-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WDd70tkCLUJaz7bu0MEqjv+mhrxAvhCLbM0hS70X2bbDa65PbaalgHPMUccTi4pa z773XeRfyQg9kP7AUYk/fA== 0000027116-98-000002.txt : 19980626 0000027116-98-000002.hdr.sgml : 19980626 ACCESSION NUMBER: 0000027116-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980625 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATRON SYSTEMS INC/DE CENTRAL INDEX KEY: 0000027116 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 952582922 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-07445 FILM NUMBER: 98653896 BUSINESS ADDRESS: STREET 1: 304 ENTERPRISE ST CITY: ESCONDIDO STATE: CA ZIP: 92029 BUSINESS PHONE: 6197473734 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Commission File Ended March 31, 1998 Number 0-7445 DATRON SYSTEMS INCORPORATED - ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2582922 - ------------------------ -------------------------- (State of Incorporation) (I.R.S. Employer Ident. No.) 304 Enterprise Street, Escondido, California 92029-1297 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (760) 747-3734 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 - ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of June 19, 1998 was $19.5 million, based on the closing price on that date on the Nasdaq Stock Market. The number of shares outstanding of each of the registrant's classes of common stock as of June 19, 1998 was: Common Stock, par value $0.01 -- 2,679,284 shares. DOCUMENTS INCORPORATED BY REFERENCE 1. Certain portions of registrant's Annual Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the Annual Meeting of Stockholders of the registrant to be held August 5, 1998 are incorporated by reference into Part III of this report. 2. Registrant's Annual Report of its Employee Stock Purchase Plan for the fiscal year ended March 31, 1998 is incorporated by reference into Exhibit 99.1. 3. Items contained in the above-referenced documents that are not specifically incorporated by reference are not included in this report. DATRON SYSTEMS INCORPORATED FORM 10-K FISCAL YEAR 1998 TABLE OF CONTENTS PART I 1 Item 1. Business 1 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II 9 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 9 Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations 9 Item 8. Financial Statements And Supplemental Data 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 9 PART III 10 Item 10. Directors and Executive Officers of the Registrant 10 Item 11. Executive Compensation 10 Item 12. Security Ownership of Certain Beneficial Owners and Management 10 Item 13. Certain Relationships and Related Transactions 10 PART IV 11 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 11 1 PART I Item 1. Business. Company Overview Datron Systems Incorporated and its wholly owned subsidiaries (the "Company") provide specialized satellite communication products and systems and high quality radio communication products and services to worldwide private and governmental markets and to several United States Government customers, including the Department of Defense ("DoD"). The Company was founded in 1969 and became an independent publicly held corporation in 1985. The Company operates its business through two subsidiaries. In October 1985, the Company acquired its wholly owned subsidiary, Datron World Communications Inc., formerly known as Trans World Communications, Inc. ("DWC"). DWC conducts the Company's Communication Products and Services business. In June 1990, the Company acquired its wholly owned subsidiary, Datron/Transco Inc., formerly known as Transco Communications Inc. ("D/T"). D/T conducts the Company's Antenna and Imaging Systems business. In September 1993, the Company formed a wholly owned subsidiary, Datron Telecommunications International Inc., to provide private international telecommunication systems. Datron Telecommunications was merged into DWC on March 31, 1995. The Company discontinued its private international telecommunications business in fiscal 1996. In March 1996, D/T consolidated its image processing division in San Jose, California, which was acquired in August 1994, with its remote sensing earth station business in Simi Valley, California. In connection with that consolidation, the Company recorded a restructuring charge of $1,421,000 ($855,000, or $0.32 per share, after taxes). Investment Considerations This report contains certain forward-looking statements that may be used in evaluating the opportunities and risks associated with future Company performance. However, actual results could differ materially from those described in the forward-looking statements due to, among other things, the following factors: Dependence on Sales to Foreign Customers - ---------------------------------------- Sales to foreign customers accounted for 55%, 49% and 58% of consolidated sales in fiscal 1998, 1997 and 1996, respectively. Sales of Communication Products and Services have been even more highly concentrated with foreign customers: 88%, 94% and 93% in fiscal 1998, 1997 and 1996, respectively. Sales to foreign customers often involve risk because of political and economic uncertainties in many foreign countries, which can result in funding delays or inability of those customers to obtain financing for anticipated purchases of Company products. As a result, it is often more difficult to predict order bookings from foreign customers than it is from domestic customers. In addition, foreign political unrest, war and economic downturns could have a significant negative impact on future Company sales and income. Reliance on Large Orders from a Small Number of Customers - --------------------------------------------------------- A substantial percentage of sales may be heavily concentrated with a small number of customers. Within the Communication Products and Services business segment, the same single customer accounted for 24%, 30% and 39% of that segment's sales in fiscal 1998, 1997 and 1996, respectively. Although sales in the Antenna and Imaging Systems business segment have not been so heavily concentrated with one customer, it is common for a small number of customers to each account for approximately 5% to 15% of that segment's sales each year. Because it is unusual to receive large orders from the same customer in successive years, it is necessary to find new customers each year to replace the previous year's sales. There can be no assurance that the Company will be able to do so in the future. In addition, reliance on large orders can result in financial performance varying widely from quarter-to-quarter, and also carries contract cancellation risk that can more adversely affect Company performance than it would if the Company depended on small orders from a large number of customers. 2 Timely Development and Customer Acceptance of New Products - ---------------------------------------------------------- The Company's products are subject to obsolescence. To prevent this from occurring, the Company has an ongoing new product development program to keep the technologies employed in its products current and to introduce new products that meet changing market requirements. Lack of timely development of new technologies and new products, or lack of acceptance of new products by the Company's customers could have a negative impact on future sales and income. Fixed Price Development Contracts - --------------------------------- The Company often accepts fixed-price contracts that require custom engineering, custom software or the development of new features and capabilities. Such contracts usually include the sale of standard products and components, but not always. Although engineering cost estimates are prepared as a basis for quoting such contracts, there can be no assurance the Company will be able to develop the required features, capabilities or software within established cost budgets. Should development costs exceed established budgets, the result could have a material adverse effect on earnings. New Consumer Product and Market - ------------------------------- In November 1995, the Company introduced its first consumer product, a mobile direct broadcast satellite ("DBS") television reception system for recreational vehicles, buses and long-haul trucks. This product represents a departure from the Company's historical business that has focused on large contracts, relatively small numbers of deliverables and customers that are primarily government agencies or large corporations. Several additional DBS antenna products have subsequently been introduced, including a marine product line and antenna systems for large business jets and commercial jets. A production line has been established to meet expected demand for these products. In fiscal 1997, the Company determined its method of using exclusive national distributors to sell these products was not effective, and spent the latter part of that year unwinding the distribution agreements, clearing the distribution pipeline and establishing a factory direct to dealer distribution system. The Company does not have previous experience in building or selling a consumer product. Although it believes it can produce DBS products in required quantities, there can be no assurance it will be able to do so. Also, although the Company believes its new methods of distribution will improve sales, there can be no assurance they will or that consumer demand for its DBS products will be as large as the Company anticipates. Competitors - ----------- The Company has competitors for all the products and services it offers. The level of competition varies by product line and ranges from many competitors for its radio products to a few competitors for its tracking antenna products. The Company could be adversely affected by competitors' development of new or different products that may provide or be perceived as providing greater value than the Company's products. The Company may or may not be successful in developing competing products. Many of the Company's competitors and potential competitors have substantially greater resources than the Company and may be more successful in developing, producing and marketing their products. In such case, the Company may experience substantial competition, which could have a material adverse effect on the Company's business. 3 Declining Sales for the U.S. Department of Defense - -------------------------------------------------- In fiscal 1993, the Company restructured its operations in response to declining DoD spending. Sales for the DoD have declined from $31.9 million in fiscal 1993 to $12.1 million in fiscal 1998, primarily due to completion of long-term DoD contracts that have not been replaced with new orders. The Company believes sales for the DoD may continue to decline in the future, although at a less severe rate than in recent years. However, those sales are still expected to represent a significant portion of the Company's consolidated sales. There can be no assurance that new DoD orders will be received or that the orders received will be sufficient to meet the Company's sales objectives. General The Company operates in two business segments: Antenna and Imaging Systems, which are supplied by D/T, and Communication Products and Services, which are supplied by DWC. Antenna and Imaging Systems - --------------------------- This segment designs and manufactures satellite communication terminals, telemetry tracking and control systems, servo control products and high-quality microwave antennas. In fiscal 1994, because of a continuing decline in defense business, the Company began pursuing additional markets for its products. The primary such market has been remote sensing satellite earth stations, and the Company now provides earth station hardware, software and image processing systems to that market. In fiscal 1996, the Company introduced a mobile satellite television reception system for recreational vehicles, buses and long-haul trucks. That system was the Company's first consumer product. The business of this segment was adversely affected in fiscal 1996 by the cancellation of an $8.8 million remote sensing system order and by lower than anticipated order bookings and sales of remote sensing systems. It was these events that led to the consolidation of the remote sensing business in the fourth fiscal quarter ended March 31, 1996. In fiscal 1998, low gross margins in this business segment resulting from cost overruns primarily due to inadequate engineering were responsible for a $2.5 million operating loss. Because of this problem, several new managers and engineers were hired, and the subsidiary president was replaced. Descriptions of the major product areas follow: Satellite Communication ("SATCOM") Terminals. The Company is a supplier of satellite communication antenna systems and subsystems used to receive defense-related data and data transmitted through satellites of other government and commercial organizations. The stabilizing and automatic tracking capabilities of its antenna systems make them particularly well suited for use on ships, motor vehicles and other mobile platforms. Over the past two decades, the Company has been a prime contractor and a subcontractor for shipboard SATCOM antenna systems used by the U.S. Navy. More recently, the Company has been developing airborne SATCOM antenna systems for the U.S. Air Force. The United States military has developed a SATCOM system known as MILSTAR. The Company has been a subcontractor of Raytheon in the Navy's segment of the MILSTAR program known as NESP. Under the subcontract, the Company developed a pedestal for shipboard antennas that supports and positions the antenna in response to external commands. This program was substantially concluded in fiscal 1997. 4 Telemetry Tracking and Control ("TT&C") Systems. TT&C systems monitor and control vehicles such as satellites, missiles and aircraft. They receive radio telemetry signals containing vehicle status information, engage in automatic tracking of the vehicle so contact is maintained and transmit command signals so vehicle control can be established and maintained. Servo Control Products. The Company's involvement with SATCOM and TT&C markets has required a high capability in radio frequency electronics, antenna engineering, servo controls and large precision mechanical systems. The Company has developed a line of pedestals and rotators, servo power amplifiers and positioning control units that are often used as building blocks for specific customer requirements. Microwave Products. The Company designs and manufactures broad bandwidth microwave antennas for the aerospace industry that are used on high performance aircraft, missiles and space launch vehicles. Remote Sensing Satellite ("RSS") Systems. The RSS systems market is a subset of the broader earth observation market. It involves using several types of satellites containing optical and radar sensors in conjunction with specific earth acquisition and data processing equipment to produce images. The images are in the form of hard copy and/or digital data that allow the user to study changes on the earth's surface or environment. Applications include locating minerals, updating maps, forecasting weather, monitoring crops, studying the environment, monitoring earth resources and gathering economic or military intelligence. The Company has supplied antennas for RSS purposes for several years. In fiscal 1994, the Company began to focus more attention and resources on the RSS systems market. As part of this strategy, the Company formed a joint venture with International Imaging Systems, Inc. ("I2S"), a privately-held company in Milpitas, California, to provide complete RSS systems for the international marketplace. I2S's expertise was in the fields of digital image processing and photogrammetry. The Company acquired I2S in fiscal 1995 and now offers its customers complete RSS earth stations, including image processing capability. In fiscal 1998, RSS sales accounted for 33% of the Antenna and Imaging Systems' sales compared with 35% of its sales in fiscal 1997. Mobile DBS Television Systems. The Company introduced its first DBS antenna product in fiscal 1996. That product allows a recreational vehicle owner or trucker to receive DBS television from a parked vehicle at the touch of a button by automatically locating the satellite. During fiscal 1997, the Company introduced several additional DBS antenna products including systems for boats at anchor, boats underway, RVs and trucks on the open road, and satellite telephone service through a dual frequency feed that operates simultaneously with the television system. Also during fiscal 1997, the Company was first to demonstrate live DBS television on a commercial airliner, and in fiscal 1998, was first to obtain Federal Aviation Administration certification of an airborne DBS system designed for large business jets. Customers and Marketing Sales of Antenna and Imaging Systems' products and services have historically been concentrated with the DoD, which accounted for 31% of this segment's fiscal 1998 sales and 47% of its fiscal 1997 sales. Marketing and sales activities for its DoD customers and other non- defense governmental agencies are conducted by internal sales and engineering personnel. Most customers for the RSS systems business are foreign government space and communications agencies. Marketing and sales activities for those products are conducted through independent sales representatives in Europe, South America and Asia. Introduction of mobile DBS television systems required the establishment of new distribution methods to sell these consumer products. The Company's initial approach of using exclusive national distributors was not effective and the Company is now selling its DBS products direct to dealers and original equipment manufacturers, as well as through select non exclusive distributors and agents. Company employees provide sales and marketing support and installation training for the dealers. 5 Manufacturing, Assembly and Sources of Supply Products for the Company's Antenna and Imaging Systems segment are designed, manufactured and assembled at facilities in Simi Valley, California. The Company purchases certain components and subsystems from subcontractors and vendors. Some of these items are standard off- the-shelf components and others are fabricated to Company specifications. The Company also fabricates electronic assemblies from purchased electronic components and circuit boards. A production line for DBS antenna products was established in fiscal 1996 and expanded in fiscal 1997. The Company is rarely dependent on a single source of supply for materials, parts or components. However, once a subcontractor is selected to provide components built to Company specifications, the Company is often dependent on that subcontractor. Failure of the subcontractor to perform could jeopardize the ability of the Company to meet its required delivery schedules. Communication Products and Services - ----------------------------------- This business segment designs, manufactures and distributes high frequency ("HF") radios and accessories for over-the-horizon radio communications and very high frequency ("VHF") radios and accessories for line-of-sight communications. The Company's HF radios operate in the frequency range of 1.6 to 30 megahertz, where radio waves generated from the transmitter reflect off the ionosphere back to the point of receipt on earth. The Company's VHF radio products, which operate in the frequency range of 30 to 88 megahertz, provide users high-quality transmission for line-of-sight communications. In addition to its standard radios, the Company offers frequency hopping and encryption options to its VHF product line and automatic link establishment options to its HF product line. Frequency hopping is a technique that prevents interruption or interception of radio signals by changing, at very high speeds, the frequency at which they are transmitted. This technology utilizes advanced synchronized mechanisms that ensure all radios in a network are synchronized and frequency hop at the same time. Automatic link establishment, when used in HF radio equipment, automatically determines the best available frequencies on which to communicate. The Company offers a wide range of accessory products to complement the HF and VHF product lines. These accessory products include antennas and antenna tuners, power sources, amplifiers, remote control systems, modems, data communications equipment and audio accessories. A substantial percentage of sales of Communication Products and Services are often concentrated with a small number of customers. In fiscal 1998, two Asian customers accounted for 24% and 10% of this segment's sales and a South American customer accounted for 12% of its sales. In fiscal 1997, the same two Asian customers accounted for 30% and 24% of this segment's sales. And, in fiscal 1996, one of the same Asian customers accounted for 39% of this segment's sales. Because it is unusual to receive large orders from the same customer in successive years, it is often necessary to find new customers each year to replace the previous year's sales. To minimize the impact fluctuating sales may have on the Company's operations, temporary employees are used whenever possible. The Federal Communications Commission granted the Company a license to carry international telephone traffic in May 1993 and the Company began carrying international telephone traffic to customers in Ukraine and Latvia in September 1993 and to a customer in Russia during fiscal 1995. Also in fiscal 1995, the Company established an uplink facility in California to carry satellite paging traffic for customers in the United States. However, in fiscal 1996, the Company determined that significantly larger resources would be required to compete successfully in these markets and that competition would likely drive margins to an unacceptably low level. Consequently, the Company withdrew from these markets during fiscal 1996. 6 Customers and Marketing Sales to foreign customers accounted for 88% of this segment's fiscal 1998 sales and 94% of the segment's fiscal 1997 sales. Most of its international customers are agencies of foreign governments that perform civil defense, paramilitary and military operations, and foreign governmental agencies that perform civilian tasks unrelated to military operations, such as civil aviation agencies, drug interdiction agencies, embassies and disaster relief organizations. Domestic customers are primarily various agencies of the United States Government, including the Drug Enforcement Administration and Department of State. The Company's products are sold in over 80 countries by a network of independent sales and service representatives, most of whom are non- exclusive sales agents of the Company. These representatives provide both pre-sale and post-sale support. Many of them operate service facilities that offer both warranty and long-term maintenance of the Company's equipment. Sales are usually denominated in U.S. Dollars. In addition to direct sales, the Company sometimes sells its radio products to international suppliers of complementary equipment. It also sometimes licenses the local manufacturing of its equipment to customers in certain countries. The latter practice is usually followed where local regulations discourage the importation of complete units. Manufacturing, Assembly and Sources of Supply Communication products are designed and manufactured at facilities in Escondido, California. Company engineers work closely with manufacturing and marketing personnel to improve existing designs and to introduce new products that meet the ever changing demands of the marketplace. A new family of tactical VHF radios was introduced in fiscal 1998 and a new family of handheld radios was introduced in fiscal 1997. The Company purchases certain electronic components, circuit boards and fabricated metal parts, and painting and silk screening services. Other than when it licenses overseas manufacturing for a particular local market, the Company performs most other manufacturing functions necessary for the production of its products. The Company is rarely dependent on any single source of supply for the manufacture of its communication products. Although only one supplier may be used for certain parts, the Company believes that multiple sources are usually available. Backlog Order backlog at March 31 was as follows: 1998 1997 ----------- ----------- Antenna and Imaging Systems $19,949,000 $13,086,000 Communication Products and Services 5,494,000 4,862,000 ----------- ----------- Total $25,443,000 $17,948,000 =========== =========== The 52% increase in Antenna and Imaging Systems backlog at March 31, 1998 compared with March 31, 1997 was primarily due to higher bookings of remote sensing systems and antennas for the DoD and other non- defense governmental customers. The 13% increase in Communication Products and services backlog at March 31, 1998 compared with March 31, 1997 was due to improved order bookings in the third and fourth quarters of fiscal 1998. 7 Competition The Company competes in each of its business segments with several companies. Depending on the specific product, these companies may be similar in size to the Company or may be large diversified companies which at times may also be customers of the Company. The Company believes its major competitive advantages are the quality of its products, their cost effective designs, timeliness of delivery, ease of use and easy serviceability. Patents, Trademarks, Copyrights and Licenses The Company has applied for several patents related to its DBS products. However, the Company believes that patents are not a significant factor in the Company's business and that the success of the Company depends primarily on the technical competence and managerial and marketing ability of the Company's personnel. DATRON(R) and design, TRANSWORLD(R), I2S(R), PRI2SM(R), OPEN 2000(R), DBS-2000(R), DBS-3000(R), DBS-4000(R) and VI2STA(R) are registered trademarks of the Company. The Company has obtained licenses for the VHF frequency hopping technology and for the automatic link establishment technology used in the Company's VHF and HF radio products, respectively. Employees The Company employed approximately 319 employees at the end of fiscal 1998 compared with approximately 309 employees at the end of fiscal 1997. The 3% increase in employment during fiscal 1998 was primarily due to a similar increase in sales for fiscal 1998. None of the Company's employees are covered by a collective bargaining agreement and the Company considers its employee relations to be good. Financial Information Additional financial information concerning segment, geographic and major customers is included in Note 10 of the Notes to Consolidated Financial Statements. See Part II, Item 8. Item 2. Properties. DWC leases approximately 63,000 square feet of office, engineering and manufacturing space in Escondido, California. The lease term expires on January 31, 1999 with two renewal options of five years each. DWC and the Company's corporate headquarters operate from that facility. In March 1998, the Company signed a new ten-year lease for a 70,000 square foot production and office facility located in Vista, California. That lease commences February 1, 1999 and contains a renewal option of five years. The Vista facility will replace the Escondido facility. D/T owns a 110,000 square foot office, engineering and manufacturing building located on a nine-acre site in Simi Valley, California. D/T conducts operations from that facility. D/T leases 139,000 square feet of office, engineering and manufacturing space in Camarillo, California. The term of the lease is seven years expiring June 28, 1998. In June 1993, the Company moved from that facility as part of the consolidation of D/T. The Company has sublet 108,100 square feet of the facility to three subtenants whose subleases expire on June 28, 1998. D/T also leases a 20,000 square foot office, engineering and manufacturing facility in San Jose, California. That lease term expires March 31, 1999. The Company has sublet that facility to a subtenant whose sublease expires March 31, 1999. 8 Information with respect to obligations for lease rentals is included in Note 9 of the Notes to Consolidated Financial Statements. See Part II, Item 8. The Company considers its properties to be suitable and adequate for its present needs. The facilities in Escondido and Simi Valley are being fully utilized. The facility in Camarillo is not needed and a portion of it has been sublet. The facility in San Jose is not needed and has been sublet. Item 3. Legal Proceedings. The Company is not involved in any litigation that is expected to have a material effect on the Company's business or consolidated financial position. In August 1992, Trans World Communications, Inc. ("Trans World"), a wholly owned subsidiary of the Company and which was renamed Datron World Communications Inc. on March 31, 1995, was named as defendant in a lawsuit filed by ATACS Corporation ("ATACS") and AIRTACS Corporation ("AIRTACS") relating to a contract to provide radio communication shelters. ATACS and AIRTACS contend that Trans World entered into an agreement to team with them on the contract and then wrongfully failed to use them as subcontractors. They seek damages in excess of $2,000,000. In a May 28, 1997 ruling, the court found Trans World in breach of a teaming agreement but was not able to determine what damages, if any, were incurred by ATACS and AIRTACS. The court ordered both parties to submit supplemental findings to support their positions regarding damages. On September 3, 1997, the court awarded ATACS and AIRTACS one dollar ($1.00) in damages. ATACS and AIRTACS have appealed the court's decision. The Company has taken a cross appeal with respect to the issue of whether the Company was in breach of any teaming agreement. The Company believes final resolution of this matter will not materially affect the consolidated financial position of the Company. Item 4. Submission of Matters to a Vote of Security Holders. None. Executive Officers of the Registrant David A. Derby, 56, has been President and Chief Executive Officer of the Company since May 1982, and Chairman of the Board since April 1998. William L. Stephan, 52, has been Vice President, Chief Financial Officer and Treasurer of the Company since November 1993. Executive officers are elected by and serve at the discretion of the Board of Directors. There are no family relationships among directors or executive officers of the Company. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information required by Item 5 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Common Stock Activity" on the inside back cover of the Annual Report, that portion of which is attached hereto as Exhibit 13. Item 6. Selected Financial Data. Information required by Item 6 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Datron Systems Incorporated Selected Financial Data" on the inside front cover of the Annual Report, that portion of which is attached hereto as Exhibit 13. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information required by Item 7 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 through 9 of the Annual Report, that portion of which is attached hereto as Exhibit 13. Item 8. Financial Statements and Supplementary Data. Information required by Item 8 of Form 10-K is incorporated herein by reference from the consolidated financial statements of the Company at March 31, 1998 and 1997 and for each of the three years in the period ended March 31, 1998 and the Independent Auditors' Report appearing on pages 10 through 24 of the Annual Report, that portion of which is attached hereto as Exhibit 13. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. During the two most recent fiscal years ended March 31, 1998, there has not been a change in accountants or a reported disagreement with accountants on any matter of accounting principles or practices or financial statement disclosure. 10 PART III Item 10. Directors and Executive Officers of the Registrant. Information required by Item 10 of Form 10-K with respect to directors is incorporated herein by reference from the information contained in the section captioned "Nomination and Election of Directors" in the Company's Notice of Annual Meeting of Stockholders to be Held Wednesday, August 5, 1998 at 11:00 A.M. and Proxy Statement ("Proxy Statement"), a copy of which is to be filed as Exhibit 22 within 120 days of the end of the Registrant's fiscal year. Information required by Item 10 of Form 10-K with respect to executive officers is set forth in Part I of this report under the section captioned "Executive Officers of the Registrant," pursuant to instruction 3 to paragraph (b) of Item 401 of Regulation S-K. Item 11. Executive Compensation. Information required by Item 11 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Executive Compensation" in the Proxy Statement, a copy of which is to be filed as Exhibit 22 within 120 days of the end of the Registrant's fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required by Item 12 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement, a copy of which is to be filed as Exhibit 22 within 120 days of the end of the Registrant's fiscal year. Item 13. Certain Relationships and Related Transactions. Information required by Item 13 of Form 10-K is incorporated herein by reference from the information contained in the section captioned "Executive Compensation" in the Proxy Statement, a copy of which is to be filed as Exhibit 22 within 120 days of the end of the Registrant's fiscal year. 11 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: Page in 1998 Annual Report ------------ (1) Financial Statements: Consolidated Balance Sheets at March 31, 1998 and 1997 10 Consolidated Statements of Operations for the Years Ended March 31, 1998, 1997 and 1996 11 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1998, 1997 and 1996 12-13 Consolidated Statements of Cash Flows for the Years Ended March 31, 1998, 1997 and 1996 14 Notes to Consolidated Financial Statements 15-23 Independent Auditors' Report 24 (2) Financial Statement Schedules: Page ---- Independent Auditors' Report on Financial Statement Schedule S-1 Schedule II. Valuation and Qualifying Accounts S-2 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this report. (c) Exhibits. The following exhibits are filed as part of this report: Exhibit Number Description - ------ ----------- 3.1 Certificate of Incorporation. 3.2 Bylaws. 4.15 Stockholder Rights Agreement dated August 21, 1990. 4.16 First Amendment to Stockholder Rights Agreement dated as of October 29, 1993. 12 10.5 1988 Key Employee Stock Purchase Plan. 10.8 Employment Agreement between the Registrant and David A. Derby. 10.10 Employment Agreement between the Registrant and Richard W. Pershing. 10.31 Lease of Trans World Communications, Inc. facilities at 298, 302 and 304 Enterprise Street, Escondido, California. 10.32 Sublease of Transco Products, Inc. facilities at 1001 Flynn Rd., Camarillo, California. 10.33 Guaranty of Sublease for Transco Products, Inc. facilities. 10.34 Consent and Nondisturbance Agreement. 10.36 Amended and Restated 1985 Stock Option Plan. 10.37 First Amendment to Trans World Communications, Inc. Lease Agreement dated January 15, 1993. 10.38 Contribution and Assumption Agreement between Datron Systems Incorporated and Datron/Transco Inc. dated June 30, 1993. 10.39 Datron Systems Incorporated Profit Sharing and Savings Plan (Amended and Restated as of March 1, 1994). 10.40 Trans World Communications, Inc. 401(k) Plan, as amended effective April 1, 1994. 10.46 1995 Stock Option Plan. 10.47 Second Amendment to Trans World Communications, Inc. Lease Agreement dated February 8, 1995. 10.48 Agreement and Plan of Merger between Datron Telecommunications International Inc. and Trans World Communications, Inc. dated as of March 14, 1995. 10.53 Datron Systems Incorporated Supplemental Executive Profit Sharing Plan (Effective as of April 1, 1994). 10.54 Third Amendment to Trans World Communications, Inc. Lease Agreement dated May 1, 1995. 10.57 First Amendment of the Datron Systems Incorporated Profit Sharing and Savings Plan (Amended and Restated as of March 1, 1994). 10.58 Datron Systems Incorporated Employee Stock Purchase Plan (Adopted Effective July 1, 1997). 10.59 Amended and Restated Credit Agreement and Note between the Registrant and Union Bank of California dated August 8, 1997. 13 10.60 Waiver and First Amendment to Amended and Restated Credit Agreement and Note between Registrant and Union Bank of California dated February 10, 1998. 10.61 Datron World Communications Inc. Lease Agreement dated as of February 13, 1998. 10.62 Fourth Amendment to Trans World Communications, Inc. Lease Agreement dated March 1, 1998. 10.63 First Amendment to Employment Agreement between the Registrant and Richard W. Pershing dated as of April 1, 1998. 10.64 Waiver and Second Amendment to Amended and Restated Credit Agreement and Note between Registrant and Union Bank of California dated April 30, 1998. 13 Certain portions of Registrant's Annual Report to Stockholders for the fiscal year ended March 31, 1998 containing information required by Part I and Part II of this report. 21 Subsidiaries. 22 Proxy Statement, Notice of Annual Meeting of Stockholders to be Held Wednesday, August 5, 1998 at 11:00 A.M. and Form of Proxy (to be deemed filed only to the extent required by the instructions to exhibits for reports on Form 10-K) to be filed within 120 days of the end of the Registrant's fiscal year. 23 Independent Auditors' Consent - Deloitte and Touche. 24 Power of Attorney (on signature page 16) 27.1 Financial Data Schedule for Twelve Months Ended March 31, 1998. 27.2 Restated Financial Data Schedule for the Year Ended March 31, 1996. 27.3 Restated Financial Data Schedule for the Nine Months Ended December 31, 1995. 27.4 Restated Financial Data Schedule for the Six Months Ended September 30, 1995. 99.1 Annual Report of the Datron Systems Incorporated Employee Stock Purchase Plan - --------------------------------------- [FN] Incorporated by this reference to the Exhibit bearing the same number filed with the Registration Statement on Form 8-B of the Registrant on November 13, 1987. Incorporated by this reference to the Registration Statement on Form S-8 of the Registrant filed March 22, 1988. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1988. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1989. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's report on Form 8-K dated July 13, 1990. Incorporated by this reference to the Registration Statement on Form S-8 of the Registrant filed April 16, 1993. 14 Incorporated by this reference to Exhibit I to the Registrant's Registration Statement on Form 8-A filed November 5, 1990. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1995. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1997. Incorporated by this reference to the Exhibit bearing the same number filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. Supplemental Information - ------------------------ Copies of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held August 5, 1998 and copies of the form of proxy to be used for such Annual Meeting will be furnished to the Securities and Exchange Commission prior to the time they will be distributed to Stockholders. 15 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: June 25, 1998 DATRON SYSTEMS INCORPORATED By: /s/ DAVID A. DERBY David A. Derby Chairman of the Board, President, Chief Executive Officer and Director 16 KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below appoints David A. Derby and William L. Stephan, jointly and severally, as his true and lawful attorney-in-fact, each with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, jointly and severally, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, jointly and severally, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date --------- ----- ---- Chairman of the Board, President, Chief Executive By:/s/DAVID A. DERBY Officer and Director David A. Derby (Principal Executive Officer)June 25, 1998 Vice President, Chief Financial Officer (Principal By:/s/WILLIAM L. STEPHAN Financial and Accounting William L. Stephan Officer) June 25, 1998 By:/s/KENT P. AINSWORTH Director June 15, 1998 Kent P. Ainsworth By:/s/MICHAEL F. BIGHAM Director June 15, 1998 Michael F. Bigham By:/s/ADRIAN C. CASSIDY Director June 15, 1998 Adrian C. Cassidy By:/s/JOHN R. COPPLE Director June 24, 1998 John R. Copple By:/s/WILLIAM A. PRESTON Director June 17, 1998 William A. Preston By:/s/PETER F. SCOTT Director June 15, 1998 Peter F. Scott By:/s/ROBERT D. SHERER Director June 15, 1998 Robert D. Sherer INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE Board of Directors Datron Systems Incorporated Escondido, California We have audited the accompanying consolidated financial statements of Datron Systems Incorporated (the Company) as of March 31, 1998 and 1997, and for each of the three years in the period ended March 31, 1998, and have issued our report thereon dated May 8, 1998; such financial statements and report are included in your 1998 Annual Report to Stockholders and are incorporated herein by reference. Our audits also included the financial statement schedule of the Company listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Deloitte & Touche LLP San Diego, California May 8, 1998 S-2 DATRON SYSTEMS INCORPORATED SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1998, 1997 AND 1996
Balance at Balance at Beginning End Description of Year Additions Write-offs of Year ----------- --------- --------- ---------- ---------- Year ended March 31, 1996 - ------------------------- Allowance for doubtful accounts $247,000 $98,000 $98,000 $247,000 Allowance for inventory obsolescence 724,000 45,000 60,000 709,000 Allowance for warranties 749,000 754,000 488,000 1,015,000 ---------- -------- -------- ---------- $1,720,000 $897,000 $646,000 $1,971,000 ========== ======== ======== ========== Year ended March 31, 1997 - ------------------------- Allowance for doubtful accounts $247,000 $136,000 $157,000 $226,000 Allowance for inventory obsolescence 709,000 735,000 94,000 1,350,000 Allowance for warranties 1,015,000 632,000 940,000 707,000 ---------- ---------- ---------- ---------- $1,971,000 $1,503,000 $1,191,000 $2,283,000 ========== ========== ========== ========== Year ended March 31, 1998 - ------------------------- Allowance for doubtful accounts $226,000 $166,000 $202,000 $190,000 Allowance for inventory obsolescence 1,350,000 477,000 $171,000 1,656,000 Allowance for warranties 707,000 829,000 603,000 933,000 ---------- ---------- -------- ---------- $2,283,000 $1,472,000 $976,000 $2,779,000 ========== ========== ======== ==========
EX-10.60 2 EXHIBIT 10.60 WAIVER AND FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND NOTE THIS WAIVER AND FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND NOTE ("First Amendment"), made and entered into as of the 10th day of February, 1998, by and between DATRON SYSTEMS INCORPORATED, a Delaware corporation ("Company"), and UNION BANK OF CALIFORNIA, N.A., a national banking association ("Bank"), W I T N E S S E T H: WHEREAS, on August 8, 1997, the Company and the Bank entered into a certain Amended and Restated Credit Agreement and Note (the "Credit Agreement") pursuant to which the Bank agreed to extend to the Company and the Company agreed to accept from the Bank certain credit facilities more particularly described therein; and WHEREAS, the Company and the Bank desire (i) to evidence the waiver by the Bank of the Company's compliance with one of the financial covenants set forth in the Credit Agreement for the fiscal quarter of the Company ended December 31, 1997, and (ii) to amend the Credit Agreement (A) to extend the Revolving Loan Facility Termination Date through and including April 30, 1999, (B) to decrease the maximum amount available under the Revolving Loan Facility by an amount (the "Reduction Amount") equal to the greater of Four Million Dollars ($4,000,000.00) or one hundred percent (100%) of the net proceeds received by D/T from its financing (the "Simi Valley Financing") of the real property presently encumbered by the Deed of Trust (the "Property"), such decrease to become effective on the date on which the Simi Valley Financing closes or April 30, 1998, whichever is the earlier (the "Reduction Date"), (C) to decrease the maximum aggregate amount available under the Revolving Loan Facility, the Standby Facility and the L/C Facility by the Reduction Amount, such decrease to become effective on the Reduction Date, (D) to modify certain of the covenants with which the Company is to comply, and (E) to provide for certain ancillary matters; NOW, THEREFORE, for and in consideration of the premises hereof, and other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. All capitalized terms used in this First Amendment shall, unless otherwise defined herein or unless the context otherwise requires, have the meanings given thereto in the Credit Agreement. 2. The Bank hereby waives, for the fiscal quarter of the Company ended December 31, 1997, and only for such fiscal quarter, compliance by the Company with the profitability covenant set forth in Subsection 4.02(k) of the Credit Agreement, and agrees that such noncompliance shall not constitute an Event of Default under the Credit Agreement or under the Credit Agreement as amended by this First Amendment. The waiver here given is specific to the covenant, and for the fiscal quarter of the Company, referred to above and shall not operate as a waiver of compliance by the Company with any other covenant set forth in the Credit Agreement, or in the Credit Agreement as amended by this First Amendment, or with the covenant referred to above for any other fiscal quarter of the Company. 3. Section 1.01 of the Credit Agreement is amended to read as follows: 1.01 Availability of the Facilities. Subject to the terms and conditions of this Agreement, the Bank shall (x) from time to time during the period commencing on the First Amendment Effective Date and ending on April 30, 1999 (the "Revolving Loan Facility Termination Date"), advance to the Company such loans as the Company may request under the Revolving Loan Facility (individually a "Revolving Loan" and collectively the "Revolving Loans"), and (y) from time to time during the period commencing on the First Amendment Effective Date and ending on June 30, 1999 (the "Letter of Credit Facilities Termination Date"), issue for the account of the Company much standby letters of credit as the Company may request under the Standby Facility (individually a "Standby L/C" and collectively the "Standby L/C's"), and such commercial documentary letters of credit as the Company may request under the L/C Facility (individually a "Commercial L/C" and collectively the "Commercial L/C's"); provided, however, that: (a) Except as otherwise provided in Subsections 1.01(b), (c), (d), (e) and (f) hereof, the sum of: (i) the aggregate principal amount of all outstanding Revolving Loans ("Revolving Loan Utilization"); (ii) the aggregate amount available to be drawn under all Standby L/C's; (iii) the aggregate amount of unpaid reimbursement obligations in respect of all drafts drawn under Standby L/C's (the sum of the aggregate amounts described in Subsection 1.01(a)(ii) hereof and in this Subsection 1.01(a)(iii) being hereinafter referred to as "Standby L/C Utilization"); (iv) the aggregate amount available to be drawn under all Commercial L/C's; and (v) the aggregate amount of unpaid reimbursement obligations in respect of all drafts drawn under Commercial L/C's (the sum of the aggregate amounts described in Subsection 1.01(a)(iv) hereof and in this Subsection 1.01(a)(v) being hereinafter referred to as "Commercial L/C Utilization"); shall not exceed in the aggregate (x) at any given time during the period commencing on the First Amendment Effective Date and ending on the Reduction Date, Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00), and (y) at any other given time, the difference between Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00) and the Reduction Amount; (b) Revolving Loan Utilization shall not exceed in the aggregate (i) at any given time during the period commencing on the First Amendment Effective Date and ending on the Reduction Date, the lesser of (A) Nine Million Five Hundred Thousand Dollars ($9,500,000.00), or (B) the difference between Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00) and the sum of Standby L/C Utilization and Commercial L/C Utilization, and (ii) at any other given time, the lesser of (A) the difference between Nine Million Five Hundred Thousand Dollars ($9,500,000.00) and the Reduction Amount, or (B) the difference between Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00) and the mum of Standby L/C Utilization, Commercial L/C Utilization and the Reduction Amount; (c) Commercial L/C Utilization "hall not exceed in the aggregate at any one time the least of (i) Two Million Dollars ($2,000,000.00), (ii) the difference between Fifteen Million Dollars ($15,000,000.00) and Standby L/C Utilization, or (iii) the difference between Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00) and the sum of Revolving Loan Utilization, Standby L/C Utilization and, at any time after the Reduction Date, the Reduction Amount; (d) Standby L/C Utilization "hall not exceed in the aggregate at any one time, the lesser of (i) the difference between Fifteen Million Dollars ($15,000,000.00) and Commercial L/C Utilization, or (ii) the difference between Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00) and the sum of Revolving Loan Utilization, Commercial L/C Utilization and, at any time after the Reduction Date, the Reduction Amount; (e) Standby L/C Utilization relating to Standby L/C's issued in favor of beneficiaries located in countries listed in Column B or Column C of Exhibit A hereto shall not exceed, as to all beneficiaries located in any given country listed in Column B or Column C of Exhibit A hereto, Three Million Five Hundred Thousand Dollars ($3,500,000.00) in the aggregate at any one time; and (f) Standby L/C Utilization relating to Standby L/C's issued in favor of beneficiaries located in countries listed in Column D of Exhibit A hereto (individually a "Column D Country" and collectively the "Column D Countries") shall not exceed in the aggregate at any one time (i) in the case of all beneficiaries located in any given Column D Country, Five Hundred Thousand Dollars ($500,000.00), and (ii) in the case of all beneficiaries located in all Column D Countries, the least of (A) Two Million Five Hundred Thousand Dollars ($2,500,000.00), (B) the difference between (1) Fifteen Million Dollars ($15,000,000.00), and (2) the sum of Standby L/C Utilization relating to Standby L/C's issued in favor of all beneficiaries located in all countries other than Column D Countries and Commercial L/C Utilization, or (C) the difference between (1) Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00), and (2) the sum of Standby L/C Utilization relating to Standby L/C's issued in favor of all beneficiaries located in all countries other than Column D Countries, Commercial L/C Utilization, Revolving Loan Utilization and, at any time after the Reduction Date, the Reduction Amount. Within the limits set forth above, and except as otherwise provided herein, the Company may utilize the Facilities, repay amounts-owing thereunder, and reutilize the Facilities. 4. The proviso which immediately follows clause (ii) of Subsection 1.02(d) of the Credit Agreement is amended to read as follows: provided, however, that the rates set forth in Subsections 1.02(d)(i) and (ii) hereof shall each be reduced by thirty-five one-hundredths of one percent (0.35%) per annum (x) on the tenth (lOth) Banking Day following the first date subsequent to September 29, 1998 on which a monthly Financial Statement delivered by the Company to the Bank pursuant to Subsection 4.01(a)(i) hereof reflects profitability of not less than Two Hundred Fifty Thousand Dollars ($250,000.00) for each of the two (2) consecutive fiscal quarters of the Company most recently ended and the Company is in compliance with each and all of the terms and conditions set forth in this Agreement and the other Facility Documents in the case of any Reference Rate Revolving Loan or in the case of a LIBOR Revolving Loan which is first made on or after such date, or (y) on the first day of the First Interest Period which commences on or after such tenth (10th) Banking Day in the case of a LIBOR Revolving Loan which was made prior to, and is outstanding on, such tenth (10th) Banking Day. 5. The first sentence of Subsection 1.02(g)(i) of the Credit Agreement is amended to read as follows: If not sooner repaid, the Company shall repay the aggregate unpaid principal amount of all Revolving Loans on the Revolving Loan Facility Termination Date; provided, however, that on the Reduction Date, the Company shall repay such portion of the aggregate unpaid principal amount of all Revolving Loans as shall be necessary (A) to reduce Revolving Loan Utilization to an amount not greater than the difference between Nine Million Five Hundred Thousand Dollars ($9,500,000.00) and the Reduction Amount, and (B) to reduce the sum of Revolving Loan Utilization, Standby L/C Utilization and Commercial L/C Utilization to an amount not greater than the difference between Nineteen Million Five Hundred Thousand Dollars ($19,500,000.00) and the Reduction Amount. 6. Subsection 1.02(h) of the Credit Agreement is amended to read as follows: (h) Revolving Loan Commitment Fee. During the period commencing on January 1, 1998 and ending on the Reduction Date, the Company shall pay to the Bank a commitment fee of one-quarter of one percent (1/4 of 1%) per annum on the difference between Nine Million Five Hundred Thousand Dollars (69,500,000.00) and the average daily principal amount of outstanding Revolving Loans during each calendar quarter or portion thereof. Thereafter, and until the Revolving Loan Facility Termination Date, the Company shall pay to the Bank a commitment fee of one-quarter of one percent (1/4 of 1%) per annum on the difference between (i) Nine Million Five Hundred Thousand Dollars ($9,500,000.00), and (ii) the mum of (A) the average daily principal amount of outstanding Revolving Loans during each calendar quarter or portion thereof, and (B) the Reduction Amount. Such fee "hall be payable quarterly in arrears on the last day in each March, June, September and December (commencing on the first such day to occur after the First Amendment Effective Date), and at maturity (whether by acceleration or otherwise). 7. Subsection 4.02(a) of the Credit Agreement is amended to read as follows: (a) Liens. The Company will not, and will not permit any Subsidiary to, create or assume, or permit to exist, any mortgage, lien, charge or encumbrance on, pledge of, or other security interest in, any property or assets of any kind of the Company or such Subsidiary, except for Permitted Liens, liens created in favor of the Bank and such liens as D/T may create or cause to be created on the Property in connection with the Simi Valley Financing. 8. Subsection 4.02(f) of the Credit Agreement is amended to read as follows: (f) Unsecured Indebtedness. Investments. Advances and Guaranties. The Company will not, and will not permit any Subsidiary to, incur any unsecured Indebtedness, advance funds to (whether by way of loan, "sock purchase, capital contribution, or otherwise) or incur any Indebtedness with respect to the obligations of, any Person; provided, however, that (i) the Company may (A) on or prior to June 30, 1998, purchase the residence of a certain officer of the Company for a purchase price not to exceed Seven Hundred Fifty Thousand Dollars ($750,000.00), and hold such residence as an investment until such time as the Company deems it appropriate to sell the same, and (B) guaranty the obligations of DWC arising under a lease of new facilities to be entered into by DWC on or prior to December 31, 1998, and (ii) the Company and its Subsidiaries may (A) make acquisitions, whether by purchase of stock or by purchase of assets, of all or any substantial division or portion of the assets and business of another Person as and to the extent permitted by Subsection 4.02(e) hereof, (B) make advances to finance sales in the ordinary course of business, (C) incur trade debt in the ordinary course of business, and (D) purchase certificates of deposit from banks with deposits in excess of Five Hundred Million Dollars ($500,000,000.00), securities issued by the United States government and commercial paper rated A-1 by Standard & Poor's or Prime-1 by Moody 's. 9. Subsection 4.02(k) of the Credit Agreement is amended to read as follows: (k) Profitability. The Company will not (i) permit its consolidated net after tax profits to be less than Fifty-three Thousand Dollars ($53,000.00) for the fiscal quarter of the Company ending March 31, 1998, or less than One Thousand Dollars ($1,000.00) for the fiscal year of the Company ending March 31, 1998, and (ii) permit its consolidated net after tax profits to be less than Two Hundred Fifty Thousand Dollars ($250,000.00) for any fiscal quarter of the Company ending on or after June 30, 1998. 10. Subsection 6.01(i) of the Credit Agreement is amended by deleting therefrom the period which appears at the end of such subsection and by substituting in lieu thereof a semicolon followed by the word "or". 11. Section 6.01 of the Credit Agreement is amended by the addition thereto of a new Subsection 6.01(j) to read as follows: (j) The Simi Valley Financing shall fail to close on or prior to April 30, 1998, or shall close on or prior to April 30, 1998 but shall fail to generate net proceeds in an amount equal to or greater than Three Million Five Hundred Thousand Dollars ($3,500,000.00). 12. Section 7.01 of the Credit Agreement is amended by the addition thereto of the following definitions in proper alphabetic order: "First Amendment" shall mean that certain Waiver and First Amendment to Amended and Restated Credit Agreement and Note, dated as of February 10, 1998, by and between the Company and the Bank. "First Amendment Effective Date" shall mean the date on which the First Amendment becomes effective as provided in Paragraph 13 thereof. "Property" shall have the meaning given to that term in the second recital to the First Amendment. "Reduction Amount" shall have the meaning given to that term in the second recital to the First Amendment. "Reduction Date" shall have the meaning given to that term in the second recital to the First Amendment. "Simi Valley Financing" shall have the meaning given to that term in the second recital to the First Amendment. 13. This First Amendment shall become effective on the date on which the Bank shall have received the following: (a) This First Amendment, duly executed by the Company; (b) A Consent in the form appended hereto as Exhibit I, duly executed by D/T; and (c) A Consent in the form appended hereto as Exhibit II, duly executed by DWC. 14. In order to facilitate the closing of the Simi Valley Financing, the Bank shall, as promptly as practicable following Bank's receipt of written notice that D/T and D/T's lender are prepared to close such financing, deliver to an escrow agent acceptable to the Bank, the Company, D/T and D/T's lender (a) a reconveyance of the Deed of Trust, in recordable form, and (b) an instruction letter authorizing such escrow agent either (i) to cause such reconveyance to be recorded at such time as such escrow agent has taken possession of, and is prepared to remit to D/T or D/T's order, net proceeds of the Simi Valley Financing in an amount equal to or greater than Three Million Five Hundred Thousand Dollars ($3,500,000.00), or (ii) to return such reconveyance to the Bank unrecorded if such escrow agent has not taken possession of, and is not prepared to remit to D/T or D/T's order, net proceeds of the Simi Valley Financing in an amount equal to or greater than Three Million Five Hundred Thousand Dollars ($3,500,000.00) by the close of business on the tenth (10th) Banking Day following the date much escrow agent receives such reconveyance and instruction letter (or such later date to which the Bank may consent in writing). 15. Except as expressly provided herein, the Credit Agreement is unchanged and remains in full force and effect. 16. This First Amendment shall be governed by and construed in accordance with the laws of the State of California. 17. This First Amendment may be executed in any number of identical counterparts, any set of which signed by both parties hereto shall be deemed to constitute a complete, executed original for all purposes. IN WITNESS WHEREOF, the Bank and the Company have caused this First Amendment to be executed as of the day and year first above written. UNION BANK OF CALIFORNIA, N.A. By: /s/JACK LENHOF Title: Vice President By: /s/STEPHEN DUNNE Title: Vice President DATRON SYSTEMS INCORPORATED By: /s/ WILLIAM L. STEPHAN Title: Vice President and Chief Financial Officer By: /s/ DAVID A. DERBY Title: President and Chief Executive Officer EX-10.61 3 EXHIBIT 10.61 STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-MODIFIED NET AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, February 13, 1998 is made by and between NORTH COUNTY INDUSTRIAL. PARK, L.P. and DATRON WORLD COMMUNICATIONS INC. (collectively the "Parties," or individually a "Party"). 1.2(a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of Lot E, Vista Commerce Center, located in the City of Vista County of San Diego, State of California, with zip code 92083, as outlined on Exhibit 1 attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): 106,000 s.f. concrete tilt-up building of which the Premises will consist of approx. 70,000 rentable square feet. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2(b) Parking: 200 unreserved vehicle parking spaces ("Unreserved Parking Spaces"); and n/a reserved vehicle parking spaces ("Reserved Parking Spaces"), (Also see Paragraph 2.6.) 1.3 Term: 10 years and 1 months ("Original Term") commencing See Addendum 2 ("Commencement Date") and ending 10 years later ("Expiration Date"). (Also see Paragraph 3.) 1.4 Early Possession: see Addendum 2. ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $ See Add. 3 per month ("Base Rent"), payable on the first day of each month commencing Commencement Date (Also see Paragraph 4.) [] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum 3.2 attached hereto. 1.6 (a) Base Rent Paid Upon Execution: $ -0- as Base Rent for the period. See Addendum 12 1.6 (b) Lessee's Share of Common Area Operating Expenses: See Add. 4 percent ( %) ("Lessee's Share") as determined by other criteria as described in Addendum 4. 1.7 Security Deposit: $58,800.00 ("Security Deposit"). (Also see Paragraph 5.) See Addendum 12 1.8 Permitted Use: General office, sales administration or any other use or purpose permitted under applicable zoning and other applicable laws. Manufacturing, assembly, research and development, storage. ("Permitted Use") (Also see Paragraph 6.) 1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10(a) Real Estate Brokers. The following real estate broker(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [] CB Commercial Real Estate Group represents Lessor exclusively ("Lessor's Broker"); [] Diversified Properties/CB Commercial represents Lessee exclusively ("Lessee's Broker"); or [ ] _______________________________ represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.) 1.10(b) Payment to Brokers. Upon the execution of this Lease by both Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Broker(s) (or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $_____) for brokerage services rendered by said Broker(s) in connection with this transaction. 1.11 Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by Datron Systems Incorporated See Exhibit "7" ("Guarantor"). (Also see Paragraph 37.) 1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 18, and Exhibits "1" through "17" all of which constitute a part of this Lease. 2. Premises, Parking and Common Areas. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a noncompliance with this warranty within ninety days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor warrants that any improvements (other than those constructed by Lessee or at Lessee's direction) on or in the Premises which have been constructed or installed by Lessor or with Lessor's consent or at Lessor's direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said warranties shall not apply to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee given within six (6) months following the Commencement Date and setting forth with specificity the nature and extent of such non compliance, take such action, at Lessor's expense, as may be reasonable or appropriate to rectify the non-compliance. Lessor makes no warranty that the Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable Laws (as defined in Paragraph 2.4). 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by the Broker(s) to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws" ) and the present and future suitability of the Premises for Lessee's Intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Premises and for the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pickup trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law. 2.7 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and Interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the noncompliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, Including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay in Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or portion any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder, provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during, which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the forms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b)) of an Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: See Addendum 16 (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, Irrigation systems; Common Area lighting facilities, fences and gates, elevators and roof. (bb) Exterior signs and any tenant directories. (cc) Fire detection and sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Real Property Taxes (as defined in Paragraph 10.2) to be paid by lessor for the Building and the Common Areas under Paragraph 10 hereof. (vi) The cost of the premiums for the insurance policies maintained by Lessor under Paragraph 8 hereof. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas. (viii) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Industrial Center. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Center already has the same, Lessor already provide the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within ten (10) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessors option, however, an amount may be estimated by Lessor from time to time of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Lessor shall designate, during each 12 month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shell deliver to Lessee within (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's share as indicated on said statements, Lessee shall be credited the amount of such, over- payment against Lessee's Share of Common Area Operating expenses next becoming due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year were less than Lessee's Share as Indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within ten (10) days after delivery by Lessor to Lessee of said statement. 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessors option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not impair the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, does not conflict with uses by other lessees, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The form "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity or existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3), "Reportable Use" shall mean (i) the Installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or resolved from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, 1iabililies, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing' at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations; ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consul tants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts end/or consultants in connection therewith to advise Lessor with restrict to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such Inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such Inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a pan thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain the contract for the heating, air conditioning and ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the cost thereof. (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7,1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic tire extinguishing system including fire alarm and/or smoke detection and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, healing, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make alterations and non- structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the current cost thereof on any one occasion does not exceed $25,000.00. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to the Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (1) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits In a prompt and expeditious manner. Any Alterations or Utility installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish to Lessor with as-built plans and specifications therefor, Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $25,000.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the Premises' that will cost $25,000.00 or more, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one- half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender, and Restoration. (a) Ownership. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises, Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal. Unless otherwise agreed in writing. Lessor may require the removal at any time of all or any part of any Alternations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 Payment of Premiums. The cost of the premiums for the Insurance policies maintained by Lessor under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such Insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the Amendment of the Pollution Exclusion endorsement for damage caused by heat: smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alternations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of nay undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $5,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a General Policyholders Ratings of at least B+, V, or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which, shall invalidate the insurance policies referred to in this Paragraphs 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor, Lessee shall at least thirty (30) days prior the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by an deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, storm, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined In Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty per cent (50%) or more of the total Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option or Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee- Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor, if Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either party. 9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is not an insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), 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 writ ten notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days (allowing the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent, Common Area Operating Expenses and Other charges, if any, payable by Lessee hereunder (or the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate, this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements to this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or S100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessor shall have the right within ten (10) days alter the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the excess costs of (a) Investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.8 Termination ~ Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 Waiver of Statutes. Lessor and Lessee agree that the forms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Rea1 Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 Real Property Tax Definition. As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereon and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available, Lessor's reasonable determination thereof, in good faith shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the Taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay directly for all utilities and services supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. If any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. Assignment and Subletting. See Addendum 17. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 39. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a non-curable Breach, Lessor shall have the right to either: (i) terminate this Lease; or (ii) upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) or the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $500.00, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly Incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease, Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No subleases under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), S350.00 is a reasonable sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies sot forth in Paragraphs 13.2 and/or 19.3: (a) The vacating of the Premises without the Intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the Inspection, maintenance and service contracts required under Paragraph 7.1 (b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1 (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than they (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors: (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (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 substantially 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; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the forms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance polices, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon Invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check in the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided and (iv) any other amount necessary to compensate Lessor for a11 the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessees Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1 (b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by Subparagraph 13.1(b),(c) or (d). In such case, the applicable grace period under the unlawful detainer statue shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue, the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor or free or abated rent or either charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be deemed conditioned upon Lessee's full and faithful performance of all of the forms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this lease and of not further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within fifteen (15) days after such amount shall be due, then, without any requirement of notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonable required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exorcise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or toss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Brokers' Fees. 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form published by The American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in now way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective, Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying safely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. Each Broker shall be an intended third party beneficiary of the provisions of this Paragraph 22. 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United Stales Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right to Holdover. See Addendum 18. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies in law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initialed in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of Trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to a11 renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.C. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device and that in the event of such foreclosure, such now owner shall not: (i) be liable for any act of omission of any prior 1essor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a non-disturbance agreement) from the Lender that Lessee's possession and this Lease, including any options to extend the form hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorneys' Fees. If any Party or Broker brings an action or proceeding, to enforce the forms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such, proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such, as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of This Paragraph 31. , 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or Lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof, which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. See Addendum 13. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lessor interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. {a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may, as a condition to considering any such, request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. Guarantor. 37.1 Form of Guaranty. If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by The American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease, including the authority at the Guarantor (and of the party signing on Guarantors behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (b) current financial statements of Guarantor as may from time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Premises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Lease, the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor: (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lease. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised try any person or entity other then said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either an a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor, has given to Lessee three (3) or more notices of separate Default under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a) (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) stays after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations (Rules and Regulations) which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE,OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEOUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: El Cajon, California on: March 24, 1998 By LESSOR: North County Industrial Park LP by: Whammy, Inc., General Partner By: /s/ JEFFREY C. HAMANN Name Printed: Jeffrey C. Hamman Title: President By: /s/ DANIEL M. WHITAKER Name Printed: Daniel M. Whitaker Title: Secretary Address: 475 W. Bradley Avenue El Cajon, CA 9202 Telephone: (619) 440-7424 Facsimile: (619) 440-8914 Executed at: Escondido, California on: March 23, 1998 By LESSEE: Datron World Communications Inc. By: /s/ WILLIAM L. STEPHAN Name Printed: William L. Stephan Title: Secretary/Treasurer Address: 304 Enterprise Street Escondido, CA 92029 Telephone: (760) 747-1079 Facsimile: (760) 747-2474 ADDENDUM TO LEASE This Addendum to Lease ("Addendum") is made by and between NORTH COUNTY INDUSTRIAL PARK, L.P., a California limited partnership ("LESSOR") and DATRON WORLD COMMUNICATIONS INC., a California corporation ("LESSEE") and is intended to supplement that certain Standard Industrial/Commercial Multi-Tenant Lease-Modified Net between LESSOR and LESSEE dated February 13, 1998, ("Lease") to which this Addendum is annexed. If there is any inconsistency between this Addendum and the Lease, the terms of this Addendum shall supersede and control. LESSOR and LESSEE agree as follows: 1. Premises and Building Shell Description. "Building" means the freestanding building denoted on the site plan ("Site Plan"), which is annexed to this Addendum as EXHIBIT "1", as VISTA COMMERCE CENTER Lot E and the "Premises" means and refers to the portion of the Building as depicted in EXHIBIT "1", which is being leased to LESSEE pursuant to this Lease. The Building is planned to consist of the Building Shell Improvements as described in section 5 of this Addendum, subject to subsection 1.2 of this Addendum. The Building Shell Improvements are being designed and constructed substantially in accordance with those certain preliminary architectural plans dated February 24, 1998 prepared by Paul Giese ("Architect") which are more particularly described in EXHIBIT "2" annexed to this Addendum ("Preliminary Building Shell Plans"). The components of the Building Shell Improvements construction shall also conform to the specifications attached as EXHIBIT "3" to this Addendum ("Building Shell Specifications"). 1.1 Planned Size and Final Measurement. It is planned that the Building will contain approximately 106,000 rentable square feet, of which the Premises will consist of approximately single story 70,000 rentable square feet. All square footage measurements shall be from the roof "drip line" and in accordance with the Building Owners and Managers Association International ("BOMA") standards. Following Substantial Completion (as defined below) of all of the Building Shell Improvements and the Tenant Improvements, LESSOR will, in good faith, certify the actual rentable square feet of the Premises to establish the exact rentable square feet for all purposes of the Lease. If LESSEE disputes LESSOR's certification of the actual rentable square feet of the Premises, LESSEE shall notify LESSOR in writing within ten (10) days of LESSEE's receipt of the certified rentable square feet of the Premises from LESSOR of LESSEE's intent to exercise its rights under this section. In such event, LESSOR and LESSEE shall submit the dispute concerning rentable square feet of the Premises to the Architect, and the Architect's certification of rentable square feet of the Premises will be binding upon LESSOR and LESSEE. 1.2 Modifications. LESSEE agrees that LESSOR may make modifications to the Building Shell Improvements design on account of government or lender requirements and otherwise as reasonably determined by LESSOR; provided, however any such modifications shall not: (a) increase or decrease the total rentable square feet of the Premises by more than two percent (2%); (b) materially change the Building Shell Specifications; or (c) materially and adversely affect LESSEE's use of the Premises. 2. Effective Date/Term/Commencement Date. Notwithstanding any other provision of the Lease, this Lease shall be effective upon execution by LESSOR and LESSEE ("Effective Date") and shall constitute a legally binding contract for LESSOR to deliver possession of the Premises in accordance with the requirements of this Lease and for LESSEE to accept possession and pay the rentals beginning upon the Commencement Date (as defined below). Notwithstanding that the Effective Date of this Lease is the date of execution of this Lease, LESSEE's obligation to commence payment of the rentals payable under this Lease shall not commence until the occurrence of the Commencement Date. The obligation to pay Rent shall be abated for the first month of the term of the Lease. All other terms of the Lease, however, (including but not limited to the obligation to pay real property taxes and insurance premiums and to maintain the premises) shall be in effect during the rental abatement period. 2.1 Commencement Date. Except as otherwise provided in section 5.5 of this Addendum, the term "Commencement Date" means the date of the Substantial Completion (as defined below) of the Building Shell Improvements and the Tenant Improvements. The term "Completion Date means February 1,1999, provided such date shall be subject to extension (a) on account of delays caused by LESSEE as described in subsection 5.5 of this Addendum, (b) for delays caused by fire, earthquake or other unavoidable casualties or inclement weather conditions not reasonably anticipatable, (c) extraordinary or unusual governmental action other than usual permit and inspection procedures, (d) for delays encountered as a result of the discovery of any unknown or concealed conditions affecting the Premises, (e) for delays caused by general area-wide labor or material shortages or labor disputes (such a strikes or lockouts), or any other causes not the fault of LESSOR or LESSOR's Contractor, subcontractors, agents or employees or (S) by one (1) day for each day after October 30, 1998, the issuance of the building permit for the Tenant Improvements is delayed, provided such delay is caused by LESSEE per Sections 5.2, 5.3, 5.4.1, 5.5, 5.7, 7 and 9. 2.2 LESSOR's Delay. In the event that the Completion is delayed on account of the Default of LESSOR or on account of the fault of LESSOR's Contractor in failing to timely cause Substantial Completion of the Building Shell and Tenant Improvements, LESSEE shall be entitled to a Delay Credit" against the Rent becoming due on and after the Commencement Date in an amount equal to one (1) day of Rent for each day that the Completion Date is so delayed. 2.3 Commencement Date Delay. Notwithstanding Section 2.2, the LESSOR will have until October, 15, 1998 to notify the LESSEE of up to a 90 day delay in the Commencement Date beyond February 1, 1999. If the LESSOR so notifies the LESSEE in writing, then the Delay Credit per section 2.2 will be reduced to S3,70.0 per month or any part thereof during such 90 day delay period only and the "Delay Credit" per Section 2.2 will be calculated from the new Commencement Date. 2.4 Lease Term. The initial of the Lease ("Lease Terms") shall be a period of ten (10) years beginning one month after the Commencement Date; and ending one hundred twenty (120) consecutive months later; provided, however, if the Commencement Date occurs other than on the first day of a calendar month, the Initial Lease Term shall be deemed extended for a period of time equal to the number of days between the Commencement Date and the beginning of the first full calendar month following the Commencement Date. The initial term of the Lease is subject to extension in accordance with section 8 of this Addendum. 2.5 "Lease Year" Defined. The term "Lease Year" means each consecutive twelve (12) month period during the Lease Term; provided, however, in the case of the first Lease Year, such Lease Year shall be a period of time beginning on the Commencement Date and ending twelve (12) consecutive months following the Commencement Date, and each subsequent Lease Year shall be determined from the anniversary of the expiration of such first Lease Year; provided, further, however, if the Commence Date occurs other than on the first day of a calendar month, the first Lease Year shall be deemed extended for a period time equal to the number of days between the Commencement Date and the beginning of the first full calendar month following the Commencement Date. 2.6 The first month after the Commencement Date shall be Rent free. 3. Rent. "Rent" for the Premises shall be the sum of (a) the Base Rent described in subsection 3.1 of this Addendum, subject to adjustment as provided in subsection 3.2 of this Addendum, (b) the Allowance Amortization Charge as determined under subsection 3.3 of this Addendum, (c) LESSEE's Share of Common Area Operating Expenses as defined in Paragraph 4 of the Lease, and (d) any other amounts becoming payable by LESSEE under the Lease. The Rent shall be payable on the first day of each month. 3.1 Base Rent. The monthly Base Rent set forth in Paragraph 1.5 of the Lease for the first Lease Year (as defined below) of the Original Term represents the full Base Rent payable upon the Commencement Date determined by multiplying the amount of S.42 per rentable square foot by the estimated total 70,000 rentable square feet of the Premises. If there is a variance in the rentable square footage of the Premises as actually constructed, the Base Rent for the first Lease Year shall be adjusted based on the actual rentable square feet within the Premises multiplied times $.42 per rentable square foot. 3.2 Increase in Rent. The Rent shall be increased at the beginning of the second Lease Year, and at the beginning of each Lease Year thereafter, by an amount equal to 3% of the sum of Base Rent plus Allowance Amortization charge in effect during the immediately preceding Lease Year. 3.3 Tenant Improvement Allowance Amortization. As more particularly provided in section 5 of this Addendum, LESSOR will provide a Tenant Improvement Allowance ("Allowance") to pay a portion of the Tenant Improvement Costs (as defined below). The term "Allowance Amortization Charge" means an amount to be added to the Base Rent, and shall be payable by LESSEE as a part of the Rent from and after the Commencement Date, which is calculated as follows: (a) determine the aggregate amount of the Allowance expended by LESSOR for the Tenant Improvements Costs; (b) amortize the amount of the Allowance based on an economic return equivalent to eleven percent (11 %) per annum to derive a monthly payment sufficient to pay in full an amount equal to the Allowance and such economic return over a period of time from the Commencement Date to the end of the Lease term specified in Lease Paragraph 1.3; and (c) the resulting monthly payment shall equal the Allowance Amortization Charge. If the amount of the Allowance Amortization Charge is determined after the Commencement Date on account of a delay in finalizing the Tenant Improvement Costs, then LESSEE shall pay LESSOR the amount accruable from the Commencement Date to the end of the then current month, adjusted for any Free Rent within fifteen (15) days after LESSOR's billing for such accrued amounts, and shall thereafter pay the monthly Allowance Amortization Charge with each payment of Base Rent. LESSEE shall have the right to pay in full the remaining unamortized balance of the Allowance during the last thirty (30) days of any Lease Year, provided that any such payment must be in the full amount of the unamortized balance of the Allowance as of the date of the payment, and LESSOR shall not be obligated to accept any lesser payment or payments at any other time. Upon LESSEE's full payment of the unamortized balance of the Allowance, the Allowance Amortization Charge shall no longer be payable by LESSEE as additional rent. 4. LESSEE's Share of Common Area Operating Expenses. The LESSEE's Share of Common Area Operating Expenses stated in Paragraph 1.6(b) of the Lease is an estimate based on the estimated rentable square feet to be included in the Industrial Center, the Building and the Premises. Following completion, the actual percentage will be adjusted to equal a percentage determined by dividing the rentable square feet in the Premises by the total rentable square feet, as certified by LESSOR, in the Industrial Center. Notwithstanding any other provision of the Lease, LESSOR agrees that the property management fee allocable to LESSEE's Share of Common Area Operating Expenses shall not exceed two percent (2%) of the Base Rent. In addition, LESSEE shall have the right, at its expense, to audit or otherwise inspect the books and records of LESSOR regarding the calculation of the Common Area Operating Expenses. 5. Building Shell Improvements and Tenant Improvements. LESSOR, at its expense, shall construct the Building Shell Improvements. The phrase "Building Shell Improvements" means the improvements comprising the Building to be constructed as shown in the Building Shell Plans and the Building Shell Specifications, including (a) roofing, fascia, exterior walls, doors and windows, and truck doors (both at grade and at dock level), (b) footings and concrete floors, (c) fire sprinkler system, (d) conduits and pipes for telephone, electricity, water, fire sprinklers and sewer brought to "stub out", termination points in or above a perimeter wall of the Premises, (e) a main electrical termination panel for the Building, (f) paving and finish of parking areas, entrance areas and walkways, (g) landscaping for the Industrial Center as reasonably determined by LESSOR, and (h) site improvements consisting of street, gutters, sidewalks, curbs, storm drains and erosion control (construction period and permanent) as required to comply with governmental requirements 5.1 Tenant Improvements. The phrase "Tenant Improvements" means all interior improvements which are not a part of the Building Shell Improvements, including (a) partitions, walls, doors, (b) all interior surface finishes, including wall coverings, paint, floor coverings, suspended ceilings and other similar items, (c) duct work, heat pumps, vents, filters, diffusers, terminal boxes and accessories for completion of heating, ventilation and air conditioning systems within the Premises, (d) electrical distribution systems (including panels, subpanels, wires and outlets), lighting fixtures, outlets, switches and other electrical work to be installed in the Premises, (e) plumbing lines, fixtures and accessories, (f) all fire and life safety control systems such as fire walls and fire alarms (including piping, wiring and accessories) to be located in the Premises, (g) entrance door signage and directory listings, as authorized by LESSOR, (h) improvements required for compliance with Title 24, (i) level mechanism for load docks; provided, however, LESSEE's trade fixtures, equipment and personal property (including telephone systems, chairs, tables, furniture, movable partitions and other equipment used in LESSEE's business) shall not be considered part of the Tenant Improvements. 5.2 Design of Tenant Improvements. LESSEE shall furnish to LESSOR for its approval, a space plan showing the configuration of the Improved Office Space no later than May I5, 1998, which shall be the Approved Space Plan following LESSOR's approval. LESSEE shall furnish to LESSOR a complete set of plans and specifications detailing all Tenant Improvements no later than June 30, 1998 ("Tenant Improvement Plans). Unless otherwise approved by LESSOR, the Tenant Improvement Plans will be prepared by the Architect, who shall also obtain permits for the plans. Should Architect, in LESSEE's sole opinion, not progress in a timely fashion to meet the June 30, 1998, requirement for the Tenant Improvement Plans, LESSEE may select a different architect/space planner to develop the Tenant Improvement Plans. In such event, all expenses incurred by LESSOR's Architect shall not be part of the Allowance, and all expenses incurred by LESSEE's architect shall be part of the Allowance and shall be reimbursed by LESSOR to LESSEE on a monthly basis. Further, the June 30, 1998, date outlined herein shall be adjusted forward by the amount of days from May 15, 1998 to the date LESSEE gives written notice of its election to terminate Architect. If LESSEE does not execute and deliver the Lease on or before March 1, 1998, or if LESSEE delays in providing the Approved Space Plan and/or the Tenant Improvement Plans such delays shall not change the Commencement Date of the Lease, which shall be the date the Premises would have been available for occupancy, but for any such delay; provided such delays will delay the date for Substantial Completion. The Tenant Improvement Plans shall be subject to LESSOR's prior approval, which will not be unreasonably withheld; provided, however, LESSOR shall have the absolute right of disapproval, in its sole discretion, of any Tenant Improvements which (a) alter or otherwise affect any structural component of the Building, (b) are visible from the exterior of the Premises, (c) do not conform to the Approved Space Plan for the Improved Office Space, or (d) the Tenant Improvement Plans specify materials which are not readily available or customarily and ordinarily used in similarly situated construction work where the procurement of such materials would cause a delay in Substantial Completion. LESSOR shall respond within fifteen (15) days after receipt of the Tenant Improvement Plans in which to approve or disapprove in writing the Tenant Improvement Plans. If LESSOR disapproves the Tenant Improvement Plans, it shall state with specificity the reasons for such disapproval. If LESSOR reasonably disapproves the Tenant Improvement Plans, LESSEE shall promptly cause the Tenant Improvement Plans to be revised and resubmitted to LESSOR for its review and approval within fifteen (15) days from notice of LESSOR's disapproval. Following LESSOR's approval, LESSOR will have the Architect submit the Tenant Improvement Plans for government plan checking and a building permit, if required, provided, LESSOR shall have the right to approve any changes required by such governmental authorities. The final Tenant Improvement Plans shall be subject to any changes required by governmental authorities. 5.3 Approved Contractor. Hamann Construction, a licensed general contractor, will be the general contractor for construction of the Building Shell Improvements and Tenant Improvements. LESSOR and LESSEE hereby approve Hamann Construction acting as the general contractor ("Contractor"). Contractor's agreed-upon markup (profit and overhead) for the Tenant Improvements will be 12% of the actual costs incurred in the development and construction of the Tenant Improvements exclusive only of the costs of the preparation of the Tenant Improvement Plans and government permits. LESSEE shall have the right to review the subcontract proposals ("Bids") for the Major Trades (as defined below) required for construction of the Tenant Improvements. No later than thirty (30) days prior to the commencement of construction, LESSOR shall cause Contractor to deliver to LESSEE Bids for each Major Trade from no less than three (3) licensed and qualified subcontractors together with a written notice specifying the Bids which Contractor recommends for acceptance. LESSEE shall have the right to reasonably disapprove one of the Bids for each of the Major Trades selected by Contractor by giving LESSOR written notice of any objection that LESSEE may have to such Bids within five (5) days from LESSEE's receipt of the Bids from Contractor; provided, however, LESSEE shall not have the right to disapprove more than one (1) bid within a Major Trade, and Contractor shall have the right to select any of the remaining Bids in such Major Trade category. LESSEE's notice of disapproval shall explain in detail the basis for the disapproval of any Bid recommended by Contractor. Contractor shall have the right to utilize any subcontractors submitting Bids for which LESSEE does not timely give notice of its disapproval. The term "Major Trades" means portions of the construction work: consisting of the supply or installation of electrical, heating and air conditioning, fire sprinkler system, framing, drywall, plumbing, painting, floor coverings, suspended ceilings, glass, doors and ceramic tile. 5.3.1 Project Schedule. Contractor shall provide to LESSEE a project schedule for both the Shell Building and the Tenant Improvements within three months of the execution of the Lease. Thereafter, Contractor shall provide LESSEE monthly updates to the Project Schedule. 5.4 Allowance for Tenant Improvement Costs. LESSOR agrees to pay a maximum of $980,000.00 ("Allowance") for Tenant Improvement Costs as defined below. The Allowance shall be applied solely to pay the cost of such Tenant Improvements, and under no circumstances shall LESSEE be entitled to any payment on account of any unused, portion of the Allowance following completion of the Tenant Improvements and payment of the Tenant Improvement Costs. The amount of the Allowance actually advanced by LESSOR shall be used to calculate the amount of the Allowance Amortization Charge described in subsection 3.3 of this Addendum. 5.4.1 Excess Costs Payable BY LESSEE. LESSEE will be responsible for payment of any excess Tenant Improvement Costs which exceed the amount of the Allowance payable by LESSOR under subsection of this Addendum. LESSEE shall deposit funds with LESSOR (or make such other arrangements to guaranty payment of such excess costs as are acceptable to LESSOR) in an amount equal to such excess prior to the issuance of the building permit for construction of the Tenant Improvements, except in the case of excess costs resulting from changes during construction. Any construction changes shall be subject to LESSOR's approval and LESSEE shall deposit funds with LESSOR to pay such costs within five (S) days following notice of Contractor's cost for any change. 5.5 Completion and Acceptance of Building Shell and Tenant Improvements. The Commencement Date of the Lease shall not occur until Substantial Completion (as defined in subsection 5.5.1 of this Addendum) of the Building Shell Improvements reasonably required for occupancy of the Building, and the Tenant Improvements. Notwithstanding the preceding provisions, if Substantial Completion is delayed on account of LESSEE's failure to timely submit the Tenant Improvement Plans (or any revisions thereto), LESSEE's request for special materials, finishes or installations (i.e. materials which are not readily available or customarily and ordinarily used in similarly situated construction work) not shown in the Tenant Improvement Plans as approved by LESSOR, changes to the Approved Space Plan or approved Tenant Improvement Plans requested by LESSEE or other delays caused by LESSEE, the Commencement Date of this Lease shall occur prior to Substantial Completion and as of the date Substantial Completion would have occurred but for such delays by LESSEE. Notwithstanding the foregoing, a delay in Substantial Completion attributable to LESSEE for actions other than those deadlines outlined in section 5.2 shall not be deemed to have occurred unless LESSOR gives LESSEE notice of its action causing such delay and LESSEE fails to take actions necessary to prevent a delay of LESSEE's obligations hereunder condoning for three days after receipt of written notice from LESSOR specifying LESSEE's action which will cause such delay. 5.5.1 "Substantial Completion" Defined. The term Substantial Completion" means the date upon which LESSOR reasonably satisfies all of the following requirements: (a) the construction of the applicable Building Shell Improvements is substantially completed, subject only to minor corrective work which does not affect or limit LESSEE's use of the Premises; provided, LESSOR shall complete any such minor work within thirty (30) days; (b) the construction of the applicable Tenant Improvements is substantially completed in accordance with the Tenant Improvement Plans as modified only by any changes requested by LESSEE and approved by LESSOR or as otherwise permitted by this Lease, subject only to minor corrective work which does not affect or limit LESSEE's use of the Premises; provided, LESSOR shall complete any such minor work within thirty (30) days; (c) LESSOR has procured a certificate of occupancy (whether temporary or permanent) or other applicable permit permitting LESSEE's immediate use and occupancy of the Building; and (d) LESSOR has given LESSEE written notice stating that such Substantial Completion has occurred and that the Premises are available for LESSEE's immediate possession and occupancy ("Notice of Possession"). LESSOR shall give LESSEE at least ten (10) days written notice in advance of the estimated date of Substantial Completion. 5.5.2 Condition of Premises. Prior to the Commencement Date, LESSEE and LESSOR shall conduct a walk-through inspection of the Premises and prepare and sign a punch-list of all items needing additional work by LESSOR, and LESSEE shall thereafter have an additional sixty (60) days in which to identify to LESSOR any construction deficiencies or defects which were not readily observable at the time of the preparation of the first punch-list, whereupon say items so identified in no more than three (3) additional punch-lists and agreed to by LESSOR following consultation with LESSEE, will be added to the final punch-list. The punch-lists to be prepared by LESSEE shall not include any damage to the Premises caused by LESSEE's move-in, which damage shall be repaired or corrected by LESSEE, at its expense. If LESSEE fails to submit the final punch-list to LESSOR within the sixty (60) day period immediately following the Commencement Date, it shall be deemed that there are no items needing additional work or repair. LESSOR's contractor shall complete all reasonable punch-list items within thirty (30) days after the walk-through inspection and within thirty (30) days following LESSOR's receipt of any additional punch-lists, or as soon as practicable thereafter. Upon LESSOR or LESSOR's contractor's indication to LESSEE of the completion of such punch-list items, LESSEE shall acknowledge the completion of such items in writing to LESSOR. If LESSEE fails either to so acknowledge the completion of such items within seven (7) days of such stated completion or within such seven day period to specify in writing to LESSOR in reasonable detail any such previously listed punch-list items that remain uncompleted, all such items shall be deemed approved by LESSEE. 5.6 LESSOR's Enforcement of Contractor Warranties. LESSOR has obtained from Contractor the following warranties ("Contractor Warranties"): "CONTRACTOR unconditionally warrants all materials and equipment furnished under this Contract will be new, unless otherwise specified, and that all Work will be of good quality, free from material faults and defects and in conformance with the Contract Documents. CONTRACTOR, at its expense, shall repair or replace any Work requiring replacement or repair within one (1) year from completion of the Project, except with respect to the roof membrane only, which CONTRACTOR will repair or replace within two (2) years as required to prevent water penetration. In the event CONTRACTOR fails to timely perform its warranty obligation, OWNER shall have the right to cause such repairs or replacements and CONTRACTOR shall be liable for the reasonable costs of such repairs or replacements. LESSOR agrees to take such commercially reasonable action as necessary to enforce such Contractor Warranties for the repair or maintenance of the Premises on account of any items covered by the Contractor Warrantees, including patent or latent defects or deficiencies in the Premises. 5.6.1 Exclusion From Common Area Operating Expenses. Notwithstanding any other provision, any costs of repairs or replacement of any patent or latent defect or deficiency identified during the period the applicable Contractor Warranties remain in effect shall not be included in calculating Common Area Operating Expenses. 5.7 LESSEE's Fixturization. No later than thirty (30) days prior to the expected date of Substantial Completion of the Building, LESSOR shall permit LESSEE to enter upon the Premises for the purposes of permitting LESSEE to commence installation of LESSEE's machinery and trade fixtures ("Fixturization Period"). LESSEE agrees to carry out such work in such manner as will not interfere with Contractor's work. LESSOR shall not be responsible for securing the Premises or liable for any loss or damage to any such machinery or trade fixtures installed by LESSEE prior to the delivery of possession of the Premises. LESSEE shall not be responsible for payment of any of the Rent during the Fixturization Period, provided LESSEE shall be responsible for compliance with all other terms and conditions of the Lease, including the provisions in Paragraph 8 of the Lease requiring LESSEE to maintain certain insurance. 6. Hazardous Materials Questionnaire. Without limiting LESSEE's obligations under Paragraph 6 of the Lease regarding compliance with Hazardous Substance Laws, LESSEE shall, within ten (10) days from the execution of the Lease, complete and deliver to LESSOR for its filing with applicable government authorities a Hazardous Materials Questionnaire in the form as set forth in EXHIBIT "4" annexed to this Addendum. 7. Additional Provisions Regarding Financial Statements. Notwithstanding the provisions of Paragraph 16.2 of the Lease, LESSOR agrees to accept the audited financial statements of Guarantor in lieu of separate financial statements from LESSEE so long as LESSEE's financial performance is reported only as a part of Guarantor's consolidated financial statements; provided, however, LESSEE agrees to cooperate with LESSOR to provide information concerning LESSEE's separate business and financial affairs to the extent required by LESSOR's lender. 8. Option to Extend. Subject to the provisions of Paragraph 39 of the Lease, LESSEE shall have the option to extend the Lease Term for one additional term of five (5) years, which option is exercisable only by LESSEE giving LESSOR written notice of the election to exercise such option ("Election Notice") no earlier than twelve (12) months and no later than nine (9) months before the expiration of the Original Term. If LESSEE fails for any reason to timely give such Election Notice, such option rights shall automatically terminate and be of no further force or effect and LESSEE shall not have any other right to extend the Original Term. 8.1 Remaining Lease Terms. Except as provided in this subsection and in subsection 8.2 of this Addendum, if LESSEE elects to extend the Original Term, all other terms and conditions of the Lease shall remain in effect during such extended term except: (a) no tenant improvements or allowances shall be provided by LESSOR, and LESSEE shall be deemed to have extended the term of the Lease and accepted the Premises "AS IS" in their then-existing condition and without representation or warranty from LESSOR; (b) upon expiration of the five (5) year extension, LESSEE shall have no further right to extend the term of the Lease; and (c) the Base Rent applicable during the option term shall be determined in accordance with subsection 8.2 of this Addendum. 8.2 Adjustment to Base Rent. The Base Rent for the extension period shall be an amount equal to the "far rental value" of the Premises as determined in the following manner: (a) Within thirty (30) days from LESSEE's Election Notice, LESSOR and LESSEE shall meet in an effort to negotiate, in good faith, the fair rental value of the Premises for the option period. If LESSOR and LESSEE have not agreed upon the fair rental value of the Premises at least ninety (90) days prior to the beginning of the applicable option period, the fair rental value shall be determined by appraisal, by one or more appraisers ("Appraiser(s)"). The Appraisers shall have at least five (5) years experience in the appraisal of commercial/industrial real property in the area in which the Premises is located and shall be members of professional organizations such as M.A.I. or equivalent. (b) If LESSOR and LESSEE are not able to agree upon the fair rental value of the Premises within the prescribed time period, then LESSOR and LESSEE shall attempt to agree in good faith upon a single Appraiser not later than seventy-five (75) days prior to the beginning of the applicable option period. If LESSOR and LESSEE are unable to agree upon a single Appraiser within such time period, then LESSOR and LESSEE shall each appoint one Appraiser not later than sixty-five (65) days prior to the beginning of the applicable option period. Within ten (10) days thereafter, the two (2) appointed Appraisers shall appoint a third Appraiser. If either LESSOR or LESSEE fails to appoint its Appraiser within the prescribed time period, the single Appraiser appointed shall determined the fair rental value of the Premises. If both parties fail to appoint Appraisers within the prescribed time periods, then the first Appraiser thereafter selected by a party shall determine the fair rental value of the Premises. Each party shall bear the cost of its own Appraiser and the parties shall share equally the cost of the single or third Appraiser, if applicable. (c) For the purposes of such appraisal, the term "fair rental value. shall mean the price that a ready and willing tenant would pay, as of the beginning of the applicable option period, as monthly rent to a ready and willing landlord of property comparable to the Premises if such property were exposed for lease on the open market for a reasonable period of time and taking into account all of the purposes for which such property may be used. If a single Appraiser is chosen, then such Appraiser shall determine the fair rental value of the Premises. Otherwise, the fair rental value of the Premises shall be the arithmetic average of the two (2) of the three (3) appraisals which are closest in amount, and the third appraisal shall be disregarded. LESSOR and LESSEE shall instruct the Appraiser(s) to complete the determination of the fair rental value not later than thirty (30) days prior to the beginning of the applicable option period. If the fair rental value is not determined prior to the beginning of the, option period, then LESSEE shall continue to pay to LESSOR the Base Rent applicable to the Premises immediately prior to such extension, until the fair rental value is determined. When the fair rental value of the Premises is determined, LESSOR shall deliver notice thereof to LESSEE, and if the fair rental value is higher, LESSEE shall pay to LESSOR, within ten (10) days after receipt of such notice, the difference between the Base Rent actually paid by LESSEE to LESSOR and the new Base Rent determined hereunder. (d) Notwithstanding any other provision of this Lease, in no event shall the Base Rent in effect for the last year of the Original Term be decreased on account of the operation of this section. 9. Corporate Resolution. Within ten (10) days of Lease execution, LESSEE shall provide LESSOR with a certified copy of a Corporate Resolution authorizing William L. Stephan sign this Lease on behalf of DATRON WORLD COMMUNICATIONS INC. 10. Estimated Operating Expense Budget. A copy of the 1998 Estimated Common Area Operating Expenses Budget is attached to this Addendum as EXHIBIT "5". LESSEE acknowledges that (a) this estimate is being provided only to illustrate the projected amounts and categories of expense and that actual results may be different than the estimates; and (b) it is aware that amounts and categories of expense may vary in future years as the Premises ages. Common Area Operating Expenses shall not increase by more than five percent (5%) per year cumulatively not including property taxes. 11. Current Rules and Regulations. Pursuant to Paragraph 2.9 of the Lease, LESSOR has adopted the Rules and Regulation annexed to this Addendum as EXHIBIT "6", and such Rules and Regulations shall remain in effect until changed by LESSOR in accordance with the Lease. 12. Security Deposit. If LESSEE is not in default at Commencement of the Lease then 1/2 of the security deposit under section 1.7 of the Lease will be applied to the second month's rent, when due. 13. Signage. LESSEE shall be granted primary building signage (two sides of the building) and monument signage at the entrance and corner of the site. If a single user moves into the balance of the Project, they will be permitted to install a sign on their end of the building. If the building is leased to multiple tenants, they will be limited to door signage. 14. Additional Provisions Regarding Parking. Notwithstanding any other provision, LESSEE shall have the right to mark any of the parking spaces set aside on EXHIBIT "1" as LESSEE's parking spaces with carefully painted lettering or logo identifying LESSEE not exceeding 18" by 12". 15. Antennas. Subject to LESSEE's compliance, at its expense, with all Applicable Laws as defined in subparagraph 2.4 of the Lease, LESSOR consents to LESSEE's installation of one 60' tower and three 20' whip antennas at the locations shown on EXHIBIT "1". Said tower and antennas shall be for the private use of the LESSEE and not for any other commercial purpose. 16. Additional Provisions Regarding Common Area Operating Expenses. (e) Common Area Operating Expenses shall include reasonable expenditures which would be capitalized in accordance with generally accepted accounting principles, but such expenditure shall be prorated on an annual basis over the useful life of the improvement or facility so replaced or rehabilitated, and from the date of any expenditure, there shall be included in Common Area Operating Expenses during any single Lease Year only the pro rata portion of that expenditure as is properly allocable to such Lease Year. Common Area Operating Expenses shall not include: (1) the cost of any additional or extraordinary services provided to other tenants of the Building; (2) costs paid for directly by LESSEE; (3) principal and interest payments on loans secured by deeds of trust recorded against the Industrial Center; (4) real estate sales or leasing brokerage commissions; (5) executive salaries of off-site personnel employed by LESSOR except for the charge (or pro rata share) of the manager of the Industrial Center; (6) expenses for repairs or other work occasioned by fire, windstorm or other insured casualty (excluding any insurance deductible therefrom); (7) expenses incurred in leasing or procuring new tenants, including any advertising costs associated with vacant spaces in the Premises, Building or Industrial Center; (8) legal expenses incurred in enforcing or negotiating the terms of any lease, or in connection with any financing or syndication of the Industrial Center; (9) interest or amortization payments on any debt and rent payable under any lease to which this Lease is subject and all costs and expenses associated with any such debt or lease; (10) expenses incurred by LESSOR to the extent the same are reimbursed from any other tenant, occupants of the Industrial Center or third parties (other than as Common Area Operating Expenses reimbursed or other similar reimbursement from such other parties); and (11) interest or penalties due for late payment by LESSOR, of any Common Area Operating. 17. Additional Provisions Regarding Assignment and Subletting. Subject to Subparagraph 12.2 of the Lease and except as provided in subsection 17.2 below, LESSOR agrees to consent to LESSEE's assignment of the Lease or any subleasing of a portion of the Premises in any Permitted Transaction (as defined below); provided, however, any such assignment or subleasing shall not release or otherwise affect the liability of LESSEE, or any Guarantor, for the obligations under this Lease. 17.1 "Permitted Transaction" Defined. The phrase Permitted Transaction" means and refers to an assignment or sublease in connection with a transaction being undertaken in good faith and not for the purpose of indirectly subletting or assigning the Lease through a step transaction or otherwise, and which meets any one of the following requirements: (a) an assignment or sublease to a subsidiary, affiliate, division or corporation controlling, controlled by or under common control with LESSEE; (b) an assignment or sublease to a successor corporation related to LESSEE by merger, consolidation, nonbankruptcy reorganization or government action; (c) an assignment of the Lease or sublease to another entity, which is not affiliated with LESSEE ("Unaffiliated Transferees) in conjunction with the concurrent good faith sale and transfer to such Unaffiliated Transferee of substantially all of LESSEE's assets; or (d) LESSEE's sale of capital stock through the NYSE, AMEX or any other major public exchange, and any such sale shall not be deemed an assignment, subletting or ocher transfer of this Lease or the Premises requiring LESSOR's consent. 17.2 Exception. Prior to the consummation of any Permitted Transaction, LESSEE shall cause the proposed assignee or subtenant to complete and submit to LESSOR a Hazardous Materials Questionnaire in the form as set forth in EXHIBIT "4" signed by the proposed assignee or subtenant. Notwithstanding any other provision, LESSOR shall have the right to decline to consent to any Permitted Transaction in which the assignee's or subtenant's use of the Premises would increase the risk of contamination of any Hazardous Substance as compared to the risk presented by LESSEE's use of the Premises. 17.3 Additional Rental. Except in the case of a Permitted Transaction, fifty percent (50%) of any sums or other economic consideration (without deduction) received by LESSEE as a result of an assignment or subletting to which LESSOR has consented, whether denominated rentals under the assignment or sublease or otherwise, which exceed, in the aggregate, the total sums which LESSEE is obligated to pay LESSOR under this Lease (prorated to reflect obligations allocable to that portion of the Premises subject to a sublease) shall be payable to LESSOR as additional rental under this Lease without affecting or reducing any other obligation of LESSEE under this Lease. Such amounts shall be due and payable within fifteen (15) days from LESSEE's receipt. In the event of subletting of only a portion of the Premises, in calculating whether the rent received by LESSEE exceeds the rent payable under this Lease, the rent payable under the Lease shall be prorated according to the square footage involved in order to reflect the rent applicable to the space sublet. In no event shall this provision be construed or applied to reduce the Base Rent or other charges payable by LESSEE under this Lease, nor modify, waive or otherwise affect LESSOR's rights and remedies in the event of a sublease or assignment (other than a Permitted Transaction) without LESSOR's consent. In the cases of an assignment or sublease (other than a Permitted Transaction) to which LESSOR has not given its consent, in addition to all other rights and remedies, LESSOR may elect, by giving LESSEE written notice, to adjust the rentals payable under this Lease based on the then fair rental value of the Premises. 18. Additional Provisions Regarding Holdover. If LESSEE remains in possession of all or any part of the Premises after the expiration of the Term, with the consent of LESSOR, such tenancy shall be from month-to-month only and not a renewal hereof or any extension for any further teen, and in such case, Base Rent shall be increased to an amount equal to one hundred fifty percent (150%) of the Base Rent paid during the last month of the Term and all other sums due hereunder shall be payable in the amount and at the time applicable at the time of expiration and at the time specified in this Lease and such month-to-month tenancy shall be subject to every other term, covenant and agreement of this Lease. "LESSOR" NORTH COUNTY INDUSTRIAL PARK, L.P., a California limited partnership By: WHAMMY, INC., a California corporation, General Partner Dated: 3/24/1998 By: /S/JEFFREY C. HAMMAN President Dated: 3/30/1998 By: /s/DANIEL M. WHITAKER Secretary "LESSEE" DATRON WORLD COMMUNICATIONS INC., a California corporation Dated: March 23, 1998 By: /s/WILLIAM L. STEPHAN Secretary/Treasurer EX-10.62 4 EXHIBIT 10.62 FOURTH AMENDMENT TO TRANS WORLD COMMUNCATIONS, INC. LEASE AGREEMENT DATED MARCH 1, 1998 FOURTH AMENDMENT DATED MARCH 1, 1998 TO THAT LEASE DATED NOVEMBER 15, 1988 BETWEEN ENTERPRISE HEIGHTS INDUSTRIAL CENTRE ASSOCIATES, "LANDLORD", AND TRANSWORLD COMMUNICATIONS, A WHOLLY OWNED SUBSIDIARY OF DATRON SYSTEMS, INC. "TENANT", FOR THE PREMISES AT 298,302 AND 304 ENTERPRISE STREET IN ESCONDIDO, CALIFORNIA. All the terms and conditions of the Lease remain in full force and effect except the following: 2.0l Term: The term of the lease shall be as follows: 298, 302 and 304 February 1, 1993 thru January 31, 1999 300 Enterprise, Suites "L" & "M" March 1, 1995 thru January 31, 1999 300 Enterprise, Suites "A", "B" & "C" May 1, 1995 thru January 31, 1999 Unless sooner terminated pursuant to any provision hereof. Notwithstanding Article 14.01, provided Tenants is not otherwise in breach or in default of this Lease, beyond any applicable notice and cure period, the term(s) may be extended at Tenant's option upon not less than 90 days notice (i.e. on or before November 1, 1998) to have either February 28, 1999. March 31, 1999, or April 30, 1999 be the new expiration date of the Lease on the same terms and conditions as set forth herein, with no additional increase in rent or fees required under Articles VI and VIII. 3.01 Rent: The basic monthly rent shall be changed to: March 1, 1998 thru January 31, 1999 - $35,053.06 (Subject to Rental Adjustment provisions contained in Paragraphs 3.01 and 15.2 of the First Amendment to Lease which remain unchanged). 14.20 Additional Provisions Enterprise Heights Partners, and or Broker have permission to enter premises with 24 hours notice to show prospect tenants. 15.6 Taxes and Reimbursement for Costs: The current $4,786.86 monthly fee to cover all items required of Tenant under articles VI and VIII shall be increased as follows: March 1, 1998 thru January 31, 1999 - $5,581.48 (Subject to the adjustment provisions contained in Paragraph 3.02) Date: 03/24/98 Date: 3/23/98 LANDLORD TENANT Enterprise Heights Datron World Communications Inc. Industrial Centre formerly known as Transworld Associates Communications Inc. By:/s/ CHARLES R. SWIMMER By:/s/ WILLIAM L. STEPHAN Charles R. Swimmer, William L. Stephan General Partner Secretary/Treasurer EX-10.63 5 EXHIBIT 10.63 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN THE REGISTRANT AND RICHARD W. PERSHING DATED AS OF APRIL 1, 1998 This First Amendment to Employment Agreement is entered into as of April 1, 1998 by and between DATRON SYSTEMS INCORPORATED, a Delaware corporation (the "Company") and RICHARD W. PERSHING (the "Employee"). RECITALS The Company and Employee are parties to an Employment Agreement dated as of May 1, 1990, which they desire to amend as provided herein. NOW THEREFORE, the parties agree as follows: 1. Duties. Section 1 of the Agreement is amended to read as follows: "Employee is employed by Company in the position of Assistant to the President for the term set forth in Section 5. Employee shall work at Company's office located at 75-572 Debby Lane, Indian Wells, California. Employee shall perform such duties as may be reasonably designated by Company." 2. Compensation. Section 3 of the Agreement is amended to read as follows: "During the term of the Agreement, Company shall pay Employee a salary at the annual rate then in effect in equal installments on a weekly basis; provided however, that the annual rate will not be less than $12,000." 3. Termination. Section 5, Subsections (a) and (c) of the Agreement are amended to read as follows: At the end of Subsection (a) insert the following paragraph: "If Employee's employment is terminated by the Company under Section 5(a), the annual rate specified in Section 3 shall increase to $150,000 effective upon delivery of notice of termination. Subsection (c) is amended to read: "If Employee dies, Company shall continue to pay Employee's salary and continue Employee's benefits for six months following the date of death." 4. Continuation of Terms. In all other respects the provisions of the Agreement shall continue to be effective. DATRON SYSTEMS INCORPORATED By: /s/ DAVID A. DERBY, President /s/ RICHARD W. PERSHING EX-10.64 6 EXHIBIT 10.64 WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND NOTE THIS WAIVER AND SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT AND NOTE ("Second Amendment") is made and entered into as of April 30, 1998, by and between DATRON SYSTEMS INCORPORATED, a Delaware corporation ("Borrower" or "Company") and UNION BANK OF CALIFORNIA, N.A. ("Bank"). This Second Amendment amends that certain Amended and Restated Credit Agreement, as previously Amended, by and between Bank and Borrower dated as of August 8, 1997 ("Credit Agreement"). RECITALS A. Whereas, the parties hereto agreed to certain modifications of the Facility Documents ("Loan Documents"). B. Whereas, on August 1, 1995 Datron/Transco, Inc.("Guarantor") executed its Continuing Guaranty in the amount of Twenty-Nine Million and No/100 Dollars ($29,000,000.00) of Borrower's Obligations to Bank on August 1, 1995, and Datron World Communications Inc.("Guarantor" with each Guarantor referenced herein together as "Guarantors") executed its Continuing Guaranty in the amount of Twenty-Nine Million and No/100 Dollars ($29,000,000.00) of Borrower's Obligations to Bank, both of which remain in full force and effect and referenced herein inclusive with Loan Documents. C. Whereas, the Borrower and the Bank desire to evidence (1) the Bank's waiver of the Borrower's compliance with three of the financial covenants for the periods ending for the fourth quarter and fiscal year end March 31, 1998, (2) modify two of the financial covenants (a) one for the first quarter ending June 30, 1998, and (b)one for the fiscal year ending March 31, 1999, and (3) modify the timing of the decrease in the maximum amount available under the Revolving Loan Facility, the Standby Facility and the UC Facility from April 30, 1998 to July 31, 1998 (Reduction Date) without changing the Reduction Amount, and (4) modify the minimum amount of the Simi Valley Financing from $3,500,000.00 to $3,300,000.00 ("Designated Defaults"), and (5) to provide for certain ancillary matters. AGREEMENT NOW THEREFORE, in consideration of the foregoing and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower and Guarantors hereby agree as follows: 1. Incorporation of Recitals. Each of the above recitals is incorporated herein and deemed to be the agreement of the Bank and Borrower and Guarantors and is relied upon by each party to this Second Amendment in agreeing to the terms of this Second Amendment. All capitalized terms used in this Second Amendment shall, unless otherwise defined herein or unless the context otherwise requires, have the meanings given thereto in the Credit Agreement. 2. Confirmation of Collateral. Borrower hereby grants and confirms that all obligations of Borrower to Bank are secured by a duly recorded security interest of first priority in the Collateral. 2.a. Confirmation of Guarantys. Each Guarantor hereby acknowledges and confirms such Guarantor's respective unconditional obligation as Guarantor of the obligations of Borrower to Bank as set forth in its Guaranty and reaffirms and restates each and every term, condition and provision thereof. 3. Confirmation of Representations and Warranties. Borrower hereby confirms all representations and warranties contained in the Loan Documents and reaffirms all covenants set forth therein, as amended. Further, Borrower certifies that, as of the date of this Second Amendment, there exists no Event of Default as defined in the Loan Documents other than the Designated Defaults, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default. 4. Conditions Precedent. Borrower understands that this Second Amendment shall not be effective and Bank shall have no obligation to amend the terms of the Loan Documents as provided herein unless and until each of the following conditions precedent has been satisfied not later than the respective date set forth below, or waived by Bank (in Bank's sole discretion), for whose sole benefit such conditions exist, with Bank's determination as to whether they have been timely satisfied being conclusive absent manifest error: 4.1 On or before May 15, 1998, Borrower and Guarantors shall have executed and delivered to Bank this Second Amendment; 4.2 On or before May 15, 1998, Borrowers shall have paid the Extension and Waiver Fee of Twelve Thousand Dollars ($12,000.00) which is equal to one-half (.5%) percent per annum of the Revolving Loan Facility Commitment annualized for the three month period; and, 4.3 On or before such time as Bank may require, Borrowers shall have taken any and all actions and execute and deliver to Bank any and all documents necessary or appropriate in Bank's sole discretion to effectuate this Second Amendment. 5. Waiver of Defaults. Subject to all of the terms and conditions of this Second Amendment, including, without limitation, the requirements of Sections 4 and 5 hereof, Bank hereby agrees to waive, for the fiscal quarter and fiscal year end of the Borrower ending March 31, 1998, and only for such fiscal quarter and year end, compliance by the Borrower with the Tangible Net Worth, Profitability, and Cash Flow Coverage Ratio covenants as set forth in Subsections 4.02(i), (k), and (m) of the Credit Agreement, and agrees that such noncompliance shall not constitute an Event of Default under the Credit Agreement or under the Credit Agreement as amended by the First and this Second Amendment. The waiver here given is specific to the covenants, and for the fiscal quarter and year end of the Borrower, referred to above and shall not operate as a waiver of compliance by the Borrower with any other covenant set forth in the Credit Agreement, or in the Credit Agreement as amended by the First or this Second Amendment, or with the covenants referred to above for any other fiscal quarter or year end of the Borrower. 6. Modification of Loan Documents. To induce Bank to enter into this Second Amendment, Borrower agrees that the Loan Documents are hereby supplemented and modified as follows, which modifications shall supersede and prevail over any conflicting provisions of the Loan Documents: 6.1 Subsection 4.02(i) Tangible Net Worth of the Credit Agreement is amended to read as follows: The Company will not, as at the end of any fiscal quarter or fiscal year end of the Company, permit its consolidated Tangible Net Worth to be less than Twenty-Three Million Four Hundred Thousand and No/100 Dollars ($23,400,000.00). 6.2 Subsection 4.02(k) Profitability of the Credit Agreement is amended to read as follows: The Company will not (1) permit its consolidated net after tax profits to be less than Ninety-Seven Thousand Dollars ($97,000.00) for the fiscal quarter of the Company ending June 30, 1998, and (2) permit its consolidated net after tax profits to be less than Two Hundred Fifty Thousand Dollars ($250,000.00) for any fiscal quarter of the Company ending on or after September 30, 1998. 6.3 Subsection 6.010 The Simi Valley Financing of the Credit Agreement is amended to read as follows: Simi Valley Financing shall fail to close on or prior to July 31, 1998, or shall close on or prior to July 31, 1998 but shall fail to generate net proceeds in an amount equal to or greater than Three Million Three Hundred Thousand Dollars ($3,300,000.00). 6.4 Subsection 1.01(b), (c), (d), (e) and (f) Availabilities of the Facilities of the Credit Agreement is amended such that any reference to the Reduction Date shall be changed from April 30, 1998 to July 31, 1998 hereafter; therefore, the maximum amounts available under the Revolving Loan Facility, the Standby Facility and the UC Facility shall be reduced by the Reduction Amount of Four Million dollars ($4,000,000.00) on the Reduction Date. 6.5 Subsection 1.02(d) of the Credit Agreement is amended in its entirety to read as follows: Revolving Loan Interest Rate Options. The Company shall pay interest on the unpaid principal amount of each Revolving Loan from the date of such loan (if such loan is made on or after the Effective Date), from the Effective Date (if such loan is a Reference Rate Revolving Loan made prior to the Effective Date), or from the first day of the hrst Interest Period for such loan which commences on or after the Effective Date (if such loan is a LIBOR Revolving Loan made prior to the Effective Date), until the maturity thereof (whether by acceleration or otherwise), at one of the following rates per annum: (i) Reference Rate Option - During such periods as such Revolving Loan is a Reference Rate Revolving Loan, a rate per annum equal to the Reference Rate plus one and one-half percent (1.5%), such rate to change from time to time as the Reference Rate shall change; or (ii) LIBO Rate Option - during such periods as such Revolving Loan is a LIBOR Revolving Loan, a rate per annum equal at all times during each Interest Period for such loan to the LIBO Rate for such Interest Period ~ two and one-half percent (2.5%). Each Revolving Loan shall, at any given time prior to maturity, bear interest at one, and only one, of the above rates. 7. Release. Borrower and each Guarantor hereby, for itself, its successors, heirs, executors, administrators and assigns, releases, acquits and forever discharges Bank, its directors, officers, employees, agents, affiliates, successors, administrators and assigns ("Released Parties") of and from any and all claims, actions, causes of action, demands, rights, damages, costs, loss of service, expenses and compensation whatsoever which any Borrower or Guarantor might have because of anything done, omitted to be done, or allowed to be done by any of Released Parties and in any way connected with the Liabilities or this Second Amendment or the other Loan Documents as of the date of execution of this Second Amendment, WHETHER KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN, including without limitation, any settlement negotiations and also including without limitation, any damages and the consequences thereof resulting or to result from the events described, referred to or inferred hereinabove ("Released Matters"). Each Borrower and Guarantor further agrees never to commence, aid or participate in (except to the extent required by order or legal process issued by a court or governmental agency of competent jurisdiction) any legal action or other proceeding based in whole or in part upon the foregoing. In furtherance of this general release, each Borrower and Guarantor acknowledges and waives the benefits of California Civil Code Section 1542 (and all similar ordinances and statutory, regulatory, or judicially created laws or rules of any other jurisdiction), which provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR Borrower and each Guarantor agrees that this waiver and release is an essential and material term of this Second Amendment and that the agreements in this paragraph are intended to be in full satisfaction of any alleged injuries or damages in connection with the Released Matters. Borrower and each Guarantor represents and warrants that it has not purported to convey, transfer or assign any right, title or interest in any Released Matter to any other person or entity and that the foregoing constitutes a full and complete release of the Released Matters. Borrower and each Guarantor also understands that this release shall apply to all unknown or unanticipated results of the transactions and occurrences described above, as well as those known and anticipated. Borrower and each Guarantor has consulted with legal counsel prior to signing this release, or had an opportunity to obtain such counsel and knowingly chose not to do so, and executes such release voluntarily, with the intention of fully and finally extinguishing all Released Matters. 8. Effect of Amendment. Bank and Borrower and each Guarantor agree that except as expressly provided herein, the Credit Agreement and the Loan Documents shall remain in full force and affect in accordance with their respective terms, without waiver or modification. Each of Borrower and Guarantors acknowledges that it is relying on no written or oral agreement, representation, warranty, or understanding of any kind made by Bank or any employee or agent of Bank except for the agreements of Bank set forth herein or in the Credit Agreement or other Loan Documents. 9. Applicable Law; Jurisdiction. Except as otherwise provided herein, this Second Amendment and the rights and obligations of the parties hereto shall be governed by the laws of the State of California without regard to principles concerning choice of law. In any action arising out of or connected with this Second Amendment, Borrower and Guarantors each hereby expressly consents to the personal jurisdiction of any state or federal court located in the State of California and also consents to service of process by any means authorized by federal or governing state law. IN WITNESS WHEREOF, Bank and Borrower and each Guarantor have executed this Second Amendment as of the date set forth in the preamble. BORROWER BANK DATRON SYSTEMS, INC. UNION BANK OF CALIFORNIA, N.A. By: /s/ WILLIAM L. STEPHAN By:/s/EMILY DENNY McKNIGHT Title: Vice President and Chief Title: Vice President Financial Officer GUARANTOR DATRON/TRANSCO INC. By:/s/DAVID A. DERBY Title: Chairman GUARANTOR DATRON WORLD COMMUNICATIONS, INC. By:/s/DAVID A. DERBY Title: Chairman EX-13 7 EXHIBIT 13 CERTAIN PORTIONS OF REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR FISCAL YEAR ENDED MARCH 31, 1998 CONTAINING INFORMATION REQUIRED BY PART I AND PART II OF THIS REPORT Information required by Part II, Item 5: Market for Registrant's Common Equity and Related Stockholder Matters. This information is contained in the section captioned "Common Stock Activity" on the inside back cover of the Annual Report. Common Stock Activity The common stock of Datron Systems Incorporated is traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol DTSI. The following table sets forth the high and low closing sales prices by quarter for the two most recent fiscal years as reported by Nasdaq: Fiscal Year 1998 Quarter Ended High Low -------- ------- June 30, 1997 $10.625 $ 9.00 September 30, 1997 $12.9375 $ 9.75 December 31, 1997 $11.625 $10.125 March 31, 1998 $10.375 $7.50 Fiscal Year 1997 Quarter Ended High Low ------- ------- June 30, 1996 $15.50 $11.675 September 30, 1996 $12.313 $8.75 December 31, 1996 $10.375 $6.00 March 31, 1997 $10.063 $6.813 On March 31, 1998, there were approximately 1,700 stockholders of the Company's common stock. The Company has never paid a cash dividend on its common stock and does not anticipate doing so in the foreseeable future. Information required by Part II, Item 6: Selected Financial Data. This information is contained in the section captioned "Datron Systems Incorporated Selected Financial Data" on the inside front cover of the Annual Report. Selected Financial Data
Fiscal Years Ended March 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------------------------------------------------- Statements of Operations Net sales $54,628,000 $53,269,000 $61,165,000 $70,033,000 $65,636,000 Net income (loss) (3,163,000) 268,000 (1,241,000) 3,920,000 5,251,000 Earnings (loss)per share assuming dilution $(1.18) $0.10 $(0.48) $1.51 $2.10 Balance Sheets Working capital $20,354,000 $24,756,000 $18,042,000 $14,241,000 $13,540,000 Total assets 51,284,000 56,476,000 58,459,000 55,944,000 49,488,000 Long-term debt 5,600,000 8,900,000 5,200,000 0 0 Total liabilities 21,679,000 23,868,000 26,588,000 23,079,000 20,887,000 Stockholders' equity 29,605,000 32,608,000 31,871,000 32,865,000 28,601,000 Book value per share $11.05 $12.26 $12.24 $12.84 $11.40
[FN] See Note 2 of Notes to Consolidated Financial Statements for an explanation of the determination of shares used in computing earnings (loss) per share. No dividends were declared or paid during the years presented. Information required by Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations. This information is contained on pages 6 through 9 of the Annual Report. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Overview Datron Systems Incorporated and its wholly owned subsidiaries (the "Company") provide products and services that address the needs of emerging satellite and radio communication markets. It reports operations in two business segments: Antenna and Imaging Systems, and Communication Products and Services. The Antenna and Imaging Systems business segment designs and manufactures specialized satellite communication systems, subsystems and antennas that are sold worldwide to commercial and governmental customers, including the U.S. Department of Defense ("DoD"). Fiscal 1998 sales for this segment were $33,789,000, a 1% increase from fiscal 1997 sales of $33,304,000. The DoD accounted for 31% and 47% of this segment's sales in fiscal 1998 and 1997, respectively. Because of the decline in U.S. defense spending, the Company has been pursuing additional markets for this segment's products. The primary such market has been remote sensing satellite earth stations. Sales of remote sensing products represented 33% and 35% of this segment's sales in fiscal 1998 and 1997, respectively. Sales of antenna systems for non-defense governmental agencies accounted for 18% and 4% of this segment's sales in fiscal 1998 and 1997, respectively. Another additional market is mobile direct broadcast satellite ("DBS") television reception systems for recreational vehicles, boats and large business jets. Sales of DBS products represented 18% and 14% of this segment's sales in fiscal 1998 and 1997, respectively. The Communication Products and Services business segment designs, manufactures and distributes high frequency and very high frequency radios and accessories for worldwide military and civilian purposes. Fiscal 1998 sales for this segment were $20,839,000, a 4% increase from fiscal 1997 sales of $19,965,000. Foreign customers accounted for 88% of fiscal 1998 sales and 94% of fiscal 1997 sales. During fiscal 1998, this segment sold radio products to an Asian customer that accounted for 24% of this segment's sales and 9% of consolidated sales. During fiscal 1997, sales of radio products to the same Asian customer accounted for 30% of this segment's sales and 11% of consolidated sales. Consolidated sales for fiscal 1998 were $54,628,000, a 3% increase from fiscal 1997 consolidated sales of $53,269,000. The increase in sales was primarily due to higher sales of DBS antennas and radio products, partially offset by lower sales of products for the DoD. Net loss for fiscal 1998 was $3,163,000, or $1.18 per share, compared with net income in fiscal 1997 of $268,000, or $0.10 per share. The net loss was primarily due to low gross margins resulting from cost overruns at the Antenna and Imaging Systems business segment. The net loss also included the write-off of the Company's investment in EarthWatch Incorporated of $1,113,000, or $0.42 per share. The investment in EarthWatch was made as part of a contract to supply earth station antennas in 1995 in support of EarthWatch's plans to be the first to launch a high-resolution, commercial remote sensing satellite. Although EarthWatch launched their first satellite in December 1997, communication with the satellite was subsequently lost and EarthWatch will need to raise new financing to achieve a longer term objective. Consequently, the decision was made to write off the investment. In March 1996, the Company announced its plan to consolidate its image processing division in San Jose, California with its remote sensing earth station business in Simi Valley, California. Both of those functions are part of the Antenna and Imaging Systems business segment. In connection with the consolidation, the Company recorded a restructuring charge of $1,421,000 ($855,000, or $0.32 per share, after taxes). Major categories of costs and expenses included in the restructuring charge were estimated employee severance, $683,000; goodwill write-off, $679,000; and estimated future losses on facility lease, $59,000. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. A variety of factors could cause the Company's actual results to differ from the anticipated results expressed in such forward-looking statements. These include, among others, uncertainties stemming from the dependence of the Company on foreign sales and on large orders from a relatively small number of customers, risks relating to the decline in the Company's traditional defense business and the Company's efforts to develop and market consumer products, lack of timely development or customer acceptance of new products, and the impact of competition. Investors are referred to the Company's periodic reports under the Securities Exchange Act of 1934, including without limitation, the Investment Considerations set forth in the Company's Annual Report on Form 10-K. The consolidated financial statements and notes thereto that appear on pages 10 through 23 should be read in conjunction with the following review. RESULTS OF OPERATIONS Operating results for the last three fiscal years are presented for each of the Company's two business segments (in thousands):
ANTENNA AND IMAGING SYSTEMS Years Ended March 31, --------------------- 1998 1997 1996 ------- ------- ------- Net sales $33,789 $33,304 $31,872 ======= ======= ======= Percent of consolidated net sales 62% 63% 52% === === === Gross profit $4,963 $9,923 $8,682 Operating expenses before corporate expenses and restructuring 7,472 8,110 10,341 ------ ------ ------ Operating income (loss) $(2,509) $1,813 $(1,659) ====== ===== ====== Percent of consolidated operating income (loss) before corporate expenses and restructuring 179% 80% (137%) ==== === ====
Sales of Antenna and Imaging Systems increased $485,000, or 1%, in fiscal 1998 compared with fiscal 1997 sales. The increase was primarily due to higher sales of DBS antenna products, partially offset by lower sales for the DoD and similar customers and by lower sales of remote sensing systems. Although sales for the DoD were 34% lower in fiscal 1998 than in fiscal 1997, higher sales of similar antenna products to other customers made up for most of the decline. Sales of Antenna and Imaging Systems increased $1,432,000, or 4%, in fiscal 1997 compared with fiscal 1996 sales. The increase was primarily due to sales of new DBS antenna products and to higher sales of remote sensing systems, partially offset by lower sales for the DoD. Gross profit percentage on Antenna and Imaging Systems' sales was 14.7% in fiscal 1998 compared with 29.8% in fiscal 1997 and 27.2% in fiscal 1996. The decrease in fiscal 1998 from fiscal 1997 was primarily due to cost overruns resulting from the necessity to substantially increase cost estimates to complete several projects. The Company periodically reviews and revises these costs. The need for increased expenditures was identified in the fourth quarter when those projects were undergoing final integration and testing. Several projects had design defects requiring redesign and rework. The increase in fiscal 1997 from fiscal 1996 was primarily due to the absence of a write-off of non-recoverable costs associated with a canceled remote sensing order in fiscal 1996. Efficiencies resulting from the consolidation of the Company's remote sensing business into the Simi Valley facility and reductions in reserves for contract contingencies also contributed to the increase. Operating loss percentage on sales of Antenna and Imaging Systems' products was 7.4% in fiscal 1998 compared with an operating income percentage of 5.4% of sales in fiscal 1997 and an operating loss percentage before provision for restructuring of 5.2% of sales in fiscal 1996. The decrease in fiscal 1998 from fiscal 1997 was primarily due to lower gross margins, partially offset by lower new product development and selling expenses. The improvement in fiscal 1997 from fiscal 1996 was primarily due to higher gross profits and to lower research and development, selling and administrative expenses. COMMUNICATION PRODUCTS AND SERVICES
Years Ended March 31, --------------------- 1998 1997 1996 ------- ------ ------- Net sales $20,839 $19,965 $29,293 ======= ====== ====== Percent of consolidated net sales 38% 37% 48% === === === Gross profit $6,404 $5,426 $9,531 Operating expenses before corporate expenses and restructuring 5,293 4,970 6,660 ------ ----- ----- Operating income $1,111 $456 $2,871 ====== ===== ====== Percent of consolidated operating income (loss) before corporate expenses and restructuring (79%) 20% 237% === === ====
Sales of Communication Products and Services increased $874,000, or 4%, in fiscal 1998 compared with fiscal 1997 sales. The increase in sales was primarily due to a higher backlog of orders at the beginning of fiscal 1998 than at the beginning of fiscal 1997. Sales of radio products to two Asian customers accounted for $7,181,000, or 34%, of this segment's fiscal 1998 sales. Sales of Communication Products and Services decreased $9,328,000, or 32%, in fiscal 1997 compared with fiscal 1996 sales. The decrease was due to lower orders resulting from delays in new product development and from softness in the worldwide radio market. Sales of radio products to the same two Asian customers accounted for $10,885,000, or 55%, of this segment's fiscal 1997 sales. Sales of radio products to one of the same Asian customers accounted for $11,457,000, or 39%, of this segment's fiscal 1996 sales. One customer will often account for a large percentage of this segment's annual sales; however, it is unusual to have large sales from the same customer in successive years. Gross profit percentage on Communication Products and Services' sales was 30.7% in fiscal 1998 compared with 27.2% in fiscal 1997 and 32.5% in fiscal 1996. The improvement in fiscal 1998 from fiscal 1997 was due to production efficiencies resulting from lower labor and overhead costs, partially offset by higher materials costs resulting from a less favorable product mix. The decline in fiscal 1997 from fiscal 1996 was due to higher labor and overhead costs, production inefficiencies resulting from a much lower sales level than the previous year and to increases in the provision for inventory obsolescence. Operating income percentage on sales of Communication Products and Services was 5.3% in fiscal 1998 compared with 2.3% of sales in fiscal 1997 and 9.8% of sales in fiscal 1996. The increase in fiscal 1998 compared with fiscal 1997 was due to higher gross margins, partially offset by higher administrative and new product development expenses. The decrease in fiscal 1997 compared with fiscal 1996 was due to lower gross profits and higher new product development expenses, partially offset by lower selling and administrative expenses. Because operating losses were incurred in the Antenna and Imaging Systems business segment in fiscal 1998 and 1996, and because a consolidated operating loss before corporate expenses and restructuring was incurred in fiscal 1998 and consolidated operating income before corporate expenses and restructuring was incurred in fiscal 1996, operating income attributable to the Communication Products and Services business segment was (79%) and 237% of consolidated operating income (loss) before corporate expenses and restructuring in fiscal 1998 and 1996, respectively. Consolidated expenses were as follows: Selling, general and administrative ("SG&A") expenses were $12,179,000 in fiscal 1998 compared with $11,770,000 in fiscal 1997 and $15,101,000 in fiscal 1996. Fiscal 1998 SG&A expenses increased 3% over fiscal 1997 SG&A expenses primarily because of higher administrative expenses at the Communication Products and Services business segment and because of increases in reserves for commitments and contingencies at the Antenna and Imaging Systems business segment. Selling expenses declined at both business segments. Fiscal 1997 SG&A expenses decreased 22% over fiscal 1996 SG&A expenses due to spending reductions at both business segments, cost reductions related to the Company's fourth quarter fiscal 1996 consolidation and restructuring, and to reductions in reserves for commitments and contingencies that the Company determined were no longer necessary. Research and development ("R&D") expenses were $1,987,000 in fiscal 1998 compared with $2,432,000 in fiscal 1997 and $3,280,000 in fiscal 1996. Fiscal 1998 R&D expenses decreased 18% over fiscal 1997 R&D expenses because of lower spending on development programs for mobile DBS products, partially offset by higher spending on development programs for new radio products. The Company expects to increase spending on new product development programs in fiscal 1999. Most of the anticipated increase will be for programs to enhance tracking antenna capabilities. Fiscal 1997 R&D expenses decreased 26% over fiscal 1996 R&D expenses primarily because of lower spending on development programs for mobile DBS products, partially offset by higher spending on development programs for new radio products. Interest expense was $373,000 in fiscal 1998 compared with $607,000 in fiscal 1997 and $211,000 in fiscal 1996. The 39% decrease in fiscal 1998 was due to lower levels of term debt during fiscal 1998. The 188% increase in fiscal 1997 from fiscal 1996 was due to much higher levels of term debt during fiscal 1997. The effective income tax provision (benefit) rates for fiscal years 1998, 1997 and 1996 were (26.4%), 51.1% and (39.8%), respectively. The low benefit rate in fiscal 1998 was due to the Company's inability to take a deduction for the write-off of its investment in EarthWatch Incorporated because of a lack of offsetting capital gains. The high provision rate in fiscal 1997 was due to relatively high unallowable expenses for tax purposes compared with low fiscal 1997 pre-tax book income. Order backlog at March 31 was as follows: 1998 1997 ----------- ----------- Antenna and Imaging Systems $19,949,000 $13,086,000 Communication Products and Services 5,494,000 4,862,000 ----------- ----------- Total $25,443,000 $17,948,000 =========== =========== The 52% increase in Antenna and Imaging Systems backlog at March 31, 1998 compared with March 31, 1997 was primarily due to higher bookings of remote sensing systems and antennas for the DoD and other non- defense governmental customers. The 13% increase in Communication Products and Services backlog at March 31, 1998 compared with March 31, 1997 was due to improved order bookings in the third and fourth quarters of fiscal 1998. LIQUIDITY AND CAPITAL RESOURES At March 31, 1998, working capital was $20,354,000 compared with $24,756,000 at March 31, 1997, a decrease of $4,402,000 or 18%. Significant changes affecting working capital during fiscal 1998 were as follows: accounts receivable decreased $2,409,000 primarily due to good collections and low fourth quarter sales in fiscal 1998; inventories decreased $261,000 primarily due to an increase in the provision for inventory obsolescence; accounts payable and accrued expenses increased $1,927,000. The Company's cash position at March 31, 1998 was $634,000 compared with $1,072,000 at March 31, 1997, a decrease of 41%. At March 31, 1998, the Company had borrowed $5,600,000 in term debt from its bank to meet operating cash requirements. Those borrowings represented a 37% decrease in term debt from the $8,900,000 of borrowings at March 31, 1997. Capital expenditures were $1,125,000 in fiscal 1998 compared with $891,000 in fiscal 1997. Capital expenditures in fiscal 1999 are expected to be higher than they were in fiscal 1998. At March 31, 1998, the Company had a $19,500,000 revolving line of credit with its bank, of which up to $15,000,000 may be used for the issuance of letters of credit and up to $9,500,000 may be used for direct working capital advances provided that total credit extended does not exceed $19,500,000. The letter of credit facility expires on June 30, 1999 and the working capital facility expires on April 30, 1999. In April 1998, the Company amended its revolving line of credit with its bank. Under the amended agreement, effective July 31, 1998, the Company will have a committed revolving line of credit in the amount of $15,500,000, of which up to $15,000,000 may be used for the issuance of letters of credit and up to $5,500,000 may be used for direct working capital advances. Total credit extended may not exceed $15,500,000. The Company believes its existing working capital, anticipated future cash flows from operations and available credit with its bank are sufficient to finance presently planned capital and working capital requirements through the end of fiscal 1999. Certain business opportunities could arise that would require working capital and credit availability for the issuance of letters of credit in amounts that exceed current credit limits with its bank. The Company believes there are alternative sources of financing available that would provide the necessary credit in that event; however, there can be no assurance the Company will be able to obtain such financing. Certain portions of the Company's internal operating systems and some software included in products sold to its customers are subject to failure as a result of the Year 2000 date issue (the "Year 2000 issue"). The Company is addressing this issue by examining those systems and software programs where there may be a risk of failure resulting from the Year 2000 issue, and determining an appropriate course of action to remedy identified problems in a timely fashion. In addition, the Company is in process of communicating with suppliers and others with whom it conducts business to assess whether they are Year 2000 compliant, and if not, to gain assurance they are taking appropriate steps to become compliant. The Company does not believe it will incur a material financial impact from the risk of failure, or from the costs associated with assessing the risk of failure, arising from the Year 2000 issue. The Company has never paid a cash dividend on its common stock and does not anticipate doing so in the foreseeable future. Inflation and changing prices have not had a significant impact on the Company's historical operations. Information required by Part II, Item 8: Financial Statements and Supplementary Data. This information is contained on pages 10 through 24 of the Annual Report. DATRON SYSTEMS INCORPORATED CONSOLIDATED BALANCE SHEETS
March 31, 1998 1997 ------------------------ ASSETS Current assets: Cash $634,000 $1,072,000 Accounts receivable, net 15,487,000 17,896,000 Inventories 14,048,000 14,309,000 Deferred income taxes 3,502,000 2,788,000 Prepaid expenses and other current assets 848,000 1,168,000 ----------------------- Total current assets 34,519,000 37,233,000 Property, plant and equipment, net 10,864,000 12,030,000 Goodwill, net 5,646,000 5,851,000 Investment --- 1,113,000 Other assets 255,000 249,000 ------------------------ Total assets $51,284,000 $56,476,000 ======================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $8,745,000 $7,647,000 Accrued expenses 3,932,000 3,103,000 Customer advances 965,000 744,000 Income taxes payable 203,000 194,000 Current portion of restructuring reserve 320,000 789,000 ------------------------ Total current liabilities 14,165,000 12,477,000 Long-term debt 5,600,000 8,900,000 Restructuring reserve --- 435,000 Deferred income taxes 1,914,000 2,056,000 ------------------------ Total liabilities 21,679,000 23,868,000 ------------------------ Commitments and contingencies -- Note 9 Stockholders' equity: Preferred stock -- par value $0.01; authorized 2,000,000 shares, none issued or outstanding --- --- Common stock -- par value $0.01; authorized 10,000,000 shares, 3,070,063 and 3,063,937 shares issued in 1998 and 1997, respectively 31,000 31,000 Additional paid-in capital 10,670,000 10,602,000 Retained earnings 21,254,000 24,417,000 Treasury stock, at cost; 390,779 and 404,521 shares in 1998 and 1997, respectively (2,106,000) (2,198,000) Stock option plan and stock purchase plan notes receivable (244,000) (244,000) ------------------------ Total stockholders' equity 29,605,000 32,608,000 ------------------------ Total liabilities and stockholders' equity $51,284,000 $56,476,000 ======================== See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31, 1998 1997 1996 ------------------------------------ Net sales $54,628,000 $53,269,000 $61,165,000 Cost of sales 43,261,000 37,920,000 42,952,000 ------------------------------------ Gross profit 11,367,000 15,349,000 18,213,000 Selling, general and administrative 12,179,000 11,770,000 15,101,000 Research and development 1,987,000 2,432,000 3,280,000 Restructuring --- --- 1,421,000 ------------------------------------ Operating income (loss) (2,799,000) 1,147,000 (1,589,000) Interest expense (373,000) (607,000) (211,000) Other income (expense) (1,126,000) 8,000 (261,000) ------------------------------------ Income (loss) before income taxes (4,298,000) 548,000 (2,061,000) Income taxes (benefit) (1,135,000) 280,000 (820,000) ------------------------------------ Net income (loss) ($3,163,000) $268,000 ($1,241,000) ==================================== Earnings (loss) per common share ($1.18) $0.10 ($0.48) ==================================== Weighted average number of common shares outstanding 2,670,000 2,629,000 2,591,000 ==================================== Earnings (loss) per common share -- assuming dilution ($1.18) $0.10 ($0.48) ==================================== Weighted average number of common and common equivalent shares outstanding 2,670,000 2,676,000 2,591,000 ==================================== See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Stock Option Plan Common Stock Additional and Stock Purchase Par Paid-In Retained Treasury Plan Notes Shares Value Capital Earnings Stock Receivable Total ----------------------------------------------------------------------------------------- Balance at April 1, 1995 2,559,623 $31,000 $10,587,000 $25,390,000 ($2,979,000) ($164,000) $32,865,000 Purchase of treasury stock (4,401) (51,000) (51,000) Stock options exercised for treasury stock and tax benefits 48,970 (37,000) 397,000 (80,000) 280,000 Stock option compensation 18,000 18,000 Net loss (1,241,000) (1,241,000) -------------------------------------------------------------------------------------------- Balance at March 31, 1996 2,604,192 31,000 10,568,000 24,149,000 (2,633,000) (244,000) 31,871,000 Purchase of treasury stock (8,776) (84,000) (84,000) Stock options exercised for treasury stock and tax benefits 64,000 (4,000) 519,000 515,000 Stock option compensation 38,000 38,000 Net income 268,000 268,000 ------------------------------------------------------------------------------------------- Balance at March 31, 1997 2,659,416 31,000 10,602,000 24,417,000 (2,198,000) (244,000) 32,608,000 Stock issued under employee stock purchase plan 6,126 45,000 45,000 Purchase of treasury stock (4,058) (53,000) (53,000) Stock options exercised for treasury stock and tax benefits 17,800 4,000 145,000 149,000 Stock option compensation 19,000 19,000 Net loss (3,163,000) (3,163,000) -------------------------------------------------------------------------------------------- Balance at March 31, 1998 2,679,284 $31,000 $10,670,000 $21,254,000 ($2,106,000) ($244,000) $29,605,000 ============================================================================================ See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31, 1998 1997 1996 ------------------------------------ Cash Flows from Operating Activities Net income (loss) ($3,163,000) $268,000 ($1,241,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,513,000 2,953,000 3,317,000 Restructuring (904,000) (1,267,000) 588,000 Loss on investment 1,113,000 --- --- Changes in operating assets and liabilities: Accounts receivable 2,409,000 (2,879,000) 2,594,000 Inventories 261,000 1,499,000 (5,807,000) Deferred income taxes (856,000) 801,000 229,000 Prepaid expenses and other assets 297,000 1,389,000 (1,819,000) Accounts payable and accrued expenses 1,927,000 (3,145,000) (754,000) Customer advances 221,000 (2,949,000) 1,236,000 Income taxes payable 9,000 (46,000) (2,311,000) Other liabilities --- --- (23,000) ------------------------------------ Net cash provided by (used in) operating activities 3,827,000 (3,376,000) (3,991,000) ------------------------------------ Cash Flows from Investing Activities Additions to property, plant and equipment (1,125,000) (891,000) (2,683,000) Purchase of investment --- (223,000) (890,000) ------------------------------------ Net cash used in investing activities (1,125,000) (1,114,000) (3,573,000) ------------------------------------ Cash Flows from Financing Activities (Decrease) increase in long-term debt (3,300,000) 3,700,000 5,200,000 Stock options exercised and tax benefits 213,000 553,000 378,000 Purchase of treasury stock (53,000) (84,000) (51,000) Payment advanced against stock option plan note receivable --- --- (80,000) ------------------------------------ Net cash provided by (used in) financing activities (3,140,000) 4,169,000 5,447,000 ------------------------------------ Decrease in cash (438,000) (321,000) (2,117,000) Cash at beginning of year 1,072,000 1,393,000 3,510,000 ------------------------------------ Cash at end of year $634,000 $1,072,000 $1,393,000 ==================================== Supplemental Cash Flow Information: Interest paid $384,000 $635,000 $224,000 Income tax paid (refunds received) ($367,000)($1,989,000) $3,306,000 See notes to consolidated financial statements.
DATRON SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS Datron Systems Incorporated and its wholly owned subsidiaries (the "Company") provide satellite communication and image processing systems through its Antenna and Imaging Systems business segment and high-quality radio and other wireless communication products to a worldwide market through its Communication Products and Services business segment. The Antenna and Imaging Systems business segment designs and manufactures specialized satellite communication systems, subsystems and antennas that are sold worldwide to commercial and governmental customers, including the U.S. Department of Defense. This business segment also provides earth station hardware, software and image processing systems for the remote sensing satellite systems market, and produces mobile satellite television reception systems for recreational vehicles, boats and airplanes. This business segment operates from facilities in Simi Valley, California. Communication products include HF (high frequency) and VHF (very high frequency) radio products and communication systems that are designed and manufactured in Escondido, California. These products are sold worldwide through a network of Company salespersons and independent dealers and sales representatives. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories Inventories are carried at the lower of cost (first-in, first- out) or market (determined on the basis of estimated realizable value). Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Useful lives range from two to ten years for machinery and equipment and furniture and fixtures, and from twenty to forty years for buildings and building improvements. Leasehold improvements are amortized over the related lease term. Goodwill Goodwill represents the excess of the cost of purchased businesses over the fair value of their net assets at date of acquisition and is being amortized on a straight-line basis over periods ranging from 20 to 38 years. The recoverability of goodwill is evaluated on a recurring basis utilizing the fair value methodology. As part of the restructuring charge at March 31, 1996, $679,000 in goodwill was written off. See Notes 3 and 4. Accumulated amortization of goodwill was $2,055,000 at March 31, 1998 and $1,850,000 at March 31, 1997. Investment Investment represents preferred stock in EarthWatch Incorporated. There is no public market for any of EarthWatch's securities. On December 24, 1997, EarthWatch launched its first remote sensing satellite and subsequently lost communications with it. EarthWatch management has indicated they need to raise additional financing to achieve a longer term objective. Because there can be no assurance EarthWatch will be able to raise additional financing or achieve their objectives, the investment of $1,113,000 was written off in the fourth quarter of fiscal 1998. Treasury Stock Repurchased shares of the Company's common stock are included in treasury stock at cost. Shares issued from treasury stock for exercise of stock options are issued at original cost on a first-in, first-out basis. Revenue Recognition Revenue from product sales is generally recognized at the time of shipment. Revenue from certain fixed-price contracts requiring substantial performance over several periods prior to commencement of deliveries is accounted for under the percentage-of-completion (cost- to-cost) method of accounting. Expected profits or losses on these contracts are based upon the Company's estimates of total sales value and cost at completion. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments resulting from such revisions are recorded in the periods in which revisions are made. Losses on contracts are recorded in full as they are identified. Accounts receivable include unbilled costs and accrued profits related to contracts accounted for under the percentage-of-completion method of accounting. There are no material amounts of contract holdbacks or claims subject to uncertainty of realization. Substantially all amounts are expected to be collected within one year. Funds received from customers in advance of contract work are classified as current liabilities. Income Taxes Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." This statement requires that deferred income taxes be reported in the Company's financial statements utilizing the asset and liability method. Under this method, deferred income taxes are determined based on enacted tax rates applied to the differences between the financial statement and tax basis of assets and liabilities. Earnings (Loss) Per Share Effective for the three-month period ended December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This statement provides simplified standards for the computation and presentation of earnings per share ("EPS"), making EPS comparable to international standards. SFAS No. 128 requires dual presentation on the face of the income statement of "Basic" and "Diluted" EPS by entities with complex capital structures, replacing "Primary" and "Fully Diluted" EPS illustrated under Accounting Principles Board ("APB") Opinion No. 15, "Earnings Per Share." Basic EPS excludes dilution from common stock equivalents and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects potential dilution from common stock equivalents, similar to Fully Diluted EPS, but uses only the average stock price during the period as part of the computation. Shares used in computing earnings (loss) per common share - assuming dilution include the weighted average of common stock outstanding plus equivalent shares issuable under the Company's stock option plans, when such amounts are dilutive. Options to purchase 320,000 shares of common stock at prices ranging from $6.50 - $16.00 were not included in the computation of diluted EPS at March 31, 1998 because the effect of such options would be anti-dilutive. Such options expire at various dates from February 20, 1999 to March 22, 2008. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which was effective for the Company beginning April 1, 1996. SFAS No. 123 requires expanded disclosures for stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share. See Note 8. NOTE 3. RESTRUCTURING In March 1996, the Company announced its plan to consolidate its image processing division in San Jose, California with its remote sensing earth station business in Simi Valley, California. In connection with this decision, a restructuring charge in the amount of $1,421,000 ($855,000, or $0.32 per share, after taxes) was recorded in the fourth quarter ended March 31, 1996. The major categories of costs and expenses included in this restructuring charge are as follows: Estimated employee severance $ 683,000 Goodwill write-off 679,000 Estimated future losses on facility lease 59,000 --------- Total $1,421,000 ========= In fiscal 1993, the Company restructured its Antenna and Imaging Systems business segment. The restructuring reserve at March 31, 1998 and 1997 includes remaining estimated future losses on the Company's Camarillo, California facility lease of $320,000 and $1,224,000, respectively. NOTE 4. ACQUISITION OF BUSINESS On August 11, 1994, the Company acquired the business and assets of International Imaging Systems, Inc. (I2S), a privately held company located in Milpitas, California. At March 31, 1996, remaining goodwill from this acquisition in the amount of $679,000 was written off as part of the Company's decision to consolidate its remote sensing business. See Note 3. NOTE 5. BALANCE SHEET INFORMATION
Accounts receivable at March 31: 1998 1997 ------------ ----------- Billed $ 8,676,000 $14,019,000 Unbilled 7,001,000 4,103,000 ------------ ----------- Subtotal 15,677,000 18,122,000 Allowance for doubtful accounts (190,000) (226,000) ------------ ---------- Total $15,487,000 $17,896,000 ============ ===========
Inventories at March 31: 1998 1997 ------------ ---------- Raw materials $ 7,830,000 $9,316,000 Work-in-process 4,067,000 2,753,000 Finished goods 2,151,000 2,240,000 ------------ ----------- Total $14,048,000 $14,309,000 ============ ===========
Inventories are presented net of allowances for obsolescence of $1,656,000 and $1,350,000 at March 31, 1998 and 1997, respectively.
Property, plant and equipment at March 31: 1998 1997 ------------ ----------- Land and buildings $ 8,557,000 $ 8,529,000 Machinery and equipment 15,201,000 14,590,000 Furniture and office equipment 1,506,000 1,443,000 Leasehold improvements 821,000 815,000 Construction-in-process 299,000 66,000 ----------- ----------- Subtotal 26,384,000 25,443,000 Accumulated depreciation and amortization (15,520,000) (13,413,000) ------------ ----------- Total $10,864,000 $12,030,000 ============ ===========
Accrued expenses at March 31: 1998 1997 ---------- ----------- Salaries and employee benefits $1,731,000 $1,408,000 Warranty allowance 933,000 707,000 Commission and service fees 519,000 421,000 Contract loss allowance 87,000 Other 749,000 480,000 ---------- ---------- Total $3,932,000 $3,103,000 ========== ==========
NOTE 6. LONG-TERM DEBT At March 31, 1998, the Company had a committed revolving line of credit with its bank of $19,500,000, of which up to $15,000,000 may be used for the issuance of letters of credit and up to $9,500,000 may be used for direct working capital advances. Total credit extended may not exceed $19,500,000. The letter of credit facility expires on June 30, 1999 and the working capital facility expires on April 30, 1999. Interest is payable on borrowings under the line of credit at the bank's prime rate plus 0.85% or at LIBOR plus 1.85%, at the option of the Company. At March 31, 1998, the bank's prime rate was 8.50%. The line of credit is secured by assets of the Company and contains certain financial covenants with which the Company is in compliance. A commitment fee of 0.25% is payable to the bank on the unused portion of the working capital facility. At March 31, 1998, there were borrowings of $5,600,000 under the line and the bank had issued letters of credit against the line totaling $7,408,000. On April 30, 1998, the Company amended its credit agreement and note with its bank. Under the amended agreement, effective July 31, 1998, the Company will have a committed revolving line of credit with the bank of $15,500,000, of which up to $15,000,000 may be used for the issuance of letters of credit and up to $5,500,000 may be used for direct working capital advances. Total credit extended may not exceed $15,500,000. Interest is payable on borrowings under the line of credit at the bank's prime rate plus 1.50% or at LIBOR plus 2.50%, at the option of the Company. The Company believes the carrying amount of its outstanding long- term debt at March 31, 1998 and 1997 is a reasonable estimate of its fair value. This was determined based on a review of borrowing rates available to the Company at March 31, 1998 and 1997 for loans with similar terms and maturities. NOTE 7. INCOME TAXES Effective April 1, 1993, the Company changed its method of accounting for income taxes from the provisions of APB Opinion No. 11, "Accounting for Income Taxes" (Deferred Method) to the provisions of SFAS No. 109, "Accounting for Income Taxes" (Liability Method). The Company's deferred income tax assets and liabilities at March 31 are as follows:
1998 1997 ---------- ---------- Deferred income tax assets: Contract loss and other allowances $1,652,000 $1,419,000 Alternative minimum tax credits 557,000 Accrued employee benefits 424,000 384,000 Net operating loss carryover 369,000 171,000 Investment tax credits 207,000 173,000 Restructuring reserve 137,000 530,000 Other 156,000 111,000 --------- --------- Total 3,502,000 2,788,000 --------- --------- Deferred income tax liabilities: Depreciation (1,639,000) (1,777,000) State taxes (275,000) (279,000) --------- --------- Total (1,914,000) (2,056,000) --------- --------- Net deferred income tax asset $1,588,000 $ 732,000 ========= =========
As of March 31, 1998, the Company had $294,000 and $3,039,000 of federal and California net operating loss carryforwards, respectively. In addition, the Company had $557,000 and $207,000 of federal and California credit carryforwards, respectively. The federal net operating loss carryforwards expire in 2013, and the California net operating loss carryforwards expire from 2001 to 2003. There is no expiration date for the federal credit carryforwards. The California credit carryforwards expire from 2004 to 2006. In the event of certain ownership changes, the Tax Reform Act of 1986 imposes certain restrictions on the amount of net operating loss carryforwards which may be used in any year by the Company. The provision (benefit) for income taxes for the years ended March 31 are as follows:
1998 1997 1996 ----------- --------- ----------- Federal: Current $ (280,000) $(599,000) $(1,059,000) Deferred (694,000) 811,000 335,000 State: Current 78,000 10,000 Deferred (161,000) (10,000) (106,000) ----------- --------- ---------- Total $(1,135,000) $ 280,000 $ (820,000) =========== ========= ==========
The provision (benefit) for income taxes differs from the federal statutory tax rate for the years ended March 31 due to the following:
1998 1997 1996 ----------- --------- ----------- Expected tax (benefit) at statutory rate $(1,461,000) $ 186,000 $ (701,000) Disallowed capital loss 378,000 State tax (benefit), net of federal tax effect (103,000) 20,000 (63,000) Foreign Sales Corporation earnings (70,000) (28,000) (116,000) Goodwill amortization 70,000 70,000 70,000 Other differences 51,000 32,000 (10,000) ----------- --------- ---------- Total $(1,135,000) $ 280,000 $ (820,000) =========== ========= ==========
NOTE 8. EMPLOYEE INCENTIVE PLANS In May 1985, the Company adopted the 1985 Stock Option Plan (1985 Plan). Under the 1985 Plan, as amended, 500,000 shares of common stock may be issued upon the exercise of options granted to employees of the Company at not less than the fair market value on the date of grant and to directors of the Company at not less than 85% of the fair market value on the date of grant. Options become exercisable ratably over three years and expire ten years from the date of grant. The 1985 Plan expired in May 1995. As of March 31, 1998, 15,000 shares of common stock had been issued in connection with the exercise of an option granted pursuant to the 1985 Plan for which $80,000 of the exercise price received was in the form of a secured promissory note. The note is due June 11, 1998 and bears interest at 6.27% per annum. In February 1995, the Company adopted the 1995 Stock Option Plan (1995 Plan), which was approved by the Company's stockholders at the 1995 Annual Meeting. The 1995 Plan permits up to 500,000 shares of common stock to be issued upon the exercise of options granted under the 1995 Plan. However, because the number of shares available for issuance under the 1995 Plan was reduced by the number of options granted and outstanding under the 1985 Plan at the time of its expiration in May 1995, the effective number of shares authorized for issuance under the 1995 Plan is 206,700, of which 61,073 were available under the 1985 Plan at the time of its expiration. Terms of issuance and exercise of options granted under the 1995 Plan are similar to those under the 1985 Plan. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had compensation expense for the Company's two fixed stock option plans (the 1985 Plan and 1995 Plan) been determined consistent with the provisions of SFAS No. 123 based on the fair value at date of grant for awards made in fiscal years ended March 31, 1998, 1997 and 1996, and assumed forfeiture rates of 12%, 10% and 10%, respectively, net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ----------- -------- ----------- Net income (loss) - ----------------- As reported $(3,163,000) $268,000 $(1,241,000) Pro forma $(3,601,000) $ 62,000 $(1,532,000) Earnings (loss) per common share - ------------------- As reported $(1.18) $0.10 $(0.48) Pro forma $(1.35) $0.02 $(0.59) Earnings (loss) per common share - assuming dilution - ------------------- As reported $(1.18) $0.10 $(0.48) Pro forma $(1.35) $0.02 $(0.59)
The pro forma effect on net income (loss) for fiscal years 1998, 1997 and 1996 is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expense related to grants awarded prior to April 1, 1995. The weighted-average fair value of options granted under the two stock option plans with exercise prices equal to market price during fiscal years 1998, 1997 and 1996 is estimated at $4.17, $5.44 and $6.81, respectively, and the weighted-average exercise prices for those options was $8.92, $11.25 and $14.58, respectively. The weighted-average fair value of options granted under the two stock option plans with exercise prices at less than market price during fiscal years 1998, 1997 and 1996 is estimated at $4.36, $7.06 and $9.45, respectively, and the weighted-average exercise prices for those options was $7.23, $11.26 and $15.73, respectively. These estimates were determined by using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants awarded in fiscal years 1998, 1997 and 1996, respectively: dividend yield of 0%, 0% and 0%; expected volatility of 44%, 45% and 43%; risk- free rate of return of 5.81%, 6.42% and 6.09%; and expected lives of 5 years, 5 years and 5 years. A change in these assumptions could result in a significant change to the indicated fair value amounts. A summary of the status of the Company's two fixed stock option plans as of March 31, 1998, 1997 and 1996 and activity during the years then ended is as follows:
1998 1997 1996 ------------------ ----------------- ------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 219,580 $11.35 270,150 $10.46 247,300 $7.98 Granted 164,000 $8.81 30,500 $11.25 84,500 $14.99 Canceled (45,820) $13.42 (17,070) $12.90 (12,680) $11.77 Exercised (17,800) $7.67 (64,000) $7.13 (48,970) $5.72 ------- ------ ------- ------ ------- ------ Outstanding at end of year 319,960 $9.96 219,580 $11.35 270,150 $10.46 ======= ===== ======= ====== ======= ====== Options exercisable at end of year 145,293 $10.86 143,780 $10.30 182,650 $8.66 ======= ===== ======= ====== ======= ======
Stock option compensation expense related to options granted at less than fair value on date of grant pursuant to the 1985 Plan and 1995 Plan was $19,000, $38,000 and $18,000 in fiscal years 1998, 1997 and 1996, respectively. Information about fixed stock options outstanding at March 31, 1998 is as follows:
Options Outstanding Options Exercisable ----------------------------------- ------------------------ Weighted- Ave Weighted- Weighted- Range of Remaining Ave Ave Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - --------------- ----------- ----------- -------- ----------- ------- $6.50 - $7.23 15,000 7.4 years $6.98 5,000 $6.50 $8.08 - $9.50 199,500 7.3 $8.60 73,167 $8.71 $10.00 - $12.88 67,460 7.8 $11.41 37,460 $11.81 $14.25 - $16.00 38,000 6.2 $15.68 29,666 $15.67 - --------------- ------- --- ------ ------- ------ $6.50 - $16.00 319,960 7.3 years $9.96 145,293 $10.86 =============== ======= === ====== ======= ======
At March 31, 1998, 34,270 shares were available for grant under the 1995 Plan. In March 1988, the Company adopted the 1988 Key Employee Stock Purchase Plan (Purchase Plan). Under terms of the Purchase Plan, 75,000 shares of common stock may be made available for purchase at fair market value to key employees as determined by the board of directors. As of March 31, 1998, 50,000 shares had been purchased pursuant to the Purchase Plan, and a note receivable in the amount of $164,000 due April 10, 1999 at an interest rate of 4.99% was outstanding. The Company has a non-contributory qualified profit sharing plan. Employees are eligible to participate on April 1 following their date of employment and benefits vest over seven years. Annual contributions are determined by the board of directors. Such amounts were zero, zero and zero for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. In November 1995, the Company adopted the Supplemental Executive Profit Sharing Plan, effective as of April 1, 1994. The plan is a deferred compensation plan intended to provide certain executive employees with additional funds for their retirement. Terms of participation and vesting of benefits are similar to those of the qualified profit sharing plan. Eligibility for participation and annual contributions are determined by the board of directors. Contributions for the fiscal years ended March 31, 1998, 1997, and 1996, were zero, $56,000 and zero, respectively. In August 1997, the Company adopted the Employee Stock Purchase Plan, effective as of July 1, 1997. Employees are eligible to participate in the plan if they have been employed a minimum of six months and work at least 20 hours per week. Eligible employees may use funds from accumulated payroll deductions to purchase shares of Company common stock at the end of six-month offering periods. They may contribute up to 10% of gross earnings toward such purchases, not to exceed $12,500 per offering period, and may purchase a maximum of 1,000 shares per offering period. The purchase price for the shares is 85% of the lesser of the fair market value of the common stock at the beginning of the offering period or at the end of the offering period. Shares purchased must be held for a minimum of three months before they can be sold. At the end of the first offering period on December 31, 1997, the Company issued 6,126 shares of common stock to employees at a purchase price of $7.33 per share. A total of 200,000 shares has been authorized for issuance under the Employee Stock Purchase Plan. NOTE 9. COMMITMENTS AND CONTINGENCIES The Company leases certain production and office facilities and certain equipment under noncancelable operating leases. As a result of the fiscal year 1993 restructuring, a portion of one of the Company's production facilities has been subleased to three subtenants whose subleases expire on June 28, 1998. The Company's San Jose facility has been subleased to a subtenant whose sublease expires on March 31, 1999. In March 1998, the Company signed a new ten-year lease for a production and office facility located in Vista, California. That lease commences February 1, 1999. Future minimum operating lease obligations for each of the years ended March 31 are as follows:
Total Lease Sublease Net Lease Year Obligation Income Obligation - ---------- ----------- -------- ---------- 1999 $945,000 $296,000 $649,000 2000 667,000 667,000 2001 649,000 649,000 2002 632,000 632,000 2003 630,000 630,000 Thereafter 3,973,000 3,973,000 --------- -------- --------- Total $7,496,000 $296,000 $7,200,000 ========= ======== =========
Approximately $320,000 of this future net lease obligation is included in the restructuring reserve. See Note 3. Total rent expense under noncancelable operating leases was $618,000, $567,000 and $787,000 for the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Additional rent payments in the amounts of $638,000, $695,000 and $465,000 were charged to the restructuring reserve during the fiscal years ended March 31, 1998, 1997 and 1996, respectively. In the normal course of business, the Company is subject to claims and litigation that may be raised by governmental agencies in connection with the Company's long-term contract business and other civil claims by private parties. In connection with a Defense Contract Audit Agency (DCAA) audit of a $9.6 million U.S. Navy contract completed in 1989, DCAA has submitted a report to the Contracting Officer alleging deficiencies in the information provided to the Navy at the time the contract was negotiated and recommending a reduction in the contract value of $2.7 million. During the fiscal year ended March 31, 1995, DCAA amended its recommendation to a reduction in contract value of $1.9 million. The Company is confident that its actions have been appropriate at all times and believes that the conclusions in the DCAA report are erroneous; the Company intends to challenge the report and its conclusions vigorously. During the fiscal year ended March 31, 1998, the Company had several discussions with the Contracting Office regarding this matter. In the opinion of management, resolution of this matter would not materially affect the consolidated financial position of the Company. In August 1992, Trans World Communications, Inc. (Trans World), a wholly owned subsidiary of the Company and which was renamed Datron World Communications Inc. on March 31, 1995, was named as defendant in a lawsuit filed by ATACS Corporation (ATACS) and AIRTACS Corporation (AIRTACS) relating to a contract to provide radio communication shelters. ATACS and AIRTACS contend that Trans World entered into an agreement to team with them on the contract and then wrongfully failed to use them as subcontractors. They seek damages in excess of $2,000,000. In a May 28, 1997 ruling, the court found Trans World in breach of a teaming agreement but was not able to determine what damages, if any, were incurred by ATACS and AIRTACS. The court ordered both parties to submit supplemental findings to support their positions regarding damages. On September 3, 1997, the court awarded ATACS and AIRTACS one dollar ($1.00) in damages. ATACS and AIRTACS have appealed the court's decision. The Company has taken a cross appeal with respect to the issue of whether the Company was in breach of any teaming agreement. The Company believes that final resolution of this matter will not materially affect the consolidated financial position of the Company. NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in two business segments: Antenna and Imaging Systems, and Communication Products and Services. See Note 1. The following table contains certain segment, geographic and customer information about the Company's business:
Years Ended March 31, ----------------------------------------- 1998 1997 1996 ----------------------------------------- Net sales: Antenna and Imaging Systems $33,789,000 $33,304,000 $31,872,000 Communication Products and Services 20,839,000 19,965,000 29,293,000 ----------- ----------- ----------- Total $54,628,000 $53,269,000 $61,165,000 =========== =========== =========== Operating income (loss): Antenna and Imaging Systems $(2,509,000) $ 1,813,000 $(1,659,000) Communication Products and Services 1,111,000 456,000 2,871,000 ---------- ---------- ---------- Total (1,398,000) 2,269,000 1,212,000 Restructuring (1,421,000) General corporate expenses (1,401,000) (1,122,000) (1,380,000) Interest expense (373,000) (607,000) (211,000) Other income (expense) (1,126,000) 8,000 (261,000) ---------- ----------- ---------- Income (loss) before income taxes $(4,298,000) $ 548,000 $(2,061,000) =========== =========== =========== Identifiable assets: Antenna and Imaging Systems $24,891,000 $26,596,000 $29,076,000 Communication Products and Services 20,286,000 24,603,000 22,807,000 Corporate 6,107,000 5,277,000 6,576,000 ----------- ----------- ----------- Total $51,284,000 $56,476,000 $58,459,000 =========== =========== =========== Capital additions: Antenna and Imaging Systems $ 655,000 $ 190,000 $ 1,821,000 Communication Products and Services 456,000 688,000 861,000 Corporate 14,000 13,000 1,000 ---------- ----------- ----------- Total $1,125,000 $ 891,000 $ 2,683,000 ========== =========== =========== Depreciation and amortization: Antenna and Imaging Systems $1,658,000 $ 1,791,000 $ 2,141,000 Communication Products and Services 837,000 1,149,000 1,163,000 Corporate 18,000 13,000 13,000 ---------- ----------- ----------- Total $2,513,000 $ 2,953,000 $ 3,317,000 ========== =========== =========== Net sales: U.S. $24,589,000 $27,316,000 $25,697,000 Asia 16,104,000 18,148,000 20,116,000 Europe 4,923,000 2,251,000 4,846,000 South America 4,547,000 2,792,000 3,386,000 Africa 3,979,000 2,484,000 6,493,000 Other 486,000 278,000 627,000 ----------- ----------- ----------- Total $54,628,000 $53,269,000 $61,165,000 =========== =========== =========== Sales for U.S. Department of Defense: Antenna and Imaging Systems $10,386,000 $15,787,000 $17,658,000 Communication Products and Services 1,682,000 558,000 529,000 ----------- ----------- ----------- Total $12,068,000 $16,345,000 $18,187,000 =========== =========== ===========
For the fiscal year ended March 31, 1998, two customers accounted for 17% and 15% of Antenna and Imaging Systems net sales and three customers accounted for 24%, 12% and 10% of Communication Products and Services net sales. For the fiscal year ended March 31, 1997, three customers accounted for 13%, 12% and 11% of Antenna and Imaging Systems net sales and two customers accounted for 31% and 24% of Communication Products and Services net sales. For the fiscal year ended March 31, 1996, one customer accounted for 15% of Antenna and Imaging Systems net sales and one customer accounted for 39% of Communication Products and Services net sales. NOTE 11. QUARTERLY FINANCIAL DATA - Unaudited (in thousands, except per-share data)
Fiscal Year 1998 Earnings (Loss) Per Share Net Gross Net Assuming Sales Profit Income (Loss) Dilution ------- ------ ------------- -------- First Quarter $10,341 $2,355 $(548,000) $(0.21) Second Quarter 14,937 3,611 149,000 0.06 Third Quarter 17,081 4,268 347,000 0.13 Fourth Quarter 12,269 1,133 (3,111,000) (1.16) ------- ------- ----------- ------- Fiscal Year $54,628 $11,367 $(3,163,000) $(1.18) ======= ======= =========== =======
First quarter results reflect low sales of radio communication products and military antennas. Sales of both radio communication products and military antennas increased in the second and third quarters, however, the improvement in net income during those quarters was primarily due to higher gross profits on the higher radio communication product sales. Low gross margins on sales of antenna and imaging systems products during the first three quarters, resulting from higher engineering costs and improperly bid contracts, were a major factor contributing to the cumulative net loss through the third quarter. The lower fourth quarter net sales and large net loss were primarily due to cost overruns at the Company's Datron/Transco Inc. subsidiary resulting from increases in estimates to complete several projects that required redesign and rework. Also included in the fourth quarter net loss was a $1,113,000 ($0.42 per share) write-off of the Company's investment in EarthWatch Incorporated.
Fiscal Year 1997 Earnings Per Share Net Gross Net Assuming Sales Profit Income Dilution ------- ------ ------ -------- First Quarter $12,457 $3,456 $29 $0.01 Second Quarter 14,620 3,909 155 0.06 Third Quarter 12,923 3,612 20 0.01 Fourth Quarter 13,269 4,372 64 0.02 ------- ------- ---- ----- Fiscal Year $53,269 $15,349 $268 $0.10 ======= ======= ===== =====
Net sales, gross profits and net income were relatively consistent from quarter-to-quarter, and generally lower than they were in fiscal 1996. Lower sales of radio communication products were primarily responsible for the decline, partially offset by lower operating expenses. Third quarter net income reflects a $552,000 ($330,000, or $0.12 per share, after taxes) reduction in reserves for commitments and contingencies. Fourth quarter net sales reflect $666,000 in sales returns of DBS antenna products from a former distributor. Gross profit for the fourth quarter reflects a $605,000 increase in the Company's provision for inventory obsolescence. INDEPENDENT AUDITORS' REPORT To the Board of Directors Datron Systems Incorporated Escondido, California We have audited the accompanying consolidated balance sheets of Datron Systems Incorporated and its subsidiaries as of March 31, 1987 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Datron Systems Incorporated and its subsidiaries as of March 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Deloitte & Touche LLP San Diego, California May 8, 1998 EX-21 8 EXHIBIT 21: DATRON SYSTEMS INCORPORATED SUBSIDIARIES MARCH 31, 1998 Percentage of Jurisdiction Voting Securities in which Name Owned by Parent Incorporated - -------------------------------- ------------------ ------------- Datron World Communications Inc. 100% California Datron/Transco Inc. 100% California Datron/Trans World Communications Int'l Ltd. (a Foreign Sales Corporation) 100% U.S. Virgin Islands EX-22 9 EXHIBIT 22 Proxy Statement, Notice of Annual Meeting of Stockholders to be Held Wednesday, August 5, 1998 at 11:00 A.M. and Form of Proxy (to be deemed filed only to the extent required by the instructions to exhibits for reports on Form 10-K) to be filed within 120 days of the end of the Registrant's fiscal year. EX-23 10 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Numbers 2-99763, 33-16985 and 33-20785 of Datron Systems Incorporated on Form S-8 of our reports dated May 8, 1998, appearing in and incorporated by reference in the Annual Report on Form 10-K of Datron Systems Incorporated for the year ended March 31, 1998. DELOITTE & TOUCHE LLP Deloitte & Touche LLP San Diego, California June 25, 1998 EX-24 11 EXHIBIT 24 POWER OF ATTORNEY (on signature page 16) EX-27 12
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1998 MAR-31-1998 634 0 15,677 190 14,048 34,519 26,384 15,520 51,284 14,165 0 0 0 31 29,574 51,284 54,628 54,628 43,261 43,261 15,292 0 373 (4,298) (1,135) (3,163) 0 0 0 (3,163) (1.18) (1.18)
EX-27 13 EXHIBIT 27.2 RESTATED FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED 3/31/96
5 THIS FINANCIAL DATA SCHEDULE HAS BEEN RESTATED TO REFLECT THE REGISTRANT'S ADOPTION OF STATEMENT OF ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1996 MAR-31-1996 1,393 0 15,264 247 15,808 37,298 24,692 10,857 58,459 19,256 0 0 0 31 31,840 58,459 61,165 61,192 42,952 42,952 20,063 0 238 (2,061) (820) (1,241) 0 0 0 (1,241) (0.48) (0.48)
EX-27 14 EXHIBT 27.3 RESTATED FINANCIAL DATA SCHEDULE FOR THE NINE MONTHS ENDED 12/31/95
5 THIS FINANCIAL DATA SCHEDULE HAS BEEN RESTATED TO REFLECT THE REGISTRANT'S ADOPTION OF STATEMENT OF ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS MAR-31-1996 DEC-31-1995 814 0 24,288 226 14,731 43,173 24,207 10,506 64,988 21,765 0 0 0 31 33,864 64,988 49,355 49,380 33,907 33,907 13,920 0 104 1,449 530 919 0 0 0 919 0.35 0.35
EX-27 15 EXHIBIT 27.4 RESTATED FINANCIAL DATA SCHEDULE FOR THE SIX MONTHS ENDED 9/30/95
5 THIS FINANCIAL DATA SCHEDULE HAS BEEN RESTATED TO REFLECT THE REGISTRANT'S ADOPTION OF STATEMENT OF ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE." THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS MAR-31-1996 SEP-30-1995 110 0 20,126 172 12,063 35,182 23,344 9,614 56,208 18,502 0 0 0 31 33,664 56,208 30,016 30,035 19,726 19,726 9,102 0 36 1,171 429 742 0 0 0 742 0.29 0.28
EX-99.1 16 EXHIBIT 99.1 ANNUAL REPORT OF THE DATRON SYSTEMS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN ANNUAL REPORT For the fiscal year ended March 31, 1998 DATRON SYSTEMS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN (Full title of the plan) Datron Systems Incorporated 304 Enterprise Street, Escondido, California 92029-1297 (Name of issuer of the securities held pursuant to the plan and the address of its principal executive office) DATRON SYSTEMS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN F-1 Index To Financial Statements Page Independent Auditors' Report F-2 Financial Statements: Statement of Net Assets Available for Benefits F-3 Statement of Changes in Net Assets Available for Benefits F-4 Notes to Financial Statements F-5 Schedules: None All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or the notes thereto. F-2 INDEPENDENT AUDITORS' REPORT Datron Systems Incorporated Employee Stock Purchase Plan We have audited the accompanying statements of net assets available for benefits of Datron Systems Incorporated Employee Stock Purchase Plan (the "Plan") as of March 31, 1998 and the related statements of changes in net assets available for benefits for the nine months ended March 31, 1998. These financial statements are the responsibility of the Plan's management Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, information regarding the Plan's net assets available for benefits as of March 31, 1998 and the changes in net assets available for benefits of the Plan for the nine months ended March 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Deloitte & Touche LLP San Diego, California June 22, 1998 F-3 DATRON SYSTEMS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS March 31, 1998 Cash $25,220 Participant contributions receivable 2,313 ------- Net assets available for benefits $27,532 ======= See accompanying notes to financial statements F-4 DATRON SYSTEMS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS Nine Months Ended March 31, 1998 Participant contributions $94,937 Benefits paid (44,911) Cash disbursements to employees withdrawing from the plan (22,493) -------- Net increase $27,532 Net assets available for benefits: Beginning of period 0 ------- End of period $27,532 ======= See accompanying notes to financial statements F-5 DATRON SYSTEMS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS Note 1. Plan Description In August 1997, the stockholders adopted, effective July 1, 1997, the Datron Systems Incorporated Employee Stock Purchase Plan (the "Stock Purchase Plan") under Section 423 of the Internal Revenue Code. The Stock Purchase Plan is intended to provide eligible employees with the opportunity to acquire an equity interest in Datron Systems Incorporated (the "Company") through the acquisition of purchase rights. Employees are eligible to participate in the plan if they have been employed a minimum of six months and work at least 20 hours per week. Eligible employees may use funds from accumulated payroll deductions to purchase shares of Company common stock at the end of six-month offering periods. They may contribute up to 10% of gross earnings toward such purchases, not to exceed $12,500 per offering period, and may purchase a maximum of 1,000 shares per offering period. The purchase price for the shares is 85% of the lesser of the fair market value of the common stock at the beginning of the offering period or at the end of the offering period. Shares purchased must be held for a minimum of three months before they can be sold. At the end of the first offering period on December 31, 1997, the Company issued 6,126 shares of common stock to employees at a purchase price of $7.33 per share. A total of 200,000 shares has been authorized for issuance under the Employee Stock Purchase Plan. Note 2. Summary of Significant Accounting Policies Basis of Accounting The Stock Purchase Plan's financial statements are prepared on the accrual basis of accounting. Administrative Expenses of the Plan All expenses incurred in the administration of the Stock Purchase Plan are paid by the Company. F-6 Contributions Contributions to the Stock Purchase plan are recorded as compensation is earned by participants. Such contributions originate from after- tax payroll deductions of participants. Income Taxes The Stock Purchase Plan was established under Section 423 of the Internal Revenue Code and is, therefore, exempt from income taxes. F-7 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Compensation Committee of the Datron Systems Incorporated Employee Stock Purchase Plan has duly caused this annual report to be signed by the undersigned thereunto duly authorized. DATRON SYSTEMS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN By:/s/ WILLIAM L. STEPHAN Date: June 25, 1998 William L. Stephan Datron Systems Incorporated Employee Stock Purchase Plan Compensation Committee -----END PRIVACY-ENHANCED MESSAGE-----