-----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, Tel3A7Req3lYO+D1tEOLE+5N37iQ5eUshh4guDgpNNK1A0WazOVyEQZtDvmOAxHY poT2C0ZTAYdPXVOAavJm8A== 0000912057-97-026453.txt : 19970811 0000912057-97-026453.hdr.sgml : 19970811 ACCESSION NUMBER: 0000912057-97-026453 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970627 FILED AS OF DATE: 19970808 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RICHEY ELECTRONICS INC CENTRAL INDEX KEY: 0000320591 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-ELECTRONIC PARTS & EQUIPMENT, NEC [5065] IRS NUMBER: 953335821 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09788 FILM NUMBER: 97653459 BUSINESS ADDRESS: STREET 1: 7441 LINCOLN WAY STE 100 CITY: GARDEN GROVE STATE: CA ZIP: 92641 BUSINESS PHONE: 7148988288 MAIL ADDRESS: STREET 1: 7441 LINCOLN WAY CITY: GARDEN GROVE STATE: CA ZIP: 92641 FORMER COMPANY: FORMER CONFORMED NAME: BRAJDAS CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MICRO Z CORP DATE OF NAME CHANGE: 19840611 10-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 27, 1997 Commission File Number: 0-9788 RICHEY ELECTRONICS, INC. ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0594451 - --------------------------------- ------------------------------- (State or other jurisdiction (I.R.S. Employer Identification of incorporation or organization) No.) 7441 Lincoln Way, Garden Grove, California 92641 -------------------------------------------------- (Address of Principal Executive Office) (Zip Code) (714) 898-8288 ---------------------------------------------------- (Registrant's Telephone Number, including Area Code) 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 As of August 6, 1997, 9,063,935 shares of the registrant's Common Stock, $0.001 par value, were issued and outstanding. 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. RICHEY ELECTRONICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 27, DECEMBER 31, 1997 1996 ------------ ------------ ASSETS CURRENT ASSETS Cash $ 29,000 $ 30,000 Trade receivables 31,473,000 27,111,000 Inventories 46,866,000 37,631,000 Deferred income taxes 2,629,000 2,629,000 Other current assets 1,225,000 1,235,000 ------------ ------------ Total current assets $ 82,222,000 $ 68,636,000 ------------ ------------ LEASEHOLD IMPROVEMENTS, EQUIPMENT FURNITURE AND FIXTURES, net $ 5,076,000 $ 3,668,000 ------------ ------------ OTHER ASSETS AND INTANGIBLES Deferred income taxes $ 4,355,000 $ 2,218,000 Deferred debt costs 2,407,000 2,533,000 Other 409,000 473,000 Goodwill 50,230,000 47,233,000 ------------ ------------ $ 57,401,000 $ 52,457,000 ------------ ------------ $144,699,000 $124,761,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 3,201,000 $ 4,012,000 Accounts payable 21,770,000 16,551,000 Accrued expenses 5,833,000 5,040,000 ------------ ------------ Total current liabilities $ 30,804,000 $ 25,603,000 ------------ ------------ LONG-TERM DEBT Subordinated notes payable $ 2,000,000 $ 2,000,000 Convertible subordinated notes payable 55,755,000 55,755,000 Other long-term debt 18,157,000 7,450,000 ------------ ------------ $ 75,912,000 $ 65,205,000 ------------ ------------ STOCKHOLDERS' EQUITY Preferred Stock -- -- Common Stock 9,000 9,000 Additional paid-in-capital 21,726,000 21,001,000 Retained earnings 16,324,000 12,943,000 Cumulative translation adjustment (76,000) -- ------------ ------------ Total stockholders' equity $ 37,983,000 $ 33,953,000 ------------ ------------ $144,699,000 $124,761,000 ------------ ------------ ------------ ------------ SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2 RICHEY ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED -------------------------- --------------------------- JUNE 27, JUNE 28, JUNE 27, JUNE 28, 1997 1996 1997 1996 ----------- ----------- ------------ ------------ Net Sales: $59,346,000 $58,212,000 $116,140,000 $116,596,000 Cost of Goods Sold: 44,684,000 43,406,000 86,949,000 87,477,000 ----------- ----------- ------------ ------------ Gross Profit: $14,662,000 $14,806,000 $ 29,191,000 $ 29,119,000 ----------- ----------- ------------ ------------ Operating expenses: Selling, warehouse, general, and administrative $10,021,000 $10,206,000 $ 20,075,000 $ 20,986,000 Amortization of intangibles 380,000 366,000 749,000 703,000 ----------- ----------- ------------ ------------ $10,401,000 $10,572,000 $ 20,824,000 $ 21,689,000 ----------- ----------- ------------ ------------ Operating income $ 4,261,000 $ 4,234,000 $ 8,367,000 $ 7,430,000 Interest Expense 1,455,000 1,339,000 2,716,000 2,631,000 ----------- ----------- ------------ ------------ Income before income taxes $ 2,806,000 $ 2,895,000 $ 5,651,000 $ 4,799,000 Federal and state income taxes 1,128,000 1,160,000 2,270,000 1,922,000 ----------- ----------- ------------ ------------ Net income $ 1,678,000 $ 1,735,000 $ 3,381,000 $ 2,877,000 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ Earnings per Share Primary $0.19 $0.19 $0.37 $0.32 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ Fully Diluted $0.18 $0.18 $0.35 $0.31 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ Weighted Average number of shares outstanding Primary 9,063,000 9,058,000 9,063,000 9,058,000 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------ Fully Diluted 13,010,000 13,006,000 13,010,000 11,720,000 ----------- ----------- ------------ ------------ ----------- ----------- ------------ ------------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 RICHEY ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED ------------------------------ JUNE 27, JUNE 28, 1996 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $3,381,000 $2,877,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,584,000 1,420,000 Deferred income taxes 761,000 770,000 Changes in operating assets and liabilities, net of effect of business combinations: (Increase) in trade receivables (1,134,000) (2,636,000) (Increase) in inventories (6,351,000) (3,293,000) Decrease in other assets 137,000 17,000 Increase in accounts payable and accrued expenses 824,000 1,380,000 ----------- ----------- Net cash provided by (used in) operating activities ($798,000) $535,000 ----------- ----------- CASH FLOWS (USED IN) INVESTING ACTIVITIES Purchase of leasehold improvements and equipment ($706,000) ($692,000) Payment of acquisition and restructuring costs (7,290,000) (4,779,000) ----------- ----------- Net cash (used in) investing activities ($7,996,000) ($5,471,000) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net advances (repayments) on short-term revolving line of credit ($1,085,000) -- Net advances (repayments) on long-term revolving line of credit -- ($7,911,000) Borrowings (payments) on long-term debt 9,944,000 (40,855,000) Proceeds from issuance of convertible debt -- 55,755,000 Transaction costs associated with refinancing activities (38,000) (2,619,000) Proceeds from issuance of common stock -- 19,000 ----------- ----------- Net cash provided by financing activities $8,821,000 $4,389,000 ----------- ----------- Net effect of translation on cash ($28,000) -- ----------- ----------- (Decrease) in cash ($1,000) ($547,000) CASH Beginning $30,000 $572,000 ----------- ----------- Ending $29,000 $25,000 ----------- ----------- ----------- -----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4 RICHEY ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (UNAUDITED)
SIX MONTHS ENDED ------------------------------ JUNE 27, JUNE 28, 1996 1996 ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash Payments For: Interest $2,473,000 $1,306,000 ----------- ----------- ----------- ----------- Income taxes $ 913,000 $ 116,000 ----------- ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of MS Electronics: Working capital acquired $ 888,000 Fair market value of other assets acquired including goodwill 2,231,000 ----------- Purchase price and related transaction costs $3,119,000 ----------- ----------- Acquisition of Simmonds Technology: Working capital acquired $ 363,000 Fair market value of equipment acquired 1,384,000 Deferred income taxes 2,920,000 Goodwill 3,635,000 Long-term lease obligations (756,000) Common stock warrants issued (730,000) ----------- Purchase price and related transaction costs $6,816,000 ----------- -----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 RICHEY ELECTRONICS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 27, 1997 (UNAUDITED)
COMMON STOCK ---------------------------------------- ADDITIONAL CUMULATIVE PREFERRED SHARES PAR PAID-IN RETAINED TRANSLATION STOCK OUTSTANDING VALUE CAPITAL EARNINGS ADJUSTMENT TOTAL --------- ----------- ------ ----------- ----------- ----------- ----------- Balance, December 31, 1996 -- 9,063,000 $9,000 $21,001,000 $12,943,000 -- $33,953,000 Common stock warrants issued in conjunction with STI acquisition -- -- -- 725,000 -- -- 725,000 Translation adjustment -- -- -- -- -- (76,000) (76,000) Net Income -- -- -- -- 3,381,000 -- 3,381,000 --------- ----------- ------ ----------- ----------- ----------- ----------- Balance, June 27, 1997 -- 9,063,000 $9,000 $21,726,000 $16,324,000 ($76,000) $37,983,000 --------- ----------- ------ ----------- ----------- ----------- ----------- --------- ----------- ------ ----------- ----------- ----------- -----------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 RICHEY ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Richey Electronics, Inc. (the "Company" or "Richey Electronics") is a specialty distributor of electronic components and a provider of related value-added assembly services. The Company distributes a broad line of connectors, switches, wire, cable and heat shrinkable tubing and other interconnect, electromechanical and passive components used in the assembly and manufacturing of electronic equipment. Richey Electronics also provides a wide variety of value-added assembly services. These value-added assembly services consist of (i) component assembly, which is the assembly of components to manufacturer specifications and (ii) contract assembly, which is the assembly of cable assemblies, battery packs and mechanical assemblies to customer specifications. The Company's customers are primarily small- and medium-sized original equipment manufacturers. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management's opinion, the accompanying financial statements reflect all material adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the results for the interim periods presented. The results for the interim periods ended June 27, 1997 and June 28, 1996 are not necessarily indicative of the results which will be reported for the entire year. For further information, refer to the audited financial statements of the Company and notes thereto for the year ended December 31, 1996, included in the Company's Annual Report on Form 10-K. RECENT PRONOUNCEMENTS In February 1997, the FASB issued SFAS No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share. This standard redefines earnings per share under generally accepted accounting principles. Under this standard, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. SFAS No. 128 will be effective 7 RICHEY ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) for the Company for its fiscal years beginning with 1998. If the Company had applied SFAS No. 128 in the accompanying unaudited financial statements, its earnings per share would not have changed. In the first six months of 1997, the FASB also issued SFAS No. 129, Disclosure of Information about Capital Structure, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Reporting Disaggregated Information about a Business Enterprise. These statements will be effective for the Company for its fiscal years beginning with 1998. Management has not yet completed its analysis to determine the impact implementations of SFAS No. 129, 130 and 131 will have on the Company's financial statements. PRINCIPLES OF CONSOLIDATION The accompanying unaudited financial statements consolidate the accounts of Richey Electronics and its wholly owned Canadian subsidiary which was acquired on June 13, 1997. All material intercompany transactions have been eliminated. EARNINGS PER SHARE The weighted average number of shares used for computing fully diluted earnings per share assumes that the 7% Convertible Subordinated Notes due 2006 (the "Notes") which were sold by the Company in the first quarter of 1996 through a private offering are converted at $14.125 per share on the date they were issued. The Notes are not common stock equivalents and, therefore, are not considered in determining the primary weighted average number of shares. Net income used in computing fully diluted earnings per share is increased for the interest expense, net of tax, associated with the Notes. INCOME TAXES Income tax expense in these interim financial statements is recorded based upon the Company's expected annual effective income tax rate. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's Canadian subsidiary are translated into US dollars in accordance with Statement of Financial Accounting Standards No. 52, Foreign 8 RICHEY ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Currency Translation, using the Canadian dollar as the functional currency. The Company translates the balance sheet accounts at the exchange rate on the balance sheet date and the income statement at the average exchange rate for the period. Translation gains and losses are recorded in stockholders' equity, and transaction gains and losses are reflected in income. NOTE 2. BUSINESS COMBINATIONS ACQUISITIONS IN 1996 On March 19, 1996, the Company completed the acquisition of the assets and business of MS Electronics, Inc. MS Electronics specializes in the distribution of interconnect, electromechanical and passive electronic components and provides related value-added assembly services in the Baltimore-Washington marketplace. On December 5, 1996, the Company acquired the assets and business of Summit Distributors, Inc., a Buffalo, New York distributor of interconnect, electromechanical and passive electronic components. These acquisitions were accounted for as purchase business combinations, with the operations of the acquired business included subsequent to the acquisition date. Pro forma financial information is not provided with respect to these acquisitions because they would not have materially changed reported sales or net income. STI ACQUISITION IN 1997 DESCRIPTION OF ACQUISITION On June 13, 1997, the Company completed the purchase (the "STI Acquisition") of all of the issued and outstanding common stock of Simmonds Technologies Inc. ("STI"), an indirect wholly owned subsidiary of Simmonds Capital Limited ("Simmonds"), for $1. STI is a distributor of interconnect, electromechanical and passive electronic components, headquartered in Toronto, Ontario, with additional branch locations in the Montreal, Ottawa, Winnipeg, Saskatoon, Calgary, Edmonton and Vancouver regions. In events related to the STI Acquisition, the Company also issued to Simmonds a warrant to purchase 197,044 shares of common stock of the Company at an exercise price of $10.15 per share. For purchase accounting purposes, the value of this warrant was estimated to be $730,000. In addition, through STI, the Company contributed approximately $1.1 million toward the future settlement of certain of STI's long-term capital lease obligations and facility leases to be retained by Simmonds. Simmonds agreed to be responsible for negotiating such settlements and obtaining releases of STI's obligations under such leases. 9 RICHEY ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) The Company also transferred to Simmonds $3.4 million of STI non-core inventory which the Company believes it will not be able to use in its operations. Simmonds also received a right to a future payment due March 31, 2002 from STI based upon a percentage of STI's operating earnings as defined by agreement between the parties. For purchase accounting purposes, this future payment will be accounted for as contingent consideration and will be recorded as additional purchase price when the amount is determinable. The additional consideration will be recorded as goodwill and amortized over the remaining economic life of the goodwill, or approximately ten years. Under the terms of the transaction, the Company refinanced STI's bank indebtedness of approximately $5.7 million. The Company funded the STI bank debt refinancing and the contribution toward settlement of certain long-term obligations referred to above, by drawing upon the Company's $45 million revolving line of credit with Wells Fargo Bank, N.A. The STI Acquisition was accounted for as a purchase business combination, with the operations of STI included subsequent to the date of acquisition. Net sales and net income associated with STI for the period from June 13 through June 27, 1997 or a comparable period for 1996 were not material and therefore pro forma financial information is not presented. In July 1997, the Company changed the name of STI to Richey Electronics Limited. 10 RICHEY ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) PRELIMINARY ALLOCATION OF PURCHASE PRICE The following preliminary allocation of the purchase price after adjusting to fair value the assets and liabilities of STI is based upon estimates that are currently available and is subject to change based upon final numbers. The final allocation will be contingent upon completion of management's assessment of the fair value of net assets acquired. U.S. DOLLARS ------------ Consideration and liabilities assumed: Bank debt assumed and then refinanced $ 5,720 Accounts payable, accrued expenses and lease obligations assumed 5,942 Cash contribution toward settlement of long-term lease obligations 1,095 Transaction costs 730 Common stock warrants 730 Contingent payment obligation - ------- $14,217 ------- ------- Allocated to: Current assets $ 6,278 Deferred tax assets 2,920 Leasehold improvements, fixtures and assets acquired under capital leases 1,384 Goodwill 3,635 ------- $14,217 ------- ------- In the preliminary allocation of the purchase price, the Company has recorded a deferred tax asset of $2,920,000, which is net of a valuation allowance of approximately $1,000,000. This deferred tax asset represents STI net operating loss carryforwards. Realization of this deferred tax asset is dependent upon the Company generating Canadian taxable income of approximately $6,500,000 before the expiration dates of these loss carryforwards which are 2002 and 2003. Due to the uncertainty inherent in forecasts of future results, management has established the valuation allowance to reduce the net deferred tax asset to the tax benefit expected to be realized over the next three to five years. 11 RICHEY ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) ASSUMPTION OF LEASE OBLIGATIONS In connection with the STI Acquisition, certain operating and capital lease obligations were assumed. Future minimum lease payments under these capital and operating leases are as follows: YEAR ENDING CAPITAL LEASES OPERATING LEASES TOTAL ----------- -------------- ---------------- ----- 1997 $ 238,000 $ 262,000 $ 500,000 1998 374,000 510,000 884,000 1999 372,000 443,000 815,000 2000 164,000 372,000 536,000 2001 37,000 373,000 410,000 Thereafter 4,000 3,398,000 3,402,000 ---------- ---------- ---------- Total minimum payments 1,189,000 5,358,000 6,547,000 Less: Amount Representing Interest 142,000 -- 142,000 ---------- ---------- ---------- Present value of net minimum lease payments $1,047,000 $5,358,000 $6,405,000 The capital lease obligations are included in other long-term debt and current maturities of long-term debt on the balance sheet. This lease commitment schedule reflects the entire operating lease obligation for the Pickering (Toronto) facility or approximately $365,000 a year through December 2010. The Company has entered into an informal sublease arrangement for 50% of this facility. By December 31, 1997, the Company expects to enter into a new lease for this reduced space. The above schedule does not reflect obligations under the leases for which Simmonds is responsible for obtaining settlements and releases as described above. NOTE 3. STOCK OPTIONS The Company has a stock option plan adopted in 1992 and amended and restated in 1997. In general, the options granted under this plan vest at a rate of 25% per year over a four-year period and expire ten years from the date of grant. The options granted were granted at fair market value at the date of grant. As of June 27, 1997, total options authorized for grant were 1,300,000, of which 630,992 were available for grant. During the 12 RICHEY ELECTRONICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) six months ended June 27, 1997, 60,500 options were granted to employees at a price of $12.875, 1,250 options were exercised and 12,500 options were canceled. NOTE 4. NET OPERATING LOSS CARRYFORWARDS As of December 31, 1996, the Company had acquired net operating loss carryforwards ("NOLs") with the following expiration dates: EXPIRATION DATE FEDERAL --------------- ----------- 2005 . . . . . . . . . . . . . . . . . . . . $ 454,000 2006 . . . . . . . . . . . . . . . . . . . . 9,673,000 2007 . . . . . . . . . . . . . . . . . . . . 2,588,000 2008 . . . . . . . . . . . . . . . . . . . . 771,000 ----------- $13,486,000 ----------- ----------- Section 382 of the Internal Revenue Code of 1986, as amended and the related regulations impose certain limitations on a corporation's ability to use NOLs if more than a 50% ownership change occurs. The Company's issuance of additional common stock in 1995, together with an earlier acquisition, constitute a more than 50% ownership change. As a result, the usage of these NOLs is restricted to approximately $4,900,000 on an annual basis. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SUMMARY OF SELECTED DATA (UNAUDITED) The following table sets forth certain items in the statements of operations as a percent of net sales for periods shown and additional items of a statistical nature.
QUARTER ENDED SIX MONTHS ENDED ----------------- ----------------- JUNE 27, JUNE 28, JUNE 27, JUNE 28, 1997 1996 1997 1996 ------- ------- ------- ------- Statements of Operations Data: - ------------------------------ Net Sales. . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% Cost of Goods Sold . . . . . . . . . . . . . . . 75.3 74.6 74.9 75.0 ----- ----- ----- ----- Gross Profit . . . . . . . . . . . . . . . . . 24.7 25.4 25.1 25.0 ----- ----- ----- ----- Selling, warehouse, general & administrative . . 16.9 17.5 17.3 18.0 Amortization of intangibles. . . . . . . . . . . 0.6 0.6 0.6 0.6 ----- ----- ----- ----- Operating Income . . . . . . . . . . . . . . . 7.2 7.3 7.2 6.4 Interest Expense . . . . . . . . . . . . . . . . 2.5 2.3 2.3 2.3 ----- ----- ----- ----- Income before income taxes . . . . . . . . . . 4.7 5.0 4.9 4.1 Federal and state income taxes . . . . . . . . . 1.9 2.0 2.0 1.6 ----- ----- ----- ----- Net Income . . . . . . . . . . . . . . . . . . 2.8% 3.0% 2.9% 2.5% ----- ----- ----- ----- ----- ----- ----- -----
JUNE 27, MARCH 28, DEC. 31, SEPT. 27, JUNE 28, 1997 1997 1996 1996 1996 -------- -------- -------- -------- -------- Balance Sheet Data: - ------------------- Total assets (000). . . . . . . . . . . . . . . . $144,699 $129,946 $124,761 $128,420 $129,828 Working capital (000) . . . . . . . . . . . . . . $ 51,418 $ 45,555 $ 43,033 $ 43,311 $ 41,221 Ratio of current assets to current liabilities. . 2.7 2.6 2.7 2.6 2.4 Short-term debt (000) . . . . . . . . . . . . . . $ 3,201 $ 3,553 $ 4,012 $ 263 $ 219 Subordinated long-term notes payable (000). . . . $ 2,000 $ 2,000 $ 2,000 $ 2,958 $ 2,956 Convertible subordinated notes payable (000). . . $ 55,755 $ 55,755 $ 55,755 $ 55,755 $ 55,755 Other long-term debt (000). . . . . . . . . . . . $ 18,157 $ 7,450 $ 7,450 $ 10,034 $ 10,546 Inventory turnover. . . . . . . . . . . . . . . . 4.0x 4.2x 4.4x 4.2x 4.9x Days sales outstanding in accounts receivable . . 44.3 45.0 44.1 46.1 46.4 Stockholders' equity (000). . . . . . . . . . . . $ 37,983 $ 35,656 $ 33,953 $ 32,048 $ 30,288
14 RESULTS OF OPERATIONS Net income for the second quarter of 1997 was $1,678,000 ($0.18 per share, fully diluted) compared with net income of $1,735,000 ($0.18 per share, fully diluted) for the 1996 second quarter. For the six months ended June 27, 1997, net income was $3,381,000 ($0.35 per share, fully diluted) compared with $2,877,000 ($0.31 per share, fully diluted) for the same period in 1996, an increase of 17.5%. Sales for the second quarter of 1997 rose to $59,346,000 from $58,212,000 for the same period in 1996, an increase of 1.9%. For the first six months of 1997, sales were $116,140,000 compared with sales of $116,596,000 for the first six months of 1996. Net sales of electronic components decreased to $40,514,000 for the second quarter of 1997 from $42,405,000 for the second quarter of 1996. Component sales for the second quarter of 1997, while down 4.5% from the second quarter of 1996, improved on a quarter-by-quarter basis from $39,028,000 in the first quarter of 1997 and $36,454,000 in the third quarter of 1996. This improvement reflects the continuing slow recovery in the electronics distribution industry from the industry-wide downturn in 1996. Net sales of value-added services increased to $18,832,000 for the second quarter of 1997 from $15,807,000 for the second quarter of 1996. Value-added sales for the second quarter of 1997 were up 19.1% from the second quarter of 1996 and up 6.0% from the first quarter of 1997 and continued to grow at a more rapid pace than component sales as a result of the continuing trend by OEMs to outsource assembly operations. The Company believes that order backlog (confirmed orders from customers for shipment within the next 12 months) generally averages two to three months' sales in the electronics distribution industry. The Company's order backlog in the United States at June 27, 1997 was $57,255,000, up from $52,612,000 at June 28, 1996 and up from $53,800,000 at December 31, 1996. Gross profit margin for the first six months of 1997 was 25.1% compared to gross profit margin of 25.0% for the first six months of 1996. Gross profit margin for the second quarter of 1997 was 24.7% compared to margins of 25.4% for the second quarter of 1996 and 25.6% for the first quarter of 1997. The decrease in margins for the second quarter of 1997 was primarily due to increased pricing pressures for electromechanical and passive components and value-added services. Operating expenses for the second quarter of 1997 were $10,401,000 (17.5% of net sales) compared to $10,572,000 (18.1% of net sales) for the second quarter of 1996. For the first six months of 1997, operating expenses were $20,824,000 (17.9% of net sales) compared to $21,689,000 (18.6% of net sales) for the first six months of 1996. The reduction in operating expenses was primarily the result of savings realized from the operational integration of Deanco into the Company through reductions in duplicative facilities, personnel and other operating costs. These savings were partially offset by 15 expense investments, primarily in sales, marketing and MIS personnel. In addition, in the second quarter of 1997, the Company instituted additional measures to reduce operating expenses in light of its bookings levels and marketing surveys of its customers which suggested that the recovery from the 1996 industry-wide downturn would proceed more slowly than management had anticipated. Interest expense for the second quarter of 1997 was $1,455,000 as compared with $1,339,000 for the second quarter of 1996. The increase in interest expense was primarily due to an increase in borrowings as a result of the STI Acquisition and a non-recurring $70,000 unused line fee under the Company's revolving line of credit. Federal and state income tax expense decreased to $1,128,000 (40% effective rate) for the quarter ended June 27, 1997 from $1,160,000 (40% effective rate) for the corresponding period of 1996. This decrease was proportional to the decrease in pre-tax earnings for the quarter. See Note 4 of Notes to Condensed Consolidated Financial Statements for further discussion of income tax matters. LIQUIDITY AND CAPITAL RESOURCES The Company currently maintains with Wells Fargo Bank, N.A. a $45 million revolving line of credit. The Company used this line of credit to fund the purchase of STI on June 13, 1997. As of June 27, 1997, the Company had outstanding borrowings under this revolving line of credit of $19,365,000 and additional borrowing capacity of $25,500,000. Working capital increased to $51,418,000 on June 27, 1997 from $43,033,000 on December 31, 1996, an increase of $8,385,000. During the first six months of 1997, the Company generated $9,951,000 of earnings before interest, income taxes, depreciation and amortization ("EBITDA") as compared to EBITDA of $8,850,000 for the corresponding period of 1996, an increase of 12.4%. During the first six months of 1997, operating activities generated $6,687,000 in cash from net income, depreciation, amortization, deferred income taxes, decreases in other assets and increases in accounts payable and accrued expenses. During the same period, the Company invested $7,485,000 in inventory and receivables. Thus, operating activities for the first six months of 1997 used net cash of $798,000 as compared to net cash of $535,000 provided by operating activities for the same period of 1996. During the first six months of 1997, the Company used $7,996,000 in investing activities, including $706,000 for capital expenditures relating to normal investments in leasehold improvements, software, furniture, fixtures and equipment, $474,000 for payment of restructuring costs accrued in connection with acquisitions in 1995 and $6,816,000 relating to the acquisition of STI. See Note 2 of Notes to Condensed Consolidated Financial Statements. This use of cash was financed with borrowings under the Company's revolving line of credit. 16 For the quarter ended June 27, 1997, inventory turnover was 4.0x compared to 4.9x for the quarter ended June 28, 1996 and 4.4x for the quarter ended December 31, 1996. These decreases are the result of inventory investment in nationally franchised lines and lower than anticipated sales growth in the first six months of 1997. Days sales outstanding in accounts receivable were 44.3 days at June 27, 1997 compared to 46.4 days at June 28, 1996 and 44.1 days at December 31, 1996. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None. ITEM 2. CHANGES IN SECURITIES. (a) and (b) None (c) Information required by Item 701 of Regulation S-K On June 13, 1997, in events related to the STI Acquisition, the Company issued to STI a warrant to purchase 197,044 shares of common stock of the Company at an exercise price of $10.15 per share (subject to adjustment in certain events) and STI transferred this warrant to Simmonds. The expiration date of this warrant is March 31, 2002. This warrant was issued in a private placement pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Act"). In connection with the issuance of this warrant, STI represented to the Company that it is an accredited investor as defined in Regulation D under the Act and agreed to comply with other applicable requirements necessary to make such exemption available. For purposes of accounting for the purchase of STI, $730,000 was allocated to this warrant. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its annual meeting of stockholders on May 1, 1997. C. Don Alverson, Thomas W. Blumenthal, William C. Cacciatore, Edward L. Gelbach, Greg A. Rosenbaum, Norbert W. St. John and Donald I. Zimmerman were each reelected to serve as directors until the next annual meeting of stockholders, and received votes as follows: 18 NUMBER OF VOTES NUMBER OF VOTES CAST FOR WITHHELD FROM NAME HIS ELECTION HIS ELECTION ---- --------------- --------------- C. Don Alverson 8,131,895 7,072 Thomas W. Blumenthal 8,131,898 7,069 William C. Cacciatore 8,131,895 7,072 Edward L. Gelbach 8,131,898 7,069 Greg A. Rosenbaum 8,131,898 7,069 Norbert W. St. John 8,131,898 7,069 Donald I. Zimmerman 8,131,898 7,069 At this annual meeting, stockholders also voted to ratify the appointment of McGladrey & Pullen, LLP as the Company's independent auditors for 1997. 7,763,155 votes were cast for, 41,737 votes were cast against and 3,275 votes abstained from ratifying such appointment. At this annual meeting, stockholders also voted to approve the Amended and Restated 1992 Stock Option Plan of the Company which was attached as Appendix A to the Company's proxy statement for the 1997 annual meeting. 7,858,898 votes were cast for, 55,788 votes were cast against and 14,244 votes abstained from approving such plan. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits required by Item 601 of Regulation S-K. 2.1 Share Purchase Agreement dated June 13, 1997, among Richey Electronics, Inc., SCL Electronics Ltd., Simmonds Technologies Inc. and Simmonds Capital Limited (Incorporated by reference from the Current Report on Form 8-K for Richey Electronics, Inc., dated June 26, 1997, filed June 26, 1997 as exhibit 2.1 thereof). 2.2 Intercompany Debt Repayment Agreement dated June 13, 1997 among Simmonds Capital Limited, SCL Electronics Ltd. and Simmonds Technologies Inc. (Incorporated by reference from the Current Report on Form 8-K for Richey Electronics, Inc., dated June 26, 1997, filed June 26, 1997 as exhibit 2.2 thereof). 19 3.1 Restated Certificate of Incorporation of Richey Electronics, Inc. (Incorporated by reference from the Registration Statement on Form S-1, filed January 7, 1994, Registration No. 33-73916 as exhibit 3.1 thereof). 3.2 Bylaws of Richey Electronics, Inc. (Incorporated by reference from the Registration Statement on Form S-1, filed January 7, 1994, Registration No. 33-73916 as exhibit 3.2 thereof). 4.1 Indenture between Richey Electronics, Inc. and First Trust of California, National Association, dated as of February 15, 1996 (Incorporated by reference from the Annual Report on Form 10-K for Richey Electronics, Inc. filed March 26, 1996 as exhibit 4.1 thereof). 4.2 Registration Rights Agreement among Richey Electronics, Inc., Jefferies & Company, Inc. and Cruttenden Roth Incorporated, dated as of February 26, 1996 (Incorporated by reference from the Registration Statement on Form S-2, filed April 26, 1996, Registration No. 333-02983 as exhibit 4.2 thereof). 4.3 Warrant dated June 13, 1997, to purchase common stock of Richey Electronics, Inc., expiring March 31, 2002 (Incorporated by reference from the Current Report on Form 8-K for Richey Electronics, Inc., dated June 26, 1997, filed June 26, 1997 as exhibit 4.1 thereof). 10.1 Amended and Restated 1992 Stock Option Plan (Incorporated by reference from the definitive proxy statement for the 1997 annual meeting of stockholders, dated March 21, 1997, filed March 21, 1997 as appendix A thereof). 10.2 Lease between Wychrest Estates Inc. and Simmonds Technologies Inc. (as assignee of Simmonds Communications Ltd.) for lease of premises at 580 Granite Court, Pickering, Ontario. 10.3 Lease Contract No. 002506 dated September 12, 1996, between CIBC Equipment Finance Limited and Simmonds Technologies Inc. 11.1 Statement regarding computation of per share earnings 27.1 Financial Data Schedule (b) Reports on Form 8-K. Current Report on Form 8-K dated June 26, 1997 and filed on June 26, 1997 (reporting on the acquisition of Simmonds Technologies Inc.) 20 SIGNATURES Pursuant to the requirements 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. RICHEY ELECTRONICS, INC. (Registrant) By /s/ Richard N. Berger -------------------------------- Richard N. Berger Vice President, Chief Financial Officer and Secretary August 8, 1997 21 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 2.1 Share Purchase Agreement dated June 13, 1997, among Richey Electronics, Inc., SCL Electronics Ltd., Simmonds Technologies Inc. and Simmonds Capital Limited (Incorporated by reference from the Current Report on Form 8-K for Richey Electronics, Inc., dated June 26, 1997, filed June 26, 1997 as exhibit 2.1 thereof). 2.2 Intercompany Debt Repayment Agreement dated June 13, 1997 among Simmonds Capital Limited, SCL Electronics Ltd. and Simmonds Technologies Inc. (Incorporated by reference from the Current Report on Form 8-K for Richey Electronics, Inc., dated June 26, 1997, filed June 26, 1997 as exhibit 2.2 thereof). 3.1 Restated Certificate of Incorporation of Richey Electronics, Inc. (Incorporated by reference from the Registration Statement on Form S-1, filed January 7, 1994, Registration No. 33-73916 as exhibit 3.1 thereof). 3.2 Bylaws of Richey Electronics, Inc. (Incorporated by reference from the Registration Statement on Form S-1, filed January 7, 1994, Registration No. 33-73916 as exhibit 3.2 thereof). 4.1 Indenture between Richey Electronics, Inc. and First Trust of California, National Association, dated as of February 15, 1996 (Incorporated by reference from the Annual Report on Form 10-K for Richey Electronics, Inc. filed March 26, 1996 as exhibit 4.1 thereof). 4.2 Registration Rights Agreement among Richey Electronics, Inc., Jefferies & Company, Inc. and Cruttenden Roth Incorporated, dated as of February 26, 1996 (Incorporated by reference from the Registration Statement on Form S-2, filed April 26, 1996, Registration No. 333-02983 as exhibit 4.2 thereof). 4.3 Warrant dated June 13, 1997, to purchase common stock of Richey Electronics, Inc., expiring March 31, 2002 (Incorporated by reference from the Current Report on Form 8-K for Richey Electronics, Inc., dated June 26, 1997, filed June 26, 1997 as exhibit 4.1 thereof). 10.1 Amended and Restated 1992 Stock Option Plan (Incorporated by reference from the definitive proxy statement for the 1997 annual meeting of stockholders, dated March 21, 1997, filed March 21, 1997 as appendix A thereof). 22 10.2 Lease between Wychrest Estates Inc. and Simmonds Technologies Inc. (as assignee of Simmonds Communications Ltd.) for lease of premises at 580 Granite Court, Pickering, Ontario. 10.3 Lease Contract No. 002506 dated September 12, 1996, between CIBC Equipment Finance Limited and Simmonds Technologies Inc. 11.1 Statement regarding computation of per share earnings 27.1 Financial Data Schedule 23 EX-10.2 2 EXHIBIT 10.2 EXHIBIT 10.2 LEASE DATED JUNE 2, 1995 BETWEEN: LANDLORD: WYCHREST ESTATES INC. TENANT: SIMMONDS COMMUNICATIONS LTD. PREMISES: 580 GRANITE COURT PICKERING, ONTARIO I N D E X Section ------- Parties Recital ARTICLE I - DEFINITIONS Meaning of Certain Term 1.(1) Certificate Conclusive 1.(2) ARTICLE II - LEASE OF PREMISES Leased Premises 2 ARTICLE III - HABENDUM Term 3.(1) Tenant to Take Possession 3.(2) Installation of Tenant's Improvements 3.(3) Early Occupancy 3.(4) ARTICLE IV - RENT Minimum Rent 4.(1) Payment of Annual Minimum Rent 4.(2) Tenant to Pay Rent 4.(3) Rent in Arrears 4.(4) Prepaid Rent 4.(5) ARTICLE V - TENANT'S TAXES Tenant to Pay Certain Taxes 5.(1) Right of Contestation 5.(2) Separate School Taxes 5.(3) ARTICLE VI - USE OF LEASED PREMISES Generally 6 ARTICLE VII - REPAIR AND MAINTENANCE OF LEASED PREMISES Tenant's Obligation 7.(1) Exceptions 7.(2) Tenant's Alterations 7.(3) Repair and Maintenance of Fixtures, etc. 7.(4) SECTION ------- Compliance by Tenant with Statutes, Orders, etc. 7.(5) Notice of Defects or Damage 7.(6) ARTICLE VIII - INSURANCE Tenant's Insurance 8.(1) Application of Proceeds 8.(2) Waiver of Subrogation 8.(3) ARTICLE IX - INDEMNITY By Tenant 9.(1) Limit of Landlord's Liability 9.(2) ARTICLE X - ENTRY BY LANDLORD Right of Landlord 10.(1) Maintenance of Services, etc. 10.(2) Suspension of Services 10.(3) Entry by Landlord Not to Interfere 10.(4) Entry in Absence of Tenant 10.(5) ARTICLE XI - LANDLORD'S REMEDIES Landlord May Perform Tenant's Covenants 11.(1) Re-entry 11.(2) Landlord May Re-let 11.(3) Right to Distrain 11.(4) Landlord's Remedies Cumulative 11.(5) ARTICLE XII - EXPIRATION OF TERM Removal of Tenant's Property 12.(1) Surrender of Leased Premises 12.(2) Overholding 12.(3) Effect of Termination 12.(4) Exhibit Leased Premises 12.(5) ARTICLE XIII - DISPOSITIONS Assignment and Sub-letting 13.(1) Consent May Be Withheld 13.(2) Effect of Assignments, etc. 13.(3) Change in Control of Tenant 13.(4) SECTION ------- Transfers by Landlord 13.(5) Rights of Landlord's Mortgagees 13.(6) Priority of Lease 13.(7) ARTICLE XIV - CERTIFICATES, NOTICES, PAYMENTS AND STATEMENTS Estoppel Certificates 14.(1) Notices 14.(2) Payments 14.(3) Statements 14.(4) ARTICLE XV - RENEWAL Options to Renew 15.(1) Arbitration 15.(2) ARTICLE XVI - CONSTRUCTION OF IMPROVEMENTS Initial Improvements 16.(1) Extras 16.(2) Tenant's Work 16.(3) Warranty 16.(4) Partial Assignment of Warranties and Guarantees 16.(5) ARTICLE XVII - GENERAL PROVISIONS Additional Documents and Acts 17.(1) Time of the Essence 17.(2) Failure of Landlord to Deliver Possession 17.(3) Non-Performance by Landlord or Tenant 17.(4) Approvals 17.(5) Net Lease 17.(6) Landlord's Covenants 17.(7) Planning Act 17.(8) Notice of Lease 17.(9) Authorization 17.(10) Waivers 17.(11) Severability 17.(12) Changes Required by Context 17.(13) Whole Agreement 17.(14) Headings 17.(15) Applicable Law 17.(16) Assigns 17.(17) Counterparts 17.(18) Guarantee 17.(19) Execution Schedule "A" - Legal Description THIS LEASE made the 2nd day of June, 1995. PURSUANCE OF THE SHORT FORMS OF LEASES ACT B E T W E E N WYCHREST ESTATES INC. (herein called the "Landlord") OF THE FIRST PART - and - SIMMONDS COMMUNICATIONS LTD. (herein called the "Tenant") OF THE SECOND PART - and - GEORGIAN CONSTRUCTION CORPORATION (herein called the "Guarantor") OF THE THIRD PART WHEREAS the Landlord and the Tenant have agreed to enter into this lease and the Guarantor has agreed to guarantee the obligations of the Landlord. NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the rents, covenants, obligations and agreements hereinafter reserved and contained: ARTICLE I DEFINITIONS MEANING OF CERTAIN TERMS 1. (1) In this lease and in the schedules and appendices to this lease: (a) "Architect" means an architect appointed by the Landlord, (b) "Building" means the initial improvements referred to in Section 16.(1) and the Proposal. - 2 - (c) "Commencement Date" means that date which is the earlier of (i) 20 days after the date of the certificate of an Architect to the effect that the Leased Premises are substantially completed, and (ii) the date on which the Tenant, with the consent of the Landlord, occupies the whole of the Leased Premises for business. (d) "Leased Premises" means the lands and premises described in Schedule "A" and includes all buildings, structures, improvements, fixtures, heating, ventilating, air conditioning and mechanical, sprinkler, and electrical equipment and machinery, and water, gas, sewage, telephone and other communications facilities and electrical power services and utilities comprised, therein, belonging thereto, connected therewith or used in the operation thereof and now or hereafter constructed, erected or installed therein and thereon but excludes all other moveable trade fixtures and furniture and equipment not affixed to the Leased Premises, (e) "Leasehold Improvements" means all fixtures, improvements, installations, alterations and additions from time to time made, constructed, erected or installed in or to the Leased Premises, including all partitions however affixed and all rugs, carpeting and floor coverings affixed in any way to the Leased Premises, but excludes all other moveable trade fixtures and furniture and equipment not affixed to the Leased Premises, (f) "Minimum Rent" means the rental referred to in section 4.(1), (g) "mortgage" includes a mortgage, pledge, charge, hypothec, encumbrance or financing arrangement and, where the context requires, a ground or underlying lease, and "mortgagee" includes the holder of such mortgage and the lessor under such ground or underlying lease, (h) "Proposal" means the letter agreement dated April 25, 1995 from the Tenant to the Landlord providing for the construction of the Building described therein and all amendments thereto from time to time and all plans, specifications and drawings therein or arising therefrom as same may be created or amended from time to time. - 3 - (i) "Real Property Taxes" means all real estate taxes, general taxes, school taxes, levies, rates, duties, assessments and charges from time to time imposed against real property, buildings, structures and improvements by municipal or other governmental authorities having jurisdiction, and all taxes, levies, rates, duties assessments and charges (including income taxes) which may at any time be substituted therefor or replace the same, but excludes business taxes, (j) "rent" includes all amounts payable by the Tenant under this lease, (k) "Stipulated Rate of Interest" means that rate of interest at the time such interest falls due under this lease which is equal to the rate of interest charged by the Landlord's banker to its most creditworthy commercial customers plus 2%, (l) "Sales Tax" means all business transfer, multi-stage sales, sales, use, consumption, value-added or other similar taxes imposed by the Government of Canada or by any provincial or local government upon the Landlord or the Tenant in respect of this lease or the payment made by the Tenant hereunder or the goods and services provided by the Landlord hereunder including without limitation the rental of the Leased Premises, and (m) "Term" means the term of this lease and any renewal or extension thereof. CERTIFICATE CONCLUSIVE 1. (2) The certificate, addressed to both the Landlord and the Tenant, of an Architect or of a qualified and publicly licensed land surveyor appointed by the Landlord as to the size of any area or areas, or the gross leasable area of any premises (to be calculated in accordance with standards set by the Building Office Manager's Associations from time to time) and the date that the Leased Premises are substantially completed, shall be conclusive and binding on the parties. The certificate of an Architect as to the extent of any injury, or the portion of the Leased Premises capable of being used for the purpose for which they are leased, or the period within which any injury may be repaired, or the date on which any repairs have been completed, shall be conclusive and binding on the parties. - 4 - ARTICLE II LEASE OF PREMISES LEASED PREMISES 2. The Landlord hereby leases the Leased Premises to the Tenant and the Tenant hereby leases the Leased Premises from the Landlord for the Term, at the rent, subject to the conditions and in accordance with the covenants, obligations and agreements contained in this lease. ARTICLE III HABENDUM TERM 3. (1) TO HAVE AND TO HOLD the Leased Premises for and during the period of Fifteen (15) years beginning on the Commencement Date and from thenceforth next ensuing and fully to be complete and ended on the day preceding the 15th anniversary of the Commencement Date, subject to the rights of renewal referred to herein. TENANT TO TAKE POSSESSION 3. (2) The Tenant shall not be obliged to accept the Leased Premises with outstanding deficiencies in the construction thereof which by their nature prevent the Tenant from using the Building for its intended use. Provided further that it the Building has been completed to the extent that the Tenant can occupy same for the conduct of its business but there are outstanding major construction deficiencies and the Tenant elects to take occupancy of the Building notwithstanding, the Tenant shall not be obliged to pay any Minimum Rent until all such outstanding deficiencies are completed as certified by the Architect. Subject to the foregoing, the Tenant shall notify the Landlord of any defects or faults in or in respect of the Leased Premises which prevent or diminish its use within l year after the date the Tenant shall be given occupancy by the Landlord and failing the giving of notice hereunder, the Tenant shall be deemed for all purposes to have accepted the Leased Premises in the then existing condition and the Landlord shall not have any - 5 - further obligation to the Tenant for any such defects or faults. In the event of any dispute between the parties as to whether or not there exist any defects or faults, the decision of the Architect shall be final and binding upon both parties. INSTALLATION OF TENANT'S IMPROVEMENTS & FIXTURING 3. (3) Prior to the Commencement Date, the Tenant shall be entitled to enter upon the Leased Premises for the purpose of installing its Leasehold Improvements and for the purpose of setting up or storing its trade fixtures, furniture and equipment provided it obtains the Landlord's consent, which consent shall not be unreasonably withheld or delayed and provided that it does not interfere with the Landlord's work required pursuant to this lease and the Proposal. For greater certainty, such entry, setting up and storage shall not constitute occupying the Leased Premises for the purpose of determining the "Commencement Date". EARLY OCCUPANCY 3. (4) Notwithstanding the provisions of Section 3.(4) the Tenant, upon completion by the Landlord of the warehouse component of the Building sufficient for the occupancy by the Tenant, shall be entitled to occupy such warehouse component prior to the Commencement Date for purposes of use in the conduct of its business and during the period from such early occupancy to the Commencement Date the Tenant shall be bound by the terms of this Lease with the exception that the Tenant shall not be obliged to pay any Minimum Rent and shall only be responsible for its proportionate share of additional rent as provided for under this Lease based on the proportion that the area of the premises that the Tenant is then occupying bears to the total area of the Building. In the event that the warehouse component of the Building is not available for use by the Tenant as aforesaid by October 4, 1995 for any cause not attributable to the Tenant or to those events contemplated in Section 17.(4), the Landlord shall compensate the Tenant for any incremental expenses and\or damages incurred as a result of the delay in providing early occupancy, including, but not limited to, any additional expenses resulting from any holding over in the Tenant's existing premises or the rental of alternate premises and all associated relocation and leasehold improvement costs for the alternate premises and consequential losses as a result of the delay in providing early occupancy. - 6 - ARTICLE IV RENT MINIMUM RENT 4. (1) Subject to the provisions of section 17.(3) from and after the Commencement Date the Tenant shall pay to the Landlord in lawful money of Canada, without deduction, abatement or set-off, an annual Minimum Rent for the Leased Premises of: (a) For years 1 through 5 : $ 429,470. per annum; (b) For years 6 through 10 : $ 483,070. per annum; (c) For years 11 through 15: $ 543,370. per annum. The parties acknowledge the Minimum Rent is based on the following rental rates per square foot of gross leasable area: (a) For years 1 through 5 : $6.41; (b) For years 6 through 10 : $7.21; (c) For years 11 through 15: $8.11. The Architect shall furnish the Tenant with the Architect's certificate pursuant to Section 1.(2) certifying the gross leasable area of the Leased Premises as soon as reasonably possible after completion of the construction of the Building. Upon delivery of the Architect's certificate pursuant to Section 1.(2) certifying the gross leasable area of the Leased Premises the Minimum Rent shall be adjusted accordingly. PAYMENT OF ANNUAL MINIMUM RENT 4. (2) The annual Minimum Rent shall be paid in equal consecutive monthly instalments in advance. The Minimum Rent for the portion of the Term beginning on the Commencement Date to and including the last day of the month in which the Commencement Date occurs shall be pro-rated and paid in advance on the Commencement Date and thereafter a monthly instalment of Minimum Rent shall fall due and be paid in advance on the first day of each and every month. - 7 - TENANT TO PAY RENT 4. (3) The Tenant covenants to pay rent. The Tenant waives the benefit of Section 35 of the Landlord and Tenant Act R.S.O. 1990 or any statute that may be substituted therefor, as from time to time amended and agrees to pay rent without any set-off whatever. RENT IN ARREARS 4. (4) All rent in arrears shall bear interest at the Stipulated Rate of Interest from the date on which the same became due until the date of payment thereof. PREPAID RENT 4. (5) The Tenant shall on execution of this Lease pay the Landlord $71,578.33, on account of and to be applied against the first two months Minimum Rent. ARTICLE V TENANT'S TAXES TENANT TO PAY CERTAIN TAXES 5. (1) From and after the Commencement Date the Tenant shall pay and discharge as rent on or before the date when the same or the instalments for the same become due (a) all Real Property Taxes separately levied, rated, charged or assessed against the Leased Premises or the Leasehold Improvements, (b) Sales Taxes and every tax, rate, duty, assessment and license fee in respect of or relating to (i) all moveable trade fixtures and furniture and equipment in or on the Leased Premises; (ii) of any and every business conducted on or from the Leased Premises; and (iii) the use or occupancy of the Leased Premise including, without limitation, all business taxes, rates and licenses, and - 8 - (c) all rates and charges for water, gas, sewage, telephone and other communications facilities and electric power services and utilities supplied to the Leased Premises. RIGHT OF CONTESTATION 5. (2) Tenant shall be entitled to contest in its own name or in the Landlord's name any assessment for purposes of Real Property Taxes against the Leased Premises and the Landlord shall co-operate with the Tenant; provided that the Tenant shall post with the Landlord adequate security in form satisfactory to the Landlord for payment of such taxes, penalties and costs, if any prior to any contestation of such taxes. SEPARATE SCHOOL TAXES 5. (3) If the Leased Premises are assessed in whole or in part for the support of separate schools the Tenant shall pay and discharge as rent on or before the date when the same or the instalments for the same become due the amount by which Real Property Taxes so payable exceed those which would have been payable except for such assessment for the support of separate schools. ARTICLE VI USE OF LEASED PREMISES GENERALLY 6. The Tenant shall be entitled to use the Leased Premises for any legal purpose, including, without limitation, a corporate office and distribution facility. It is understood that the Building shall be referred to as the "Simmonds Technologies Building" and that the Tenant shall have the sole and exclusive right to all identification on the Building and to change the signage on the Building all subject only to compliance by the Tenant with the provisions of Sections 7.(3) and 7.(5) herein. - 9 - ARTICLE VII REPAIR AND MAINTENANCE OF LEASED PREMISES TENANT'S OBLIGATION 7. (1) The Tenant covenants that (a) subject to the Landlord's warranty repair obligations in Section 16.(4) the Tenant shall maintain, repair and (except as otherwise provided herein) replace the Leased Premises to the same extent as would a prudent owner, such repairs and replacements to include those of a capital or structural nature, (b) the Landlord may enter and view the state of repair, upon reasonable notice during business hours, and (c) subject to the Landlord's warranty repair obligations in Section 16.(4) the Tenant shall repair the Leased Premises according to notice in writing. EXCEPTIONS 7. (2) The obligations of the Tenant under Section 7.(1) shall be subject to damage or injury caused by or resulting from any act, default or negligence of the Landlord, its officers, agents, servants, employees or contractors and which is not covered by insurance which the Tenant is required to maintain under this lease. TENANT'S ALTERATIONS 7. (3) The Tenant shall not make any alteration, addition, repair or improvement to the Leased Premises or make, construct, erect or install any sign or Leasehold Improvements in or to the Leased Premises except with the prior written approval of the Landlord such approval not to be unreasonably withheld. The Tenant shall not overload the capacity of any of the heating, ventilating, air-conditioning, mechanical, sprinkler or electrical equipment or machinery or water, gas, sewage, telephone or other communications facilities or electric power services or utilities in the Leased Premises. Any such equipment, machinery, facilities or utilities required by the Tenant in addition to those provided by the Landlord shall be installed, if available, only with the prior approval of the Landlord and at the expense of the Tenant. - 10 - REPAIR AND MAINTENANCE OF FIXTURES, ETC. 7. (4) Every alteration, addition or improvement made by or on behalf of the Tenant to the Leased Premises and all signs and Leasehold Improvements made, constructed, erected or installed in or to the Leased Premises shall be maintained by the Tenant in a state of good repair consistent with the covenant of the Tenant in section 7.(1), subject only to the exceptions set out in section 7.(2). COMPLIANCE BY TENANT WITH STATUTES, ORDERS, ETC. 7. (5) Unless it qualifies as a legal non-conforming use, the Tenant shall comply with and conform to the requirements of every applicable lawful statute, law, by- law, ordinance, regulation and order and with every reasonable regulation and order of the Insurers' Advisory Organization or of any body having similar functions, or of any liability or fire insurance company by which the Tenant or the Landlord may be insured affecting the operation, condition, maintenance, use or occupation of the Leased Premises and the making of any alteration or addition therein or thereto whether or not such alteration or addition is required on account of any particular use to which the Leased Premises may be put and whether or not such requirement, regulation or order is of a kind now existing or within the contemplation of the parties. All work performed by or on behalf of the Tenant pursuant to this section shall be subject to the requirements of section 7.(3). NOTICE OF DEFECTS OR DAMAGE 7. (6) The Tenant shall promptly notify the Landlord of any defect or deficiency in, malfunction of, or damage to the Leased Premises or any equipment, service or utility in the Leased Premises. ARTICLE VIII INSURANCE TENANT'S INSURANCE 8. (1) The Tenant, in the names of the Tenant, the Landlord and every mortgagee of the Leased Premises, shall take out and maintain with respect to the Leased Premises and the Tenant's use and occupation thereof and furnish to the Landlord certificates - 11 - of a policy or policies of an insurance company or companies reasonably acceptable to the Landlord and such mortgagees of (a) insurance against destruction or damage by fire and those additional perils contained in the "extended perils" endorsement of such insurance company or companies usual from time to time for similar risks to the extent of the full replacement cost thereof but excluding the replacement cost of footings, foundations and pavements, (b) insurance against loss by such insurable hazards as the Landlord may from time to time reasonably request on a replacement cost basis in an amount sufficient to cover the cost of replacement of all signs and Leasehold Improvements made, constructed, erected or installed in or to the Leased Premises, (c) if any boiler or pressure vessel is operated therein, boiler and pressure vessels insurance up to a limit of not less than $500,000, (d) not less than $2,000,000 inclusive coverage for legal liability for bodily injury or death or property damage resulting from each occurrence, and (e) such other insurance as the Landlord, acting as a prudent owner, or such mortgagees may reasonably require. APPLICATION OF PROCEEDS OF INSURANCE 8. (2) The proceeds of all policies of insurance under section 8.(1)(a), (b), (c) and (e) shall be applied to repair the injury with respect to which such proceeds are paid. WAIVER OF SUBROGATION 8. (3) Every policy of insurance maintained under this Article shall provide cross liability coverage and waiver of subrogation, if available, with respect to the Landlord and all other companies owned, operated or controlled by or affiliated with it and with respect to their officers, directors and employees. The Landlord may require the Tenant to supply evidence thereof from time to time. Every right, exemption from liability, defence and immunity of whatsoever nature applicable to the Landlord or to which it is entitled under this lease shall also be available and shall extend to protect all other companies owned, operated or - 12 - controlled by or affiliated with it and to protect their officers, directors and employees and for such purposes the Landlord is or shall be deemed to be acting as agent or trustee on behalf of and for the benefit of such companies and persons. ARTICLE IX INDEMNITY BY TENANT 9. (1) The Tenant shall indemnify and save the Landlord harmless from any and all liabilities, damages, costs, (including legal fees), fines, penalties, claims, suits or actions resulting from or arising with respect to (a) any breach, violation or non-performance of any covenant, obligation or agreement of the Tenant under this lease, (b) any damage to property however occasioned by the Tenant, its officers, agents, employees, contractors, customers, invitees or licensees and any injury to any person or persons, including death resulting at any time therefrom, occurring in or on the Leased Premises or any part thereof arising from or occasioned by any cause whatever, except where such damage or injury is due to the act, default or negligence of the Landlord, its officers, agents, servants, employees or contractors, and (c) any contract, lien, privilege, mortgage, charge or encumbrance of the Leased Premises arising from or occasioned by the act, default or negligence of the Tenant, its officers, agents, servants, employees, contractors, customers, invitees or licensees, and such indemnification shall survive the termination of this lease, anything in this lease to the contrary notwithstanding. At the request of the Landlord the Tenant shall forthwith discharge any such contract, lien, privilege, mortgage, charge or encumbrance or shall cause it to be removed from the title to the Leased Premises. - 13 - LIMIT OF LANDLORD'S LIABILITY 9. (2) Except as arising out of the Landlord's own negligence or its warranty repair obligations to the Tenant contained in Section 16.(4) or the Proposal, the Landlord shall not be liable or responsible in any way for, and the Tenant shall not be entitled to any abatement of rent in respect of any loss, damage or injury of any nature whatever that may be suffered or sustained to any persons or property, and in particular, without limiting the generality of the foregoing, the Landlord shall not be liable for any loss, damage or injury of any nature whatever to any person or property resulting from (a) the condition or arrangement or the interruption or breakdown of any heating, ventilating, air conditioning or mechanical or electrical equipment or machinery or of any water, gas, sewage, telephone or other communications facilities or electrical power services or utilities comprised in the Leased Premises or belonging thereto, connected therewith or used in the operation thereof, (b) any failure to supply adequate drainage, (c) steam, smoke, water, rain, snow or other substances leaking, issuing, flowing or escaping into any part of the Leased Premises, or (d) anything done or omitted to be done by the Tenant, its servants, employees, agents, contractors, customers, invitees or licensees, by persons in the Leased Premises, by occupants of adjacent property, or by the public, nor shall the same constitute an eviction. ARTICLE X ENTRY BY LANDLORD RIGHT OF LANDLORD 10. (1) The Landlord and its officers, agents, servants, employees and contractors shall be entitled at all reasonable times to enter the Leased Premises upon reasonable notice except in emergencies for the purpose of making any repair in this lease required or permitted to be made by the Landlord and for the purpose of making any repair which the Tenant fails to make - 14 - according to notice in writing, or to do any work which the Landlord is required or entitled to do under this lease. MAINTENANCE OF SERVICES, ETC. 10. (2) The Landlord shall have the right to use, install, maintain and repair pipes, wires, ducts and other installations in, under or through the walls, ceilings, and floors of the Leased Premises for or in connection with the supply of any services or utilities to the Leased Premises and the right to do such work in the Leased Premises as the Landlord may deem necessary to preserve, improve or protect the Leased Premises, or the building in which the Leased Premises are contained. SUSPENSION OF SERVICES 10. (3) In order to make any repairs, alterations, improvements or additions in or relating to the Leased Premises or to any part of the building in which the Leased Premises are contained, the Landlord, if such action is necessary, upon reasonable notice to the Tenant may interrupt or suspend the supply to the Leased Premises of any services or utilities until such repairs, alterations, improvements or additions shall have been completed. ENTRY BY LANDLORD NOT TO INTERFERE 10. (4) The Landlord and its officers, agents, servants, employees and contractors in entering the Leased Premises or in making any repair or in doing any work shall not unreasonably or unnecessarily interfere with or disturb the conduct of the business of the Tenant. The Landlord shall indemnify the Tenant for all losses and damages to the Leased Premises and to fixtures and personal property sustained by reason of such entry, making such repair and doing such work. Such indemnification shall not extend to loss of profits. ENTRY IN ABSENCE OF TENANT 10. (5) If the Tenant or its representative shall not be personally present to open and permit an entry into the Leased Premises at any time when for any reason an entry therein shall be necessary for emergency purposes under this lease, the Landlord or the Landlord's agent may enter the Leased Premises by a master key, or may forcibly enter the Leased Premises without in any manner affecting the covenants, obligations and agreements of the Tenant under this lease. - 15 - ARTICLE XI LANDLORD'S REMEDIES LANDLORD MAY PERFORM TENANT'S COVENANTS 11. (1) If the Tenant shall be in default of any of its covenants, obligations or agreements under this lease (other than its covenant to pay rent) and such default shall have continued for such period as may be reasonable in the circumstances to remedy such default after notice by the Landlord to the Tenant specifying with reasonable particularity the nature of such default and requiring the same to be remedied, the Landlord, without prejudice to any other rights which it may have with respect to such default, may remedy such default and the cost thereof to the Landlord together with interest thereon at the Stipulated Rate of Interest from the date such cost was incurred by the Landlord shall be added to the rent due on the next succeeding date on which Minimum Rent is payable and such amount shall thereupon become due and payable as rent in addition to the regular payment of Minimum Rent then due. The Landlord shall be subrogated to the extent of such payment to all rights, remedies and priorities of the payee of the amounts paid by the Landlord to remedy such default. RE-ENTRY 11. (2) An event of default by the Tenant shall occur when (a) the Tenant shall be in default in the payment of any rent five (5) days after written demand therefor, (b) the Tenant shall be in default of any of its covenants, obligations or agreements under this lease (other than its covenant to pay rent) and such default shall have continued for such period as may be reasonable in the circumstances to remedy such default after written notice by the Landlord to the Tenant specifying with reasonable particularity the nature of such default and requiring the same to be remedied, (c) any property of the Tenant has been sold under a valid writ of execution, or any receiver of any property of the Tenant shall have been appointed, or the Tenant shall have made an assignment for the benefit of creditors or shall have made any assignment or have had a receiving order made against it under the Bankruptcy - 16 - Act, or becoming bankrupt or insolvent shall have made application for relief under the provisions of any statute now or hereafter in force concerning bankrupt or insolvent debtors, or any action whatever, legislative or otherwise shall have been taken with a view to the winding up, dissolution or liquidation of the Tenant, or (d) any insurance policy is cancelled or not renewed by an insurer by reason of any particular use or occupation of the Leased Premises. Upon the occurrence of any event of default by the Tenant the then current month's rent together with the rent for the 3 months next ensuing shall immediately become due and payable, and the Landlord may terminate this lease and without notice or any form of legal process whatever may re-enter the Leased Premises. Notwithstanding any such termination the Tenant shall pay to the Landlord all loss of rent suffered by reason of this lease having been prematurely determined and all damages incurred by the Landlord with respect thereto, including the cost of recovering the Leased Premises, and including the worth at the time of such termination of the excess, if any, of the amount of rent for the remainder of the Term over the then reasonable rental value of the Leased Premises for the remainder of the Term. LANDLORD MAY RE-LET 11. (3) If the Landlord does not exercise its option under section 11.(2) to terminate this lease it may nevertheless in the events set out in section 11.(2) from time to time re-enter the Leased Premises without terminating this lease, make such alterations and repairs as it may consider to be necessary in order to re-let the Leased Premises, and re-let the Leased Premises or any part thereof as agent for the Tenant for such period or periods (which may extend beyond the Term) and at such rental or rentals and upon such other terms and conditions as the Landlord in its sole discretion may deem advisable. Upon each such re-letting all rentals received by the Landlord from such re-letting shall be applied, first, to the payment of any costs and expenses of such re-letting, including brokerage fees and solicitors' fees and of the costs of such alterations and repairs; second, to the payment of any indebtedness other than rent due from the Tenant to the Landlord; third, to the payment of rent due and unpaid, and the residue, if any, shall be held by the Landlord and applied in payment of future rent as it may become due and payable. The Tenant shall pay to the Landlord the amount by which the rentals received from such re-letting during any month are less than the rent payable during that month by the - 17 - Tenant. Notwithstanding any such re-letting without termination, the Landlord may at any time thereafter elect to terminate this lease. No such re-entry or taking of possession by the Landlord shall be construed as an election on its part to terminate this lease, unless, at the time of or subsequent to such re-entry or taking of possession, a written notice of such intention has been given to the Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. RIGHT TO DISTRAIN 11. (4) The Tenant waives and renounces the benefit of any present or future statute purporting to limit or qualify the Landlord's right to distrain and agrees with the Landlord that upon the happening of any event of default described in section 11.(2) the Landlord, in addition to the other rights reserved to it, shall have the right (a) to enter the Leased Premises as agent of the Tenant either by force or otherwise without being liable for any prosecution therefor and to take possession of any goods and chattels whatsoever on the Leased Premises, save and except any such goods and chattels as are owned by any occupiers of the Leased Premises other than the Tenant, (b) to levy distress against the goods and chattels of the Tenant at any place to which the Tenant or any other person may have moved them, in the same manner as if such goods and property had remained upon the Leased Premises or at any other premises of the Tenant, (c) to change the locks on the Leased Premises to prevent the removal by the Tenant or any other person of the goods and chattels which are the subject matter of the distress without thereby re-entering the Leased Premises or terminating this Lease, (d) to levy distress after dark and on Sundays, and (e) to sell any goods and chattels seized at public or private sale without notice and to apply the proceeds of such sale on account of the rent or other sums provided in this Lease to be paid by the Tenant as rent in arrears or in satisfaction of the default by the Tenant of its covenants, obligations and agreements under this Lease; provided that the Tenant shall remain liable for the deficiency, if any. - 18 - Notwithstanding any term or condition of this Lease or anything contained in any legislation, none of the goods and chattels of the Tenant at any time during the continuance of the Term shall be exempt from levy by distress for rent or other sums provided in this Lease to be paid by the Tenant as rent in arrears, and upon any claim being made for such exemption by the Tenant, or upon distress being made by the Landlord, this provision may be pleaded as an estoppel against the Tenant in any action brought to test the rights to the levying upon any such goods as are named as exempted in such legislation, the Tenant waiving as it hereby does all and every benefit that it could or might have with regard thereto. LANDLORD'S REMEDIES CUMULATIVE 11. (5) The remedies of the Landlord provided for in this lease are cumulative and not alternatives. ARTICLE XII EXPIRATION OF TERM REMOVAL OF TENANT'S PROPERTY 12. (1) The Tenant shall not remove any Leasehold Improvements or any other fixtures, furnishings or equipment affixed in any way to the Leased Premises, whether at the expiration or other sooner termination of the Term without the express permission of the Landlord. If not in default under this lease the Tenant may, on the expiration or other sooner termination of the Term, remove from the Leased Premises all its signs and moveable trade fixtures and furniture and equipment. The Tenant shall repair any damage to the Leased Premises which may be occasioned by such removal. On the expiration or other sooner termination of the Term all such signs and moveable trade fixtures and furniture and equipment and all Leasehold Improvements and fixtures, furnishings or equipment affixed in any way to the Leased Premises not so removed shall be deemed to have become the property of the Landlord except where the Tenant is overholding pursuant to Section 12.(3). SURRENDER OF LEASED PREMISES 12. (2) At the expiration of the Term the Tenant shall peaceably surrender and yield up to the Landlord the Leased Premises and all Leasehold Improvements not removed therefrom - 19 - pursuant to section 12.(1) all in good and substantial repair and condition in accordance with this lease. OVERHOLDING 12. (3) If at the expiration of the Term by lapse of time the Tenant shall hold over for any reason the tenancy of the Tenant thereafter shall be from month to month and shall, in the absence of written agreement to the contrary, be subject to all covenants, obligations and agreements provided for in this lease except as to duration. EFFECT OF TERMINATION 12. (4) The termination of this lease whether by lapse of time or by the exercise of any right of either the Landlord or Tenant pursuant to this lease shall be wholly without prejudice to the right of the Landlord to recover arrears of rent or damages for antecedent default by the Tenant of its covenants, obligations or agreements under this lease. EXHIBIT LEASED PREMISES 12. (5) During the six (6) months prior to the expiration of the initial term or any renewal the Landlord may exhibit the Leased Premises to prospective tenants and place upon the Leased Premises the usual notices "For Rent" which notices the Tenant shall permit to remain without molestation. The Landlord at any time during the Tenant's usual business hours may exhibit the Leased Premises to prospective purchasers or mortgagees thereof. ARTICLE XIII DISPOSITIONS ASSIGNMENT AND SUB-LETTING 13. (1) The Tenant shall not assign this lease nor sub-let the whole or any part of the Leased Premises except with the prior written consent of the Landlord and any mortgagees of the Leased Premises which shall not be unreasonably withheld; provided that (a) the Tenant shall deliver to the Landlord and such mortgagees a written request to such assignment or sub-lease together with a copy of the proposed - 20 - assignment or sub-lease and shall provide the Landlord and such mortgagees with such information as the Landlord and such mortgagees may reasonably require with respect to the business and financial responsibility and standing of the proposed assignee or sublessee, and (b) within 14 days after the receipt by it of such request and information the Landlord by notice in writing to the Tenant, if the request was to assign this lease or to sub-let the whole of the Leased Premises, may terminate this lease, or if the request was to sub-let a portion of the Leased Premises, may terminate this lease with respect to such portion. Such termination shall be effective on a date named in such notice which shall be the last day of a month not less than 30 days nor more than 120 days following the delivery of such notice. Upon such termination of this lease as to a portion of the Leased Premises the Leased Premises shall be deemed to include only the remaining portion and the rent payable under this lease shall be adjusted accordingly. If the Landlord gives such notice to so terminate this lease the Tenant shall have the right, exercisable by a written election delivered to the Landlord within 7 days after the receipt by it of such notice, to withdraw its request for such assignment or sub-lease and such notice given by the Landlord shall thereby be cancelled and rendered null and void. (c) the provisions of the foregoing clause (b) shall not apply where the Tenant has contracted for the sale on a going concern basis of its assets including the assignment of this lease. Notwithstanding the foregoing, no consent shall be required in connection with any assignment or subletting to an affiliate of Simmonds Communications Ltd. The Tenant shall not grant any concession or enter into any license or franchise to use the Leased Premises or any part thereof without the prior written consent of the Landlord. CONSENT MAY BE WITHHELD 13. (2) Notwithstanding anything contained in Section 23 of the Landlord and Tenant Act, R.S.O., 1990 or any statute that may be substituted therefor as from time to time amended, the Landlord shall not be deemed to be unreasonable in withholding its consent under section 13.(1) and may arbitrarily withhold such consent - 21 - unless the proposed assignee or sub-lessee shall have agreed with Landlord to assume and perform each of the covenants, obligations and agreements of the Tenant under this lease or if in the discretion of the Landlord such assignment, sub-letting or parting with possession by the Tenant might adversely affect the character or nature of the Leased Premises. EFFECT OF ASSIGNMENTS, ETC. 13. (3) No assignment, or other disposition by the Tenant of this lease or of any interest under this lease, shall relieve the Tenant from the performance of its covenants, obligations or agreements under this lease. CHANGE IN CONTROL OF TENANT 13. (4) If after the execution of this lease any person, firm, corporation, organization or group bound to vote together shall acquire, by ownership or otherwise, directly or indirectly, more than 50% of the votes for the election of the directors of the Tenant, the Landlord may terminate this lease by notice given within 60 days after the date on which the Landlord becomes aware of such acquisition unless the Landlord shall have consented to such acquisition, which consent shall not be unreasonably withheld. Upon the request of the Landlord from time to time, the Tenant shall make available to the Landlord all books and records relating to the ownership or control of the Tenant. The foregoing provisions shall not apply to the Tenant so long as the Tenant is Simmonds Communications Ltd. or its affiliate. TRANSFERS BY LANDLORD 13. (5) The Landlord, at any time and from time to time, may sell, transfer, lease, assign or otherwise dispose of the whole or any part of its interest in the Leased Premises and, at any time and from time to time, may enter into any mortgage of the whole or any part of its interest in the Leased Premises. After warranty repair obligations of the Landlord have been fulfilled and the Landlord is not otherwise in default hereunder or under the Proposal, if the party acquiring such interest shall have agreed to assume and, so long as it holds such interest, to perform each of the covenants, obligations and agreements of the Landlord under this lease in the same manner and to the same extent as if originally named as the Landlord in this lease, both the Landlord and the Guarantor shall thereupon be released from - 22 - all of their respective covenants, obligations and agreements under this lease or the Proposal. RIGHTS OF LANDLORD'S MORTGAGEES 13. (6) If at any time during the currency of a mortgage of the interest of the Landlord in the Leased Premises notice of which has been given to the Tenant, any default shall occur in the performance of any of the covenants, obligations or agreements of the Landlord which would give rise to a right in the Tenant to terminate this lease, then the Tenant, before becoming entitled as against the holder of such mortgage to exercise any right to terminate this lease, shall give to the holder of such mortgage notice in writing of such default. The holder of such mortgage shall have such period as may be reasonable in the circumstances within which to remedy such default as agent of the Landlord (or by such other means as will avoid the holder of such mortgage becoming a mortgagee in possession of the Leased Premises by reason of effecting such remedy) and if such default is remedied within such period the Tenant shall not by reason thereof terminate this lease. Any notice to be given to the holder of such mortgage shall be deemed to have been properly given if mailed by registered mail to its most recent address of which the Tenant shall have notice. PRIORITY OF LEASE 13. (7) This lease and all rights of the Tenant under this lease are and shall be subject and subordinate to all ground or underlying leases and to all mortgages now or hereafter made by the Landlord if the holders thereof shall have agreed to permit the Tenant to remain in possession of the Leased Premises in accordance with the provisions of this lease so long as the Tenant is not in default under this lease. The Tenant, if so requested and subject to the entering into of the appropriate non-disturbance agreement, shall attorn to such mortgagee when such mortgagee takes possession of the Leased Premises and to any purchaser of the Leased Premises and shall recognize such mortgagee or purchaser as the Landlord under this lease. The holder of any such mortgage may subordinate and postpone such mortgage to this lease at any time by an instrument in writing to such effect registered against the title of the Leased Premises without any further consent or agreement of the Tenant. - 23 - ARTICLE XIV CERTIFICATES, NOTICES AND PAYMENTS ESTOPPEL CERTIFICATES 14. (1) The Tenant at any time and from time to time upon not less than 10 days' prior notice, at the request of the Landlord, shall execute and deliver as directed by the Landlord a statement in writing certifying that this lease is unmodified and in full force and effect (or, if modified, stating the modifications and that this lease is in full force and effect as modified), the amount of any rent payable under this lease, the dates to which any amount provided in this lease to be paid by the Tenant to the Landlord has been paid and stating whether or not there is any existing default under this lease on the part of the Landlord of which the Tenant has notice. NOTICES 14. (2) All notices, demands and requests which may be or are required to be given under this lease shall be in writing. All notices, demands and requests shall be served personally, sent by registered mail or sent by telefax addressed in the case of the Landlord and the Guarantor to them at: 160 Traders Blvd., E., Suite 200 Mississauga, Ontario L4Z 3K7 Attention: Gene Maida ------------------------------ Fax No. (905) 568-2884 and in the case of the Tenant: (a) Prior to Commencement Date to it at: 5255 Yonge Street, Suite 1050 Willowdale, Ontario M2N 6P4 Attention: John Simmonds ------------------------------ Fax No: - 24 - (b) After the Commencement Date to it at: the Leased Premises Attention: John Simmonds ------------------------------ Fax No: or at such other place as such party may from time to time designate by written notice to the other. Notices, demands and requests which are served in the manner aforesaid shall be deemed sufficiently served or given for all purposes of this lease, in the case of those personally served, on the day of such service, in the case of those given by registered mail, on the third postal delivery day following the mailing thereof and, in the case of those given by fax, on the first business day following the date of transmission. Notwithstanding the foregoing provisions of this section with respect to mailing, in the event that it may be reasonably anticipated that due to any strike, lockout or similar event involving the postal service, any payment, notice, demand, request, approval, consent and other communication will not be received by the addressee by no later than the third business day following the mailing thereof, then the mailing of any such payment, notice, demand, request, approval, consent and other communication shall not be an effective means of sending same but rather any such payment, notice, demand, request, approval, consent and other communication shall be sent by one of the other means herein. PAYMENTS 14. (3) Until such time as the Tenant shall have received written notice to the contrary, all payments of rent shall be paid to the Landlord at its address referred to in section 14.(2) and notwithstanding any transfer or other disposition by the Landlord of the Leased Premises or of the rent or any change of the name and address of the payee of any rent, the Tenant, until receipt of such notice, may continue to pay the rent to the same payee to which and in the same manner in which the last preceding payment thereof was made and each such payment made by the Tenant prior to the receipt by it of such notice shall, to the extent thereof, exonerate and discharge the Tenant of its liability to pay such rent. - 25 - STATEMENTS 14. (4) The Tenant shall deliver to the Landlord within 60 days of the end of each financial year a full set of its financial statements for each financial year during the term of this lease. Such financial statements shall be prepared by licensed Ontario Chartered accountants and in accordance with generally accepted accounting principles. The foregoing provisions shall not apply to the Tenant so long as the Tenant is Simmonds Communications Ltd. or its affiliate. ARTICLE XV RENEWAL OPTIONS TO RENEW 15. (1) Provided the Tenant shall not be in default hereunder, the Tenant shall have the option of renewing the within lease for two (2) further terms of five (5) years each, under the same terms and conditions as are herein contained except for the Minimum Rent, which shall be the then current market rental rate for equivalent space in the Town of Pickering, at such rate may be agreed upon by Landlord and Tenant, or failing such agreement no later than three (3) months prior to the commencement of each of the five (5) year renewal terms, as determined by arbitration pursuant to section 15.(2) provided that the Minimum Rent for the first and second renewal terms shall never be less than the Minimum Rent payable for the last year of the initial term of this Lease and the last year of the first renewal period respectively, and save and except that there shall be no further option to renew after the second renewal period. Written notice of intention to renew must be given to the Landlord by the Tenant no later than six (6) months prior to the end of the term hereof or the first renewal period as the case may be. ARBITRATION 15. (2) If the Landlord and Tenant cannot agree as to the rent for either of the two renewal periods then the matter shall be submitted to arbitration under the Arbitrations Act and the sale arbitrator shall be such recognized leasing agent as the Landlord and Tenant may agree upon whose decision shall be final and binding on the Landlord and on the Tenant - 26 - ARTICLE XVI CONSTRUCTION OF IMPROVEMENTS INITIAL IMPROVEMENTS 16. (1) The Landlord agrees with the Tenant to construct the Building in accordance with the Proposal and all applicable building and zoning requirements such that full occupancy and use of the Leased Premises shall be available on or before November 1, 1995, and such that the warehouse component of the Leased Premises shall be ready for occupancy and use by the Tenant by October 4, 1995. The Tenant shall be permitted to retain, at its cost, a representative (who may be an employee of the Tenant or an affiliated company) to ensure strict adherence to the Proposal and to perform any other tasks as the Tenant may reasonably require to ensure that the Landlord's Work is effected as required under the Proposal. The existence or input of such representative will not in any way diminish the Landlord's obligations under the Proposal. EXTRAS 16. (2) The Landlord will control the design and development of the initial improvements but may include extra features, or changes or additional work required by the Tenant beyond the scope of the work described in the Proposal, provided the requirements are consistent in the Landlord's sole opinion with the overall design and quality of the initial improvements. Prior to carrying out such extra features, changes or additional work the Landlord shall provide the Tenant with a firm estimate of same and the cost of same shall be borne by the Tenant and paid to the Landlord prior to taking possession of the Leased Premises. TENANT'S WORK 16. (3) The Tenant at its cost and expense shall complete or cause the completion of the construction and installation of its leasehold improvements and its equipment and fixtures and any other work not expressly required to be done by the Landlord under the Proposal, and all such work shall first be subject to approval by the Landlord in accordance with the provisions of section 7.(3) and the Proposal. All work performed by the Tenant with respect to the Leased Premises shall - 27 - (a) be done as expeditiously as possible, in a good and workmanlike manner and with first-class new materials, (b) be done in compliance with such reasonable rules and regulations as the Landlord or its agents or contractors may make, (c) be done in such manner as will not interfere unreasonably with work being done by the Landlord upon the Leased Premises, (d) be subject to the reasonable supervision of the Landlord or its agents or contractors but in respect of which the Landlord shall not charge, (e) shall be performed only by such contractors or subcontractors as will work in harmony and without causing any labour dispute with each other, with the Landlord's contractors and subcontractors and with the contractors and subcontractors of all others working in or upon the Leased Premises or any part thereof, and the Tenant shall require its contractors and subcontractors to employ only such labour as will work in harmony and without causing any labour dispute with all other labour then working in the Leased Premises or any part thereof; and shall permit only those contractors and subcontractors as have been duly licensed by the authority having jurisdiction over the appropriate profession and which have been approved as to qualifications and competency in writing by the Landlord (which approval will not be unreasonably withheld), (f) be done at the risk of the Tenant, and (g) be done in accordance with the applicable requirements of all regulatory authorities having jurisdiction with respect thereto. The Tenant agrees at its expense to obtain and maintain for so long as the Tenant's work continues, public liability insurance and workmen's compensation insurance adequate to fully protect the Landlord as well as the Tenant from and against any and all liability for death of or injury to person or damage to property caused in or about, or by reason of the conduct of the Tenant's work. The Tenant shall deliver to the Landlord certificates evidencing such coverage prior to the commencement of the Tenant's work. - 28 - WARRANTY 16. (4) In addition to any warranties contemplated in the Proposal the Landlord shall correct, at its own expense any work which is found to be not in accordance with the Proposal, and any defects in the work due to faulty products and/or workmanship appearing within a period of one year from the date of Substantial Performance of the work. The Landlord shall correct and/or pay for any damage to other work resulting in any corrections required under the foregoing conditions. PARTIAL ASSIGNMENT OF WARRANTIES AND GUARANTEES 16. (5) Without limiting the Landlord's obligations hereunder, the Landlord shall assign to the Tenant to the extent necessary for the Tenant to fulfil its obligations under this Lease the benefit of all warranties and guarantees of workmanship and materials and of design and architectural services which the Landlord may have obtained in connection with the construction of the Building and other improvements on the Leased Premises. ARTICLE XVII GENERAL PROVISIONS ADDITIONAL DOCUMENTS AND ACTS 17. (1) Each party shall execute and deliver such additional documents and instruments and shall perform such additional acts as may be necessary or appropriate in connection with this lease and all transactions contemplated by this lease to effectuate, carry out and perform all of the covenants, obligations and agreements of this lease and such transactions. TIME OF THE ESSENCE 17. (2) Time shall be of the essence of this lease. FAILURE OF LANDLORD TO DELIVER POSSESSION 17. (3) The Landlord shall give possession of the Leased Premises substantially completed to the Tenant on the Commencement Date provided however, anything in this lease to the contrary notwithstanding, and in supplement to the provision of Section 17.(2), the Landlord shall not be deemed to be in default - 29 - under this lease if the Landlord is unable to give possession of the Leased Premises on the Commencement Date by reason of the fact that construction, repairs, improvements or decorations of the Leased Premises are not completed or for any other reason not due to the negligent or wrongful act or default of the Landlord or for any other reason beyond its reasonable control. In such circumstances the rent shall not commence until the later of thirty (30) days from the date on which the Landlord shall have delivered possession of the Leased Premises to the Tenant for the purpose of preparing the Leased Premises for its use and occupation or the date on which the Leased Premises are substantially completed and the term of the Commencement Date shall be amended accordingly. No such failure to give possession of the Leased Premises on the Commencement Date shall in any way affect the validity of this lease or the covenants, obligations and agreements of the Tenant under this lease or the terms or conditions of this lease, nor shall the same be construed in any way to extend the Term. If the Landlord shall not have delivered possession of the Leased Premises to the Tenant by March 31, 1996, the Landlord or the Tenant shall have the right at any time thereafter and prior to the delivery of possession of the Leased Premises to terminate this lease by written notice given to the other. NON-PERFORMANCE BY LANDLORD OR TENANT 17. (4) Notwithstanding any other provision of this lease, whenever, and to the extent that either the Landlord or the Tenant shall be unable to fulfil, or shall be delayed or restricted, it being understood that "unable, delayed or restricted" shall not include postponement arising from increased cost of building supplies or labour in connection with the Landlord's work, such matters being at the risk of the Landlord, in the fulfillment of any obligation (other than the payment of any money) under any provisions of this lease by reason of strike, lock-out, war or acts of military authority, rebellion or civil commotion, fire or explosion, flood, wind, water, earthquake, act of God, or other casualty or by reason of being unable to obtain the materials goods, equipment, services, utility or labour required to enable it to fulfil such obligation or by reason of the order or direction of any administrator, controller or board, or any governmental department or officer or other authority or by reason of not being able to obtain any permission or authority required thereby, or by reason of any other cause beyond its control or not wholly or mainly within its control, whether of the foregoing character or not, and not caused by its default or its act of commission or omission and not avoidable by the exercise of reasonable effort or foresight by it, such party shall, so long as any such impedient exists, be relieved from the - 30 - fulfillment of such obligation and the other party shall not be entitled to compensation for any damage, inconvenience, nuisance or discomfort thereby occasioned. APPROVALS 17. (5) Whenever in this lease any matter requires the approval of a party and such approval is required not to be unreasonably withheld, such approval shall be deemed to have been given unless within 30 days after the request to it for such approval such party shall have notified the party requesting such approval of the reasons for its refusal to give such approval. NET LEASE 17. (6) This is a net lease. The rent and all costs, expenses and obligations relating to the Leased Premises shall be paid by the Tenant except as may otherwise be expressly provided in this Lease. LANDLORD'S COVENANTS 17. (7) The Landlord covenants with the Tenant: (a) for quiet enjoyment; (b) that, as at the Commencement Date, the Leased Premises shall be zoned M-1 to permit their use for office, warehouse and assembly uses for electronics and communications equipment; and (c) that the Landlord will not during the process of carrying out its work under this Lease and the Proposal release any Hazardous substance on to the Land. For the purposes of this section, "Hazardous Substance" means any substance, waste, liquid, gaseous or solid matter, fuel, microorganism, sound, vibration, ray, heat, odor, radiation, energy vector, plasma, organic or inorganic matter which is or is deemed to be, alone or in any combination, hazardous, hazardous waste, solid or liquid waste, toxic, a pollutant, a deleterious substance, a contaminant or a source of pollution or contamination under any Environmental Laws and "Release" means releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, depositing, injecting, escaping, leaching, disposing or dumping. - 31 - PLANNING ACT 17. (8) This lease is entered into subject to the express condition that it is to be effective only if the provisions of Section 50 of the Planning Act, S.O. 1990, or any statute that may be substituted therefor, as from time to time amended, are complied with and only if any consent required thereby is granted on conditions which are acceptable to the Landlord. Until any such required consent is obtained, the Term of this Lease shall be deemed not to exceed a period of twenty-one (21) years, less one (1) day, subject however to the Tenant exercising the first right of renewal provided for herein. NOTICE OF LEASE 17. (9) This lease shall not be registered against the title to the Leased Premises. Each of the Landlord and the Tenant agrees that at the request of the other it will execute and deliver a notice of this lease for registration against the title to the Leased Premises. No such notice of lease shall amend or alter, or shall be deemed to have amended or altered, any of the covenants, obligations or agreements contained in this lease. AUTHORIZATION 17. (10) Each of the Landlord and the Tenant has all requisite power and possesses all licenses, franchises, permits, consents and other rights necessary to enable it to enter into this lease. WAIVERS 17. (11) No waiver by a party of any breach by another party of any of the covenants, obligations and agreements under this lease shall be a waiver of any subsequent breach or of any other covenant, obligation or agreement, nor shall any forbearance to seek a remedy for any breach be a waiver of any rights and remedies with respect to such or any subsequent breach. The acceptance by the Landlord of the payment of rent after notice to the Tenant of any default shall not constitute a waiver of any rights or remedies of the Landlord with respect to such or any other default. SEVERABILITY 17. (12) If any covenant, obligation or agreement in this lease or the application thereof to any person or circumstance shall, - 32 - to any extent, be invalid or unenforceable, the remainder of this lease or the application of such covenant, obligation or agreement to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each covenant, obligation and agreement in this lease shall be separately valid and enforceable to the fullest extent permitted. CHANGES REQUIRED BY CONTEXT 17. (13) This lease shall be read with all changes of gender and number required by the context. The representations, warranties and covenants of the Tenant contained in this lease are and shall be construed as joint and several representations, warranties and covenants of each party comprising the Tenant. WHOLE AGREEMENT 17. (14) This lease supersedes all prior agreements, arrangements and communications and, together with the Proposal, contains and constitutes the entire agreement between the parties. There are no understandings, inducements, representations, warranties, collateral agreements or conditions affecting or supported by this lease or upon which any party has relied in entering into this lease other than as expressed in this lease. This lease may be amended or modified only by a written instrument signed by each of the parties. The schedules and appendices to this lease form part of this lease. HEADINGS 17. (15) The article headings and section headings in this lease have been inserted for convenience of reference only and do not form part of this lease. They shall not be referred to in the interpretation of this lease. APPLICABLE LAW 17. (16) This lease shall be construed in accordance with the laws of the Province of Ontario and no action or other proceeding shall be brought to construe or enforce this lease except in those courts having jurisdiction in the Province of Ontario. - 33 - ASSIGNS 17. (17) This lease shall enure to the benefit of and be binding upon the parties hereto, shall be binding upon their respective successors and assigns and shall enure to the benefit of and be enforceable by only such successors and assigns which have succeeded or which have received such assignment in the manner permitted by this lease. COUNTERPARTS 17. (18) This lease may be executed in a number of counterparts, each of which shall be deemed an original and all of which shall constitute one and the same lease. GUARANTEE 17. (19) To induce the Tenant to execute and deliver this lease and in consideration of the execution and delivery hereof by the Tenant and Guarantor, the Guarantor as principal and not as surety hereby covenants with the Tenant that: (a) The Landlord shall duly perform and observe each and every covenant, obligation and agreement in this lease on the part of the Landlord to be performed and observed, in a manner therein specified, and that if for any reason including the insolvency or bankruptcy of the Landlord, the Landlord makes default in the performance or observance of any of the covenants, obligations or agreements which under the terms of this lease are to be performed, or observed by the Landlord, the Guarantor shall forthwith pay to the Tenant all damages that may arise in consequence of the non-observance or non-performance of any of the said covenants, obligations or agreements. (b) The Guarantor is jointly and severally bound with the Landlord for the fulfilment of all covenants, obligations and agreements of the Landlord under the Lease. In the enforcement of its rights under this guarantee the Tenant may proceed against the Guarantor as if it were named as Landlord under this Lease. (c) The Tenant shall not be required to proceed against the Landlord or to pursue any other remedy whatsoever which may be available to the Tenant before proceeding against the Guarantor, and the Guarantor hereby waives any right to require the Tenant to do so. - 34 - (d) No delay of the Tenant in taking any steps to enforce performance or observance of the several covenants, obligations or agreements contained in this lease to be performed observed by the Landlord, no extension or extensions of time which may be given by the Tenant from time to time to the Landlord, and no other act or failure to act of or by the Tenant shall release, discharge or in any way reduce the obligations of the Guarantor under its covenants contained in this guarantee. IN WITNESS WHEREOF the parties hereto have executed this lease. WYCHREST ESTATES INC. Per: --------------------------------- c/s Per: --------------------------------- GEORGIAN CONSTRUCTION CORPORATION Per: --------------------------------- c/s Per: --------------------------------- SIMMONDS COMMUNICATIONS LTD. Per: --------------------------------- c/s Per: --------------------------------- - 35 - SCHEDULE "A" ------------ Part Lot 30 Range 3, Broken Front Concession Being the Remainder of Parcel Pickering B.F. 3-30-16 Section Town of Pickering, Town of Pickering, Regional Municipality of Durham Designated as Parts 1, 2, 3, 4 and 5, Plan 40R-11999. EX-10.3 3 EXHIBIT 10.3 CIBC - ----------------- Equipment Finance CUSTOMER #081425 LEASE NUMBER (LESSOR USE ONLY) LEASE 002506 REGIONAL OFFICE 5050 SOUTH SERVICE ROAD, BURLINGTON, ONTARIO, L7R 4C8 LESSEE (the "Company") LEGAL NAME AND ADDRESS SUPPLIER OF EQUIPMENT NAME SIMMONDS TECHNOLOGIES INC. NAME SCOTIABANK THE BANK OF NOVA SCOTIA ADDRESS 5255 YONGE STREET, SUITE 1050, ADDRESS 2154 LAWRENCE AVENUE, E. CITY NORTH YORK, CITY SCARBOROUGH, PROVINCE POSTAL CODE TELEPHONE PROVINCE POSTAL CODE TELEPHONE ONTARIO M2N 6P4 (416) 221-1900 ONTARIO M1R 3A8 ( ) CONTACT NAME TITLE REPRESENTATIVE GARY HOKKANEN EQUIPMENT TO BE LEASED QUANTITY DESCRIPTION UNIT COST EQUIPMENT AS REFERENCED TO ON BILLS OF SALE DATED SEPT. 6, 1996 BETWEEN THE BANK OF NOVA SCOTIA AND CIBC EQUIPMENT FINANCE LIMITED. DETAILED DESCRIPTION ON SCOTIABANK CONTRACTS #'S : #42272 DATED MARCH 12, 1996 #42721 DATED DEC. 6, 1996 #42054 DATED MARCH 12, 1996 #42393 DATED APRIL 26, 1996 EQUIPMENT COST $1,260,287.82 INSURANCE $ - OTHER FEES (CEFL's Registration #R136587912) $ $ - EQUIPMENT LOCATION 580 GRANITE COURT, PICKERING, ONTARIO TOTAL LEASE COST $1,260,287.82 TERMS OF PAYMENT LEASE TERMS NUMBER RENTAL PERIOD RENTAL PROVINCIAL (INCL. PST & GST) (MONTHS) OF RENTALS (PAYABLE IN ADVANCE) AMOUNT SALES TAX GST TOTAL RENTAL PER DIEM RENTAL /X/ MONTHLY SEE ATTACHED EXHIBIT "B" N/A 44 44 / / QUARTERLY $ / / ANNUALLY / / OTHER: SEE ADDITIONAL PROVISIONS $ $ $ PURCHASE OPTION (SUBJECT TO SECTION 17 ON THE REVERSE) FIRST TOTAL RENTAL PAYMENT DATE (LESSOR USE ONLY) (Day 1st - 24th Only) (i) THE FIRST DAY OF THE 37TH RENTAL PERIOD FOR 20% OF THE TOTAL LEASE COST OR (ii) THE LAST DAY OF THE 44TH RENTAL PERIOD, FOR MARKET VALUE. D D M M Y Y 12 09 96 ADDITIONAL PROVISIONS "THIS ENTITY DOES HAVE A FRENCH NAME OR AN ENGLISH/FRENCH COMBINATION NAME* TECHNOLOGIES SIMMONDS INC.
LEASE PROVISIONS FOR VALUABLE CONSIDERATION, THE COMPANY AND CIBC Equipment Finance Limited ("CEFL") AGREE AS FOLLOWS (WITH CAPITALIZED TERMS NOT DEFINED BELOW REFERRING TO THE INFORMATION CORRESPONDING TO THOSE TERMS NOTED ABOVE): 1. EQUIPMENT LEASED. CEFL agrees to acquire and pay for the property noted under Equipment To Be Leased, together with all accessories, attachments, accessions and replacement or additional parts supplied with or added to that property (collectively, the "Equipment") at a total cost (including front end tax, freight, preparation, assembly and installation charges) not exceeding the Total Lease Cost. CEFL agrees to lease the Equipment to the Company and the Company agrees to lease it from CEFL in accordance with the provisions of this Lease. CEFL may from time to time add to that description of the Equipment by setting out serial numbers or other identifying references. 2. TERM. The term of this Lease starts on the day when any of the Equipment is first delivered to the Company. The term ends after a period equal to the Lease Term (except, if that date is the 25th day of a calendar month or any following day to the end of that month, then the term extends to the end of that month). 3. RENT. The Company will, on the first day of each consecutive Rental Period, pay to CEFL, as rent for the use of the Equipment for that period, the Total Rental together with all sales, use, transaction, value added, goods and services or similar taxes payable from time to time by CEFL or the Company in connection with the Equipment to the extent that such taxes have not already been included in the computation of Total Rental set out above. The first day of each Rental Period (when the Total Rental is to be paid) is the day of the calendar month when the term of this Lease starts except, if the term start date is the 25th day of a calendar month or any following day to the end of that month, then each Rental Period will commence (and the Total Rental is to be paid) on the first day of each calendar month commencing with the month following the term start date and the Company will on the term start date pay to CEFL an amount equal to the Per Diem Rental times the number of days in the period from and including that term start date to but excluding the start of the first Rental Period (together with applicable taxes as required above) as rent for that period. Upon signing this Lease, the Company will pay to CEFL a non-refundable payment equal to the Total Rental (together with the applicable taxes as required above) which CEFL will apply as payment of the rent for the first Rental Period. SEE REVERSE SIDE FOR ADDITIONAL PROVISIONS WHICH ARE PART OF THIS LEASE THE COMPANY AND CEFL AGREE TO THE PROVISIONS OF THIS LEASE AS SET OUT ABOVE AND ON THE REVERSE SIDE OF THIS PAGE, TOGETHER WITH THE PROVISIONS OF ALL SCHEDULES AND EXHIBITS (IF ANY) ATTACHED TO THIS PAGE, AND, IN CONSIDERATION OF THOSE PROVISIONS, SIGN AND DELIVER THIS LEASE TO BE EFFECTIVE ON THE DATE SET OUT BELOW. CIBC EQUIPMENT FINANCE LIMITED LESSEE NAME (NAME OF COMPANY) BY SIMMONDS TECHNOLOGIES INC. ---------------------------- AUTHORIZED SIGNATURE BY DAVID O'KELL NAME AND TITLE --------------- By --------------------------- 4. PAYMENT. The Company must make all payments to CEFL (without any condition, deduction, set-off or holdback) at its address as noted at the top of the first page of this Lease (or any other address that CEFL advises). 5. EQUIPMENT ACCEPTANCE. The Company will inspect and test the Equipment as soon as it is delivered. The Company agrees that CEFL has no duty to inspect or test the Equipment either before or after its delivery. Immediately after delivery, the Company will notify (in written form as CEFL may require) either (i) CEFL of its acceptance of the Equipment or (ii) CEFL and the supplier or manufacturer of its rejection of the Equipment. By accepting the Equipment, the Company acknowledges that the Equipment has been delivered in good condition and operating order and in accordance with its intended purpose as prescribed by the Equipment supplier and/or manufacturer and that the Equipment is located at the Equipment Location. If the Company rejects or does not accept the Equipment or if it is determined at any time that the Equipment is defective or unacceptable for any reason, the Company shall remain bound by its obligations under the Lease and will have no claim against CEFL in respect to the Equipment, but may, if it so chooses, have a claim against the supplier, the manufacturer and/or other persons. 6. WARRANTIES. The Company acknowledges that it alone has selected the Equipment, the supplier and/or the manufacturer. The Company has satisfied itself that: (i) the Equipment is suitable for its intended purpose; (ii) the supplier and/or manufacturer shall bear all liability, financial and/or otherwise, and will be able to acquit themselves of any and all obligations in respect to the Equipment (whether undertaken by them or otherwise imposed by law on them); (iii) all warranties, guarantees or other undertakings made by the supplier or manufacturer shall be assignable and the Company shall be able to address any claim against the supplier, manufacturer and/or any others (excluding CEFL); or, if not the case, that the Company is prepared to bear the risk thereof. The Company further acknowledges that CEFL does not deal in the Equipment and, subject to the provisions contained in the Lease, CEFL has not made any warranty or guarantee or agreed to any undertaking or condition with respect to the Equipment, the supplier or the manufacturer, including whether the Equipment is suitable to the Company. Specifically, and without limitation to the foregoing, CEFL shall not be responsible if a supplier or manufacturer delays or fails to fill an order for the Equipment or if the Equipment is defective or unacceptable for any reason, including a failure in its performance, capacity or operation. This Lease is in substance a financial transaction with CEFL fully performing its obligations by allowing the Company to possess and use the Equipment and exercise any option rights. CEFL assigns to the Company, for the term of this Lease, the benefit of all warranties, guarantees or other undertakings (the Company hereby guaranteeing the assignability thereof) made by the supplier or the manufacturer of the Equipment, but CEFL will not be responsible under these warranties, guarantees or undertakings. 7. USE, MAINTENANCE & RETURN. The Company shall, at its own expense, lawfully and carefully prepare, assemble and install the Equipment, maintain it in good repair and working order (except for normal wear and tear resulting from proper use) and operate it through competent personnel. The Company will keep the Equipment at the place of business designated as the Equipment Location and will not remove it from that place without CEFL's prior written consent, which consent will not be unreasonably withheld. The Company will use the Equipment in its business only for commercial purposes and not for personal, consumer, family or household use. Upon termination of the Lease for any reason (and assuming that the Company has not exercised a then valid option to purchase the Equipment), CEFL may require that the Company, promptly and at the Company's expense, either properly pack the Equipment for shipment and deliver it in good repair and working order (except for normal wear and tear resulting from proper use) to CEFL at a place which CEFL may reasonably designate or, at CEFL's option, dispose of the Equipment in any reasonable manner. The Company will allow CEFL to have access from time to time to the Equipment during reasonable business hours in order to inspect it or observe its use or to repossess and/or remove it at any time after termination of this Lease for any reason. 8. EQUIPMENT RISKS. The Company is responsible for all risk of loss and theft of and damage to the Equipment as well as all risks to the Company and others in connection with the Equipment. The Company's responsibility for these risks continues, not only during the term of this Lease, but also while the Equipment is being transported before the start and after the end of the term of this Lease. If the Equipment is lost or damaged beyond repair or is stolen or for any other reason is not available or suitable for return at any time during the term of this Lease, the Company will notify CEFL of that event and, unless CEFL is agreeable to another arrangement, will immediately on demand pay to CEFL the casualty value which will be equal to any excess of what is then the total present value of all unpaid and future rent payments under this Lease over any insurance proceeds paid to CEFL as a result of the event. The present value will be calculated by discounting at the rate per year equal to 3% per year less than the Prime Rate (being a variable reference interest rate per year declared by Canadian Imperial Bank of Commerce from time to time to be its prime rate for Canadian dollar loans made by it in Canada) on the date of this Lease. Upon payment of the casualty value, this Lease is terminated. 9. INSURANCE. The Company will at its own expense maintain "all-risk" property insurance of not less than the replacement cost of the Equipment, together with comprehensive general liability insurance (including coverage for property damage, bodily injury and contractual liability) and any other form of insurance covering the Equipment against risks as considered prudent for that type of property by operators of businesses similar to that run by the Company. The insurance must be in amounts, in form and with insurers acceptable to CEFL. Each insurance policy must name both the Company and CEFL as insureds, name CEFL as loss payee and contain a clause requiring the insurer to give to CEFL prior notice of a revision to its provisions or of its cancellation. The Company will maintain that insurance not only during the term of this Lease but also while the Equipment is being transported before the start and after the end of the term. At CEFL's request, the Company will give CEFL evidence acceptable to CEFL that the insurance coverage is in effect (but CEFL is not obliged to determine or advise the Company if there is adequate coverage in effect). If the Company does not, CEFL may (but does not have to) obtain proper insurance and the Company will immediately on demand repay CEFL the cost of that insurance. 10. TITLE. Subject to the Company exercising any option to buy, CEFL shall have full ownership of and title to the Equipment and may require that the Equipment bear a clear notice of CEFL's rights on the Equipment in a form acceptable to CEFL. The Company will ensure that the Equipment is kept free and clear of all liens and will pay all fees, charges and taxes assessed from time to time in connection with the Equipment. Alterations, additions and improvements to the Equipment may be made only with CEFL's prior written consent (unless for usual maintenance) and immediately become CEFL's property and part of the Equipment. The Company has no interest in the Equipment other than the right to possess, insure and use the Equipment for the term of this Lease and any option or right to buy (and the Company grants to CEFL a purchase money security interest in the Equipment in consideration of CEFL enabling the Company to acquire that right). If this Lease is governed by the laws of the Province of Quebec, for greater assurance and as security for the performance of its obligations hereunder, the Company hypothecates to CEFL for an amount equal to the Total Lease Cost, all of the Company's right to possess and use and under any option to buy, the Equipment. The Company will ensure that the Equipment always remains personal or movable property (without the need for any other party's consent or waiver to allow CEFL to remove it) even though it may become attached to real or immovable property. The Company will install the Equipment in a manner permitting its removal without material damage to the Equipment or the place of its installation. The Company will be responsible for damage to property and the liability of CEFL reasonably incurred due to CEFL entering any premises and repossessing and removing the Equipment upon termination of this Lease for any reason. 11. LAWS AND TAXES. The Company will comply with all laws relating to this Lease or to the Equipment (including, without limitation, laws relating to use, operation or maintenance of the Equipment). Except as otherwise specifically provided herein, the Company shall pay when due all taxes and other charges of any kind whatever now or in the future imposed by any government or public authority or agency ("Taxes"), including, without limitation, all income, capital, sales, use, transaction, value-added, goods and services and similar taxes, relating to or arising in respect of this Lease or the Equipment (including, without limitation, all Taxes relating to purchase, ownership, delivery, leasing, financing, possession, use, operation or return of the Equipment and specifically including any such Taxes payable by CEFL). Notwithstanding the foregoing, the Company shall have no obligation (i) to pay separately any Taxes which form part of the Total Rental for any period, which have been specifically included in computing the Total Lease Cost or which have been paid by the Company in accordance with section 3 above, (ii) to pay any goods and services or substantially similar Taxes imposed on CEFL in respect of which CEFL receives a full, current input tax credit or refund, (iii) to pay any Taxes imposed on CEFL which are based on its net income, or (iv) to pay any large corporations, capital or similar Taxes imposed on CEFL except to the extent that such Taxes are imposed on CEFL, or CEFL's liability in respect thereof is increased, by reason of a change in law or in the application or interpretation thereof occurring after the date hereof. 12. INDEMNIFICATION. Unless caused by CEFL's sole gross negligence, the Company will indemnify CEFL for all losses, costs and liability including but not limited to claims based on strict liability in tort or legislation including delictual, absolute, legal or contractual liability in the Province of Quebec, which CEFL incurs in connection with the Equipment (other than taxes based on CEFL's net income). All indemnities and liability limitations in favour of CEFL will continue after the term of this Lease and even if the Lease is terminated. 13. DEFAULT. There shall be default under the terms of the Lease ("Default") in the event that any of the following occurs: 1) The Company does not perform any of its obligations (including not paying an amount when due) under this Lease or under any other contract, document or instrument by which it is bound and the default continues for 15 days; 2) The Company becomes subject to a bankruptcy, insolvency, receivership or similar proceeding, or an encumbrancer takes possession of any of the Equipment or a substantial part of the Company's property; 3) The Company suspends business, abandons or attempts to transfer or gives up possession of any of the Equipment or substantially all of the Company's property. 4) Other than caused by normal wear and tear resulting from proper use in the normal course of the Company's business (as conducted on the date of this Lease), anything happens or is about to happen which CEFL reasonably believes may materially reduce the value of the Equipment or CEFL's interest in it or increase the risk to it; 5) If the Company is a corporation, there is a change in the Company's effective control without CEFL's written consent, or any action is taken to wind-up, liquidate or dissolve the Company; 6) If the Company is in default under any other lease, contract, agreement or obligation, now existing or hereafter extended to, with or due to CEFL, the Canadian Imperial Bank of Commerce or any assignee of CEFL whether the Company is bound alone or with others; or 14. REMEDIES UPON DEFAULT. In the event of Default or continued Default, CEFL may without giving notice to the Company terminate this Lease and/or, in addition to any other right it may have at law or otherwise, may without notice do any or all of the following: 1) REPOSSESSION - CEFL may enter wherever the Equipment is located (or CEFL believes that it is located) and repossess and remove it (if necessary, disconnecting it from any other property); 2) SELL OR RE-LEASE - CEFL may sell or re-lease the Equipment in such manner and for amounts and upon such terms as CEFL may reasonably determine and may apply the net proceeds against what the Company owes to CEFL; 3) RECOVER ARREARS - CEFL may sue for arrears of rent and other amounts owing by the Company; and/or 4) DAMAGES FOR TERMINATION - CEFL may require the Company to pay immediately on demand damages suffered by CEFL to CEFL as a result of the termination of the Lease. These damages will be, as a genuine pre-estimate of liquidated damages for loss of a bargain and not as a penalty, the total present value of all unpaid and future rent payments under this Lease, less the present value of any net proceeds realized by CEFL upon selling or re-leasing the Equipment after deducting all costs, expenses and liability incurred in connection with any repossession and that sale or re-lease. The present values will be calculated by discounting at the rate per year equal to 3% per year less than the Prime Rate (as defined in Section 8 hereof) existing at the date of this Lease. 15. EXPENSES UPON DEFAULT. The Company will immediately on demand pay for all costs and expenses incurred by CEFL by reason of the occurrence of a Default or in exercising CEFL's remedies as a result of a Default. 16. DEFAULT INTEREST. Should the Company fail to pay when due any part of the rent herein reserved or any sum required to be paid to CEFL hereunder, the Company shall pay to CEFL, in addition thereto, a late charge of ten dollars ($10.00) for each month or part thereof for which said rent or other sum shall be delinquent together with interest on any and all delinquent payments and amounts in default from the date thereof until paid in full at the rate of 18% per annum calculated monthly. The Company further agrees to pay to CEFL a returned cheque or non-sufficient funds (NSF) charge to reimburse CEFL for its time and expense incurred with respect to a cheque or a pre-authorized payment debit that is returned for any reason. Such NSF charge shall be the greater of $25.00 or the actual bank charges to CEFL plus any other amounts allowed by law. 17. OPTION TO PURCHASE. Provided the Company is not in default under the Lease on an Option Date and has not been at any time previously thereto, it shall have the option to buy the Equipment at the applicable Option Price on that Option Date. The Company may exercise that option by notifying CEFL of its intention at least 30 days (but not more than 90 days) before the Option Date and by paying CEFL on or before the Option Date the Option Price, together with all applicable taxes and any other amounts due under this Lease. CEFL will then transfer to the Company ownership of and title to the Equipment without any warranty, guarantee or undertaking by CEFL and in its then condition, quantity and location. This Lease will then terminate. For the purpose of determining an option price, the fair market value of the Equipment will be its fair market value, as both the Company and CEFL may agree to in writing or, if not so agreed, as fixed by an independent appraiser acceptable to both the Company and CEFL. 18. PROVINCIAL WAIVERS. The Company acknowledges that statements under the various provincial personal property security acts and the Civil Code of Quebec may be registered with respect to this Lease and the Equipment. The Company hereby waives receipt of, and the right to receive, a copy of any registered statement or verification statement with respect thereto. To the extent not prohibited by any law applicable to and governing this Lease, the Company hereby waives the benefit of all provisions of any law, statute or regulation which would in any manner affect CEFL's rights and remedies hereunder, including provisions of the Limitation Civil Rights Act of Saskatchewan. For purposes of the Civil Code of Quebec, the Company acknowledges that this Lease shall be considered a contract of leasing. 19. OTHER INFORMATION. The Company will from time to time provide CEFL with any information or document which CEFL may reasonably request. The Company authorizes CEFL to conduct credit investigations and authorizes Canadian Imperial Bank of Commerce to release any credit information to CEFL. 20. NOTICE. All notices stipulated in the Lease shall be delivered in writing. Any document in connection with this Lease will be considered to have been delivered to or served upon, and received by, CEFL or the Company upon the earlier of actual receipt by an employee or an officer of the receiving party and (if mailed and there has been no applicable interruption of postal service) the expiry of 10 days after the date the document was posted by prepaid ordinary mail to the receiving party's address as set out on the first page of this Lease (or another address as the receiving party may have last notified the sender). 21. LANGUAGE. The Company and CEFL wish that this Lease and all related documents be drawn up and signed in English. LES PARTIES RECONNAISSENT QU'ELLES ONT EXIGE QUE CE CONTRAT DE LOCATION DE MEME QUE TOUS LES AUTRES DOCUMENT S'Y RATTACHANT SOIENT REDIGES EN ANGLAIS. 22. MISCELLANEOUS. a) Time is of the essence in respect of this Lease. b) This Lease will be governed by and construed in accordance with the laws of the province or territory described by the Equipment Location. c) This Lease is the entire agreement between the Company and CEFL and may be varied only by written documentation signed by both the Company and CEFL. d) If more than one person, firm or corporation signs this Lease, each is jointly and severally liable (or, in other words, CEFL may, at is option, require performance or payment of all obligations under the Lease from any one of them or a portion from each), but CEFL is released from any of its obligations by performing that obligation to any one of them. e) A provision of this Lease which is void or unenforceable in a jurisdiction is, as to that jurisdiction, ineffective to that extent without invalidating the remaining provisions. f) The Company may not assign the Company's rights and obligations under this Lease, and may not sub-lease or loan the Equipment, unless CEFL gives its prior written approval. CEFL may assign, at its sole discretion at any time, without the consent of the Company, its right, title and interest in the Lease and in the Equipment described herein to any individual, or other legal entity and upon such assignment the word CEFL shall mean and include such assignee. The Company hereby consents to the delivery by CEFL to any prospective assignee of such information concerning the Company as may be in CEFL's possession and requested by the assignee. g) All CEFL's rights are cumulative and not alternative and may be exercised by CEFL separately or together in any order or combination. h) The Company will do all acts and sign all documents as CEFL may require to give effect to this Lease and to protect CEFL's rights. i) The Company has received a copy of this Lease. GUARANTEE For valuable consideration, the undersigned irrevocably and unconditionally guarantees performance, immediately upon demand, of the Company's obligations under the lease set out above, as it may from time to time be amended (the "Lease") and agrees to indemnify CEFL against any loss incurred by CEFL resulting from the failure by the Company to perform such obligations. The undersigned's liability under this Guarantee will not be limited or reduced, nor will CEFL be responsible or owe a duty (as a fiduciary or otherwise) to the undersigned, nor will CEFL's rights be prejudiced, by the existence or occurrence (with or without the undersigned's knowledge or consent) of any circumstance or event that might otherwise be a defence available to the undersigned or the Company, including (without limitation) (i) CEFL granting extensions of time or other indulgences to the Company; (ii) any changes to the Lease or to the leasing transaction between the Company and CEFL; (iii) any defect or unsuitability of the Equipment; (iv) any loss of or in respect of, or the unenforceability of, any collateral security held by CEFL; (v) any change in the Company's name or its membership or shareholding; (vi) any incapacity or lack or limitation of power of the Company; or (vii) the liquidation, bankruptcy or insolvency of the Company or others. CEFL need not exhaust its recourse against the Company or other persons or the Equipment or any collateral security it may hold before being entitled to performance by the undersigned. The amount appearing due in any account stated by CEFL or settled between CEFL and the Company will be conclusive as to that amount being due. All debts and liabilities which the Company has incurred or may from time to time incur in any manner to the Guarantor are assigned to CEFL and postponed to amounts owing under the Lease. If the undersigned receives any moneys in payment of any of those debts and liabilities, the undersigned will hold them in trust for, and will immediately pay them to, CEFL without reducing the undersigned's liability to CEFL. This Guarantee is governed by the laws governing the Lease. If this Guarantee is governed by the laws of the Province of Quebac, the undersigned renounces all benefits of division and discussion. If more than one person, firm of corporation signs this Guarantee, each is jointly and severally liable (or, in other words, CEFL may, at its option, require performance or payment of all obligations under the Lease from any one of them or a portion from each). Capitalized terms in this Guarantee have the meanings defined in the Lease. Given this day of ,19 -------------------- ---------------- -------- Witness ------------------------------------ Name: } ------------------------- ------------------------------------ Address: Address: ---------------------- ------------------ EXHIBIT "B" This is the Schedule of Rentals referred to as Exhibit "B" in the attached Lease Contract No. 002506 dated Sept. 12th, 1996 between CIBC Equipment Finance Limited ("CEFL") and Simmonds Technologies Inc. Lease Contract based on a 44 month term as follows: FLOATING RATE RENTAL 1. Based on the current 30 day B.A. Rate of 4.08%, Lease Rate of 7.33% and the Lease Term, the Monthly Rental Payments are $32,623.94 plus GST of $2,283.68 plus PST of $2,609.92 for a total monthly rental of $37,517.54. The total monthly rental is payable on the 12th day of each month throughout the Lease term starting on Sept. 12, 1996 ("Commencement Date"), subject to the adjustment clause below. FLOATING RATE RENTAL ADJUSTMENT CLAUSE 2. (a) On each anniversary of the Commencement Date, at the end of the Lease Term, and on the date or dates referred to in paragraph (b) below, CEFL will calculate the Adjusted Rental (based on the current B.A. Rate) as of each of the Rental Payment Dates for the preceding year or since the last calculation thereof, if applicable. If the sum of such Adjusted Rentals exceeds the sum of the actual Rentals paid on such Rental Payment Dates then CEFL shall invoice and lessee shall pay to CEFL such difference, otherwise CEFL shall refund such difference to lessee. (b) Provided that the Lease Rate on the date of written request referred to below is at least 200 basis points greater than the Lease Rate in effect on the date of execution of the Lease, then at any time or times but not more than quarterly either CEFL or the Lessee may, on 15 days prior written notice, request that the Adjusted Rental be calculated and the difference paid or refunded as set forth in paragraph 2(a) above. FIXED RATE RENTAL 3. (a) At any time during the Lease Term the Lessee has the option, provided that it is not in default of its obligations under the Lease and upon 15 days prior written notice to CEFL, to fix the Periodic Rental from the next Rental Payment Date following the expiry of the 15 day notice period ("Fixing Date") for the then remaining Lease Term, subject to paragraph (iii) of this section. If such option is exercised: (i) the Adjusted Rental shall be calculated in accordance with paragraph 2(a) hereof for the applicable period prior to the Fixing Date; (ii) notwithstanding section 2 hereof and subject to paragraph (i) of this section, no further calculations or adjustments shall at any time be made pursuant to section 2 hereof; and (iii) the Rental shall be calculated on the Effective Date and recalculated on each 5th anniversary of the Fixing Date (if any) by CEFL, and shall be the product of the Fixed Monthly Rental factor and the Net Book Value determined as of the Fixing Date and each such 5th anniversary thereafter. (b) The fixed Monthly Rental Factor shall be calculated as of the Fixing Date and each 5th anniversary thereof and in the same manner as the Monthly Rental Factor but based on the CEFL base rate then in effect on the 15th day of the month immediately preceding the date of calculation, plus 225 basis points. DEFINITIONS 4. For the purpose of the Exhibit and the Lease: (a) Adjusted Rental means the relevant Rental adjusted as set forth in Clause 2 of Exhibit B as of any determination date. (b) Banker's Acceptance means a bill of exchange (i) drawn by CEFL and accepted by Canadian Imperial Bank of Commerce, (ii) denominated in Canadian dollars, (iii) for a term of 30 days, (iv) issued and payable only in Canada, and (v) having a face value of not less than $100,000. (c) CEFL Base Rate means the rate of interest applicable to CEFL cost of borrowing. (d) Lease Rate means the 30 Day BA Rate in effect on the date of determination, plus 325 basis points. (e) Monthly Rental Factor is determined in accordance with CEFL's standard procedures based on that portion of the Lease Term remaining following the date of determination and based on the Lease Rate in effect on the date of determination. (f) Net Book Value means the net book value of CEFL's investment in the Lease on the date of determination and is calculated by deducting unearned income from the gross lease receivable which remains unpaid as of the date of determination in accordance with generally accepted accounting principles. (g) Rental referred to in section 1 hereof is calculated by multiplying the total Equipment Cost by the Monthly Rental Factor in effect on the date of execution of the Lease and subject to section 3 hereof such amount shall remain in the Rental throughout the Lease Term. (h) 30 Day BA Rate means either, (i) the yield on the date of determination on Banker's Acceptance expressed as an annual rate of interest, as reported on the Reuters Monitor Service, page CDOR, using the average line and rounded to two decimals; or (ii) if the Reuters Monitor Service is not available, the rate of interest as would permit the Canadian Imperial Bank of Commerce to obtain the same effective rate as if it had accepted and purchased a Banker's Acceptance at the same acceptance fee and pricing at which it would have accepted and purchased on the bid side of the market, such Banker's Acceptance at approximately 10:00 a.m. Toronto time on the date of determination. (i) Prime Rate means the variable reference interest rate per year declared by Canadian Imperial Bank of Commerce ("CIBC") from time to time to be its prime rate for Canadian dollar loans made by CIBC in Canada. This page initialed for identification EX-11.1 4 EXHIBIT 11.1 EXHIBIT 11.1 RICHEY ELECTRONICS, INC. COMPUTATION OF EARNINGS PER SHARE ($ AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED -------------------- -------------------- JUNE 27, JUNE 28, JUNE 27, JUNE 28, 1997 1996 1997 1996 ------- ------- ------- ------- PRIMARY EARNINGS PER SHARE: Net income used to compute primary earnings per share $1,678 $1,735 $3,381 $2,877 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average number of shares used to compute primary earnings per share 9,063 9,058 9,063 9,058 ------ ------ ------ ------ ------ ------ ------ ------ Primary earnings per share $0.19 $0.19 $0.37 $0.32 ------ ------ ------ ------ ------ ------ ------ ------ FULLY DILUTED EARNINGS PER SHARE: Net income $1,678 $1,735 $3,381 $2,877 Add: Interest on convertible subordinated notes payable, net of taxes 622 584 1,218 779 ------ ------ ------ ------ Net income used to compute fully diluted earnings per share $2,300 $2,319 $4,599 $3,656 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average number of shares outstanding 9,063 9,058 9,063 9,058 Add: Weighted average shares of convertible subordinated notes payable assuming conversion 3,947 3,948 3,947 2,662 ------ ------ ------ ------ Weighted average number of shares used to compute fully diluted earnings per share 13,010 13,006 13,010 11,720 ------ ------ ------ ------ ------ ------ ------ ------ Fully diluted earnings per share $0.18 $0.18 $0.35 $0.31 ------ ------ ------ ------ ------ ------ ------ ------
EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-27-1997 29 0 31,473 0 46,866 82,222 5,076 0 144,699 30,804 75,912 0 0 9,000 37,974 144,699 116,140 0 86,949 107,024 749 0 2,716 5,651 2,270 0 0 0 0 3,381 0.37 0.35
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