
or reclassify the outstanding shares of its Common Stock into a larger number
of shares, or (c) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, then in each case the Warrant Shares
shall be adjusted to equal the number of such shares to which the Holder of
this Warrant would have been entitled upon the occurrence of such event had
this Warrant been exercised immediately prior to the happening of such event
or, in the case of a stock dividend or other distribution, prior to the
record date for determination of such shareholder entitled thereto, and the
Exercise Price shall be proportionately adjusted. An adjustment made
pursuant to this Section 6.1 shall become effective immediately after such
record date, in the case of a dividend or distribution, and immediately after
the effective date, in the case of a subdivision, split, combination or
reclassification.
4
<PAGE>
SECTION 6.2. REORGANIZATION OR RECLASSIFICATION. In case of any
capital reorganization or any reclassification of the Common Stock of the
Company (whether pursuant to a merger of consolidation or otherwise), this
Warrant shall thereafter be exercisable for the number of shares of stock or
other securities or property receivable upon such capital reorganization or
reclassification of Common Stock, as the case may be, by a Holder of the
number of shares of Common Stock into which this Warrant was exercisable
immediately prior to such capital reorganization or reclassification of
Common Stock; and, in any case, appropriate adjustment shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the Holder of this Warrant such that the provisions
set forth herein shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other securities or property
thereafter deliverable upon the exercise of this Warrant.
SECTION 6.3. DISTRIBUTIONS OF ASSETS OR SECURITIES OTHER THAN COMMON
STOCK. In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock shares of any of its capital stock (other
than Common Stock), rights or warrants to purchase any of its securities,
cash (other than dividends paid out of net surplus or current or retained
earnings), other assets or evidences of its indebtedness, then in each case
the Exercise Price shall be reduced by the fair market value (as determined
in good faith by the Board of Directors of the Company) of the portion of the
securities, cash, assets or evidences of indebtedness so distributed
applicable to one share of Common Stock. An adjustment made pursuant to this
Section 6.3 shall become effective immediately after such distribution date.
SECTION 6.4. NOTICE OF CERTAIN CORPORATION TRANSACTIONS. The Company
shall promptly mail to the Holder a notice of any proposed dividend, merger,
dissolution, liquidation or winding up of the Company, stating the proposed
record date (if any) or effective date for any such transaction and briefly
describing the transaction.
SECTION 6.5. NO ADJUSTMENT OR READJUSTMENT IN CERTAIN CIRCUMSTANCES.
The Company shall not make any adjustment or readjustment of any of the
Exercise Price or the number of Warrant Shares in the case of: (a) the
exercise of this Warrant, or (b) the issuance or sale by the Company of
Common Stock or rights or options pursuant to, or the adjustment of the
exercise price, or the exercise or termination, of rights or options issued
pursuant to, any employee stock option or similar plan of the Company, or (c)
except as specifically provided in this Section 6, by reason of the issuance
of shares of Common Stock or any other securities of the Company in exchange
for cash, property or services or other consideration.
SECTION 6.6. CERTIFICATE OF ADJUSTMENT. Upon the occurrence of each
adjustment or readjustment pursuant to this Section 6, the Company, at its
expense, shall as promptly as practicable compute such adjustment or
readjustment in accordance with the provisions of this Section 6, and prepare
and furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing in reasonable detail the facts upon which such
adjustment or readjustment in based.
5
<PAGE>
SECTION 7. REGISTRATION RIGHTS.
SECTION 7.1. INCIDENTAL REGISTRATION. Until such time as any of the
Warrant Shares may be sold pursuant to the provisions of Rule 144 adopted
under the Act, whenever the Company proposes to file a registration statement
with the Securities and Exchange Commission (the "Commission") for an
offering of the sale of Common Stock for cash consideration only, if such
registration statement would permit the inclusion of Warrant Shares to be
sold on behalf of the Holder pursuant to the rules of the Commission, it
will, prior to such filing, give prompt written notice to the Holder of its
intention to do so and, upon the written request of the Holder given within
twenty (20) days after the Company provides such notice, which request will
state the intended method of disposition of the Warrant Shares (the
"Disposition Method"), the Company will, subject to the other provisions of
this Section 7, cause all Warrant Shares which the Company has been requested
by the Holder to register to be included in such registration statement to
the extent necessary to permit their sale or other disposition in accordance
with the Disposition Method; PROVIDED THAT the Company will have the right to
postpone or withdraw any registration effected pursuant to this Section 7
without obligation to the Holder.
In connection with any offering under this Section 7.1 involving an
underwriting, the Company will not be required to include any Warrant Shares
in such underwriting unless the Holder accepts the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it and
applicable to all other sellers of shares in such offering, and then only in
such quantity as will not, in the reasonable opinion of the underwriters,
jeopardize the success of the offering by the Company. If in the reasonable
opinion of the managing underwriter the registration of all, or part of, the
Common Stock which the Holder and other shareholders have requested to be
included would materially and adversely affect such public offering, then the
Company will be required to include in the underwriting only that number of
shares, if any, which the managing underwriter reasonably believes may be
sold without causing such adverse effect. If the shares of Common Stock to
be included in the underwriting in accordance with the foregoing is fewer
than the total number of shares which the Holder and other shareholders have
requested to be included, then the Holder and other holders of shares of
Common Stock entitled to include shares of Common Stock in such registration
will participate in the underwriting PRO RATA based upon the number of shares
the Holder and each such holder of Common Stock has requested to be included
in such registration.
SECTION 7.2. OTHER PROVISIONS RELATING TO REGISTRATION RIGHTS. In
connection with any registration pursuant to this Section 7, the company will:
(a) use all reasonable efforts to cause such registration statement
to become and remain effective for not less than thirty (30) days (the
Holder hereby agreeing to furnish the Company, within fifteen (15) days
following a request by the Company, with such information concerning the
Holder to be included in such registration statement as may be reasonably
requested by the Company), it being understood and acknowledged that the
Company may be required to suspend effectiveness of such registration
statement or notify the Holder to suspend any effort to effect sales of the
Common Stock if the Company is attempting to consummate an acquisition or
sale that would materially affect the Company's business;
6
<PAGE>
(b) furnish to the Holder and the underwriters, if any, participating
in such registration such reasonable number of copies of the registration
statement, each amendment thereto, preliminary prospectus, final
prospectus, each amendment thereto, and other such documents as the Holder
and underwriters, if any, may reasonably request in order to facilitate the
public offering of such securities;
(c) use its good faith reasonable efforts to register or qualify the
securities covered by such registration statement under such state
securities or blue sky laws of such jurisdictions as the Holder may
reasonably request in writing within twenty (20) days following the
original filing of such registration, except that the Company will not for
any purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified;
(d) notify the Holder, promptly after it will receive notice thereof,
of the time when such registration statement has become effective or a
supplement to any prospectus forming a part of such registration statement
has been filed;
(e) notify the Holder promptly of any request by the Commission for
the amending or supplementing of such registration statement or prospectus
or for additional information;
(f) prepare and file with the Commission, promptly upon the
reasonable request of the Holder, any amendments or supplements to such
registration statement or prospectus which, in the opinion of counsel for
the Holder (and concurred in by counsel for the Company), is required under
the Act or the rules and regulations thereunder in connection with the
distribution of the Warrant Shares by the Holder;
(g) prepare and promptly file with the Commission and promptly notify
the Holder of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Act, any event has
occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein,
in the light of circumstances in which they were made, not misleading;
(h) advise the Holder, promptly after the Company receives notice or
obtains knowledge thereof, of the issuance of any stop order by the
Commission suspending the effectiveness of such registration statement or
the initiation or threatening of any proceeding for that purpose and
promptly use its good faith, reasonable efforts to prevent the issuance of
any stop order or to obtain its prompt withdrawal if such stop order should
be issued.
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<PAGE>
(i) if an underwriter is used by the Holder and approved by the
Company, enter into an underwriting agreement that is satisfactory to the
Company and the Holders.
(j) upon the request of one or more holders of Warrant Shares then
being registered, the Company will cooperate with any underwriters (as
defined in the Act) for the requesting party approved by the Company (which
approval will not be unreasonably withheld), including, without limitation,
providing such information, certificates, comfort letters of accountants
and opinions of counsel as may be customarily and reasonably requested by
such underwriters.
(k) pay all fees, disbursements and expenses in connection with the
registration, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel for the Company
and expenses of complying with applicable securities or blue sky laws, but
excluding Holder's attorney's fees and any underwriter's fees or
commissions.
(l) With a view to making available the benefits of certain rules and
regulations of the Commission which may permit the sale of restricted
securities (as that term is used in Rule 144 under the Act) to the public
without registration, the Company agrees to:
(1) use its reasonable efforts to make and keep public
information available, as those terms are understood and
defined in Rule 144;
(2) use its reasonable efforts to file with the Commission in a
timely manner all reports and other documents required by
the Company under the Act and the Exchange Act so as to
permit the Holders to sell the Warrant Shares pursuant to
Rule 144; and
(3) so long as a Holder owns any Warrant Shares, furnish to
Holders upon request a written statement by the Company as
to its compliance with the reporting requirements under the
Exchange Act and the Act as required by Rule 144, a copy of
the most recent annual or quarterly report of Company and
such other reports and documents so filed as such Holder may
reasonably request in availing itself of any rule or
regulation of the Commission allowing such Holder to sell
any Warrant Shares without registration.
SECTION 7.3. INDEMNIFICATION RELATING TO REGISTRATION OF WARRANT SHARES.
In the event of any registration of any Warrant Shares under the Act pursuant
to this Warrant, Company will indemnify and hold harmless the seller of such
Warrant Shares, each underwriter of such Warrant Shares, and each other
person, if any, who controls such seller or underwriter within the meaning of
the Act or the Exchange Act against any losses, claims, damages or
liabilities, joint or several, to which such seller, underwriter or
controlling person may become subject under the Act, the
8
<PAGE>
Exchange Act, state securities or blue sky laws or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of
material fact contained in any registration statement, any preliminary
prospectus or final prospectus contained in the registration statement, or
any amendment or supplement to such registration statement, or arise out of
or are based upon the omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and the Company will reimburse such seller, underwriter and each
such controlling person for any legal or any other expenses reasonably
incurred by such seller, underwriter or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
PROVIDED, HOWEVER, that the Company will not be liable in any such case to
the extent that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or omission made in such registration
statement, preliminary prospectus or prospectus, or any such amendment or
supplement, in reliance upon and in conformity with information furnished to
the Company, in writing, by or on behalf of any seller, underwriter or
controlling person specifically for use in the preparation thereof.
In the event of any registration of any Warrant Shares under the Act,
each seller of Warrant Shares ("Seller"), severally and not jointly, will
indemnify and hold harmless the Company, each of its directors and officers
and each underwriter (if any) and each person, if any, who controls the
Company or any such underwriter within the meaning of the Act or the Exchange
Act against any losses, claims, damages or liabilities, joint or several, to
which the Company, such directors and officers, underwriter or controlling
person may become subject under the Act, Exchange Act, state securities or
blue sky laws or otherwise insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of material fact contained
in any registration statement under which such shares were registered under
the Act, any preliminary prospectus or final prospectus contained in the
registration statement, or any amendment or supplement to the registration
statement, or arise out of or are based upon any omission or alleged omission
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, if the statement or omission was made
in reliance upon and in conformity with information furnished in writing to
the Company by or on behalf of such Seller, specifically for use in
connection with the preparation of such registration statement, prospectus,
amendment or supplement.
Each party entitled to indemnification under this Section 7.4 (the
"Indemnified Party") will give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and will permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom; PROVIDED, that counsel for the
Indemnifying Party, who will conduct the defense of such claim or litigation,
will be approved by the Indemnified Party (whose approval will not be
unreasonably withheld); and PROVIDED, FURTHER, that the failure of any
Indemnified Party to give notice as provided herein will not relieve the
Indemnifying Party of its obligations under this Section 7.4 to the extent
such Indemnifying Party was not harmed by such failure. The Indemnified
Party may participate in such defense at such party's expense; PROVIDED,
HOWEVER, that the Indemnifying Party will pay such expense if representation
of such Indemnified Party by the counsel retained by the Indemnifying Party
would be inappropriate due to actual or potential
9
<PAGE>
differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding. No Indemnifying Party, in
the defense of any such claim or litigation will, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified Party
will consent to entry of any judgment or settle such claim or litigation
without the prior written consent of the Indemnifying Party.
In order to provide for just and equitable contribution to joint
liability under the Act in circumstances in which the indemnity provisions
provided for in this section are for any reason held to be unavailable to the
indemnified parties although applicable in accordance with its terms; then,
in each such case, the Company and such Seller will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportions as shall be appropriate
to reflect the relative fault of the Company, on the one hand, and the
Seller, on the other hand, with such relative fault determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or by the Seller, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission; PROVIDED, HOWEVER, that, in
any such case no person or entity guilty of fraudulent misrepresentation,
within the meaning of Section 22(f) of the Act, shall be entitled to
contribution from any person or entity who is not guilty of such fraudulent
misrepresentation.
SECTION 8. TERMINATION OF RESTRICTIONS. The restrictions imposed by
Section 1.3 hereof upon the transferability of any Warrant Shares shall cease
and terminate as to any Warrant Shares (a) when such securities shall have
been effectively registered under the Act and any applicable state securities
laws and disposed of in accordance with the registration statement(s)
covering such securities, or (b) when, in the opinions of both counsel for
the Holder and counsel for the Company, such restrictions are no longer
required in order to insure compliance with the Act and applicable state
securities laws. Whenever such restrictions shall terminate as to any
Warrant Shares, the Holder shall be entitled to receive from the Company,
without expense (other than transfer taxes, if any), new securities of like
tenor not bearing a legend as to restrictions on transfer.
SECTION 9. NO RIGHTS AS A SHAREHOLDER; NOTICES TO THE HOLDER.
Nothing contained in this Warrant shall be construed as conferring upon the
Holder or its transferees the right to vote or to receive dividends or to
consent or to receive notice as a shareholder in respect of any meeting of
shareholders for the election of directors of the Company or any other
matter, or any rights whatsoever as a shareholder of the Company. If,
however at any time prior to the expiration of this Warrant and prior to its
exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any securities
upon its Common Stock or make any distribution to the holders of its Common
Stock;
10
<PAGE>
(b) the Company shall offer to the holders of its Common Stock any
additional Common Stock or securities convertible into Common Stock or any
right to subscribe thereto; or
(c) a reclassification, consolidation, merger or sale or all or
substantially all of the Company's property, assets and business as an
entirety or a dissolution, liquidation or winding up of the Company shall
be proposed;
then in any one or more of such events, the Company shall give notice in
writing of such event to the Holder as provided in Section 11 hereof at least
twenty (20) days prior to the date fixed as a record date for the
determination of the shareholders entitled to such dividend, distribution or
subscription rights, or for the determination of shareholders entitled to
vote on such proposed reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up. Such notice shall specify such
record date. Failure to mail such notice or any defect in such notice or in
the mailing of the notice shall not affect the validity of any action taken
in connection with such dividend, distribution or subscription rights, or
proposed dissolution, liquidation or winding up.
SECTION 10. REPRESENTATIONS AND WARRANTIES. The Company hereby
represents and warrants to the Holder as follows:
(a) The Company is a corporation duly organized with its principal
place of business in Michigan, validly existing and in good standing under
the laws of the State of Minnesota, and has full power and lawful authority
to carry on its business;
(b) The Company has the full corporate power to execute, deliver and
issue this Warrant and to carry out its obligations hereunder; the
execution, delivery and issuance of this Warrant, and delivery and issuance
of Warrant Shares upon exercise of this Warrant, have been duly and validly
authorized by the Board of Directors of the Company; no other corporate
acts or proceedings on the part of the Company are necessary to authorize
this Warrant or the Warrant Shares; and this Warrant constitutes a valid
and legally binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject only to applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium,
or other laws and equitable principles of general appreciation relating to
or affecting the enforcement of creditor's rights and remedies.
(c) The Warrant Shares will, when issued pursuant to this Warrant, be
duly authorized and validly issued, fully paid and nonassessable, and not
subject to preemptive rights;
(d) No consent or approval by, or filing with, any governmental
authority is required in connection with the execution, delivery and
issuance by the Company of this Warrant or the delivery and issuance of the
Warrant Shares other than such as have been obtained or made (or as may be
required in the future under applicable securities laws in connection with
the transfer or exercise of this Warrant or the resale of the Warrant
Shares); and
11
<PAGE>
(e) The execution, delivery, issuance of this Warrant and the
delivery and issuance of the Warrant Shares will not result in the
violation of any term or provision of the charter or by-laws of the Company
or any loan agreement, indenture, note or other instrument, or decree,
order, statute, rule or regulation applicable to the Company (subject,
however, to compliance with applicable securities laws in connection with
the transfer or exercise of this Warrant or the resale of the Warrant
Shares).
SECTION 11. NOTICES. Any notice pursuant to this Warrant by the
Company or by the Holder shall be in writing and shall be mailed first class,
postage prepaid, or delivered (a) to the Company, at its principal office at
2000 Town Center, Suite 690, Southfield, Michigan 48075, or (b) to the Holder,
at its or his address as indicated in the books and records of the Company.
Either party may from time to time change the address to which notices to it are
to be delivered or mailed under this Warrant by notice in writing to the other
party.
SECTION 12. SUCCESSORS. All the covenants and provisions of this
Warrant by or for the benefit of the Company or the Holder shall bind and inure
to the benefit of their respective successors and assigns.
SECTION 13. APPLICABLE LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of Michigan without giving
effect to principles of conflict of laws.
SECTION 14. CAPTIONS. The captions of the Sections and subsections of
this Warrant have been inserted for convenience only and shall have no
substantive effect.
IN WITNESS WHEREOF, the undersigned has executed this Warrant this 23d day
of September, 1997.
ELTRAX SYSTEMS, INC.
By: /s/ William P. O'Reilly
----------------------------
William P. O'Reilly
Chairman and CEO
12
<PAGE>
ELTRAX SYSTEMS, INC.
PURCHASE FORM
The undersigned hereby irrevocably elects to exercise the within Warrant
to purchase _________ shares of Common Stock of Eltrax Systems, Inc., hereby
makes payment of $___________ in payment of the Aggregate Exercise Price
thereof, and requires that certificates for such shares be issued in the name
of:
_______________________________________________________________________________
(Please Print Name and Social Security No.)
_______________________________________________________________________________
(Street Address)
_______________________________________________________________________________
(City, State and Zip Code)
DATED:________________________ , ______
Name of Warrantholder or Assignee:_____________________________________________
(Please Print)
Address:_______________________________________________________________________
_______________________________________________________________________
Signature:_____________________________________________________________________
13
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned sells, assigns and transfers unto
_______________________________________________________________________
(Name of Assignee Must be Printed or Typewritten)
_______________________________________________________________________
(Street Address)
_______________________________________________________________________
(City, State and Zip Code)
the within Warrant, irrevocably constituting and appointing
_______________________________ Attorney to transfer such Warrant on the books
of the Company, with full power of substitution in the premises.
DATED:______________________ , ______
______________________________
Signature of Registered Holder
14
<PAGE>
FIRST AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Amendment (the "Amendment") is made on this 14th day of August,
1997 by and between Eltrax Systems, Inc., a Minnesota corporation, Nordata,
Inc., a California corporation d/b/a Datatech, Atlantic Network Systems,
Inc., a North Carolina corporation, EJG Techline, Incorporated, a California
corporation, and Four Corners Technology, Inc., an Arizona corporation
(individually a "Borrower" and collectively, the "Borrowers"), and State
Street Bank and Trust Company, a Massachussetts trust company with its
principal office at 225 Franklin Street, Boston, Massachusetts 02110 (the
"Bank"); and
WHEREAS, the Borrowers and the Bank are parties to a Revolving Credit
Agreement dated as of October 31, 1996, as amended, which provides for the
Bank to make available to the Borrowers a $5,000,000 Revolving Line of Credit
(the "Credit Agreement");
WHEREAS, the Borrowers desire that the Bank increase the Revolving Line
of Credit by an additional $500,000, to a total of $5,500,000, such increase
to be effective only until September 30, 1997 after which the amount of the
Revolving Line of Credit will revert to $5,000,000, and the Bank is willing
to make available to the Borrowers this increase in the Revolving Line of
Credit, on the terms and conditions set forth therein.
NOW, THEREFORE, the Borrowers, jointly and severally, and the Bank,
hereby agree as follows:
1. Section 1(a) of the Credit Agreement is hereby amended by changing the
definition of Commitment Amount, as set forth therein, to the following:
"COMMITMENT AMOUNT: From and after the date of the Amendment until
September 30, 1997, $5,500,000"; thereafter $5,000,000.
2. Section 2(a)(iii) of the Credit Agreement is hereby amended by deleting
the first sentence thereof and inserting the following in lieu thereof:
"The Revolving Credit Loan shall be evidenced by an Amended and Restated
Commercial Promissory Note in the original principal amount of
$5,500,000 in substantially the form of EXHIBIT I hereto (the "Revolving
Credit Note"), dated as of the date of the First Amendment to the Credit
Agreement, and completed with appropriate insertions, which Revolving
Credit Note shall be due and payable in full on the Maturity date."
3. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers jointly and severally
represents and warrants to the Bank as follows:
<PAGE>
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Section 4 of the Credit Agreement and in each Instrument of
Adherence (Credit Agreement) executed and delivered by one or more of the
Borrowers to the Bank (the "Instrument of Adherence"), were true and correct
in all material respects when made. Except to the extent that such
representations and warranties expressly relate to a specific date or were
based on facts which have changed in the ordinary course of business,
which changes either singly or in the aggregate, have not been materially
adverse, the representations and warranties contained in Section 4 of the
Credit Agreement and the Instruments of Adherence, after giving effect to
this Amendment, are true and correct on the date hereof.
(b) ENFORCEABILITY. The execution and delivery by each of the
Borrowers of this Amendment, and the performance by each of the Borrowers of
the Amendment and the Credit Agreement, as amended hereby, are within the
corporate authority of such Person and have been duly authorized by all
necessary corporate proceedings. This Amendment and the Credit Agreement, as
amended hereby, are valid and legally binding obligations of each of the a
Borrowers, enforceable in accordance with their terms, except as limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating
to the enforcement of creditors' rights in general.
(c) NO DEFAULT. Except as set forth in the Compliance Certificate
attached hereto, no Default or Event of Default has occurred and is
continuing, and no Default or Event of Default will exist after the execution
and delivery of this Amendment.
(d) OTHER AGREEMENTS. The execution and delivery by each of the
Borrowers of this Amendment, and the performance by each of the Borrowers of
this Amendment and the Credit Agreement, as amended hereby, will not conflict
with, or result in a breach of any term, condition or provision of, or
constitute a default under, such Borrowers' charter or by-laws as presently
in effect or any other agreement, trust, deed, indenture, mortgage or other
instrument to which such Person is a party or by which such Person or any of
the property of such Person is bound or affected.
4. AFFIRMATION OF THE BORROWERS. Each of the Borrowers hereby affirms its
absolute and unconditional, joint and several promise to pay to the Bank
the Loans and all other amounts due under the Credit Agreement on the
Maturity Date provided in the Credit Agreement, as amended hereby.
5. EFFECTIVENESS. The effectiveness of this Amendment shall be conditioned
upon receipt by the Bank of this Amendment, executed by each of the
Borrowers and the Bank. Execution of this Amendment by the Bank does not
constitute a waiver by the Bank of any defaults, notices of default or
rights of the Bank under the Credit
2
<PAGE>
Agreement, as amended hereby, all of which are unaffected hereby and remain
in full force and effect.
6. MISCELLANEOUS PROVISIONS.
(a) Except as otherwise expressly provided by this Amendment, all of
the terms, conditions and provisions of the Credit Agreement shall remain the
same. It is declared and agreed by each of the parties hereto that the
Credit Agreement, as amended hereby, is and shall continue in full force and
effect, and that this Amendment and such Credit Agreement shall be read and
construed as one instrument.
(b) This Amendment is intended to take effect as an agreement under
seal and shall be construed according to and governed by the laws of the
Commonwealth of Massachusetts.
(c) This Amendment may be executed in any number of counterparts, but
all such counterparts shall together constitute but one instrument. In making
proof of this Amendment it shall not be necessary to produce or account for
more than one counterpart signed by each party hereto by and against which
enforcement hereof is sought.
(d) Each of the Borrowers hereby jointly and severally agrees to pay to
the Bank, on demand by the Bank, all reasonable out-of-pocket costs and
expenses incurred or sustained by the Bank in connection with the preparation
of this Amendment and the documents referred to herein (including reasonable
legal fees).
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
ELTRAX SYSTEMS, INC.
By: /s/ Nicholas J. Pyett
-------------------------------
Title: Treasurer
----------------------------
NORDATA, INC. d/b/a Datatech
By: /s/ Nicholas J. Pyett
-------------------------------
Title: Treasurer
----------------------------
3
<PAGE>
ATLANTIC NETWORK SYSTEMS, INC.
By: /s/ Nicholas J. Pyett
-------------------------------
Title: Treasurer
----------------------------
EJG TECHLINE INCORPORATED
By: /s/ Nicholas J. Pyett
-------------------------------
Title: Treasurer
----------------------------
FOUR CORNERS TECHNOLOGY, INC.
By: /s/ Nicholas J. Pyett
-------------------------------
Title: Treasurer
----------------------------
STATE STREET BANK AND TRUST COMPANY
By: /s/ Frederic Epstein
-------------------------------
Title: Vice President
----------------------------
4
<PAGE>
SECOND AMENDMENT TO
REVOLVING CREDIT AGREEMENT
This Second Amendment to the Revolving Credit Agreement (the "Amendment")
is made as of October 6, 1997, by and among Eltrax Systems, Inc., a Minnesota
Corporation ("Eltrax") having its principal place of business at 2000 Town
Center, Suite 690, Southfield, Michigan 48075, each of the wholly owned
subsidiaries of Eltrax, as their names appear on the signature page of this
Amendment (individually a "Borrower" and collectively, the "Borrowers") and
State Street Bank and Trust Company (the "Bank"), a Massachusetts Trust Company
with its principal offices at 225 Franklin Street, Boston, Massachusetts 02110.
WHEREAS, the Borrowers and the Bank have previously executed a Revolving
Credit Agreement dated as of October 31, 1996, as amended (the "Credit
Agreement"); and
WHEREAS, the Borrower and the Bank executed a First Amendment to Revolving
Credit Agreement on August 14, 1997, which increased the Revolving Line of
Credit to $5,500,000; and
WHEREAS, the Borrowers desire that the Bank increase the Revolving Line of
Credit by an additional $2,500,000, to a total of $8,000,000, and make certain
other modifications, and the Bank is willing to make available to the Borrowers
this increase in the Revolving Line of Credit along with the requested
modifications, on the terms and conditions set forth therein.
NOW THEREFORE, the Borrowers, jointly and severally, and the Bank hereby
agree as follows:
1. Section 1(a) of the Credit Agreement, which defines the phrase
COMMITMENT AMOUNT, is deleted in its entirety and substituted with the
following:
"COMMITMENT AMOUNT : $8,000,000"
2. Section 1(a) of the Original Agreement, which defines the phrase
BORROWING BASE, is deleted in its entirety and substituted with the following:
"BORROWING BASE: An amount equal to the sum of
eighty (80%) percent of the Eligible Accounts plus
the lesser of (a) $2,000,000 and (b) thirty (30%)
percent of the Eligible Inventory."
3. Section 1(a) of the Credit Agreement, which defines the phrase
MATURITY DATE, is deleted in its entirety, and substituted with the following:
"MATURITY DATE: October 31, 1999."
<PAGE>
4. Section 2(a)(iii) of the Credit Agreement is hereby amended by
deleting the first sentence thereof and inserting the following:
"The Revolving Credit Loan shall be evidenced by
an Amended and Restated Commercial Promissory
Note in the original principal amount of
$8,000,000 in substantially the form of EXHIBIT I
hereto (the "Revolving Credit Note"), dated as of
the date of the Second Amendment to the Credit
Agreement, and completed with appropriate
insertions, which Revolving Credit Note shall be
due and payable in full on the Maturity Date."
5. Section 2(d), Paragraph (i) of the Credit Agreement is deleted in its
entirety and substituted with the following:
"COMMITMENT FEE. At all times prior to
termination of the Commitment, the Borrowers
shall pay to the Bank, a Commitment Fee of one-
fourth of one percent (1/4%) per annum of the
difference between the amount of the Commitment
Amount and the sum of the daily average
principal amount of the Revolving Credit Loans
outstanding from time to time. The Commitment
Fee shall be calculated on the last day of each
calendar quarter and on any other date the
Commitment is terminated. The Commitment Fee
shall be due and payable on the last day of each
quarter."
6. Section 6(s) of the Credit Agreement, FINANCIAL COVENANTS, is deleted
in its entirety, and substituted with the following:
"Financial Covenants. The Borrowers shall comply with
the following Financial Covenants, measured on a
consolidated basis:
(i) MINIMUM CURRENT RATIO. On and prior to
December 31, 1997, the Borrowers shall not permit
the ratio of their Current Assets to Current
Liabilities to be less than 1.00:1.00 at any
time. Beginning January 1, 1998, the ratio of
Current Assets to Current Liabilities shall not
be less than 1.1 to 1.0 at any time, and
commencing January 1, 1999, the ratio of Current
Assets to
2
<PAGE>
Current Liabilities shall not be less than 1.5 to
1.0 at any time.
(ii) MAXIMUM INDEBTEDNESS TO NET WORTH. On
and prior to December 31, 1997, the Borrowers
shall not permit the ratio of their Indebtedness
to Net Worth to be greater than 1.5:1.0 at any
time. Beginning January 1, 1998, the ratio of
Indebtedness to Net Worth shall not be greater
than 1.3 to 1.0 at any time, and commencing
January 1, 1999, the ratio of Indebtedness to Net
Worth shall not be greater than 1.2 to 1.0 at any
time.
(iii) POSITIVE EBITDA. For the quarter
ending December 31, 1997, the Borrowers'
consolidated EBITDA shall be positive, and for
any individual month in such quarter, shall not
be a loss of more than $100,000. For the months
ending January 31, 1998 and February 28, 1998,
the Borrowers' consolidated EBITDA for the three
month period ending with such month shall be
positive. Commencing with the month ending March
31, 1998, and at the end of each subsequent
month, the Borrowers' consolidated EBITDA for the
three month period ending with such month shall
not be less than $350,000.
(iv) MAXIMUM CAPITAL EXPENDITURE. The
Borrowers shall not permit their Capital
Expenditures to exceed $750,000 during the year
ending December 31, 1997, and $500,000 for any
subsequent fiscal year."
3
<PAGE>
7. CHANGES OF NAME, MERGERS, ETC. None of the Borrowers shall merge
with or into any Person, including any of the Borrowers, change its name or
change its principal place of business without giving the bank at least 15
days prior written notice thereof, and executing and delivering to the bank
such Uniform Commercial Code Financing Statements, Landlord's Waivers and any
other documents the Bank may reasonably request in order to more fully
evidence and document the Bank's continuing security interest in the
Collateral of any such Borrower, after giving effect to any such name change,
merger or other transaction.
8. CLOSING FEE. Simultaneous with the execution and delivery of this
Amendment, the Borrowers will pay to the Bank a Closing Fee of $30,000.
9. REPRESENTATIONS AND WARRANTIES. Each of the Borrowers jointly and
severally represents and warrants to the Bank as follows:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
contained in Section 4 of the Credit Agreement and in each Instrument of
Adherence (Credit Agreement) executed and delivered by one or more of the
Borrowers to the Bank (the "Instrument of Adherence"), were true and correct
in all material respects when made. Except to the extent that such
representations and warranties expressly relate to a specific date or were
based on facts which have changed in the ordinary course of business, which
changes either singly or in the aggregate, have not been materially adverse,
the representations and warranties contained in Section 4 of the Credit
Agreement and the Instruments of Adherence, after giving effect to this
Amendment, are true and correct on the date hereof.
(b) ENFORCEABILITY. The execution and delivery by each of the
Borrowers of this Amendment, and the performance by each of the Borrowers of
the Amendment and the Credit Agreement, as amended hereby, are within the
corporate authority of such Person and have been duly authorized by all
necessary corporate proceedings. This Amendment and the Credit Agreement, as
amended hereby, are valid and legally binding obligations of each of the
Borrowers, enforceable in accordance with their terms, except as limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating
to the enforcement of creditors' rights in general.
(c) NO DEFAULT. Except as set forth in the Compliance Certificate
attached hereto, no Default or Event of Default has occurred and is
continuing, and no Default or Event of Default will exist after the execution
and delivery of this Amendment.
(d) OTHER AGREEMENT. The execution and delivery by each of the
Borrowers of this Amendment, and the performance by each of the Borrowers of
this Amendment and the Credit Agreement, as amended hereby, will not conflict
with, or result in a breach of any term, condition or provision of, or
constitute a default under, such Borrower's charter or by-laws as presently
in effect or any other agreement, trust, deed, indenture, mortgage or other
instrument to which such Person is a party or by which such Person or any of
the property of such Person is bound or affected.
4
<PAGE>
10. AFFIRMATION OF THE BORROWERS. Each of the Borrowers hereby affirms
its absolute and unconditional, joint and several promise to pay to the Bank
the Loans and all other amounts due under the Credit Agreement on the
Maturity Date provided in the Credit Agreement, as amended hereby.
11. WAIVER OF DEFAULT. The Bank waives any and all Events of Default
under the Agreement which have occurred for any period on or prior to August
31, 1997.
12. EFFECTIVENESS. The effectiveness of this Amendment shall be
conditioned upon receipt by the Bank of this Amendment, executed by each of
the Borrowers and the Bank. Execution of this Amendment by the Bank does not
constitute a waiver by the Bank of any defaults, notices of default or rights
of the Bank under the Credit Agreement, as amended hereby, all of which are
unaffected hereby and remain in full force and effect.
13. MISCELLANEOUS PROVISIONS.
(a) Except as otherwise expressly provided by this Amendment, all of
the terms, conditions and provisions of the Credit Agreement shall remain the
same. It is declared and agreed by each of the parties hereto that the
Credit Agreement, as amended hereby, is and shall continue in full force and
effect, and that this Amendment and such Credit Agreement shall be read and
construed as one instrument.
(b) This Amendment is intended to take effect as an agreement under
seal and shall be construed according to and governed by the laws of the
Commonwealth of Massachusetts.
(c) This Amendment may be executed in any number of counterparts, but
all such counterparts shall together constitute but one instrument. In making
proof of this Amendment it shall not be necessary to produce or account for
more than one counterpart signed by each party hereto by and against which
enforcement is sought.
(d) Each of the Borrowers hereby jointly and severally agrees to pay to
the Bank, on demand by the Bank, all reasonable out-of-pocket costs and
expenses incurred or sustained by the Bank in connection with the preparation
of this Amendment and the documents referred to herein (including reasonable
legal fees).
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment as a
sealed instrument as of the date first above written.
ELTRAX SYSTEMS, INC.
By: /s/ Nicholas J. Pyett
----------------------------
Nicholas J. Pyett
Its: Treasurer
NORDATA, INC. (D/B/A DATATECH)
By: /s/ Nicholas J. Pyett
-----------------------------
Nicholas J. Pyett
Its: Treasurer
ATLANTIC NETWORK SYSTEMS, INC.
By: /s/ Nicholas J. Pyett
-----------------------------
Nicholas J. Pyett
Its: Treasurer
EJG TECHLINE INCORPORATED
By: /s/ Nicholas J. Pyett
-----------------------------
Nicholas J. Pyett
Its: Treasurer
FOUR CORNERS TECHNOLOGY, INC.
By: /s/ Nicholas J. Pyett
-----------------------------
Nicholas J.Pyett
Its: Treasurer
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HI-TECH CONNECTIONS, INC.
By: /s/ Nicholas J. Pyett
-----------------------------
Nicholas J. Pyett
Its: Treasurer
STATE STREET BANK AND TRUST COMPANY
By: /s/ Frederic Epstein
-----------------------------
Frederic Epstein
Its: Vice President
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SUBLEASE AGREEMENT
FOR COMMERCIAL SPACE IN
BURGOE REALTY CO., INC.
BERN TOWNSHIP FACILITY
THIS SUBLEASE AGREEMENT (hereinafter referred to as "Lease") made this 15th
day of September, 1996, by and between BURGOE/WYOMISSING PARTNERS (hereinafter
referred to as "Landlord"), a Pennsylvania corporation having its principal
place of business at 506 Morgantown Road, Reading, Berks County, Pennsylvania
19611 and Hi-Tech Connections, Inc., hereinafter referred to as "Tenant"), a
Pennsylvania business corporation having its principal place of business at the
Reading Regional Airport Industrial Park, RD #9, Box 9394, Reading,
PA 19605-9651.
WITNESSETH:
WHEREAS, Landlord has agreed to lease a portion of the Total Premises to
Tenant upon the terms and conditions hereinafter set forth; and,
WHEREAS, Landlord and Tenant now seek to perpetuate, in writing, their
present understandings and agreements.
NOW, THEREFORE, INTENDING TO BE LEGALLY BOUND HEREBY, and in
consideration of the mutual covenants contained herein, Landlord and Tenant
hereby agree as follows:
1. LEASED PREMISES. Landlord hereby leases to Tenant twenty thousand
(20,000) square feet of floor space located in an industrial/commercial
facility constructed on the Total Premises (hereinafter referred to as the
"Leased Premises"). A description of the Leased Premises is attached hereto
and made a part hereof as Exhibit "A".
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2. TERM. The term of this Lease shall be for one year commencing on
January 1, 1997 and ending on December 31, 1997. If the Commencement Date is
the first day of the month, the term of this Lease shall expire at midnight
of the day which precedes the first (1st) anniversary of the Commencement
Date. If the Commencement Date is not the first day of the month, the term
of this lease shall expire at midnight on the last day of the calendar month
in which the first (1st) anniversary of the Commencement Date occurs; rent
from the Commencement Date through the last day of the month in which the
Commencement Date occurs shall be apportioned at the annual rate based on a
three hundred sixty (360) day year.
3. OCCUPANCY OF PREMISES: Premises shall be conclusively deemed ready
for Tenant's occupancy January 1, 1997.
4. RENT. Tenant agrees to pay to Landlord, without deduction or
offset, a total minimum rental of Eighty Thousand and 00/100 Dollars
($80,000) during the term of this Lease payable in monthly installments of
Six Thousand Six Hundred Sixty-Six Dollars and Sixty-Seven Cents ($6,666.67),
in advance, on the first day of each month during the term of this Lease.
minimum rent is based upon a charge of Four Dollars ($4.00) per square foot
per year. Upon the execution of this Agreement, the sum of Six Thousand Six
Hundred Sixty-Six Dollars and Sixty-Seven Cents ($6,666.67) has been paid by
the Tenant to the Landlord, receipt of which is hereby acknowledged as rent
for the first month of the Lease. All rentals due under this Lease shall be
payable by Tenant and mailed to the Landlord, c/o 506 Morgantown Road,
Reading, Pennsylvania 19611.
In addition, Tenant agrees to pay as additional rent, upon notice and
demand, any increase in the insurance premium upon the buildings and property
of which the Lease Premises are a part due to an increase in the cost of
insurance in excess of the cost on said buildings and
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property as was in effect as of the inception of this Lease, providing such
insurance acknowledges a public warehousing use of the Lease Premises by
Tenant, if said increase is caused by the occupancy of the Leased Premises by
the Tenant or by any act of neglect of the Tenant. Landlord agrees to
provide the Tenant with a statement from the insurance carrier showing what
portion of any increase is attributable to such occupancy by the Tenant or to
any such act of neglect of the Tenant.
During each year of the Lease, Tenant shall pay to Landlord as
additional rent the pro rata portion (such portion determined by computing
the relationship of the total amount of square feet rented hereunder as
compared to the total square feet contained in the Total Premises) of all
real estate taxes or contributions made in lieu of taxes which have been
assessed against the property during each twelve (12) month period of the
within Lease.
All charges for additional rent as provided hereunder shall be made when
levied or invoiced to the Landlord and payment therefore shall be made by
Tenant within fifteen (15) days of Landlord' s written demand to Tenant. An
itemized statement will be provided by Landlord, if requested by Tenant,
substantiating all additional rent due, but the request shall not delay
payment beyond the 15 day payment period.
5. USE OF PREMISES. The Leased Premises shall be used and occupied
only for the purpose of office, warehouse, and storage and for the
fabrication and manufacture of product and no other purpose or purposes
without Landlord's prior written consent. Tenant shall, at its own risk and
expense, obtain all governmental licenses and permits necessary for such use.
6. ACCEPTANCE OF PREMISES. Upon delivery of occupancy to Tenant,
Tenant acknowledges that it will have fully inspected and accepts the Leased
Premises in their condition
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"as is", and that the same are suitable for the use specified in the
immediately preceding paragraph.
7. QUIET ENJOYMENT. Landlord covenants, warrants, and represents that
it has full right and power to execute this Lease and to grant the estate
demised herein and that Tenant, upon payment of the rents herein reserved,
and performing the terms, conditions, and covenants herein contained, shall
peaceably and quietly have, hold, and enjoy the Leased Premises during the
full term of this Lease, and any extension hereof.
8. SUBORDINATION. Tenant accepts this Lease subject and subordinate
to the present state of title of the Leased Premises and to any recorded
mortgage, deed of trust or any other lien presently existing upon the Leased
Premises and to any renewal, extension or modification thereof. Tenant
agrees upon demand to execute such instruments subordinating this Lease to
any future mortgage, deed of trust or other security instrument as may be
required, provided such further subordination shall be upon the express
condition that the Lease shall be recognized by the mortgagee and that the
rights of Tenant shall remain in full force and effect during the term of
this Lease, so long as Tenant shall continue to perform all of the covenants
hereof.
9. UTILITIES. Tenant shall pay the cost of all utility services
including a pro rata portion of water and sewer, all heat, electric service
or telephone service and all other services used in the Leased Premises.
Landlord reserves the right to install separate meters at Tenant's expense
for any public utilities servicing the Leased Premises for which a meter is
not presently installed, and in which event, Tenant shall make payments when
due directly to the utility involved. Landlord shall not be required to pay
for any service, supplies or upkeep in connection with the utilities to the
Leased Premises.
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10. MAINTENANCE BY LANDLORD. Landlord shall at its expense maintain
only the roof, foundation, and the structural soundness of the exterior walls
(excluding all windows, window glass, plate glass and all doors) of the
building of which the Leased Premises is a part, in good repair and
condition, except reasonable wear and tear; provided, however, that Tenant
shall repair and pay for any damage caused by Tenant's negligence or default
hereunder. Tenant shall immediately give written notice to Landlord of the
need for repairs and Landlord shall proceed promptly to make such repairs
after having had reasonable opportunity. Landlord shall be responsible for
all exterior maintenance to the Total Premises including snow plowing.
11. MAINTENANCE BY TENANT. Tenant shall, at its own risk and expense,
maintain all other parts of the Leased Premises, including all windows, glass
and doors, in good and sanitary order, condition and repair, normal wear and
tear excepted. Tenant shall, at its own expense, keep and maintain all
utilities, fixtures, and mechanical equipment, including equipment installed
by Landlord, located in or on the Leased premises. At the termination of
this Lease, Tenant shall deliver up the Leased Premises broom clean and in
the same good order and condition as existed at the beginning date of this
Lease, ordinary wear and tear and damage by fire or other casualty excepted.
Tenant shall not store any trash, merchandise, crates, pallets or materials
of any kind outside the Leased Premises and shall not burn trash or other
substances on the Leased Premises. All trash shall be kept in metal
containers (with metal tops) which must be kept painted, the design and
location of which shall be approved by Landlord.
12. ALTERATIONS, CHANGES, AND IMPROVEMENTS. Tenant shall be
responsible for all interior fix up costs including heating, air
conditioning, plumbing and electrical work, all of which must be approved and
consented to by Landlord. Tenant acknowledges and understands that the Leased
Premises is the square footage provided for herein
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and is computed based on a measurement to the center line dimensions between
demising walls. Tenant shall not, without obtaining the prior written
consent of the Landlord, make or permit any alterations, additions or
improvements which shall, on an annual basis amount, in the aggregate, to
more than Five Thousand and 00/100 Dollars ($5,000.00). Consent for minor
alterations, additions or improvements in excess of the above-described
limits, will not be unreasonably withheld by Landlord. Tenant shall have the
right, at all times, to install Tenant's shelves, bins, machinery, air
conditioning or heating equipment and trade fixtures (hereinafter
collectively called "Tenant's Trade Fixtures"), provided Tenant complies with
all applicable governmental laws, ordinances and regulations and further
provided that such installations by Tenant shall not overload, damage or
deface the Leased Premises. Providing Tenant is not in default of any of the
terms, conditions or covenants of this Lease, Tenant shall have the right to
remove, at the termination of this Lease, any of Tenant's Trade Fixtures so
installed, including any extra air conditioning and heating equipment
installed and paid for by Tenant, if any (as specifically differentiated from
any such equipment owned or installed by Landlord), and provided, further,
that Tenant shall immediately repair any damage caused by such removal and
leave the Leased Premises in a broom clean and orderly condition. All such
work shall be done at such times and in such manner as shall minimize any
inconvenience to other occupants of the building of which the Leased Premises
is a part. All alterations, additions and improvements made by Tenant (other
than installation of Tenant Is Trade Fixtures) shall become the property of
Landlord upon the termination of this Lease or Landlord may require Tenant to
remove such alterations, additions and improvements and any other property
placed in or on the Leased Premises by Tenant and restore the Leased Premises
to its original condition. Tenant shall, at all times, keep the Leased
Premises and property in which the Leased Premises are situated free from any
liens arising out of any work performed, material furnished or obligations
incurred by Tenant.
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13. COMPLIANCE WITH LAW, WASTE, AND QUIET CONDUCT. Tenant shall comply
with all governmental laws, ordinances, and regulations applicable to the use
of the Leased Premises and shall promptly comply with all governmental orders
and directives for the correction, prevention and abatement of nuisances in,
upon, or connected with the Leased Premises, all at Tenant's sole risk and
expense. Tenant shall not commit, or suffer to be committed, any waste upon
the Leased Premises or any nuisance, other act, or thing which may disturb
the quiet enjoyment of any other tenant in the building in which the Leased
Premises may be located.
14. ASSIGNMENT AND SUBLEASING. Tenant may not assign this Lease or any
interest herein or sublet the whole or any part of the Leased Premises
without Landlord's prior written consent in each instance, which consent
shall not be unreasonably withheld. If Landlord should consent to any such
sublease or assignment, Tenant shall nevertheless remain the principal
obligor to Landlord under all the terms, conditions, covenants, and
obligations of this Lease and, the acceptance of an assignment or subletting
of the Leased Premises by an assignee or subtenant shall be construed as a
promise on the part of such assignee or subtenant to be bound by and to
perform all of the terms, conditions, and covenants by which Tenant herein is
bound. No such assignment or subletting shall be construed to constitute a
novation or a release of any claim Landlord may then or thereafter have
against Tenant hereunder. Tenant shall furnish Landlord with a fully
executed copy of any such assignment or sublease at the time such instrument
is executed. Any transfer of this Lease by or from Tenant by liquidation
shall constitute an assignment for the purposes of this Lease.
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15. TAXES.
(a) Tenant shall pay before delinquency any and all taxes,
assessments, license fees, and public charges levied, assessed or imposed
and which become payable during the lease term upon Tenant's fixtures,
furniture, appliances, and personal property installed or located in the
Leased Premises.
(b) Landlord agrees to pay before they become delinquent all real
estate taxes and special assessments as lawfully levied or assessed against
the Leased Premises; provided, however, Landlord may contest and dispute
the same and in such case the disputed item need not be paid until finally
adjudged to be valid.
16. SIGNAGE. Any and all exterior signs or means of identification must
be approved by Landlord.
17. FIRE AND CASUALTY DAMAGE. In the event the Leased Premises or the
building in which the Leased Premises are located are damaged or destroyed by
fire or other casualty, Tenant shall give immediate written notice thereof to
Landlord. The rights and obligations or Landlord and Tenant in the event of
such casualty shall be as follows;
(a) TOTAL DESTRUCTION. In the event the Leased Premises are totally
destroyed by fire or other casualty or, in the sole judgment of Landlord,
should be so damaged that the rebuilding or repairs cannot reasonably be
completed within one hundred twenty (120) working days after the date of
written notification by Tenant to Landlord of the happening of the damage,
this Lease shall terminate and the rent shall be abated for the unexpired
portion of the Lease, effective as of the date of such damage.
(b) PARTIAL DESTRUCTION. If the Leased Premises or the building in
which the Leased Premises are located should be damaged by fire or other
casualty, such that:
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(i) in the sole judgment of Landlord, rebuilding or repairs
cannot be reasonably expected to be completed within sixty (60)
working days from the date of written notification by Tenant to
Landlord of the happening of the damage, or
(ii) the said damages cannot be repaired by the expenditure of
forty percent (40%) of the full insurable value of the building in
which the Leased Premises are located immediately prior to the
casualty but the damages are not such as to amount to a total
destruction, as described herein in paragraph 17(a);
then and in that event, this Lease shall not terminate and Landlord shall
proceed with reasonable diligence to rebuild or repair the building and
Leased Premises to substantially the condition in which they existed prior
to such damage. In such event, if such damage was not caused or
contributed to by act of negligence of Tenant, its agents, employees,
invitees or those for whom Tenant is responsible, rent payable hereunder
during the period in which the Leased Premises are untenantable shall be
adjusted to such extent as may be fair and reasonable under all
circumstances.
If these Leased Premises or the building in which the Leased Premises
are located should be damaged by fire or other casualty such that in the
sole judgment of Landlord, rebuilding, or repair can be reasonably expected
to be completed within sixty (60) working days from the date of written
notification by Tenant to Landlord of the happening of the damage and if
the Leased Premises or the building in which the Leased Premises are
located are not so damaged as to require a reasonably estimated expenditure
of more than ten percent (10%) of the full insurable value of the building
in which the Leased Premises are located immediately prior to the casualty,
then rental hereunder shall not abate, but Landlord shall proceed to repair
and rebuild than buildings and Leased Premises, and use its best efforts to
repair the same within sixty (60) days from the date of written
notification by Tenant to Landlord of the happening of the damage.
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18. CONDEMNATION. In the event the Leased Premises shall be totally or
partially condemned or taken, then, effective as of the date of vesting of
title, the rent hereunder for such part shall be equitably apportioned and
this Lease shall continue as to such part not so taken. In the event that
only a part of the building shall be so condemned or taken, then (1) if
substantial structural alteration or reconstruction of the building shall, in
the sole opinion of Landlord, be necessary or appropriate as a result of such
condemnation or taking (whether or not the Leased Premises be affected),
Landlord may, at its option, terminate this Lease and the term and estate
hereby granted as of the date of such vesting of title by notifying Tenant in
writing of such termination within sixty (60) days following the date on
which Landlord shall have received notice of vesting title, or (2) if
Landlord does not elect to terminate this Lease, as aforesaid, this Lease
shall be and remain unaffected by such condemnation or taking, except that
the rent shall be apportioned to the extent, if any, hereinbefore provided.
In the event that only a part of the Leased Premises shall be so condemned or
taken and this Lease and the term and estate hereby granted are not
terminated as hereinbefore provided, Landlord will, at its expense, restore
with reasonable diligence the remaining structural portions of the Leased
Premises as nearly as practicable to the same condition as it was in prior to
such condemnation or taking.
In the event of termination in any of the cases hereinabove provided,
this Lease and the term and estate hereby granted shall expire as of the date
of such termination with the same effect as if that were the date
hereinbefore set for the expiration of the term of this Lease, and the rent
hereunder shall be apportioned as of such date.
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In the event of any condemnation or taking hereinabove mentioned of all
or part of the Leased Premises, Landlord shall be entitled to receive the
entire award in the condemnation proceeding, including any award made for the
value of the estate vested by this Lease in Tenant, and Tenant hereby
expressly assigns to Landlord any and all right, title, and interest of
Tenant now or hereafter arising in or to any part thereof, and Tenant shall
be entitled to receive no part of such award; provided, however, Tenant shall
have the right, at its sole cost and expense, to assert a separate claim in
any condemnation proceeding for Tenant's Trade Fixtures.
19. ABANDONMENT. Tenant shall not abandon the Leased Premises at any
time during the term of this Lease; and if Tenant shall abandon or surrender
the Leased Premises, or be dispossessed by process of law or otherwise, any
personal property belonging to Tenant left on the Leased Premises shall, at
the option of the Landlord, be deemed abandoned.
20. INDEMNIFICATION BY TENANT. Except for the fault, failure, negligent
or intentional acts of the Landlord, its agents, employees or visitors, Tenant
will protect, indemnify and save harmless Landlord from and against all
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses (including without limitation, reasonable attorneys' fees and
expenses) imposed upon or incurred by or asserted against Landlord by reason of
(a) any accident, injury to or death of persons (including workmen) or loss of
or damage to property occurring on or about the Leased Premises or any part
thereof or the adjoining sidewalks, curbs, vaults and vault space, if any,
streets or ways, (b) any use, nonuse or condition of the Leased Premises or any
part thereof or the adjoining sidewalks, curbs, vaults or vault space, if any,
streets or ways, (c) any failure on the part of Tenant to perform or comply with
any of the terms of this Lease, (d) performance of any labor or services or the
furnishing of any materials or other property in respect of the Leased Premises
or any part thereof, or (e) any loss
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or damage (consequential or otherwise) sustained by Landlord arising out of
any labor dispute involving Tenant and which affects Landlord's use of the
Total Premises. In case any action, suit or proceeding is brought against
Landlord by reason of any such occurrence, Tenant, upon Landlord's request,
will at Tenant's expense resist and defend such action, suit or proceeding,
or cause the same to be resisted and defended by counsel designated by the
insurer whose policy covers such occurrence or by counsel designated by
Tenant and approved by Landlord. The obligations of Tenant under this
paragraph arising by reason of any such occurrence having taken place during
the term of this Lease shall survive any termination of this Lease.
21. LIABILITY INSURANCE. Tenant, at its own expense, shall provide and
keep in force with companies acceptable to Landlord public liability
insurance for the benefit of Landlord and Tenant against liability for bodily
injury and property damage in the amount of not less than One Million and
00/100 Dollars ($1,000,000.00) in respect to injuries to or death of one or
more persons in any one occurrence. Tenant shall furnish Landlord with a
certificate of such policy and whenever required shall satisfy Landlord that
such policy is in full force and effect. Such policy shall be primary and
noncontributing with insurance carried by Landlord. Any such policy shall
name as insureds Landlord, Meridian Bank, and the Berks County Industrial
Development Authority as their interests may appear, Tenant and any mortgagee
of the Leased Premises and shall provide for at least ten (10) days notice to
all named insureds before cancellation. Tenant shall be responsible for all
damage to goods, contents and merchandise stored in the Leased Premises and
any loss or damage thereto, regardless of cause, and it is Tenant's
obligation to obtain appropriate insurance coverage thereon.
22. LANDLORD'S RIGHT OF ENTRY. Landlord and its authorized agents have
the right to enter the Leased Premises during normal working hours for the
following purposes:
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(a) inspecting the general condition and state of repair of the Leased
Premises; (b) making repairs required of Landlord; (c) showing of the Leased
Premises to any prospective tenant or purchaser during the final one hundred
twenty (120) day period of the lease term; (d) to show the Leased Premises
for lease if the Tenant shall not have renewed or extended this Lease within
the time herein provided; or (e) to show the building for any other legal or
reasonable purpose. If Tenant shall not have renewed or extended this Lease
prior to the final one hundred twenty (120) day period of the lease term,
Landlord and its authorized agents shall have the right to erect on or about
the Leased Premises the customary sign advertising the property for lease or
for sale. If Tenant plans to vacate, Landlord shall have the right to erect
"For Lease" or "For Sale" signs on the Leased Premises at any time after
Tenant fails to exercise the renewal option contained herein, if any.
23. NEGATIVE COVENANTS. In order to induce Landlord to execute this
Lease, Tenant covenants and warrants to Landlord that during the term of this
Lease, Tenant shall not:
(a) Fail to pay the rent, additional rent and all other sums owing
pursuant to this Lease on the days and times and at the places at which the
same are payable or make any abatement, deduction or setoff against the
same;
(b) Fail to make full and timely performance of all other duties and
obligations arising under this Lease or arising under any other agreement,
contract, instrument or other documentation between Tenant and Landlord,
whether executed prior to, concurrent with or subsequent to the execution
of this Lease;
(c) Occupy the Leased Premises in any manner or for any purpose
except as permitted in this Lease;
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(d) Assign, mortgage, or pledge this Lease or underlet of sublease
the Leased Premises, or any portion thereof, or permit any other person or
other entity to occupy or use the Leased Premises, or any part thereof,
without the prior written consent of Landlord which consent shall not be
unreasonably withheld;
(e) Make any alterations, additions or improvements to the Leased
Premises except as permitted in this Lease.
(f) Place any weights and any portion of the Leased Premises beyond
the safe carrying capacity of said structure or use any machinery or
equipment which will cause structural damage to the Leased Premises or
deterioration of the floors thereof; and
(g) Do or suffer to be done any act, matter or thing objectionable to
insurance companies or in violation of the provisions of any insurance
policies provided for in this Lease or whereby the said insurance or any
other insurance now in force or hereinafter to be placed on the Total
Premises or in the Leased Premises shall become void or suspended, or
whereby the same shall be rated as a more hazardous risk than at the
execution thereof or at the time Tenant takes possession of the Leased
Premises.
(h) Remove, attempt to remove or manifest, in the reasonable opinion
of Landlord, an intention to remove any goods or property from or out of
the Leased Premises other than in the ordinary course of business, without
having first paid to Landlord all rent, additional rent, and any other sums
which may become owing during the term of this Lease or without having
first obtained the prior written consent of Landlord to such removal, which
consent shall not be unreasonably withheld;
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(i) Vacate or desert the Leased Premises during the term of this
Lease or permit the same to be empty or unoccupied without having first
obtained the prior written consent of Landlord, which consent shall not be
unreasonably withheld;
(j) Permit any order, noise, sound or vibration which may, in
Landlord's reasonable judgment, in any way tend to impair the use of any
part of the Total Premises or Leased Premises or interfere with the
business or occupancy of any other lessee of Landlord, or make or permit
any disturbance of any kind in the Leased Premises, or interfere in any way
with other lessees of Landlord or those having business in the Leased
Premises or allow any occupant of the Leased Premises to conduct himself in
a manner which Landlord in its sole opinion may reasonably deem improper or
objectionable;
(k) Obstruct any portion of the Total Premises used in common with
Landlord, any other lessees of Landlord or the agents, servants, employees,
or invitees of Landlord or any other lessee of Landlord or use the same for
any purpose other than egress and ingress to and from the Leased Premises
or use the same as a waiting room or lounging place for Tenant or its
agents, servants, employees or invitees;
(l) Place or allow to be placed any items on the outside of the
Leased Premises, on the windows, windowsills or projections thereof, that
could be visible from outside the Leased Premises;
(m) Bring in or remove from the Leased Premises any heavy or bulky
object except by experienced movers or riggers approved in writing by
Landlord which approval will not be unreasonably withheld, and only after
notice to and approval by Landlord of the weight and size of the object and
of the time, method and manner of bringing in or removing the same,
notwithstanding the foregoing, nothing herein contained shall be
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deemed to constitute any limitation upon Tenant in the normal conduct of
its public warehousing operations and the loading and unloading of
materials pursuantto such warehousing operations as more fully set
forth herein;
(n) Use or allow to be used on the Leased Premises any article or
substance having an offensive odor, including but not limited to, ether,
naphtha, phosphorus, benzol, gasoline, benzine, petroleum, or any product
thereof, crude or refined, earth or coal oils, flashlight powder, or other
explosives, kerosene, camphene, burning fluid or other dangerous, explosive
or rapidly burning matter or material of any nature whatsoever,
notwithstanding the foregoing, nothing herein contained shall be deemed to
prohibit the use by Tenant of normal cleaning materials;
(o) Use electricity in the Leased Premises in excess of the capacity
of any of the electrical conductors or equipment in or otherwise serving
the Leased Premises, or add to or alter the electrical system servicing the
Leased Premises or connect thereto any additional fixtures, appliances or
equipment without the prior written consent of Landlord, which consent
shall not unreasonably be withheld;
(p) Use or occupy the Leased premises or permit or suffer the same to
be used or occupied in violation of the use, regulation permit or statement
of occupancy, if any, issued for said Leased Premises or in violation of
any order, regulation or requirement of any federal, state, or local
authority, and the use permitted in this Lease shall not be deemed a
representation or guarantee by Landlord that such use is lawful or
permitted under any permit or statement or occupancy, or otherwise;
(q) Execute and deliver any financing or security agreement or
statement that would be a lien upon the Total Premises or Leased Premises;
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(r) Erect, make or maintain on or affixed to any part of the Total
Premises or Leased Premises including but not limited to any windows and
doors therein, any sign, picture, television viewer or projection, or other
representation or advertisement or notice of any kind, which is visible
from any location outside of the Leased Premises and no loudspeaker system
or any other form or sound or audio transmission system or apparatus shall
be used in or at the Total Premises or Leased Premises by Tenant or its
employees, servants, agents, or invitees for advertisement, promotional
purposes, or any other purpose without the prior written consent of
Landlord, which consent shall not be unreasonably withheld;
(s) Allow anything to be done that may impair the value of the Total
Premises or Leased Premises;
(t) Liquidate or dissolve itself.
24. DEFAULT BY TENANT. The following events shall be deemed to be events
of default by Tenant under this Lease:
(a) Tenant's failure to pay any installment of the rent on the date
the same is due if such failure shall continue for a period of ten (10)
calendar days after written notice thereof to Tenant.
(b) Tenant's failure to comply with any term, provision, or covenant
of this Lease, other than the payment of rent, if such failure shall
continue for more than thirty (30) days after due written notice thereof to
Tenant or if such failure cannot reasonably be cured within the said thirty
(30) days and Tenant shall not have commenced to cure such failure within
such thirty (30) day period or shall not thereafter with reasonable
diligence and good faith proceed to cure such failure.
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(c) Tenant shall become insolvent, or shall make a transfer in fraud
of creditors, or shall make an assignment for the benefit of creditors.
(d) Tenant shall file a petition under any section or chapter of the
National Bankruptcy Act, as amended, or under any similar law or statute of
the United States or any State thereof; or Tenant shall be adjudged
bankrupt or insolvent in proceedings filed against Tenant thereunder.
(e) A receiver or trustee shall be appointed for all or substantially
all of the assets of Tenant.
(f) Tenant shall do or permit to be done anything which creates a
lien upon the Leased Premises, provided said lien has not been satisfied,
removed, or bonded after a period of ten (10) days.
(g) Upon the occurrence of any of such events of default, Landlord
shall have the right, at Landlord's election to pursue, in addition to and
cumulative of any other rights Landlord may have, at law or in equity, any
one or more of the following remedies without any notice or demand
whatsoever:
(1) Terminate this Lease, in which event Tenant shall
immediately surrender the Leased Premises to Landlord, and if Tenant
fails to do so, Landlord may, without prejudice to any other remedy
which it may have for possession or arrearages in rent, enter upon and
take possession of the Leased Premises and expel or remove Tenant and
any other person who may be occupying said Leased. Premises or any
part thereof, without being liable for prosecution or any claim or
damages therefor unless such damage is caused by the negligence of
Landlord, its agents or employees, and Tenant agrees to pay to
Landlord, its agents or
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employees, and Tenant agrees to pay to Landlord on demand the amount
of all loss and damage, which Landlord may suffer by reason of such
termination, whether through inability to relet the Leased Premises
on satisfactory terms or otherwise.
(2) Enter upon and take possession of the Leased Premises and
expel or remove Tenant and any other person who may be occupying the
Leased Premises or any part thereof, without being liable for
prosecution or any claim for damages therefor unless such damage is
caused by the negligence of Landlord, its agents or employees, and
relet the Leased Premises and receive the rent therefor; and Tenant
agrees to pay to Landlord on demand any deficiency that may arise by
reason of such reletting.
(3) Enter upon the Leased Premises without being liable for
persecution or any claim for damages therefor unless such damage is
caused by the negligence of Landlord, its agents or employees, and do
whatever Tenant is obligated to do under the terms of this Lease, and
Tenant agrees to reimburse Landlord on demand for any expenses which
Landlord may incur in thus effecting compliance with Tenant's
obligations under this Lease and Tenant further agrees that Landlord
shall not be liable for any damages resulting to the Tenant from such
action, unless caused by the negligence of Landlord.
(4) Tenant hereby waives the usual notice to quit and agrees to
surrender said Leased Premises at the expiration of said term or the
termination of this Lease without any notice whatsoever.
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Pursuit of any of the foregoing remedies shall not preclude pursuit of
any of the other remedies herein provided or any other remedies provided by
law, nor shall pursuit of any remedy herein provided constitute a forfeiture
or waiver of any rent due to Landlord hereunder or of any damages accruing to
Landlord by reason of the violation of any of the terms, provisions, and
covenants herein contained. Failure by Landlord to enforce one or more of
the remedies herein provided, upon any event of default shall not be deemed
or construed to constitute a waiver of such default or of any other
violations or breach of any of the terms, provisions, and covenants herein
contained. In determining the amount of loss or damage which Landlord may
suffer by reason of termination of this Lease or the deficiency arising by
reason of the reletting by Landlord, as above provided, allowance shall be
made for the expense of repossession and any repairs or remodeling undertaken
by Landlord following repossession, and for any leasing commissions incurred
by Landlord.
25. SURRENDER OF LEASE NOT MERGER. The voluntary or other surrender of
this Lease by Tenant, or a mutual cancellation thereof, shall not work a
merger and shall, at the option of Landlord, terminate all or any existing
subleases, and/or subtenancies, or may, at the option of Landlord, operate as
an assignment to it of any or all of such subleases or subtenancies.
26. ATTORNEYS' FEES. In the event that either party to this Lease
brings suit against the other party to enforce the terms of this Lease, the
party that prevails shall be reimbursed by the other party for reasonable
court costs and attorneys' fees incurred and paid by the party that prevails,
which shall be deemed to have accrued on the commencement of such action and
shall be enforceable whether or not such action is prosecuted to judgment.
27. NOTICES. All notices, statements, demands, requests, consents,
approvals, authorizations, offers, agreements, appointments, or designations
under this Lease by either party
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<PAGE>
to the other shall be in writing and shall be sufficiently given and served
upon the other party if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed as follows:
To Tenant, RD #9, Box 9394, Reading, PA 19605, or at such other
address as Tenant shall notify Landlord in writing.
To Landlord, Burgoe Wyomissing Partners, 506 Morgantown Road, Reading,
PA 19611, or to such other place as Landlord may from time to time
designate by notice to Tenant.
28. WAIVER. The waiver by Landlord of any breach of any term, covenant,
or condition herein contained shall not be deemed to be a waiver of such term,
covenant, or condition for any subsequent breach of the same or any other term,
covenant, or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant, or condition of this Lease other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
29. MISCELLANEOUS PROVISIONS.
(a) Whenever the singular number is used in this Lease and when
required by the context, the same shall include the plural, and the
masculine gender shall include the feminine and neuter genders, and the
word "person" shall include corporation, firm, or association. If there
shall be more than one (1) Tenant, the obligations imposed under this Lease
upon Tenant shall be joint and several.
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(b) The marginal headings or titles of the paragraphs of this Lease
are not a part of this Lease and shall have no effect upon the construction
or interpretation of any part of this Lease.
(c) This instrument contains all of the agreements and conditions
made between the parties to this Lease and may not be modified orally or in
any other manner than by an agreement in writing signed by all the parties
to this Lease or their respective successors in interest.
(d) Time is of the essence of each term and provision of this Lease.
(e) Except as otherwise expressly stated, each payment required to be
made by Tenant shall be in addition to and not in substitution for other
payments to be made by. Tenant.
(f) Subject to Paragraph 14, the terms and provisions of this Lease
shall be binding upon and inure to the benefit of the successors and
assigns of Landlord and Tenant.
30. RENEWAL OPTION. In the event the Tenant has performed all of the
terms, covenants, and conditions of this Lease which are required of it, then
and in that event, the Tenant is granted an option to extend this Lease for
two additional terms of one (1) year beginning immediately upon the
expiration of the initial term as defined herein. The option provided for
above shall be exercised by the Tenant notifying the Landlord in writing by
certified or registered mail at least six (6) months before the expiration of
the original term of this Lease of its intention to exercise such option. If
the option is not exercised as herein provided for, then the option shall be
deemed waived and the Lease shall terminate accordingly. If said option is
exercised, all of the terms, conditions, and covenants of this Lease
including provisions for
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additional rental charges shall prevail and be binding upon the parties for
the extended period except that the annual minimum rental for the extension
period shall be established as set forth hereafter. The annual minimum
rental for the extension period shall be computed by using Four Dollars
($4.00) per square foot per year as the base rate and adding thereto the
amount resulting from a percentage increase of that figure equal to the
percentage increase in the consumer price index for all cities from the base
year through the expiration point with a cap on such increase of five percent
(5%) per year. For the purposes of computing the consumer price index,
January 1, 1996 shall be considered as the base month and year. In addition,
the rate would be adjusted on a pro-rata basis based upon the total square
foot of the Total Premises for any increase in land rental charges levied by
the ultimate owner of the real estate of Reading Regional Airport Authority,
all of which are passed on to the Landlord named herein. Both parties
understand that such land rental rate increases do not occur until 1998 as
the land rental cost levied by Reading Regional Airport Authority remains
fixed until that time.
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have signed and sealed this Lease as of
the day and year first above written.
LANDLORD
BURGOE REALTY CO., INC.
By: /s/ Rick B. Burkey
---------------------------------
President
Attest:
-----------------------------
Secretary
TENANT
------------------------------------
By: /s/ Edward Barrett
---------------------------------
President or Vice President
Attest:
-----------------------------
Secretary or Asst. Secretary
24
<PAGE>
EXHIBIT "A"
ALL THAT CERTAIN tract or parcel of land, being Lot No. 18, as shown on
a Plan off "Reading Municipal Airport Industrial Park", Section No. 1 - Phase
I, recorded in Plan Book Volume 126, Page 22, Berks County Records, together
with improvements including a pre-engineered steel frame structure measuring
100 feet wide by 300 feet long, being situate in the Township of Bern, County
of Berks and Commonwealth of Pennsylvania, and being more fully bounded and
described as follows, to wit:
BEGINNING at a point on the Northern right-of-way line of MacArthur
Road, said point being a corner in common with Lot No. 17 as shown on said
plan of "Reading Municipal Airport Industrial Park"; thence leaving the
Northerly right-of-way line of MacArthur Road extending along said Lot No.
17, North 31 degrees 16 minutes 22 seconds East, a distance of 452.53 feet to
a point in line of lands of Reading Municipal Airport Authority (reserved for
Aeronautical use); thence extending along the same South 58 degrees 43
minutes 38 seconds East, a distance of 311.00 feet to a point, a corner in
common with Lot No. 19 as shown on the aforementioned plan; thence extending
along said Lot No. 19 the two (2) following courses and distances to wit:
(1) South 31 degrees 16 minutes 22 seconds West, a distance of 421.3 feet;
and (2) South 49 degrees 30 minutes 07 seconds West, a distance to a point on
the aforementioned Northerly right-of-way line of MacArthur Road; thence
extending along said right-of-way line the two (2) following courses and
distances to wit:
(1) in a Northwesterly direction along the arc of a curve deflecting to the
left, having a radius of 340.00 feet, a central angle of 18 degrees 13
minutes 45 seconds, a tangent distance of 54.55 feet, and a distance along
the arc of 108.17 feet to a point of tangency; and (2) North 58 degrees 43
minutes 38 seconds West, a distance of 188.74 feet to the place of beginning.
CONTAINING in Area 3.242 acres of land.
BEING PART OF THE SAME PREMISES which The City of Reading, by Deed dated
November 22, 1957, and recorded in Deed Book Volume 1286, Page 60, Berks
County Records, granted and conveyed unto The Reading Municipal Airport
Authority.
<PAGE>
LEASE AGREEMENT
This Agreement is made at Westlake, Ohio, this 1st day of December,
1996, by and between JMG DEVELOPMENT CO., LTD., hereinafter referred to as
the "Lessor", and DATACOMM ASSOCIATES, INC., hereafter referred to as the
"Lessee".
In consideration of the mutual promises and covenants of the Parties
herein contained, the Lessor and Lessee do hereby agree as follows:
1. DESCRIPTION OF LEASED PREMISES
Lessor hereby agrees to lease to the Lessee at the rent and upon all of
the terms and conditions herein contained, a portion of the office space in
the commercial building located at 30701 Lorain Road, North Olmsted, Ohio
44070, consisting of approximately 4800 usable square feet, and identified on
the floor plan attached hereto as Suites 'A' and 'C'.
2. TERM OF LEASE
The term of this lease shall be for a period of one hundred twenty (120)
months, commencing on the 1st day of December, 1996, and ending on the 30th
day of November, 2006.
In the event the Lessee takes possession of the property prior to
n/a, 199_, the Lessee shall pay rent at the rate of $________ per day from
the date of delivery of possession until N/A, 199_.
3. RENT PAYABLE
Lessee agrees to pay the Lessor as and for rent during the term of this
Lease, the sum of EIGHT HUNDRED TWO THOUSAND FOUR HUNDRED SEVENTY-ONE DOLLARS
AND ELEVEN CENTS. ($802,471.11), payable in installments of $5,833.33 per
month with the first month's rent being payable on the date of execution of
this Lease, and subsequent installments on the first day of each month during
the term of this Lease. All rental payments to be paid by the Lessee to the
Lessor pursuant to the terms of this Lease shall be paid to the Lessor at
30701 Lorain Road,. North Olmsted, Ohio 44070, or at such other address as
Lessor may hereafter designate in writing to the Lessee. The term sum
reflects a 3% increase per year, as a minimum and is further accelerated by
using C.P.I. (Consumer Price Index) as a reference.
At the end of the lease, there will be a 5 year option for renewal if
the Lessee and Lessor wants to take advantage of that option.
In the event the monthly rent to be paid by the Lessee to the Lessor is
not received by the Lessor by the 5th day of the month, a late charge of
$100.00, per occurrence shall be paid by the Lessee.
<PAGE>
4. SECURITY DEPOSIT
Lessee further agrees to deposit with the Lessor on the date of
execution hereof, the sum of ($5,834.00), as and for a security deposit, for
the faithful performance by the Lessee of the obligations on the part of the
Lessee to be performed in this Lease and including any damages which may be
done to the leased premises by the Lessee during its occupancy of the
premises under the term of this Lease. SAID SECURITY DEPOSIT SHALL NOT,
UNDER ANY CIRCUMSTANCES, BE APPLIED BY LESSEE AS RENT FOR THE PREMISES AND
SAID DEPOSIT SHALL BE RETURNED TO THE LESSEE WITHIN TEN (10) DAYS OF THE DATE
LESSEE VACATES THE PREMISES, less any amounts deducted for damages done to
the leased premises by Lessee, reasonable wear and tear excepted. Also may
be used at Lessor's option as partial payment for early termination of
contract.
5. USE OF PROPERTY
Lessee shall use and occupy the property for the operation of its
business, including all uses incidental or related thereto and for no other
purpose without the written consent of the Lessor. In its use of the
premises, Lessee shall observe and comply with all laws of the State of Ohio,
ordinances of the City of North Olmsted and any rules and regulations
governing the use of the building promulgated by the Lessor.
6. UTILITIES, REAL ESTATE TAXES AND RUBBISH REMOVAL
Lessee agrees, from and after the date it takes possession of the
property to pay all charges for gas, electric and telephone which shall be
separately metered and billed to the Lessee. The Lessor agrees to pay all
water an sewer charges levied against the building during the term of this
Lease.
In the event during the term of this Lease, real estate taxes are
increased over the amount being levied as of the date of the commencement of
the term of this Lease, Lessee agrees to pay it's portion as a percentage of
space occupied of the amount of any such increase upon presentation of proof
of payment of said taxes by the Lessor.
Lessor agrees to be responsible for the removal of rubbish from the
building premises, provided however, that in the event of accumulation of
rubbish requires Lessor to retain a commercial rubbish removal contractor for
that purpose, Lessee agrees to pay it's portion as a percentage of space
occupied of the monthly charges for said service.
7. ASSIGNMENT AND SUBLETTING
Lessee shall not be permitted to assign this Lease of its obligations
hereunder to any other party without first obtaining the written consent of
the Lessor to such assignment. Lessee shall not be permitted to sublet all
or any portion of the premises for any term without first obtaining the
written consent of the Lessor to such subletting. In the event the Lessor
consents to an assignment and/or subletting, the Lessee shall nevertheless
remain liable to Lessor for all
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rents reserved hereunder and for any damages to the leased premises during
the term of such assignment or subletting for which Lessee is responsible
under the terms of this Lease.
8. REPAIRS AND MAINTENANCE
Lessee, at its sole cost and expense, shall be responsible for al
repairs to, cleaning, and maintenance of the interior of the leased premises
which shall include the walls, ceiling, floor, doors, windows and other
usable space occupied by the Lessee. Lessee shall be responsible for normal
maintenance for the heating, air-conditioning and plumbing systems serving
the leased space. Lessee agrees to pay up to the sum of $2,000.00 per year
for each year during the term of the Lease or any renewal term for any
repairs required to the leased premises, including, not limited to, repairs
necessary for the proper functioning of the plumbing, heating and electrical
systems serving the leased premises.
In the event, during the initial term of this Lease or during any
renewal term, there occurs a major breakdown of the air-conditioning unit or
the heating unit serving the leased premises, and, as a result, the cost to
repair said unit exceeds the replacement cost of a new unit, the Lessor may,
at Lessor's option, elected to purchase and install a new unit for the leased
premises. In the event the Lessor elects to purchases and install a new
unit, the Lessee agrees to reimburse the Lessor for a portion of the cost of
said replacement based on the useful life of the unit, as determined by its
manufacturer, and the number of years remaining under the term of the lease
and any renewal term. (For illustration purposes only, assume at the time of
the unit's breakdown, the cost of a replacement unit is $1,000.00, that there
are two years remaining under the term, and that the useful life of the unit
is 10 years - Lessee shall then be required to pay the sum of $200.00 toward
the cost of the replacement unit.)
The Lessee accepts said premises "as is" in its present physical
condition, subject to the improvements to be made to the premises by the
Lessor and the Lessee, and agrees to surrender up the said premises upon the
termination of this Lease in the same condition as upon the date of delivery
of the premises, reasonable wear and tear accepted.
Lessor shall keep the common areas and the exterior of the building, and
any parking areas in good repair such that the building is maintained in a
substantially similar condition as other professional office space in the
area.
Lessee agrees to pay to the Lessor it's portion as a percentage of space
occupied of the costs incurred by the Lessor to maintain the common areas in
the building and the exterior of the premises, not to exceed $ N/A , per
year.
9. ALTERATIONS AND IMPROVEMENTS
Lessor agrees to make all of those improvement specified in Exhibit
attached hereto at their sole cost and expense of the Lessee.
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Except as specified in Exhibit ' ' attached hereto, the Lessee shall
not make any alterations or improvements to the leased premises during the
term of this Lease without first obtaining the express written consent of the
Lessor, which consent shall not be unreasonably withheld. Any alterations or
improvements shall become the property of the Lessor on termination this
Lease.
10. PERSONAL PROPERTY OF THE LESSEE; INDEMNIFICATION
Lessee hereby agrees to indemnify and save the Lessor absolutely
harmless for any loss, damage or liability whatsoever for any personal
property brought into the lease premises by the Lessee. Upon expiration of
the term of the Lease, Lessee agrees to remove all of its personal property
from the leased premises without damage to the premises. In the event any
damages occur to the leased premises as a result of the removal of the
Lessee's personal property, the Lessee agrees to pay the Lessor for all
damages incurred.
Lessee further agrees to indemnify and save Lessor absolutely harmless
from any claims, demands, damages, causes of action, losses or other
liability whatsoever resulting from any injury to or the death of any persons
or damage to any property occurring as a result of any act or failure to act
upon the part of the Lessee and its employees and agents.
11. INSURANCE
Lessee agrees to purchase and maintain public liability insurance with a
limit of not less that $300,000.00 and fire legal liability insurance with a
limit of not less that $50,000.00 and to name Lessor as an additional insured
under said policy. Lessee further agrees to provide Lessor with a
certificate of insurance showing the coverages hereinabove specified on or
before the commencement date of the term of this Lease and to keep said
insurance in effect during the term of this Lease and renewal term.
12. LESSOR'S COVENANT TO RESTORE
In the event the leased premises are damaged or destroyed by any cause,
excepting the negligence of the Lessee, its employees, or agents, and, as a
result of said damage or destruction, the Lessee is unable to occupy or use
any part of said leased premises, the amount of the monthly rent payable by
the Lessee to the Lessor as stated herein shall abate on a percentage basis
("Percentage basis" means that if 10% of the leased premises is damaged and
not fit of use or occupancy, the Lessee may withhold 10% of the rent due)
from the date the Lessee is unable to use or occupy any portion of the leased
premises until the premises are restored to such condition that the Lessee
can resume occupancy of the leased premises. The Lessee agrees to
immediately notify the Lessor of any such loss so occurring and the Lessor
shall, as soon as practicable after notice of said loss, restore said
premises to the same condition as existed prior to said damage or
destruction. Lessor shall not, under any circumstances, be liable to Lessee
for any loss or damages sustained by Lessee during the period of time Lessee
is unable to use and occupy said premises as a result of any destruction or
damages occurring to the leased premises.
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In the event the time required to restore said leased premises to the
same condition as they existed prior to the date of said loss exceeds thirty
(30) days, the Lessee may, upon notification by the Lessor of that fact,
elect to terminate this Lease and, in that event, the Lessee shall
immediately remove all of its personal property from the lease premises in
the manner specified in Paragraph 10 hereof.
13. MORTGAGE SUBORDINATION
This Lease, and all the rights of the Lessee herein contained, shall be
subordinate to any mortgage lien or other security interest now in existence
or hereafter placed against the property by the Lessor, and the Lessee, upon
the request of the Lessor, agrees to execute and deliver all documents
necessary or required to reflect the fact of such subordination.
14. LESSOR'S RIGHT OF ENTRY
Lessor shall have the right at any time to enter the leased premises to
make emergency repairs or upon the occurrence of any damage to or destruction
of the leased premises.
Lessor shall likewise have the right, at reasonable times and for
reasonable duration by prior arrangement with Lessee to enter the leased
premises to do any of the following:
(a) to make non-emergency repairs or improvements which are not
the responsibility of the Lessee under the terms of this Lease,
(b) to determine that the Lessee is in compliance with all of the
obligations on the part of the Lessee to be performed under the terms of this
Lease.
Lessor shall have the right during the last 3 months of the term to
exhibit the premises to third parties for the purpose of leasing or selling
the same by 24 hours prior arrangement with Lessee and at any time during
non-business hours.
15. DEFAULT BY LESSEE
In the event any rent reserved herein or other charges shall remain
unpaid for a period of fifteen (15) days from the due date thereof, or, in
the event the Lessee , within fifteen (15) days from the date of notice by
Lessor that the Lessee is in default under the terms of this Lease for its
failure to comply with its obligations hereunder and has failed to cure said
default, the Lessor may, without further notice to the Lessee, re-enter said
leased premises and remove all persons and property therefrom by an action in
forcible detainer or otherwise, and, upon resuming possession, the Lessor may
relet the premises and terminate this Lease. Lessee shall be responsible for
all costs, including reasonable attorney fees, if any, incurred by the Lessor
in obtaining possession of the premises an reletting the leased premises in
the event of a default by the Lessee.
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16. LESSOR'S COVENANT OF QUITE ENJOYMENT
Lessor hereby covenants and agrees with the Lessee that if the Lessee
shall well and timely pay all rents reserved herein, and provided that Lessee
shall perform and observe all of the covenants and conditions on the part of
the Lessee to be performed and observed herein, the Lessee shall peaceably
and quietly hold, occupy and enjoy the leased premises during the term of
this Lease without any hindrance or molestation by the Lessor or any person
or persons claiming any right to the use or possession of the leased premises.
Lessor represents that Lessor is the true and lawful owner of the
premises and Lessor has full power and authority to make and enter into this
Lease.
17. PARKING
Lessee acknowledges that the paved areas contiguous to the building
provide for 32 parking spaces. Lessor agrees to designate 18 parking spaces
for the exclusive use of the employees of the Lessee. Lessee acknowledges
that the remaining parking spaces, not designated for the exclusive use of
other tenants of the building, shall be used in common for parking for the
tenants of the building.
18. COMMON AREAS
Lessee shall be permitted to use the vestibule, hallway and two (2)
bathrooms in common with the tenant of Suite ' ' and that both tenants of
Suites ' ' and ' ' shall thereafter be obligated to clean and maintain said
space, including the bathrooms, in a good and safe condition which is
satisfactory to the Lessor.
19. GOVERNING LAW
This Lease, and all of its terms, provisions an conditions shall be
construed in accordance with and governed by the applicable laws of the State
of Ohio.
20. BINDING EFFECT
This Agreement, and all of its terms, provisions and conditions shall
inure to the benefit of and be binding upon the parties hereto, and their
respective heirs, executors, administrators, personal representatives, and
successors and assigns.
21. AMENDMENTS AND MODIFICATIONS
Any and all amendments or modifications to this Lease shall be made in
writing and signed by both parties hereto.
6
<PAGE>
IN WITNESS WHEREOF, the Lessor and Lessee have hereunto set their hands
the day and year first above written.
IN THE PRESENCE OF:
/s/ John M. Good /s/ Pamela S. Good
- ------------------------------ -------------------------------
John M. Good Pamela S. Good
DataComm Associates, Inc. JMG Development Co. LTD.
- ------------------------------ --------------------------------
(Lessee Company) (Lessor Company)
President & CEO By:
- ------------------------------ ----------------------------
C.E.O. (Lessor Corporate Secretary)
7
<PAGE>
WERNER PALMQUIST INVESTMENTS
INDUSTRIAL LEASE
1. Parties: This lease, dated for reference purposes only, 2/21/96 is made
by and between Werner Palmquist Investments (herein called Lessor") and FOUR
CORNERS TECHNOLOGY AND/OR BOB HUGHES AND/OR JOEL BLICKENSTAFF (herein called
"Lessee").
2. Premises: The property situated in the County of Maricopa, state of
Arizona, commonly known as 7802 E. GRAY ROAD SUITE 300, 400, AND 500 ,
SCOTTSDALE, AZ 85260. Said real property including the land and all
improvements thereon, is herein called "the Premises".
3. Term: The term of this lease shall be 36 MONTHS commencing on 3/1/96 and
ending on 2/28/99 unless sooner terminated pursuant to any provision hereof.
4. Rent: Lessee shall pay to Lessor as rent for the Premises equal monthly
payments of $4533.12 plus applicable rental taxes in advance on the 1st day
of each month of the term hereof. CURRENT SALES TAX IS 4.15% BUT COULD CHANGE
AT ANY TIME.
5. Security Deposit: Lessee shall deposit with Lessor upon execution hereof
$4533.12 LESS CURRENT SECURITY DEPOSIT RECEIVED OF 3312.64 = 1220.48 as
security for Lessee's faithful performance of Lessee's obligations thereunder.
6. Use
6.1 Use: The premises shall be used and occupied only for such
purposes as allowed by zoning IE: ELECTRONIC DISTRIBUTION and for no other
purpose.
6.2 Compliance with law: Lessee shall comply promptly with all
applicable statutes, ordinances, rules, regulations, orders, restrictions of
record, and requirements in effect during the term of the lease.
6.3 Condition of Premises. Lessee hereby accepts the Premises in
the condition existing as of the date of the execution hereof, subject to all
applicable zoning, municipal, county and state laws, ordinances and
regulations governing and regulating the use of the Premises.
7. Maintenance Repairs and Alterations
7.1 Lessor's Obligations. Lessor shall keep in good order,
condition and repair the foundation, and exterior, excluding the interior
surface of exterior walls, windows, and doors. Lessor shall have an
obligation to make repairs within a reasonable time after receipt of written
notice of the need for such repairs.
7.2 Lessee's Obligations
(a) Lessee shall keep in good order, condition and repair the
interior of the Premises and every part thereof. Lessee shall keep all exterior
areas in a neat and orderly condition and shall not allow trash cartons, crates
and so forth to accumulate or be left laying in parking lots or anywhere else on
the property.
(b) Lessee shall surrender the Premises to Lessor in the same
condition received, broom clean, ordinary wear and tear excepted. Lessee shall
repair any damage to the Premises occasioned by the removal of its trade
fixtures, furnishings and equipment.
7.3 Alterations and Additions: Lessee shall not, without Lessor's
prior written consent, make any alterations, improvements, or additions, except
for non structural alterations not
<PAGE>
exceeding $250.00 in cost. Lessor may require that Lessee remove any or all
of said alterations, improvements or additions, at the expiration of the
term, and restore the Premises to the prior condition.
8. Insurance:
8.1 Liability Insurance. Lessee shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily injury
and Property Damage insurance insuring the Lessor and Lessee against any
liability arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. The policy shall contain cross
liability endorsements and shall insure performance by Lessee of the
indemnity provisions.
8.2 Property Insurance: Lessor shall obtain and keep in force
during the term of this Lease a policy or policies of Insurance covering loss
or damage to the Premises, but not Lessee's fixtures, equipment or tenant
improvements.
8.4 Waiver of Subrogation. Lessee and Lessor each hereby waives any
and all rights of recovery against the other, or against the officers,
employees, agents, and representatives of the other, for loss of or damage to
such waiving party or its property or the property of others under its control,
where such loss or damage is insured against under any insurance policy in force
at the time of such loss or damage.
8.5 Indemnity. Lessee shall indemnify and hold harmless Lessor
from and against any and all claims arising from Lessee's business,
activities, or work.
8.6 Exemption of Lessor from Liability. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or from damage to the goods, wares, merchandise or the
property of Lessee. Lessee's employees invitees, customers, or any other
person in or about the Premises, nor shall Lessor be liable for injury to the
person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places,
and regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant, if any, of
the building in which the Premises are located.
9. Damage or Destruction.
9.1 Partial Damage Insured. If the Premises are damaged and such
damage was caused by casualty covered under an insurance policy, Lessor shall
at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect but Lessor shall not
repair or replace any fixtures, equipment or tenant improvements.
9.2 Partial Damage Uninsured. If at any time during the term hereof
the Premises are damaged, except by negligent or willful act of Lessee (In
which event Lessee shall make the repairs, at its expense) and such damage
was caused by casualty not covered under an insurance policy. Lessor may at
Lessor's option either (i) repair such damage as soon as reasonably possible
at Lessor's expense, in which event this Lease shall continue in full force
and effect or (ii) give written notice to Lessee within thirty (30) days
after the date of the occurrence of such damage of Lessor's intention to
cancel and terminate this Lease.
<PAGE>
9.3 Total Destruction. If at any time during the term hereof the
Premises are totally destroyed from any cause whether or not covered by the
insurance (including any total destruction required by any authorized public
authority) this Lease shall automatically terminate as of the date of such
total destruction.
9.5 Abatement of Rent: Lessee's Remedies. If the Premises are
partially destroyed or damaged and Lessor or Lessee repairs or restores them
pursuant to the provisions of this paragraph 9. the rent payable thereunder
for the period during which such damage, repair or restoration continues
shall be abated in proportion to the degree to which Lessee's use of the
premises is impaired. Except for abatement of rent, if any, Lessee shall have
no claim against Lessor for any damage suffered by reason of any such damage,
destruction, repair or restoration.
10. Personal Property Taxes: Lessee shall pay all taxes assessed against and
levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.
11. Utilities. Lessee shall pay for all electric power, and telephone,
supplied to the Premises, together with any taxes thereon.
12. Assignment and Subletting: Lessee shall not voluntarily or by operation of
law, assign, transfer, sublet or otherwise transfer or encumber all or any part
of Lessee's interest in this Lease or in the Premises, without Lessor's prior
written consent. Any attempted assignment, transfer, or subletting without such
consent shall be void, and shall constitute a breach of this Lease.
13. Defaults. The occurrence of any one or more of the following events shall
constitute a material default and breach of this Lease by Lessee.
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee thereunder, as and when due, where such
failure shall continue for period of Three (3) days after written notice thereof
from Lessor to Lessee.
(c) The failure by Lessee to observe or perform any of the covenants,
conditions or provisions of this Lease.
(d) (i) The making by Lessee of any general arrangement for the benefit
of creditors; (ii) the filing by or against Lessee of a petition to have Lessee
adjudged a bankrupt or a petition for reorganization or arrangement under any
law relating to bankruptcy (unless in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substanstantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease where
possession is not restored to Lessee within thirty (30) days on or after
attachment, execution or the other judicial seizure of substantially all of
Lessee's assets located interest in this lease where such seizure is not
discharged within thirty (30) days.
13.2 Remedies. In the event of any such material default or breach
by Lessee, Lessor may at any time thereafter with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which the
Lessor may have by reason of such default or breach:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means in which case this Lease shall terminate and Lessee shall immediately
surrender possession of the Premises to Lessor. In such event Lessor shall be
entitled to recover from Lessee all damages incurred by Lessor by reason of
Lessee's default including, but not limited to the cost of
<PAGE>
recovering possession of the Premises, expenses or reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's
fees and any real estate commission actually paid.
(b) Maintain Lessee's right to possession in which such case this Lease
shall continue in effect whether or not Lessee shall have abandoned the Premises
in such event the Lessor shall be entitled to enforce all of Lessor's rights and
remedies under this Lease, including the right to recover the rent as if becomes
due thereunder.
(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the State of Arizona.
13.4 Late Charges. If any installment of rent or any other sum due
from Lessee shall not be received by Lessor within ten (10) days after such
amount shall be due, Lessee shall pay to Lessor late charge equal to 5 % per
month of such overdue amount.
15. Broker's Fee. The brokers fee, if any, shall be by separate agreement
between Lessor and broker.
16. General Provisions.
16.1 Estoppel Certificates.
(a) Lessee shall if requested execute acknowledge and deliver to Lessor
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
date to which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Lessee's knowledge, any uncured defaults on
the part of the Lessor thereunder, or specifying such defaults if any are
claimed. Any such statement may be conclusively relied upon by any prospective
purchaser or encumbrance of the Premises.
16.2 Lessor's Liability. the term "Lessor" as used herein shall mean
only the owner or owners at the time in question of the fee title or a Lessee's
interest in a ground lease of the Premises, in the event of any transfer of such
title or interest. Lessor herein named (and in case of any subsequent transfers
the then guarantor) shall be relieved from and after the date of such transfer
of all liability as respects Lessor's obligations thereafter to be performed,
provided that any funds in the hands of Lessor or the then guarantor at the time
of such transfer, in which Lessee has an interest, shall be delivered to the
grantee. The obligations contained in this Lease to be performed by Lessor
shall, subject as aforesaid, be binding on Lessor's successors and assigns, only
during their respective period of ownership.
16.3 Sever ability. The invalidity of any provision of this lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
16.4 Interest on Past-due Obligations. Except as expressly herein
provided, any amount due to Lessor not paid when due shall bear interest at 18 %
per annum from the date due.
16.5 Time of Essence. Time is of the
essence.
16.7 Incorporation of Prior Agreements: Amendments. This lease
contains all agreements of the parties with respect to any matter mentioned
herein.
16.11 Holding Over. If Lessee remains in possession of the Premises
or any part thereof after the expiration of the term hereof without the express
written consent of Lessor, such occupancy shall be tenancy form month to month
at a rental in the amount of the last monthly rental plus all other charges
payable thereunder and upon all terms hereof applicable to a month-to- month
tenancy.
<PAGE>
16.14 Binding Effect: This Lease shall bind the parties, their
personal representatives, successors and assignees. This lease shall be
governed by the laws of the State of Arizona.
16.15 Subordination.
(a) This lease, at Lessor's option, shall be subordinate to any
mortgage or deed of trust or any other hypothecation for security now or
hereafter placed upon the property.
(b) Lessee agrees to execute any documents required to effectuate
such subordination or to make this Lease prior to the lien of any mortgage, deed
of trust or ground lease, as the case may be within ten (10) days after written
demand.
16.16 Attorney's Fees. If either party herein brings an action to
enforce the terms hereof or declare rights thereunder, the prevailing party in
any such action, on trial or appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the court.
16.17 Lessor's Access. Lessor and Lessor's agents shall have the
right to enter the Premises at reasonable times for the purpose of inspecting
the same, showing the same in prospective purchasers, lenders, or Lessees, and
making such alterations, repairs, improvements or additions to the Premises or
to the building of which they are a part as Lessor may deem necessary or
desirable.
16.18 Signs and Auctions. Lessee shall not place any sign upon the
Premises or conduct any auction thereon without Lessor's prior written consent.
16.20 Corporate Authority. If Lessee is a corporation, each
individual executing this lease on behalf of said corporation represents and
warrants that he is duly authorized to execute and deliver this Lease on behalf
of said corporation in accordance with a duty adopted resolution of the Board of
Directors of said corporation or in accordance with the bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
16.23 Multiple Tenant Building. Lessee agrees to abide by, keep and
observe all reasonable rules and regulations which Lessor may make from time to
time for the management, safety, care and cleanliness of the building and
grounds, the parking of vehicles and the preservation of good order herein as
well as for the convenience of other occupants and tenants of the building. The
violations of any such rules and regulations, shall be deemed a material breach
of this lease.
16.24 Parking. Uncovered parking spaces will be available on a first
come basis. Unless otherwise specified by lessor. Covered parking spaces are to
be assigned to the Lessee by the Lessor and Lessee will pay to Lessor at a
separate monthly rental rate the sum of $15.00 per month, payable at the same
time and in the same manner as the rent for the premises. Lessee agrees that
Lessee shall be solely responsible for the policing of the covered parking areas
to insure that unauthorized persons are not using the parking spaces allocated
to Lessee.
16.25 Storage No exterior storage is allowed, including vehicles
belonging to Lessee.
16.27 Additional Provisions: THERE IS A 5% PER YEAR INCREASE IN
LEASE RATE EFFECTIVE AFTER THE FIRST 12 MONTHS OF THE LEASE AND FOR EACH 12
MONTH PERIOD THEREAFTER. THE UNDERSIGNED GUARANTEES PERFORMANCE OF ABOVE
LEASE AND PAYMENT OF ALL SUMS DUE THEREAFTER IN THE EVENT OF DEFAULT, HEREBY
WAIVING NOTICE OF ANY MODIFICATION, AMENDMENT OR EXTENSION. LESSEE AGREES NOT
TO CHANGE OR MODIFY LOCKS WITHOUT GIVING A NEW KEY IMMEDIATELY TO LESSOR.
<PAGE>
LESSEE AGREES TO NOTIFY LESSOR 30 DAYS PRIOR TO VACATING PREMISES FOR
WHATEVER REASON.
The parties hereto have executed this Lease on the dates specified
immediately adjacent to their respective signatures.
LESSOR LESSEE
WERNER PALMQUIST INVESTMENTS
/s/ B. Warner /s/ Robert Hughes
- ------------------------ ------------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME UNDER
WHICH SUBSIDIARY JURISDICTION OF PERCENTAGE
NAME OF SUBSIDIARY DOES BUSINESS INCORPORATION OWNER OWNED
- ------------------ ---------------- --------------- ----- ----------
<S> <C> <C> <C> <C>
Nordata, Inc. Eltrax California Eltrax 100%
Systems, Inc.
Rudata, Inc. None California Eltrax 100%
Systems, Inc.
Atlantic Network Eltrax North Carolina Eltrax 100%
Systems, Inc. Systems, Inc.
EJG Techline Incorporated Eltrax California Eltrax 100%
Systems, Inc.
Four Corners Eltrax Arizona Eltrax 100%
Technology, Inc. Systems, Inc.
Hi-Tech Eltrax Pennsylvania Eltrax 100%
Connections, Inc. Systems, Inc.
DataComm Eltrax Ohio Eltrax 100%
Associates, Inc. Systems, Inc.
Midwest Telecom Eltrax Ohio Eltrax 100%
Associates, Inc. Systems, Inc.
</TABLE>
Note: All subsidiaries with the exception of Nordata, Inc. and Four Corners
Technology, Inc. were merged into Eltrax Systems, Inc. on January 1,
1998.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 366,364
<SECURITIES> 0
<RECEIVABLES> 9,353,349
<ALLOWANCES> 0
<INVENTORY> 4,298,794
<CURRENT-ASSETS> 602,062
<PP&E> 863,174
<DEPRECIATION> 0
<TOTAL-ASSETS> 21,491,002
<CURRENT-LIABILITIES> 13,990,280
<BONDS> 0
0
0
<COMMON> 108,478
<OTHER-SE> 7,392,244
<TOTAL-LIABILITY-AND-EQUITY> 21,491,002
<SALES> 0
<TOTAL-REVENUES> 49,934,139
<CGS> 41,328,951
<TOTAL-COSTS> 41,328,951
<OTHER-EXPENSES> 18,376,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244,742
<INCOME-PRETAX> (10,016,373)
<INCOME-TAX> 1,315,970
<INCOME-CONTINUING> (11,332,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,332,343)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> 0
</TABLE>
