-----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, N05UkWaZuoll8NVwFkd/k5sx+xhEWi2qdBbHRxurIxjjhTdvY7NQL55namhHFREG 0fDWHoByNA62mqBqSAjGQw== 0000914317-05-001127.txt : 20050331 0000914317-05-001127.hdr.sgml : 20050331 20050331094818 ACCESSION NUMBER: 0000914317-05-001127 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050331 DATE AS OF CHANGE: 20050331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YDI WIRELESS INC CENTRAL INDEX KEY: 0000712511 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 042751645 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29053 FILM NUMBER: 05716686 BUSINESS ADDRESS: STREET 1: 20 INDUSTRIAL DRIVE EAST CITY: SOUTH DEERFIELD STATE: MA ZIP: 01373 BUSINESS PHONE: 4136658551 MAIL ADDRESS: STREET 1: 20 INDUSTRIAL DRIVE EAST STREET 2: INDUSTRIAL PARK CITY: SOUTH DEERFIELD STATE: MA ZIP: 01373 FORMER COMPANY: FORMER CONFORMED NAME: TELAXIS COMMUNICATIONS CORP DATE OF NAME CHANGE: 19991015 FORMER COMPANY: FORMER CONFORMED NAME: MILLITECH CORP DATE OF NAME CHANGE: 19990913 10-K 1 form10k-67392_ydi.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-K -------------------------- |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 000-29053 YDI Wireless, Inc. (Exact name of registrant as specified in its charter) Delaware 04-2751645 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8000 Lee Highway Falls Church, VA 22042 (Address of principal executive offices) (703) 205-0600 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X| As of June 30, 2004, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $67,676,873. For purposes of this calculation only, shares of common equity held by each of the registrant's directors and officers on that date and by each person who beneficially owned 10% or more of the outstanding common stock on that date have been excluded in that such persons may be deemed to be affiliates. The aggregate market value has been computed based on a price per share of $5.75, which is the price at which the common equity was last sold on June 30, 2004. As of March 18, 2005, the registrant had 22,407,724 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant's 2005 annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ PART I This Annual Report on Form 10-K contains forward-looking statements as defined by federal securities laws. Forward-looking statements are predictions that relate to future events or our future performance and are subject to known and unknown risks, uncertainties, assumptions, and other factors that may cause actual results, outcomes, levels of activity, performance, developments, or achievements to be materially different from any future results, outcomes, levels of activity, performance, developments, or achievements expressed, anticipated, or implied by these forward-looking statements. Forward-looking statements should be read in light of the cautionary statements and important factors described in this Form 10-K, including Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations--Safe Harbor for Forward-Looking Statements. We undertake no obligation to update or revise any forward-looking statement to reflect events, circumstances, or new information after the date of this Form 10-K or to reflect the occurrence of unanticipated or any other subsequent events. Item 1. Business. Overview We provide broadband, or high-speed, wireless access products in the United States and internationally. Our systems enable service providers, enterprises and governmental organizations to deliver high-speed data connectivity enabling a broad range of applications. We believe our fixed wireless systems address the growing need of our customers and end-users to rapidly and cost effectively deploy high-speed communication networks. Our goal is to offer reliable wireless data equipment with improved range, performance and ease of use. We are the result of a merger consummated on April 1, 2003 between Telaxis Communications Corporation ("Telaxis") and Young Design, Inc. ("Young Design") as well as the acquisitions described below. Telaxis was a publicly traded company that focused on developing high capacity millimeter wave wireless products. Young Design was a privately held company that developed, produced, and sold wireless data products, primarily in microwave frequencies. Subsequent to the merger, the company effected a 1 for 100 reverse stock split followed by a 25 for 1 forward stock split, re-incorporated in Delaware, and changed its name to YDI Wireless, Inc. 2004 Acquisitions As discussed below, in the second quarter of 2004, we acquired KarlNet, Inc., Terabeam Corporation, and Ricochet Networks, Inc. Acquisition of KarlNet, Inc. On May 13, 2004, we acquired KarlNet, Inc., a pioneer and leader in software development for operating and managing wireless networks. The terms of the merger agreement provided for an upfront cash distribution to the KarlNet, Inc. stockholders of approximately $3.0 million, issuance of 1.0 million restricted shares of our common stock, and subsequent cash payments of up to $2.5 million based on achievement of certain performance milestones and compliance with representations and warranties. The $3.0 million cash distribution consisted of $1.2 million cash on hand at KarlNet and a $1.8 million loan we made from our operating capital. Founded in 1993, KarlNet had grown from a pioneer in Internet firewall and security solutions to a leading provider of wireless software and systems. From creating the first commercially available firewall to creating the first wireless residential gateway (the Apple Airport), Karlnet has been a leader in technology. KarlNet had sold over 1.5 million wireless units and created wireless software sold by companies such as Apple, Agere, Lucent, and Proxim. The company was headquartered in Dublin, Ohio. KarlNet is being integrated into our operations and is functioning as our software design and support center as well as providing digital hardware design and support. 2 Acquisition of Terabeam Corporation On June 22, 2004, we acquired Terabeam Corporation. Terabeam, then headquartered in Redmond, Washington, was a provider of broadband wireless systems to telecommunications providers. Pursuant to the merger, we issued approximately 11.6 million shares of our common stock in exchange for all of the outstanding shares of Terabeam. At the time of the merger, Terabeam had approximately $50.2 million in cash and marketable securities, $2.6 million in other assets, and $8.7 million in total liabilities. Terabeam was a leading provider of wireless fiber (broadband wireless) solutions that extended and optimized carrier and enterprise networks. Terabeam's wireless fiber solutions use high frequency millimeter wave (60 GHz radio frequency) and free space optics (transferring data through the air with light) technologies. Operating at full line rates of 100 Mbps to 1.25 Gbps, millimeter wave and free space optics (also known as FSO) systems enabled network service providers and business customers to achieve high bandwidth connectivity at significantly lower costs and deployment times than other high-data-rate technologies. Terabeam had a history of losses and cash burn. In connection with the merger and subsequent consolidation, we have reduced capital expenditures, significantly reduced the personnel at Terabeam, closed Terabeam's two offices in the Redmond, Washington area, exited a number of leases relating to unused facilities, and consolidated resources at Terabeam's North Andover, Massachusetts facility. The North Andover facility has been integrated into our operations focusing on millimeter wave and microwave hardware development and support. In addition, the addition of Terabeam has positioned us to aggressively pursue non-communication millimeter wave products business such as radar systems and sub-systems. We also greatly reduced expenditures relating to Terabeam's FSO product line and development efforts, but, due to limited but vocal demand, we have continued certain FSO products and development efforts. Acquisition of Ricochet Networks, Inc. On June 25, 2004, we acquired Ricochet Networks, Inc. Ricochet is a leading mobile Wireless Internet Service Provider (WISP) headquartered in Denver, Colorado. Ricochet provides high speed mobile Internet connectivity in San Diego, California and Denver and had over 7,000 paying customers when we acquired it. As of December 31, 2004, Ricochet had over 8,000 paying wireless subscribers, and we believe that it is one of the largest, if not the largest, WISP with a network operating exclusively in license free frequencies. The purchase price for the transaction consisted of $3 million in cash, 42,105 restricted shares of our common stock, and a note payable for $300,000, subject to certain reductions in the purchase price to the extent that we experience liabilities beyond certain agreed upon limits. Ricochet's services business is operated independent of the rest of our business - the equipment business - except for certain overlapping personnel and functions. Ricochet was originally formed to acquire certain assets from the bankruptcy estate of Metricom. Prior to its bankruptcy, Metricom had deployed the Ricochet(R) network in many major metropolitan cities including New York, Los Angeles, San Francisco, Seattle, Chicago, Philadelphia, Phoenix, Baltimore, Philadelphia, Atlanta, Dallas/Fort Worth, Minneapolis, and Washington, DC. Ricochet is investigating the feasibility of restoring service in these markets. In addition, Ricochet is pursuing opportunities to provide Homeland Defense and public safety systems utilizing the Ricochet solution. Also, Ricochet is offering equipment to service providers, WISPs, and municipalities who wish to offer wireless Internet services and become part of Ricochet's network. "Terabeam Wireless" Business Name Effective in mid-August 2004, we implemented our go to market strategy under the name of "Terabeam Wireless." This means that we plan to market the company and do business using the name "Terabeam Wireless." Industry Background We believe that there exists a significant need for bandwidth where digital phone lines or fiber optic cable are either too expensive to deploy, unavailable or inadequate to meet demand. This barrier is often referred to as the "last mile" gap. Carriers typically have to overcome cost, time, technological, and other barriers when trying to close the last mile gap. 3 In the current economic climate, it is expected that network development, especially at the network edge, will focus on deployments where new capital expenditures will be closely followed by new revenue. Connecting new subscribers to existing broadband at low incremental cost would fit well in this market reality. A wireless complement would enable these connections. We believe that our products are well suited to this market environment as they permit telecommunications carriers to bring broadband connectivity to the network edge faster and cheaper than with new landline build-outs. As a result of the capital expenditure reductions by fiber carriers, some potential subscribers are looking elsewhere to satisfy their connectivity needs. For example, enterprises are expected to increasingly turn to network integrators to provide connectivity between their local area networks ("LANs") and storage area networks ("SANs"), as their business conditions improve. Cellular network operators are faced with similar connectivity issues when they try to provide backhaul to connect their cellular telephone towers to the rest of their networks. We expect this issue to intensify as subscribers demand increasingly data-intensive mobile services. Overlaying all of these industry trends is the current desire for increased network redundancy and reduced vulnerability through duplicate and alternative communications paths, which can often readily be provided with our products. Fixed Wireless Broadband Telecommunications carriers that do not have direct connectivity to the end customer through an existing medium such as copper, fiber, or cable cannot cost effectively create a new land line connection to that customer and are relegated to reselling the existing connectivity, possibly with enhancements, in some form or fashion. As a reseller, the telecommunications carrier is subjected to the quality of service and support provided by the underlying operator of the network. Extended range license-free fixed wireless broadband systems allow telecommunications carriers to establish an alternative network that they can own and control to enable them to offer superior connectivity head to head with the incumbent service provider. Our products allow a telecommunications carrier to offer broadband connectivity to markets where no broadband has been previously deployed because it was not cost effective to offer broadband connectivity using traditional landline solutions. Equally important, the use of license-free spectrum permits a new entrant to rapidly and cost effectively reach a new market of subscribers demanding broadband connectivity. Many small to medium sized ISPs (Internet Service Providers) have no other viable means to offer high-speed Internet service to their customers other than using the license-free radio bands. ISPs are increasingly offering wireless broadband connectivity and are known as WISPs (Wireless Internet Service Providers). Our point-to-multipoint systems have been deployed by over 1,500 WISPs and are currently serving tens of thousands of end customers, many of which had no broadband access prior to the roll outs incorporating our equipment. Rural Broadband In many rural areas of the country there is no DSL or cable TV service available. Residential and business customers there typically only have slow-speed dial-up Internet access. Some use satellite links for broadband Internet access, but its relatively slow upload speeds and long latency do not make it an ideal choice for high-speed wireless Internet access. Many Internet Service Providers now use the license-free radio bands to offer high-speed wireless Internet to their rural dial-up customers. Our long-range point-to-multipoint systems are well suited for these rural areas and towns where there is no other viable broadband option. Public Hot Spots and Hot Zones A Hot Spot is a geographical area in which end users utilizing a WLAN (Wireless LAN) card can access a broadband wireless connection for Internet connectivity. The Hot Spot is usually offered by a telecommunications carrier for a fee or by the local venue owner/operator for a fee or as an amenity. An increasing number of Hot Spots permitting free public access are being deployed by a variety of organizations including cities and towns. The advantages of Hot Spots are broadband connectivity, ease of use, mobile operations and roaming capabilities. The primary disadvantage of Hot Spots is that their effective range of less than 300 feet greatly limits the benefit of a single Hot Spot and would require the deployment of a large number of Hot Spots to generate any meaningful level of coverage. To date, the deployment of Hot Spots has been sporadic and is generally limited to high traffic areas such as airports, convention centers, hotels and coffee shops. This limited deployment has attracted limited attention from end-users who require a broader area of coverage to widely adopt the service. 4 We have been an industry leader in the concept of Hot Zones. A Hot Zone is the functional equivalent of a Hot Spot except that it incorporates our amplifier and high gain antenna technology to illuminate a dramatically larger area of coverage than is covered by a traditional Hot Spot. For instance, rather than providing a single coffee shop with wireless coverage by utilizing a Hot Spot, a carrier could provide wireless coverage to a zone of several coffee shops and restaurants by utilizing a Hot Zone. Also, since the deployment of Hot Zones is more similar to the deployment of cellular telephone systems, we believe that telecommunications carriers will migrate to Hot Zone deployments rather than attempting to build out Hot Spots one building at a time. We believe that the proliferation of Hot Zones will create a dramatic improvement in the geographical footprint of Hot Spot type coverage which is required to increase the acceptance and demand from end users. Cellular Backhaul We believe that the need for high-speed backhaul, the connections between cellular telephone towers and the rest of the cellular telephone network, will remain solid and even increase due to the increased capacity demands of existing cellular deployments as well as the deployment of additional cellular systems. The amount of data that needs to be backhauled from cellular systems should increase significantly as 2.5G, 3G and other high-data-rate cellular systems are developed and deployed and more data intensive applications are offered. We believe that the backhaul data rates required for some individual cells will exceed the capabilities of the land line T-1/E-1 connections that are typically used today, thereby providing an attractive market for our Link CX product with its 45 Mbps (Megabits per second) and DS-3 capabilities and our other high-capacity products. Private Enterprise Networks Business, government and institutional enterprise network deployments are increasingly deploying high-speed connections between multiple buildings occupied by the same or affiliated businesses or other enterprises in a campus or business complex setting. Given that public fiber network carriers have curtailed their capital spending programs, enterprises are turning to network integrators to connect their LANs together. These integrators are motivated to quickly and cost effectively deploy solutions and are very receptive to considering alternative methods of providing connections - such as our products - - rather than just fiber optic cable. In addition, high-data-rate next generation fixed wireless LAN systems such as IEEE 802.11a/b/g (several different standards for wireless LAN interoperability) are creating additional needs for LAN-to-LAN connectivity that could be met with our products, depending upon the data rate required. The higher data rate capabilities within the LAN are generating demand for higher speed connections between LANs such as our Gigalink(R) products, with its Gigabit Ethernet (1.25 Gigabits per second) data rate capabilities. The Desire for Redundancy and Reduced Vulnerability In both government and commercial communications systems, there is now a strong emphasis on redundancy in networks, including the use of alternative media in achieving redundancy. In addition, there is greater emphasis on distributed network infrastructures to prevent single node network failures. These trends could favorably affect all of the market segments that we are addressing as our products provide a redundant path of wireless connectivity rather than the exclusive use of land-line-based connectivity. Increasing Acceptance and Demand to Carry Voice over Internet Protocol (VoIP) There has been an increasing demand for Voice over Internet Protocol as a low cost replacement for existing telephone voice connections. VoIP permits a voice connection whereever an Internet connection exists. VoIP operates best in a broadband environment due to its connectivity and latency requirements, and we believe that wireless systems, such as systems built with our products, provide an excellent infrastructure for VoIP capabilities. A network providing high speed wireless data communications with our equipment could add VoIP capabilities with little or no recurring expense but greatly expand the network's addressable market through the addition of the voice offering. We are actively working to enhance our products to optimize their ability to support VoIP including increasing bandwidth and adding Quality of Service (QOS) to our point-to-multipoint products to give VoIP communications priority over other types of data communications on the system. 5 Increasing Acceptance of Wireless Mesh Solutions As network providers try to achieve higher levels of reliability while utilizing license-free frequency bands, wireless mesh solutions are being utilized at an increasing rate. The advantage of a wireless mesh network is that data traffic has multiple potential paths from the base station to the end customer. This allows the network to dynamically route around failures in the network and provide a much higher level of reliability than would be possible in a typical point-to-point or point-to-multipoint network. Ricochet's self healing wireless mesh networks operate by having multiple wireless routers direct data traffic back to one or more base stations that are connected to a wired or wireless backhaul connection. In addition, Ricochet's network has supported large scale deployments of over 5,000 users in metropolitan markets. Our Solution We believe that there exists a growing market to provide license-free high-speed wireless connectivity. The advantage of utilizing license-free spectrum is that the operator can deploy the necessary equipment without the expense and time associated with acquiring a license. This allows for rapid deployment as well as creating a more competitive landscape without the artificial barriers associated with a license holder having a monopolistic hold over a geographical area. There are several significant advantages of utilizing wireless connectivity as opposed to traditional land-line solutions such as copper, fiber, digital subscriber line (DSL) or cable modems. Wireless can be very rapidly and selectively deployed at a much lower cost than traditional land-line solutions. This permits service providers to rapidly enter new markets and offer new services. Wireless is also well positioned to improve and grow over time as applications dictate while many landline solutions are usually inherently limited in bandwidth by the medium that they operate in. Finally, as demonstrated by the rapid proliferation of cellular phones worldwide, users have demonstrated an enjoyment of the mobility and freedom of wireless systems. We try to provide the best price/performance ratio for our class of products by, where possible, combining industry standardized wireless communication equipment, such as 802.11b equipment, with enhanced range, functionality and robustness. The goal is to provide higher quality products that can be utilized under the demanding conditions required by large-scale service providers while keeping the price of the equipment at a range that permits a relatively rapid payback of investment by our customers. Because our proprietary technology enables our systems to transmit over longer distances than competing product designs, service providers, businesses and other enterprises require fewer units to cover a specified area. As a result, they are able to reduce both their initial and incremental capital expenditures for network deployment. We offer a broad range of systems that enable service providers, businesses and other enterprises to create complete broadband wireless networks that connect end-users to the fiber backbone. Our point-to-point systems are primarily used within the backhaul segments of networks and also provide last mile access to large businesses. Our point-to-multipoint systems are used primarily to provide last mile access to small to mid-sized businesses and residential users. Many of our systems use similar radio frequency technology, digital signal processing and network management software. We believe this design commonality offers service providers, businesses and other enterprises higher end-to-end performance, lower equipment costs and lower training and maintenance costs. Markets which are benefiting from the use of our license-free wireless equipment include: o Service providers such as WISPs who utilize fixed wireless connectivity to offer broadband connectivity to their customers o Telecommunications carriers that can utilize our products to offer enhanced services or to fill in gaps in their existing networks quickly and cost effectively o Service providers or enterprises that need high speed connectivity between two or more points such as linking the LANs of two buildings o Operators of Hot Spots who utilize our equipment to provide high speed mobile connectivity in high density areas such as airports, convention centers and downtown areas o Government, military or emergency service providers who utilize our equipment in order to provide a rapidly deployable high speed data distribution system in the event that existing 6 communication systems are inadequate or unavailable or as a redundant back up to their primary communication systems o Cities and towns wishing to provide Hot Spots and Hot Zones o State and local government requiring data interconnectivity for education, medical facilities, and general governmental requirements Our broadband wireless access systems have various disadvantages and limitations. For example, the broadband wireless access industry is technology intensive and requires us to continually develop new products or product enhancements in order for us to remain competitive. WiMax is a highly publicized wireless development that is creating significant disruption in our industry. Although we are developing our own WiMax products, it is difficult to determine the impact that WiMax will have on our industry and thus it is difficult to decide how much of our resources should be applied to WiMax. In addition, in contrast to mobile wireless access solutions, our systems require line-of-sight installation, which often requires the end-user to obtain roof rights from third parties. Since we focus primarily on license-free bands, our systems may also experience problems due to radio signal interference, which may occur if multiple wireless systems are operating on the same radio frequencies and in the same geographic areas as our systems. Signal fade due to rain is a significant limiting factor for the operation of our products that operate in the higher 24 GHz and 60 GHz frequencies. Certain aspects of our product line can be substituted with off the shelf WLAN products which have been subjected to extreme commoditization and price erosion over the last few years. Such products are extremely low cost and can either cause downward pressure on the prices that we can receive in the market place for our products and, in some cases, even replace our products entirely. Strategy Our objective is to be a leading global provider of broadband wireless access systems operating in the license-free frequencies. Our strategy to accomplish this objective is to: Capitalize on our technology expertise to rapidly introduce new products. Our team of engineers has multi-disciplinary technical capabilities, including radio frequency technology spanning from microwave to millimeter waves as well as digital, software and networking expertise. We have dramatically enhanced our software development capabilities with the acquisition of KarlNet, Inc. during the second quarter of 2004. We believe integrating these capabilities is highly complex, and we intend to continue to take advantage of our technology expertise to introduce product enhancements and new products in a rapid and cost effective manner. As systems become more complex and sophisticated and particularly as systems operate at higher data rates and frequencies, we believe that it will become increasingly difficult for organizations without our breadth of skills to be competitive in product development. Evolve our direct sales model and direct relationship with our end customers into a channel strategy with value add partners. Due to our direct sales model, we have relationships with many of our end customers. As a result of this, we believe that we have closer and more sustainable relationships and generate more product loyalty. In addition, by maintaining direct contact with the end users we believe that we remain more attuned to the limitations of existing technology and opportunities for new product development. Although we plan to continue to directly support and sell to major and strategic accounts, we are becoming more actively involved with partners who offer much greater exposure into opportunities than we can develop alone. We are working with these partners to leverage our sales people and technical knowledge to pursue a greater number of opportunities for our solutions. Expand our sales efforts outside of the United States and establish international channels of distribution. Currently approximately 74% of our revenues are generated by the sale of products within the United States. We believe that markets outside of the United States actually offer better market potential than what exists inside the United States because there is significantly less deployed communications infrastructure throughout much of the world. While we have had limited success in our overseas efforts to date, we believe that our products are competitive in the overseas markets. We believe that results to date have been limited in some part due to our application of our direct sales model into overseas markets. We believe that establishing distribution channels may be a better system for offering our products in overseas markets and have recently begun developing such 7 distribution channels. It is still too early for us to ascertain if the use of local distributors will improve our overseas revenues. Expand through acquisitions. We intend to pursue acquisitions of complementary businesses, technologies, products or services to expand our presence in the broadband wireless access market. We are currently integrating the operations, customer bases, and product lines from KarlNet and Terabeam. In particular, we are working to integrate Terabeam's millimeter product line with the millimeter back-haul products acquired as the result of the Young Design, Inc. - Telaxis Communications Corporation merger. Our RAN and Link EX, Link 4X, and Link CX product lines are a result of technology purchases from InterWAVE Communications in May 2002 and March 2003, respectively. Our Ricochet acquisition expanded our business into services. Products Equipment Business We have two primary product lines: high-speed point-to-point products and point-to-multipoint products. In 2004, point-to-point products accounted for approximately 28% of our revenues and our point-to-multipoint products accounted for approximately 72% of our revenues. Our best selling point-to-point products are our Link CX and Marquee Bridge, and our best selling point-to-multipoint products are our AP-Plus and EtherAnt II and Marquee. In addition, as a result of the KarlNet acquisition, we now offer standalone software solutions. Our Terabeam acquisition has enabled us to offer millimeter wave subsystems as well as component parts to government, military, and other customers. Services Business Our acquisition of Ricochet expanded our business into mobile Non-Line of Sight (NLOS) wireless communication services. We currently operate the Ricochet(R) network in Denver, Colorado, San Diego, California, and Aurora, Colorado. We currently have over 8,000 paying subscribers. Commencement of service in Aurora in the fourth quarter of 2004 was our first expansion of the Ricochet(R) network. We are currently considering numerous other markets in which we may begin to offer Ricochet(R) service. High-Speed Point-to-Point Products Point-to-point systems are used to bridge networks from one location to another ("Bridging") or carry data traffic from remote locations to a service provider's core network ("Backhaul"). Each of our point-to-point systems consists of identical piece(s) of equipment deployed at each end of the desired link. Each piece of equipment is first connected to an end-user's network by a cable and a connector and the radio unit and antennas are positioned to have clear line of sight to each other, usually on a rooftop or tower. All of our point-to-point products are designed for the radio unit to be deployed as close to the antenna as possible to minimize cable cost and loss of the radio signal. Several units are available with an integrated antenna as an option to maximize efficiency and ease of installation. The two antennas are then aimed at one another to create a wireless connection between the two locations. By using multiple systems, an operator can connect more than two locations to form a more extensive network. Our products offer a variety of transmission speeds and radio frequencies. The table below summarizes the features of our current products: ------------------------------------------------------------------------ PRODUCT NAME DATA RATE FREQUENCY ------------------------------------------------------------------------ BRIB (Bridge in a Box) 4 Mbps half duplex 2.4 GHz 11 Channels ------------------------------------------------------------------------ EtherLeap(R) 4 Mbps half duplex 24 GHz 13 channels ------------------------------------------------------------------------ Link EX 8 Mbps full duplex UNII (5.2/5.7 GHz) (16 Mbps aggregate) 8 channels ------------------------------------------------------------------------ Link 4X Four (4) E-1 circuits UNII (5.2/5.7 GHz) 8 channels ------------------------------------------------------------------------ Link CX 45 Mbps full duplex/DS3 5.3 GHz or 5.7 GHz 2 channels ------------------------------------------------------------------------ GigaLink(R) OC-3, OC-12 or 1.25 60 GHz Gbps full duplex ------------------------------------------------------------------------ Marquee 24 Mbps half-duplex 2.4 GHz, 4.9 GHz and 5.8 GHz ------------------------------------------------------------------------ Avara(R) 100 Mbps full duplex Optics (light) 850 nm ------------------------------------------------------------------------ 8 BRIB and EtherLeap(R). These point-to-point products have the same central radio technology inside them and differ only in the frequency at which they operate. All units utilize direct sequence spread spectrum (DSSS) technology for improved interference resistance. These units are designed to be pole mounted with data and power carried along a single line of weatherized cable allowing for quick and easy deployment. These products share the same feature-rich radio management and monitoring software interface. The BRIB has a line of sight range of about 3 miles (longer range versions are available) and is an excellent low cost solution for low density deployments or for an enterprise connecting two buildings. The EtherLeap has a range of about 1 to 3 miles and is used primarily by organizations seeking a higher level of security or interference resistance or in extremely radio frequency hostile environment where the other license-free frequencies are all occupied. Link EX and Link 4X. The Link EX product consists of a pole-mounted radio that gets power and data from a single weatherized cable. The Link EX offers 8 Mbps full duplex connectivity with a line-of-sight range of up to 10 miles. Full duplex operation means that data is passed in both directions at the same time. This is important in latency sensitive applications such as voice or streaming video applications. The Link 4X product incorporates a Link EX with an indoor unit that channelizes the Link EX's data stream into four (4) E-1 channels for easy integration into phone systems based upon European telco transmission standards. The Link EX or 4X is used primarily by carriers with small to mid-size backhaul needs. Link CX. The Link CX product is primarily deployed to enable service providers, businesses and other enterprises to expand or establish private networks by bridging Internet and network traffic among multiple facilities. In addition, the Link CX is also used to provide fiber extension and last mile access. The Link CX has a line of sight range of up to 25 miles and offers extremely feature rich management and monitoring capabilities. Gigalink(R). The Gigalink(R) product is a compact, easily deployed product operating in the 60 GHz millimeter-wave band between 57 GHz and 64 GHz. It enables fiberless transmission of data, voice and video communication at variable fiber optic data rates from OC-3 (155 Mbps) to OC-12 (622 Mbps) and Ethernet traffic at speeds up to 1.25 Gbps full duplex. It is engineered to provide link distances of up to 1,000 meters with 99.99% availability, depending upon prevailing rainfall rates in the geographic regions where it will be used. Marquee. The Marquee product is an advanced point-to-point and point-to-multipoint system utilizing OFDM modulation. Marquee also incorporates our TurboCell(R) software which optimizes the performance of Marquee in outdoor and extended range applications. Significant features of Marquee include non-line of sight (NLOS) propagation, dynamic active polling, packet aggregation, dynamic bandwidth shaping on the base and remote side, power over Ethernet, and a single piece, easy to install form factor. We have introduced Marquee products operating at 4.9 and 5.8 GHz and expect to introduce a 2.4 GHz version of Marquee in 2005. We believe that this product was the first product certified by the Federal Communications Commission for operating in the new "public safety" 4.9 GHz radio band. This product thus enables public safety entities to benefit from the wireless broadband capabilities available using this recently allocated public safety band. Avara(R). Our Avara(R) product is the latest in a line of high-bandwidth, carrier-grade systems developed by Terabeam Wireless. Avara is unique among our solutions in that it operates via free-space optics and thus does not use radio waves. The system is a cost-effective solution for high-bandwidth connectivity at ranges less than one kilometer and is ideal for deployments such as mobile wireless backhaul, single customer access, multi-tenant building access, enterprise E1/T1, Fast Ethernet extension and LAN-to-LAN or campus connectivity. Avara operates at a wavelength of 850 nm and is completely eye-safe, with a Class 1 IEC/CDRH rating, which means no warning labels or access restrictions are required. 9 Point-to-multipoint products Our point-to-multipoint systems are designed to enable service providers, businesses and other enterprises to address the last mile bottleneck. Our systems enable service providers to cost-effectively connect end-users to a central hub. Businesses, governmental agencies and other enterprises may also use these systems to cost-effectively connect multiple facilities within their private networks. Our point-to-multipoint systems permit cumulative connectivity of up to 25 Mbps from a single base unit and can support hundreds of customers from a single location. These systems can operate over distances of 10 miles or more providing for extremely large areas of coverage. Since our point-to-multipoint systems require line of sight to connect, actual coverage is dictated by the ability to achieve actual line of sight from the base site to the end customer's antenna. Our point-to-multipoint system are typically deployed in a hub and spoke configuration consisting of (1) a single central base station, and (2) customer premise equipment (CPE) located at each end-user's location. The Base Station wirelessly connects to the remote CPE. The Base Station offers high-speed two-way data communications to each end-user using a technique called time division duplexing (TDD). The Base Station can operate in 2.4 GHz or 5.8 GHz frequencies, in various geographic configurations and can be divided in discrete sectors to permit supporting hundreds of clients from a single base station. The Base Station is able to connect to the central office of a service provider using land line connectivity for both our point-to-point and our point-to-multipoint technologies. Our most popular CPE, our EtherAnt-II product, transmits and receives data between the end-user and the Base Station. The EtherAnt-II is extremely easy to install and uses a single weatherized Category 5 Ethernet cable carrying both data and power to the pole-mounted antenna with integrated radio. Our proprietary software allows for remote management and monitoring of an unlimited number of EtherAnt-IIs from a single location. In December 2004, we began our initial introduction of our EtherAnt-3. The EtherAnt-3 incorporates much of the performance of the EtherAnt-II with the added advantage of being upgradeable to a TurboCell(R) service solely with a software upgrade that can be performed in the field. Finally, we offer certain software elements of our point-to-multipoint systems as a standalone product to select original equipment manufacturer customers. KarlNet developed and is continuing to improve our point-to-multipoint software offerings. This results in both enhanced wireless products for us to sell as well as attractive potential revenue streams from sales of the standalone software. To date, over 1.0 million wireless devices running our software have been sold. We offer both feature rich solutions utilizing industry standard 802.11a/b/g software as well as our proprietary TurboCell(R) software. TurboCell software permits industry standard 802.11a/b/g hardware to run on a proprietary protocol that optimizes the wireless performance in outdoor and extended range applications. Advantages of TurboCell over standard 802.11a/b/g include active polling, packet aggregation, dynamic bandwidth shaping, enhanced security, and resolution of the "hidden node" problem. Sales and Marketing Equipment Business We sell our products domestically and internationally to service providers, government agencies, businesses and other enterprises directly through our sales force and indirectly through distributors and value-added resellers. We focus our marketing efforts on supporting our direct sales force, distributors, value-added resellers and systems integrators. We also seek to stimulate market demand by increasing brand awareness and educating potential customers about the advantages of using our products. We regularly hold wireless training seminars to introduce our customers and potential customers to the technologies and theories behind wireless data communications. We focus primarily on the domestic market but have recently increased our efforts to improve sales outside of the United States. In the United States we primarily sell directly through our internal sales force but also work with value added resellers (VARs) and system integrators/installers. Overseas, we currently sell directly but we are increasing our number of international distributors and VARs and we expect that indirect channels will become an increasingly large portion of our international sales. 10 Services Business Our service business is currently operated only in the United States in Denver, Colorado and Aurora, Colorado and San Diego, California. We are actively considering the expansion of the Ricochet(R) network, particularly in those cities where Ricochet infrastructure has previously been deployed. In addition to our current model of providing high speed mobile wireless Internet services to primarily individuals, we are considering offering those services to various municipal departments and personnel for mobile communications, especially homeland security, fire, safety, health and welfare requirements. Finally, we are exploring opportunities to offer the Ricochet services on a wholesale level to parties interested in reselling our services on a private label or co-labeled basis. Customer Service We are committed to providing our customers with high levels of service and support both in our equipment and services businesses. We provide training, technical assistance and customer support on the installation, management, use and testing of our products. We also provide a 12-month warranty for our systems and offer both in-warranty and out-of-warranty repair services. Our repair center is staffed with technicians who work to identify potential problems and repair equipment. Customers We have a very diversified base of customers and end-users consisting of service providers, government agencies, businesses and other enterprises. Most of our business is conducted with customers who expect delivery very quickly after placing their orders with us. Although our business is not strongly seasonal, we generally see a higher level of activity in the second and third quarter of each year as warmer weather in the Northern Hemisphere makes outdoor installations of our equipment easier. We typically see a relative decline in our business in the fourth quarter of each year, particularly in the month of December. During the years ended December 31, 2004, 2003, and 2002, no customers accounted for more than 10% of sales. For the years ended December 31, 2004, 2003, and 2002, sales to customers outside of the United States and Canada accounted for approximately 18%, 16%, and 10%, respectively, of revenues. As of December 31, 2004, the Company had a single employee and minor assets located outside of the United States. Our firm backlog as of December 31, 2004, 2003, and 2002 was approximately $1,450,000, $1,175,000, and $745,000, respectively. Research and Development Our research and development efforts are focused on improving the functionality and performance of our existing products as well as developing new products to meet the changing needs of our diverse base of customers and end-users. We devote a substantial portion of our resources to developing new products, enhancing existing products, expanding and improving our core wireless technologies and strengthening our technological expertise. We are currently pursuing the following research and development initiatives: o Developing point-to-multipoint systems in different frequencies and with lower price points o Adapting our products to additional frequencies and interfaces o Developing higher speed products o Enhancing our products with new software features as well as developing new software architectures that will increase capacity of our products and their overall performance. We are currently developing Logan, our next generation software platform, which will be our building block for future product introductions. We expect to introduce a higher speed version of our Marquee products, a higher powered version of our Marquee 4.9 product for the public safety/homeland defense market and a 2.4 GHz version of Marquee. Logan will also be the software foundation of our 802.16 WiMAX-compliant product currently under development. We are also exploring the use of Logan as the foundation for a next generation wireless mesh product that would utilize Ricochet intellectual property. 11 In addition, we are working to enhance our high end point-to-point offering with projects to develop a lower cost gigabit Ethernet 60 GHz product and a 70/80 GHz product. Finally, we are considering the introduction of a low cost self install Free Space Optics product. We devote a substantial portion of our resources to developing new products, enhancing existing products, expanding and improving our core wireless technologies, and strengthening our technological expertise. We invested approximately $3.5 million ($2.9 million of expenses and $0.6 million of capitalized software), $1.7 million and $0.4 million in research and development activities in 2004, 2003, and 2002, respectively. Manufacturing We outsource much of our manufacturing to a variety of contract manufacturers. We complete the final assembly and testing of our products at our Falls Church, Virginia facility, our North Andover, Massachusetts facility and to a lesser extent, our Sunnyvale, California facility. Our in-house manufacturing consists primarily of pilot production, final product assembly and product testing. Our strategy is to outsource manufacturing and procurement of component parts to manufacturers with the expertise and ability to achieve the cost reductions associated with volume manufacturing and to respond quickly to orders, while maintaining our quality standards. This allows us to focus our internal resources on developing new products. We depend on single or limited source suppliers for several key components used in our products. Several of these components have recently been discontinued by their manufacturers, and as a result, we have been forced to purchase large quantities of sub-components for these products. We believe that our current inventory of discontinued subcomponents is adequate for the expected volume of products to be produced in the future; however if the required volume of products exceeds expectations, we may be forced to find replacement parts or redesign the products, which may add significantly to our costs. We are in the process of re-designing those products which use the old parts with a current generation of parts. Conversely, if the actual volume of products is less than expected, we may end up holding inventories of sub-components that will not have any value to us. As of December 31, 2004, our inventory and commitments for large quantities of discontinued parts was less than $150,000. Our WLAN products are currently dependent on Agere System's ("Agere") WLAN division as our primary sources for proprietary 802.11 chips, modules and cards. Agere has formally announced that they are discontinuing their WLAN offering and we are in the process of migrating to alternative WLAN platforms. In addition, our RAN and Link EX, Link 4X, and Link CX products all incorporate one or more single source components. If, for any reason, a supplier fails to meet our quantity or quality requirements, or stops selling components to us or our contract manufacturers at commercially reasonable prices, we could experience significant production delays and cost increases, as well as higher warranty expenses and product reputation problems. Because the key components and assemblies of our products are complex, difficult to manufacture and require long lead times, we may have difficulty finding alternative suppliers to produce our components and assemblies on a timely basis. We have experienced shortages of some of these components in the past, which delayed related revenue, and we may experience shortages in the future. In addition, because the majority of our products have a short sales cycle of between 30 and 90 days, we may have difficulty in making accurate and reliable forecasts of product needs. As a result, we could experience shortages in supply, which could delay or decrease revenue because our customers may cancel their orders or choose a competitor for their future needs. We have limited manufacturing capability and limited experience in large scale or foreign manufacturing. There can be no assurance that we will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis. In addition, in order to compete successfully, we will need to achieve significant product cost reductions. Although we intend to achieve cost reductions through engineering improvements, production economies, and manufacturing at lower cost locations, including outside the United States, there can be no assurance that we will be able to do so. In order to remain competitive, we must continue to introduce new products and processes into our manufacturing environment, and there can be no assurance that any such new products will not create obsolete inventories related to older products. We have been producing our Marquee and Avara (R) products for a relatively short time. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in developing industries, particularly companies in relatively new and rapidly evolving markets. These risks include: 12 o an evolving and unpredictable business model; o uncertain acceptance of new products and services; o competition; and o challenges in managing growth. We cannot assure you that we will succeed in addressing these risks. If we fail to do so, our revenue and operating results could be materially harmed. Competition The markets for broadband wireless systems and WLAN are extremely competitive and we expect that competition will intensify in the future. Increased competition could adversely affect our business and operating results through pricing pressures, the loss of market share and other factors. The principal competitive factors affecting wireless local area networking and fixed wireless markets and WLAN include the following: data throughput; effective radio frequency coverage area; interference immunity; network security; network scalability; price; integration with voice technology; wireless networking protocol sophistication; ability to support industry standards; roaming capability; power consumption; product miniaturization; product reliability; ease of use; product costs; product features and applications; product time to market; product certifications; changes to government regulations with respect to each country served and related to the use of radio spectrum; brand recognition; OEM partnerships; marketing alliances; manufacturing capabilities and experience; effective distribution channels; and company reputation. With our broadband products, we could be at a disadvantage to competitors, particularly Alcatel, Business Networks AB, Alvarion, Ceragon Networks, AirSpan Networks, Inc., Cisco Systems, Proxim and Stratex Networks, which have broader distribution channels, brand recognition, extensive patent portfolios and more diversified product lines. In addition, broadband wireless access solutions compete with other high-speed solutions such as cable modem technologies, satellite technologies, digital subscriber lines and fiber optic cables. Many of these alternative technologies can take advantage of existing installed infrastructure and have achieved significantly greater market acceptance and penetration than broadband wireless access technologies. Other factors that influence the choice between wireless and wire line products include reliability and security, speed and volume capacity, cost effectiveness, availability of sufficient frequencies and geographic suitability. We expect to face increasing competitive pressures from both current and future technologies in the broadband access market. We have extensive competition in our WLAN business, including without limitation, Cisco (including LinkSys), D-Link, Enterasys Networks, Harris Corporation, Intel Corporation, Intersil Corporation, Nokia Corporation, Proxim, Symbol Technologies and 3Com Corporation. Additionally, numerous companies have announced their intention to develop competing products in both the commercial wireless and home networking markets, including several Asia-based companies offering low-price IEEE 802.11a/b/g products. We could also face future competition from companies that offer products which replace network adapters or offer alternative communications solutions, or from large computer companies, PC peripheral companies, as well as other large networking equipment companies. Furthermore, we could face competition from certain of our OEM customers, which have, or could acquire, wireless engineering and product development capabilities, or might elect to offer competing technologies. We can offer no assurance that we will be able to compete successfully against these competitors or those competitive pressures we face will not adversely affect our business or operating results. Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. These competitors may succeed in establishing technology standards or strategic alliances in the broadband wireless or WLAN markets, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage. We can offer no assurance that we will succeed in developing products or technologies that are more effective than those developed by our competitors. Furthermore, we compete with companies that have high volume manufacturing and extensive marketing and distribution capabilities, areas in which we have only limited experience. We can offer no assurance that we will be able to compete successfully against existing and new competitors as wireless markets evolve and the level of competition increases. 13 Intellectual Property Our success depends on the preservation and protection of our product and manufacturing process designs and other proprietary technology. We use a variety of intellectual property in the development and manufacturing of our products, but do not believe that any of our intellectual property is individually critical to our current operations. Taken as a whole, however, we believe our intellectual property rights are significant. In addition to our registered intellectual property, we also use proprietary technology in our business. This technology includes internally developed proprietary comprehensive network management software and specialized knowledge and technical expertise that have been developed over time by our employees. In order to maintain the confidential nature of this technology, we have chosen to protect it by generally limiting access to it, treating portions of it as trade secrets and obtaining confidentiality or non-disclosure agreements from persons who are given access to it. All of our employees have signed our standard confidentiality agreement, which prohibits them from disclosing our confidential information, technology developments and business practices, as well as any confidential information entrusted to us by other parties. We also have two intellectual property license agreements with interWAVE Communications which grant us a non-exclusive royalty-free perpetual license to use some of its intellectual property, including patents, patent applications, copyrights, software, technology and proprietary information related to our RAN and Link EX, Link 4X, and Link CX products. We increased our patent portfolio substantially through the acquisitions of KarlNet, Terabeam and Ricochet. While we do not believe that any of these patents individually is material to our current equipment business, we believe our patent portfolio is valuable. We continue work to procure additional patents that are beneficial to our business and are looking at ways to optimize the value of the patents that we have recently acquired. We currently do not receive any material amounts from licensing any of our patents. Government Regulation Our products are subject to extensive telecommunications-based regulation by the United States and foreign laws and international treaties. In the United States, we are subject to various Federal Communications Commission, or FCC, rules and regulations. Current FCC regulations permit license-free operation in certain FCC-certified bands in the radio spectrum. Our spread spectrum wireless products are certified for unlicensed operation in the 2.4 -- 2.4835 GHz, 5.15 -- 5.35 GHz, 5.725 -- 5.825 GHz, 24.05-24.25 GHz and 57.05-64 GHz frequency bands. Operation in these frequency bands is governed by rules set forth in Part 15 of the FCC regulations. The Part 15 rules are designed to minimize the probability of interference to other users of the spectrum and, thus, accord Part 15 systems secondary status in the frequency. In the event that there is interference between a primary user and a Part 15 user, a higher priority user can require the Part 15 user to curtail transmissions that create interference. In this regard, if users of our products experience excessive interference from primary users, market acceptance of our products could be adversely affected, which could materially and adversely affect our business and operating results. The FCC, however, has established certain standards that create an irrefutable presumption of noninterference for Part 15 users and we believe that our products comply with such requirements. There can be no assurance that the occurrence of regulatory changes, including changes in the allocation of available frequency spectrum, changes in the use of allocated frequency spectrum, or modification to the standards establishing an irrefutable presumption for unlicensed Part 15 users, would not significantly affect our operations by rendering current products obsolete, restricting the applications and markets served by our products or increasing the opportunity for additional competition. Our products are also subject to regulatory requirements in international markets and, therefore, we must monitor the development of spread spectrum and other radio frequency regulations in certain countries that represent potential markets for our products. We must conform our products to a variety of regulatory requirements and protocols established to, among other things, avoid interference among users of radio frequencies and to permit interconnection of equipment. Each country has different regulations and a different regulatory process. In order for our products to be used in some jurisdictions, regulatory approval and, in some cases, specific country compliance testing and re-testing may be required. In addition, domestic and international authorities continue to 14 regulate the allocation and auction of the radio frequency spectrum. These regulations have a direct impact on us, because our licensed products can be marketed only if permitted by suitable frequency allocations, auctions and regulations. The implementation of these regulations may delay our end-users in deploying their systems, which could, in turn, lead to delays in orders of our products by our customers and end-users. The delays inherent in this regulatory approval process may force us to reschedule, postpone or cancel the installation of our products by our customers, which may result in significant reductions in our sales. While there can be no assurance that we will be able to comply with regulations in any particular country, we will design our products to minimize the design modifications required to meet various 2.4 GHz and 5 GHz international spread spectrum regulations. In addition, we will seek to obtain international certifications for our product line in countries where there are substantial markets for wireless networking systems. Changes in, or the failure by us to comply with, applicable domestic and international regulations could materially adversely affect our business and operating results. In addition, with respect to those countries that do not follow FCC regulations, we may need to modify our products to meet local rules and regulations. Regulatory changes by the FCC or by regulatory agencies outside the United States, including changes in the allocation of available frequency spectrum, could significantly affect our operations by restricting our development efforts, rendering current products obsolete or increasing the opportunity for additional competition. Several changes by the FCC were approved within the last eight years including changes in the allocation and use of available frequency spectrum, as well as the granting of an interim waiver. These approved changes could create opportunities for other wireless networking products and services. There can be no assurance that new regulations will not be promulgated that could materially and adversely affect our business and operating results. It is possible that the United States and other jurisdictions will adopt new laws and regulations affecting the pricing, characteristics and quality of broadband wireless systems and products. Increased government regulations could: o decrease the growth of the broadband wireless industry; o hinder our ability to conduct business internationally; o reduce our revenues; o increase the costs and pricing of our products; o increase our operating expenses; and o expose us to significant liabilities. Any of these events or circumstances could seriously harm our business and results of operations. We are also subject to U.S. government export controls. We rely on our customers to inform us when they plan to deliver our products to other countries, and we regularly inform our customers of the export controls with which they must comply. However, a violation of U.S. export controls could seriously harm our business. Employees As of March 18, 2005, we had 123 employees, consisting of 25 in manufacturing, 42 in research and development, 36 in sales, marketing and customer service, and 20 in finance and administration. We had 111 employees in our equipment business and 12 employees in our services business. We are not a party to any collective bargaining agreement. We believe that relations with our employees are good. Item 2. Properties. Properties We lease approximately 175,000 square feet of facilities in nine locations. Our headquarters is an approximately 15,000 square foot facility located in Falls Church, Virginia. This facility accommodates the following departments: senior management, administration, finance, marketing, manufacturing, sales and a small amount of research and development. This property is leased from an affiliate of ours on terms that are believed to be at market rates. The term of the lease for this facility expires on December 31, 2010. 15 We lease an approximately 32,000 square foot facility located in South Deerfield, Massachusetts. This facility accommodates legal and corporate affairs and a research and development area as well as limited assembly capabilities. The term of the lease for this facility expires on October 31, 2005. We do not plan on extending this lease and are in the process of locating and leasing a different facility. We believe we will be able to locate a suitable facility without undue difficulty. We lease an approximately 18,000 square foot facility located in Sunnyvale, California. This facility accommodates sales as well as technical support and final manufacturing, testing, and repair of our RAN and Link EX, Link 4X, and Link CX products. The term of the lease for this facility expires on March 31, 2007. We lease an approximately 10,000 square feet facility located in Dublin, Ohio. This facility accommodates our primary software development and sales operations and personnel. The lease is comprised of two locations within the same building expiring at different times. The term of the lease for 7,000 square feet expires on January 31, 2008. The term of the lease for 3,000 square feet expires on January 31, 2006. We lease an approximately 11,000 square feet facility located in North Andover, Massachusetts. This facility accommodates approximately 25 engineering, development, manufacturing, and associated staff for our Harmonix Division. The term of the lease expires August 31, 2005. We do not expect to extend our lease of this facility so are in the process of locating and leasing a different facility. We believe we will be able to locate a suitable facility without undue difficulty. Our Ricochet Networks subsidiary leases an approximately 5,000 square feet facility located in Denver, Colorado. This facility accommodates engineering, development, sales, and marketing operations, and associated staff, for our Ricochet Networks subsidiary. The term of the lease expires on January 31, 2008. We have guaranteed the obligations of Ricochet Networks under this lease. Our Ricochet Networks subsidiary leases approximately 84,000 square feet located in two facilities in Denver, Colorado and one facility in Tulsa, Oklahoma. These facilities provide warehouse space for Ricochet's inventory. The two Denver facilities are leased on a month-to-month basis. The term of the lease for the Tulsa facility expires on December 31, 2005. If any of these facilities were to become unavailable for our continued use, we believe we could locate suitable new warehouse space without undue difficulty. Primarily with respect to our Ricochet Networks subsidiary, we or Ricochet directly will lease and has been leasing space in and around each of the areas where it provides service as necessary to house switches, other equipment, and personnel. There are a number of facilities leased by Terabeam Corporation prior to our acquiring that company that are not presently being used and that we have no present plans to use. We have been negotiating with the landlords of the various facilities for the early termination of those leases. Item 3. Legal Proceedings. Legal Proceedings During the period from June 12 to September 13, 2001, four purported securities class action lawsuits were filed against Telaxis in the U.S. District Court for the Southern District of New York: Katz v. Telaxis Communications Corporation et al., Kucera v. Telaxis Communications Corporation et al., Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis Communications Corporation et al. The lawsuits also named one or more of the underwriters in the Telaxis initial public offering and certain of its officers and directors. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint which supersedes the individual complaints originally filed. The amended complaint alleges, among other things, violations of the registration and antifraud provisions of the federal securities laws due to alleged statements in and omissions from the Telaxis initial public offering registration statement concerning the underwriters' alleged activities in connection with the underwriting of Telaxis' shares to the public. The amended complaint seeks, among other things, unspecified damages and costs associated with the litigation. These lawsuits have been assigned along with, we understand, approximately 1,000 other lawsuits making substantially similar allegations against approximately 300 other publicly-traded companies and their public offering underwriters to a single federal judge in the U.S. District Court 16 for the Southern District of New York for consolidated pre-trial purposes. We believe the claims against us are without merit and have defended the litigation vigorously. The litigation process is inherently uncertain, however, and there can be no assurance that the outcome of these claims will be favorable for us. On July 15, 2002, together with the other issuer defendants, Telaxis filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In October 2002, the court approved a stipulation dismissing without prejudice all claims against the Telaxis directors and officers who had been defendants in the litigation. On February 19, 2003, the court issued its ruling on the separate motions to dismiss filed by the issuer defendants and the underwriter defendants. The court granted in part and denied in part the issuer defendants' motions. The court dismissed, with prejudice, all claims brought against Telaxis under the anti-fraud provisions of the securities laws. The court denied the motion to dismiss the claims brought under the registration provisions of the securities laws (which do not require that intent to defraud be pleaded) as to Telaxis and as to substantially all of the other issuer defendants. The court denied the underwriter defendants' motion to dismiss in all respects. In June 2003, we elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. We understand that a large majority of the other issuer defendants have also elected to participate in this proposed settlement. If ultimately approved by the court, this proposed settlement would result in the dismissal, with prejudice, of all claims in the litigation against us and against the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants. The proposed settlement provides that the insurers of the participating issuer defendants will guarantee that the plaintiffs in the cases brought against the participating issuer defendants will recover at least $1 billion. This means there will be no monetary obligation to the plaintiffs if they recover $1 billion or more from the underwriter defendants. In addition, we and the other participating issuer defendants will be required to assign to the plaintiffs certain claims that the participating issuer defendants may have against the underwriters of their IPOs. The proposed settlement contemplates that any amounts necessary to fund the guarantee contained in the settlement or settlement-related expenses would come from participating issuers' directors and officers liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer's insurance coverage were insufficient to pay that issuer's allocable share of the settlement costs. Therefore, the potential exposure of each participating issuer defendant should decrease as the number of participating issuer defendants increases. We currently expect that our insurance proceeds will be sufficient for these purposes and that we will not otherwise be required to contribute to the proposed settlement. Consummation of the proposed settlement remains conditioned on, among other things, receipt of both preliminary and final court approval. Formal settlement documents were submitted to the court in June 2004, together with a motion asking the court to preliminarily approve the form of settlement. Certain underwriters who were named as defendants in the settling cases, and who are not parties to the proposed settlement, opposed preliminary approval of the proposed settlement of those cases. On February 15, 2005, the court issued an order preliminarily approving the proposed settlement in all respects but one. The plaintiffs and the issuer defendants are in the process of assessing whether to proceed with the proposed settlement, as modified by the court. If the plaintiffs and the issuer defendants elect to proceed with the proposed settlement, as modified by the court, they will submit revised settlement documents to the court. The underwriter defendants may then have an opportunity to object to the revised settlement documents. If the court preliminarily approves the proposed settlement, notice of the terms of the proposed settlement be sent to all proposed class members and a hearing will be scheduled at which any objections to the proposed settlement may be heard. Thereafter, the court will determine whether to grant final approval to the proposed settlement. If the proposed settlement described above is not consummated, we intend to continue to defend the litigation vigorously. Moreover, if the proposed settlement is not consummated, we believe that the underwriters may have an obligation to indemnify us for the legal fees and other costs of defending these suits. While there can be no assurance as to the ultimate outcome of these proceedings, we currently believe that the final result of these actions will have no material effect on our consolidated financial condition, results of operations, or cash flows. 17 We are subject to potential liability under contractual and other matters and various claims and legal actions which are pending or may be asserted against us or our subsidiaries. These matters may arise in the ordinary course and conduct of our business. While we cannot predict the outcome of such claims and legal actions with certainty, we believe that such matters should not result in any liability which would have a material adverse affect on our business. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of stockholders during the three months ended December 31, 2004. 18 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock is currently quoted on the Nasdaq SmallCap Market under the symbol "YDIW." The table below shows, for the calendar year quarters indicated, the reported high and low sale prices of our common stock, as reported on the Nasdaq SmallCap Market from January 1, 2003 until March 31, 2003 and again from June 30, 2004 to December 31, 2004. The table below shows, for the period from April 1, 2003 through June 29, 2004, the reported high and low bid quotations for our common stock on the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. In each case, this information is based on published financial sources. Our common stock prices and bids have been adjusted to reflect the net 1 for 4 reverse stock split implemented on July 9, 2003. YDI Common Stock ---------------------- High Low ---- --- 2003 First Quarter $1.12 $0.44 Second Quarter $4.84 $0.60 Third Quarter $4.95 $3.00 Fourth Quarter $5.45 $3.05 2004 First Quarter $7.90 $3.60 Second Quarter $6.80 $3.60 Third Quarter $5.85 $1.96 Fourth Quarter $7.55 $2.15 As of March 18, 2005, the number of stockholders of record of our common stock was approximately 234. We have never declared or paid any cash dividends on any class of our common equity. We currently intend to retain any future earnings to fund the development and growth of our business and currently do not anticipate paying cash dividends in the foreseeable future. Equity Compensation Plan Information The following table and narrative provide information about our equity compensation plans as of December 31, 2004. More information about our stock options is contained in our financial statements, including the notes thereto, included in this Annual Report on Form 10-K. 19
- ------------------------------------------------------------------------------------------------------------------ Number of securities Number of securities remaining to be issued upon Weighted-average available for future issuance exercise of exercise price of under equity compensation plans outstanding options, outstanding options, (excluding securities reflected warrants and rights warrants and rights (1) in column (a)) Plan category (1) (a) (b) (c) - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by security holders 970,831 $5.25 621,250 (2) - ------------------------------------------------------------------------------------------------------------------ Equity compensation plans not approved by security holders 79,165 $2.10 0 - ------------------------------------------------------------------------------------------------------------------ Total 1,049,996 $5.01 621,250 - ------------------------------------------------------------------------------------------------------------------
- ------------ (1) This column does not reflect the options outstanding on December 31, 2004 to purchase 121,638 shares of our common stock at an exercise price of $1.60 per share that we assumed in connection with our combination with Young Design, Inc. on April 1, 2003. Those options had been issued under an equity compensation plan that was approved by Young Design's stockholders. No future grants of options may be made under that plan. (2) Consists of shares available for future issuance under our 2004 Stock Plan. On July 17, 2001, our board of directors adopted our 2001 Nonqualified Stock Plan and reserved 375,000 shares of our common stock for issuance pursuant to that plan. The 2001 plan provides for the grant of non-qualified stock options, performance share awards, and stock awards (restricted or unrestricted) to directors, officers, and employees. The compensation committee of the board of directors generally administers the 2001 plan and recommends to the board of directors or decides itself the terms of stock rights granted, including the exercise price, the number of shares that may be purchased under individual option awards, and the vesting period of options. The board of directors may amend, modify, or terminate the 2001 stock plan at any time as long as the amendment, modification, or termination does not impair the rights of plan participants under outstanding options or other stock rights. Effective September 9, 2004, the 2001 plan was amended to reduce the number of shares of our common stock issuable thereunder to 175,764, which was the number of shares subject to outstanding options as of that date. No further grants or awards will be made pursuant to the 2001 plan. Stock Repurchase
- ------------------------------------------------------------------------------------------------------------------- (d) Maximum Number (or Approximate Dollar (a) Total (c) Total Number of Value) of Shares (or Number of Shares (or Units) Units) that May Yet Shares (or (b) Average Purchased as Part of Be Purchased Under Units) Price Paid per Publicly Announced the Plans or Period Purchased Share (or Unit) Plans or Programs Programs - ------------------------------------------------------------------------------------------------------------------- Month #1 (October 1, 2004 - 0 N/A N/A N/A October 31, 2004) - ------------------------------------------------------------------------------------------------------------------- Month #2 (November 1, 2004 - November 30, 2004) 0 N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------- Month #3 (December 1, 2004 - December 31, 2004) 500,000(1) $2.31 0 0 - ------------------------------------------------------------------------------------------------------------------- Total 500,000 $2.31 0(2) 0(2) - -------------------------------------------------------------------------------------------------------------------
- ---------- (1) On December 17, 2004, we signed a stock purchase agreement pursuant to which we agreed to repurchase 500,000 shares of our common stock from MTB Investment Advisors, Inc. These 500,000 shares were issued to that investor in a private placement in December 2003. The aggregate purchase price for this stock was $1,155,000. (2) We have not publicly announced any plan or program to repurchase any of our common stock. 20 Item 6. Selected Financial Data. The following selected historical consolidated financial data was derived from our historical financial statements. The financial statements for the fiscal year ended December 31, 2000 were audited by Reznick Fedder & Silverman, independent accountants. The financial statements for the fiscal years ended December 31, 2001 through 2004 were audited by Fitzgerald, Snyder, & Co., P.C., an independent registered public accounting firm. This information should be read in conjunction with our management discussion and analysis of financial condition and results of operations and our financial statements, including the related notes, contained elsewhere in this annual report on Form 10-K.
Year Ended December 31, ------------------------------------------------------------- 2000 2001 2002 2003 2004 ---- ---- ---- ---- ---- (in thousands, except per share data) Consolidated Statements of Operations Data: Revenue, net ....................................... $ 13,046 $ 14,314 $ 20,304 $ 27,241 $ 22,897 Gross profit ....................................... 6,673 5,028 7,928 11,527 9,483 Income (loss) from continuing operations ........... 2,248 125 947 300 (1,346) Extraordinary item ................................. -- -- 89 4,347 -- Change in accounting ............................... -- -- 526 -- -- Net income (loss) applicable to common stockholders ...................................... 2,248 125 1,562 4,647 (1,346) Basic earnings (loss) per share from continuing operations ........................................ 0.23 0.01 0.10 0.02 (0.07) Basic - Extraordinary gain ......................... -- -- 0.01 0.35 -- Basic - Change in accounting ....................... -- -- 0.06 -- -- Basic earnings (loss) per share .................... 0.23 0.01 0.17 0.37 (0.07) Diluted earnings (loss) per share from continuing operations ........................................ 0.23 0.01 0.10 0.02 (0.07) Diluted - Extraordinary gain ....................... -- -- 0.01 0.34 -- Diluted - Change in accounting ..................... -- -- 0.06 -- -- Diluted earnings (loss) per share .................. $ 0.23 $ 0.01 $ 0.17 $ 0.36 $ (0.07) Shares used in computing basic earnings per share .. 9,568 9,375 9,375 12,571 19,792 Shares used in computing diluted earnings per share 9,568 9,375 9,375 12,841 19,792 December 31, ------------------------------------------------------------- 2000 2001 2002 2003 2004 (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents and short term investments ...................................... $ 1,219 $ 1,133 $ 939 $ 8,990 $40,737 Working capital ...................................... 2,793 2,111 2,946 12,577 41,532 Total assets ......................................... 4,806 6,898 8,572 20,719 77,284 Long-term obligations, less current portion .......... 10 1,568 1,402 1,298 1,270 Total stockholders' equity ........................... $ 2,870 $ 2,908 $ 4,508 $16,185 $65,991
During the second quarter of 2003, we recognized a one-time gain of approximately $4.3 million due to the negative goodwill resulting from the Young Design-Telaxis combination. During the second quarter of 2004, we acquired KarlNet, Terabeam and Ricochet. These acquisitions (primarily Terabeam) significantly strengthened our balance sheet while also increasing liabilities. These acquisitions also increased our operating loss by more than $5.0 million from the prior year. This increased operating loss was offset by the one-time gain of approximately $3.7 million from the sale of Phazar stock in the fourth quarter of 2004. Our Quarterly Financial Data
Quarter (in thousands, except per share data) - ----------------------------------------------------------------------------------------------------------------------- 2004 First Second Third Fourth - ------------------------------------------------- ------- ------- ------- ------- Revenue ......................................... $ 6,017 $ 4,733 $ 6,370 $ 5,777 Gross profit .................................... 2,466 1,540 2,688 2,789 Net income (loss) ............................... 303 (1,605) (2,351) 2,307 Basic and diluted earnings (loss) per share ..... $ 0.02 $ (0.10) $ (0.09) $ 0.10 - -----------------------------------------------------------------------------------------------------------------------
21
Quarter (in thousands, except per share data) - --------------------------------------------------------------------------------------------------------------- 2003 First Second Third Fourth - --------------------------------------------- --------- --------- --------- ---------- Revenue ..................................... $ 6,436 $ 7,229 $ 8,029 $ 5,547 Gross profit ................................ 1,998 2,268 4,288 2,973 Income (loss) before extraordinary item ..... 106 (815) 1,053 (44) Extraordinary item .......................... -- 4,347 -- -- Net income (loss) ........................... 106 3,532 1,053 (44) Basic earnings (loss) per share before extraordinary item ....................... 0.01 (0.06) 0.08 0.00 Basic earnings per share - Extraordinary item ..................................... -- 0.32 -- -- Basic earnings per share .................... 0.01 0.26 0.08 0.00 Diluted earnings (loss) per share before extraordinary item ....................... 0.01 (0.06) 0.07 0.00 Diluted earnings per share - extraordinary item ..................................... -- 0.32 -- -- Diluted earnings per share .................. $ 0.01 $ 0.26 $ 0.07 $ 0.00 - ---------------------------------------------------------------------------------------------------------------
Earnings (loss) per share calculations for each of the quarters are based on the weighted average shares outstanding for each period. The sum of the quarters may not necessarily be equal to the full year earnings per share amounts. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview We are a designer and manufacturer of broadband wireless equipment and systems in the licensed-free wireless products communications industry. These point-to-point (PTP) and point-to-multipoint (PTM) systems are primarily used by wireless operators to connect their base stations to other base stations and to existing wire line networks. We continually invest in the development and introduction of wireless products in the marketplace in an effort to provide customers with the best price/performance ratio for license-free wireless communications. During 2003 and 2002, we made a strategic decision to expand our product suite to include high bandwidth PTP backhaul products that would complement our 802.11b PTM product offerings. Therefore rather than design such a product on our own, we purchased inventory of RAN and Link CX, Link EX, and Link 4X products and license rights to manufacture and sell these products. These products continue to give us expanded sales growth within this large product segment. Our PTP products primarily enable service providers, businesses, and other enterprises to expand or establish private networks by bridging data traffic among multiple facilities. In addition, we have developed enhanced PTM systems that enable service providers, businesses, and other enterprises to connect multiple facilities within a geographic area to a central hub. We also believe that our diverse and expanding customer base as well as our market and industry experience makes us a strong competitor in the wireless communications market. In addition, we are an experienced designer of turnkey long distance wireless systems for applications such as wireless Internet, wireless video, wireless local area networks (LANs), wireless wide area networks (WANs), and wireless virtual private networks (VPNs). On April 1, 2003, Telaxis Communications Corporation ("Telaxis") closed a strategic combination transaction with Young Design, Inc., a privately-held Virginia corporation ("Young Design"). In that transaction, Telaxis formed a subsidiary that merged with and into Young Design and each outstanding share of Young Design common stock was converted into the right to receive 2.5 shares of Telaxis common stock. Telaxis was the continuing corporation, Telaxis stockholders continued to hold Telaxis common stock following the transaction, and Young Design became a wholly owned subsidiary of Telaxis. On July 9, 2003, Telaxis reincorporated into Delaware, changed its name to YDI Wireless, Inc. ("YDI" or the "Company") and implemented a net 1 for 4 reverse stock split. Effective May 13, 2004, we acquired KarlNet, Inc., a wireless software development company. Effective June 22, 2004, we acquired Terabeam Corporation, a wireless telecommunications company. Effective June 25, 22 2004, we acquired Ricochet Networks, Inc., a wireless service provider. The financial results of these companies from and after the dates of acquisition are included in the financial results reported herein. Critical Accounting Policies The preparation of our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect: the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reporting periods. We are required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from our estimates. The most significant areas involving our judgments and estimates are described below. Revenue Recognition For our equipment business, we recognize revenue when a formal purchase commitment has been received, shipment has been made to the customer, collection is probable and, if contractually required, a customer's acceptance has been received. For our services business, we recognize revenue when the customer pays for and then has access to our network for the current fiscal period. Any funds the customer pays for future fiscal periods are treated as deferred revenue and recognized in the future fiscal periods for which the customer has access to our network. Purchase Price Accounting We have grown considerably through combining with other businesses. We acquired Telaxis in 2003 and KarlNet, Terabeam and Ricochet Networks in 2004. These transactions were accounted for using the purchase method. Under the purchase method, the acquiring company includes the fair value of the assets of the acquired entity on its balance sheet. The determination of fair value necessarily involves many assumptions. The operations of the acquired entity are included in our operations following the date of acquisition. Capitalized Software We have capitalized software costs of approximately $1.6 million, net of amortization, related to software products available for sale. We are amortizing those costs over the expected lives of the products. The annual amortization will be the straight-line method over the remaining estimated economic life of the product including the period being reported on. In addition, we capitalize software costs for projects from the time the project is determined to be technologically feasible until the project is salable. When the project becomes salable, we will cease capitalizing costs and begin amortizing costs previously capitalized over the expected salable life of the project. Approximately $680,000 of software related costs are not being amortized since the software has not been placed in service as of the December 31, 2004. Approximately $600,000 was capitalized in software costs during 2004. Prior to the KarlNet acquisition on May 13, 2004, we had no internally developed software capitalized costs. Inventory Valuation Inventory is stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Provisions are made to reduce excess or obsolete inventory to its estimated net realizable value. The process for evaluating the value of excess and obsolete inventory often requires us to make subjective judgments and estimates concerning future sales levels, quantities, and prices at which such inventory will be able to be sold in the normal course of business, particularly where we have made last-time-buys of components. Accelerating the disposal process or incorrect estimates of future sales may necessitate future adjustments to these provisions. Accounts Receivable Valuation We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. 23 Goodwill Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As of December 31, 2004, no impairment losses have been recognized on any of our acquired goodwill. Intangible Assets Intangible assets are accounted for in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets". Intangible assets with finite lives are amortized over the estimated useful lives using the straight-line method. Intangible assets with finite lives are reviewed for impairment. An impairment loss on such assets is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually, or more frequently if there are indications that the asset is impaired. The impairment test for these assets consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset with an indefinite useful life exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For either type of intangible asset, after an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited. Our intangible assets include purchased technology and various assets acquired in business combination transactions. Assets acquired in business combination transactions include existing hardware technologies, trade names, existing software technologies, customer relationships and patents. Some of these assets have finite useful lives and some have indefinite useful lives. As of December 31, 2004, no impairment losses have been recognized on any of the intangible assets we owned. 24 Result of Operations Years Ended December 31, 2004 and 2003 The following table provides statement of operations data as a percentage of sales for the periods presented.
Years Ended December 31 -------------------- 2004 2003 ------- ------- Sales ............................................... 100% 100% Cost of sales ....................................... 59 58 ------- ------- Gross profit ........................................ 41 42 Operating expenses Selling ......................................... 11 8 Research and development ........................ 13 6 General and administrative ...................... 44 26 ------- ------- Total operating expenses ..................... 68 40 ------- ------- Operating income (loss) ............................. (27) 2 Other income ........................................ 21 -- Income taxes ........................................ -- (1) Extraordinary gain and change in accounting -- 16 ------- ------- Net income (loss) ................................... (6)% 17% ======= =======
Sales Sales for the year ended December 31, 2004 were $22.9 million as compared to $27.2 million for the same period in 2003 for a decrease of $4.3 million or 16%. There were two significant factors contributing to our net decline in sales. First was the receipt of significant orders in 2003 from two large customers. One was Verizon for their "Hot Spot" trial build-out, and the other was Enterasys for whom we did some production on a trial basis. Those orders were not replicated in 2004 resulting in a sales decrease of nearly $3.8 million. Second, a general softness in the demand for 802.11b equipment within the industry resulted in an additional sales decrease of about $3.0 million. However, these sales declines were offset by sales from the three companies we acquired in the second quarter of 2004. Sales by these acquired companies were nearly $2.5 million from the date of acquisition through year-end. We also increased the amount of our international sales during 2004. For the years ending December 31, 2004 and 2003, international sales, excluding Canada, were approximately 18% and 16%, respectively, of total sales. We enhanced our international sales presence in the second half of 2004 by hiring two experienced international sales professionals as well as having several of our products certified by in-country regulatory authorities. Presently we are focusing our efforts in Latin America, the Middle East and Africa. We intend to expand our international presence in the near future into Asia Pacific and other geographic regions where we believe there is a market for our products. The challenges for 2005 continue to be our efforts to expand our current customer base by obtaining larger customers, to replace any lost customers, and to expand our sales channels to include distributors, value added resellers, and federal and other government-related customers. We want to realign and enhance our sales and marketing departments to expand our efforts to sell larger system-based communication solutions into first and second tier carriers while continuing to stay close to our core WISP customers. We have hired an experienced Vice President of Marketing from a large telecommunications company to help promote our products and brands in our current markets as well as in other markets into which we would like to expand. We expect our sales will continue to benefit from our acquisitions of KarlNet, Terabeam, and Ricochet. Cost of goods sold and gross profit Cost of goods sold and gross profit for the year ended December 31, 2004 were $13.4 million and $9.5 million, respectively. For the same period in 2003, costs of goods sold and gross profit were $15.7 million and 25 $11.5 million, respectively. Gross profit, as a percentage of sales, for the years ended December 31, 2004 and 2003 was 41% and 42%, respectively. There were a few major reasons for the change in cost of goods sold and gross profit from 2004 compared to 2003. During 2004, we did not replace the revenue we received in 2003 from two large customers, Verizon and Enterasys. The lack of the revenue from Verizon negatively impacted our gross profit by approximately 2.6% as a percent of total sales. The lack of revenue from Enterasys positively impacted our gross profit comparison by approximately 1.0%. We also realized a partial year positive impact in our gross profit compared to 2003 due to our acquisition of KarlNet and Terabeam. This resulted in an increase in our gross profit as a percent of sales for the year of approximately 0.5% which was offset by a decrease in gross profit for the year of approximately 0.1% due to the Ricochet acquisition. Our introduction of new products did help our overall gross profit but only by about 0.2% because these new products were introduced late in the year. However, in 2005, we will realize a full year of benefit from these late 2004 product introductions. We also expect to introduce new and improved products in 2005. However, even as we introduce new products to our customers in 2005, we believe that our profit margins will be challenged because of the significant downward pressure brought about by increased competition from the many new competitors entering the wireless marketplace. Some competitors may use more favorable pricing structures than us to try and gain immediate market share. We have seen more examples of this behavior now than in past years and expect it to only intensify over time. Maintaining our profit margins continues to be one of our major goals. One of the best ways to maintain profit margins is to continually seek and implement cost savings ideas or new designs that will reduce the cost of our products. In addition, we are continually looking for more cost effective contract manufacturers. When properly utilized, contract manufacturers can bring significant production efficiencies by reducing labor costs as well as material costs because of the large volumes of raw material purchases larger contract manufacturers can negotiate. We have begun utilizing off-shore manufacturers for certain mechanical parts of our products. We are also investigating the use of lower cost offshore contract manufacturers for possible turnkey manufacturing of our products, but are balancing that with the additional risks of using offshore manufacturers. Despite our efforts, we may be unable to maintain our margins in this highly competitive market. Sales and Marketing Expenses Selling and marketing expenses consist primarily of employee salaries and associated costs for selling, marketing, and customer support. Selling and marketing expenses increased to $2.6 million for the year ended December 31, 2004 from $2.2 million for the year ended December 31, 2003, which is a $0.4 million or 16% increase. The relatively large increase in overall sales and marketing expenses is a combination of several factors, some which are offsetting, including: (1) while overall sales personnel headcount decreased, the hiring of experienced new sales personnel, with resulting higher salaries, resulted in an increase in related costs of approximately $0.3 million, and (2) the hiring of a new Vice President of Marketing, increase in advertising, increased membership in professional associations, attendance at more trade shows, and increase in brand and product awareness marketing costs in the aggregate increased costs approximately $0.1 million. In 2005, we plan to hire a senior sales executive to lead our sales efforts as well as several more seasoned sales and marketing personnel with both domestic and international experience in the wireless market. Additionally, we are also looking to expand our distributor channel, establish a new value added reseller channel and first and second tier carrier channel, and increase our sales to federal and other government-related customers. Research and Development Expenses Research and development expenses consist primarily of personnel salaries and fringe benefits and related costs associated with our product development efforts. These include costs for development of products and components, test equipment and related facilities. Research and development expenses increased to $2.9 million for the year ended December 31, 2004 from $1.7 million for the year ended December 31, 2003, a $1.2 million increase or 73% year over year. $0.9 million of the increase in research and development expenses from 2003 to 2004 was attributable to the net addition of 23 research and development personnel as a result of our three acquisitions, while the remaining $0.3 million increase was due to the purchase of additional prototype materials and other related 26 support costs. We believe that the increase in research and development personnel increased our product development capability, particularly on the software side. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries, benefits and associated costs for information systems, finance, legal, and administration of a public company. General and administrative expenses increased to $10.0 million for the year ended December 31, 2004 from $7.1 million for the year ended December 31, 2003, a $2.9 million increase or 41%. The increase is primarily due to the following factors: (1) salaries and fringe benefit expenses increased by approximately $1.2 million, (2) professional, legal, and accounting fees increased by approximately $0.9 million, (3) depreciation and amortization expense increased by approximately $0.9 million, (4) additional rents, maintenance and utilities on new facilities was approximately $0.4 million, and (5) insurance and bad debt expense decreased by approximately $0.3 million and $0.2 million, respectively. As with all expenses, we are monitoring our general administrative expenses with the goal of reducing them in 2005. Income Taxes Benefit for income taxes for the year ended December 31, 2004 in the amount of $2,000 relates to net refunds of state income taxes. As of December 31, 2004, we cannot accurately predict when sufficient taxable income will be generated to justify recognition of deferred tax assets without a valuation allowance. Provision for income taxes for the year ended December 31, 2003 in the amount of $0.3 million relates to (1) an increase in the valuation allowance associated with the deferred tax assets of $0.4 million offset by (2) the tax benefit from carrying back existing net operating losses to recover taxes previously paid. Years Ended December 31, 2003 and 2002 The following table provides statement of operations data as a percentage of sales for the periods presented.
Years Ended December 31 ----------------------- 2003 2002 ------- ------- Sales ............................................ 100% 100% Cost of sales .................................... 58 61 ------- ------- Gross profit ..................................... 42 39 Operating expenses Selling ...................................... 8 12 Research and development ..................... 6 2 General and administrative ................... 26 18 ------- ------- Total operating expenses .................. 40 32 ------- ------- Operating income (loss) .......................... 2 7 Other income ..................................... -- 1 Income taxes ..................................... (1) (4) Extraordinary gain and change in accounting 16 4 ------- ------- Net income (loss) ................................ 17% 8% ======= =======
Sales Sales for the year ended December 31, 2003 were $27.2 million as compared to $20.3 million for the same period in 2002 for an increase of $6.9 million or 34%. The increase in sales is primarily due to the addition of two new large customers, the introduction of new products, and the modification of our list prices both upwards and downwards as market competition dictates. First, sales to Enterasys resulted in about $2.5 million or 9.2% of revenue and sales to Verizon resulted in about $2.2 million or 8.1% of revenue. Second, revenue for new products amounted to just under $2.0 million or 7.4% of revenue. Finally, after the modification of our list prices, as mentioned above, we realized an overall increase in our revenue during 2003. 27 For the years ending December 31, 2003 and 2002, international sales, excluding Canada, were approximately 16% and 10%, respectively, of total sales. Young Design's business combination with Telaxis had no impact on our revenue in 2003 because Telaxis had virtually no revenue from its products in 2003 or 2002 due to lack of customer demand. Cost of goods sold and gross profit Cost of goods sold and gross profit for the year ended December 31, 2003 were $15.7 million and $11.5 million, respectively. For the same period in 2002, costs of goods sold and gross profit were $12.4 million and $7.9 million, respectively. Gross profit, as a percentage of sales, for the years ended December 31, 2003 and 2002 was 42% and 39%, respectively. In order of significance, during 2003, we introduced several new products to the market and realized higher gross profit margins, the most significant being our integrated two-channel "Hot Spot" access point product for the telco market. This product resulted in a 0.6% improvement in our annual gross profit from 2002. Other new product introductions, especially the Etherant-II, resulted in an additional 1.0% improvement in our gross profit. Our modification of list prices helped improve gross profit margin by an estimated 0.9%. Next, due to a large glut of excess inventory in the electronic component industry, we were able to purchase large quantities of excess electronic component parts in late 2000, 2001 and early 2002 at a significant discount. As electronic component prices began to rebound in late 2002 and throughout 2003, we were able to reduce our current year purchases as a result of our previous purchases of surplus electronic parts, resulting in a 0.5% improvement of our annual profit margin. The surplus parts previously purchased and discussed above have been completely used during 2003. Sales and Marketing Expenses Selling and marketing expenses consist primarily of employee salaries and associated costs for selling, marketing, and customer support. Selling and marketing expenses decreased to $2.2 million for the year ended December 31, 2003 from $2.4 million for the year ended December 31, 2002, which is approximately a $0.2 million or 8% decline. The relatively small decrease in overall sales and marketing expenses is a combination of several offsetting factors: (1) increased headcount of sales personnel to expand customer contacts, (2) reduction of advertising, dues for professional associations and elimination of attendance at trade shows which historically produced little in product sales or company and brand awareness, and (3) establishment of a central travel administrator position to ensure compliance with our travel and entertainment guidelines. Research and Development Expenses Research and development expenses consist primarily of personnel salaries and fringe benefits and related costs associated with our product development efforts. These include costs for development of products and components, test equipment and related facilities. Research and development expenses increased to $1.7 million for the year ended December 31, 2003 from $0.4 million for the year ended December 31, 2002, a $1.3 million increase or 325% year over year. The increase in research and development from 2002 to 2003 was primarily attributable to the addition of 17 research and development engineers amounting to approximately $1.1 million, while the remainder was for the purchase of additional prototype materials and other related support costs. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries, benefits and associated costs for information systems, finance, legal, and administration of a public company. General and administrative expenses increased to $7.1 million for the year ended December 31, 2003 from $3.6 million for the year ended December 31, 2002 or 97%. The increase of approximately $3.5 million is made up of several significant expenses mostly attributable to Young Design's business combination with Telaxis on April 1, 2003. In order of magnitude are the following expense elements and their individual impact: (1) salaries and fringe benefit expenses increased approximately $0.9 million, (2) Directors and Officers insurance as well as property and casualty insurance increased approximately $0.7 million, (3) additional rents, maintenance and utilities on new facilities was approximately $0.7 million, (4) professional, legal, and accounting fees increased approximately $0.6 million, and 28 (5) bad debt increased approximately $0.3 million, but on significantly higher revenue. For 2003, bad debt expense was 2.4% of revenue as compared to 1.8% for 2002. Income Taxes Provision for income taxes for the year ended December 31, 2003 in the amount of $0.3 million relates to (1) an increase in the valuation allowance associated with the deferred tax assets of $0.4 million offset by (2) the tax benefit from carrying back existing net operating losses to recover taxes previously paid. As of December 31, 2003, we cannot accurately predict when sufficient taxable income will be generated to justify recognition of deferred tax assets without a valuation allowance. Provision for income taxes for the year ended December 31, 2002 in the amount of $0.8 million relates to an estimated effective tax rate of 42%. Extraordinary gain The extraordinary gain was due to the immediate recognition into income of negative goodwill of $4.3 million related to the Telaxis combination in accordance with SFAS No. 141. Liquidity and Capital Resources At December 31, 2004, we had cash, cash equivalents, and investments available-for sale of $40.7 million. This excludes restricted cash of $5.1 million. For the year ended December 31, 2004, cash used by operations was $5.6 million. We currently are meeting all of our working capital needs through cash on hand as well as internally generated cash from operations and other activities. We do this through active cash management such as matching our Days Payable Outstanding (DPO) with our Days Sales Outstanding (DSO). Currently, both DPO and DSO are between 44 and 47 days. In addition, approximately 25 - 30% of our sales are paid prior to shipment by credit card, wire transfer, or letter of credit, which increases cash flow and decreases credit risk and bad debt expense. We see no immediate requirement over the next twelve months for external financing to fund our day-to-day normal operations, which includes sales and marketing, research and development, and general and administrative expenses of our core business. For the year ended December 31, 2004, cash provided by investing activities was approximately $40.0 million. The increase in cash relates primarily to the $10.3 million of cash and $34.6 million from sales of securities acquired in connection with the three companies we acquired in the first half of 2004. This was offset by cash used for acquisitions of $4.8 million. Cash used in financing activities was $7.6 million for the year ended December 31, 2004. The primary uses of the funds were approximately $7.7 million for repurchases of outstanding stock. Our long-term financing requirements depend upon our growth strategy, which relates primarily to our desire to increase revenue both domestically as well as internationally. One of the biggest obstacles to success is bringing new products to the market in a timely fashion. New products or product lines may be designed and developed internally, but it may be more cost effective to acquire product offerings from competitors to reduce time to market. Our current funding levels may have to be supplemented through new bank debt financing, public or private debt or equity offerings, or other means, depending upon our desired rate of future growth. 29 We have the following contractual obligations and commercial commitments as of December 31, 2004:
Payments due by period (numbers in thousands) ---------------------------------------------------------------------- Less than 1 - 3 4 - 5 After 5 Total 1 year years years years ---------- ---------- ---------- ---------- ---------- Operating leases - buildings - in use ............. $ 4,196 $ 1,355 $ 2,225 $ 303 $ 313 Operating leases - buildings - not in use ......... 3,610 2,670 746 194 -- Notes payable ..................................... 4,268 3,011 846 411 -- Operating leases - equipment ...................... 131 131 -- -- -- Employment Contracts .............................. 537 537 -- -- -- ---------- ---------- ---------- ---------- ---------- Total contractual cash obligations ................ $ 12,742 $ 7,704 $ 3,817 $ 908 $ 313 ========== ========== ========== ========== ==========
The above table includes the $1.3 million of principal and interest payments for the Merry Fields' mortgage and the lease payments from YDI to Merry Fields. The lease payments are the source of cash for Merry Fields to repay the mortgage. The mortgage is the responsibility of Merry Fields; however, we guarantee full payment of this mortgage. Impact of Recently Issued Accounting Standards In December 2004, the FASB issued SFAS 123R, a revision of SFAS 123, "Accounting for Stock-based Compensation." SFAS 123R requires public companies to recognize expense associated with share-based compensation arrangements, including employee stock options, using a fair value-based option pricing model, and eliminates the alternative to use Opinion 25's intrinsic value method of accounting for share-based payments. In accordance with the new pronouncement, we plan to begin recognizing the expense associated with our share-based payments, as determined using a fair value-based method, in our statement of operations beginning on July 1, 2005. Adoption of the expense provisions of the statement may have a material impact on our results of operations. The standard allows three alternative transition methods for public companies: modified prospective application without restatement of prior interim periods in the year of adoption; modified retrospective application with restatement of prior interim periods in the year of adoption; and modified retrospective application with restatement of prior financial statements to include the same amounts that were previously included in pro forma disclosures. We have not determined which transition method we will adopt. During November 2004, the FASB issued SFAS No. 151 "Inventory Costs." This statement clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and wasted material (spoilage). The statement requires that these costs be accounted for as current period charges. The adoption of this pronouncement had no material impact on our results of operations, financial position or cash flows in the reported periods. Disclosures About Market Risk The following discusses our exposure to market risks related to changes in interest rates, equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are exposed to risks and uncertainties, many of which are out of our control. Actual results could vary materially as a result of a number of factors, including those discussed in this Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, Safe Harbor for Forward-Looking Statements. As of December 31, 2004, we had bank balances of cash and cash equivalents of $35.4 million and restricted cash of $5.1 million. All these funds are on deposit in short-term accounts with several national banking organizations. Therefore, we do not expect that an increase in interest rates would materially reduce the value of these funds. The primary risk to loss of principal is the fact that these balances are only insured by the Federal Deposit Insurance Corporation up to $100,000 per bank. At December 31, 2004, the uninsured portion totaled approximately $41.4 million. In addition, we presently hold approximately $5.4 million in corporate and U.S. Federal agency bonds. These bonds have a maturity dates no later than February 2006. These bonds are interest rate sensitive and therefore 30 as rates rise, the value of these bonds will decrease. We do not believe that a significant increase in interest rates would have a material effect on our financial condition or results of operations, particularly given the relatively short-term nature of these holdings. We guarantee the Merry Fields, LLC debt. The interest rate on the loan is fixed. Therefore, fluctuations in interest rates would not impact the amounts payable relating to that debt. In the past three years, all sales to international customers were denominated in United States dollars and, accordingly, we were not exposed to foreign currency exchange rate risks. Additionally, we import from other countries. Our sales and product supply may therefore be subject to volatility because of changes in political and economic conditions in these countries. We presently do not use any derivative financial instruments to hedge our exposure to adverse fluctuations in interest rates, foreign exchange rates, fluctuations in commodity prices or other market risks; nor do we invest in speculative financial instruments. Due to the nature of our borrowings and our short-term investments, we have concluded that there is no material market risk exposure and, therefore, no quantitative tabular disclosures are required. Safe Harbor for Forward-Looking Statements General Overview This Annual Report on Form 10-K contains forward-looking statements as defined by federal securities laws which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance or products, underlying assumptions and other statements which are other than statements of historical facts. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "contemplates," "believes," "estimates," "predicts," "projects," and other similar terminology or the negative of these terms. From time to time, we may publish or otherwise make available forward-looking statements of this nature. All such forward-looking statements, whether written or oral, and whether made by us or on our behalf, are expressly qualified by the cautionary statements described in this Form 10-K, including those set forth below, and any other cautionary statements which may accompany the forward-looking statements. In addition, we undertake no obligation to update or revise any forward-looking statement to reflect events, circumstances, or new information after the date of this Form 10-K or to reflect the occurrence of unanticipated or any other subsequent events, and we disclaim any such obligation. You should read forward-looking statements carefully because they may discuss our future expectations, contain projections of our future results of operations or of our financial position, or state other forward-looking information. However, there may be events in the future that we are not able to accurately predict or control. Forward-looking statements are only predictions that relate to future events or our future performance and are subject to substantial known and unknown risks, uncertainties, assumptions, and other factors that may cause actual results, outcomes, levels of activity, performance, developments, or achievements to be materially different from any future results, outcomes, levels of activity, performance, developments, or achievements expressed, anticipated, or implied by these forward-looking statements. As a result, we cannot guarantee future results, outcomes, levels of activity, performance, developments, or achievements, and there can be no assurance that our expectations, intentions, anticipations, beliefs, or projections will result or be achieved or accomplished. In summary, you should not place undue reliance on any forward-looking statements. Cautionary Statements In addition to other factors and matters discussed elsewhere in this Form 10-K, in our other periodic reports and filings made from time to time with the Securities and Exchange Commission, and in our other public statements from time to time (including, without limitation, our press releases), some of the important factors that, in our view, could cause actual results to differ materially from those expressed, anticipated, or implied in the forward-looking statements include, without limitation, the following: 31 o The continuing uncertainty in the telecommunications industry and the global economy is adversely affecting our sales due in part to our being a smaller, younger company. In the past few years, the overall economic climate in the United States and many other parts of the world has declined. Telecommunication equipment markets specifically have experienced a severe downturn. This downturn has resulted in our customers having less capital available from capital markets, and less willingness to spend internal capital, to purchase equipments such as ours. As a result, potential customers may be less willing to spend their limited budgets on products from us, a relatively small, young company that may not survive the economic downturn. Because we do not have the financial resources or name recognition of larger companies, this downturn may adversely affect the growth and stability of our business and our financial condition and results of operations. o The WLAN equipment industry in which we principally operate is intensely competitive which could negatively impact our financial results. The telecommunications equipment industry in which we operate is intensely competitive. Most of our products are in a portion of the telecommunications equipment industry generally referred to as wireless local area networks (WLAN). Competition is intense in this industry for a number of reasons. For example, there are relatively few barriers to entry in this market. Also, this industry has attracted substantial media and other attention in recent months in part due to the ability of this equipment to provide broadband Internet connectivity simply, quickly, and efficiently. These same reasons, among others, have caused a number of companies to develop products that compete (or could be viewed as competing) with ours. This large number of companies offering products that may be perceived to be similar or even interchangeable with our products can have the effect of reducing the prices at which we are able to sell our products. In turn, this can reduce our gross margins and negatively impact our general financial results. o We face substantial competition from a number of larger companies with substantially greater resources and longer operating histories, and we may not be able to compete effectively. Many of our competitors or perceived competitors offer a variety of competitive products and services and some may offer broader telecommunications product lines. These companies include Proxim, Alvarion, Cisco, Alcatel, Stratex Networks, Ceragon, Nokia, Business Networks AB, AirSpan Networks, D-Link, Enterasys Networks, Intel Corporation, Intersil Corporation, Symbol Technologies, 3Com Corporation, Wi-Lan, Inc., Hyperlink, and Harris Corporation. Additionally, our millimeter wave radio products must compete with the existing and new fiber optic infrastructure and suppliers in the United States and elsewhere. Many of these companies have greater customer recognition, installed bases, financial resources, and sales, production, marketing, manufacturing, engineering, and other capabilities than we do. o We also face competition from private and start-up companies given the limited barriers to entry in our business. We face actual and potential competition not only from established companies, but also from start-up and other private companies that are developing and marketing new commercial products and services. Most of the products we sell are based on standards established by the Institute of Electrical and Electronics Engineers (IEEE) that require interoperability. Also, there are not substantial technical development difficulties, manufacturing difficulties, prohibitive intellectual property rights, or high business start-up costs that may create greater barriers to entry in other businesses. As a result, there are not significant barriers to entry into a number of markets we serve. This lack of barriers and the perceived attractiveness of some of these markets, among other reasons, have resulted in private companies entering these markets. These private companies include Vivato, Trapeze, Colubris Networks, and Trango Broadband. o We may experience difficulty in distinguishing our products from other WLAN products which may reduce our sales and gross margins. We believe that some products in the WLAN business in which we primarily operate have become commodities in which there is intense price competition, and we believe that trend will continue and intensify. We need to carefully and clearly distinguish our products from competing products and technologies that may be able to provide wireless broadband access or connectivity. Points of distinction include operating range of our products, scalability of networks using our products, remote management and monitoring capabilities, durability and robustness of our products, data rate transmission capabilities of our products, ease and speed of installation of our products, markets served by our products, cost of our products, other features of our products, security and interference issues, and value proposition of our products for our customers. Failure to distinguish our products for our 32 customers, investors, and others could hinder market acceptance of our products, delay our obtaining customers for our products, force reductions in contemplated sales prices of our products, and reduce our overall sales and gross margins. This ability to distinguish is becoming more important as we try to introduce more feature-rich products at higher prices. o Potential customers may view price as the primary differentiator between our products and products of our competitors, which could reduce the price at which we can sell our products and negatively impact our financial results. Because products in our WLAN business have to comply with specific public standards, at times potential customers may perceive there to be little other than price to differentiate our products from products of a competitor. This intense customer focus on pricing can have the effect of reducing the prices at which we are able to sell our products. In turn, this can reduce our gross margins and negatively impact our general financial results. o Alternative broadband connectivity technologies may have advantages over our products and make our products less attractive to customers. A number of competing technologies may be able to provide high-speed, broadband access or connectivity. These competing technologies include digital subscriber lines, hybrid fiber coaxial cable, fiber optic cable, T-1/E-1 and other high-speed wire, laser (also known as free space optics), satellite, and other point-to-multipoint wireless and point-to-point wireless technologies. Some of these technologies may have advantages over our products, such as lower cost, greater range, better security, and greater current market acceptance. o New broadband connectivity technologies may be developed that have advantages over our products and make our products less attractive to customers. New products or new technologies may be developed that supplant or provide lower-cost or better performing alternatives to our products. For example, the majority of products we sell are based on the IEEE 802.11b standard. We believe products are being developed based on the IEEE 802.11a/b/g and 802.16 (also known as WiMax) standards which may have advantages over products based on the IEEE 802.11b products, such as greater data transmission capabilities and longer range. o The actual or potential availability of new broadband connectivity technologies could cause our customers to delay buying decisions. We operate in a business where there is rapid technological change, and new products and technologies are continually introduced to the market in actual or conceptual form. These new products or technologies may have or appear or be described to have advantages over our products or other products then currently available. Even though actual products may not be available until some (perhaps indefinite) time after initial introduction of the conceptual product or technology, the possibility of obtaining these new products could cause potential customers to delay their decision to buy products such as ours. This delay could adversely impact our business, financial condition, and results of operations. o We are selling into a market that has a broad range of desired product characteristics and features which may make it difficult for us to develop products that will address a broad enough market to be commercially viable. We are selling into a market place that is experiencing a convergence of competing technologies. The market that we currently serve is experiencing a convergence of voice driven telecommunications methodology and data centric networking based methodology. As a result there exists a divergence of product requirements and corporate cultures for our customers and even within the same customer. Typically, established telecommunications providers desire extremely robust products with the expectation of a relatively long effective life. Networking providers on the other hand are looking for optimal performance at any given time with the assumption that they will be upgrading the equipment again in several years and therefore are extremely cost sensitive. In addition, established telecommunications providers seek products that fit into their existing networks (T-1, E-1, OC-3, OC-12 interfaces and data rates) while networking based providers prefer ethernet interfaces and data rates. If we are unable to satisfy one or more of the requirements of our current and prospective customers, we may lose, or fail to gain, meaningful market share. o We may not develop products for the portions of the broadband connectivity and access markets that grow. Predicting which segments of the broadband connectivity and access markets will develop and at what rate these markets will grow is difficult. We may needlessly spend money and resources developing products for a market that does not develop. On the other hand, we may miss market opportunities if we 33 fail to act promptly and decisively to develop new products. Our business, financial condition, and results of operations will be materially adversely affected if we develop the wrong product or miss market opportunities. o Our sales may decline if we are unable to keep pace with rapid technological changes and industry standards. Our ability to succeed in our competitive market will depend upon successful development, introduction, and sale of new products and enhancements on a timely and cost-effective basis in response to changing customer requirements and competitors' product developments. We may not be successful in selecting, developing, manufacturing, and marketing new products or enhancements which could adversely affect our sales. o We believe that the prices for our products will decline over time which could hurt our financial results. We believe that average selling prices for our products will tend to decline from the point at which a product is initially priced and marketed. Reasons for this decline may include the maturation of such products, the effect of volume price discounts in existing and future contracts, technology changes, and the intensification of competition, including from lower-cost foreign suppliers. This price decline could hurt our financial results. o The expected price decline of our products will hurt our financial results unless we are able to offset those declines with cost savings or new product introductions. We will attempt to offset expected price declines of our products by reducing our product costs and non-product costs and by introducing new products with higher gross margins. If we are unable to offset declining selling prices by reducing direct materials and manufacturing expenses, our gross margins will decline. If we cannot develop new products in a timely manner or we fail to achieve increased sales of new products at higher gross margins, our revenue and gross margins may decline. o Our plans to continue to introduce new products will require capital and other investments that may not be recovered. We devote significant resources to the development and marketing of new products and technologies and expect to continue to do so. These investments include facilities, equipment, inventory, personnel, and other items to develop and produce these products and to provide marketing, sales, service and support, and administration organizations to service and support these products. We anticipate many of these commitments and expenditures would be made in advance of realization of increased sales, which may not occur. If sales do not increase as expected, our gross margins and general financial performance would be adversely affected. o Our financial results have fluctuated significantly, and we expect the fluctuations will continue for a variety of reasons, many of which are out of our control. Our quarterly financial results have fluctuated significantly for a number of reasons including our acquisitions of Terabeam Corporation, Ricochet Networks, Inc., and KarlNet, Inc. in the second quarter of 2004; the combination of Telaxis and Young Design in April 2003; our limited long-term commitments from customers; the receipt of significant customer orders; timing of obtaining customers for any new products we may introduce; the mix of our product sales; our manufacturing capacity constraints and our ability to fulfill orders; our inability to obtain components in the quantities we need; new product introductions by us or by our competitors; seasonal factors that may affect capital spending by customers; and general economic conditions. We expect that many of these and other factors will continue to affect our business and will cause our financial results to fluctuate in the future. o Our past acquisition activity and contemplated future acquisition activity contributes to the difficulty in predicting our future financial performance. The combination of Telaxis and Young Design in April 2003 resulted in changes in our financial performance. The historically unprofitable financial results of Telaxis caused the operating results of the combined company to be unprofitable in the second quarter of 2003. Although the combined company did briefly return to profitability, the acquisitions of the unprofitable Terabeam Corporation, KarlNet, Inc., and Ricochet Networks, Inc. in the second quarter of 2004 have caused the company to be unprofitable (on an operating basis) in its most recent fiscal quarters. However, the company's balance sheet has become significantly stronger given the addition of the assets from the acquired companies. We have stated our intention to make selected acquisitions from time to time and, therefore, expect that our future acquisition activity will contribute to fluctuations in our financial results and to difficulties in predicting our financial performance. 34 o We may not achieve the contemplated benefits of our three 2004 acquisitions which could materially and adversely affect our business. In the second quarter of 2004, we acquired Terabeam Corporation, Ricochet Networks, Inc., and KarlNet, Inc. We may not be able to achieve the expected synergies and other benefits of those acquisitions at all or to the extent expected. We may not be able to integrate those companies in a cost-effective, timely manner without material liabilities or loss of desired employees, suppliers, or customers. Our management may be distracted from our core business due to those acquisitions. The expected cost savings from the transactions may not be fully realized or may take longer to realize than expected. Our investors, competitors, customers, suppliers, employees, and others may react negatively to the acquisitions. We may have little experience operating in some of the business areas in which those acquired companies typically operated so may not fully benefit from the acquisitions. Those acquisitions may expose us to lawsuits or other liabilities, known or unknown. Addition of these companies may increase the difficulty for us, financial analysts, and others to predict the combined company's future business and financial performance. These factors could materially and adversely affect our business, perception in our market, and financial results. Should these factors materially and adversely affect our business, it could result in a material impairment charge to write-down goodwill. o The fact that we receive few long-term purchase commitments from customers contributes to the difficulty in predicting our future financial performance. Due to the nature of our products and customers, we generally have a very short time between receiving an order and shipping the order. Very few of our customers provide us with long-term purchase commitments. As a result, we generally have a relatively low backlog and have limited visibility of sales going forward. This lack of visibility contributes to the difficulty in predicting our future financial performance by us, financial analysts, and investors. o Receipt of significant customer orders have caused our financial results to fluctuate and contribute to the difficulty in predicting our future financial performance. At times, we have received significant orders from customers that have caused our financial results to fluctuate. For example, we received large orders from a single customer in 2003 that contributed positively to the financial results of several quarters in 2003. The non-recurrence of those orders in 2004 has made our financial results look worse in comparison. We expect that at times we may get similar significant orders in the future which could cause significant fluctuations in sales, gross margins, and operating results. These fluctuations contribute to the difficulty in predicting our future financial performance by us, financial analysts, and investors. o Difficulties in obtaining the components we need to manufacture our products have caused our financial results to fluctuate and contribute to the difficulty in predicting our future financial performance. In the third and fourth quarters of 2003 and to a lesser extent in the first quarter of 2004, we were unable to obtain sufficient components to manufacture certain of our products. We believe this shortage had a negative impact on our revenue and financial results for those quarters. Given the number of components in our products, the age of some of our products, and the limited number of suppliers of some of these components, we may experience similar component shortages from time to time in the future. These shortages could contribute to fluctuations in our financial results and to the difficulty in predicting our future financial performance. o We cannot predict when or whether we will be able to achieve operating profitability, which could adversely affect our ability to continue as a going concern and our stock price. We were not profitable on an operating basis in any fiscal quarter of 2004. We have made no predictions concerning our future profitability or lack of profitability, particularly given our acquisition in 2004 of three unprofitable companies. Our failure to achieve and maintain profitability may affect our ability to continue as a going concern and cause the market price of our stock to decline or prevent it from rising. o We may be unsuccessful in leveraging our direct sales model into one using more distributors and resellers. Historically, the great majority of our sales were direct sales made by our employees. We are seeking to expand our sales channels through the use of distributors and resellers, particularly for international sales. Use of distributors and resellers makes us dependent, to some extent, on those third parties who will have the relationships with the end customers. We may not be successful in attracting qualified distributors and resellers. The use of distributors or resellers may not increase our sales and may result in channel and price conflict, customer confusion, and customer dissatisfaction, all of which could adversely impact our business and financial results. 35 o We may be unsuccessful in our efforts to obtain larger customers, and these efforts could adversely impact our current business. We currently have a diversified customer base with many relatively small customers. We are trying to expand our customer base by obtaining larger customers. Our efforts may not be successful. For example, larger customers may not want to deploy products like ours that operate in unlicensed frequencies. Our efforts could adversely impact our current business due to diversion of efforts and attention, our current customers not being pleased by our customer expansion efforts, and other reasons. o Our business depends in part on continued demand for broadband connectivity and access. The future success of our business is dependent in part upon the continued and increasing demand for high-speed, broadband connectivity and access, particularly with regard to the Internet, and for high-speed telecommunications products. The markets for such services may not grow at all or as expected. o We depend on our senior employees who are extensively involved in many aspects of our business, and our business would likely be harmed if we lose their services and cannot hire additional qualified personnel. Particularly because we are a relatively small company, our future operating results depend in significant part upon the continued contributions of senior management and key sales and technical personnel, many of who would be difficult to replace. Future operating results also depend upon the ability to attract and retain qualified management, sales, and technical personnel. Competition for these personnel is intense, and we may not be successful in attracting or retaining them. Only a limited number of persons with the requisite skills to serve in these positions may exist, and it may be difficult for us to hire the skilled personnel we need. We have experienced difficulty in attracting, hiring, and retaining experienced sales personnel with the right blend of skills for our company, and we may experience difficulty with other types of personnel in the future. o We have no key-man life insurance on any of our executive officers or other employees. Loss of the services of any of our key executive officers or other key employees could have a material adverse effect on our business, financial condition, and results of operations. The lack of key man insurance means that we would receive no insurance proceeds to buffer any such adverse effects. o We do not currently have a succession plan in place. We currently do not have a succession plan in place if our chief executive officer or other senior personnel were to become unable to perform their responsibilities due to illness, injury, termination of service, or other reasons. Loss of the services of our chief executive officer or other senior personnel could have a material adverse effect on our business, financial condition, and results of operations. Lack of a succession plan could exacerbate our difficulties in overcoming the issues created by the loss of services of our chief executive officer or other senior personnel due to uncertainty and responsibility transition issues. o Our limited internal manufacturing capacity makes us dependent on contract manufacturers, which could harm our sales and damage our reputation. Our internal manufacturing capacity, by design, is limited. We currently expect to rely on contract manufacturers to provide manufacturing of our complete products, components, and subassemblies. Our failure to obtain satisfactory performance from any contract manufacturers could cause us to fail to meet customer requirements, lose sales, and expose us to product quality issues. In turn, this could damage relationships with customers and have a material adverse effect on our reputation, business, financial condition, and results of operations. o We may be unable to engage contract manufacturers to manufacture our products which could force us to increase our internal manufacturing capacity. The technical nature of our products, the wide variety of our products, and the current uncertainty and historical fluctuation in our business may make contract manufacturers unwilling or reluctant to manufacture products for us at all or on acceptable terms. It may be difficult and time-consuming to engage a third-party manufacturer or manufacturers. If we are unable to engage a third-party manufacturer or manufacturers, we may have to increase our internal manufacturing capability. We may be unable to do so at all or without significant expense. o Because many of our components or products are provided by limited or single-source suppliers, we may not be able to obtain sufficient quantities to meet our business needs. Many of the components, subassemblies, and services necessary for the manufacture of our systems are obtained from a sole supplier 36 or a limited group of suppliers. We generally do not have any committed long-term supply agreements with these vendors. We have from time to time experienced an inability to obtain an adequate supply of required components and subassemblies. For example, in the third and fourth quarters of 2003 and to a lesser extent in the first quarter of 2004, we were unable to obtain sufficient components to manufacture certain of our products. Our inability to obtain these components in the quantities and at the times we desire could halt production, reduce our ability to meet customer demands, and reduce our sales. o Because many of our components or products are provided by limited or single-source suppliers, we may not be able to obtain sufficient quantities at prices to make our products profitably. Many of the components, subassemblies, and services necessary for the manufacture of our systems are obtained from a sole supplier or a limited group of suppliers. Our inability to obtain these items at the prices we desire could hurt our sales and lower our margins. o Because many of our components or products are provided by limited or single-source suppliers, we may have to purchase extra inventory that ultimately may not be used. Many of the components, subassemblies, and services necessary for the manufacture of our systems are obtained from a sole supplier or a limited group of suppliers. A supplier may decide to end the manufacture of a product and provide us with an opportunity to make a last-time buy of the product. In that situation, we have to estimate our future needs for that product. If we underestimate, we would have an insufficient supply to manufacture our products. If we overestimate, we may end up purchasing inventory that is not used or becomes obsolete and that ultimately we have to write off. That loss could adversely affect our financial results. o Our inability to receive sufficient quantities of limited or single source components or products could make us develop alternative sources, which could reduce our sales and may be time consuming and expensive if it can be done at all. In the event of a reduction or interruption in the supply of a key component, we may have to develop alternative sources for the component. We may not be able to locate an alternative supplier of certain products or components at all or at acceptable prices. Our inability to develop alternative sources for components could result in delays or reductions in product shipments, increase our costs, and reduce or eliminate our profit margins. Even if we are successful at developing alternative sources, a significant amount of time could be required to receive an adequate flow of components from the alternative source. o Our inability to receive sufficient quantities of limited or single source components or products could make us reconfigure our products, which could reduce our sales and may be time consuming and expensive if it can be done at all. In the event of a reduction or interruption in the supply of a key component, we may have to reconfigure our products to work with different components. Reconfiguration of our products to adapt to new components could entail substantial time and expense. We may be unable to reconfigure our products to work with new components. Even if we are successful at reconfiguring our products, a significant amount of time could be required to receive an adequate flow of replacement components. o Our reliance on limited or single-source suppliers makes us vulnerable to difficulties at those suppliers. The production of our products is vulnerable to production difficulties, quality variations, work stoppages, acts of God such as weather and fire, and other events beyond our control at our suppliers. All of these events could adversely affect the cost and timely delivery of our products. o Failure to maintain adequate levels of inventory could result in a reduction or delay in sales and harm our results of operations. In a competitive industry such as the wireless telecommunications equipment industry, the ability to effect prompt turnaround and delivery on customer orders can make the difference in maintaining an ongoing relationship with our customers. This competitive market condition requires us to keep inventory on hand to meet such market demands. Given the variability of customer requirements and purchasing power, it is difficult to predict the amount of inventory needed to satisfy demand. If we over- or under-estimate inventory requirements to fulfill customer needs, our results of operations could be adversely affected. If market conditions change swiftly, it may not be possible to terminate purchasing contracts in a timely fashion to prevent excessive inventory increases. In particular, increases in inventory could materially adversely affect operations if such inventory is ultimately not used or becomes obsolete. To date, we do not believe that we have materially over-estimated or under-estimated our inventory requirements. 37 o Our failure to effectively manage our recent and anticipated future growth could strain our management, infrastructure, and other resources and adversely affect our results of operations. We expect our recent and anticipated future growth to present management, infrastructure, systems, and other operating issues and challenges. These issues include controlling expenses, the development, introduction, marketing, and sales of new products, the development and application of consistent internal controls and reporting processes, the integration and management of a geographically and ethnically diverse group of employees, and the monitoring of third-party manufacturers and suppliers. Any failure to address these issues at a pace consistent with our business could cause inefficiencies, additional operational expenses and inherent risks, greater risk of billing delays, inventory write-downs, and financial reporting difficulties. o Difficulties in reducing our operating expenses could harm our results of operations. A material portion of our operating expenses is fixed. For example, approximately $3.0 million of our $4.4 million in operating expenses in the fourth quarter of 2004 (approximately 68%) were fixed expenses. If we experience a material reduction or delay in sales, we may find it difficult to reduce our operating expenses on a timely basis. Difficulties of this nature would adversely affect our financial condition and harm our operating results. o We typically permit flexible purchase order changes that may adversely affect our margins and operating results. We have typically permitted purchase orders to be modified or canceled with limited or no penalties. Any inability or failure to reduce actual costs or cancel supplier and contract manufacturing commitments in response to a customer modification or cancellation could adversely affect our gross margins and operating results. o Our business and financial results could be adversely affected by warranty claims. Products as complex as ours frequently contain undetected errors or defects, especially when first introduced or when new versions are released. This is especially a concern for us given our anticipated continuing introduction of new products. The occurrence of such errors or defects could result in products being returned under warranty for repair or replacement with us having to bear the associated expense. Although we maintain what we believe to be appropriate overall warranty reserves based on historical repair occurrences, an unanticipated high repair occurrence related to a specific product or number of products could make the reserves inadequate at any specific time and adversely affect our financial results. o Our business and financial condition could be adversely affected by product liability claims. Products as complex as ours frequently contain undetected errors or defects, especially when first introduced or when new versions are released. This is especially a concern for us given our anticipated continuing introduction of new products. The occurrence of such errors or defects could result in product liability claims being brought against us. Although we have not had any material product liability claims brought against us to date, such claims may be brought in the future and could adversely affect our financial results. o Our international business activities expose us to a number of risks not present in our United States operations, which we have little experience addressing. Our international business activities may carry additional risks and difficulties, including complying with complex foreign laws and treaties applicable to doing business and selling our products in other countries; availability of suitable export financing; timing and availability of export licenses; tariffs and other trade barriers; difficulties in staffing and managing foreign operations; difficulties in complying with foreign customs and general ways of doing business; and political and economic instability which may be more pronounced in less-developed areas. We have little experience in facing many of these issues and may not be able to address the issues in a manner to enable us to expand our international sales and operations. o Because of international sales and operations, we may be exposed to currency risk that could adversely affect our financial condition and results of operations. Some of our sales to date have been made to customers located outside the United States, and we expect that some of our future sales will continue to be to customers outside the United States. We are currently trying to increase our sales to customers outside the United States. Historically, our international sales have been denominated in United States dollars. For international sales that are denominated in United States dollars, a decrease in the relative value of foreign currencies could make our products less price-competitive and could have an adverse effect on our financial condition and results of operations. For any international sales denominated 38 in foreign currencies, a decrease in the value of the foreign currencies relative to the United States dollars could result in decreased margins from those transactions. o The laws and legal systems of foreign governments may limit our ability to enforce our rights against our customers. Our customer purchase and other agreements may be governed by foreign laws, which may differ significantly from United States laws. Also, the court systems and procedures in foreign countries may differ significantly from United States courts. Therefore, we may be limited in our ability to collect our accounts receivable, to enforce our other rights under such agreements, and to collect damages, if awarded. o Lack of relationships in foreign countries may limit our ability to expand our international operations and sales. In many cases, regulatory authorities in foreign countries own or strictly regulate local telephone companies. Established relationships between government-owned or government-controlled telephone companies and their traditional indigenous suppliers of telecommunications equipment often limit access to those markets. The successful expansion of our international operations in some markets will depend on our ability to form and maintain strong relationships with established companies providing communication services and equipment or other local partners in those regions. The failure to establish regional or local relationships could limit our ability to successfully market or sell our products in international markets and expand our international operations. o Governmental regulation affecting markets in which we compete or products we make or services we offer could adversely affect our business and results of operations. Radio communications and services are extensively regulated by the United States and foreign governments as well as by international treaties. To operate in a jurisdiction, we must obtain regulatory approval for our products and comply with differing and evolving standards and regulations. The delays inherent in this approval process may cause the cancellation, postponement, or rescheduling of the installation of communications systems by us and our customers. The failure to comply with regulations in a jurisdiction could result in the suspension or cessation of our ability to operate in that jurisdiction. New regulations or changes in the interpretation of existing regulations could require us to modify our products or services and incur substantial costs to bring our products or services into compliance. o Our products typically require regulatory approval before they can be commercially deployed. Our products must typically receive regulatory approvals before they can be commercially deployed. As a result, customers may require that we obtain these approvals before buying or agreeing to buy our products. Obtaining these approvals can be a long, expensive process. Delays in obtaining the necessary approvals could hinder market acceptance of our products, delay sales of our products, and adversely affect our ability to market those products. o Changes in governmental regulation could adversely affect our competitive position. Governmental laws and regulations applicable to our products and services evolve and change frequently. These changes could hurt our competitive position. For example, a point we often use in marketing our equipment products is that our products have been approved by the United States Federal Communications Commission, which sometimes can be a long, expensive process. The Federal Communications Commission proposed regulations that would relax this approval process and potentially allow more products to operate as approved products. If enacted, these regulations could make it easier for competitive products to qualify as products approved by the Federal Communications Commission. This could adversely affect our competitive position. Similarly, changes in the laws and regulations applicable to our service business could adversely affect our competitive position in that business. o We are subject to domestic and international authorities' allocations of the radio frequency spectrum. Equipment to support new systems and services can be marketed only if suitable frequency allocations are made available to telecommunications service providers. The process of allocating frequencies to service providers is typically expensive, complex, and lengthy. If service providers and others are delayed in deploying new systems and services, we could experience lack of orders or delays in orders. Similarly, failure by regulatory authorities to allocate suitable frequency spectrum could have a material adverse effect on our results. 39 o At time we rely on a limited number of customers for a material portion of our sales, which exposes us to risks relating to the loss of sales and credit risk. For the year ended December 31, 2004, no one customer accounted for more than 10% of our sales. However, we did have a number of substantial customers. We are currently attempting to increase its number of substantial customers which could increase our customer concentration risks. Our ability to maintain or increase our sales in the future will depend in part upon our ability to obtain additional orders from these customers. Our customer concentration also results in concentration of credit risk. An acquisition of one of our significant customers could cause any current orders to be delayed or canceled and no new orders being placed with us and could further concentrate our customer base. Adverse developments such as these with our significant customers could adversely impact our sales and financial results. o The continuing uncertainty in the telecommunications industry has caused us to maintain tight credit limits, which may be adversely affecting our sales. Many of our potential customers have faced or are facing financial difficulties due to the industry-wide uncertainty and depressed conditions. As a result, we have maintained what we believe to be stringent policies concerning the extension of credit to potential customers. We believe that these tight credit policies may be limiting our sales. As a result, we may loosen our credit policies, which may increase our sales but may also increase the likelihood of having bad debts from customers who can't or won't pay. o Given the relatively small size of many of our customers, they may not be able to pay for the products they purchase from us in the time period we expect or at all. We are subject to credit risk in the form of trade accounts receivable. We could face difficulties in receiving payment in accordance with our typical policies allowing payment within 30 days. Many of our customers are new and smaller service providers which do not have the financial resources of existing, larger service providers. Any delay, inability, or refusal to pay for purchases of our products may materially adversely affect our business. Difficulties of this nature have occurred in the past, and we believe they will likely occur in the future. o Our failure or inability to protect our intellectual property could adversely affect our business and operations, particularly in our equipment business which has otherwise relatively low barriers to entry. Our ability to compete depends in part on our ability to protect our intellectual property. The steps we have taken to protect our technology may be inadequate to prevent misappropriation of our technology and processes. Existing trade secret, trademark, and copyright laws offer only limited protection. Our patents could be invalidated or circumvented. Inability or failure to protect our intellectual property could remove a barrier to a competitor entering our WLAN business, which in general has lower barriers to entry than other businesses. o Laws of foreign countries where we do business may provide less intellectual property protection for our products, which could adversely affect our ability to compete in our price-sensitive business. The laws of certain foreign countries in which our products are or may be developed, manufactured, or sold may provide less protection for the intellectual property contained in our products. This may make the possibility of piracy of our technology and products more likely. This piracy could result in cheaper copies of our products being available on the market, which could adversely affect our business and financial results. o Our intellectual property rights do not prevent other companies from developing similar technology, which could be superior to ours. Other companies could develop products that use similar and perhaps superior technology. This technology could be developed in a way to not violate or infringe our intellectual property rights. As a result, our intellectual property rights provide no assurance that competing and perhaps superior products won't be developed, even if we are able to protect our intellectual property rights. o We may engage in litigation to protect our intellectual property, which could be costly, long, and distracting even if ultimately successful. If we believe our intellectual property rights are being infringed, we may commence litigation or take other actions to enforce our patents, protect our trade secrets and know-how, or determine the scope and validity of the patents or intellectual property rights of others. There can be no assurance that we would be successful in any such litigation. Any litigation could result in substantial cost and divert the attention of our management, which could harm our operating results and future operations. 40 o Much of our material intellectual property is not protected by patents, which may reduce the extent to which we can protect our intellectual property. We rely primarily on trade secret laws, confidentiality procedures, patents, copyrights, trademarks, and licensing arrangements to protect our intellectual property. While we do have a number of patents, the patents alone do not provide significant protection for much of our intellectual property used in our current equipment products. A significant portion of our proprietary technology is know-how, and employees with know-how may depart before transferring their know-how to other employees. The fact that much of our intellectual property is not covered by patents could reduce the extent to which we can protect our rights in that intellectual property. o Our products and operations could infringe on the intellectual property rights of others, which could have an adverse impact on our business. We would have to address any such infringements by seeking licenses, altering our products, or no longer selling the products. Any licenses we may be required to seek may be expensive or otherwise onerous. Similarly, changing our products may be costly, time-consuming, and impractical and could detract from the value of our products. A party making a claim of infringement could secure a judgment against us that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products. Any claim of infringement by a third party also could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. Any of these events could seriously harm our business. o We have limited experience operating our Ricochet(R) network and may be unable to operate it effectively, which could adversely impact our business. Our business historically has focused on selling wireless communications equipment. Our purchase of Ricochet Networks in June 2004 was our first major entry into providing wireless communication services - actual Internet connectivity instead of just providing the equipment to enable the connectivity. The services market is a very different market from the equipment market with different customer bases, methods of doing business, and other issues. We may not be successful at addressing the different issues and challenges relating to our services business. The services business may divert management's attention and financial and other resources from our equipment business. These issues could adversely impact our overall business and financial results. o Our entry into the wireless communications services business through Ricochet(R) could adversely impact our equipment business because those customers may perceive us as now competing with them. In our equipment business, we generally sell our products to companies that provide wireless communications connectivity and services. Those companies may be displeased with our purchase of Ricochet, as they may believe this purchase now makes us an actual or potential competitor to them. Therefore, these companies may be reluctant to, and may not, purchase further wireless communications equipment from us or may reduce their purchases. These reductions in purchases could adversely impact our overall business and financial results. o We expect to continue to generate losses as we continue to operate and possibly expand our Ricochet(R) network and service. Our Ricochet business has a history of losses, and we expect to incur significant additional operating losses in the future. We cannot predict when or if we will be able to achieve or sustain profitability for our Ricochet business. Previous owners of Ricochet similarly experienced difficulty in achieving or sustaining profitability of the business. If we are unable to achieve or sustain profitability or positive cash flow from Ricochet's operating activities, we may be unable to conduct that business effectively or competitively. o We may be unable to grow the user base and geographically expand the Ricochet(R) network due in part to the turbulent history of Ricochet. We are the fourth owner and operator of the Ricochet network in less than five years. The initial operator of the network commenced voluntary bankruptcy proceedings and, we believe, did not perform some of its agreements relating to the network, including agreements to expand the network. These ownership changes, bankruptcy, and related uncertainty and non-performance of agreements have damaged Ricochet's reputation and relationships that could be vital to the successful operation and possible expansion of the network. This history may cause users to be reluctant to subscribe to the Ricochet service and may cause third parties to be reluctant to contract with us relating to the operation and possible expansion of the network. These issues in general could adversely impact our 41 efforts to maintain and grow our user base and geographically expand the Ricochet network and our business in general. o The data access market in which Ricochet operates is highly competitive, which could adversely impact our ability to attract and retain users of our Ricochet(R) service. Competition in the market for data access and communications services is intense. A number of privately and publicly held communications and data access companies have developed or are developing new wireless and wired communications and data access services and products using technologies that may compete with ours. Some wireless data service companies have operated for many years and are already broadly deployed in major markets and well-recognized. Many of these companies have significantly greater resources, more established brand names, and larger customer bases than we do. In addition, several companies in various other industries, such as the satellite communications industry, may enter the market for mobile data access in the future. Further, we may face competition from Internet service providers that could offer Internet, online or data access services at prices lower than those offered by us. This competition could limit our ability to increase our user base, cause us to lose market share, and force us to reduce prices or incur additional selling, marketing and product development expenses, any of which could harm our business and our results of operations. o Different data access technologies may have advantages over our Ricochet(R) service, which could adversely impact our ability to attract and retain users of our service. The market for data access and communications services is characterized by rapidly changing technology, new product introductions, and evolving industry standards. A number of data access technologies, such as digital subscriber lines and cable modems, generally are able to provide faster data rates than our network. This may negatively affect user perceptions as to the attractiveness of our wireless service and result in pressure to reduce our prices. Increased data rates also may result in the widespread development and acceptance of applications that require a higher data transfer rate than our service provides. Our success will depend to a substantial degree on our ability to differentiate our service from competitive offerings and promote and sell the advantages of our service. Our inability to do this could cause us to be unable to increase our users and to lose users to competing service providers. o The success of our Ricochet business ultimately will depend on our ability to attract and retain sufficient users to our Ricochet(R) service. There may only be a limited market today for our Ricochet service, and we bear the risk that we will not sell enough subscriptions to our service or generate sufficient revenue for us to recoup the substantial expenditures we have made and will continue to make to operate and possibly expand our network. In addition, competition to provide wireless data access services of the type Ricochet offers could result in a high turnover rate among our users, which could have an adverse effect on our business and results of operations. o User demand for our Ricochet(R) service is unpredictable. We cannot reliably project potential demand for our Ricochet service, including whether there will be sufficient demand at the prices we need for that business to be profitable in either the markets in which we currently operate or in any markets into which we may expand. We cannot reliably predict demand because the market for mobile wireless data access services is in the early stages of development and it is not clear what combination of features is required for a service to gain broad user acceptance. Different possible features include cost, security, speed of connectivity, reliability, ease of use, and quality of service. How we address these issues is likely to affect the demand for our Ricochet service. o Our success depends, in part, on our ability to market our Ricochet(R) service. We believe that a substantial marketing effort is necessary to stimulate demand for our Ricochet service. We expect to be marketing and advertising our service to attract users to our service. From time to time, we may undertake special marketing plans or promotions for our service. We may engage channel partners or others to assist us with marketing our service. We cannot predict whether these marketing efforts will be successful and attract the users that we need to sustain our Ricochet business and operations. If we are unable to market our service successfully, or at all, our ability to attract users and generate revenues will be adversely affected and our business will be adversely impacted. o The success of our Ricochet(R) service depends, in part, on our ability to provide adequate customer support. We currently provide users of the Ricochet service with customer support. We cannot predict 42 whether users of our service will be satisfied with the customer support provided. If we are unable to provide adequate customer service, our ability to retain users could be adversely affected and our reputation and business could be adversely impacted. o We may be unable to attract users and compete with other data access providers if we do not expand our Ricochet(R) network coverage area. We currently are offering our Ricochet service in only two markets. We are actively considering the expansion of the Ricochet service into other markets. Competitive factors may require that we offer our service in additional markets as well as further develop our Ricochet network in the markets where we already are offering service. If we do not expand our network, we may be unable to attract users and compete with other data access providers, which may offer a competing service with a broader coverage area. Consequently, our business and financial results could be adversely impacted. o There are numerous contingencies involved in the possible expansion of our Ricochet(R) network, which if not resolved as expected could adversely impact our business. Before we decide to expand our Ricochet network to offer service to users in other targeted markets, we must consider a number of business, regulatory, and implementation issues, risks, and contingencies, many of which are not within our control. These issues include predicted costs of expansion, making an accurate assessment of potential markets, ability to use equipment installed by a previous operator of the Ricochet system, resolving any issues created by previous operators of the Ricochet system in the targeted market, cost and availability of network and circuit backhaul connections, any specific regulatory requirements relating to expansion into a given market, and delays or refusals by local governments or other third parties to enter into the agreements we need to deploy our network. We may not be able to address these issues and risks in a timely basis or at the cost that we have assumed or at all. Unfavorable or untimely resolution of these issues could adversely impact our business and financial results. o We may not effectively manage our expansion of the Ricochet(R) service into new markets, which could adversely impact our reputation and business. If we decide to expand our network, we must manage the design, deployment, installation, maintenance, operation, and support of a bigger mobile wireless data access network. If we are unable to manage this future growth effectively, or if we experience difficulties in managing the growth of our network, our business, results of operations, reputation and prospects for growth could be adversely impacted. o Our inability to obtain and retain attachment rights for our Ricochet(R) network equipment could adversely affect our ability to operate or expand our network. The operation and possible expansion of our network depend to a significant degree on our ability to obtain and maintain rights to attach our poletop radios to municipal or other facilities from local municipalities, public utilities, or other governmental or third-party entities. We may face delays or rejections in attempting to obtain the approvals and agreements necessary to install, attach, and maintain our network equipment. These difficulties may, in some cases, be exacerbated by issues created by former operators of the Ricochet network. Our inability to obtain these agreements in a timely manner and on terms acceptable to us, or at all, could force us to seek alternative sites on which to install network radios. In turn, use of these alternatives sites could significantly increase the time and cost required to operate or expand the network. o Our inability to obtain and retain space on rooftops or towers for our Ricochet(R) network equipment could adversely affect our ability to operate or expand our network. The operation and possible expansion of our network depend to a significant degree on our ability to lease space for our wired access points on building rooftops or on transmission towers owned by third parties. There is substantial competition from a variety of communications companies for these sites. Given this competition, obtaining the desired space can be a time-consuming, expensive process. If we are unable to identify and negotiate leases for the desired space in a timely manner and on terms favorable or acceptable to us, the operation and expansion of our network could be impaired. o Our ability to increase the number of users of the Ricochet(R) system and to expand the geographic reach of the Ricochet system could be limited by availability of necessary equipment. One of the assets we acquired when we purchased Ricochet was its significant inventory of modem, poletop radio, and wired access point equipment. We believe this inventory will enable continued operation and some amount of expansion of the Ricochet network without significant inventory costs. However, at some point, our 43 operation and possible expansion of the Ricochet network may require us to obtain additional inventory. Doing some may be a time-consuming, expensive process, if we are able to do so at all. Our inability to obtain this additional inventory at the times, in the quantities, and at the prices we desire could adversely impact our competitive position, our continued operation of the network, our plans to expand the network, and our general business. o Our Ricochet(R) service depends on a network connections provided by third parties, which are subject to disruption by events beyond our control. Our success will depend upon the adequacy, reliability, and security of the networks and circuits used to carry data within our Ricochet network and between our Ricochet network and corporate networks and the Internet. Because these connections used to carry the data are owned or controlled by third parties, we have no control over their quality and maintenance. Generally, we have limited recourse against the providers of these connections if the connection fails. If there is any failure of the Internet backbone, the network connecting our system to the Internet backbone, any circuit supporting the exchange of data between our wired access points or our network interface facilities, or any other link in the delivery chain, whether from operational disruption, natural disaster, or otherwise, our service could be interrupted and our reputation, business, and results of operations could be adversely affected. o The failure of our third-party contractors to maintain and repair the Ricochet(R) system equipment on a timely, efficient basis could adversely affect our reputation with our customers. We generally use third-party contractors to install and replace when needed our poletop radios and wired access points. The successful operation of our network is dependent on timely actions by these parties, which can be affected by numerous factors, including the supply of labor, materials and equipment, and prevailing weather conditions, all of which are beyond our control. Failure to repair the network in a timely fashion could adversely impact our relationship with our customers, our general reputation, and our business and prospects. o The Ricochet(R) network operates in unlicensed radio frequencies, which subject the network to harmful interference issues. Because the Ricochet network operates in frequency bands on a license-free basis, the Federal Communication Commission requires that we not cause harmful interference to licensed users in the band and we must accept any interference present in the bands. Excessive harmful interference could disrupt our service and discourage users from subscribing to or retaining our service. This could harm our reputation, affect our competitive position, and impair our business and results of operations. o We are a defendant in pending stockholder litigation that could materially and adversely affect our business. We are a party to four purported securities class action lawsuits. These lawsuits relate to the underwriters' alleged unlawful activities in connection with our initial public offering in February 2000. The lawsuits have been assigned along with approximately 1,000 other lawsuits making substantially similar allegations against hundreds of other publicly traded companies and their public offering underwriters to a single federal judge for consolidated pre-trial purposes. A tentative settlement of these lawsuits has been reached between the plaintiffs and affected companies. However, there can be no assurance that this or any other settlement will be consummated. These lawsuits are at an early stage and involve substantial uncertainty and, accordingly, we cannot predict the outcome. Defending lawsuits of this nature can be a lengthy and expensive process, and we may not prevail. Even if we prevail or the action is settled, the costs associated with these lawsuits could be substantial. In addition, these lawsuits could have other material adverse impacts on us, such as management distraction, adverse publicity, and adverse reaction from the financial markets, from our customers, or from actual or potential strategic partners. The difficulties and uncertainties relating to these lawsuits very likely may be increased and complicated because of the large number of pending similar cases and other parties involved. The outcome of these lawsuits could materially compromise our ability to continue to operate our business. o We have elected to participate in a proposed settlement of this pending stockholder litigation, but there can be no assurance that this settlement will be consummated. In June 2003, we elected to participate in a proposed settlement agreement with the plaintiffs in the pending stockholder litigation. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants. The parties to the proposed settlement submitted formal settlement documents to the court in June 2004 and requested preliminary approval by the court of the proposed settlement. Certain defendant underwriters in the settling cases opposed preliminary approval of the proposed settlement. In February 2005, the court 44 issued an order preliminarily approving the proposed settlement in all respects but one. The plaintiffs and the issuer defendants are in the process of assessing whether to proceed with the proposed settlement, as modified by the court. If the plaintiffs and the issuer defendants elect to proceed with the proposed modified settlement, they will submit revised settlement documents to the court. The underwriter defendants may then have an opportunity to object to the revised settlement documents. If the court preliminarily approves the proposed settlement, notice of the proposed settlement be sent to all proposed class members and a hearing will be scheduled at which any objections to the proposed settlement may be heard. Consummation of the proposed settlement remains conditioned on, among other things, receipt of both preliminary and final court approval. Given the number of companies and attorneys involved in these proceedings, we expect that any consummation of this settlement will be a lengthy process. There can be no assurance that this settlement will be consummated. o Proceeds under our directors' and officers' insurance policies may be unavailable or insufficient to cover our exposure under the proposed settlement of the pending stockholder litigation. The proposed settlement provides that the insurers of the participating issuer defendants will guarantee that the plaintiffs will recover at least $1 billion from the underwriter defendants. Any amounts necessary to fund that guarantee would come from participating issuers' directors' and officers' liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. However, we could be required to contribute to the costs of the settlement if our insurance coverage were insufficient to pay our allocable share of the settlement costs. We have a total of $15 million in directors and officers insurance coverage applicable to this litigation. We currently believe that this insurance coverage would be sufficient to cover our allocable share of the settlement costs. However, the insurance proceeds may be unavailable if the companies issuing those policies experience financial difficulties or are otherwise unable or unwilling to pay under those policies. Also, there can be no assurance that proceeds under those policies would be sufficient to cover our exposure under the settlement. o Our stock price has been volatile and may continue to be volatile. The market price of our common stock has been volatile and is likely to remain volatile. Some of the reasons for the volatility are within our control, but many are beyond our control and unrelated to our operating performance. We believe the following factors, among others, have contributed to our stock price volatility: o Our financial performance and results o Announcements by us concerning our relationships with our existing or new customers o Announcements by us concerning our completed and contemplated acquisitions and other strategic growth plans o Announcements by our customers o Our integration of Telaxis Communications and Young Design following the April 2003 combination of the two companies o Our integration of Terabeam Corporation, Ricochet Networks, Inc. and KarlNet, Inc. following the second quarter 2004 acquisition of those companies o Sales of shares of our stock that we issued in connection with our completed acquisitions or the perception that such shares may be sold o The relatively low number of shares of our stock that trade on an average day o The announcement of our filing an application to list our common stock on the Nasdaq SmallCap Market o The introduction of new products by us o The financial performance of our competitors o The introduction of new products by our competitors o Other announcements by our competitors o General conditions of the financial markets We expect these factors and others to continue to contribute to the volatility of our stock price. o Registration of the restricted stock held by one of our major stockholders could cause our stock price to fall. One stockholder, Concorde Equity, owned approximately 23% of our outstanding common stock on March 18, 2005. Concorde Equity is an investment company controlled by Robert E. Fitzgerald, a board member and our chief executive officer. Concorde Equity received this stock in a private placement in connection with the combination of Young Design and Telaxis in April 2003. As such, this stock has 45 been and is currently subject to restrictions on sale or transfer. In the merger agreement, we agreed to register this stock with the SEC in the first half of 2004, which, if completed, would enable this stock to be sold with much less restriction. We have not yet registered this stock. This registration and potential sale of large amounts of our common stock could cause our stock price to fall or prevent it from increasing. o Expiration of the lock-up period restricting the sale or transfer of stock held by our major stockholders could cause our stock price to fall. Funds controlled by Mobius Venture Capital and SOFTBANK Capital Partners currently hold some stock that cannot be sold or otherwise transferred due to contractual lock-up provisions. We believe these stockholders collectively owned approximately 32% of our outstanding common stock on March 18, 2005. Gary E. Rieschel, a co-founder of Mobius Venture Capital, currently sits on our board of directors. These stockholders, all former Terabeam stockholders, entered into lock-up agreements with us in connection with our acquisition of Terabeam. The lock-up agreements provide that these stockholders will not sell or transfer any of our stock issued to them pursuant to the merger for a period of at least 180 days after closing of the merger (through at least December 19, 2004). These stockholders may sell or transfer up to 50% of the shares issued to them during the period beginning December 19, 2004 and ending on the date that is 270 days after closing (March 19, 2005). These stockholders may sell or transfer up to an additional 25% of the shares issued to them during the period beginning March 19, 2005 and ending on the one-year anniversary of the closing (June 22, 2005). All restrictions under those agreements on the sale or transfer of the stock issued in the merger expire on June 22, 2005. Once the lock-up periods expire, these stockholders could sell their shares of our stock or distribute those shares to their investors who then could sell the shares. Based on the lock-up release schedule described above, half of the stock held by these stockholders as of March 18, 2005 was free from the lock-up restrictions and another 25% of that stock was released from the lock-up restrictions effective March 19, 2005. This expiration of these lock-up periods and potential distribution and/or sale of large amounts of our common stock could cause our stock price to fall or prevent it from increasing. o Future actual or potential stock distributions or sales by our major stockholders could cause our stock price to fall. Our major stockholders, Concorde Equity and funds controlled by Mobius Venture Capital, owned approximately 47% of our outstanding common stock on March 18, 2005. Our stock held by Concorde Equity is currently subject to restrictions on sale or transfer but portions of this stock can be (and have been) sold in the open market. Commencing April 2, 2005, the legal restrictions on sale or transfer of this stock will be reduced due to the length of time Concorde Equity held the stock. At that time, Concorde Equity will have more flexibility in selling shares of stock or distributing it to the investors in Concorde Equity. Similarly, as the stock controlled by Mobius is released from the lock-up restrictions, Mobius will have flexibility in selling shares of stock or distributing it to its investors. Because principals of Concorde Equity and Mobius are members of our board of directors, any sales or distributions by those stockholders will be reported publicly shortly after they occur. Actual or potential sales of this stock by these stockholders (or their investors) could cause our stock price to fall or prevent it from increasing for numerous reasons. For example, a substantial amount of our common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of our stock. Also, actual or potential distributions or sales by these stockholders could be viewed negatively by other investors because these stockholders are controlled by members of our board of directors and/or senior executives. o Future actual or potential sales of the stock we issued in connection with our acquisitions in 2004 could cause our stock price to fall. In the second quarter of 2004, we acquired three companies and issued approximately 12.6 million shares in connection with those acquisitions. Approximately 4.5 million of these shares were able to be sold immediately in the public markets. That number has increased as approximately 5.3 million shares that were originally subject to lock-up restrictions are now free from those restrictions. Additionally, commencing in May 2005, portions of another 1.0 million shares will be able to be sold in the public markets. Some of the shares issued in the acquisitions were acquired by former Terabeam Corporation option holders who exercised their options shortly before we acquired Terabeam. The exercise prices for some of those options were significantly lower than the recent market price of our common stock so holders of this stock may be willing to sell at lower prices. A substantial amount of this common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of our stock. 46 o Future actual or potential sales of the stock we privately issued prior to the initial public offering of our common stock in February 2000 could cause our stock price to fall. We believe that a number of our pre-IPO stockholders continue to hold their shares, and those stockholders may decide to sell their shares. A substantial amount of this common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of our stock. o Future actual or potential sales of the stock we issue upon exercise of stock options could cause our stock price to fall. As of March 18, 2005, we had options outstanding to buy approximately 1,607,621 shares of our common stock and may grant options or other stock grants relating to an additional approximately 130,250 shares of our common stock. We have filed registration statements with the SEC relating to the shares of our common stock that may be issued pursuant to the exercise of those outstanding stock options and stock options or other stock grants that we may grant in the future. In many cases, holders of those options could decide to exercise the options and immediately sell the shares. A substantial amount of this common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of our stock. Further, actual or potential sales of this stock could be viewed negatively by other investors because some of these stock options are held by our directors and senior executives. o Future actual or potential sales of the stock we issue upon exercise of stock warrants could cause our stock price to fall. On March 18, 2005, we had warrants outstanding to purchase approximately 784,991 shares of our common stock at a weighted average purchase price of $3.00 per share. Shares of our common stock received upon exercise of those warrants may, depending on the method of exercise, be immediately available for public sale. A substantial amount of this common stock becoming available (or being perceived to become available) for sale in the public market could cause the market price of our common stock to fall or prevent it from increasing, particularly given the relatively low trading volumes of our stock. o If we acquire other companies or product lines by issuing stock, the result may be dilutive to existing stockholders. In the second quarter of 2004, we acquired three companies and issued approximately 12.6 million shares in connection with those acquisitions. We may acquire other companies, businesses, and product lines in the future and may issue shares of our stock in connection with any such acquisitions. Any such issuances could significantly dilute the holdings of our current stockholders. o If we raise additional capital by issuing stock, the result may be dilutive to existing stockholders. Our board of directors may decide to issue additional equity securities in many situations without the need for any stockholder vote. Given the recent prices for our common stock, significant dilution to our stockholders could result if we raise additional funds by issuing equity securities. Further, these issuances may also involve issuing stock at a price per share below the current trading prices. For example, on December 8, 2003, we issued 500,000 shares of our common stock in a private placement at a price of $4.10 per share. That price was an approximately 14% discount from the last sale price of our common stock on that date of $4.75 per share. o The terms of any equity securities we may issue in the future may be better than the terms of our common stock. Our board of directors is authorized to create and issue equity securities that have rights, privileges, and preferences senior to those of our common stock. In many situations, our board could take these actions without the need for any stockholder vote. o We have limited capital resources and our prospects for obtaining additional financing, if required, are uncertain. Our future capital requirements will depend on numerous factors, including expansion of marketing and sales efforts, development costs of new products, the timing and extent of commercial acceptance for our products, our integration with Terabeam Corporation, Ricochet Networks, Inc., and KarlNet, Inc. and any other companies we may acquire, and potential changes in strategic direction. Additional financing may not be available to us in the future on acceptable terms or at all. If funds are not available, we may have to delay, scale back, or terminate business or product lines or our sales and marketing, research and development, acquisition, or manufacturing programs. Our inability to obtain 47 capital could seriously damage our business, operating results, and financial condition and cause our stock price to decline. o We may raise additional capital on terms that we or our stockholders find onerous, which could adversely affect our financial results and stock price. In the future, we may be able to raise additional capital only on terms that we find onerous. Alternatively, some of our stockholders may find the terms of our capital arrangements to be onerous. For example, a small number of stockholders expressed displeasure at our issuing shares in December 2003 in a private placement at a price below the current trading price of our stock. We may also obtain funds through arrangements with partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. The terms of our capital arrangements or the perceived onerous nature of those arrangements could adversely affect our financial results and stock price. Possible Implications of Cautionary Statements The items described above, either individually or in some combination, could have a material adverse impact on our reputation, business, need for additional capital, ability to obtain additional debt or equity financing, current and contemplated products gaining market acceptance, development of new products and new areas of business, cash flow, results of operations, financial condition, stock price, viability as an ongoing company, results, outcomes, levels of activity, performance, developments, or achievements. Given these uncertainties, investors are cautioned not to place undue reliance on any forward-looking statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. See Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations, Disclosures about Market Risk. Item 8. Financial Statements and Supplementary Data. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Registered Public Accounting Firm .................. 49 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets............................................... 50 Consolidated Statements of Operations..................................... 51 Consolidated Statement of Changes in Stockholders' Equity................. 52 Consolidated Statements of Cash Flows..................................... 53 Notes to Consolidated Financial Statements................................ 54 Schedule II - Valuation and Qualifying Accounts........................... 74 48 Report of Independent Registered Public Accounting Firm ================================================================================ TO THE BOARD OF DIRECTORS YDI WIRELESS, INC. Falls Church, Virginia We have audited the accompanying consolidated balance sheets of YDI WIRELESS, INC., (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 2004, 2003, and 2002. We also have audited the related financial statement Schedule II for the years ended December 31, 2004, 2003, and 2002. These consolidated financial statements and financial statement Schedule II are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement Schedule II based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of YDI WIRELESS, INC. as of December 31, 2004 and 2003 and the results of its operations and cash flows for the years ended December 31, 2004, 2003, and 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement Schedule II for the years ended December 31, 2004, 2003 and 2002, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As described in Note 2 to the financial statements, during 2002 the Company changed its method of accounting for the excess of acquired net assets over cost. /s/ Fitzgerald, Snyder & Co., P.C. McLean, Virginia February 25, 2005 49 YDI WIRELESS, INC. CONSOLIDATED BALANCE SHEETS December 31, (In thousands, except share data)
2004 2003 ---------- ---------- Assets Current assets: Cash and cash equivalents ....................................................... $ 35,368 $ 8,990 Investment securities - available-for-sale ...................................... 5,369 -- Accounts receivable, net ........................................................ 2,972 2,511 Refundable income taxes ......................................................... 151 226 Inventory ....................................................................... 7,442 3,134 Assets held for sale ............................................................ -- 790 Prepaid expenses ................................................................ 253 162 ---------- ---------- Total current assets ........................................................ 51,555 15,813 Property and equipment, net ........................................................ 2,511 1,747 Other Assets: Restricted cash ................................................................. 5,136 -- Investment securities - available-for-sale ...................................... -- 2,316 Investment securities - at cost ................................................. -- 311 Goodwill ........................................................................ 6,072 -- Intangible assets, net .......................................................... 11,919 483 Deposits ........................................................................ 91 49 ---------- ---------- Total other assets .......................................................... 23,218 3,159 ---------- ---------- Total assets ................................................................ $ 77,284 $ 20,719 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses ........................................... $ 6,965 $ 3,023 Deferred revenue ................................................................ 159 -- Current maturities of notes payable ............................................. 2,899 213 ---------- ---------- Total current liabilities ................................................... 10,023 3,236 Notes payable, net of current maturities ........................................... 1,270 1,298 ---------- ---------- Total liabilities ........................................................... 11,293 4,534 Commitments and contingencies Stockholders' Equity Preferred stock, $0.01 par value; authorized 4,500,000, none issued at December 31, 2004 and December 31, 2003 ....................................... -- -- Common stock, $0.01 par value, 100,000,000 shares authorized; 22,845,847 issued, 22,345,847 outstanding at December 31, 2004 and 14,179,882 issued and outstanding at December 31, 2003 ................................... 228 142 Additional paid-in capital ...................................................... 59,637 6,173 Retained earnings ............................................................... 7,277 8,673 Treasury stock .................................................................. (1,155) -- Accumulated other comprehensive income: Net unrealized gain (loss) on available-for-sale securities ................... 4 1,197 ---------- ---------- Total stockholders' equity .................................................. 65,991 16,185 ---------- ---------- Total liabilities and stockholders' equity .................................. $ 77,284 $ 20,719 ========== ==========
See accompanying notes to consolidated financial statements. 50 YDI WIRELESS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (In thousands, except share and per share data)
YDI Wireless, YDI Wireless, Young Inc. Inc. Design, Inc. ------------------------------------------- 2004 2003 2002 ----------- --------- ----------- Revenues .......................................................................... $ 22,897 $ 27,241 $ 20,304 Cost of goods sold ................................................................ 13,414 15,714 12,376 ----------- --------- ----------- Gross profit .................................................................. 9,483 11,527 7,928 Operating expenses: Selling costs ................................................................. 2,557 2,204 2,366 Research and development ...................................................... 2,949 1,704 424 General and administrative .................................................... 9,976 7,090 3,640 --------- --------- --------- Total operating expenses .................................................. 15,482 10,998 6,430 --------- --------- --------- Operating income (loss) ........................................................... (5,999) 529 1,498 Other income (expenses): Interest income ............................................................... 810 128 22 Interest expense .............................................................. (209) (149) (131) Equity method loss from unconsolidated subsidiaries ........................... -- -- (181) Contract cancellation income .................................................. -- -- 564 Gain on sale of Phazar stock .................................................. 3,882 -- -- Other income (expenses) ....................................................... 168 53 (10) --------- --------- --------- Total other income (expenses) ............................................. 4,651 32 264 --------- --------- --------- Income (loss) before income taxes, extraordinary gain, cumulative effect of accounting change, and minority interests ..................................... (1,348) 561 1,762 Provision (benefit) for income taxes .......................................... (2) 261 752 --------- --------- --------- Income (loss) before extraordinary gain, cumulative effect of accounting change, and minority interests ........................................................ (1,346) 300 1,010 Extraordinary gain (net of income taxes of $0) .................................... -- 4,347 89 Cumulative effect of accounting change (net of income taxes of $0) ................ -- -- 526 --------- --------- --------- Income (loss) before minority interests ........................................... (1,346) 4,647 1,625 Minority interests in (gains) losses of subsidiaries .......................... -- -- (63) --------- --------- --------- Net income (loss) ................................................................. $ (1,346) $ 4,647 $ 1,562 ========= ========= ========= Weighted average shares - basic ................................................... 19,792 12,571 9,375 ========= ========= ========= Earnings (loss) per share, basic .............................................. $ (0.07) $ 0.37 $ 0.17 ========= ========= ========= Weighted average shares - diluted ................................................. 19,792 12,841 9,375 ========= ========= ========= Earnings (loss) per share, diluted ............................................ $ (0.07) $ 0.36 $ 0.17 ========= ========= ========= Pro forma amounts assuming the new accounting method is applied retroactively: Income (loss) before income taxes, extraordinary gain, cumulative effect of accounting change and minority interests ................................... $ (1,346) $ 300 $ 1,010 ========= ========= ========= Net income (loss) ................................................................. $ (1,346) $ 4,647 $ 1,123 ========= ========= ========= Weighted average shares - basic ................................................... 19,792 12,571 9,375 ========= ========= ========= Earnings (loss) per share, basic .............................................. $ (0.07) $ 0.37 $ 0.12 ========= ========= ========= Weighted average shares - diluted ................................................. 19,792 12,841 9,375 ========= ========= ========= Earnings (loss) per share, diluted ............................................ $ (0.07) $ 0.36 $ 0.12 ========= ========= =========
See accompanying notes to consolidated financial statements. 51 YDI WIRELESS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except share data)
Accumulated Common Stock Additional Other --------------------- Paid-in Retained Treasury Comprehensive Shares Amount Capital Earnings Stock (Loss) Income Total ---------- ------- ---------- ---------- --------- ------------- -------- Balances, December 31, 2001 .............. 9,375,000 $ 94 $ 357 $ 2,504 $ -- $ (47) $ 2,908 Comprehensive income: Net income (loss) .................... -- -- -- 1,562 -- -- 1,562 Unrealized gain (loss) on investments -- -- -- -- -- 38 38 ---------- ------- ---------- ---------- --------- ----------- -------- Total comprehensive income (loss) ..... -- -- -- 1,562 -- 38 1,600 ---------- ------- ---------- ---------- --------- ----------- -------- Balances, December 31, 2002 .............. 9,375,000 $ 94 $ 357 $ 4,066 $ -- $ (9) $ 4,508 Merger with Telaxis ...................... 4,177,078 42 3,697 -- -- -- 3,739 Exercise of stock options and warrants ... 127,804 1 218 -- -- -- 219 Issuance of common stock, net of costs ... 500,000 5 1,901 -- -- -- 1,906 Distribution to Merry Fields members .... -- -- -- (40) -- -- (40) Comprehensive income: Net income (loss) .................... -- -- -- 4,647 -- -- 4,647 Unrealized gain (loss) on investments -- -- -- -- -- 1,206 1,206 ---------- ------- ---------- ---------- --------- ----------- -------- Total comprehensive income (loss) ... -- -- -- 4,647 -- 1,206 5,853 ---------- ------- ---------- ---------- --------- ----------- -------- Balances, December 31, 2003 .............. 14,179,882 $ 142 $ 6,173 $ 8,673 $ -- $ 1,197 $ 16,185 Stock issued for acquisitions ............ 12,609,237 126 59,552 -- -- -- 59,678 Treasury stock purchased ................. (4,683,183) (42) (6,458) -- (1,155) -- (7,655) Distribution to Merry Fields members .... -- -- -- (50) -- -- (50) Exercise of stock options and warrants ... 239,911 2 370 -- -- -- 372 Comprehensive income: Net income (loss) .................... -- -- -- (1,346) -- -- (1,346) Unrealized gain (loss) on investments, net of reclassification adjustments -- -- -- -- -- (1,193) (1,193) ---------- ------- ---------- ---------- --------- ----------- -------- Total comprehensive income (loss) .. -- -- -- (1,346) -- (1,193) (2,539) ---------- ------- ---------- ---------- --------- ----------- -------- Balances, December 31, 2004 .............. 22,345,847 $ 228 $ 59,637 $ 7,277 $ (1,155) $ 4 $ 65,991 =========== ======= ========== ========== ========= =========== ========
See accompanying notes to consolidated financial statements. 52 YDI WIRELESS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (in thousands)
YDI YDI Young Wireless, Wireless, Design, Inc. Inc. Inc. ---------- ---------- ---------- 2004 2003 2002 ---------- ---------- ---------- Cash flows from operating activities: Net income (loss) ............................................................... $ (1,346) $ 4,647 $ 1,562 Depreciation and amortization ................................................. 1,249 183 131 (Gain) loss on disposal of property and equipment ............................. (14) 24 -- Realized (gain) loss on trading and available-for-sale securities .................................................................... (3,521) (92) 4 Loss on write-down of investment in unconsolidated subsidiary ................. -- 36 -- Equity method loss from unconsolidated subsidiaries ........................... -- -- 181 Cumulative effect of accounting change ........................................ -- -- (526) Loss on write down of assets held for sale .................................... -- 200 -- Bad debts ..................................................................... 488 660 384 Deferred income tax ........................................................... -- 387 580 Extraordinary gain ............................................................ -- (4,347) (89) Inventory allowance ........................................................... 400 -- -- Changes in assets and liabilities affecting operations: Restricted cash ............................................................. 740 -- -- Accounts receivable, net .................................................... 153 (1,485) (1,189) Inventory ................................................................... (1,748) (748) (794) Deposits .................................................................... 2 (21) (3) Prepaid expenses ............................................................ 143 697 (432) Refundable income taxes ..................................................... 75 (226) -- Accounts payable and accrued expenses ....................................... (2,306) (71) 886 Deferred revenue ............................................................ 96 -- -- Contract deposit - nonrefundable ............................................ -- -- (551) Customer order deposits ..................................................... -- (9) -- Minority interests .......................................................... -- -- 63 ---------- ---------- ---------- Net cash provided by (used in) operating activities .................... (5,589) (165) 207 ---------- ---------- ---------- Cash flows from investing activities: Proceeds on disposal of property and equipment .................................. 964 425 -- Purchase of securities .......................................................... (790) (726) (686) Purchase of property and equipment .............................................. (37) (30) (16) Purchase of intangible assets ................................................... -- (585) -- Investment in capitalized software .............................................. (601) -- -- Sale of securities .............................................................. 34,616 242 11 Cash used for acquisitions ...................................................... (4,800) -- -- Cash received from acquisitions ................................................. 10,254 7,421 -- ---------- ---------- ---------- Net cash provided by (used in) investing activities ......................... 39,606 6,747 (691) ---------- ---------- ---------- Cash flows from financing activities: Distributions to Merry Fields members ........................................... (50) (40) -- Exercise of stock options ....................................................... 372 219 -- Issuance of common stock ........................................................ -- 1,906 -- Purchase of treasury stock ...................................................... (7,655) -- -- Issuance of notes payable ....................................................... -- 500 2,336 Repayment of notes payable ...................................................... (200) (1,116) (2,046) Repayment of capital leases ..................................................... (106) -- -- ---------- ---------- ---------- Net cash provided by (used in) financing activities ......................... (7,639) 1,469 290 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ............................... 26,378 8,051 (194) Cash and cash equivalents, beginning of period ..................................... 8,990 939 1,133 ---------- ---------- ---------- Cash and cash equivalents, end of period ........................................... $ 35,368 $ 8,990 $ 939 ========== ========== ========== Supplemental disclosure of cash flow information: Cash paid for interest .......................................................... $ 200 $ 149 $ 130 ========== ========== ========== Income taxes paid ............................................................... $ 4 $ 90 $ 163 ========== ========== ========== Stock issued in acquisitions .................................................... $ 59,678 $ 3,739 $ -- ========== ========== ==========
See accompanying notes to consolidated financial statements. 53 YDI WIRELESS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization Young Design, Inc. ("Young Design") was incorporated under the laws of the Commonwealth of Virginia on February 28, 1986 to engage in the business of manufacturing and selling equipment for use in transmission of data access on a wireless basis. On April 1, 2003, Young Design completed a strategic combination transaction (the "combination") with Telaxis Communications Corporation ("Telaxis"), pursuant to a definitive strategic combination agreement. On July 9, 2003, Telaxis reincorporated into Delaware and changed its name to YDI Wireless, Inc. ("YDI Wireless" or the "Company"). For financial reporting purposes, Young Design was treated as the acquiring company and the transaction was accounted for as a reverse merger since Young Design had voting control and majority representation on the Board of Directors after the merger with Telaxis. The financial statements contained herein are those of Young Design carried forward at historical cost. Merry Fields, LLC ("Merry Fields") was formed by certain shareholders of Young Design under the laws of the State of Delaware on August 11, 2000. Merry Fields owns the property and land leased to Young Design for its principal operations. In accordance with FIN 46R, Merry Fields, LLC is a Variable Interest Entity and therefore, the financial statements of Merry Fields are consolidated with the financial statements of YDI Wireless, Inc. Fixed assets with a carrying value of approximately $1.5 million secure the Merry Fields note payable of approximately $1.1 million. Effective May 13, 2004, the Company acquired KarlNet, Inc. ("KarlNet"), a wireless software development company. Effective June 22, 2004, the Company acquired Terabeam Corporation ("Terabeam"), a wireless telecommunications equipment company. Effective June 25, 2004, the Company acquired Ricochet Networks, Inc. ("Ricochet"), a wireless service provider. Each of these acquisitions was accounted for using the purchase method of accounting and the purchase price was allocated to the assets purchased and the liabilities assumed based on the estimated fair values at the date of acquisition. The financial results of these companies from and after the dates of acquisition are included in the financial results reported for the Company. During 2004, YDI began operating in two defferent business areas. The first business is the historic operations of YDI as a designer, manufacturer, and seller of wireless telecommunications equipment ("Equipment"). The second business is as a wireless internet service provider ("Services") in several major metropolitan cities. This business was acquired with the Ricochet Networks acquisition during the second quarter of 2004. There are no significant intercompany transactions which affect the revenue or expenses of either business. Summarized information as of December 31, 2004 and for year then ended is as follows:
Equipment Services Total Assets ................................. $ 73,312 $ 3,972 $ 77,284 Revenue ................................ $ 21,614 $ 1,283 $ 22,897 Operating income (loss) ................ $ (4,616) $ (1,383) $ (5,999)
2. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 54 Principles of Consolidation The consolidated financial statements include the accounts of YDI Wireless and its wholly owned subsidiaries and also Merry Fields, a consolidated affiliate. Merry Fields is a Variable Interest Entity, and therefore the financial statements of Merry Fields are consolidated with the financial statements of YDI Wireless, Inc. All significant inter-company balances and transactions have been eliminated in consolidation. Asset Impairment The Company periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Cash and Cash Equivalents The Company considers cash on hand, deposits in banks, money market accounts and investments with an original maturity of three months or less to be cash or cash equivalents. Restricted Cash As part of the Terabeam acquisition, YDI Wireless acquired $5.9 million in restricted cash. During 2004, $0.8 million was released as a result of contract payments. As of December 31, 2004, the restricted cash consists of $0.1 as collateral for letters of credit relating to lease obligations and $5.0 million held in an indemnification trust for the benefit of former Terabeam directors and officers. This trust was established by Terabeam in January 2002, and the funds are managed by an unrelated trustee. To date, no claims have been asserted against the trust funds. The trust expires in 2007 and any remaining funds will be distributed to the Company. Investments Investments consist of investments in corporate and various government agency debt securities, most of which mature in approximately one year or less and investments in marketable equity securities. The Company classifies the investments as available-for-sale. Management has the intent and ability to sell these securities for working capital purposes should the need arise. Such securities are stated at fair value using published market prices, with any material unrealized holding gains or losses reported, net of any tax effects, as accumulated other comprehensive income (loss), which is a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary, if any, are included in operations. As of December 31, 2003, the Company held unregistered common stock in a public company. These investments were recorded at cost. These investments were all sold as of December 31, 2004. Accounts Receivable The Company provides an allowance to account for amounts, if any, of its accounts receivable, which are considered uncollectible. The Company bases its assessment of the allowance for doubtful accounts on historical losses and current economic conditions. In most cases, accounts receivable are determined to be past due based on a contractual term of 30 days. The allowance for doubtful accounts was approximately $590,000 and $205,000 as of December 31, 2004 and 2003, respectively. Bad debt expense was approximately $488,000, $660,000, and $384,000 for the years ended December 31, 2004, 2003 and 2002, respectively. Inventory Inventory consists of electronic components and finished goods and is stated at the lower of cost or market. Cost is determined by the first-in, first-out method. 55 Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from two to seven years for personal property and 39 years for real property. Purchase Price Accounting The Company has grown considerably through combining with other businesses. The Company acquired Telaxis in 2003 and KarlNet, Terabeam and Ricochet Networks in 2004. These transactions were accounted for using the purchase method. Under the purchase method, the acquiring company includes the fair value of the assets of the acquired entity on its balance sheet. The determination of fair value necessarily involves many assumptions. The operations of the acquired entity are included in the Company's operations following the date of acquisition. Goodwill Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually at the reporting unit level, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As of December 31, 2004, no impairment losses have been recognized on any of the Company's acquired goodwill. Intangible Assets Intangible assets are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets". Intangible assets with finite lives are amortized over the estimated useful lives using the straight-line method. Intangible assets with finite lives are reviewed for impairment. An impairment loss on such assets is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually, or more frequently if there are indications that the asset is impaired. The impairment test for these assets consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset with an indefinite useful life exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. For either type of intangible asset, after an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes its new accounting basis. Subsequent reversal of a previously recognized impairment loss is prohibited. The Company's intangible assets include purchased technology and various assets acquired in business combination transactions. Assets acquired in business combination transactions include existing hardware technologies, trade names, existing software technologies, customer relationships and patents. Some of these assets have finite useful lives and some have indefinite useful lives. As of December 31, 2004, no impairment losses have been recognized on any of the intangible assets owned by the Company. Income Taxes The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The principal differences are net operating loss carry forwards, property and equipment, allowance for doubtful accounts, inventory reserves, and accruals. Merry Fields is a limited liability company and is taxed as a partnership. Accordingly, for Merry Fields, items of income, deductions, expenses and credits pass through directly to its members and are reported on their tax returns. 56 Revenue Recognition For the Equipment business, the Company recognizes revenue when a formal purchase commitment has been received, shipment has been made to the customer, collection is probable and, if contractually required, a customer's acceptance has been received. For the Services business, the Company recognizes revenue when the customer pays for and then has access to our network for the current fiscal period. Any funds the customer pays for future fiscal periods are treated as deferred revenue and recognized in the future fiscal periods for which the customer has access to our network. Excess of Acquired Net Assets Over Cost The excess of acquired net assets over cost, recognized in income in 2002, resulted from the acquisition of Zeus in 2001. The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets purchased and the liabilities assumed based on the estimated fair values at the date of the acquisition. The Company recognized $526,000 of excess acquired net assets over cost during 2002 as the cumulative effect of accounting change in accordance with SFAS No. 141, "Business Combinations." The excess of acquired net assets over cost, recognized in 2003, resulted from the acquisition of Telaxis. The acquisition was accounted for using the purchase method of accounting and the purchase price was allocated to the assets purchased and the liabilities assumed based on the estimated fair values at the date of the acquisition. The Company recognized the entire $4,347,000 of excess acquired net assets over cost as an extraordinary gain in the second quarter 2003 in accordance with SFAS No. 141, "Business Combinations" in conjunction with completing the acquisition on April 1, 2003. Research and Development Research and development costs are expensed as incurred. Stock based compensation In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 provides for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company continues to account for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. APB No. 25 provides that compensation expense relative to a company's employee stock options is measured based on the intrinsic value of the stock options at the measurement date. Effective for interim periods beginning after December 15, 2002, SFAS No. 148 also requires disclosure of pro-forma results on a quarterly basis as if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), but applied the intrinsic value method set forth in Accounting Principles Board Opinion No. 25. No compensation expense has been recognized in connection with options, as all options have been granted with an exercise price equal the fair value of the Company's common stock on the date of grant. The fair value of each option grant has been estimated as of the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions for 2004, 2003 and 2002: risk-free interest rate of 3.67%, 2.37% and 2.21%, expected life of 5 years, volatility 205%, 284% and 101% and dividend rate of zero percent, respectively. Using these assumptions, the fair value of the stock options granted in 2004, 2003 and 2002 was between $2.42 - $5.34, $0.96 - $5.29, and $1.21, respectively, which would be amortized as compensation expense over the vesting period of the options. If the Company had elected to recognize compensation expense based on the fair value at the grant dates, consistent with the method prescribed by SFAS No. 123, net income per share would have been changed to the pro forma amount indicated below: 57
(in thousands, except per share amounts) December 31, ------------------------------------------------ 2004 2003 2002 ----------- ----------- ----------- Net income (loss) attributable to common stockholders, as reported: ............................................. $ (1,346) $ 4,647 $ 1,562 Less: Total stock based employee compensation expense determined under the fair value based method for all awards ................................................... 563 1,213 185 ----------- ----------- ----------- Pro forma net income (loss) attributable to common stockholders ............................................. $ (1,909) $ 3,434 $ 1,377 =========== =========== =========== Basic net income (loss) per common share, as reported ........ $ (0.07) $ 0.37 $ 0.17 =========== =========== =========== Basic net income (loss) per common share, pro forma .......... $ (0.10) $ 0.27 $ 0.15 =========== =========== =========== Diluted net income (loss) per common share, as reported ...... $ (0.07) $ 0.36 $ 0.17 =========== =========== =========== Diluted net income (loss) per common share, pro forma ........ $ (0.10) $ 0.27 $ 0.15 =========== =========== ===========
Advertising costs Advertising costs are expensed when incurred. Advertising expense totaled approximately $43,000, $9,000 and $23,000 for 2004, 2003 and 2002, respectively. Shipping and Handling Costs Shipping and handling are charged to customers and included in both revenue and costs of goods sold on the Consolidated Statements of Operations. Comprehensive Income The Company reports comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." During the years ended December 31, 2004, 2003 and 2002, the Company had approximately $(1,193,000), $1,206,000 and $38,000, respectively, of unrealized gains (losses) on available-for-sale investments, net of income taxes of $0, $0 and $26,000. All of the $1,193,000 unrealized loss for 2004 represents a reclassification adjustment for gains realized in net income. Corporate Structural Changes On July 9, 2003, YDI effected a net reverse 1-for-4 split of its outstanding common stock. Fair Value of Financial Instruments The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and notes payable approximate fair value. Investment securities available for sale are recorded at estimated fair value based on quoted market prices where available. As of December 31, 2003, the estimated fair value of investment securities - at cost was approximately $1.0 million. This estimated fair value was calculated by using a 15% discount from the published market values for comparable registered stock. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS 123R, a revision of SFAS 123, "Accounting for Stock-based Compensation." SFAS 123R requires public companies to recognize expense associated with share-based compensation arrangements, including employee stock options, using a fair value-based option pricing model, and eliminates the alternative to use Opinion 25's intrinsic value method of accounting for share-based payments. In accordance with the new pronouncement, the Company plans to begin recognizing the expense associated with its share-based payments, as determined using a fair value-based method, in its statement of operations beginning on July 1, 2005. Adoption of the expense provisions of the statement may have a material impact on the Company's results of operations. The standard allows three alternative transition methods for public companies: modified prospective application without restatement of prior interim periods in the year of adoption; modified retrospective application with restatement of prior interim periods in the year of adoption; and modified retrospective application 58 with restatement of prior financial statements to include the same amounts that were previously included in pro forma disclosures. The Company has not determined which transition method it will adopt. During November 2004, the FASB issued SFAS No. 151 "Inventory Costs." This statement clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and wasted material (spoilage). The statement requires that these above-mentioned costs be accounted for as current period charges. The adoption of this pronouncement had no material impact on the Company's results of operations, financial position or cash flows in the reported periods. 3. Investment Securities As part of the Terabeam acquisition, YDI Wireless acquired approximately $34.2 million in marketable securities. These securities are fixed income bonds from corporate and United States government sponsored entities (GSEs). It is the Company's intention to use these securities to meet our cash needs. The Company owned 199,618 unregistered shares and 270,632 registered shares as December 31, 2003 and 184,618 unregistered shares and 238,893 registered shares as of December 31, 2002 of Phazar Corporation. All Phazar shares were sold during the fourth quarter of 2004. Cost basis of investments are determined for securities purchased through a securities broker at cost of the security plus acquisition costs. Cost basis of securities acquired with the purchase of a company, such as with Terabeam, are based on quoted market prices on the date of acquisition. Gain or loss on securities is computed using cost basis of First-in, First-out (FIFO) basis. Investment securities are summarized as follows:
December 31, ----------------------------------------------------------- (in thousands) 2004 2003 --------------------------- --------------------------- Carrying Carrying Cost Basis Value Cost Basis Value ----------- ----------- ----------- ----------- Available-for-sale: Fixed income ............................... $ 5,221 $ 5,225 $ 600 $ 609 Equity investments ......................... 144 144 10 10 Phazar - registered ........................ -- -- 509 1,697 ----------- ----------- ----------- ----------- 5,365 5,369 1,119 2,316 At-cost: Phazar - unregistered ...................... -- -- 311 311 ----------- ----------- ----------- ----------- Total ...................................... $ 5,365 $ 5,369 $ 1,430 $ 2,627 =========== =========== =========== ===========
The net gains (losses) on investment securities included in earnings are as follows:
(in thousands) 2004 2003 2002 ----------- ----------- ----------- Equity securities .......................... $ 3,521 $ 92 $ 4 =========== =========== ===========
The gain of $3,521,000 for 2004 is net of a recorded loss of $236,000 due to a decline in value deemed to be other than temporary on investment securities - - available-for-sale. Proceeds from the sale of investment securities were $34,616,000, $242,000, and $11,000 for the years ended December 31, 2004, 2003, and 2002, respectively. 59 4. Inventory Inventory consisted of the following (in thousands):
December 31, -------------------------- 2004 2003 ---------- ---------- Raw Materials .............................................................. $ 1,968 $ 574 Work in process ............................................................ 124 26 Finished goods ............................................................. 5,950 2,734 ---------- ---------- 8,042 3,334 Allowance for excess and obsolescence ...................................... (600) (200) ---------- ---------- Net Inventory .............................................................. $ 7,442 $ 3,134 ========== ==========
5. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, which range from two to seven years for personal property and 39 years for real property. Property and equipment consisted of the following (in thousands):
December 31, -------------------------- 2004 2003 ---------- ---------- Land ....................................................................... $ 522 $ 522 Building and improvements .................................................. 1,377 1,377 Automobiles ................................................................ -- 22 Equipment .................................................................. 1,056 146 ---------- ---------- 2,955 2,067 Less: accumulated depreciation ...................................... (444) (320) ---------- ---------- Property and equipment, net ................................................ $ 2,511 $ 1,747 ========== ==========
Depreciation expense totaled approximately $240,000, $72,000, and $120,000, respectively, for the periods ended December 31, 2004, 2003, and 2002. 6. Goodwill As of December 31, 2004, goodwill consisted of the following (in thousands): Acquisition Amount ----------- ------ KarlNet .................................. $ 2,490 Terabeam* ................................ 3,382 Ricochet ................................. 200 --------- Goodwill ................................. $ 6,072 ========= *As of December 31, 2004, we have $3.3 million of contingent liabilities remaining from the Terabeam acquisition valued at the net present value of contractual lease payments. As these liabilities are settled, goodwill will be adjusted to reflect the difference in the contingent liabilities during the one year allocation period. 60 7. Intangibles Schedule of Non-Amortizable Assets During 2004, the Company capitalized $601,000 of costs related to internally developed software that is technologically feasible but not yet saleable. Prior to the KarlNet acquisition in 2004, YDI did not have any internally developed software costs.
(in thousands) December 31, ----------------------------- 2004 2003 ----------- ----------- Capitalized software - not placed in service .............................. $ 681 $ -- Trade names - no identifiable useful life ................................. 3,750 -- ----------- ----------- $ 4,431 $ -- =========== ===========
Schedule of Amortizable Assets
(in thousands) December 31, ----------------------------- 2004 2003 ----------- ----------- Capitalized software - placed in service ............................... $ 1,225 $ -- Patents, customer relationships and other technologies with identifiable useful lives ....................................... 7,394 594 ----------- ----------- 8,619 594 Less: accumulated amortization .................................. (1,131) (111) ----------- ----------- Amortizable intangible assets, net ..................................... $ 7,488 $ 483 =========== ===========
Amortization is computed using the straight-line method over the estimated useful life, based on the Company's assessment of technological obsolescence, of the respective assets. Amortization expense for the years ended December 31, 2004, 2003, and 2002 totaled approximately $1,020,000, $111,000, and $11,000, respectively. 8. Notes Payable Notes payable consisted of the following at December 31:
(in thousands) 2004 2003 ----------- ----------- In May 2002, Merry Fields executed a loan consolidation and refinance agreement with a financial institution for a term loan of $1,565,374 collateralized by the building and land with a book value of $1,527,362 in Falls Church, Virginia. The loan requires monthly payments of $18,781 consisting of principal and interest. The loan bears interest at 7.34% per annum and matures on May 31, 2012 ............................ $ 1,241 $ 1,406 The Company assumed convertible notes as part of the Terabeam acquisition. The convertible notes' aggregate principal amount totals $2.5 million. The notes mature on July 12, 2005, with interest only payments before then at an annual rate of 6.75% in quarterly installments. At the discretion of holders of the notes, the notes are convertible into shares of the Company's common stock beginning in July 2004, based on a value of $27.27 per share of common stock or 91,675 shares in the aggregate. If the conversion option is not elected prior to July 12, 2005, the holders will receive the principal of $2.5 million in cash on the maturity date. The Company has classified the convertible notes as a short-term liability on the accompanying balance sheet ............................... 2,542 -- In June 2003, the Company issued a $300,000 note as part of the consideration for the acquisition of Ricochet Networks. The loan requires monthly payments of interest and principal of $9,401. The note bears interest at 8.00% per annum and matures on June 1, 2007 ...................................... 255 -- Other ........................................................... 131 105 ----------- ----------- 4,169 1,511 Current portion ........................................ (2,899) (213) ----------- ----------- $ 1,270 $ 1,298 =========== ===========
61 Future principal payments are as follows: 2005............... $ 2,899 2006............... 248 2007............... 228 2008............... 207 2009............... 249 Thereafter......... 338 ---------- $ 4,169 ========== 9. Income Taxes The provision (benefit) for income taxes is summarized as follows (in thousands):
December 31, ---------------------------------------------- 2004 2003 2002 ---------- ---------- ---------- Current tax expense (benefit) Federal .............................. $ -- $ (112) $ 145 State ................................ (2) (14) 27 ---------- ---------- ---------- (2) (126) 172 ---------- ---------- ---------- Deferred tax expense (benefit) Federal .............................. -- 344 489 State ................................ -- 43 91 ---------- ---------- ---------- -- 387 580 ---------- ---------- ---------- $ (2) $ 261 $ 752 ========== ========== ==========
The components of the net deferred tax assets (liabilities) at December 31, 2004 and 2003 are as follows (in thousands):
December 31, ---------------------------- 2004 2003 ---------- ---------- Current net deferred tax assets (liabilities): Allowance for doubtful accounts ................... $ 230 $ 82 Inventory valuation allowance ..................... 234 80 Unrealized (gain) loss on investments ............. -- (482) Accruals .......................................... 407 270 Net operating loss carryforwards .................. 712 177 ---------- ---------- 1,583 127 Valuation allowance ................................... (1,583) (127) ---------- ---------- $ -- $ -- ========== ========== Non-current net deferred tax assets (liabilities): Intangible and depreciable assets ................. $ (69) $ (93) Accruals .......................................... -- 93 ---------- ---------- (69) -- Valuation allowance ................................... 69 -- ---------- ---------- $ -- $ -- ========== ==========
62 The provision for income taxes is different from that which would be obtained by applying the statutory Federal income tax rate to income before income taxes, extraordinary gain, cumulative effect of accounting change and minority interests. The items causing this difference are as follows (in thousands):
2004 2003 2002 --------- --------- --------- Tax expense (benefit) at U.S. statutory rate ............ $ (472) $ 191 $ 599 State income taxes ...................................... (54) 22 70 Equity method loss ...................................... -- -- 69 Merry Fields, LLC income ................................ (55) (49) (28) Change in valuation allowance ........................... 1,387 127 -- Permanent tax differences ............................... (780) -- -- Other differences ....................................... (28) (30) 42 --------- --------- --------- Provision (benefit) for income taxes .................... $ (2) $ 261 $ 752 ========= ========= =========
The income tax benefit for the year relates to minimum state tax payments. The Company is in a tax loss position and cannot accurately predict when it will generate taxable income to utilize these tax assets. The Company has approximately $50.1 million in net operating losses available through 2023. 10. Commitments and Contingencies Leases The Company has various operating leases for equipment, office and production space. These leases generally provide for renewal or extension at market prices. In August 2000, Merry Fields executed a lease agreement with Young Design for the lease of the building in Falls Church, Virginia. The lease commenced on January 1, 2001 and terminates on December 31, 2010. The lease provides for base monthly rent payments of $20,625 with a 3% fixed annual increase after the base year. All intercompany rental income and expense under the lease agreement have been eliminated in consolidation. Rent expense, excluding rent paid to Merry Fields, for the years ended December 31, 2004, 2003, and 2002 was approximately $753,000, $463,000, and $151,000, respectively. Schedule of Commercial Commitments Aggregate maturities of the operating leases, exclusive of the Merry Fields lease, are as follows as of December 31, 2004 (in thousands): 2005.............. $ 1,486 2006.............. 1,102 2007.............. 814 2008.............. 309 2009.............. 304 Thereafter........ 313 ----------- $ 4,328 =========== In addition, the Company has accrued liabilities of $3.4 million relating to real estate leases for currently unutilized space. Substantially all of this amount relates to the real estate leases acquired in connection with the acquisition of Terabeam. The Company acquired 27 Terabeam real estate leases with aggregate payments due under those leases as of June 22, 2004 of $6.6 million. The Company has been negotiating the termination of those leases (see Note 6). The Company settled eight of those leases during 2004 for one-time payments. 11. 401(k) - Retirement Plan The Company has a 401(k) retirement plan covering all employees who meet certain minimum eligibility requirements. Each year employees can elect to defer the lesser of 15% of earned compensation or the maximum 63 amount permitted by the Internal Revenue Code. The Company makes contributions to the plan at its discretion. The Company made no contribution to the plan for the periods ended December 31, 2004, 2003, or 2002. 12. Stockholders' Equity The warrant and option numbers shown in this footnote reflect the adjustments to those warrants and options due to the April 1, 2003 combination of Young Design and Telaxis and the reverse stock split effected on July 9, 2003. Stock Warrants Prior to the Telaxis IPO, Telaxis issued warrants in conjunction with several debt offerings. Of the warrants issued, 389,626 remain outstanding as of December 31, 2004. During June 2004, YDI issued 50,000 warrants with a purchase price of $4.75. The warrants expire in June 2005. All of these warrants were outstanding as of December 31, 2004. In conjunction with the Terabeam acquisition, YDI assumed 574,706 warrants with purchase prices ranging from $0.40 to $17.05. The expiration dates of these warrants were between August 2004 and May 2008. Of the warrants assumed, 401,839 were outstanding as of December 31, 2004. In summary, the Company has issued warrants for its common stock as follows:
Warrants Outstanding ----------------------------------- Per Share Number of Shares Exercise Price ---------------- --------------- Outstanding warrants December 31, 2002 -- $ -- Telaxis warrants ......................... 432,338 $ 2.08 - 8.64 Warrants exercised ....................... (18,498) $ 2.08 Warrants expired/canceled ................ (22,421) $ 2.08 - 8.64 Outstanding December 31, 2003 ................. 391,419 $ 2.08 Warrants issued........................... 624,706 $ 0.40 - 17.05 Warrants exercised ....................... (57,713) $ 0.40 -2.27 Warrants expired/canceled ................ (116,947) $ 0.40 - 5.68 ------------- -------------- Outstanding December 31, 2004 ................. 841,465 $ 0.40 - 17.05 ============= ==============
Expiration dates of warrants are as follows: Number of Expiration Date Warrants ----------------------- ------------- 2005................... 335,721 2006................... 308,278 2007................... 142,466 2008................... 55,000 Stock Options Issued The Company has stock option plans that provide for the granting of options to employees, directors, and consultants. The plans permit the granting of options to purchase a maximum of 1,150,000 shares of common stock at various prices and require that the options be exercisable at the prices and at the times as determined by the Board of Directors, not to exceed ten years from date of issuance. As of December 31, 2004, 621,250 options are available for issuance under these plans. 64 A summary of the option activity is as follows:
Options Outstanding --------------------------------------- Per Share Exercise Number of Shares Price ---------------- ------------------ Outstanding December 31, 2002 ................................ 444,688 $ 1.60 Options granted and assumed in conjunction with merger... 766,432 $ 1.60 - 161.00 Options exercised ....................................... (119,204) $ 0.92 - 5.30 Options expired/canceled ................................ (322,187) $ 1.52 - 4.00 -------------- ---------------- Outstanding December 31, 2003 ................................ 769,729 $ 0.92 - 161.00 Options granted ......................................... 815,350 $ 2.47 - 6.99 Options exercised ....................................... (182,198) $ 0.96 - 5.76 Options expired/canceled ................................ (231,247) $ 1.32 - 161.00 -------------- ---------------- Outstanding December 31, 2004 ................................ 1,171,634 $ 0.92 - 161.00 === ==== ============== ================
A summary of the stock options outstanding and exercisable as of December 31, 2004 is as follows:
Options Outstanding Options Exercisable - ----------------------------------------------------------- ------------------------- Weighted Average Weighted- Weighted Remaining Weighted- Average Average Number Life Average Number Exercise Exercise Price Outstanding (years) Exercise Price Outstanding Price - ----------------------------------------------------------- ------------------------- $ 0.00 - 2.00 156,754 2.59 $ 1.46 149,924 $ 1.48 $ 2.01 - 4.00 706,782 4.96 $ 2.63 256,782 $ 2.82 $ 4.01 - 6.00 108,951 5.44 $ 5.00 79,781 $ 5.06 $ over 6.00 199,147 4.36 $ 14.19 76,347 $ 26.46 - ----------------------------------------------------------- -------------------------
65 13. Earnings (Loss) per Share:
(in thousands except per share data) December 31, ------------------------------------------- 2004 2003 2002 ---------- ---------- ---------- Numerator Income (loss) from continuing operations ............................ $ (1,346) $ 300 $ 947 Extraordinary item .................................................. -- 4,347 89 Change in accounting ................................................ -- -- 526 ---------- ---------- ---------- Net income (loss) ................................................... $ (1,346) $ 4,647 $ 1,562 ========== ========== ========== Denominator - weighted average shares: Denominator for basic earnings (loss) per share ..................... 19,792 12,571 9,375 Dilutive effect of stock options .................................... -- 270 -- ---------- ---------- ---------- Denominator for diluted earnings (loss) per share ................... 19,792 12,841 9,375 ========== ========== ========== Basic earnings (loss) per share from continuing operations ......................................................... $ (0.07) $ 0.02 $ 0.10 Basic earnings per share - Extraordinary item ....................... -- 0.35 0.01 Basic earnings per share - change in accounting ..................... -- -- 0.06 ---------- ---------- ---------- Basic earnings (loss) per share ..................................... $ (0.07) $ 0.37 $ 0.17 ========== ========== ========== Diluted earnings (loss) per share before extraordinary item and change in accounting ......................... $ (0.07) $ 0.02 $ 0.10 Diluted earnings per share- Extraordinary item ...................... -- 0.34 0.01 Diluted earnings per share- Extraordinary item and change in accounting ................................................ -- -- 0.06 ---------- ---------- ---------- Diluted earnings (loss) per share ................................... $ (0.07) $ 0.36 $ 0.17 ========== ========== ==========
14. Concentrations The Company maintains its cash, cash equivalent, and restricted cash balances in several banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 per bank. At December 31, 2004, and 2003, the uninsured portion totaled approximately $41.4 million and $8.8 million, respectively. As of December 31, 2004, accounts receivable from one customer totaled approximately $590,000, which represents 16% of total accounts receivable. As of December 31, 2003, no customers owed more than 10% of the total accounts receivable. During the years ended December 31, 2004, 2003, and 2002, no customers accounted for more than 10% of sales. For the years ended December 31, 2004, 2003, and 2002 sales to customers outside of the United States and Canada accounted for approximately 18%, 16%, and 10%, respectively, of revenues. As of December 31, 2004, the Company had a single employee and minor assets located outside of the United States.
% of Company Sales ----------------------------------------- Region 2004 2003 2002 --------------------------------------------- ---------- --------- -------- North America (US and Canada) ............... 82% 84% 90% Latin America (Mexico, Central, South America, and Caribbean) ................... 4% 7% 4% Asia Pacific (China, Taiwan, Japan, other Pacific territories, Australia, New Zealand) .................................. 4% 2% 1% Europe (Western, Eastern, Russia) ........... 5% 3% 2% Middle East and Africa (a.k.a. E.M.E.A.) .... 5% 4% 3%
66 15. Acquisitions Telaxis On April 1, 2003, Young Design merged with Telaxis. For accounting and financial reporting purposes, Young Design was treated as the acquiring company and the transaction was accounted for as a reverse merger. Young Design had voting control and majority representation on the Board of Directors after the merger with Telaxis. Young Design merged with Telaxis for various strategic reasons including the fact that Telaxis was a publicly traded vehicle providing a potential source of capital and liquidity. The cost of the April 1, 2003 acquisition consisted of 4,177,078 shares of common stock and 695,976 options valued at $3.7 million and acquisition costs of approximately $0.1 million. On April 1, 2003, Telaxis had net assets with a fair market value of $8.1 million. Accounting for the transaction as a reverse merger resulted in an excess of net assets over book value of $4.3 million. The assets and liabilities of Telaxis were recorded at fair value under the purchase method of accounting. As the fair value of the assets acquired exceeded the purchase price, the long-lived assets were reduced to zero and negative goodwill was recorded. The valuation of the stock was based on the average closing price for the five days preceding the announcement of the acquisition. Telaxis' condensed balance sheet at fair value is as follows: (in thousands) April 1, 2003 ------------- Cash and cash equivalents................ $ 7,421 Property and equipment (held for sale)... 1,405 Other assets............................. 426 Liabilities.............................. (1,166) ------------- Net assets acquired...................... $ 8,086 ============= KarlNet The Company acquired 100% ownership of KarlNet, Inc., a wireless software development company. The purchase price consisted of $1.8 million in cash and 1,000,000 shares of YDI stock. The shares were valued at $4.27 each, which was the average share price from May 12 - 14, 2004. The definitive acquisition agreement was signed and the acquisition was completed on May 13, 2004. Prior to the acquisition, KarlNet was an important supplier to YDI. YDI decided to purchase KarlNet to secure access to KarlNet's software source code used in YDI's current products as well as help us reduce our future costs of goods sold. The operations of KarlNet are included in the consolidated statement of operations after the acquisition date. The cost of the acquisition is as follows: (in thousands) Cash .............................. $ 1,800 YDI stock ......................... 4,270 ------------ Total consideration ............... $ 6,070 ============ In addition, the definitive agreement for the acquisition of KarlNet provided for various contingent consideration. YDI will pay up to an additional $2.5 million over the two years following closing based on achievement of certain milestones and compliance with other conditions. As of December 31, 2004, no events have occurred that have triggered the obligation to pay any of the contingent consideration. Pursuant to the provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), the Company believes the payment of any contingent consideration will be treated as additional cost of the acquisition as the contingencies are resolved. 67 The final purchase price allocation is based on the fair value of KarlNet's balance sheet as of May 13, 2004 and is summarized as follows: (in thousands) Cash................................ $ 99 Accounts receivable, net............ 750 Inventory........................... 650 Property and equipment.............. 99 Other assets........................ 50 Identifiable intangible assets...... 2,305 Goodwill............................ 2,490 Liabilities......................... (373) ------------ Total consideration................. $ 6,070 ============ The amount allocated to identifiable intangible assets was based on the present value of estimated future cash flows of the specific identifiable intangible assets. Intangible assets, with finite lives, are being amortized over their useful life, after they are placed in service. (in thousands) Goodwill................... $ 2,490 Not amortizable for financial or tax purposes Software in development.... 80 Amortizable after placed in service Customer relationships..... 1,000 4 years Developed software......... 1,225 4 years
The table includes the final value of intangibles other than goodwill. The goodwill from the KarlNet acquisition has been associated with the equipment business. Terabeam The Company acquired 100% ownership of Terabeam Corporation, a wireless telecommunications equipment company. The purchase price consists of 11,567,132 shares of YDI stock and the assumption of 574,706 warrants. The YDI shares were valued at $4.76 per share, which was the average share price from April 5 - 20, 2004. The definitive agreement was signed on April 14, 2004. The warrants were valued using the Black-Scholes method using actual remaining lives of each warrant and exercise price of each warrant, volatility of 205%, risk-free rate of interest of 3.67%, 0% dividend yield, and current stock price of $4.25. YDI acquired Terabeam for its strong balance sheet, its complementary product lines relating to YDI's own millimeter wave product offerings, and its component chipsets. The operations of Terabeam are included in the consolidated statement of operations following the acquisition on June 22, 2004. The cost of the acquisition is as follows: (in thousands) YDI stock......................... $ 55,059 Warrants.......................... 132 ---------- Total consideration............... $ 55,191 ========== 68 The purchase price allocation as of December 31, 2004 is based on the fair value of Terabeam's assets and liabilities are as follows: (in thousands) Cash ....................................... $ 10,085 Cash, restricted ........................... 5,876 Marketable securities available-for-sale ... 34,229 Accounts receivable, net ................... 300 Inventory .................................. 1,310 Property and equipment ..................... 101 Other assets ............................... 870 Identifiable intangible assets ............. 7,700 Goodwill ................................... 3,382 Liabilities ................................ (8,662) ---------- Total consideration ........................ $ 55,191 ========== The amount allocated to identifiable intangible assets was based on the present value of estimated future cash flows of the specific identifiable intangible asset. The goodwill from the Terabeam acquisition has been associated with the equipment business. As of December 31, 2004, there were $3.3 million of net present value contingent lease liabilities still outstanding for the Terabeam acquisition. As these lease liabilities are settled, any difference between the net present value amount and final settlement amount will be booked to goodwill during the one year allocation period. These $3.3 million of contingent liabilities are included in our accrued expenses on the December 31, 2004 balance sheet. Intangible assets, with finite lives, are being amortized over their useful life, after they are placed in service. (in thousands) Goodwill.................. $ 3,382 Not amortizable for financial or tax purposes Trade name................ 3,600 Indefinite life - not amortizable Technology product........ 900 6 years Technology product........ 3,200 9 years
Ricochet Networks On June 25, 2004, YDI Wireless acquired 100% of Ricochet Networks, Inc., a private wireless internet service provider. The purchase price consisted of approximately 42,000 shares of YDI stock, $3.0 million in cash, and a $300,000 note to the seller. The YDI shares were valued at $5.15 per share, which was the closing share price from on June 25, 2004 - the date the definitive agreement was signed. YDI acquired Ricochet to enter the wireless services business with an established subscriber base. In addition, Ricochet has considerable patents and other intellectual properties related to wireless mesh network equipment both from a manufacturing and network operations standpoint. The operations of Ricochet are included in the consolidated statement of operations after June 25, 2004. The cost of the acquisition is as follows: (in thousands) Cash ................................... $ 3,000 YDI stock .............................. 217 Note payable ........................... 300 ----------- Total consideration .................... $ 3,517 =========== 69 The final purchase price allocation is based on the fair market value of Ricochet's assets and liabilities as of June 25, 2004. (in thousands) June 25, 2004 ------------- Cash and cash equivalents .................... $ 70 Inventory .................................... 1,000 Identifiable intangible assets ............... 1,850 Property and equipment ....................... 785 Goodwill ..................................... 200 Other assets ................................. 87 Liabilities .................................. (475) ------------ Net assets acquired .......................... $ 3,517 ============ The amount allocated to identifiable intangible assets was based on the present value of estimated future cash flows of the specific identifiable intangible asset. Intangible assets, with finite lives, are being amortized over their useful life, after they are placed in service. (in thousands) Goodwill.................. $ 200 Not amortizable for financial or tax purposes Trade name................ 150 Indefinite life - not amortizable Patented technology....... 1,700 5 years
The table includes the final value of intangibles other than goodwill. The goodwill from the Ricochet acquisition has been associated with the service business. Unaudited pro forma results of operations for the two years ended December 31, 2004 and 2003 are included below. Such pro forma information assumes that the above acquisitions had occurred as of January 1, 2004 and 2003, respectively. This summary is not necessarily indicative of what the Company's results of operations would have been if the Company had been a combined entity during such periods, nor does it purport to represent results of operations for any future periods. For the year ended December 31, 2003, Ricochet has been excluded from the pro forma due to the fact that no separate results are available because it was one of many divisions of a company. Pro-forma Combined Statement of Operations For the twelve months ended December 31, 2004 (in thousands, except for per share data) (unaudited)
YDI Terabeam Ricochet For the KarlNet For the For the twelve For the period from period from months period from January 1, January 1, ended January 1, 2004 to 2004 to December 2004 to May June 22, June 25, 31, 2004 13, 2004 2004 2004 Adjustments Pro Forma -------- -------- ---- ---- ----------- --------- Revenue .......................... $ 22,897 $ 2,103 $ 1,408 $ 2,236 $ (100) (1) $ 28,544 ---------------------------------------------------------------- -------- Income (loss) before ............. (3) extraordinary items and ........ -- accounting changes ............. (1,348) (340) (17,616) (398) (785) (6) (20,487) ---------------------------------------------------------------- -------- Net income (loss) ................ $ (1,346) $ (340) $(17,445) $ (398) (785) $(20,314) ================================================================ ======== Weighted average shares .......... 19,792 1,000 11,567 42 (6,724) (7) 25,677 ================================================================ ======== Loss per share ................... $ (0.07) $ (0.79) ======== ========
70 Adjustments ----------- KarlNet - ------- (1) Revenue (eliminating intercompany sales)................................... $ (100) (2) Cost of goods sold (eliminating intercompany purchases).................... (100) (3) Cost of goods sold (amortization on intangible assets acquired) ........... 200 (4) Selling expense (amortization on intangible assets acquired)............... 150 Ricochet - -------- (5) Amortization on intangible intellectual property acquired.................. $ 185 Terabeam - -------- (6) Amortization on intangible intellectual property acquired.................. $ 250 Weighted average shares - ----------------------- (7) To remove the effect of issuing the shares mid-year........................ (6,724)
Pro-forma Combined Statement of Operations For the Year Ended December 31, 2003 (in thousands, except for per share data) (unaudited)
Telaxis for the three YDI months KarlNet Terabeam December ended September December 31, 2003 3/31/03 30, 2003 31, 2003 Adjustments Pro Forma -------- ------- -------- -------- ----------- --------- Revenue .......................... $ 27,241 $ 5 $ 3,842 $ 5,172 $ (175) (1) $ 36,085 Income (loss) before extraordinary (2) items and accounting changes .... 300 (2,320) (277) (63,514) (1,200) (3) (67,011) Net income (loss) ................ $ 4,647 $ (2,320) $ (277) $(63,514) $ (1,200) $(62,664) ================================================================ Weighted average shares .......... 12,571 4,177 1,000 11,567 (3,136) (4) 26,179 ================================================================ Earnings (loss) per share from continued operations- basic and diluted .......................... $ 0.37 $ (2.39) ======== ========
Adjustments ----------- KarlNet - ------- (1) Revenue (eliminating intercompany sales)............................................. $ (175) (2) Eliminating intercompany purchases and amortization on intangible assets acquired.... 700 Terabeam - -------- (3) Amortization on intangible intellectual property acquired............................ 500 Weighted average shares - ----------------------- (4) To remove the effect of issuing the shares mid-year.................................. $ (3,136)
16. Quarterly Financial Data (unaudited)
Quarter (in thousands, except per share data) - ---------------------------------------------------------------------------------------------------------------------- 2004 First Second Third Fourth - ------------------------------------------------ --------- --------- --------- --------- Revenue ........................................ $ 6,017 $ 4,733 $ 6,370 $ 5,777 Gross profit ................................... 2,466 1,540 2,688 2,789 Net income (loss) .............................. 303 (1,605) (2,351) 2,307 Basic and diluted earnings (loss) per share .... $ 0.02 $ (0.10) $ (0.09) $ 0.10 - ----------------------------------------------------------------------------------------------------------------------
71
Quarter (in thousands, except per share data) - ----------------------------------------------------------------------------------------------------------------------- 2003 First Second Third Fourth - ---------------------------------------------------------- ---------- ---------- ---------- ---------- Revenue ................................................ $ 6,436 $ 7,229 $ 8,029 $ 5,547 Gross profit ........................................... 1,998 2,268 4,288 2,973 Income (loss) from continuing operations ............................................ 106 (815) 1,053 (44) Extraordinary gain ..................................... -- 4,347 -- -- Net income (loss) ...................................... 106 3,532 1,053 (44) Basic earnings (loss) per share from continuing operations ................................. 0.01 (0.06) 0.08 0.00 Basic earnings per share - extraordinary item .................................... -- 0.32 -- -- Basic earnings per share ............................... 0.01 0.26 0.08 0.00 Diluted earnings (loss) per share from continuing operations ................................. 0.01 (0.06) 0.07 0.00 Diluted earnings per share - extraordinary item .................................... -- 0.32 -- -- Diluted earnings per share ............................. $ 0.01 $ 0.26 $ 0.07 $ 0.00 - -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share calculations for each of the quarters are based on the weighted average shares outstanding for each period. The sum of the quarters may not necessarily be equal to the full year earnings per share amounts. 17. Contingencies During the period from June 12 to September 13, 2001, four purported securities class action lawsuits were filed against Telaxis in the U.S. District Court for the Southern District of New York: Katz v. Telaxis Communications Corporation et al., Kucera v. Telaxis Communications Corporation et al., Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis Communications Corporation et al. The lawsuits also named one or more of the underwriters in the Telaxis initial public offering and certain of its officers and directors. On April 19, 2002, the plaintiffs filed a single consolidated amended complaint which supersedes the individual complaints originally filed. The amended complaint alleges, among other things, violations of the registration and antifraud provisions of the federal securities laws due to alleged statements in and omissions from the Telaxis initial public offering registration statement concerning the underwriters' alleged activities in connection with the underwriting of Telaxis' shares to the public. The amended complaint seeks, among other things, unspecified damages and costs associated with the litigation. These lawsuits have been assigned along with, we understand, approximately 1,000 other lawsuits making substantially similar allegations against approximately 300 other publicly-traded companies and their public offering underwriters to a single federal judge in the U.S. District Court for the Southern District of New York for consolidated pre-trial purposes. We believe the claims against us are without merit and have defended the litigation vigorously. The litigation process is inherently uncertain, however, and there can be no assurance that the outcome of these claims will be favorable for us. On July 15, 2002, together with the other issuer defendants, Telaxis filed a collective motion to dismiss the consolidated, amended complaints against the issuers on various legal grounds common to all or most of the issuer defendants. The underwriters also filed separate motions to dismiss the claims against them. In October 2002, the court approved a stipulation dismissing without prejudice all claims against the Telaxis directors and officers who had been defendants in the litigation. On February 19, 2003, the court issued its ruling on the separate motions to dismiss filed by the issuer defendants and the underwriter defendants. The court granted in part and denied in part the issuer defendants' motions. The court dismissed, with prejudice, all claims brought against Telaxis under the anti-fraud provisions of the securities laws. The court denied the motion to dismiss the claims brought under the registration provisions of the securities laws (which do not require that intent to defraud be pleaded) as to Telaxis and as to substantially all of the other issuer defendants. The court denied the underwriter defendants' motion to dismiss in all respects. In June 2003, we elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. We understand that a large majority of the other issuer defendants have also elected to participate in this 72 proposed settlement. If ultimately approved by the court, this proposed settlement would result in the dismissal, with prejudice, of all claims in the litigation against us and against the other issuer defendants who elect to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. The proposed settlement does not provide for the resolution of any claims against the underwriter defendants. The proposed settlement provides that the insurers of the participating issuer defendants will guarantee that the plaintiffs in the cases brought against the participating issuer defendants will recover at least $1 billion. This means there will be no monetary obligation to the plaintiffs if they recover $1 billion or more from the underwriter defendants. In addition, we and the other participating issuer defendants will be required to assign to the plaintiffs certain claims that the participating issuer defendants may have against the underwriters of their IPOs. The proposed settlement contemplates that any amounts necessary to fund the guarantee contained in the settlement or settlement-related expenses would come from participating issuers' directors and officers liability insurance policy proceeds as opposed to funds of the participating issuer defendants themselves. A participating issuer defendant could be required to contribute to the costs of the settlement if that issuer's insurance coverage were insufficient to pay that issuer's allocable share of the settlement costs. Therefore, the potential exposure of each participating issuer defendant should decrease as the number of participating issuer defendants increases. We currently expect that our insurance proceeds will be sufficient for these purposes and that we will not otherwise be required to contribute to the proposed settlement. Consummation of the proposed settlement remains conditioned on, among other things, receipt of both preliminary and final court approval. Formal settlement documents were submitted to the court in June 2004, together with a motion asking the court to preliminarily approve the form of settlement. Certain underwriters who were named as defendants in the settling cases, and who are not parties to the proposed settlement, opposed preliminary approval of the proposed settlement of those cases. On February 15, 2005, the court issued an order preliminarily approving the proposed settlement in all respects but one. The plaintiffs and the issuer defendants are in the process of assessing whether to proceed with the proposed settlement, as modified by the court. If the plaintiffs and the issuer defendants elect to proceed with the proposed settlement, as modified by the court, they will submit revised settlement documents to the court. The underwriter defendants may then have an opportunity to object to the revised settlement documents. If the court preliminarily approves the proposed settlement, notice of the terms of the proposed settlement be sent to all proposed class members and a hearing will be scheduled at which any objections to the proposed settlement may be heard. Thereafter, the court will determine whether to grant final approval to the proposed settlement. If the proposed settlement described above is not consummated, we intend to continue to defend the litigation vigorously. Moreover, if the proposed settlement is not consummated, we believe that the underwriters may have an obligation to indemnify us for the legal fees and other costs of defending these suits. While there can be no assurance as to the ultimate outcome of these proceedings, we currently believe that the final result of these actions will have no material effect on our consolidated financial condition, results of operations, or cash flows. 73 Schedule II Valuation and Qualifying Accounts For the years ended December 31, 2004, 2003 and 2002 (in thousands)
Balance at the Balance at the beginning of end of the period Additions Deductions period -------------- ---------- ---------- -------------- December 31, 2002: Allowance for uncollectible accounts ............ $ 71 $ 384 $ (270) $ 185 Inventory allowance ............................. 264 11 (99) 176 Deferred tax allowance .......................... -- -- -- -- ---------- ---------- ---------- ---------- December 31, 2003: Allowance for uncollectible accounts ............ $ 185 $ 769 $ (749) $ 205 Inventory allowance ............................. 176 24 -- 200 Deferred tax allowance .......................... -- 127 -- 127 ---------- ---------- ---------- ---------- December 31, 2004: Allowance for uncollectible accounts ............ $ 205 $ 1,544 $ (1,159) $ 590 Inventory allowance ............................. 200 400 -- 600 Deferred tax allowance .......................... 127 1,387 -- 1,514 ---------- ---------- ---------- ----------
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. Item 9A. Controls and Procedures. Evaluation of disclosure controls and procedures Based on their evaluation as of December 31, 2004, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of that date to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC's rules and forms. In coming to this conclusion, our Chief Executive Officer and Chief Financial Officer considered the matters described under the next heading. Internal control over financial reporting Under current SEC regulations, we are not currently required to evaluate or provide a report on our internal control over financial reporting. However, we have begun our analysis on that subject to better prepare us for the time when we will be required to evaluate and provide a report on our internal control over financial reporting. Our independent auditors did provide us with its unqualified audit opinion contained in this annual report on Form 10-K relating to our financial statements for the years ended December 31, 2004 and 2003. In connection with its annual audit and review procedures, our independent auditor considered and provided input to us relating to our internal control over financial reporting. Our auditor expressed concern that certain of our internal control procedures regarding the reliability of financial reporting and the preparation of our financial statements have two material weaknesses. Upon discovery of these concerns, our auditors performed numerous additional audit procedures relating to our financial statements for the years ended December 31, 2004 and 2003 before rendering their audit opinion. 74 The two material weaknesses consisted of the following: o Weaknesses in period-end financial reporting process o General. We do not have a well-defined and organized closing process. The result was a delay in producing financial reports and schedules needed for the audit process, numerous errors in various schedules prepared for the audit, the need for a number of significant and material adjusting entries that were identified during the audit process, and the incursion of extra audit fees to perform the additional work. o Documentation of the closing process. We do not use a checklist to manage the closing process documenting who will perform each procedure, who will review each procedure, and when completion and review of each procedure is due and is accomplished. We do not have an organized process for saving schedules and reconciliations to identify and calculate pre-audit adjusting entries and support amounts in the basic financial statements, in the financial statement footnotes, and in other parts of our annual report on Form 10-K. o Controls over non-routine and non-systematic transactions. We need better control over non-routine and non-systematic transactions that are often more complex when it comes to accounting and valuation issues. We need to better research and carefully document the accounting principles and procedures to be followed when these non-routine transactions occur. o Review of the allowance for doubtful accounts. We currently adjust our allowance for doubtful accounts based on percentages applied to each aging group. While we believe this provides a reasonable basis to begin evaluating the allowance, we need to assess other factors when considering the allowance for doubtful accounts. o Weaknesses in the review and approval of the accounting function o General. Many of the accounting functions have been done by a single person. There is no documented process for the review of the work product of that person by a member of management. Significant and material adjusting entries were identified during the audit process that appeared to be due to errors made by the single person. o Journal entry support and approval. Many of our journal entries lacked proper support and approval by a responsible employee. Also, many of the explanations accompanying the entries were inadequate. In addition to the material weaknesses identified above, our auditors also identified other internal control significant deficiencies that were not concluded to constitute material weaknesses. Changes in internal control over financial reporting There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Given the inputs from our auditor described above and our own analysis relating to our internal control over financial reporting, we expect to make changes to those internal controls in the near future. Item 9B. Other Information. Not applicable. 75 PART III Item 10. Directors and Executive Officers of the Registrant. Information appearing under the captions "Board of Directors, Executive Officers, and Key Employees" and "Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement for our 2005 annual meeting of stockholders (the "2005 Proxy Statement") responsive to this Item is hereby incorporated by reference. Code of Ethics We have adopted a statement of business conduct and code of ethics that applies to all of our directors, officers, and employees, including our principal executive officer, principal financial officer, and principal accounting officer and controller. This statement has been posted on our website (http://www.terabeam.com/corporate/ethics.php) and was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2003. Item 11. Executive Compensation. Information appearing under the caption "Executive Compensation" in our 2005 Proxy Statement responsive to this Item is hereby incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information appearing under the caption "Security Ownership of Certain Beneficial Owners and Our Directors and Management" responsive to this Item in our 2005 Proxy Statement is hereby incorporated by reference. Information relating to our equity compensation plans as of December 31, 2004 appears above under Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in this Annual Report on Form 10-K. Item 13. Certain Relationships and Related Transactions Information appearing under the caption "Material Relationships and Related Party Transactions" in our 2005 Proxy Statement responsive to this Item is hereby incorporated by reference. Item 14. Principal Accountant Fees and Services Information appearing under the caption "Independent Public Accountants" in our 2005 Proxy Statement responsive to this Item is hereby incorporated by reference. 76 PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Documents filed as part of this Form 10-K: 1. Financial Statements See Index to Financial Statements under Item 8--Financial Statements and Supplementary Data. 2. Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts All other financial statement schedules have been omitted because they are not required, not applicable, or the information to be included in the financial statement schedules is included in the financial statements or the notes thereto. 3. Exhibits See Exhibit Index. 77 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, YDI Wireless has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. YDI WIRELESS, INC. Date: March 31, 2005 By: /s/ Robert E. Fitzgerald ------------------------------- Robert E. Fitzgerald, Chief Executive Officer Each person whose signature appears below hereby constitutes and appoints Robert E. Fitzgerald and Patrick L. Milton his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his own name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing as he could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of YDI Wireless and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Robert E. Fitzgerald Chief Executive Officer and Director March 31, 2005 - --------------------------- (principal executive officer) Robert E. Fitzgerald Chief Financial Officer and Treasurer March 31, 2005 /s/ Patrick L. Milton (principal financial and accounting - --------------------------- officer) Patrick L. Milton /s/ Daniel A. Saginario - --------------------------- Chairman of the Board of Directors March 31, 2005 Daniel A. Saginario /s/ John W. Gerdelman - --------------------------- Director March 31, 2005 John W. Gerdelman /s/ Daniel R. Hesse - --------------------------- Director March 31, 2005 Daniel R. Hesse /s/ Gary E. Rieschel - --------------------------- Director March 31, 2005 Gary E. Rieschel /s/ Robert A. Wiedemer - --------------------------- Director March 31, 2005 Robert A. Wiedemer
78 EXHIBIT INDEX Exhibit Number Description of Document ------- 2.1 Agreement and Plan of Merger by and among the Registrant, T-Rex Acquisition Corporation, and Terabeam Corporation dated as of April 14, 2004 (1) 2.2 Agreement and Plan of Merger by and among the Registrant, KFire Merger Corporation, KarlNet, Inc., Douglas J. Karl, and Elise L. Karl dated as of May 13, 2004 (2) 2.3 Agreement and Plan of Merger by and between Telaxis Communications Corporation and Young Design, Inc. dated as of March 17, 2003 (3) 2.4 Agreement and Plan of Merger and Reincorporation by and between Telaxis Communications Corporation and YDI Wireless, Inc. dated as of June 23, 2003 (4) 3.1 Certificate of Incorporation of the Registrant as filed with the Delaware Secretary of State on May 5, 2003 (5) 3.2 Certificate of Merger of Telaxis Communications Corporation with and into YDI Wireless, Inc. as filed with the Delaware Secretary of State on July 7, 2003 (5) 3.3 By-laws of the Registrant (5) 4.1 Form of certificate evidencing ownership of common stock of the Registrant (5) 4.2 Rights Agreement by and between the Registrant and Registrar and Transfer Company, as Rights Agent dated as of May 18, 2001 (6) 4.3 Amendment No. 1 to Rights Agreement by and between the Registrant and Registrar and Transfer Company, as Rights Agent dated as of September 9, 2002 (7) 4.4 Amendment No. 2 to Rights Agreement by and between the Registrant and Registrar and Transfer Company, as Rights Agent dated as of March 17, 2003 (3) 4.5 Amendment No. 3 to Rights Agreement by and between the Registrant and Registrar and Transfer Company, as Rights Agent dated as of May 15, 2003 (8) 10.1* Incentive Stock Option Plan of 1986 of the Registrant (9) 10.2* 1987 Stock Plan of the Registrant (9) 10.3* 1996 Stock Plan of the Registrant (9) 10.4* Amendment No. 1 to 1996 Stock Plan of the Registrant (10) 10.5* 1997 Stock Plan of the Registrant (9) 10.6* Amendment No. 1 to 1997 Stock Plan of the Registrant (10) 10.7* 1999 Stock Plan of the Registrant (9) 10.8* Amendment No. 1 to 1999 Stock Plan of the Registrant (10) 10.9* 2001 Nonqualified Stock Plan of the Registrant (11) 10.10* Amendment No. 1 to 2001 Nonqualified Stock Plan of the Registrant (10) 10.11* Young Design, Inc. 2002 Stock Incentive Plan (12) 10.12* 2004 Stock Plan of the Registrant (10) 10.13* Form of Non-Qualified Stock Option Agreement to be issued to Directors of the Registrant upon Initial Election or Appointment to Board of Directors (13) 10.14* Form of Non-Qualified Stock Option Agreement to be issued to Incumbent Directors of the Registrant on an Annual Basis (13) 10.15* Form of Incentive Stock Option Agreement for Executive Officers (13) 79 Exhibit Number Description of Document ------- 10.16* Form of Indemnification Agreement, a substantially similar version of which was entered between the Registrant and each of Messrs. Fitzgerald, Saginario, Wiedemer, Milton, and Renauld (14) 10.17* Policy Statement Concerning the Compensation of Directors of the Registrant who are not Insiders, dated February 9, 2005 (13) 10.18* Employment Agreement between the Registrant and Robert E. Fitzgerald dated as of February 9, 2005 (13) 10.19* Non-Qualified Stock Option Agreement between the Registrant and Robert E. Fitzgerald dated as of February 9, 2005 (13) 10.20* Employment Agreement between the Registrant and Thomas Bennett dated as of December 13, 2004 (15) 10.21* Employment Agreement by and between Young Design, Inc. and Michael F. Young dated as of March 1, 1999 (8) 10.22* Employment Agreement by and between the Registrant and David L. Renauld dated as of December 19, 2000 (16) 10.23* Amendment 1 to Employment Agreement by and between the Registrant and David L. Renauld dated as of August 29, 2002 (17) 10.24* Amendment 2 to Employment Agreement by and between the Registrant and David L. Renauld dated as of January 24, 2003 (18) 10.25 Secured Promissory Note from KarlNet, Inc. in favor of the Registrant dated May 13, 2004 (2) 10.26 Security Agreement between KarlNet, Inc. and the Registrant dated as of May 13, 2004 (2) 10.27 Stock Purchase Agreement between the Registrant and Michael F. Young dated as of September 14, 2004 (19) 10.28 Indemnification Agreement by and among the Registrant, Merry Fields, LLC, Concorde Equity, LLC, and Michael F. Young dated as of March 17, 2003 (3) 10.29 Form of Convertible Promissory Note of Terabeam Corporation, a substantially similar version of which has been offered to various former stakeholders of Harmonix Corporation, reflecting indebtedness in the aggregate principal amount of $2,500,000 10.30 Lease Agreement by and between Young Design, Inc. and Merry Fields, LLC dated as of August 24, 2000 (8) 10.31 Lease by and between the Registrant and O'Leary-Vincunas LLC dated November 1, 2000 (16) 10.32 First Amendment to Lease by and between the Registrant and O'Leary-Vincunas LLC dated January 20, 2003 (18) 10.33 Lease by and between the Registrant and The Irvine Company dated as of March 1, 2004 (20) 10.34 Office Lease by and between Ricochet Networks, Inc. and 1400 Glenarm Place Venture dated as of February 1, 2005, with related Guaranty by the Registrant in favor of 1400 Glenarm Place Venture 10.35 Metro I Standard Office Lease by and between KarlNet, Inc. and CB Partners Limited Partnership dated as of January 30, 2001 10.36 First Amendment and Extension of Lease Agreement by and between KarlNet, Inc. and CB Partners Limited Partnership dated November 14, 2002 10.37 Second Amendment and Extension of Lease Agreement by and between KarlNet, Inc. and CB Partners Limited Partnership dated September 22, 2003 10.38 Third Amendment and Extension of Lease Agreement by and between KarlNet, Inc. and CB Partners Limited Partnership dated January 28, 2004 80 Exhibit Number Description of Document ------- 21.1 Subsidiaries of the Registrant (21) 23.1 Consent of Fitzgerald, Snyder & Co., P.C. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) 32.1 Certification Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350 of Chapter 63 of Title 18 of the United States Code) 99.1 Stockholder Agreement by and among the Registrant and Mobius Technology Ventures VI, L.P., Mobius Technology Ventures Advisors Fund VI, L.P., Mobius Technology Ventures Side Fund VI, L.P., Softbank US Ventures VI, L.P., Softbank Technology Ventures Advisors Fund V, L.P., Softbank Technology Ventures Entrepreneurs Fund V, L.P., and Softbank Technology Ventures V, L.P. dated as of April 14, 2004 (1) 99.2 Stockholder Agreement by and among the Registrant and SOFTBANK Capital Partners, L.P., SOFTBANK Capital LP, and SOFTBANK Capital Advisors Fund LP. dated as of April 14, 2004 (1) 99.3 Lock-up Agreement by and among the Registrant and Mobius Technology Ventures VI, L.P., Mobius Technology Ventures Advisors Fund VI, L.P., Mobius Technology Ventures Side Fund VI, L.P., Softbank US Ventures VI, L.P., Softbank Technology Ventures Advisors Fund V, L.P., Softbank Technology Ventures Entrepreneurs Fund V, L.P., and Softbank Technology Ventures V, L.P. dated as of April 14, 2004 (1) 99.4 Lock-up Agreement by and among the Registrant and SOFTBANK Capital Partners, L.P., SOFTBANK Capital LP, and SOFTBANK Capital Advisors Fund LP. dated as of April 14, 2004 (1) 99.5 Form of Noncompetition Agreement, a substantially similar version of which was entered between the Registrant and each of Douglas J. Karl and Elise L. Karl dated as of May 13, 2004 (2) 99.6 Stock Purchase Agreement by and between the Registrant and Ricochet Investments, LLC dated as of June 25, 2004 (22) 99.7 Promissory Note in the amount of $300,000 from the Registrant and its subsidiaries in favor of Ricochet Investments, LLC dated June 25, 2004 (22) 99.8 Non-Competition and Confidentiality Agreement by and among Victor Mitchell, Ricochet Networks, Inc., and the Registrant dated as of June 25, 2004 (22) 99.10 Guarantee from Victor Mitchell in favor of the Registrant dated as of June 25, 2004 (22) - ---------- All non-marked exhibits are filed herewith. * Management contract or compensatory plan. (1) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on April 16, 2004. (2) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on May 20, 2004. (3) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on March 20, 2003. (4) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on July 16, 2003. (5) Incorporated herein by reference to the same-numbered exhibit to Form 10-Q filed with the SEC on August 14, 2003. (6) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on May 21, 2001. (7) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on September 12, 2002. (8) Incorporated herein by reference to the exhibits to Form 10-Q filed with the SEC on August 14, 2003. (9) Incorporated herein by reference to the exhibits to Form S-1 filed with the SEC on September 27, 1999 (File No. 333-87885). (10) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on September 15, 2004. (11) Incorporated herein by reference to the exhibits to Form 10-Q filed with the SEC on August 10, 2001. (12) Incorporated herein by reference to the exhibits to Form S-8 filed with the SEC on April 11, 2003 (File 81 No. 333-104481). (13) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on February 15, 2005. (14) Incorporated herein by reference to the exhibits to Form 10-Q filed with the Commission on November 14, 2000. (15) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on December 27, 2004. (16) Incorporated herein by reference to the exhibits to Form 10-K filed with the SEC on March 28, 2001. (17) Incorporated herein by reference to the exhibits to Form 10-Q filed with the SEC on November 14, 2002. (18) Incorporated herein by reference to the exhibits to Form 10-K filed with the SEC on March 31, 2003. (19) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on September 21, 2004. (20) Incorporated herein by reference to the exhibits to Form S-2 filed with the SEC on April 5, 2004 (File No. 333-114208). (21) Incorporated herein by reference to the exhibits to Form S-4/A filed with the SEC on October 28, 2004 (File No. 333-111110). (22) Incorporated herein by reference to the exhibits to Form 8-K filed with the SEC on July 8, 2004. 82 EX-10.29 2 ex10-29.txt Exhibit 10.29 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE LAW, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION OR (C) THE COMPANY OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION. July 12, 2004 $________ TERABEAM CORPORATION CONVERTIBLE PROMISSORY NOTE Terabeam Corporation, a Washington corporation (the "Company"), for value received, promises to pay to ___________ (the "Holder") the principal sum of $_________, subject to adjustment from time to time in accordance with Section 2 of this Note and Article VII of the Merger Agreement (the "Principal Amount"). Capitalized terms not defined herein shall have the meanings given such terms in that certain Agreement and Plan of Merger and Reorganization among the Company, Harmonix Corporation and the stockholders of Harmonix Corporation (the "Merger Agreement"). The following is a statement of the rights of the Holder and the conditions to which this Note is subject, to which the Holder, by the acceptance of this Note, agrees: 1. Principal and Interest; Payment; Prepayment (a) Principal and Interest. Interest shall accrue on the unpaid Principal Amount at a rate of 6.75% per annum, simple interest ("Interest"), measured from the date set forth above. Interest only shall be due and payable on the fifth day of the first month of each quarter during the term of this Note. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The outstanding Principal Amount and any accrued and unpaid Interest shall become due and payable on July 12, 2005 (the "Maturity Date"). Notwithstanding the foregoing, the entire unpaid Principal Amount, together with all accrued and unpaid Interest thereon, shall become immediately due and payable in the event of any Event of Default (as defined below). (b) Payment. All payments shall be made in lawful money of the United States of America at such place as the Holder hereof may from time to time designate in writing to the CONVERTIBLE PROMISSORY NOTE TERABEAM CORPORATION. Company. Payment shall be credited first to the accrued interest then due and payable and the remainder applied to principal. (c) Prepayment. The Company may at any time prepay in whole or in part the Principal Amount and any accrued and unpaid Interest thereon. 2. Purchase Note Subject to Merger Agreement; Offset This Note is a "Purchase Note" under the Merger Agreement and is expressly subject to Article VII thereof. As contemplated in the Merger Agreement, the Principal Amount and Interest is subject to adjustment. For informational purposes only, the Company may amend Schedule A hereto from time to time to reflect the Principal Amount after any such adjustment. 3. Conversion At any time after the date hereof, and subject to Article VII of the Merger Agreement, Holder shall have the right, at its sole discretion, to notify the Company in writing of its desire to convert the outstanding Principal Amount and any accrued and unpaid Interest into fully paid and nonassessable shares of common stock of YDI Wireless, Inc. ("YDI"), the Company's corporate parent ("Common Stock") at a conversion price of $27.27 per share (subject to adjustment for stock splits, stock dividends, recapitalizations and similar events), effective as of the date of such notice. The number of shares of Common Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the then-outstanding Principal Amount (subject to any reserved amounts permitted pursuant to Article VII of the Merger Agreement) and any accrued and unpaid Interest by (y) $27.27 (subject to adjustment for stock splits, stock dividends, recapitalizations and similar events). 4. Issuance of the Stock Upon Conversion; Fractional Shares As soon as practicable after conversion of this Note, the Company, at its expense, will cause to be issued in the name of and delivered to the Holder, a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which the Holder shall be entitled upon such conversion, which certificates shall include legends restricting transfer under the federal and state securities laws. No fractional shares will be issued upon conversion of this Note. If, upon conversion of this Note, a fraction of a share results, the Company will pay the cash value of that fractional share, calculated based on the per share value determined pursuant to Section 3 hereof. 5. Holder's Representations The Holder represents and warrants that: CONVERTIBLE PROMISSORY NOTE TERABEAM CORPORATION -2- (a) it is familiar with each of YDI and the Company, the nature of its business and its financial prospects, and the Holder has the capacity to protect its own interests, and (b) it is acquiring the Note and the securities that may be purchased upon conversion for investment for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution. It understands that the Note and the securities that may be purchased upon conversion have not been, and will not be, registered under the Securities Act of 1933, as amended, by reason of a specific exemption from the registration provisions of such Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Holder's representations. 6. Company Representations and Warranties The Company represents and warrants that: (a) It is a corporation duly organized and validly existing under the laws of the State of Washington. The Company has all requisite corporate power and authority to carry on its business as presently conducted, and to carry out the transactions contemplated in this Note. The Company is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the Company's financial condition, business, operations or property. (b) The execution, delivery and performance by the Company of this Note has been duly authorized by all requisite action of the Company and its directors and shareholders. This Note has been duly executed and delivered by the Company, and this Note constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. (c) No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Note, except for filings pursuant to the federal securities laws and to applicable state Blue Sky laws. 7. Transfer of Note; Restrictions on Transfer This Note may be transferred only in compliance with applicable federal and state securities laws and only upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to the Company. A new Note for like principal amount and interest will be issued to, and registered in the name of, the transferee. Interest and principal are payable CONVERTIBLE PROMISSORY NOTE TERABEAM CORPORATION -3- only to the registered holder of the Note. The Holder agrees to provide a Form W-9 to the Company upon request. 8. Events of Default If any of the events specified in this Section 8 shall occur (an "Event of Default"), the Holder may, so long as such condition exists, declare the outstanding Principal Amount and accrued but unpaid Interest immediately due and payable, by notice in writing to the Company: (a) The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, the filing by the Company of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, the appointment of a receiver, liquidator or trustee for the purpose of taking possession of all or substantially all of the Company's assets, an assignment by the Company for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action; (b) If, within 90 days after the commencement of an action against the Company (and service of process on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within 90 days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company, such appointment shall not have been vacated; or (c) Failure to pay the Principal Amount and Interest when due, if such failure is not cured within ten (10) days after the Holder's delivery of a notice of such failure. 9. Miscellaneous 9.1 Remedies The Company and all endorsers of this Note hereby waive notice, presentment, protest and notice of dishonor. 9.2 Attorneys' Fees The Company and all endorsers of this Note agree to pay the Holder's reasonable expenses and costs in collecting and enforcing this Note, including reasonable attorneys' fees. CONVERTIBLE PROMISSORY NOTE TERABEAM CORPORATION -4- 9.3 Holder as Owner The Company may deem and treat the holder of record of this Note as the absolute owner for all purposes regardless of any notice to the contrary. 9.4 No Shareholder Rights This Note shall not entitle the Holder to any voting rights or any other rights as a shareholder of YDI or the Company or to any other rights except the rights stated herein; and no dividend shall be payable or shall accrue in respect of this Note or the securities into which this Note is convertible, until this Note is converted. 9.5 Shareholders, Officers and Directors Not Liable In no event shall any shareholder, officer or director of YDI or the Company be liable for any amounts due or payable pursuant to this Note. 9.6 Notices Unless otherwise provided, any notice under this Note shall be given in writing and shall be deemed effectively given (a) upon personal delivery to the party to be notified, (b) upon confirmation of receipt by fax by the party to be notified, (c) one business day after deposit with a reputable overnight courier, prepaid for overnight delivery and addressed as set forth below, or at such other address as such party may designate by ten days' advance written notice to the other party given in the foregoing manner. If to the Holder: To the address or number last furnished in writing to the Company by the Holder If to the Company: Terabeam Corporation 20 Industrial Drive East South Deerfield, MA 01373 Fax: (413) 665-0089 Attn: General Counsel 9.7 Amendments and Waivers Any term of this Note may be amended and the observance of any term may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and the Holder; provided, however, that the Company may amend Schedule A hereto without the Holder's consent to reflect any CONVERTIBLE PROMISSORY NOTE TERABEAM CORPORATION -5- adjustments to the Principal Amount as provided in Section 2 above. Any amendment or waiver shall be binding on each future Holder and the Company. 9.8 Governing Law; Jurisdiction; Venue This Note shall be governed by and construed under the laws of the state of Washington without regard to principles of conflict of laws. The parties irrevocably consent to the jurisdiction and venue of the state and federal courts located in King County, Washington in connection with any action relating to this Note. 9.9 Successors and Assigns The terms and conditions of this Note shall inure to the benefit of and be binding on the respective successors and assigns of the parties. 9.10 Severability If one or more provisions of this Note are held to be unenforceable under applicable law, such provision shall be excluded from this Note, and the balance of this Note shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. TERABEAM CORPORATION By: ________________________________ Name:________________________________ Its: ________________________________ AGREED AND ACCEPTED: __________________ ("HOLDER") By: ________________________________ Name:________________________________ Its: ________________________________ CONVERTIBLE PROMISSORY NOTE TERABEAM CORPORATION -6- SCHEDULE A Schedule of Adjustments to Principal Amount CONVERTIBLE PROMISSORY NOTE TERABEAM CORPORATION. EX-10.34 3 ex10-34.txt Exhibit 10.34 THIS OFFICE LEASE ("Lease") is made and entered into effective as of the 1st day of February, 2005, by and between 1400 GLENARM PLACE VENTURE (the "Landlord"), and RICOCHET NETWORKS, INC., a Delaware corporation (the "Tenant"). ARTICLE 1: BASIC PROVISIONS This Article contains the basic lease provisions between Landlord and Tenant. A. Building: 1400 Glenarm Place, Denver, Colorado (the "Property", as further described in Article 30). B. Premises: Suite 100 located on the 1st floor of the Building as cross hatched on Exhibit A hereto, together with the existing walled office fixtures. C. Commencement Date: February 1, 2005, subject to Articles 2 and 4. D. Expiration Date: January 31, 2008, subject to Articles 2 and 4. E. Rentable Area: The rentable area of the Premises shall be deemed to be 4,723 square feet, and the rentable area of the Property shall be deemed to be 38,500 square feet, for purposes of this Lease, subject to Article 30. F. Tenant's Share: Twelve and 27/100 percent (12.27%), subject to Articles 3 and 30. G. Base Rent: Tenant shall pay monthly Base Rent pursuant to the following schedule and as described in Article 3: Period Monthly Base Rent 2/1/05 - 1/31/06: $5,805.35 2/1/06 - 1/31/07: $6,002.15 2/1/07 - 1/31/08: $6,198.94 H. Additional Rent: Tenant shall pay Tenant's Share of Taxes and Expenses in excess of the amount for the Base Tax Year and Base Expense Year of 2005, as further described in Article 3. I. Permitted Use: General offices, subject to Article 7. J. Security Deposit: $6,002.15, subject to Article 16. K. Broker (if any): Frederick Ross Company and Cresa Partners subject to Article 26. L. Guarantor(s): YDI Wireless, Inc. M. Landlord's Notice Address (subject to Article 25): c/o Shames-Makovsky Realty Company, 1400 Glenarm Place, Suite 201, Denver, Colorado 80202. N. Tenant's Notice Address (subject to Article 25): Ricochet Networks, Inc., 1400 Glenarm Place, Suite 100, Denver, Colorado 80202. 0. Rent Payments: Rent shall be paid to Landlord, c/o Shames-Makovsky Realty Company, 1400 Glenarm Place, Suite 201, Denver, Colorado 80202, or such other parties and addresses as to which Landlord shall provide advance notice. P. Exhibits: This Lease includes, and incorporates by this reference: Exhibit A: Premises Exhibit B: Rules Exhibit C: Guaranty The foregoing provisions shall be interpreted and applied in accordance with the other provisions of this Lease. The terms of this Article, and the terms defined in Article 30 and other Articles, shall have the meanings specified therefor when used as capitalized terms in other provisions of this Lease or related documentation (except as expressly provided to the contrary therein). ARTICLE 2: TERM AND COMMENCEMENT A. Term. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises for the Term, subject to the other provisions of this Lease. The term ("Term") of this Lease shall commence on the Commencement Date and end on the Expiration Date set forth in Article 1, unless sooner terminated as provided in this Lease, subject to adjustment as provided below and the other provisions of this Lease. B. Early Commencement. The Commencement Date, Rent and Tenant's other obligations shall be advanced to such earlier date as Tenant, with Landlord's written permission, commences occupying the Premises for business purposes. If such event occurs with respect to a portion of the Premises, the Commencement Date, Rent and Tenant's other obligations shall be so advanced with respect to such portion (and fairly prorated based on the rentable square footage involved). During any period that Tenant shall be permitted to enter the Premises prior to the Commencement Date other than to occupy the same for business purposes (e.g., to perform alterations or improvements), 2 Tenant shall comply with all terms and provisions of this Lease, except those provisions requiring the payment of Rent. Landlord shall permit early entry, so long as the Premises are legally available, Landlord has completed any work required to be performed by Landlord under this Lease (or can reasonably accommodate the scheduling of minor work Tenant desires to perform, such as cabling, without delaying any such Landlord work), and Tenant is in compliance with the other provisions of the Lease, including the insurance requirements. C. Commencement Delays. Subject to Article 4.C, the Commencement Date, Rent and Tenant's other obligations shall be postponed to the extent Tenant is not reasonably able to occupy the Premises because Landlord fails, by the Commencement Date set forth in Article 1, to: (i) deliver possession of the Premises, and (ii) substantially complete any improvements to the Premises required to be performed by Landlord under this Lease, except to the extent that Tenant, its space planners, architects, contractors, agents or employees in any way contribute to such failure. If such failure occurs with respect to a portion of the Premises, the Commencement Date, Rent and Tenant's other obligations shall be so postponed with respect to such portion (and fairly prorated based on the rentable square footage involved). If the Commencement Date is postponed pursuant to the foregoing provisions for a ninety (90) day initial grace period, Tenant shall have the right to terminate this Lease by notice to Landlord given within ten (10) days thereafter, subject to Landlord's right to cure as provided in Article 21. Any such delay in the Commencement Date shall not subject Landlord to liability for loss or damage resulting therefrom, and Tenant's sole recourse with respect thereto shall be the postponement of Rent and other obligations and right to terminate this Lease described herein. D. Adjustments and Confirmation. If the Commencement Date is advanced to an earlier date as provided above, the Expiration Date shall not be changed. If the Commencement Date is postponed as provided above, the Expiration Date shall be extended by the same length of time if Landlord so elects by notice to Tenant. If the Commencement Date occurs other than on the first day of a calendar month, Landlord may further elect by such notice to: (i) extend the Term so that the Expiration Date is the last day of the calendar month in which it would otherwise occur, and/or (ii) adjust the dates for any fixed increases in the Base Rent so that they occur on the first day of the calendar month following the month in which they would otherwise occur. Tenant shall execute a confirmation of any dates as adjusted herein in such form as Landlord may reasonably request; any failure to respond within thirty (30) days after requested shall be deemed an acceptance of the matters set forth in Landlord's confirmation. If Tenant disagrees with Landlord's adjustment of such dates, Tenant shall pay Rent and perform all other obligations commencing and ending on the dates determined by Landlord, subject to refund or credit when the matter is resolved. ARTICLE 3: BASE RENT AND ADDITIONAL RENT A. Base Rent. Tenant shall pay Landlord the monthly Base Rent set forth in Article 1 in advance on or before the first day of each calendar month during the Term; provided, Tenant shall pay Base Rent for the first full calendar month for which Base Rent 3 shall be due (and any initial partial month) when Tenant executes this Lease. B. Taxes and Expenses. Tenant shall pay Landlord Tenant's Share of Taxes and Expenses in excess of the amounts of Taxes and Expenses respectively for the Base Tax Year and Base Expense Year in the manner described below. The foregoing capitalized terms shall have the meanings specified therefor in Articles 1 and 30. C. Payments. (i) Landlord may reasonably estimate in advance the amounts Tenant shall owe for Taxes and Expenses for any full or partial calendar year of the Term. In such event, Tenant shall pay such estimated amounts, on a monthly basis, on or before the first day of each calendar month, together with Tenant's payment of Base Rent. Such estimate may be reasonably adjusted from time to time by Landlord. (ii) Within 120 days after the end of each calendar year, or as soon thereafter as practicable, Landlord shall provide a statement (the "Statement") to Tenant showing: (a) the amount of actual Taxes and Expenses for such calendar year, with a listing of amounts for major categories of Expenses, (b) any amount paid by Tenant towards Taxes and Expenses during such calendar year on an estimated basis, and (c) any further revised estimate of Tenant's obligations for Taxes and Expenses for the current calendar year. (iii) If the Statement shows that Tenant's estimated payments were less than Tenant's actual obligations for Taxes and Expenses for such year, Tenant shall pay the difference within fifteen (15) days after Landlord sends the Statement. If the Statement shows that Tenant's estimated payments exceeded Tenant's actual obligations for Taxes and Expenses, Landlord shall credit the difference against the payment of Rent next due. If the Term shall have expired and no further Rent shall be due, Landlord shall provide a refund of such difference at the time Landlord sends the Statement. (iv) If the Statement shows a further increase in Tenant's estimated payments for the current calendar year, Tenant shall: (a) thereafter pay the new estimated amount until Landlord further revises such estimated amount, and (b) pay the difference between the new and former estimates for the period from January 1 of the current calendar year through the month in which the Statement is sent within fifteen (15) days after Landlord sends the Statement. (v) In lieu of providing one Statement covering all such items, Landlord may provide separate statements, at the same or different times. So long as Tenant's obligations hereunder are not materially adversely affected thereby, Landlord reserves the right to reasonably change, from time to time, the manner or timing of Tenant's payments for Taxes and Expenses. D. Tax Refunds, Protest Costs, Fiscal Years and Special Assessments. Landlord shall each year: (i) credit against Taxes any refunds received during such year, whether or not for a prior year, (ii) include in Taxes any additional amount paid during such 4 year involving an adjustment to Taxes for a prior year due to error by the taxing authority, supplemental assessment, or other reason, (iii) for Taxes payable in installments over more than one year, include only the minimum amounts payable each year and any interest thereon, and (iv) include, in either Taxes or Expenses, any fees for attorneys, consultants and experts, and other costs paid during such year in attempting to protest, appeal or otherwise seek to reduce or minimize Taxes, whether or not successful. Notwithstanding anything to the contrary contained in this Lease, if any taxing authority, at any time, uses a fiscal year other than a current calendar year, Landlord may elect to require payments by Tenant based on: (a) amounts paid or payable during each calendar year without regard to such fiscal years, or (b) amounts paid or payable for or during each fiscal tax year. E. Grossing Up and Tenant's Share Adjustments. In order to allocate variable Expenses (i.e. those items that vary based on occupancy levels, such as cleaning and utilities) among those parties who are leasing space at the Property when it is not fully occupied during all or a portion of any calendar year, Landlord may reasonably determine the amount of such variable Expenses that would have been paid had the Property been 95% occupied, in which case the amount so determined shall be deemed to have been the amount of Expenses for such year (rather than adjusting Tenant's Share by subtracting vacant space from the denominator). Similarly, if Landlord is not furnishing any particular utility or service to a tenant during any period (the cost of which, if performed by Landlord, would be included in Expenses), Landlord may for such period: (i) adjust such items to reflect the additional amount that would reasonably have been incurred during such period had Landlord furnished such utility or service to such tenant, or (ii) exclude the rentable area of such tenant from the rentable area of the Property in computing Tenant's Share of such items. "Tenant's Share" shall be subject to such other adjustments as are provided in the definition thereof in Article 30 below. F. Prorations; Payments After Term Ends. If the Term commences on a day other than the first day of a calendar month or ends on a day other than the last day of a calendar month, the Base Rent and any other amounts payable on a monthly basis shall be prorated on a per diem basis for such partial calendar months. If the Base Rent is scheduled to increase under Article 1 other than on the first day of a calendar month, the amount for such month shall be prorated on a per diem basis to reflect the number of days of such month at the then current and increased rates, respectively. If the Term commences other than on January 1, or ends other than on December 31, Tenant's obligations to pay amounts towards Taxes and Expenses for such first or final calendar years shall be prorated on a per diem basis to reflect the portion of such years included in the Term. Tenant's obligations to pay Taxes and Expenses (or any other amounts) accruing during, or relating to, the period prior to expiration or earlier termination of this Lease, shall survive such expiration or termination. G. Landlord's Accounting Practices and Records. Landlord shall maintain records respecting Taxes and Expenses and determine the same in accordance with sound accounting and management practices consistently applied in accordance with this Lease. Although this Lease contemplates the general computation of Taxes and Expenses 5 on a cash basis, Landlord shall make reasonable and appropriate accrual adjustments to ensure that each calendar year includes substantially the same recurring items. Landlord reserves the right to apply a full accrual system of accounting so long as the same is consistently applied and Tenant's obligations are not materially adversely affected. Tenant or its representative (acting on a non-contingent fee basis) shall have the right to review such records by sending notice to Landlord no later than thirty (30) days following the furnishing of the Statement specifying such records as Tenant reasonably desires to review. Such review shall be subject to the continuing condition that Tenant not be in Default, and subject to reasonable scheduling by Landlord during normal business hours at the place or places where such records are normally kept. No later than thirty (30) days after Landlord makes such records available for review, Tenant shall send Landlord notice specifying any exceptions that Tenant takes to matters included in such Statement, Tenant's detailed reasons for each exception which support a conclusion that such exception properly identifies an error in such Statement, and a complete copy of the review report. Such Statement shall be considered final and binding on Tenant, except as to matters to which exception is taken after review of Landlord's records in the foregoing manner and within the foregoing times. The foregoing times for sending Tenant's notices hereunder are critical to Landlord's budgeting process, and are therefore of the essence of this Paragraph. If Tenant takes timely exception as provided herein, Landlord may seek certification from an independent certified public accountant or financial consultant (who shall be subject to Tenant's reasonable approval) as to the proper amount of Taxes and Expenses or the items as to which Tenant has taken exception. In such case: (i) such certification shall be considered final and binding on both parties (except as to additional amounts not then known or omitted by error), and (ii) Tenant shall pay Landlord for the cost of such certification, unless it shows that Taxes and Expenses were overstated by a net amount of five percent (5%) or more. Pending review of such records and resolution of any exceptions, Tenant shall pay Tenant's Share of Taxes and Expenses in the amounts shown on such Statement, subject to credit, refund or additional payment after any such exceptions are resolved H. General Payment Matters. Base Rent, Taxes, Expenses and any other amounts which Tenant is or becomes obligated to pay Landlord under this Lease or other agreement entered in connection herewith are sometimes herein referred to collectively as "Rent," and all remedies applicable to the non-payment of rent shall be applicable thereto. Tenant shall pay Rent in good funds and legal tender of the United States of America, together with any applicable sales tax or other taxes on Rent as further described in Article 14. Tenant shall pay Rent without any deduction, recoupment, set-off or counterclaim, and without relief from any valuation or appraisement laws, except as may be expressly provided in this Lease. No delay by Landlord in providing the Statement (or separate statements) shall be deemed a default by Landlord or a waiver of Landlord's right to require payment of Tenant's obligations for actual or estimated Taxes or Expenses. In no event shall a decrease in Taxes or Expenses serve to decrease Base Rent. Landlord may apply payments received from Tenant to any obligations of Tenant then accrued, without regard to such obligations as may be designated by Tenant. 6 ARTICLE 4: CONDITION OF PREMISES A. General Condition of Premises. Tenant has inspected, or had an opportunity to inspect, the Premises (and portions of the Property, Systems and Equipment providing access to or serving the Premises), and agrees to accept the same "as is" without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided under this Lease (which term includes any Exhibit hereto). To the extent that Landlord has expressly agreed to perform any improvements to the Premises under this Lease, the following provisions shall apply. B. Tenant Not Occupying Premises During Improvements. If Tenant is not currently occupying the Premises, then to the extent that Landlord is required to perform any improvements to the Premises under this Lease: (i) Landlord shall use diligent, good faith efforts to substantially complete any such improvements to an extent that Tenant can reasonably occupy the Premises by the Commencement Date set forth in Article 1, subject to Article 2 and the other provisions of this Lease, (ii) Tenant shall use diligent, good faith efforts to cooperate, and to cause its space planners, architects, contractors, agents and employees to cooperate, diligently and in good faith with Landlord and any space planners, architects, contractors or other parties designated by Landlord, such that any such improvements to the Premises can be planned, permits can be obtained, and the work can be substantially completed by the Commencement Date set forth in Article 1, and (iii) the Commencement Date, Rent and Tenant's other obligations shall be subject to postponement as further described in Article 2. In the event of any dispute as to whether any such improvements have been substantially completed, Landlord may refer the matter to Landlord's independent architect, whose good faith decision shall be final and binding on the parties. C. Tenant Occupying Premises During Improvements. If Tenant is currently occupying the Premises, whether pursuant to a prior lease or otherwise, and Landlord is required to perform any improvements to the Premises under this Lease, then notwithstanding any other provision of this Lease to the contrary: (i) Landlord shall use commercially reasonable efforts to minimize any disruption to Tenant's occupancy of the Premises in connection therewith, (ii) Landlord shall seek to substantially complete the same by the Commencement Date set forth in Article 1, or within a reasonable time thereafter, but shall not be required to incur overtime or pay premiums to perform such work before or after the Building Hours, and may require that Tenant cooperate in scheduling and staging the work within the Premises (including cooperation in moving personnel, furniture and equipment or permitting Landlord to do so), and (iii) there shall be no postponement of the Commencement Date or abatement of Rent as a result of any such improvements, or delays in substantially completing the same, under any circumstances (Tenant hereby acknowledging that it could have arranged for such improvements through an independent contractor, subject to Landlord's approval, the other provisions of this Lease and such other documentation as Landlord may have required). 7 ARTICLE 5: QUIET ENJOYMENT Landlord agrees that, if Tenant timely pays the Rent and performs the terms and provisions hereunder, Tenant shall hold the Premises during the Term free of lawful claims by any party acting by or through Landlord, subject to all other terms and provisions of this Lease. ARTICLE 6: UTILITIES AND SERVICES A. Standard Landlord Utilities and Services. Landlord shall provide the following utilities and services (the cost of which shall be included in Expenses): (i) Heat and air-conditioning to provide a temperature required, in Landlord's reasonable opinion and in accordance with applicable Law, for occupancy of the Premises as offices during Building Hours (as defined in Article 30). (ii) Water from city mains for drinking, lavatory and toilet purposes only, at those points of supply provided for nonexclusive general use of tenants at the Property, or points of supply in the Premises installed by or with Landlord's written consent for such purposes. (iii) Cleaning and trash removal in and about the Premises comparable to that provided as a standard service by landlords for office space in comparable office buildings in the vicinity. (iv) Passenger elevator service at all times (if the Property has such equipment serving the Premises, and subject to changes in the number of elevators in service after Building Hours or at other times), and freight elevator service (if the Property has such equipment serving the Premises, and subject to scheduling by Landlord), in common with Landlord and other parties. (v) Electricity for building-standard overhead office lighting fixtures, and equipment and accessories customary for offices, where: (a) Tenant uses an amount of electricity that is generally consistent with average office use at the Property, as reasonably determined by Landlord, (b) the Systems and Equipment are suitable, and the safe and lawful capacity thereof is not exceeded, and (c) sufficient capacity remains at all times for other existing and future tenants, as reasonably determined by Landlord (who shall be subject to similar restriction). B. Additional Utilities and Services. Landlord shall seek to provide such extra utilities or services as Tenant may from time to time request, if the same are reasonable and feasible for Landlord to provide and do not involve modifications or additions to the Property or existing Systems and Equipment, and if Landlord shall receive Tenant's request within a reasonable period prior to the time such extra utilities or services are required. Landlord may comply with written or oral requests by any officer or employee of Tenant, unless Tenant shall notify Landlord of, or Landlord shall request, the names of authorized individuals (up to 3 for each floor on which the Premises are located) and 8 procedures for written requests. Tenant shall pay, for any extra utilities or services, such standard charges as Landlord shall from time to time establish, Landlord's out-of-pocket costs for architects, engineers, consultants and other parties relating to such extra utilities or services, and a fee equal to fifteen percent (15%) of such costs (provided, Landlord's standard overtime HVAC charges shall not require an additional such percentage thereon). All payments for such extra utilities or services shall be due at the same time as the installment of Base Rent with which the same are billed, or if billed separately, shall be due within fifteen (15) days after such billing. Landlord shall not be responsible for inadequate air-conditioning or ventilation whenever the use or occupancy of the Premises exceeds the normal capacity or design loads of, affects the temperature or humidity otherwise maintained by, or otherwise adversely affects the operation of, the Systems and Equipment for the Property, whether due to items of equipment or machinery generating heat, above-normal concentrations of personnel or equipment, or alterations to the Premises made by or through Tenant without balancing the air or installing supplemental HVAC equipment. In any such case, with at least fifteen (15) days advance notice to Tenant, Landlord may: (i) elect to balance the air and/or install, operate, maintain and replace such supplemental HVAC equipment during the Term, at Tenant's reasonable expense, as an extra utility or service, or (ii) require that Tenant arrange for the same as Work under Article 9. Notwithstanding the foregoing to the contrary, in lieu of charging separately for additional utilities and services, Landlord may reasonably elect from time to time to expand the amounts of utilities or services available without separate charge, in which case the costs thereof shall be included respectively in Utility Costs or Expenses. C. Monitoring. Landlord may install and operate meters, submeters or any other reasonable system for monitoring or estimating any services or utilities used by Tenant in excess of those required to be provided by Landlord under this Article (including a system for Landlord's engineer to reasonably estimate any such excess usage). If such system indicates such excess services or utilities, Tenant shall pay Landlord's charges and fees as described in Paragraph B above for installing and operating such system and any supplementary air-conditioning, ventilation, heat, electrical or other systems or equipment (or adjustments or modifications to the existing Systems and Equipment) which Landlord may make, and Landlord's charges for such amount of excess services or utilities used by Tenant. D. Interruptions and Changes. Landlord shall have no liability for interruptions, variations, shortages, failures, changes in quality, quantity, character or availability of any utilities or services caused by repairs, maintenance, replacements, alterations (including any freon retrofit work), labor controversies, accidents, inability to obtain services, utilities or supplies, governmental or utility company acts or omissions, requirements, guidelines or requests, or other causes beyond Landlord's reasonable control (or under any circumstances with respect to utilities or services not required to be provided by Landlord hereunder). Under no circumstances whatsoever shall any of the foregoing be deemed an eviction or disturbance of Tenant's use and possession of the Premises or any part thereof, serve to abate Rent, or relieve Tenant from performance of Tenant's obligations under this Lease. However, in any such event after receiving notice, Landlord shall use commercially reasonable efforts to restore such utilities or services required to be provided hereunder to 9 reasonable levels. ARTICLE 7: USE, COMPLIANCE WITH LAWS, AND RULES A. Use of Premises. Tenant shall use the Premises only for the permitted use identified in Article 1, and no other purpose whatsoever, subject to the other provisions of this Article and this Lease. Unless expressly permitted in Article 1, Tenant shall not use or permit the Premises to be used as a: (i) medical, dental, psychology, psychiatry or science office or laboratory, (ii) telemarketing "boiler-room" sales operation, (iii) "executive suite" or "legal suite" multi-party shared offices operation, (iv) travel agency or reservation center, (v) retail real estate brokerage, retail stock brokerage, or retail bank or financial institution, (vi) computerized vehicle sales, loan or "finder" service, (vii) social-welfare office or governmental, quasi-governmental, trade association or union office or activities, (ix) employment, placement, recruiting or clerical support agency, (x) radio or television studio or broadcasting or recording facility, or (xi) school, educational facility or training center (except for training that is minor and ancillary to general office use and does not require parking in excess of code requirements for general office use). B. Compliance With Laws. Tenant shall comply with all Laws relating to the Premises and Tenant's use of the Premises and Property, and shall promptly reimburse Landlord for any expenses Landlord incurs for work or other matters relating to areas outside of the Premises in order to comply with Laws as a result of Tenant's particular use of the Premises (as opposed to a Law that applies to office tenants in general); provided, Tenant shall not be required by this provision to perform structural improvements to the Premises that will result in a benefit to Landlord extending beyond the Term, as it may be extended, unless required by a Law pertaining to: (i) Tenant's particular use of the Premises (as opposed to a Law that applies to office tenants in general), (ii) Work performed by or for Tenant or any Transferee (i.e. excluding any improvements or work that Landlord is required to perform under this Lease), or (iii) other acts or omissions of Tenant or any Transferee. C. Rules. Tenant shall comply with the Rules set forth in Exhibit B attached hereto (the "Rules"). Landlord shall have the right, by notice to Tenant, to reasonably amend such Rules and supplement the same with other reasonable Rules relating to the Property, or the promotion of safety, care, efficiency, cleanliness or good order therein. Although Landlord shall not discriminate against Tenant in the enforcement of the Rules, nothing herein shall be construed to give Tenant or any other Person any claim, demand or cause of action against Landlord arising out of the violation of Laws or the Rules by any other tenant or visitor of the Property, or out of the enforcement, modification or waiver of the Rules by Landlord in any particular instance. D. Other Requirements. So long as Tenant receives written notification of the applicable requirements, Tenant shall not use or permit the Premises or Property to be used in a way that will: (i) violate the requirements of Landlord's insurers, the American Insurance Association, or any board of underwriters, (ii) cause a cancellation of Landlord's policies, impair the insurability of the Property, or increase Landlord's premiums (any such 10 increase shall be paid by Tenant without such payment being deemed permission to continue such activity or a waiver of any other remedies of Landlord), or (iii) violate the requirements of any Lenders, the certificates of occupancy issued for the Premises or the Property, or any other requirements, covenants, conditions or restrictions affecting the Property at any time (provided none of the foregoing shall prohibit normal office use of the Premises in compliance with the other provisions of this Lease). ARTICLE 8: MAINTENANCE AND REPAIRS Except for customary cleaning and trash removal provided by Landlord under Article 6, or casualty damage to be repaired by Landlord under Article 11, Tenant shall keep and maintain (or cause to be kept and maintained) the Premises in good and sanitary condition, working order and repair, in compliance with all applicable Laws as described in Article 7, and as required under other provisions of this Lease, including the Rules (including any carpet and other flooring material, paint and wall-coverings, doors, windows, ceilings, interior surfaces of walls, lighting, plumbing and other fixtures, alterations, improvements, and systems and equipment in or exclusively serving the Premises whether installed by Landlord or Tenant). In the event that any repairs, maintenance or replacements are required, Tenant shall promptly notify Landlord and arrange for the same either: (i) through Landlord for such reasonable charges as Landlord may establish from time to time, payable within fifteen (15) days after billing, or (ii) at Landlord's option, by engaging such contractors as Landlord shall first designate or approve in writing to perform such work, all in a first class, workmanlike manner approved by Landlord in advance in writing and otherwise in compliance with Article 9 respecting "Work". Tenant shall promptly notify Landlord concerning the necessity for any repairs or other work hereunder and upon completion thereof. Tenant shall pay Landlord for any repairs, maintenance and replacements to areas of the Property outside the Premises caused, in whole or in part, as a result of moving any furniture, fixtures, or other property to or from the Premises, or otherwise by Tenant or its employees, agents, contractors, or visitors (notwithstanding anything to the contrary contained in this Lease). Except as provided in the preceding sentence, or for damage covered under Article 11, Landlord shall keep the exterior walls, roof, structure, Systems and Equipment, and common areas of the Property in good and sanitary condition, working order and repair (the cost of which shall be included in Expenses to the extent permitted in the definition thereof in Article 30) and in compliance with all applicable Laws. ARTICLE 9: ALTERATIONS AND LIENS A. Alterations and Approval. Tenant shall not attach any fixtures, equipment or other items to the Premises, or paint or make any other additions, changes, alterations or improvements to the Premises or the Systems and Equipment serving the Premises (all such work is referred to collectively herein as the "Work"), without the prior written consent of Landlord. Landlord shall not unreasonably withhold consent, except that Landlord reserves the right to withhold consent in Landlord's sole discretion for Work affecting the structure, safety, efficiency or security of the Property or Premises, the Systems and Equipment, or the appearance of the Premises from any common or public areas. 11 Landlord may only require removal of Work installed by or for Tenant as provided under Article 23. B. Approval Conditions. Landlord reserves the right to impose reasonable requirements as a condition of such consent or otherwise in connection with the Work, including requirements that Tenant: (i) use parties contained on Landlord's approved list (if reputable and available on commercially reasonable terms) or submit for Landlord's prior written approval the names, addresses and background information concerning all architects, engineers, contractors, subcontractors and suppliers Tenant proposes to use, (ii) submit for Landlord's written approval detailed plans and specifications prepared by licensed and competent architects and engineers, (iii) obtain and post permits, (iv) provide additional insurance, bonds and/or other reasonable security and/or documentation protecting against damages, liability and liens, (v) use union labor (if Landlord uses union labor), (vi) permit Landlord or its representatives to inspect the Work at reasonable times, and (vii) comply with such other reasonable requirements as Landlord may impose concerning the manner and times in which such Work shall be done. Landlord may require that all Work be performed under Landlord's supervision. If Landlord consents, inspects, supervises, recommends or designates any architects, engineers, contractors, subcontractors or suppliers, the same shall not be deemed a warranty as to the adequacy of the design, workmanship or quality of materials, or compliance of the Work with the plans and specifications or any Laws. C. Performance of Work. All Work shall be performed: (i) in a thoroughly first class, professional and workmanlike manner, (ii) only with materials that are new, high quality, and free of material defects, (iii) only by parties, and strictly in accordance with plans, specifications, and other matters, approved or designated by Landlord in advance in writing, (iv) so as not to adversely affect the Systems and Equipment or the structure of the Property, (v) diligently to completion and so as to avoid any disturbance, disruption or inconvenience to other tenants and the operation of the Property, and (vi) in compliance with all Laws, the Rules and other provisions of this Lease, and such other reasonable requirements as Landlord may impose concerning the manner and times in which such Work shall be done. Any floor, wall or ceiling coring work or penetrations or use of noisy or heavy equipment which may interfere with the conduct of business by other tenants at the Property shall, at Landlord's option, be performed at times other than Building Hours (at Tenant's sole cost). If Tenant fails to perform the Work as required herein or the materials supplied fail to comply herewith or with the specifications approved by Landlord, and Tenant fails to cure such failure within 48 hours after written or oral notice by Landlord (except notice shall not be required in emergencies), Landlord shall have the right to stop the Work until such failure is cured (which shall not limit Landlord's other remedies and shall not serve to abate the Rent or Tenant's other obligations under this Lease). Upon completion of any Work hereunder, Tenant shall provide Landlord with "as built" plans, copies of all construction contracts, and proof of payment for all labor and materials. D. Liens. Tenant shall pay all costs for the Work when due. Tenant shall keep the Property, Premises and this Lease free from any mechanic's, materialman's, architect's, engineer's or similar liens or encumbrances, and any claims therefor, or stop or 12 violation notices, in connection with any Work. If contemplated under applicable statutory procedures, Tenant shall post and record appropriate notices of non-responsibility on behalf of Landlord, and shall give Landlord notice at least ten (10) days prior to the commencement of any Work (or such additional time as may be necessary under applicable Laws), to afford Landlord the opportunity of posting and recording any other notices of non-responsibility. Tenant shall remove any such claim, lien or encumbrance, or stop or violation notices of record, by bond or otherwise within thirty (30) days after notice by Landlord. If Tenant fails to do so, Landlord may pay the amount (or any portion thereof) or take such other action as Landlord deems necessary to remove such claim, lien or encumbrance, or stop or violation notices, without being responsible for investigating the validity thereof. The amount so paid and costs incurred by Landlord shall be deemed additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord's title to, or any Lender's interest in, the Property or Premises to any such claims, liens or encumbrances, or stop or violation notices, whether claimed pursuant to statute or other Law or express or implied contract. E. Landlord's Fees and Costs. Tenant shall pay Landlord a fee for reviewing, scheduling, monitoring, supervising, and providing access for or in connection with the Work, if Tenant elects to contract Landlord for any Work performed, in an amount equal to three percent (3%) of the total cost of the Work (including costs of plans and permits therefor), and Landlord's out-of-pocket costs, including any costs for security, utilities, trash removal, temporary barricades, janitorial, engineering, architectural or consulting services, and other matters in connection with the Work, payable within fifteen (15) days after billing. ARTICLE 10: INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS A. Required Insurance. Tenant shall maintain during the Term: (i) commercial general liability ("CGL") insurance, with limits of not less than $1,000,000 for personal injury, bodily injury or death, and property damage or destruction (including loss of use thereon, combined single limit, for any one occurrence, and $2,000,000 in the aggregate per policy year, with endorsements: (a) for contractual liability covering Tenant's indemnity obligations under this Lease, and (b) adding Landlord, the management company for the Property, and other parties reasonably designated by Landlord, as additional insureds, and (ii) primary, noncontributory, extended coverage or "all-risk" property damage insurance (including installation floater insurance during any alterations or improvements that Tenant makes to the Premises) covering any alterations or improvements beyond any work or allowance provided by Landlord under this Lease, and Tenant's personal property, business records, fixtures and equipment, for damage or other loss caused by fire or other casualty or cause including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, explosion, business interruption (for at least nine (9) months), and other insurable risks in amounts not less than the full insurable replacement value of such property and full insurable value of such other interests of Tenant (subject to reasonable deductible amounts). 13 B. Certificates and Other Matters. Tenant shall provide Landlord with certificates evidencing the coverage required hereunder prior to the Commencement Date, or Tenant's entry to the Premises for delivery of materials or construction of improvements or any other purpose (whichever first occurs). Such certificates shall state that such insurance coverage may not be reduced, canceled or allowed to expire without at least thirty (30) days' prior written notice to Landlord, and shall include, as attachments, originals of the additional insured endorsements to Tenant's CGL policy required above. Tenant shall provide renewal certificates to Landlord at least thirty (30) days prior to expiration of such policies. Except as provided to the contrary herein, any insurance carried by Landlord or Tenant shall be for the sole benefit of the party carrying such insurance. Tenant's insurance policies shall be primary to all policies of Landlord and any other additional insureds (whose policies shall be deemed excess and noncontributory). All insurance required hereunder shall be provided by responsible insurers licensed in the State in which the Property is located, and shall have a general policy holder's rating of at least A- and a financial rating of at least X in the then current edition of Best's Insurance Reports. Landlord disclaims any representation as to whether the foregoing overages will be adequate to protect Tenant. C. Mutual Waiver of Claims and Subrogation. The parties hereby mutually waive all claims against each other for all losses covered or required to be covered hereunder by their respective insurance policies, and waive all rights of subrogation of their respective insurers; for purposes hereof, any deductible amount shall be treated as though it were recoverable under such policies. SUCH MUTUAL WAIVER OF CLAIMS SHALL APPLY REGARDLESS OF THE NEGLIGENCE OR GROSS NEGLIGENCE OF THE OTHER PARTY OR ITS AFFILIATES, AGENTS OR EMPLOYEES. The parties agree that their respective insurance policies are now, or shall be, endorsed such that said waiver of subrogation shall not affect the right of the insured to recover thereunder. ARTICLE 11: CASUALTY DAMAGE A. Restoration. Tenant shall promptly notify Landlord of any damage to the Premises by fire or other casualty. If the Premises or any common areas of the Property providing access thereto shall be damaged by fire or other casualty, Landlord shall use available insurance proceeds to restore the same. Such restoration shall be to substantially the same condition as prior to the casualty, except for modifications required by zoning and building codes and other Laws or by any Lender, any other modifications to the common areas deemed desirable by Landlord (provided access to the Premises is not materially impaired), and except that Landlord shall not be required to repair or replace any of Tenant's furniture, furnishings, fixtures, systems or equipment, or any alterations or improvements in excess of any work or allowance provided by Landlord under this Lease. Tenant shall reasonably cooperate in approving any plans for repairs to the Premises hereunder, and in vacating the Premises to the extent reasonably required to avoid any interference or delay in Landlord's repair work. Promptly following completion of Landlord's work, Tenant shall repair and replace Tenant's furniture, furnishings, fixtures, systems or equipment, and any alterations or improvements made by Tenant in excess of those provided by Landlord, subject to and in compliance with the other provisions of this Lease. 14 B. Abatement of Rent. Landlord shall not be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from such damage or the repair thereof. However, Landlord shall use available rent loss proceeds to allow Tenant a proportionate abatement of Rent from the date of the casualty through the date that Landlord substantially completes Landlord's repair obligations hereunder (or the date that Landlord would have substantially completed such repairs, but for delays by Tenant or any other occupant of the Premises, or any of their agents, employees, invitees, Transferees and contractors), provided such abatement: (i) shall apply only to the extent the Premises are untenantable for the purposes permitted under this Lease and not used by Tenant as a result thereof, based proportionately on the square footage of the Premises so affected and not used, and (ii) shall not apply if Tenant or any other occupant of the Premises, or any of their agents, employees, invitees, Transferees or contractors caused the damage. C. Termination of Lease. Notwithstanding the foregoing to the contrary, in lieu of performing the restoration work, Landlord may elect to terminate this Lease by notifying Tenant in writing of such termination within ninety (90) days after the date of damage (such termination notice to include a termination date providing at least thirty (30) days for Tenant to vacate the Premises), if the Property shall be materially damaged by Tenant or any other occupant of the Premises, or any of their agents, employees, invitees, Transferees or contractors, or if the Property shall be damaged by fire or other casualty or cause such that: (i) repairs to the Premises and access thereto cannot reasonably be completed within 120 days after the casualty without the payment of overtime or other premiums, (ii) more than twenty-five percent (25%) of the Premises is affected by the damage and fewer than twenty-four (24) months remain in the Term, or any material damage occurs to the Premises during the last twelve (12) months of the Term, (iii) any Lender shall require that the insurance proceeds or any material portion thereof be used to retire the Mortgage debt (or shall terminate the ground lease, as the case may be), or the damage is not fully covered, except for reasonable deductible amounts, by Landlord's insurance policies, or (iv) the cost of the repairs, alterations, restoration or improvement work would exceed thirty-five percent (35%) of the replacement value of the Building (whether or not the Premises are affected by the damage). Tenant agrees that the abatement of Rent provided herein shall be Tenant's sole recourse in the event of such damage, and waives any other rights Tenant may have under any applicable Law to perform repairs or terminate the Lease by reason of damage to the Premises or Property. ARTICLE 12: CONDEMNATION If at least fifty percent (50%) of the rentable area of the Premises shall be taken by power of eminent domain or condemned by a competent authority or by conveyance in lieu thereof for public or quasi-public use ("Condemnation"), including any temporary taking for a period of one year or longer, this Lease shall terminate on the date possession for such use is so taken. If: (i) less than fifty percent (50%) of the Premises is taken, but the taking includes or affects a material portion of the Building or Property, or the economical operation thereof, or (ii) the taking is temporary and will be in effect for less than one year 15 but more than thirty (30) days, then in either such event, Landlord may elect to terminate this Lease upon at least thirty (30) days' prior notice to Tenant. The parties further agree that: (a) if this Lease is terminated, all Rent shall be apportioned as of the date of such termination or the date of such taking, whichever shall first occur, (b) if the taking is temporary, Rent shall not be abated for the period of the taking, but Tenant may seek a condemnation award therefor (and the Term shall not be extended thereby), and (c) if this Lease is not terminated but any part of the Premises is permanently taken, the Rent shall be proportionately abated based on the square footage of the Premises so taken. Landlord shall be entitled to receive the entire award or payment in connection with such Condemnation and Tenant hereby assigns to Landlord any interest therein for the value of Tenant's unexpired leasehold estate or any other claim and waives any right to participate therein, except that Tenant shall have the right to file any separate claim available to Tenant for a temporary taking of the leasehold as described above, and for moving expenses and any taking of Tenant's personal property, provided such award is separately payable to Tenant and does not diminish the award available to Landlord or any Lender. ARTICLE 13: ASSIGNMENT AND SUBLETTING A. Transfers. Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld as further described below: (i) assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, by operation of Law or otherwise, (ii) sublet the Premises or any part thereof, (iii) permit the use of the Premises by any Persons other than Tenant and its employees (all of the foregoing are hereinafter sometimes referred to collectively as "Transfers" and any Person to whom any Transfer is made or sought to be made is hereinafter sometimes referred to as a "Transferee"). If Tenant shall desire Landlord's consent to any Transfer, Tenant shall notify Landlord in writing, which notice shall include: (a) the proposed effective date (which shall not be less than thirty (30) nor more than 180 days after Tenant's notice), (b) the portion of the Premises to be Transferred (herein called the "Subject Space"), (c) the terms of the proposed Transfer and the consideration therefor, the name, address and background information concerning the proposed Transferee, and a true and complete copy of all proposed Transfer documentation, (d) financial statements (balance sheets and income/expense statements for the current and prior year) of the proposed Transferee, in form and detail reasonably satisfactory to Landlord, certified by an officer, partner or owner of the Transferee, (e) at least one favorable financial and business reference, and (f) any other reasonable information to enable Landlord to determine the financial responsibility, character, and reputation of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space or as Landlord may reasonably request. Any Transfer made without complying with this Article shall, at Landlord's option, be null, void and of no effect, or shall constitute a Default under this Lease. Whether or not Landlord shall grant consent, Tenant shall pay $500 towards Landlord's review and processing expenses, as well as any reasonable legal fees incurred by Landlord, within fifteen (15) days after Landlord's written request. 16 B. Approval. Landlord will not unreasonably withhold its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in Tenant's notice. The parties hereby agree that it shall be reasonable under this Lease and under any applicable Law for Landlord to withhold consent to any proposed Transfer where one or more of the following applies (without limitation as to other reasonable grounds for withholding consent): (i) the Transferee is of a character or reputation or engaged in a business which is not consistent with the quality or nature of the Property or other tenants of the Property, (ii) the Transferee intends to use the Subject Space for purposes which are not permitted under this Lease, (iii) the Subject Space is not regular in shape with appropriate means of ingress and egress suitable for normal renting purposes, would result in more than a reasonable number of occupants, or would require increased services by Landlord, (iv) the Transferee is a government (or agency or instrumentality thereof), (v) the proposed Transferee or any affiliate thereof is an occupant of the Property (or of any complex in which the Property is located) or has negotiated to lease space in the Property (or in such complex) from Landlord during the prior six (6) months, (vi) the proposed Transferee does not have, in Landlord's good faith determination, satisfactory references or a reasonable financial condition in relation to the obligations to be assumed in connection with the Transfer, (vii) the Transfer involves a partial or collateral assignment, a mortgage, or other encumbrance on this Lease, (viii) the proposed Transfer involves conversion, merger or consolidation of Tenant into a limited liability company or limited liability partnership which would have the legal effect of releasing Tenant from any obligations under this Lease, (ix) the proposed Transfer would cause Landlord to be in violation of any Laws or any other lease, Mortgage or agreement to which Landlord is a party, or would give a tenant of the Property a right to cancel its lease, or (x) Tenant has committed and failed to cure a Default. If Tenant disagrees with Landlord's decision to deny approval, Tenant's sole remedy shall be to seek immediate declaratory and injunctive relief, and to recover attorneys' fees and costs as a prevailing party under Article 17. C. Transfer Premiums. If Landlord consents to a Transfer, and as a condition thereto which the parties hereby agree is reasonable, Tenant shall retain fifty percent (50%) of any Transfer Premium, and shall pay Landlord fifty percent (50%) of any Transfer Premium, derived by Tenant from such Transfer. "Transfer Premium" shall mean: (i) for a lease assignment, all consideration paid or payable therefor, and (ii) for a sublease, all rent, additional rent or other consideration paid by such Transferee in excess of the Rent payable by Tenant under this Lease (on a monthly basis during the Term, and on a per rentable square foot basis, if less than all of the Premises is transferred). In any such computation, Tenant: (a) may subtract any reasonable direct out-of-pocket costs incurred in connection with such Transfer, such as advertising costs, brokerage commissions, attorneys' fees and leasehold improvements for the Subject Space, and (b) shall include in the "Transfer Premium" any so-called "key money" or other bonus amount paid by Transferee to Tenant, and any payments in excess of fair market value for services rendered by Tenant to Transferee or in excess of fair market value for assets, fixtures, inventory, equipment or furniture transferred by Tenant to Transferee. If part of the consideration for such Transfer shall be payable other than in cash, Landlord's share of such non-cash consideration shall be in such form as is reasonably satisfactory to Landlord. Tenant shall pay the percentage of the Transfer Premium due Landlord 17 hereunder within fifteen (15) days after Tenant receives any Transfer Premium from the Transferee. D. Recapture. Notwithstanding anything to the contrary contained in this Article, Landlord shall have the option, by giving notice to Tenant within thirty (30) days after receipt of Tenant's notice of any proposed Transfer, to recapture the Premises or Subject Space. Such recapture notice shall cancel and terminate this Lease with respect to the Premises or Subject Space, as the case may be, as of the date stated in Tenant's notice as the effective date of the proposed Transfer (or at Landlord's option, such notice shall cause the Transfer to be made to Landlord or its agent or nominee, in which case the parties shall execute reasonable Transfer documentation promptly thereafter). If this Lease shall be canceled with respect to less than the entire Premises, the Rent herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party the parties shall execute written confirmation of the same. Tenant shall surrender and vacate the Premises or Subject Space, as the case may be, when required hereunder in accordance with Article 23, and any failure to do so shall be subject to Article 24. E. Terms of Consent. If Landlord consents to a Transfer: (i) the terms and conditions of this Lease, including Tenant's liability for the Subject Space, shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) no Transferee shall succeed to any rights provided in this Lease or any amendment hereto to extend the Term of this Lease, expand the Premises, or lease other space, any such rights being deemed personal to the initial Tenant, (iv) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, and (v) Tenant shall furnish a complete statement, certified by an independent certified public accountant or Tenant's financial officer, setting forth in detail the computation of any Transfer Premium that Tenant has derived and shall derive from such Transfer. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant and any Transferee relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found to have been understated, Tenant shall pay the deficiency within fifteen (15) days after demand (and if understated by more than five percent (5%), Tenant shall include with such payment Landlord's costs of such audit). Any sublease hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any sublease, whether based on Default or mutual agreement, Landlord shall have the right to: (a) deem such sublease as merged and canceled and repossess the Subject Space by any lawful means, or (b) require that such subtenant attorn to and recognize Landlord as its landlord under such sublease with respect to obligations arising thereafter, subject to the terms of Landlord's standard form of attornment documentation. If Tenant shall commit a Default under this Lease, Landlord is hereby irrevocably authorized to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply toward Tenant's obligations under this Lease). 18 F. Certain Transfers. For purposes of this Lease, the term "Transfer" shall also include, and all of the foregoing provisions shall apply to: (i) the conversion, merger or consolidation of Tenant into a limited liability company or limited liability partnership, (ii) if Tenant is a partnership or limited liability company, the withdrawal or change, voluntary, involuntary or by operation of law, of a majority of the partners or members, or a transfer of a majority of partnership or membership interests, within a twelve month period, or the dissolution of the partnership or company, and (iii) if Tenant is a closely held corporation (i.e., whose stock is not publicly held and not traded through an exchange or over the counter), the dissolution, merger, consolidation or other reorganization of Tenant, or within a twelve month period: (a) the sale or other transfer of more than an aggregate of 50% of the voting shares of Tenant (other than to immediate family members by reason of gift or death), or (b) the sale, mortgage, hypothecation or pledge of more than an aggregate of 50% of Tenant's net assets. Notwithstanding the foregoing provisions of this Article 13(F), the term "Transfer" shall not include, and none of the foregoing provisions shall apply to, any transfer or assignment of this Lease, by operation of law or otherwise, to a successor in interest to Tenant by means of merger, sale, acquisition, change of control, or sale of all or substantially all of the assets of Tenant; provided, however, that the provisions of this sentence are personal to Ricochet Networks, Inc. and its parent company, subsidiaries, and affiliates. ARTICLE 14: PERSONAL PROPERTY, RENT AND OTHER TAXES Tenant shall pay, prior to delinquency, all taxes, charges or other governmental impositions assessed against or levied upon all fixtures, furnishings, personal property, built-in and modular furniture, and systems and equipment located in or exclusively serving the Premises, notwithstanding that certain such items may become Landlord's property under Article 23 upon termination of the Lease. Whenever possible, Tenant shall cause all such items to be assessed and billed separately from the other property of Landlord. In the event any such items shall be assessed and billed with the other property of Landlord, Tenant shall pay Landlord Tenant's share of such taxes, charges or other governmental impositions within fifteen (15) days after Landlord delivers a statement and a copy of the assessment or other documentation showing the amount of impositions applicable to Tenant's property. Tenant shall pay any rent tax, sales tax, service tax, transfer tax, value added tax, or any other applicable tax on the Rent, utilities or services herein, the privilege of renting, using or occupying the Premises or collecting Rent therefrom, or otherwise respecting this Lease or any other document entered in connection herewith. Notwithstanding the foregoing, Tenant shall have no obligation to pay any excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, or other taxes to the extent applicable to Landlord's general or net income. 19 ARTICLE 15: LANDLORD'S REMEDIES A. Default. The occurrence of any one or more of the following events shall constitute a "Default" by Tenant and shall give rise to Landlord's remedies set forth in Paragraph B below: (i) failure to make when due any payment of Rent, unless such failure is cured within five (5) business days after notice (for the first default in a twelve month period, and thereafter three (3) days for any subsequent failure to make when due any payment of Rent in the same twelve month period); (ii) failure to observe or perform any term or condition of this Lease other than the payment of Rent (or the other matters expressly described herein), unless such failure is cured within any period of time following notice expressly provided with respect thereto in other Articles hereof, or otherwise within a reasonable time (but not less than fifteen (15) days), but in no event more than thirty (30) days following notice (provided, if the nature of Tenant's failure is such that more time is reasonably required in order to cure, Tenant shall not be in Default if Tenant commences to cure promptly within such period, diligently seeks and keeps Landlord reasonably advised of efforts to cure such failure to completion, and completes such cure within sixty (60) days following Landlord's notice); (iii) failure to cure immediately upon notice thereof any condition which is hazardous, interferes with another tenant or the operation or leasing of the Property, or may cause the imposition of a fine, penalty or other remedy on Landlord or its agents or affiliates, (iv) violating Article 13 respecting Transfers, or abandoning the Premises ("abandonment" under this Lease shall mean vacating or failing to occupy the Premises for more than thirty (30) days while Tenant is delinquent in paying Rent), or (v) (a) making by Tenant or any guarantor of this Lease ("Guarantor") of any general assignment for the benefit of creditors, (b) filing by or for reorganization or arrangement under any Law relating to bankruptcy or insolvency (unless, in the case of a petition filed against Tenant or such Guarantor, the same is dismissed within thirty (30) days), (c) appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located in the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days, (d) attachment, execution or other judicial seizure of substantially all of Tenant's assets located in the Premises or of Tenant's interest in this Lease, (e) Tenant's or any Guarantor's convening of a meeting of its creditors or any class thereof for the purpose of effecting a moratorium upon or composition of its debts, (f) Tenant's or any Guarantor's insolvency or failure, or admission of an inability, to pay debts as they mature, or (g) a violation by Tenant or any affiliate of Tenant under any other lease or agreement with Landlord or any affiliate thereof which is not cured within the time permitted for cure thereunder. The notice and cure periods herein are intended to satisfy and run concurrently with any notice and cure periods provided by Law, and shall not be in addition thereto. B. Remedies. If a Default occurs, Landlord shall have the rights and remedies hereinafter set forth to the extent permitted by Law, which shall be distinct, separate and cumulative with and in addition to any other right or remedy allowed under any Law or other provision of this Lease: (1) Landlord may terminate Tenant's right of possession, reenter and repossess the Premises by detainer suit, summary proceedings or other lawful means, with or without 20 terminating this Lease (except as required by Law), and recover from Tenant: (i) any unpaid Rent as of the termination date, (ii) the amount by which: (a) any unpaid Rent which would have accrued after the termination date during the balance of the Term exceeds (b) the reasonable rental value of the Premises under a lease substantially similar to this Lease, taking into account, among other things, the condition of the Premises, market conditions, the period of time the Premises may reasonably remain vacant before Landlord is able to re-lease the same to a suitable replacement tenant, and Costs of Reletting (as defined in Paragraph H below) that Landlord may incur in order to enter such replacement lease, and (iii) any other amounts necessary to compensate Landlord for all damages proximately caused by Tenant's failure to perform its obligations under this Lease. For purposes of computing the amount of Rent herein that would have accrued after the termination date, Tenant's obligations for Taxes and Expenses shall be projected based upon the average rate of increase in such items from the Commencement Date through the termination date (or if such period shall be less than three years, then based on Landlord's reasonable estimates). The amounts computed in accordance with the foregoing subclauses (a) and (b) shall both be discounted in accordance with accepted financial practice at the rate of five percent (5%) per annum to the then present value. (2) Landlord may terminate Tenant's right of possession, reenter and repossess the Premises by detainer suit, summary proceedings or other lawful means, with or without terminating this Lease (except as required by Law), and recover from Tenant: (i) any unpaid Rent as of the date possession is terminated, (ii) any unpaid Rent which thereafter accrues during the Term from the date possession is terminated through the time of judgment (or which may have accrued from the time of any earlier judgment obtained by Landlord), less any consideration received from replacement tenants as further described and applied pursuant to Paragraph H, below, and (iii) any other amounts necessary to compensate Landlord for all damages proximately caused by Tenant's failure to perform its obligations under this Lease, including all Costs of Reletting (as defined in Paragraph H below). Tenant shall pay any such amounts to Landlord as the same accrue or after the same have accrued from time to time upon demand. At any time after terminating Tenant's right to possession as provided herein, Landlord may terminate this Lease as provided in clause (1) above by notice to Tenant and may pursue such other remedies as may be available to Landlord under this Lease or Law. C. Mitigation of Damages. If Landlord terminates this Lease or Tenant's right to possession, Landlord shall be obligated to mitigate Landlord's damages if and to the extent required by applicable Law, subject to the following: (i) Landlord shall be required only to use reasonable efforts to mitigate, which shall not exceed such efforts as Landlord generally uses to lease other space at the Property, (ii) Landlord will not be deemed to have failed to mitigate if Landlord or its affiliates lease any other portions of the Property or other projects owned by Landlord or its affiliates in the same geographic area, before reletting all or any portion of the Premises, and (iii) any failure to mitigate as described herein with respect to any period of time shall only reduce the Rent and other amounts to which Landlord is entitled hereunder by the reasonable rental value of the Premises during such period, taking into account the factors described in clause B(1) above. Tenant may seek to mitigate damages by attempting to sublease the Premises or assign this Lease 21 pursuant to Article 13. D. Reletting. If this Lease or Tenant's right to possession is terminated, or Tenant abandons the Premises, Landlord may: (i) enter and secure the Premises, change the locks, install barricades, remove any improvements, fixtures or other property of Tenant therein, perform any decorating, remodeling, repairs, alterations, improvements or additions and take such other actions as Landlord shall determine in Landlord's sole discretion to prevent damage or deterioration to the Premises or prepare the same for reletting, and (ii) relet all or any portion of the Premises (separately or as part of a larger space), for any rent, use or period of time (which may extend beyond the Term hereto, and upon any other terms as Landlord shall determine in Landlord's sole discretion, directly or as Tenant's agent (if permitted or required by applicable Law). The consideration received from such reletting shall be applied pursuant to the terms of Paragraph H hereof, and if such consideration, as so applied, is not sufficient to cover all Rent and damages to which Landlord may be entitled hereunder, Tenant shall pay any deficiency to Landlord as the same accrues or after the same has accrued from time to time upon demand, subject to Paragraph C and the other provisions hereof. E. Specific Performance, Collection of Rent and Acceleration. Landlord shall at all times have the right without prior demand or notice except as required by applicable Law to (i) seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease or restrain or enjoin a violation of any provision hereof, and Tenant hereby waives any right to require that Landlord post a bond or other security in connection therewith, and (ii) sue for and collect any unpaid Rent which has accrued. Notwithstanding anything to the contrary contained in this Lease, to the extent not expressly prohibited by applicable Law, in the event of any Default by Tenant, Landlord may terminate this Lease or Tenant's right to possession and accelerate and declare all Rent reserved for the remainder of the Term to be immediately due and payable; provided the Rent so accelerated shall be discounted in accordance with accepted financial practice at the rate of five percent (5%) per annum to the then present value, and Landlord shall, after receiving payment of the same from Tenant, be obligated to turn over to Tenant any actual net reletting proceeds (net of all Costs of Reletting) thereafter received during the remainder of the Term, up to the amount so received from Tenant pursuant to this provision. F. Late Charges, Interest, and Returned Checks. Tenant shall pay, as additional Rent, a service charge of Two Hundred Fifty Dollars ($250.00) or five percent (5%) of the delinquent amount, whichever is greater, if any portion of Rent is not received when due. In addition, any Rent not paid when due shall accrue interest from the due date at the Default Rate until payment is received by Landlord. Such service charges and interest payments shall not be deemed consent by Landlord to late payments, nor a waiver of Landlord's right to insist upon timely payments at any time, nor a waiver of any remedies to which Landlord is entitled as a result of the late payment of Rent. If Landlord receives two (2) or more checks from Tenant which are returned by Tenant's bank for insufficient funds, Landlord may require that all checks thereafter be bank certified or cashier's checks (without limiting Landlord's other remedies). All bank service charges resulting from any 22 returned checks shall be borne by Tenant. G. Landlord's Cure of Tenant Violations. If Tenant fails to perform any obligation under this Lease for ten (10) days after notice thereof by Landlord (except that no notice shall be required in emergencies), Landlord shall have the right (but not the duty), to perform such obligation on behalf and for the account of Tenant. In such event, Tenant shall reimburse Landlord upon demand, as additional Rent, for all expenses incurred by Landlord in performing such obligation together with an amount equal to fifteen percent (15%) thereof for Landlord's overhead, and interest thereon at the Default Rate from the date such expenses were incurred. Landlord's performance of Tenant's obligations hereunder shall not be deemed a waiver or release of Tenant therefrom. H. Other Matters. No re-entry or repossession, repairs, changes, alterations and additions, reletting, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, nor shall the same operate to release Tenant in whole or in part from any of Tenant's obligations hereunder, unless express notice of such intention is sent by Landlord to Tenant (and if applicable Law permits, and Landlord shall not have expressly terminated this Lease in writing, then any termination shall be deemed a termination of Tenant's right of possession only). Landlord may bring suits for amounts owed by Tenant hereunder or any portions thereof, as the same accrue or after the same have accrued, and no suit or recovery of any portion due hereunder shall be deemed a waiver of Landlord's right to collect all amounts to which Landlord is entitled hereunder, nor shall the same serve as any defense to any subsequent suit brought for any amount not theretofore reduced to judgment. Landlord may pursue one or more remedies against Tenant and need not make an election of remedies until findings of fact are made by a court of competent jurisdiction. All rent and other consideration paid by any replacement tenants shall be applied at Landlord's option: (i) first, to the Costs of Reletting, (ii) second, to the payment of all costs of enforcing this Lease against Tenant or any Guarantor, (iii) third, to the payment of all interest and service charges accruing hereunder, (iv) fourth, to the payment of Rent theretofore accrued, and (v) with the residue, if any, to be held by Landlord and applied to the payment of Rent and other obligations of Tenant as the same become due (and with any remaining residue to be retained by Landlord). "Costs of Reletting" shall include all costs and expenses incurred by Landlord for any repairs or other matters described in Paragraph D above, brokerage commissions, advertising costs, attorneys' fees, and any other costs and incentives incurred in order to enter into leases with replacement tenants. Landlord shall be under no obligation to observe or perform any provision of this Lease on its part to be observed or performed which accrues while Tenant is in Default hereunder. The times set forth herein for the curing of Defaults by Tenant are of the essence of this Lease. Tenant agrees that the notice and cure rights set forth herein contain the entire agreement of the parties respecting such matters, and hereby waives any right otherwise available under any Law to redeem or reinstate this Lease or Tenant's right to possession after this Lease or Tenant's right to possession is properly terminated hereunder. 23 ARTICLE 16: SECURITY DEPOSIT Tenant shall deposit with Landlord the amount set forth in Article 1 ("Security Deposit"), upon Tenant's execution and submission of this Lease. The Security Deposit shall serve as security for the prompt, full and faithful performance by Tenant of the terms and provisions of this Lease. If Tenant commits a Default, or owes any amounts to Landlord upon the expiration or earlier termination of this Lease, Landlord may use or apply the whole or any part of the Security Deposit for the payment of Tenant's obligations hereunder. The use or application of the Security Deposit or any portion thereof shall not prevent Landlord from exercising any other right or remedy provided hereunder or under any Law and shall not be construed as liquidated damages. In the event the Security Deposit is reduced by such use or application, Tenant shall deposit with Landlord within ten (10) days after notice, an amount sufficient to restore the full amount of the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from Landlord's general funds or pay interest on the Security Deposit. Any remaining portion of the Security Deposit shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest in this Lease) within sixty (60) days after Tenant (or such assignee) has vacated the Premises in accordance with Article 23. If the Premises shall be expanded at any time, or if the Term shall be extended at an increased rate of Rent, the Security Deposit shall thereupon be proportionately increased. Tenant shall not assign, pledge or otherwise transfer any interest in the Security Deposit except as part of an assignment of this Lease approved by Landlord under Article 13, and any attempt to do so shall be null and void. ARTICLE 17: ATTORNEYS' FEES, JURY TRIAL AND VENUE In the event of any litigation or arbitration between the parties relating to this Lease, the Premises or Property (including pretrial, trial, appellate, administrative, bankruptcy or insolvency proceedings), the prevailing party shall be entitled to recover its attorneys' fees and costs as part of the judgment, award or settlement therein. In the event of a breach of this Lease by either party which does not result in litigation but which causes the non-breaching party to incur attorneys' fees or costs, the breaching party shall reimburse such fees and costs to the non-breaching party upon demand. If either party or any of its officers, directors, trustees, beneficiaries, partners, agents, affiliates or employees shall be made a party to any litigation or arbitration commenced by or against the other party and is not at fault, the other party shall pay all costs, expenses and attorneys' fees incurred by such parties in connection with such litigation. IN THE INTEREST OF OBTAINING A SPEEDIER AND LESS COSTLY HEARING OF ANY DISPUTE, LANDLORD AND TENANT HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY AGAINST THE OTHER ARISING OUT OF OR RELATING TO THIS LEASE, THE PREMISES OR THE PROPERTY. Although such jury waiver is intended to be self-operative and irrevocable, Landlord and Tenant each further agree, if requested, to confirm such waivers in writing at the time of commencement of any such action, proceeding or counterclaim. Any action or proceeding brought by either party against the other for any matter arising out of or in any way relating to this Lease, the Premises or the Property, shall be heard, at Landlord's option, in the 24 court having jurisdiction located closest to the Property. ARTICLE 18: SUBORDINATION, ATTORNMENT AND LENDER PROTECTION This Lease is subject and subordinate to all Mortgages now or hereafter placed upon the Property, and all other encumbrances and matters of public record applicable to the Property. Whether before or after any foreclosure or power of sale proceedings are initiated or completed by any Lender or a deed in lieu is granted (or any ground lease is terminated), Tenant agrees, upon written request of any such Lender or any purchaser at such sale, to attorn and pay Rent to such party, and recognize such party as Landlord (provided such Lender or purchaser shall agree not to disturb Tenant's occupancy so long as Tenant does not Default hereunder, on a form of agreement customarily used by, or otherwise reasonably acceptable to, such party). However, in the event of attornment, no Lender shall be: (i) liable for any act or omission of Landlord, or subject to any offsets or defenses which Tenant might have against Landlord (arising prior to such Lender becoming Landlord under such attornment), (ii) liable for any security deposit or bound by any prepaid Rent not actually received by such Lender, or (iii) bound by any modification of this Lease not consented to by such Lender. Any Lender may elect to make this Lease prior to the lien of its Mortgage by written notice to Tenant, and if the Lender of any prior Mortgage shall require, this Lease shall be prior to any subordinate Mortgage; such elections shall be effective upon written notice to Tenant, or shall be effective as of such earlier or later date set forth in such notice. Tenant agrees to give any Lender by certified mail, return receipt requested, a copy of any notice of default served by Tenant upon Landlord, provided that prior to such notice Tenant has been notified in writing (by way of service on Tenant of a copy of an assignment of leases, or otherwise) of the address of such Lender. Tenant further agrees that if Landlord shall have failed to cure such default within the time permitted Landlord for cure under this Lease, any such Lender whose address has been provided to Tenant shall have an additional period of thirty (30) days in which to cure (or such additional time as may be required due to causes beyond such Lender's reasonable control, including time to obtain possession of the Property by appointment of receiver, power of sale or judicial action). Except as expressly provided to the contrary herein, the provisions of this Article shall be self-operative; however Tenant shall execute and deliver, within ten (10) days after request therefor, such documentation as Landlord or any Lender may reasonably request from time to time, whether prior to or after a foreclosure or power of sale proceeding is initiated or completed, a deed in lieu is delivered, or a ground lease is terminated, in order to further confirm or effectuate the matters set forth in this Article in recordable form. ARTICLE 19: ESTOPPEL CERTIFICATES Tenant shall from time to time, within ten (10) days after written request from Landlord, execute, acknowledge and deliver a statement certifying: (i) that this Lease is unmodified and in full force and effect or, if modified, stating the nature of such modification and certifying that this Lease as so modified, is in full force and effect (or specifying the ground for claiming that this Lease is not in force and effect), (ii) the dates to which the Rent has been paid, and the amount of any Security Deposit, (iii) that Tenant is 25 in possession of the Premises, and paying Rent on a current basis with no offsets, defenses or claims, or specifying the same if any are claimed, (iv) that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord or Tenant, or specifying the same if any are claimed, and (v) certifying such other matters, and including such current financial statements, as Landlord may reasonably request, or as may be requested by Landlord's current or prospective Lenders, insurance carriers, auditors, and prospective purchasers (and including a comparable certification statement from any subtenant respecting its sublease). Any such statement may be relied upon by any such parties. If Tenant shall fail to execute and return such statement within the time required herein, Tenant shall be in Default, and shall be deemed to have agreed with the matters set forth therein (which shall not be in limitation of Landlord's other remedies). ARTICLE 20: RIGHTS RESERVED BY LANDLORD Except to the extent expressly limited herein, Landlord reserves full rights to control the Property (which rights may be exercised without subjecting Landlord to claims for constructive eviction, abatement of Rent, damages or other claims of any kind), including more particularly, but without limitation, the following rights: A. General Matters. To: (i) change the name or street address of the Property or designation of the Premises, (ii) install and maintain signs on and about the Property, and grant any other Person the right to do so, (iii) retain at all times, and use in appropriate instances, keys to all doors within and into the Premises, (iv) grant to any Person the right to conduct any business or render any service at the Property, whether or not the same are similar to the use permitted Tenant by this Lease, (v) have access for Landlord and other tenants of the Property to any mail chutes located on the Premises according to the rules of the United States Postal Service (and to install or remove such chutes), and (vi) in case of fire, invasion, insurrection, riot, civil disorder, public excitement or other dangerous condition, or threat thereof: (a) limit or prevent access to the Property, (b) shut down elevator service, (c) activate elevator emergency controls, and (d) otherwise take such action or preventative measures deemed necessary by Landlord for the safety of tenants of the Property or the protection of the Property and other property located thereon or therein (but this provision shall impose no duty on Landlord to take such actions, and no liability for actions taken in good faith). B. Access To Premises. Subject to the following provisions, to enter the Premises in order to: (i) inspect, (ii) supply cleaning service or other services to be provided Tenant hereunder, (iii) show the Premises to current and prospective Lenders, insurers, purchasers, governmental authorities, and their representatives, and during the last twelve (12) months of Tenant's occupancy, show the Premises to prospective tenants and leasing brokers, and (iv) decorate, remodel or alter the Premises if Tenant abandons the Premises at any time or vacates the same during the last 120 days of the Term (without thereby terminating this Lease), and (v) perform any work or take any other actions under Paragraph C below, or exercise other rights of Landlord under this Lease or applicable Laws. If Tenant requests that any such access occur before or after Building Hours, and 26 Landlord schedules the work accordingly, Tenant shall pay all overtime and other additional costs in connection therewith. In connection with any such access to the Premises, except in emergencies or for cleaning or other routine services to be provided to Tenant under this Lease, Landlord shall: (a) provide reasonable advance written or oral notice to Tenant's on-site manager or other appropriate person, and (b) take reasonable steps to minimize any disruption to Tenant's business. C. Changes To The Property. Subject to the last sentence of this Paragraph, to: (i) paint and decorate, (ii) perform repairs or maintenance, and (iii) make replacements, restorations, renovations, alterations, additions and improvements, structural or otherwise (including freon retrofit work), in and to the Property or any part thereof, including any adjacent building, structure, facility, land, street or alley, or change the uses thereof (other than Tenant's permitted use under this Lease), including changes, reductions or additions of corridors, entrances, doors, lobbies, parking facilities and other areas, structural support columns and shear walls, elevators, stairs, escalators, mezzanines, solar tint windows or film, kiosks, planters, sculptures, displays, and other amenities and features therein, and changes relating to the connection with or entrance into or use of the Property or any other adjoining or adjacent building or buildings, now existing or hereafter constructed. In connection with such matters, Landlord may erect scaffolding, barricades and other structures, open ceilings, close entry ways, restrooms, elevators, stairways, corridors, parking and other areas and facilities, and take such other actions as Landlord deems appropriate. However, Landlord shall: (a) maintain reasonable access to the Premises, and (b) in connection with entering the Premises, comply with the last sentence of Paragraph B above. ARTICLE 21: LANDLORD'S RIGHT TO CURE If Landlord shall fail to perform any obligation under this Lease required to be performed by Landlord, Landlord shall not be deemed to be in default hereunder nor subject to any claims for damages of any kind, unless such failure shall have continued for more than a reasonable time (but not less than fifteen (15) days), but in no event more than thirty (30) days following notice (provided, if the nature of Landlord's failure is such that more time is reasonably required in order to cure, Landlord shall not be in default if Landlord commences to cure promptly within such period, diligently seeks and keeps Tenant reasonably advised of efforts to cure such failure to completion, and completes such cure within sixty (60) days following Tenant's notice). If Landlord shall default and fail to cure as provided herein, Tenant shall have the right to perform repairs and any other obligation of Landlord (at Landlord's cost); provided, however, (i) Tenant shall have no right to withhold, set off, or abate Rent, (ii) Tenant shall have such other rights and remedies as may be available to Tenant under this Lease or under applicable Laws, and (iii) Tenant shall have the right to terminate this Lease only as may be provided for elsewhere in this Lease or under applicable Laws. 27 ARTICLE 22: INDEMNIFICATION Subject to the provisions of Articles 10 and 11, Tenant shall defend, indemnify and hold Landlord harmless from and against any and all claims, demands, losses, penalties, fines, fees, charges, assessments, liabilities, damages, judgments, orders, decrees, actions, administrative or other proceedings, costs and expenses (including reasonable attorneys' and expert witness fees, and court costs), arising or alleged to arise from: (i) any violation or breach of this Lease or applicable Law by any Tenant Parties (as defined below), (ii) damage, loss or injury to persons, property or business directly or indirectly arising out of any Tenant Party's use of the Premises or Property, or out of any other act or omission of any Tenant Parties, and (iii) any other damage, loss or injury to persons, property or business occurring in, about or from the Premises, except to the extent that such other damage, loss or injury to persons, property or business is caused by the negligence or intentional misconduct of Landlord. For purposes of this provision, "Tenant Parties" shall mean Tenant, any other occupant of the Premises and any of their respective agents, employees, invitees, Transferees and contractors. Subject to the provisions of Articles 10 and 11, Landlord shall defend, indemnify and hold Tenant harmless from and against any and all claims, demands, losses, penalties, fines, fees, charges, assessments, liabilities, damages, judgments, orders, decrees, actions, administrative or other proceedings, costs and expenses (including reasonable attorneys' and expert witness fees, and court costs), arising or alleged to arise from: (i) any violation or breach of this Lease or applicable Law by any Landlord Parties (as defined below), (ii) damage, loss or injury to persons, property or business directly or indirectly arising out of any Landlord Party's use of the Premises or Property, or out of any other act or omission of any Landlord Parties, and (iii) any other damage, loss or injury to persons, property or business occurring in, about or from the Building or the Premises, except to the extent that such other damage, loss or injury to persons, property or business is caused by the negligence or intentional misconduct of Tenant. For purposes of this provision, "Landlord Parties" shall mean Landlord, and any of its respective agents, employees and contractors. ARTICLE 23: RETURN OF POSSESSION A. General Provisions. At the expiration or earlier termination of this Lease or Tenant's right of possession, Tenant shall vacate and surrender possession of the entire Premises in the condition required under Article 8 and the Rules, ordinary wear and tear excepted, shall surrender all keys and key cards, and any parking transmitters, stickers or cards to Landlord, and shall remove all personal property and office trade fixtures that may be readily removed without damage to the Premises or Property, subject to the following provisions. B. Landlord's Property. All improvements, fixtures and other items, including ceiling light fixtures, HVAC equipment, plumbing fixtures, hot water heaters, fire suppression and sprinkler systems, built-in shelves and cabinets, interior partitioning, interior stairs, wall coverings, carpeting and other flooring, blinds, drapes and window 28 treatments, in or serving the Premises, whether installed by Tenant or Landlord, and any other items installed or provided by Landlord or at Landlord's expense (including any modular furniture provided or paid for by Landlord), shall be Landlord's property and shall remain upon the Premises, all without compensation, allowance or credit to Tenant, unless Landlord elects otherwise as provided in Paragraph C below. C. Removal of Items by Tenant. Notwithstanding the foregoing to the contrary, if prior to expiration or earlier termination of this Lease or within thirty (30) days thereafter Landlord so directs by notice, Tenant shall promptly remove such of the items described in Paragraph B above as are designated in such notice and restore the Premises to the condition prior to the installation of such items in a good and workmanlike manner; provided, Landlord shall not require removal of any such items that: (i) already existed in the Premises before this Lease and Tenant's occupancy of the Premises, or (ii) involve customary office improvements that are installed by or for Tenant pursuant to the provisions of this Lease (including any Exhibit hereto) to the extent that Tenant seeks, and Landlord grants, a written waiver of such removal requirement in connection with Landlord's approval of the plans for such improvements. D. Tenant's Failure to Remove Items. If Tenant shall fail to remove any items from the Premises as required hereunder, Landlord may do so and Tenant shall pay Landlord's charges therefor upon demand. All such property removed from the Premises by Landlord pursuant to any provisions of this Lease or any Law may be handled or stored by Landlord at Tenant's expense, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. All such property not removed from the Premises or retaken from storage by Tenant within thirty (30) days after expiration or earlier termination of this Lease or Tenant's right to possession shall, at Landlord's option, be conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of sale without payment by Landlord. Unless prohibited by applicable Law, Landlord shall have a lien against such property for the costs incurred in removing and storing the same. ARTICLE 24: HOLDING OVER Unless Landlord expressly agrees otherwise in writing, Tenant shall pay Landlord 150% of the amount of Rent then applicable prorated on a per diem basis for each day that Tenant shall fail to vacate or surrender possession of the Premises or any part thereof after expiration or earlier termination of this Lease as required under Article 23, together with all damages (direct and consequential) sustained by Landlord on account thereof. Tenant shall pay such amount of Rent monthly in advance (subject to refund of any partial month occupancy prorated on a per diem basis), and such other amounts on demand. The foregoing provisions, and Landlord's acceptance of any such amounts, shall not serve as permission for Tenant to hold-over, nor serve to extend the Term (although Tenant shall remain a tenant-at-sufferance bound to comply with all other provisions of this Lease until Tenant properly vacates the Premises, including Article 23), and Landlord shall have such other remedies to recover possession of the Premises as may be available to Landlord under applicable Laws. 29 ARTICLE 25: NOTICES Except as expressly provided to the contrary in this Lease, every notice or other communication to be given by either party to the other with respect hereto or to the Premises or Property, shall be in writing and shall not be effective for any purpose unless the same shall be served personally or by national air courier service, or United States certified mail, return receipt requested, postage prepaid, to the parties at the addresses set forth in Article 1, or such other address or addresses as Tenant or Landlord may from time to time designate by notice given as above provided. Every notice or other communication hereunder shall be deemed to have been given as of the third business day following the date of such mailing (or as of any earlier date evidenced by a receipt from such national air courier service or the United States Postal Service) or immediately if personally delivered. Notices not sent in accordance with the foregoing shall be effective when received by the parties at the addresses required herein. ARTICLE 26: REAL ESTATE BROKERS Landlord and Tenant hereby mutually: (i) represent and warrant to each other that they have dealt only with the broker, if any, designated in Article 1 (whose commission, if any, shall be paid pursuant to separate written agreement by the party signing such agreement) as broker, agent or finder in connection with this Lease, and (ii) agree to defend, indemnify and hold each other harmless from and against any and all claims, demands, losses, liabilities, damages, judgments, costs and expenses (including reasonable attorneys' and expert witness fees, and court costs), arising or alleged to arise from any breach of their respective foregoing representation and warranty under this Article. ARTICLE 27: NO WAIVER No provision of this Lease will be deemed waived by either party unless expressly waived in writing and signed by the waiving party. No waiver shall be implied by delay or any other act or omission of either party. No waiver by either party of any provision of this Lease shall be deemed a waiver of such provision with respect to any subsequent matter relating to such provision, and Landlord's consent or approval respecting any action by Tenant shall not constitute a waiver of the requirement for obtaining Landlord's consent or approval respecting any subsequent action. Acceptance of Rent by Landlord directly or through any agent or lockbox arrangement shall not constitute a waiver of any breach by Tenant of any term or provision of this Lease (and Landlord reserves the right to return or refund any untimely payments if necessary to preserve Landlord's remedies). No acceptance of a lesser amount of Rent shall be deemed a waiver of Landlord's right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the full amount due. The acceptance of Rent or of the performance of any other term or provision from, or providing directory listings or services for, any Person other than Tenant shall not constitute a waiver of Landlord's right to 30 approve any Transfer. No delivery to, or acceptance by, Landlord or its agents or employees of keys, nor any other act or omission of Tenant or Landlord or their agents or employees, shall be deemed a surrender, or acceptance of a surrender, of the Premises or a termination of this Lease, unless stated expressly in writing by Landlord. ARTICLE 28: TELECOMMUNICATION LINES A. Telecommunication Lines. Subject to Landlord's continuing right of supervision and approval, and the other provisions hereof, Tenant may: (i) install telecommunication lines ("Lines") connecting the Premises to any Property terminal block already serving or available to serve the Premises, or (ii) use such Lines as may currently exist and already connect the Premises to such terminal block. Such terminal block may comprise, or be connected through riser or other Lines with, a main distribution frame ("MDF") for the Property. Landlord disclaims any representations, warranties or understandings concerning the capacity, design or suitability of any such terminal or MDF, Property riser Lines, or related equipment. If there is, or will be, more than one tenant in the Property, at any time, Landlord may allocate, and periodically reallocate, connections to the terminal blocks and MDF based on the proportion of rentable area each tenant leases, or the type of business operations or requirements of such tenants, in Landlord's reasonable discretion. Landlord may arrange for an independent contractor to review Tenant's requests for approval hereunder, monitor or supervise Tenant's installation, connection and disconnection of Lines, and provide other such services, or Landlord may provide the same, and Tenant shall pay Landlord's charges therefor as provided in Article 9. B. Installation. Tenant may install and use Tenant's Lines and make connections and disconnections at the terminal blocks as described above, provided Tenant shall: (i) obtain Landlord's prior written approval of all aspects thereof, (ii) use an experienced and qualified contractor reasonably designated or approved in writing in advance by Landlord (whom Landlord may require to enter an access and indemnity agreement on Landlord's then-standard form of agreement therefor, (iii) comply with such reasonable inside wire standards as Landlord may adopt from time to time, and all other provisions of this Lease, including Article 9 respecting Work, and the Rules respecting access to the wire closets, (iv) not install Lines in the same sleeve, chaseway or other enclosure in close proximity with electrical wire, and not install PVC coated Lines under any circumstances, (v) thoroughly test any riser Lines to which Tenant intends to connect any Lines to ensure that such riser Lines are available and are not then connected to or used for telephone, data transmission or any other purpose by any other party (whether or not Landlord has previously approved such connections), and not connect to any such unavailable or connected riser Lines, and (vi) not connect any equipment to the Lines which may create an electromagnetic field exceeding the normal insulation ratings of ordinary twisted pair riser cable or cause radiation higher than normal background radiation, unless the Lines therefor (including riser Lines) are appropriately insulated to prevent such excessive electromagnetic fields or radiation (and such insulation shall not be provided by the use of additional unused twisted pair Lines). As a condition to permitting installation of new Lines, Landlord may require that Tenant remove any existing 31 Lines located in or serving the Premises. C. Limitation of Liability. Except to the extent due to Landlord's intentional misconduct or grossly negligent acts, Landlord shall have no liability for damages arising, and Landlord does not warrant that the Tenant's use of the Lines will be free, from the following (collectively called "Line Problems"): (i) any eavesdropping, wire-tapping or theft of long distance access codes by unauthorized parties, (ii) any failure of the Lines to satisfy Tenant's requirements, or (iii) any capacitance, attenuation, cross-talk or other problems with the Lines, any misdesignation of the Lines in the MDF room or wire closets, or any shortages, failures, variations, interruptions, disconnections, loss or damage caused by or in connection with the installation, maintenance, replacement, use or removal of any other Lines or equipment at the Property by or for other tenants at the Property, by any failure of the environmental conditions at or the power supply for the Property to conform to any requirements of the Lines or any other problems associated with any Lines or by any other cause. Under no circumstances shall any Line Problems be deemed an actual or constructive eviction of Tenant, render Landlord liable to Tenant for abatement of any Rent or other charges under the Lease, or relieve Tenant from performance of Tenant's obligations under the Lease as amended herein. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damage arising from any Line Problems ARTICLE 29: HAZARDOUS MATERIALS A. Hazardous Materials Generally Prohibited. Except as provided herein, Tenant shall not transport, use, store, maintain, generate, manufacture, handle, dispose, release, discharge, spill or leak any "Hazardous Material" (as defined in Article 30), or permit Tenant's employees, agents, contractors, or other occupants of the Premises to engage in such activities on or about the Property. However, the foregoing provisions shall not prohibit the transportation to and from, and use, storage, maintenance and handling within, the Premises of substances customarily and lawfully used in the business which Tenant is permitted to conduct in the Premises under this Lease, as an incidental and minor part of such business, and provided: (i) such substances shall be properly labeled, contained, used and stored only in small quantities reasonably necessary for such permitted use of the Premises and the ordinary course of Tenant's business therein, strictly in accordance with applicable Laws, highest prevailing standards, and the manufacturers' instructions therefor, and as Landlord shall reasonably require, (ii) such substances shall not be disposed of, released, discharged or permitted to spill or leak in or about the Premises or the Property (and under no circumstances shall any Hazardous Material be disposed of within the drains or plumbing facilities in or serving the Premises or Property or in any other public or private drain or sewer, regardless of quantity or concentration), (iii) if any applicable Law or Landlord's trash removal contractor requires that any such substances be disposed of separately from ordinary trash, Tenant shall make arrangements at Tenant's expense for such disposal in approved containers directly with a qualified and licensed disposal company at a lawful disposal site, (iv) any remaining such substances shall be completely, properly and lawfully removed from the Property upon expiration or earlier termination of this Lease, and (v) for purposes of removal and disposal 32 of any such substances, Tenant shall be named as the owner, operator and generator, shall obtain a waste generator identification number, and shall execute all permit applications, manifests, waste characterization documents and any other required forms. B. Clean Up Responsibility. If any Hazardous Material is released, discharged or disposed of, or permitted to spill or leak, in violation of the foregoing provisions, Tenant shall immediately and properly clean up and remove the Hazardous Materials from the Premises, Property and any other affected property and clean or replace any affected personal property (whether or not owned by Landlord) in compliance with applicable Laws and then prevailing industry practices and standards, at Tenant's expense (without limiting Landlord's other remedies therefor). Such clean up and removal work ("Tenant Remedial Work") shall be considered Work under Article 9 and subject to the provisions thereof, including Landlord's prior written approval (except in emergencies), and any testing, investigation, feasibility and impact studies, and the preparation and implementation of any remedial action plan required by any court or regulatory authority having jurisdiction or reasonably required by Landlord. In connection therewith, Tenant shall provide documentation evidencing that all Tenant Remedial Work or other action required hereunder has been properly and lawfully completed (including a certificate addressed to Landlord from an environmental consultant reasonably acceptable to Landlord, in such detail and form as Landlord may reasonably require). If any Hazardous Material is released, discharged, disposed of, or permitted to spill or leak on or about the Property and is not caused by Tenant or other occupants of the Premises, or their agents, employees, Transferees, or contractors, such release, discharge, disposal, spill or leak shall be deemed casualty damage under Article 11 to the extent that the Premises and Tenant's use thereof is affected thereby; in such case, Landlord and Tenant shall have the obligations and rights respecting such casualty damage provided under this Lease. C. Miscellaneous. Tenant shall immediately upon written request from time to time provide Landlord with copies of all material safety data sheets, permits, approvals, memos, reports, correspondence, complaints, demands, claims, subpoenas, requests, remediation and cleanup plans, and all papers of any kind filed with or by any regulatory authority and any other books, records or items pertaining to Hazardous Materials that are subject to this Article (collectively referred to herein as "Tenant's Hazardous Materials Records"). Tenant shall pay, prior to delinquency, any and all fees, taxes (including excise taxes), penalties and fines arising from or based on Tenant's activities involving Hazardous Material on or about the Premises or Property, and shall not allow such obligations to become a lien or charge against the Property or Landlord. If Tenant violates any provision of this Article with respect to any Hazardous Materials, Landlord may: (i) require that Tenant immediately remove all Hazardous Materials from the Premises and discontinue using, storing and handling Hazardous Materials in the Premises, and/or (ii) pursue such other remedies as may be available to Landlord under this Lease or applicable Law. ARTICLE 30: DEFINITIONS (A) "Building" shall mean the structure (or the portion thereof owned by Landlord) identified in Article 1. 33 (B) "Building Hours" shall mean 7:00 A.M. to 6:00 P.M. Monday through Friday, and 8:00 A.M. to 12:00 P.M. on Saturday (if comparable buildings in the area have standard Saturday hours), except Holidays. "Holidays" means all federal and state holidays, including New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Landlord reserves the right to increase the Building Hours beyond that which is set forth in this Paragraph. (C) "Default Rate" shall mean one and one half percent (1.5%) per month, or the highest rate permitted by applicable Law, whichever shall be less. (D) "Expenses" shall mean all expenses, costs and amounts (other than Taxes) of every kind and nature relating to the ownership, management, repair, maintenance, replacement, insurance and operation of the Property, including, without limitation (except as expressly set forth herein), any amounts paid for: (i) Utility Costs, (ii) complying with Laws (but subject to the exclusions set forth below), (iii) insurance, not limited to that required under this Lease, and which may include flood, earthquake, boiler, rent loss, workers' compensation and employers' liability, builders' risk, automobile and other coverages, including a reasonable allocation of costs under any blanket policies, (iv) supplies, materials, tools, equipment, uniforms, and vehicles used in the operation, repair, maintenance, security, and other services for the Property, including rental, installment purchase and financing agreements therefor and interest thereunder, (v) accounting, alarm monitoring, security, janitorial, trash removal, snow and ice removal, and other services, (vi) customary management fees, (vii) compensation and benefits for any personnel engaged in the operation, repair, maintenance, security or other services for the Property at or below the level of property manager, and employer's FICA contributions, unemployment taxes or insurance, any other taxes which may be levied on such compensation and benefits, and data or payroll processing expenses relating thereto (if personnel handle other properties or functions, the foregoing expenses shall be allocated appropriately between the Property and such other properties or functions), (viii) payments under any easement, cross or reciprocal easement, operating agreement, declaration, covenant, or other agreement or instrument pertaining to the sharing of costs for common areas or other matters in a development or complex of which the Property is a part, (ix) sales, use, value-added or other taxes on supplies or services for the Property, (x) the costs of operating and maintaining a property management office (such costs to be appropriately allocated between the Property and any other property served by such office), including the fair rental value thereof, (xi) operation, maintenance, repair, installation, replacement, inspection, testing, painting, decorating and cleaning of the Property, and any items located off-site but installed for the benefit of the Property, including Property identification and pylon signs, directional signs, traffic signals and markers, flagpoles and canopies, sidewalks, curbs, stairways, parking structures, lots, loading and service areas and driveways, storm and sanitary drainage systems, irrigation systems, elevators, escalators, trash compactors, and Systems and Equipment, landscaping, and all other aspects of the Property, including common area fixtures, equipment and other items therein or thereon, doors, locks and hardware, windows, gutters, downspouts, roof flashings and roofs. The foregoing provision is for definitional 34 purposes only and shall not be construed to impose any obligation upon Landlord to incur such expenses, nor as a limitation as to other Expenses that Landlord may incur with respect to the Property. Landlord may retain independent contractors (or affiliated contractors at market rates) to provide any services or perform any work, in which case the costs thereof shall be deemed Expenses. Expenses shall, however, exclude: (1) the following items: (a) interest and amortization on Mortgages, and other debt costs or ground lease payments, if any, except as provided herein, (b) depreciation of buildings and other improvements (except permitted amortization of certain capital expenditures as provided below), (c) legal fees in connection with leasing, tenant disputes or enforcement of leases, (d) real estate brokers' commissions or marketing costs, (e) improvements or alterations to tenant spaces, (f) the cost of providing any service directly to, and paid directly by, any tenant, (g) costs of any items to the extent Landlord receives reimbursement from insurance proceeds or from a warranty or other such third party (such proceeds to be deducted from Expenses in the year in which received); and (2) capital expenditures, except those: (a) made primarily to reduce Expenses or increases therein, or to comply with Laws or insurance requirements (excluding capital expenditures to cure violations of Laws or insurance requirements that existed prior to the date of this Lease), or (b) for replacements (as opposed to additions or new improvements) of roofs, and nonstructural items located in the common areas of the Property required to keep such areas in good condition; provided, any such permitted capital expenditure shall be amortized (with interest at the prevailing loan rate available to Landlord when the cost was incurred) over: (x) the period during which the reasonably estimated savings in Expenses equals the expenditure, if applicable, or (y) the useful life of the item as determined by Generally Accepted Accounting Principles (GAAP), but in no event less than five (5) years nor more than thirty (30) years. (E) "Hazardous Material" shall include, but not be limited to: (i) any flammable, explosive, toxic, radioactive, biological, corrosive or otherwise hazardous chemical, substance, liquid, gas, device, form of energy, material or waste or component thereof, (ii) petroleum-based products, diesel fuel, paints, solvents, lead, radioactive materials, cyanide, biohazards, infectious or medical waste and "sharps", printing inks, acids, DDT, pesticides, ammonia compounds, and any other items which now or subsequently are found to have an adverse effect on the environment or the health and safety of persons or animals or the presence of which require investigation or remediation under any Law or governmental policy, and (iii) any item defined as a "hazardous substance", "hazardous material", "hazardous waste", "regulated substance" or "toxic substance" under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss. 9601, et seq., Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801, et seq., Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901 et seq., Clean Water Act, 33 U.S.C. ss. l 251, et seq., Safe Drinking Water Act, 14 U.S.C. ss. 300f, et seq., Toxic Substances Control Act, 15 U.S.C. ss. 2601, et seq., Atomic Energy Act of 1954, 42 U.S.C. ss. 2014 et seq., and any similar federal, state or local Laws, and all regulations, guidelines, directives and other requirements thereunder, all as may be amended or supplemented from time to time. 35 (F) "Landlord" shall mean only the landlord from time to time, except that for purposes of any provisions defending, indemnifying and holding Landlord harmless hereunder. "Landlord" shall include past, present and future landlords and their respective partners, beneficiaries, trustees, officers, directors, employees, shareholders, principals, agents, affiliates, successors and assigns. (G) "Law" or "Laws" shall mean all federal, state, county and local governmental and municipal laws, statutes, ordinances, rules, regulations, codes, decrees, orders and other such requirements, applicable equitable remedies and decisions by courts in cases where such decisions are considered binding precedents in the State in which the Property is located, and decisions of federal courts applying the Laws of such State, at the time in question. This Lease shall be interpreted and governed by the Laws of the State in which the Property is located. (H) "Lender" shall mean the holder of any Mortgage at the time in question, and where such Mortgage is a ground lease, such term shall refer to the ground lessor (and the term "ground lease" although not capitalized is intended throughout this Lease to include any superior or master lease). (I) "Mortgage" shall mean all mortgages, deeds of trust, ground leases and other such encumbrances now or hereafter placed upon the Property or Building, or any part thereof, and all renewals, modifications, consolidations, replacements or extensions thereof, and all indebtedness now or hereafter secured thereby and all interest thereon. (J) "Person" shall mean an individual, trust, partnership, limited liability company, joint venture, association, corporation and any other entity. (K) "Premises" shall mean the area within the Building identified in Article 1 and Exhibit A. Possession of areas necessary for utilities, services, safety and operation of the Property, including the Systems and Equipment, fire stairways, perimeter walls, space between the finished ceiling of the Premises and the slab of the floor or roof of the Property thereabove, and the use thereof together with the right to install, maintain, operate, repair and replace the Systems and Equipment, including any of the same in, through, under or above the Premises in locations that will not materially interfere with Tenant's use of the Premises, are hereby excepted and reserved by Landlord, and not demised to Tenant. (L) "Property" shall mean the Building, and any common or public areas or facilities, easements, corridors, lobbies, sidewalks, loading areas, driveways, landscaped areas, skywalks, parking rights, garages and lots, and any and all other rights, structures or facilities operated or maintained in connection with or for the benefit of the Building, and all parcels or tracts of land on which all or any portion of the Building or any of the other foregoing items are located, and any fixtures, machinery, apparatus, Systems and Equipment, furniture and other personal property located thereon or therein and used in connection with the operation thereof. Landlord reserves the right to add land, buildings, easements or other interests to, or sell or eliminate the same from, the Property, and grant 36 interests and rights in the Property to other parties. If the Building shall now or hereafter be part of a development or complex of buildings or structures collectively owned by Landlord or its affiliates, the Property shall, at Landlord's option, also be deemed to include such other of those buildings or structures as Landlord shall from time to time designate, and shall initially include such buildings and structures (and related facilities and parcels on which the same are located) as Landlord shall have incorporated by reference to the total rentable area of the Property in Article 1. (M) "Rent" shall have the meaning specified therefor in Article 3. (N) "Systems and Equipment" shall mean any plant, machinery, transformers, duct work, cable, wires, and other equipment, facilities, and systems designed to supply light, heat, ventilation, air conditioning and humidity or any other services or utilities, or comprising or serving as any component or portion of the electrical, gas, steam, plumbing, sprinkler, communications, alarm, security, or fire/life/safety systems or equipment, or any elevators, escalators or other mechanical, electrical, electronic, computer or other systems or equipment for the Property, except to the extent that any of the same serves particular tenants exclusively (and "systems and equipment" without capitalization shall refer to such of the foregoing items serving particular tenants exclusively). (O) "Taxes" shall mean all amounts (unless required by Landlord to be paid under Article 14) for federal, state, county, or local governmental, special district, improvement district, municipal or other political subdivision taxes, fees, levies, assessments, charges or other impositions of every kind and nature in connection with the ownership, leasing and operation of the Property, whether foreseen or unforeseen, general, special, ordinary or extraordinary (including real estate and ad valorem taxes, general and special assessments, transit taxes, water and sewer rents, license and business license fees, use or occupancy taxes, taxes based upon the receipt of rent including gross receipts or sales taxes applicable to the receipt of rent or service or value added taxes, personal property taxes, taxes on fees paid by Landlord for property management services, and taxes or charges for fire protection, streets, sidewalks, road maintenance, refuse or other services). If the method of taxation of real estate prevailing at the time of execution hereof shall be, or has been, altered so as to cause the whole or any part of the Taxes now, hereafter or heretofore levied, assessed or imposed on real estate to be levied, assessed or imposed on Landlord, wholly or partially, as a capital stock levy or otherwise, or on or measured by the rents, income or gross receipts received therefrom, then such new or altered taxes attributable to the Property shall be included within the term "Taxes," except that the same shall not include any portion of such tax attributable to other income of Landlord not relating to the Property. Taxes shall include taxes which are increased as a result of increases in the assessment or valuation of the Property (whether based on a sale, change in ownership or refinancing of the Property or otherwise), increases in tax rates, reduction or elimination of any rollbacks or other deductions available under current law, scheduled reductions of any tax abatement, as a result of the elimination, invalidity or withdrawal of any tax abatement, or for any other cause whatsoever. Notwithstanding the foregoing, there shall be excluded from Taxes all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession 37 taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Property). (P) "Tenant" shall be applicable to one or more Persons as the case may be, the singular shall include the plural, and if there be more than one Tenant, the obligations thereof shall be joint and several. When used in the lower case, "tenant" shall mean any other tenant, subtenant or occupant of the Property. (Q) "Tenant's Share" of Taxes and Expenses shall be the percentage set forth in Article 1, but if the rentable area of the Premises changes due to the addition or subtraction of space under this Lease or by amendment, Landlord shall reasonably adjust Tenant's Share to be based on the rentable area of the Premises divided by the rentable area of the Property, subject to further adjustment hereunder and under Article 3. If the Property shall now or hereafter be part of or shall include a development or complex of two or more buildings or structures collectively owned by Landlord or its affiliates, Landlord may allocate Expenses and Taxes (or components thereof) within such complex or development, and between such buildings and structures and the parcels on which they are located, in accordance with sound accounting and management practices. In the alternative, Landlord may determine Tenant's Share of Expenses and Taxes (or components thereof) for all or any such buildings and structures, and any common areas and facilities operated or maintained in connection therewith and all parcels or tracts of land on which all or any portion of any of the other foregoing items are located, in accordance with sound accounting and management practices; provided, Landlord shall reasonably reduce Tenant's Share to be based on the ratio of the rentable area of the Premises to the rentable area of all such buildings as to which such Expenses and Taxes (or components thereof) are included. In addition, if the Property, or any development or complex of which it is a part, shall contain non-office uses during any period, Landlord may determine, in accordance with sound accounting and management practices, Tenant's Share of Taxes and Expenses for only the office portion of the Property or of such development or complex; in such event, Landlord shall reasonably adjust Tenant's Share to be based on the ratio of the rentable area of the Premises to the rentable area of such office portion for such period. Tenant acknowledges that the "rentable area of the Premises" under this Lease includes the so-called "usable area," without deduction for columns or projections, multiplied by one or more load or conversion factors to reflect a share of certain areas, which may include lobbies, corridors, mechanical, utility, janitorial, boiler and service rooms and closets, restrooms, and other public, common and service areas. Except as provided expressly to the contrary herein, the "rentable area of the Property" shall include all rentable area of all space leased or available for lease at the Property (excluding any parking facilities). Landlord may reasonably re-determine the rentable area of the Property from time to time to reflect remeasurements, reconfigurations, additions or modifications to the Property, and may reasonably adjust Tenant's Share prospectively based thereon. (R) "Utility Costs" shall include costs for electricity, power, gas, steam, oil or other fuel, water, sewer and other such services for the Property, including sales or other taxes thereon. 38 (S) "Base Expense Year" shall mean the twelve-month period ending January 31, 2005. (T) "Base Tax Year" shall mean the twelve-month period ending January 31, 2005. ARTICLE 31: OFFER The submission and negotiation of this Lease shall not be deemed an offer to enter the same by Landlord (nor an option or reservation for the Premises), but the solicitation of such an offer by Tenant. Tenant agrees that its execution of this Lease constitutes a firm offer to enter the same which may not be withdrawn for a period of twenty (20) business days after delivery to Landlord. During such period and in reliance on the foregoing, Landlord may, at Landlord's option, deposit any Security Deposit and Rent, proceed with any plans, specifications, alterations or improvements, and permit Tenant to enter the Premises, but such acts shall not be deemed an acceptance of Tenant's offer to enter this Lease, and such acceptance shall be evidenced only by Landlord signing and delivering this Lease to Tenant. ARTICLE 32: MISCELLANEOUS A. Captions and Interpretation. The captions of the Articles and Paragraphs of this Lease, and any computer highlighting of changes from earlier drafts, are for convenience of reference only and shall not be considered or referred to in resolving questions of interpretation. Tenant acknowledges that it has read this Lease and that it has had the opportunity to confer with counsel in negotiating this Lease; accordingly, this Lease shall be construed neither for nor against Landlord or Tenant, but shall be given a fair and reasonable interpretation in accordance with the meaning of its terms. The neuter shall include the masculine and feminine, and the singular shall include the plural. The term "including" shall be interpreted to mean "including, but not limited to." B. Survival of Provisions. All obligations (including indemnity, Rent and other payment obligations) or rights of either party arising during or attributable to the period prior to expiration or earlier termination of this Lease shall survive such expiration or earlier termination. C. Severability. If any term or provision of this Lease or portion thereof shall be found invalid, void, illegal, or unenforceable generally, or with respect to any particular party, by a court of competent jurisdiction, it shall not affect, impair or invalidate any other terms or provisions or the remaining portion thereof or enforceability with respect to any other party. D. Perpetuities. If the Commencement Date is delayed in accordance with Article 2 for more than nine (9) months, Landlord may declare this Lease terminated by notice to Tenant, and if the Commencement Date is so delayed for more than three years, 39 this Lease shall thereupon be deemed terminated without further action by either party. E. Short Form Lease. Neither this Lease nor any memorandum of lease or short form lease shall be recorded by Tenant, but Landlord or any Lender may elect to record a short form of this Lease, in which case Tenant shall promptly execute, acknowledge and deliver the same on a form prepared by Landlord or such Lender. F. Light, Air and Other Interests. This Lease does not grant any legal rights to "light and air" outside the Premises nor any particular view visible from the Premises, nor any easements, licenses or other interests unless expressly contained in this Lease. G. Authority. If Tenant is any form of corporation, partnership, limited liability company or partnership, association or other organization, Tenant and all Persons signing for Tenant below hereby represent that this Lease has been fully authorized and no further approvals are required, and Tenant is duly organized, in good standing and legally qualified to do business in the Premises (and has any required certificates, licenses, permits and other such items). H. Partnership Tenant. If Tenant is a partnership, all current and new general partners shall be jointly and severally liable for all obligations of Tenant hereunder and as this Lease may hereafter be modified, whether such obligations accrue before or after admission of future partners or after any partners die or leave the partnership. Tenant shall cause each new partner to sign and deliver to Landlord written confirmation of such liability, in form and content satisfactory to Landlord, but failure to do so shall not avoid such liability. I. Successors and Assigns; Transfer of Property and Security Deposit. Each of the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties' respective heirs, executors, administrators, guardians, custodians, successors and assigns, subject to Article 13 respecting Transfers and Article 18 respecting rights of Lenders. Subject to Article 18, if Landlord shall convey or transfer the Property or any portion thereof in which the Premises are contained to another party, such party shall thereupon be and become landlord hereunder, shall be deemed to have fully assumed all of Landlord's obligations under this Lease accruing during such party's ownership, including the return of any Security Deposit, and Landlord shall be free of all such obligations accruing from and after the date of conveyance or transfer. J. Limitation of Liability. Tenant agrees to look solely to Landlord's interest in the Property for the enforcement of any judgment, award, order or other remedy under or in connection with this Lease or any related agreement, instrument or document or for any other matter whatsoever relating thereto or to the Property or Premises. Under no circumstances shall any present or future, direct or indirect, principals or investors, general or limited partners, officers, directors, shareholders, trustees, beneficiaries, participants, advisors, managers, employees, agents or affiliates of Landlord, or of any of the other foregoing parties, or any of their heirs, successors or assigns have any liability for any of the foregoing matters. Under no circumstances shall any present or future, direct or 40 indirect, principals or investors, general or limited partners, officers, directors, shareholders, trustees, beneficiaries, participants, advisors, managers, employees, agents or affiliates of Tenant, or of any of the other foregoing parties, or any of their heirs, successors or assigns have any liability for any of Tenant's obligations under this Lease (unless such party has specifically assumed responsibility for some or all of such obligations in a written guarantee or similar document). In no event shall either Landlord or Tenant be liable to the other party for any consequential damages. K. Confidentiality. Each party shall keep the content and all copies of this Lease, related documents or amendments now or hereafter entered, and all proposals, materials, information and matters relating thereto, including the results of any review of Landlord's records under Article 3, strictly confidential, and shall not disclose, disseminate or distribute any of the same, or permit the same to occur, except on an "as needed" basis to the extent reasonably required for proper business purposes by Tenant's or Landlord's employees, attorneys, insurers, auditors, lenders, brokers and Transferees (and each party shall obligate any such parties to whom disclosure is permitted to honor the confidentiality provisions hereof), and except as may be required by Law or court proceedings. ARTICLE 33: OPTION TO RENEW Provided that Tenant is not in default under this Lease, Tenant is hereby granted an option to renew this Lease for an additional three (3) year term under the same terms and conditions of this Lease excepting, however, that there shall (i) be no further option to renew, and (ii) the Base Rent shall be as follows: Period Monthly Base Rent 2/1/08 - 1/31/09: $6,395.73 2/1/09 - 1/31/10: $6,592.52 2/1/10 - 1/31/11: $6,789.31 The Tenant shall exercise this option by delivering written notice to Landlord no later than May 1, 2007, failing which this option to renew shall automatically terminate. ARTICLE 34: ADDITIONAL PROVISIONS A. Replacement Lease. Tenant is currently in possession of the Premises pursuant to the Office Lease dated February 1, 2000 entered into by and between Landlord and Crossbow Acquisition Inc., as amended by the First Amendment to Office Lease dated December 15, 2000 entered into by and between Landlord and Aerie Networks, Inc., and the Settlement Agreement and Second Amendment to Lease dated June 21, 2004 entered into by and between Landlord and Tenant (collectively, the "Existing Lease"). Effective as of the Commencement Date of this Lease, this Lease replaces and supersedes the Existing Lease and the Existing Lease shall remain in full force and effect for any obligations or matters which first arose prior to the Commencement Date of this Lease. 41 B. As Is. Tenant accepts the Premises in their "as is" condition. As soon as is reasonably practicable, Landlord shall construct in a good and workmanlike manner the demising wall necessary to separate the Premises from the remainder of the first floor which is not being leased to Tenant pursuant to this Lease. Landlord shall use commercially reasonable efforts to minimize any disruption to Tenant's occupancy of the Premises in connection therewith and to promptly complete the construction after commencement. C. Additional Space. During the term of this Lease, provided that Tenant has not been in default of this Lease, in the event that any leased space in the Building located on the first or second floor becomes available due to a tenant moving out (the "Available Space"), Landlord shall provide Tenant with written notice of the same and Tenant shall have the first opportunity to lease the Available Space in its "as is" condition. Tenant shall have two (2) weeks in which to exercise this option by delivering written notice to Landlord failing which this option to expand for the Available Space which was offered shall automatically terminate. In the event that Tenant timely exercises its option to lease the Available Space, the Base Rent for the Available Space shall be the base rent on a per square foot basis as will then be due by Tenant for the Premises and the parties shall execute a lease modification agreement setting forth the addition of the Available Space to the Premises and the new amount of Base Rent. Notwithstanding anything herein to the contrary, Tenant shall not be allowed to exercise the rights contained in this Section if Tenant is in the last year of the primary term of this Lease unless Tenant exercises its option to renew; and provided further, if Tenant has exercised its option to renew and is in the sixth (6th) year of this Lease, Tenant shall be required to extend the term of this Lease at then prevailing market rates as a condition of exercising the rights contained in this Section. In the event that Tenant does not exercise its option to expand for the Available Space which was offered, Landlord shall thereafter be able to lease the offered Available Space on terms acceptable to Landlord in Landlord's sole and absolute discretion. D. Awning Signage. Tenant, at Tenant's sole cost and expense, shall (i) have the right to keep in place the existing awning signage located on the exterior of the Building, and (ii) keep the awnings in a good state of repair; provided, however, that Tenant shall remove one-half of the said signage as reasonably designated by Landlord promptly upon written request being made by Landlord. E. Closure of Stairway Access to Second Floor. There currently exists a stairway in the Premises which leads to space on the second floor of the Building which is not currently being leased by Tenant (the "Second Floor Space"). In the event that Landlord elects to close the opening or remove the said stairway to the Second Floor Space after the Commencement Date of this Lease, Landlord may do so and may enter the Premises to perform such construction as Landlord deems necessary. Landlord shall use commercially reasonable efforts to minimize any disruption to Tenant's occupancy of the Premises in connection therewith and to promptly complete the construction after commencement. Tenant acknowledges the construction contemplated by this Section, if performed, will necessarily involve work and access from both the Premises and the Second Floor Space. Tenant agrees to reasonably cooperate with Landlord to facilitate the 42 construction, if any. Additionally, Tenant acknowledges that such construction, if any, may cause some noise or other inconvenience, and Tenant agrees that Landlord shall have no liability and shall not be required to compensate Tenant for any such noise or inconvenience. Accordingly, without limitation, Tenant agrees that such construction, if any, shall be deemed to not be an interference with, nor constitute a breach of, Tenant's possessory or quiet enjoyment rights. ARTICLE 35: ENTIRE AGREEMENT This Lease, together with the Exhibits and other documents listed in Article 1 (WHICH ARE HEREBY COLLECTIVELY INCORPORATED HEREIN AND MADE A PART HEREOF AS THOUGH FULLY SET FORTH), contains all the terms and provisions between Landlord and Tenant relating to the matters set forth herein and no prior or contemporaneous agreement or understanding pertaining to the same shall be of any force or effect, except for any such contemporaneous agreement specifically referring to and modifying this Lease and signed by both parties. Without limitation as to the generality of the foregoing, Tenant hereby acknowledges and agrees that Landlord's leasing agents and field personnel are only authorized to show the Premises and negotiate terms and conditions for leases subject to Landlord's final approval, and are not authorized to make any agreements, representations, understandings or obligations binding upon Landlord respecting the condition of the Premises or Property, suitability of the same for Tenant's business, the current or future amount of Taxes or Expenses or any component thereof, the amount of rent or other terms applicable under other leases at the Property, whether Landlord is furnishing the same utilities or services to other tenants at all, on the same level or on the same basis, or any other matter, and no such agreements, representations, understandings or obligations not expressly contained herein or in such contemporaneous agreement shall be of any force or effect. TENANT HAS RELIED ON TENANT'S INSPECTIONS AND DUE DILIGENCE IN ENTERING THIS LEASE, AND NOT ON ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, CONCERNING THE HABITABILITY, CONDITION OR SUITABILITY OF THE PREMISES OR PROPERTY FOR ANY PARTICULAR PURPOSE OR ANY OTHER MATTER NOT EXPRESSLY CONTAINED HEREIN. This Lease, including the Exhibits referred to above, may not be modified, except in writing signed by both parties. [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY] 43 IN WITNESS WHEROF, the parties have executed this Lease as of the date first set forth above. LANDLORD: 1400 GLENARM PLACE VENTURE By: Shames-Makovsky Realty Company, Authorized Agent By: /s/ Evan Makovsky -------------------------------------- Name: Evan Makovsky --------------------------------- Its: President --------------------------------- TENANT: RICOCHET NETWORKS, INC., a Delaware corporation By: /s/ David L. Renauld -------------------------------------- Name: David L. Renauld --------------------------------- Its: Vice President --------------------------------- CERTIFICATE I, Andy Shannon, as Corporate Controller of the aforesaid Tenant, hereby certify that the individual(s) executing the foregoing Lease on behalf of Tenant was/were duly authorized to act in his/their capacities as set forth above, and his/their action(s) are the action of Tenant. (Corporate Seal) /s/ Andy Shannon ------------------------------------------------ 44 EXHIBIT A: PREMISES ------------------- (Floor Plate Showing Premises Cross-Hatched) [Drawing Omitted] 1 EXHIBIT B: RULES ---------------- (1) Access to Property. Before or after Building Hours, or such other hours as Landlord shall determine from time to time, access to and within the Property and/or to the passageways, lobbies, entrances, exits, loading areas, corridors, elevators or stairways and other areas in the Property may be restricted and access gained by use of a key to the outside doors of the Property, or pursuant to such security procedures Landlord may from time to time impose. Landlord shall in all cases retain the right to control and prevent access to such areas by Persons engaged in activities which are illegal or violate these Rules, or whose presence in the judgment of Landlord shall be prejudicial to the safety, character, reputation and interests of the Property and its tenants (and Landlord shall have no liability in damages for such actions taken in good faith). No Tenant and no employee or invitee of Tenant shall enter areas reserved for the exclusive use of Landlord, its employees or invitees or other Persons. Tenant shall keep doors to corridors and lobbies closed except when persons are entering or leaving. (2) Signs. Landlord shall prescribe the suite number for the Premises and cause building standard suite identification signage to be placed on or adjacent to the main entrance door of the Premises, and shall provide directory strips for any Property directory consistent with Landlord's standard practices at the Property. Landlord shall bear the expense of initial building standard signage and directory strips, and Tenant shall pay Landlord's standard charges for changes requested by Tenant and approved by Landlord thereafter promptly after billing thereof. Tenant shall not paint, display, inscribe, maintain or affix any sign, placard, picture, advertisement, name, notice, lettering or direction on any part of the outside or inside of the Property, or on any part of the inside of the Premises which can be seen from the outside of the Premises, without the prior consent of Landlord, and then only such name or names or matter and in such color, size, style, character and material, and with professional designers, fabricators and installers as may be first approved or designated by Landlord in writing. Landlord reserves the right, without notice to Tenant, to remove at Tenant's expense all matter not so installed or approved. (3) Window and Door Treatments. Tenant shall not place anything or allow anything to be placed in the Premises near the glass of any door, partition, wall or window which may be unsightly from outside the Premises, and Tenant shall not place or permit to be placed any article of any kind on any window ledge or on the exterior walls. Blinds, shades, awnings or other forms of inside or outside window devices shall not be placed in or about the outside windows or doors in the Premises except to the extent, if any, that the design, character, shape, color, material and make thereof is first approved or designated by Landlord. Tenant shall not install or remove any solar tint film from the windows. (4) Balconies and Patios. If the Premises has access to a patio or balcony, Tenant shall have a license to enter such area, subject to the following provisions: (i) Tenant's access to such area shall be limited to the area immediately adjoining the Premises (and bounded by an extension of the demising lines of the Premises), and Landlord reserves the right to install materials separating Tenant's area from the area adjoining other tenants' premises, (ii) Tenant shall use such area only in a manner that is 1 quiet and compatible with the nature of the Building as an office building, which only involves the use of benches or outdoor furniture approved by Landlord in writing, and which will not bother, disturb or annoy any other occupants of the Property, and (iii) Tenant's use thereof shall be subject to the other provisions of this Lease, including the other Rules. (5) Lighting and General Appearance of Premises. Landlord reserves the right to designate and/or approve in writing all internal lighting that may be visible from the public, common or exterior areas. The design, arrangement, style, color, character, quality and general appearance of the portion of the Premises visible from public, common and exterior areas, and contents of such portion of the Premises, including furniture, fixtures, signs, art work, wall coverings, carpet and decorations, and all changes, additions and replacements thereto shall at all times have a neat, professional, attractive, first class office appearance. (6) Property Tradename, Likeness, Trademarks. Tenant shall not in any manner use the name of the Property for any purpose other than as Tenant's business address, or use any tradenames or trademarks of Landlord, any other tenant, or their affiliates, or any picture or likeness of the Property, for any purpose, in any letterheads, circulars, notices, advertisements or other material whatsoever. (7) Deliveries and Removals. Furniture, freight and other large or heavy articles, and all other deliveries may be brought into the Property only at times and in the manner designated by Landlord, and always at the Tenant's sole responsibility and risk. Landlord may inspect items brought into the Property or Premises with respect to weight or dangerous nature or compliance with this Lease or Laws. Landlord may (but shall have no obligation to) require that all furniture, equipment, cartons and other articles removed from the Premises or the Property be listed and a removal permit therefor first be obtained from Landlord. Tenant shall not take or permit to be taken in or out of other entrances or elevators of the Property any item normally taken, or which Landlord otherwise reasonably requires to be taken, in or out through service doors or on freight elevators. Landlord may impose reasonable charges and requirements for the use of freight elevators and loading areas, and reserves the right to alter schedules without notice. Any hand-carts used at the Property shall have rubber wheels and sideguards, and no other material-handling equipment may be used without Landlord's prior written approval. (8) Outside Vendors. Tenant shall not obtain for use upon the Premises janitor or other services, except from Persons designated or approved by Landlord. Any Person engaged by Tenant to provide any other services shall be subject to scheduling and direction by the manager or security personnel of the Property. Vendors must use freight elevators and service entrances. (9) Overloading Floors; Vaults. Tenant shall not overload any floor or part thereof in the Premises or Property, including any public corridors or elevators therein, by bringing in or removing any large or heavy articles, and Landlord may prohibit, or direct and control the location and size of, safes and all other heavy articles and require at Tenant's expense supplementary supports of such material and dimensions as Landlord 2 may deem necessary to properly distribute the weight. (10) Locks and Keys. Tenant shall use such standard key system designated by Landlord on all keyed doors to and within the Premises, excluding any permitted vaults or safes (but Landlord's designation shall not be deemed a representation of adequacy to prevent unlawful entry or criminal acts, and Tenant shall maintain such additional insurance as Tenant deems advisable for such events). Tenant shall not attach or permit to be attached additional locks or similar devices to any door or window, change existing locks or the mechanism thereof, or make or permit to be made any keys for any door other than those provided by Landlord. If more than two keys for one lock are desired, Landlord will provide them upon payment of Landlord's charges. In the event of loss of any keys furnished by Landlord, Tenant shall pay Landlord's reasonable charges therefor. The term "key" shall include mechanical, electronic or other keys, cards and passes. (11) Safety and Security Devices, Services and Programs. Safety and security devices, services and programs provided by Landlord, if any, while intended to deter crime and ensure safety, may not in given instances prevent theft or other criminal acts, or ensure safety of persons or property. The risk that any safety or security device, service or program may not be effective, or may malfunction, or be circumvented by a criminal, is assumed by Tenant with respect to Tenant's property and interests, and Tenant shall obtain insurance coverage to the extent Tenant desires protection against such criminal acts and other losses, as further described in Article 10. Tenant agrees to cooperate in any reasonable safety or security program developed by Landlord or required by Law. (12) Utility Closets and Connections. Landlord reserves the right to control access to and use of, and monitor and supervise any work in or affecting, the "wire" or telephone, electrical, plumbing or other utility closets, the Systems and Equipment, and any changes, connections, new installations, and wiring work relating thereto (or Landlord may engage or designate an independent contractor to provide such services). Tenant shall obtain Landlord's prior written reasonable consent for any such access, use and work in each instance, and shall comply with such requirements as Landlord may reasonably impose, and the other provisions of Article 6 respecting electric installations and connections, Article 28 respecting telephone Lines and connections, and Article 9 respecting Work in general. Tenant shall have no right to use any broom closets, storage closets, janitorial closets, or other such closets, rooms and areas. (13) Plumbing Equipment. The toilet rooms, urinals, wash bowls, drains, sewers and other plumbing fixtures, equipment and lines shall not be misused for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. (14) Trash. All garbage, refuse, trash and other waste shall be kept in the kind of container, placed in the areas, and prepared for collection in the manner and at the times and places reasonably specified by Landlord, subject to Article 29 respecting Hazardous Materials. Landlord reserves the right to require that Tenant participate in any recycling program designed by Landlord. 3 (15) Alcohol, Drugs, Food and Smoking. Landlord reserves the right to exclude or expel from the Property any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules. Tenant shall not at any time manufacture, sell, use or give away, any spirituous, fermented, intoxicating or alcoholic liquors on the Premises, nor permit any of the same to occur. Tenant shall not at any time cook, sell, purchase or give away, food in any form by or to any of Tenant's agents or employees or any other parties on the Premises, nor permit any of the same to occur (other than in microwave ovens and coffee makers properly maintained in good and safe working order and repair in lunch rooms or kitchens for employees as may be permitted or installed by Landlord, and which do not violate any Laws or bother or annoy any other tenant). Tenant and its employees shall not smoke tobacco on any part of the Property (including exterior areas) except those areas, if any, that are designated or approved as smoking areas by Landlord. (16) Use of Common Areas; No Soliciting. Tenant shall not use the common areas, including areas adjacent to the Premises, for any purpose other than ingress and egress, and any such use thereof shall be subject to the other provisions of this Lease, including these Rules. Without limiting the generality of the foregoing, Tenant shall not allow anything to remain in any passageway, sidewalk, court, corridor, stairway, entrance, exit, elevator, parking or shipping area, or other area outside the Premises. Tenant shall not use the common area to canvass, solicit business or information from, or distribute any article or material to, other tenants or invitees of the Property. Tenant shall not make any room-to-room canvass to solicit business or information or to distribute any article or material to or from other tenants of the Property and shall not exhibit, sell or offer to sell, use, rent or exchange any products or services in or from the Premise unless ordinarily embraced within the Tenant's use of the Premises expressly permitted in the Lease. (17) Energy and Utility Conservation. Tenant shall not waste electricity, water, heat or air conditioning or other utilities or services, and agrees to cooperate fully with Landlord to assure the most effective and energy efficient operation of the Property and shall not allow the adjustment (except by Landlord's authorized Property personnel) of any controls. Tenant shall not obstruct, alter or impair the efficient operation of the Systems and Equipment, and shall not place any item so as to interfere with air flow. Tenant shall keep corridor doors closed and shall not open any windows, except that if the air circulation shall not be in operation, windows which are openable may be opened with Landlord's consent (not to be unreasonably withheld). If reasonably requested by Landlord (and as a condition to claiming any deficiency in the air-conditioning or ventilation services provided by Landlord), Tenant shall close any blinds or drapes in the Premises to prevent or minimize direct sunlight. (18) Landlord Access to Systems and Equipment. Tenant shall not place partitions, furniture or other obstructions in the Premises which may prevent or impair Landlord's access to the Systems and Equipment for the Property or the systems and equipment for the Premises. 4 (19) Unattended Premises. Before leaving the Premises unattended, Tenant shall close and securely lock all doors or other means of entry to the Premises and shut off all lights and water faucets in the Premises (except heat to the extent necessary to prevent the freezing or bursting of pipes). (20) Going-Out-Of-Business Sales and Auctions. Tenant shall not use, or permit any other party to use, the Premises for any distress, fire, bankruptcy, close-out, "lost our lease" or going-out-of business sale or auction. Tenant shall not display any signs advertising the foregoing anywhere in or about the Premises. This prohibition shall also apply to Tenant's creditors. (21) Labor Harmony. Tenant shall not use (and upon notice from Landlord shall cease using) contractors, services, workmen, labor, materials or equipment, or labor and employment practices that, in Landlord's good faith judgment, may cause strikes, picketing or boycotts or disturb labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Property. (22) Prohibited Activities. Tenant shall not: (i) use strobe or flashing lights in or on the Premises, (ii) install or operate any internal combustion engine, boiler, machinery, refrigerating, heating or air conditioning equipment in or about the Premises, (iii) use the Premises for housing, lodging or sleeping purposes or for the washing of clothes, (iv) place any radio or television antennae other than inside of the Premises, (v) operate or permit to be operated any musical or sound producing instrument or device which may be heard outside the Premises, (vi) use any source of power other than electricity, (vii) operate any electrical or other device from which may emanate electrical, electromagnetic, x-ray, magnetic resonance, energy, microwave, radiation or other waves or fields which may interfere with or impair radio, television, microwave, or other broadcasting or reception from or in the Property or elsewhere, or impair or interfere with computers, faxes or telecommunication lines or equipment at the Property or elsewhere, or create a health hazard, (viii) bring or permit any bicycle or other vehicle, or dog (except in the company of a blind person or except where specifically permitted) or other animal or bird in the Property, (ix) make or permit objectionable noise, vibration or odor to emanate from the Premises, (x) do anything in or about the Premises or Property that is illegal, immoral, obscene, pornographic, or anything that may in Landlord's good faith opinion create or maintain a nuisance, cause physical damage to the Premises or Property, interfere with the normal operation of the Systems and Equipment, impair the appearance, character or reputation of the Premises or Property, create waste to the Premises or Property, cause demonstrations, protests, loitering, bomb threats or other events that may require evacuation of the Building, (xi) advertise or engage in any activities which violate the spirit or letter of any code of ethics or licensing requirements of any professional or business organization, (xii) throw or permit to be thrown or dropped any article from any window or other opening in the Property, (xiii) use the Premises for any purpose, or permit upon the Premises or Property anything, that may be dangerous to persons or property (including firearms or other weapons (whether or not licensed or used by security guards) or any explosive or combustible articles or materials), (xiv) place vending or game machines in the Premises, except vending machines for employees, (xv) adversely affect the indoor air 5 quality of the Premises or Property, or (xvi) do or permit anything to be done upon the Premises or Property in any way tending to disturb, bother, annoy or interfere with Landlord or any other tenant at the Property or the tenants of neighboring property, or otherwise disrupt orderly, quiet use and occupancy of the Property. (23) Transportation Management. Tenant shall comply with all present or future programs intended to manage parking, transportation or traffic in and around the Property, and in connection therewith, Tenant shall take responsible action for the transportation planning and management of all employees located at the Premises by working directly with Landlord, any governmental transportation management organization or any other transportation-related committees or entities. Such programs may include, without limitation: (i) restrictions on the number of peak-hour vehicle trips generated by Tenant; (ii) increased vehicle occupancy; (iii) implementation of an in-house ridesharing program and an employee transportation coordinator; (iv) working with employees and any Property or area-wide ridesharing program manager, (v) instituting employer-sponsored incentives (financial or in-kind) to encourage employees to rideshare; and (vi) utilizing flexible work shifts for employees. (24) Responsibility for Compliance. Tenant shall be responsible for ensuring compliance with these Rules, as they may be amended, by Tenant's employees and as applicable, by Tenant's agents, invitees, contractors, subcontractors, and suppliers. Tenant shall cooperate with any reasonable program or requests by Landlord to monitor and enforce the Rules, including providing vehicle numbers and taking appropriate action against such of the foregoing parties who violate these provisions. 6 EXHIBIT C GUARANTY THIS GUARANTY, made effective this 1st day of February, 2005, by YDI Wireless, Inc, 8000 Lee Highway, Falls Church, VA 22402, (hereinafter referred to as the "Guarantor"), to and for the benefit of 1400 Glenarm Place Venture or any future landlord under the Lease (hereinafter collectively referred to as the "Landlord"). ARTICLE 1 RECITALS Section 1.1. Obligations. Ricochet Networks, Inc., a Delaware corporation (hereinafter referred to as the "Tenant"), is entering into an Office Lease of even date herewith for the real property commonly known as 1400 Glenarm Place, Suite 100, Denver, Colorado (hereinafter referred to as the "Lease"). Section 1.2. Inducement for Guaranty. As inducement for Landlord to enter into the Lease, Landlord requires that Guarantor guarantee payment of the Lease, and performance by Tenant of each and every term, covenant, condition and agreement contained in the Lease. Guarantor desires to give such guaranty in order to induce Landlord to enter into the Lease. ARTICLE 2 GUARANTY, WAIVER AND CONSENTS Section 2.1. Guaranty. Guarantor unconditionally and absolutely guarantees the due and punctual payment of the rent and any other money due or which may become due under the Lease, and the due and punctual performance and observance by Tenant of any other terms, covenants and conditions of the Lease on the part of the Lessee to be kept, observed or performed, whether according to the present terms thereof, at any earlier or accelerated date or dates as provided therein, or pursuant to any extension of time or to any change or changes in the terms, covenants and condition thereof. Section 2.2. Waiver and Consents. Guarantor waives diligence, presentment, protest, notice of dishonor, demand for payment, extension of time for payment, notice of acceptance of this Guaranty, indulgences and notice of every kind, and consents to any and all forbearances and extensions of the time for payment of the rent due under the Lease or performance under the Lease, and to any and all changes in the terms, covenants and conditions of the Lease hereafter made or granted, and to any changes, compromises or waivers of any default with respect to any other person secondarily or otherwise liable for any of the indebtedness and liabilities of the Tenant. Section 2.3. Waiver of Jury Trial. As an additional inducement to Lender to enter into the Lease, Guarantor, for itself and for all who may claim through or under it, HEREBY 1 WAIVES THE RIGHT TO TRIAL BY JURY ON ANY ISSUES BETWEEN LANDLORD AND GUARANTOR AND TO ANY ISSUES PERTAINING TO THE LEASE. ARTICLE 3 AGREEMENTS AND COVENANTS OF GUARANTOR Section 3.1. No Subrogation. Guarantor also hereby waives any claim, right or remedy which Guarantor may now have or hereafter acquire against Tenant, or any of its members, that arises under this Guaranty and/or from the performance by the Guarantor under this Guaranty, including, without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right or remedy of Landlord against Tenant, or any security which Landlord now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. This waiver shall only be in effect until all obligations to Landlord have been satisfied. Section 3.2. Enforcement. This Guaranty may be enforced by Landlord without first resorting to or exhausting any other security or collateral and without first having to evict the Tenant and relet the leased premises, or any of the other remedies provided by the Lease. If suit or other remedy is availed of, only the net proceeds therefrom, after deduction of all charges and expenses of every kind and nature whatsoever, shall be applied in reduction of the amount due under the Lease. Landlord shall not be required to institute or prosecute proceedings to recover any amounts due by Tenant as a condition of payment hereunder or enforcement hereof. Section 3.3. Primary Obligation. This Guaranty is a primary obligation of Guarantor unless the Lease is determined to be invalid, unenforceable or discharged by a court of competent jurisdiction; provided, however, that Guarantor shall not be able to assert that the Lease is invalid, unenforceable or discharged due to a bankruptcy of the Tenant or any permitted assignee of the Tenant. Section 3.4. Financial Statements. Guarantor agrees to furnish Landlord, upon demand, so long as this Guaranty shall remain in effect, a financial statement setting forth in reasonable detail the assets, liabilities and net worth of the Guarantor. Section 3.5. Expenses of Enforcement. In the event this Guaranty is placed in the hands of an attorney for enforcement, Guarantor will reimburse Landlord for all expenses incurred in connection therewith, including reasonable attorneys' fees. ARTICLE 4 MISCELLANEOUS Section 4.1. Successors and Assigns. This Guaranty shall inure to the benefit and may be enforced by Landlord, and any subsequent owner of the real property of which the leased premises are a part, and shall be binding upon and enforceable against the legal representatives, heirs and assigns of Guarantor. 2 Section 4.2. No Alteration of Other Documents. No provision of this Guaranty shall be construed to alter or amend the Lease, or to relieve Tenant of any duties or obligations under the Lease. Section 4.3. Word Meanings. As used herein the singular shall include the plural, the plural the singular and the use of any gender shall be applicable to all genders. Section 4.4. Joint Obligation. In the event that more than one person or party shall execute this Guaranty as the Guarantor herein, this agreement shall bind all persons and parties jointly and severally. Section 4.5. Colorado Law; Venue. This Guaranty and the terms and provisions hereof shall be governed by and construed according to the laws of the State of Colorado, without regard to principles of conflict of laws. Any suit hereon may be brought and prosecuted in the courts of the City and County of Denver, Colorado. Section 4.6. Remedies Cumulative. Guarantor hereby agrees with Landlord that all rights, remedies and recourse afforded to Landlord by reason of this Guaranty, or otherwise, are separate and cumulative and may be pursued separately, successively or concurrently, as occasion therefor shall occur, and are nonexclusive and shall in no way limit or prejudice any other legal or equitable right, remedy or recourse which Landlord may have. Section 4.7. Captions. The section headings contained in this Guaranty are for reference purposes only and shall not affect the meaning or interpretation of this Guaranty. WITNESS the execution hereof by the Guarantor. GUARANTOR: YDI WIRELESS, INC. By: /s/ David L. Renauld -------------------- David L. Renauld, Vice President (Print name and title) 3 EX-10.35 4 ex10-35.txt Exhibit 10.35 10/29/99 METRO I Standard Office Lease This Lease ("Lease") entered into as of the 30th day of January, 2001 between CB PARTNERS LIMITED PARTNERSHIP, an Ohio limited partnership ("Landlord"), and KARLNET, INC., a(n) Ohio Corporation ("Tenant"). Witnesseth: 1. DEMISE AND TERM: Landlord leases to Tenant and Tenant leases from Landlord the premises (the "Premises") containing approximately 6376 Rentable Square Feet (hereinafter defined) and identified as Suite No. 100 on the first floor of the building (the "Building") known as Metro I Office Building and located at 525 Metro Place North, Columbus Ohio 43017. The Building is located within and on that certain parcel of land (the "Land") described on Exhibit A attached hereto and made a part hereof. The Land, the Building and the other improvements located-within and on the Land are collectively hereinafter referred to as the "Development"., The initial term of this Lease shall be for a term of Two (2) years and One (1) months commencing on February 1, 2001, (the "Commencement Date") and ending on February 28, 2003, unless sooner terminated as hereinafter provided. 2. POSSESSION: If Landlord shall be unable to deliver possession of the Premises to Tenant on the Commencement Date because of the holding over of any existing tenant or occupant thereof, or for any other cause beyond Landlord's reasonable control, then Base Rent (hereinafter defined) and other charges payable by Tenant shall not commence until the date possession of the Premises is tendered to Tenant. Such abatement of Base Rent and other charges shall be in full satisfaction of any claim against Landlord for failure to deliver possession of the Premises on the Commencement Date. Failure to deliver possession of the Premises on the Commencement Date shall in no event extend, or be deemed to extend, the term of this Lease. Notwithstanding the foregoing, if Landlord fails for any reason to tender possession of the Premises to Tenant within one hundred twenty (120) days of the Commencement Date, either Landlord or Tenant shall have the right to terminate this Lease upon notice to the other party; provided, however, if Landlord tenders possession of the Premises within ten (10) days after receipt of Tenant's termination notice, such notice shall be deemed withdrawn and Landlord and Tenant shall proceed as if no such notice were given. If either Landlord or Tenant terminates this Lease as aforesaid, all sums deposited by Tenant with Landlord shall be returned to Tenant and this Lease shall be null and void and of no further force or effect. If Landlord shall be unable to deliver possession of the Premises to Tenant on the Commencement Date because Landlord has not substantially completed (hereinafter defined) any space preparation work in the Premises pursuant to Landlord's work letter ("Work Letter") attached hereto as Exhibit B, and made a part hereof, and if the delay in completion of such work has not been caused by Tenant's failure to submit its plans and specifications to Landlord on or before the time called for in the Work Letter, or caused by any other act or failure to act by Tenant, then the term of this Lease shall commence on the day following written notice by Landlord that such work has been substantially completed. If such date shall be other than the first day of a calendar month, Base Rent for the month in question shall be prorated on a per diem basis (based upon a thirty (30) day month). For purposes of this Lease, the term "substantially completed" shall mean that (a) an occupancy permit has been issued for the Premises and (b) the work to be performed by Landlord pursuant to the Work Letter has been completed except for minor "punch list" items which can and shall be completed by Landlord within thirty (30) days following the Commencement Date. Unfinished work, if any, undertaken by Landlord for Tenant and not included in the Work Letter shall not be considered in determining whether the Premises are substantially completed. 3. BASE RENT: Tenant shall pay landlord as Base Rent ("Base Rent") for the Premises as follows:
- --------------------------------------------------------------------------------------------------------------------------- RENT PER SQUARE FOOT ANNUAL MONTHLY RENT FROM To - --------------------------------------------------------------------------------------------------------------------------- $0.00 $0.00 $0.00 February 1, 2001 February 28, 2001 - --------------------------------------------------------------------------------------------------------------------------- $17.00 $108,392.00 $9032.67 March 1, 2001 February 28, 2003 - --------------------------------------------------------------------------------------------------------------------------- OPTION - --------------------------------------------------------------------------------------------------------------------------- $18.00 $114,768.00 $9564.00 March 1, 2003 February 28, 2004 - ---------------------------------------------------------------------------------------------------------------------------
Each payment of Base Rent shall be payable in advance, without demand, deduction or set-off, in legal tender of the United States of America, on the first day of each and every calendar month during the term of this Lease at the office of Landlord's agent, or at such other place as Landlord may designate, from time to time, in writing. Base Rent is subject to adjustment, from time to time, as set forth in Section 4 below. Base Rent and all other charges payable hereunder which are not paid when due shall bear interest from the due date until paid at the maximum lawful rate of interest permitted in the State of Ohio. Any payment obligation of Tenant under this Lease other than for Base Rent shall be deemed to be an obligation for and shall be paid.as additional rent ("Additional Rent"). Notwithstanding anything contained in this Lease, in order to cover the added expense involved in handling delinquent accounts, Tenant shall pay Landlord, in addition to any Base Rent or other charges payable hereunder .a late charge of $250.00 for any installment of Base Rent or any other charge not paid in full within five (5) days of its due date. The late charge shall be in addition to any interest charge that may be due for late payment. 4. ADJUSTMENTS TO BASE RENT AND ADDITIONAL RENT: Tenant shall pay Landlord the adjustments to Base Rent and the other charges hereinafter set forth, all of which shall be adjusted or computed as of the times and in the manner provided in this Section 4: (a) Definitions. For the purposes of this Section, the following definitions shall apply: (i) The term "Rentable Square Feet" shall mean the number of Usable Square Feet (hereinafter defined) within the Premises or the Building, as the case may be, plus a common areas/load factor of twelve percent (12%) which represents an allocation of the square footage of the Common Areas (hereinafter defined) within the Building. Landlord and Tenant have determined and agreed that the Rentable Square Feet of the Premises are (6376) square feet and the Rentable Square Feet of the Building are ( 73,491) square feet as of the date of this Lease. (ii) The term "Usable Square Feet" shall mean the area of the Premises, expressed in square feet, which is capable of being utilized by Tenant for its 2 tenancy purposes. Notwithstanding the foregoing, the Usable Square Feet of the Premises shall be subject to re-measurement within thirty (30) days following the Commencement Date at Landlord's option and Landlord shall have the right to change the Usable Square Feet in the Building, from time to time, to the extent portions thereof are or are not to be leased to tenants of the Building. If any such re-measurement discloses that the Usable Square Feet of the Premises are different than the Usable Square Feet of the Premises set forth above, Base Rent, the Rentable Square Feet of the Premises and Tenant's Share (hereinafter deemed), shall be proportionately adjusted to reflect such re-measured Usable Square Feet. If Landlord changes the Usable Square Feet in the Building as aforesaid, Tenant's Share also shall be proportionately adjusted. (iii) The term "Tenant's Share" shall mean the percentage which the Usable Square Feet of the Premises is of the total Usable Square Feet of the Building, which percentage is agreed upon as being percent (8.68%). If additional Usable Square Feet shall be included under this Lease, or the total Usable Square Feet of the Building change, Tenant's Share shall be proportionately adjusted. (iv) The term "Base Year" shall mean the calendar year during which the term of this Lease commences. (v) The term "Price Index" shall mean the "Consumer Price Index" for Urban Wage Earners and Clerical Workers, United States City Average, all items -Series A (1982-84 = 100) published by the Bureau of Labor Statistics of the U.S. Department of Labor ("Bureau"), or if such index shall be discontinued, then any index designated by the Bureau to replace such index shall be used. If no index is so designated, then Landlord shall select, in its sole judgment, a comparable substitute index. No adjustment or re-computation, retroactive or otherwise, shall be made due to any revision made to the first published figure of the Price Index for any month. (vi) The term "Price Index for the Base Year" shall mean the average of each monthly Price Index for the twelve (12) months of the Base Year. (vii) The term "Adjusted Base Rent' 'shall mean Base Rent as adjusted in accordance with the provisions hereinafter set forth. (viii) The term "Comparison Year" shall mean the first full calendar year following the Base Year and each subsequent full calendar year, or fraction thereof at the commencement or termination of this Lease. (ix) The term "Operating Expenses" shall mean those expenses incurred by Landlord during any calendar year, whether the Base Year or a Comparison Year, in respect of the operation, repair and maintenance of the Development, in accordance with generally accepted principles of sound management, as applied to the operation, repair and maintenance of similar developments in the Greater Columbus. area. Operating Expenses shall include, but not be limited to, costs of management, cleaning, heating, -decorating, lighting, utilities provided to and not paid separately by tenants of the Building and for the Common Areas, repairs and replacements of all. kinds (except to the extent proceeds of insurance or condemnation awards are available therefore), snow, ice and trash removal, sanitary control, line painting, gardening and landscaping, security, repair and replacement of the paving, curbs, walkways, roads, windows, electric power lines, gas lines, light poles, bulbs, ceiling tiles and drainage, repairs and maintenance of the exterior structure of 'the buildings in the Development, including the foundation, exterior walls and roof, interior walls and partitions thereof, repair and replacement of water lines, sanitary sewers and storm sewer lines serving the Development, rental or purchase of machinery, equipment and tools used in the maintenance of the Common Areas, the cost of inspections of the Development or any part thereof, repairs and replacements of facilities in the Common Areas, including washrooms, drinking fountains, toilets and other public facilities, signs, and sound systems, liability and property insurance, including any and all deductible payments or insurance claims paid by Landlord for losses of any kind or nature paid either to any insurance company or individuals and such other insurance coverage as Landlord or any mortgagee of Landlord deems appropriate, compensation and benefits (including premiums for workers' compensation and other insurance) paid to or on behalf of employees of Landlord to the extent involved in the operation, repair or maintenance of the Development, personal property taxes, fire protection and fire hydrant charges, utility licenses and permit fees and the cost of any capital improvement or expense made to or for the Development, including without limitation, those required to comply with applicable laws, to the extent expensed or amortized (over a period determined by Landlord) in any calendar year together with interest on the un-amortized balance thereof at the rate of eighteen percent (18%) per annum or such higher rate as may have been paid by Landlord on funds borrowed for such purposes. If at any time the Building is not fully occupied or Landlord is not supplying services to all Usable Square Feet in the Building during an entire calendar year, then Landlord may adjust actual Operating Expenses to Landlord's estimate of that amount, which would have been paid or incurred by Landlord as Operating Expenses had the Building been ninety-five percent (95%) occupied or serviced, and the Operating Expenses as so adjusted shall be deemed to be the actual Operating Expenses for such calendar year. The provisions of the preceding sentence shall apply only to those Operating Expenses that either vary with occupancy or by reason of one or more tenants not receiving goods or services, the cost of which constitutes all or part of such Operating Expenses. Operating Expenses shall not include: expenses for painting, decorating, or other work performed for individual tenants of the Building, expenses for repairs 'and other work covered by the property insurance to be maintained by Landlord, expenses incurred in leasing or procuring new tenants for the Building, including lease commissions, advertising expenses and expenses of renovating space for new tenants, legal expenses incurred in enforcing the terms of any lease of any portions of the Building, and interest and amortization payments on any mortgage. Tenant hereby acknowledges that Operating Expenses for the Base Year are $5.25 per rentable square foot of the Building. (x) The term "Taxes" shall mean all taxes of any kind or nature, including without limitation, real estate taxes and assessments, general or special, which any governmental agency may now or in the future impose on the Land or any part of the Development or the use and operation thereof or as a substitute or in addition to any such taxes payable by Landlord with respect to the Development or any part thereof, and all expenses incurred in connection with disputing or contesting such Taxes. Should any governmental authority having jurisdiction impose a tax and/or assessment (other than an income or franchise tax unless such income tax is a substitute for any existing real estate tax) upon or against the rentals payable hereunder or on the privilege of renting. or leasing real property, such tax and/or assessment shall be deemed to be included within the meaning of Taxes. If the amount of Taxes payable by Landlord with respect to the Development includes any special assessment(s) that expire(s) at any time during the term of this Lease, then, at such time as the applicable portion of an assessment is paid in full, Taxes for the Base Year shall be recalculated to exclude the amount of the applicable portion of the assessment that was paid in full. Commencing as of the year of such recalculation and continuing for each and every calendar year or partial calendar year following such recalculation or until such time as Taxes are again recalculated, Tenant shall pay Tenant's Share of any increase in Taxes based upon the recalculated amount. In determining Taxes for any given year, there shall be a, further adjustment made by Landlord in the event of the filing of a tax complaint as to the amount of Taxes, once the final Taxes for the tax year in question have been determined. Tenant hereby acknowledges that Taxes for the Base Year are $ $1.49 per rentable square foot of the Building. (b) Cost of Living Adjustment. (Intentionally deleted). (c) Operating Expenses and Taxes. In addition to adjustments to Base Rent as above provided, Tenant shall pay, on an estimated basis, monthly to Landlord Tenant's Share of the net aggregate increase, if any, in the amount of Operating Expenses and Taxes for the Comparison Year in question over those for the Base Year. Such payments shall not in any event reduce Base Rent or any adjustment to Base Rent or entitle Tenant to any refund or credit if Operating Expenses or Taxes for a Comparison Year are. less than those for the Base Year. Landlord's reasonable estimate of increases in Operating Expenses and Taxes over those for the Base Year may be used as a basis for the estimate of the increase in Operating Expenses and Taxes for any Comparison Year. (d) Reconciliation. All monthly installments of Tenant's Share of increases in Operating Expenses and Taxes, as estimated by Landlord, shall be adjusted as soon as practicable after the end of the calendar year in question so that Tenant shall pay the exact amount due for such calendar year. Any overpayments or under payments by reason of the use of Landlord's estimate shall be settled and accounted for at such time. Landlord shall pay or credit to Tenant any overpayment. Tenant shall pay to Landlord any under payment within ten (10) days of Landlord's invoice therefore. Tenant's Share of increases in Operating Expenses and Taxes for any calendar year during which the term of this Lease expires or terminates shall be prorated to the expiration or termination date. All obligations of Tenant for Tenant's Share of Operating Expenses and Taxes under this Section 4 shall survive the expiration or earlier termination of this Lease. (e) Landlord's Books. Landlord shall keep and make available to Tenant at Landlord's. office, for a period of sixty (60) days after statements are rendered to Tenant, records in reasonable detail of Operating Expenses and Taxes for the period covered by such statements and shall permit Tenant and the representatives-of Tenant to, examine and audit such statements at any reasonable time during Business Hours (hereinafter deemed). If Tenant shall dispute one (1) or more items included by Landlord in determining Operating Expenses -or Taxes for the Base Year or any Comparison Year, and such dispute is not amicably settled between Landlord and Tenant within thirty (30) days after the statement in question has been rendered, Tenant may, during the twenty (20) days next following the expiration of said thirty (30) day period, notify Landlord of its election to arbitrate said dispute and refer such disputed item or items to a reputable firm of certified public accountants, reasonably acceptable to Landlord, for decision. The decision of such firm shall be conclusive and binding upon Landlord and Tenant. The expense involved in such determination shall be borne by the party against whom a decision is rendered; provided, however, if more than one (1) item is disputed, and the decision shall be in part against each party, the expense shall be fairly apportioned by said firm. Pending such decision, Tenant shall pay the Adjusted Base Rent subject to a proper adjustment upon rendition of such decision. If Tenant shall not dispute any item or items in any such statement within sixty (60) days after such statement has been rendered, Tenant shall be deemed to have approved such statement. 5. USE OF PREMISES: The Premises shall be occupied and used exclusively as office space and for purposes incidental thereto, and shall not be used for any other purpose. Tenant shall not use or occupy or permit the user or occupancy of the Premises for any purpose which is forbidden by applicable law, which may be dangerous to life, limb or property or which creates any public or private nuisance, nor do or permit any other thing to be done which may disturb the quiet enjoyment of any other tenant of the Building, nor keep any substance or carry on or permit any operation which might emit offensive odors or conditions into other portions of the Development, nor use any apparatus which might make undue noise or cause vibrations, nor permit anything to be done which would increase the property insurance rates for the Development or of the other tenants thereof; provided, however, if there is any increase in such rates by reason of the acts of Tenant, then Tenant shall pay such increase promptly upon demand therefore by Landlord. Payment by Tenant of any such rate increase shall not be a waiver of Tenant's duty to comply with the provisions of this Section 5. 6. COMMON AREAS: Tenant. and Tenant's agents, employees, licensees and invitees shall have the right to use, in common with other tenants of the Building, Landlord and Landlord's agents, employees, licensees and invitees, the public sidewalks, entrances, lobbies, vestibules, stairways, corridors, passenger and freight elevators, toilets and other public areas of the Development (the "Common Areas"); subject, however, to such rules, regulations and security measures as may be promulgated, from time to time, by Landlord. Tenant and Tenant's agents, employees, licensees and invitees, however, shall not obstruct, litter, use for storage (temporary or otherwise) or the display of merchandise or services or for any purpose other than the intended and normal purpose, any of the Common Areas. In no event shall floor mats or runners be placed by Tenant in the corridor, lobby or vestibule of any Common Areas. Landlord shall have the right, at any time and from time to time, to change the size, location, elevation or nature of the Common Areas, or any part thereof, including, without limitation, the right to erect buildings or other structures of any type thereon. All Common Areas shall be subject to the exclusive control and management of Landlord. Landlord shall have the right to close all or any portion of the Common Areas as may be deemed necessary by Landlord's counsel to prevent a. dedication thereof or the accrual of any rights to any person or the public therein. 7. BUILDING SERVICES: Provided Tenant is not in default under any of the terms of this Lease, Landlord shall furnish Tenant the following services: (a) lighting of the Common Areas, garbage removal, snow and ice removal, landscaping, and other routine services necessary to maintain the Development in good condition;. (b) cleaning, janitor and window washing services based upon a Schedule of Service, a copy of which may be obtained from Landlord; provided, however, such schedule shall be subject to change, at Landlord's discretion, so long as the services provided by Landlord are comparable to other similar developments in the general area of the Development. Tenant shall not engage or provide cleaning, janitor, window washing or maintenance services without Landlord's prior written consent. If consent is given, such services shall be subject to supervision by Landlord and at Tenant's sole responsibility and expense; (c) heat during Business Hours with temperatures between sixty-eight (68) degrees and seventy-four (74) degrees Fahrenheit; (d) cold and hot water to facilities in the Premises and the Common Areas at Building standard temperatures for sanitary purposes only; (e) passenger elevator service during Business Hours. Freight elevator service shall be at times other than during Business Hours as are deemed reasonable by Landlord. Elevator service at other times shall be optional with Landlord, and when so provided, shall never be deemed a continuing obligation of Landlord; (f) electrical service for customary office purposes as long as Landlord provides such service; provided, however, upon not less than sixty (60) days' prior written notice to Tenant, Landlord may cease to provide, electrical service to the Premises without liability or responsibility to Tenant except to connect, within the period of said notice, the electrical system of the Premises with another source of electrical service. Thereafter, Tenant shall pay the charges for such service directly to the utility provider supplying the same upon billings therefore. Any installation by Tenant of special equipment, including intermittent operating equipment, must have the prior written approval of Landlord, and shall be subject to special charges and regulations. Any new or additional electrical facilities required to service equipment installed by Tenant and all changes in existing electrical facilities in or serving the Premises required by Tenant, if permitted, shall be installed, furnished or made by Landlord, at Tenant's expense. Tenant may purchase from Landlord all light bulbs, fluorescent tubes, ballasts or starters used in the Premises; and (g) air conditioning service during Business Hours with temperatures between seventy-two (72) degrees and seventy-eight (78) degrees Fahrenheit. The term "Business Hours" as used in this Lease shall mean Monday to Friday, inclusive from 8:00 A.M. to 6:00 P.M. and Saturdays from 8:00 A.M. to 1:00 P.M., but excluding all legal holidays. Upon not less than twenty-four (24) hours' prior written notice, Landlord shall supply heat and air conditioning to the Premises after Business Hours at a cost to Tenant of Twenty Five Dollars ( $25.00 ) per hour; provided, however, Landlord shall have the right to deny Tenant's request if Tenant fails to comply with Landlord's Rules and Regulations (hereinafter defined). Tenant shall pay Landlord's charges for any extraordinary usage of water and electricity (as determined by Landlord), and for after Business Hours heat and air conditioning and other services within ten (10) days after the date of Landlord's invoice therefore. Failure to pay either Base Rent or any other charges hereunder when due shall entitle Landlord, in addition to any other remedies available to Landlord, upon not less than five (5) days' written notice, to discontinue water, electrical service or other services to Tenant, and no such discontinuance of services shall be deemed an eviction or disturbance of Tenant's use of the Premises, render Landlord liable to Tenant for damages, or relieve Tenant from the performance of Tenant's obligations hereunder. Landlord, while not warranting that any Building service shall be free from interruptions or suspensions caused by repairs, renewals, improvements, alterations, strikes, lockouts, accidents, inability of Landlord to procure such service, or to obtain fuel or supplies, or for any other cause or causes beyond Landlord's reasonable control, nevertheless shall make commercially reasonable efforts to repair or restore any such service so interrupted or suspended. An interruption or suspension of, or fluctuation in, any Building service shall never be deemed an eviction or disturbance of Tenant's use and possession of the Premises, or any part thereof, or render Landlord liable to Tenant for damages, or relieve Tenant from the performance of Tenant's obligations hereunder. 8. RIGHTS RESERVED BY LANDLORD: Landlord reserves the following rights: (a) to change the name or street address of the Development and the Building or the suite number of the Premises or the arrangement or location of entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other parts of the Common Areas in the Development without liability to Tenant; provided, however, sixty (60) days' prior written notice shall be given to Tenant for any change in the name or street address of the Development or the Building; (b) to designate all sources furnishing sign painting, lettering, vending machines, towel or toilet supplies, or other similar services required in the Premises; (c) to enter the Premises during the last ninety (90) days of the term of this Lease, provided Tenant shall have removed substantially all of Tenant's property from the Premises, for the purpose of altering, remodeling, repairing, renovating or otherwise preparing the Premises for re-tenanting; (d) to grant anyone the exclusive privilege of conducting any particular business or activity in the Building; (e) to enter the Premises at all reasonable times, upon reasonable notice except in case of emergency when no notice shall be required, for the making of such inspections, repairs, alterations, improvements or additions of, or to, the Premises or the Development as Landlord may deem necessary or desirable, to exhibit the Premises to others during the last six (6) months of the term of this Lease and for any purpose whatsoever related to the safety, protection, preservation or improvement of the Premises, the Development or Landlord's interest therein; (f) at any time Landlord, either voluntarily or pursuant to governmental requirements, may make repairs, alterations or improvements in or to the Development or any part thereof and temporarily close entrances, doors, corridors, elevators or other parts of the Common Areas; (g) to charge Tenant any expense, including overtime or premium costs incurred by Landlord, resulting from a request by Tenant for repairs, alterations, decorating or other work performed in the Premises or the Building other than during Business Hours; and (h) Unless prohibited by applicable law, Landlord shall have the exclusive right, at any time and from time to time during the term of this Lease, to either contract for utility services for the Development or any portions thereof and the tenants thereof from a company or companies other than the company or companies currently providing utility services to the Development and the tenants thereof or continue to contract for utility services from the current providers of such services. In the event of any change in a utility provider to the Development, Tenant shall cooperate with Landlord and any such utility provider at all times, and as reasonably necessary, to allow Landlord and any such utility provider reasonable access to the Premises and the various utility lines within the Premises. Landlord may exercise all or any of the foregoing reserved rights without being deemed guilty of an eviction from or disturbance of Tenant's possession and use of the Premises, without being liable in any manner to Tenant, without an elimination or abatement of Base Rent, or other charges due hereunder and without otherwise affecting the terms of this Lease. 9. TENANT'S ADDITIONAL COVENANTS WITH RESPECT TO OCCUPANCY: Tenant, in addition to Tenant's other obligations hereunder, shall: (a) occupy the Premises in a safe and careful manner and in compliance with all applicable laws, ordinances, rules, regulations and orders of any governmental bodies having jurisdiction over the Premises including all federal, state and local laws, ordinances, rules and regulations, whether present or future, relating to and/or dealing with the protection of environmental and/or human health and safety and/or applicable to the generation, handling, manufacture, installation, treatment, storage, use, transportation, discharge, disposal, presence and/or release into the air, soil, water at, above or below ground level (whether accidental or intentional) of Hazardous Materials (hereinafter defined) and the requirements of all underwriters of policies of liability and property insurance at any time in force with respect to the Premises, the Development or any part thereof and without committing or permitting waste; (b) permit or bring on the Premises or any other part of the Development no Hazardous Materials; provided, however, Tenant shall be permitted to use such Hazardous Materials as are incidental to normal office operations so long as such materials are properly used, containerized and stored in accordance with applicable law. For purposes of this Lease, the term "Hazardous Materials" shall mean asbestos, polychlorinated biphenyls, petroleum or by-products thereof, radioactive materials, or any chemical, material or substance included in the definitions of "hazardous substances", "hazardous materials", "hazardous waste", "toxic substances" and/or words of similar import under any federal, state and local laws, ordinances, rules and regulations whether present or future, relating to and/or dealing with the protection of environmental and/or human health and safety and/or applicable to the generation, handling, manufacture, installation, treatment, storage, use, transportation, discharge, disposal, presence and/or release into the air, soil, water at, above or below ground level (whether accidental or intentional) of such substances or materials. If Tenant's use of the Premises is for a medical office or a similar or related use, (i) Tenant, at Tenant's sole cost and expense, shall be responsible solely for the disposal and removal of all needles, syringes and other "sharps" and infectious waste and materials from the Premises and the Building in accordance with all applicable laws and (ii) Tenant shall submit to Landlord on or before the Commencement Date and on an annual basis thereafter copies of Tenant's approved plan, if any, for the disposal of medical wastes and other Hazardous Materials if Tenant is required by applicable laws to prepare, apply, file or obtain any such plan. In no event shall any such tenant dispose of or place such tenant's medical or infectious waste in the trash or rubbish receptacles for the Building; (c) place no signs on the exterior of the Premises or on the interior surface of any exterior windows of the Premises or facing the Common Areas without Landlord's prior written consent. Tenant shall maintain any permitted sign in good repair and promptly remove and repair any damage caused by any such permitted or non-permitted signs at the direction of Landlord, as the case may be; Tenant shall be permitted to place a sign similar to that of the previous Tenant on the wall adjacent to the Premises's entrance door. Said sign shall be approved as to size, design and location by Landlord. (d) permit no lien, notice of intention to file lien or other charge (whether arising out of work of any contractor, mechanic, laborer, or material-man or any mortgage, conditional sale, security agreement or chattel mortgage or otherwise) which might be or become a lien or encumbrance or charge upon the Development or. any part thereof or the income therefrom, or other matter or thing whereby the estate, right and interest of Landlord in the Development or any part thereof might be impaired. Upon notice from Landlord, Tenant shall cause any lien or other charge to be cancelled and discharged of record within twenty (20) days of such notice; (e) solicit no business in the Development, nor distribute handbills or other advertising matter to others, or place the same in or on automobiles in the Common Areas; (f) comply with all reasonable rules and regulations which Landlord, in its sole discretion, may from time to time establish or change for the use and care of the Development or any part thereof ("Rules and Regulations"); and (g) install, or arrange to have installed, no air. conditioning or heating equipment or device without Landlord's. prior written approval, which.approval may be withheld for any reason. 10: ALTERATIONS -IMPROVEMENTS - PERSONAL PROPERTY: Tenant shall perform any and. all alterations, improvements, remodeling, 'renovations and construction work, other than the work set forth in the Work Letter, at Tenant's cost and expense, in accordance with plans and specifications prepared at Tenant's cost and expense, and in conformity with all applicable laws, ordinances, rules and regulations. Tenant shall not make any alterations, additions, improvements, or other changes in or to the interior or exterior of the Premises or attach, affix or build therein or thereon any improvement or installation without Landlord's prior written consent. Before any such work is performed or any materials therefore are delivered to the Premises, Landlord shall have approved Tenant's plans and specifications, Tenant's contractors and any necessary permits. Tenant shall submit to Landlord's reasonable supervision of such work. All additions, installations, alterations, fixtures and improvements (temporary or permanent) in and upon the Premises, whether installed by Tenant or Landlord, shall become Landlord's property, and shall remain upon, and be surrendered with, the Premises without disturbance or injury upon the expiration or earlier termination of this Lease, all without payment or credit to Tenant. Notwithstanding the foregoing, Tenant shall have the right to place in the Premises, at such locations therein as Tenant may from time to time determine, Tenant's furniture, trade fixtures and standard business office machines and equipment. The location and quantity of any file cabinets, safes or other extraordinarily heavy equipment or furniture, however, must be approved by Landlord or Landlord's structural engineer. Tenant's personal property shall be and remain the property of Tenant, and may be removed by Tenant at any time during the term of this Lease, or upon the expiration or earlier termination of this Lease. Tenant, however, shall repair, at Tenant's expense, any damage to the Premises or the Development caused by such removal. Tenant's personal property and trade fixtures shall be separately entered for assessment purposes or for taxation purposes of any kind. Tenant shall promptly pay all taxes levied thereon. 11. MAINTENANCE AND REPAIR OF THE PREMISES: Except as provided in this Lease to the contrary, Landlord, at Tenant's expense, shall keep and maintain in good order, condition and repair the Premises and the fixtures and other improvements therein, including, but not limited to, any tenant finish, the interior and exterior of all doors, locks, frames and checks; all interior windows, including interior windows which share a demising wall with the Common Areas, hallways, all plumbing within the Premises and all electrical systems, including the fluorescent lighting equipment and any fire systems. Tenant shall notify Landlord of the need for any such repairs and Landlord shall cause the same to be made within a reasonable time thereafter. Landlord, upon any inspection of the Premises, may also determine the need for repairs and cause such repairs to be made. Landlord shall also repair damage caused by the acts of Tenant, Tenant's employees, agents, invitees, licensees, or contractors to the Premises or to the Development. Subject to Section 15 hereof, Tenant shall be billed separately for the cost of all maintenance and repairs performed by Landlord and shall reimburse Landlord for such cost within ten (10) days of Tenant's receipt of Landlord's invoice for same. 12. MAINTENANCE, REPAIR AND ALTERATION BY LANDLORD: Landlord, subject to receipt of Tenant's payment of sums due under Section 4 hereof, shall maintain in good order and repair the Development, including the foundation, roof, exterior walls and windows, the structural portions of the Building and other buildings and improvements in the Development, the Common Areas, including the redecoration of interior Common Areas and the electrical systems, elevators, plumbing, heating, ventilation and air conditioning systems serving the Building. The cost of such maintenance, repair and replacements, when necessary, shall be included as part of Operating Expenses, unless otherwise set forth in this Lease to the contrary. Tenant shall give Landlord written notice of the necessity for repairs coming to the attention of Tenant following receipt of which Landlord shall have a reasonable time, as determined necessary by Landlord, to undertake and complete such repairs. The provisions of this Section 12 shall not apply in the case of damage or destruction by fire or. other casualty or by eminent domain, in which events the obligations of Landlord shall be controlled by other Sections -of this Lease. Notwithstanding the foregoing, Tenant shall be responsible for and shall reimburse Landlord, on demand, for the cost of all repairs and replacements to the Development which are required as the result of alterations, other improvements or installations made by or specifically for Tenant. 13. TENANT'S INSURANCE AND INDEMNITY. Tenant shall at all times during the term of this Lease maintain, at its own expense, one or more policies of liability and property damage insurance, issued by one or more insurance companies reasonably acceptable to Landlord, with the following minimum coverages: (i) Workers' Compensation; (ii) Commercial General Liability Insurance, including blanket contractual liability coverage in a minimum single limit amount of not less than One Million Dollars ($1,000,000); and (iii) special form or "all risk" property insurance for the full replacement cost of Tenant's trade fixtures, improvements other than the work to be performed by Landlord as set forth in the Work Letter and personal property. All such insurance shall name Landlord as an additional insured as its interest may appear and shall provide that no policy may be canceled on less than thirty (30) days' prior written notice to Landlord. Tenant shall furnish Landlord, annually, with certificates evidencing such insurance. Should Tenant fail to maintain such insurance and/ or furnish Landlord with such certificates after Landlord's request for Tenant to do so, Landlord shall have the right to obtain such insurance for Tenant. In such event, Tenant shall reimburse Landlord for the cost of such insurance on demand. Tenant shall indemnify and save harmless Landlord against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including reasonable attorneys' fees which may be imposed upon or incurred by or asserted against Landlord by reason of any of the following: (i) any penalty or damage or charges imposed for any violation of any law or ordinance attributable to the failure of Tenant to perform or comply with. any provision of this Lease; (ii) any accident or other occurrence on or about the Premises causing injury to any person or property whomsoever or whatsoever; (iii) any failure of Tenant in any respect to comply with the terms of this Lease to be performed by Tenant; and (iv) the use and occupancy of the Premises. Tenant's obligations under the foregoing indemnification shall survive the expiration or earlier termination of this Lease. 14. LANDLORD'S INSURANCE: Landlord, subject to receipt of Tenant's payment of sums due under Section 4 hereof, shall be responsible for insuring and shall at all times during the term of this Lease maintain a policy of property insurance in an amount not less than the full replacement cost thereof on all improvements within the Development, including the Premises and the work to be performed by Landlord set forth in the Work Letter; provided, however, Landlord shall not be responsible for and shall not be obligated to insure against any loss or damage to any trade fixtures or improvements made by Tenant. to the Premises or to Tenant's personal property. The foregoing is not intended to preclude Landlord from maintaining such other insurance as Landlord or any mortgagee of Landlord deems appropriate. 15. WAIVER OF SUBROGATION: Landlord and Tenant, for themselves and their respective insurers, hereby waive all rights of recovery and causes of action which either has or may have, or which may arise hereafter, by subrogation or otherwise, against the other for damage to the Premises or the Development, property of the other or the business of the other, caused by anyy of the perils covered or coverable by special form or "all risk" property insurance, business interruption insurance, contents, insurance, a sprinkler leakage policy in Ohio, or for which either Landlord or Tenant may be reimbursed as.a result of any other insurance coverage provided that the foregoing waivers do not invalidate any policy of insurance now or hereafter maintained by Landlord or Tenant and that any additional premium caused by the aforesaid waiver shall be paid by 'the party benefitted thereby upon notice to such party. Notwithstanding the foregoing, Tenant shall remain liable to Landlord for damage to any property of Landlord to the extent of any deductible on Landlord's property insurance policy. 16. LOSS OR DAMAGE TO TENANT'S -PROPERTY: All personal property belonging to Tenant or to any other person located in or about the Premises or the Development shall be so located at the sole risk of Tenant or such other person, and neither Landlord nor Landlord's agents or employees shall be liable for the theft or misappropriation thereof, or for. any damage or injury thereto, however caused, including without limitation, loss or damage caused by winter, snow, frost, steam, heat, cold, dampness, falling plaster, explosion, sewers or. sewage, .gas, odors, noise, the bursting or leaking of pipes, plumbing, electrical ;wiring, equipment and fixtures of all kinds,' or by any act or neglect of other tenants or occupants of the Building, or of any other person. 17. UNTENANTABILITY: If the Premises or the Building shall be partially damaged by fire or other casualty, this Lease shall remain in full force and effect and the damage to the Premises or the Building shall be repaired by Landlord as soon as practicable under the circumstances. Until such repairs shall be made, Base Rent and other charges shall be abated on a per diem basis proportionate to the extent and for the period that the Premises are unfit for occupancy or cannot be used, as the case may be. If all or substantially all of the Premises or the Building are damaged or made unfit for occupancy by fire or other casualty, Landlord may elect: (i) to terminate this Lease as of the date when the Premises or the Building are so made unfit for occupancy, by written notice to Tenant within ninety (90) days after such date, or; (ii) to repair, restore or rehabilitate the Premises or the Building, at Landlord's expense, within one hundred eighty (180) days after Landlord is in possession of all insurance proceeds and necessary permits for reconstruction or repair. If Landlord elects so to repair, restore or rehabilitate the Premises or the Building, this Lease shall not terminate, but until such repairs shall be made, Base Rent and other charges shall be abated on a per diem basis proportionate to the extent and for the period that the Premises or the Building are unfit for occupancy or cannot be used, as the case may be. If Landlord shall proceed under clause (ii) above and shall not substantially complete the work within said one hundred eighty (180) day period (excluding from said period loss of time resulting from delays beyond the reasonable control of Landlord) either Landlord or Tenant may then terminate this Lease, as of the date when the Premises or the Building were so made unfit for occupancy, by written notice to the other not later than ten (10) days after the expiration of said one hundred eighty (180) day period. In the event of a termination of this Lease pursuant to this Section 17, Base Rent shall be apportioned on a per diem basis to and including the effective date of such termination. Landlord shall incur no liability on account of any delay in the completion of any repairs to be made by Landlord which may arise by reason of adjustment of insurance, labor difficulties, or any other cause beyond Landlord's control. 18. EMINENT DOMAIN: If the whole or any part of the Premises shall be appropriated, condemned, taken orr otherwise acquired by any public or quasi-public authority under the power of eminent domain, condemnation or other proceedings or if a material part of the Building shall be so taken or acquired and the remaining part shall not be adequate for the continued operation of the Development, as determined by Landlord in Landlord's reasonable discretion, this Lease and the estate hereby created shall terminate and wholly expire on the. date title shall vest in the acquiring authority, and all Base Rent and other charges shall be prorated and adjusted as of said date. In no event shall Tenant have any claim against Landlord by reason of any appropriation, condemnation or taking of the whole or any part of the Premises or the Development; nor shall Tenant have any claim to the amount, or any portion thereof, that may be awarded as damages or paid as a result of such appropriation and/or taking. Tenant hereby assigns to Landlord All of Tenant's right, title and interest in and to any and all amounts awarded or paid by reason of such appropriation, condemnation and/or taking; provided however, the foregoing is not intended to deprive Tenant from claiming moving expenses, displacement expenses or the like directly from the acquiring authority. 19. ASSIGNMENT AND SUBLETTING: Tenant shall not sublet the Premises or any part thereof, nor assign this Lease, or permit any business to be operated in or from the Premises by any person, firm or corporation other than Tenant, without in each case first obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Any attempt to so sublet all or any portion of the Premises or to assign this Lease without Landlord's prior written consent shall be void and, at Landlord's option, shall constitute a default under this Lease. Notwithstanding the foregoing, Tenant shall have the right, without. Landlord's prior written consent, to assign this Lease or to sublet all or any portion of the Premises (i) to a parent, subsidiary or affiliated corporation or other entity in which Tenant or its parent owns or controls a . majority of such corporation's voting stock or such other entity's membership or other interests or (ii) to any corporation or other entity into which Tenant may merge or consolidate or a surviving corporation or other entity after merger or consolidation of Tenant with another corporation or other entity or (iii) upon the sale of all or, substantially all of the assets of Tenant, to an entity having a net worth equal to or greater than Tenant as of the date of this Lease or at the time of such assignment or subletting, whichever is greater. Any other assignment, transfer, mortgage, pledge or encumbrance of this Lease or an interest therein, whether voluntary, involuntary, by operation of law or otherwise, shall constitute an assignment of this Lease and shall require the prior written consent of Landlord. Upon a subletting of the Premises or any portion thereof or any assignment of this Lease, neither Tenant nor its guarantor, if any, shall be released or discharged from any liability whatsoever under this Lease and shall continue to be liable hereunder with the same force and effect as though no sublease or assignment had been made. Landlord's consent to any sublease or assignment shall not be deemed a consent to any further subletting or assignment. If Tenant requests Landlord to consent to any sublease or assignment, Tenant shall provide Landlord with the name, address, and a description of the business of the proposed assignee or subtenant, its most recent financial statement and such other evidence of financial responsibility as Landlord may request. It shall be a condition: to Landlord's consent to any subletting or assignment that: (i) at the time of any proposed subletting or assignment, Tenant shall not be in default under the terms of this Lease; (ii) the proposed subtenant or assignee is not, and has not been within the six (6) months immediately preceding Tenant's request for Landlord's consent, an occupant, or related to an occupant of the Building and intends only to occupy the Premises in accordance with the terms of this Lease; (iii) the rent payable by the proposed subtenant or assignee shall not be less than the greater of the prevailing market rent for the Building or buildings of similar character in the general location of the Building and the rent payable hereunder; (iv) the credit, financial responsibility, character, and business or professional standing of the proposed subtenant or assignee are satisfactory to Landlord, in Landlord's sole discretion; (v) the nature of the proposed occupancy is not inconsistent with Landlord's commitments to other tenants in the Building; (vi) Tenant and its subtenant or assignee shall execute, acknowledge and deliver to Landlord a fully executed counterpart of a written assignment of lease or sublease, as the case may be, in form and substance satisfactory to Landlord, and duly consented to by Tenant's guarantor, if any. In the case of an assignment, Tenant shall assign to such assignee, Tenant's entire.interest in this Lease, together with all prepaid Base Rent and other charges and any security deposit, and the assignee shall accept said assignment and assume and agree to observe and perform, directly for the benefit of Landlord, all of terms of this Lease to be observed and performed by Tenant. In the case of a subletting, the sublease shall in all respects be subject and subordinate to all of the terms of this Lease to be observed and performed by Tenant, except for the payment of Base Rent and other charges, which Tenant shall continue to pay to Landlord; and (vii) Tenant shall pay to Landlord the sum of Five Hundred Dollars ($500.00) to cover Landlord's administrative costs and overhead in connection with considering any proposed assignment or subletting. Upon any permitted assignment of this Lease or subletting of the Premises without Landlord's prior written consent as above provided. Tenant shall provide documents evidencing any such assignment or subletting as Landlord may reasonably require. Within thirty (30) days after receiving Tenant's request for Landlord's consent to any sublease or assignment and the requisite accompanying information, Landlord, by written notice to Tenant, shall (x) grant its consent, or (y) withhold its consent, or (z) terminate this Lease within said thirty (30) day period or' on such later date as Tenant proposed to sublet all or any portion of the Premises or assign this Lease, and release Tenant from its remaining obligations hereunder. Notwithstanding the foregoing, if Landlord elects to terminate this Lease pursuant to clause (z) above, Tenant shall have the right to negate such termination by written notice to Landlord within five (5) days after receipt of Landlord's notice withdrawing Tenant's request for Landlord to consent to Tenant's proposed assignment or subletting. If any proposed sublease or assignment provides for, or Tenant otherwise receives, rent, additional rent, or other consideration in excess of the Base Rent and other charges payable by Tenant hereunder, Tenant shall pay Landlord the amount of such excess as it is received by, or becomes due to Tenant. 20. REMEDIES OF LANDLORD: In addition to any and all rights and remedies allowed by law or in equity, Landlord shall have the following rights and remedies: (a) if any voluntary or involuntary petition or similar pleading under any Act of Congress relating to bankruptcy shall be filed by or against Tenant, or if any voluntary or involuntary proceeding in any court or tribunal shall be instituted by or against Tenant to declare Tenant insolvent or unable to pay Tenant's debts, then and in any such event Landlord may, if Landlord so elects, with or without notice of such election and with or without entry or other action by Landlord, forthwith terminate this Lease and Tenant's right to possession of the Premises. Upon any such termination, Landlord shall be entitled to recover damages in an amount equal to the then present value (computed at a discount rate of eight percent (8%)) of the Base Rent and other charges for the remainder of the term of this Lease, less the then present value (computed at a rate of eight percent (8%) of the fair rental value of the Premises for the remainder of the term of this Lease; (b) if Tenant shall fail to pay Base Rent when due, or fails to pay other charges within five (5) days after receipt of Landlord's invoice for same, or defaults in the prompt and full performance of any of Tenant's other obligations hereunder, and such non-monetary default is not corrected within five (5) days after written notice from Landlord or such longer period as Tenant may reasonably. require provided Tenant commences to cure such non-monetary default within said five (5) day period and diligently proceeds therewith, or if the leasehold interest of Tenant is levied upon under execution or is attached, or if Tenant makes an assignment for the benefit of creditors or if a receiver is appointed for any property of Tenant or if Tenant abandons the Premises, then and in any such event Landlord may terminate this Lease and Tenant's right of possession of the Premises, or, without terminating this Lease, terminate Tenant's right of possession of the Premises; (c) upon the termination of this Lease, or upon the termination of Tenant's right of possession of the Premises without terminating this Lease, Tenant shall surrender possession and vacate the Premises immediately, and Landlord may enter into and repossess the Premises with or without process of law and remove all persons and property therefrom in the, same manner and with the same right as if this Lease had not been made. For the purpose of any such entry and repossession, Tenant waives any and all notices except as may be required by law; (d) if Landlord elects to terminate Tenant's right to possession only, without terminating this Lease as above provided, Landlord may remove from the Premises, at Tenant's cost, any and all property found therein and such repossession shall not release Tenant from Tenant's obligation to pay Base Rent and other charges. After any such repossession by Landlord without terminating this Lease, Landlord shall make reasonable efforts to re-let the Premises, or any part thereof, as agent of Tenant, to any person, firm, or corporation and for such time and upon such terms as Landlord, in Landlord's sole discretion, may determine. Landlord's re-letting efforts shall be deemed reasonable and sufficient if Landlord lists the Premises for lease with a broker. Landlord may make repairs, alterations and additions in and to the Premises and redecorate the same to the extent deemed.by Landlord necessary or desirable to facilitate leasing of the Premises, and Tenant shall, upon demand, pay the cost thereof together with Landlord's other expenses of re-letting, including any broker's commissions. If the rents collected by Landlord upon any such re-letting are not sufficient to pay the full monthly amount of the Base Rent and other charges.due under this Lease together with the costs of any repairs, alterations, additions, redecorating and expenses paid by Landlord to effect such re-letting, Tenant shall pay to Landlord the amount of each monthly deficiency upon demand; (e) any and all property which may be removed from the, Premises by Landlord may be handled, removed, stored or otherwise disposed of by Landlord at the risk and expense of Tenant, and Landlord shall not be responsible for the preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all expenses incurred in such removal and all storage charges for said property so long as the same shall be in Landlord's possession or under Landlord's control. If any property shall remain in the Premises or in the possession of Landlord and shall not be removed by Tenant within a period of ten (10) days from and after the time when the Premises are either abandoned by Tenant or repossessed by Landlord, said property shall conclusively be deemed to have been forever abandoned by Tenant; (f) if Tenant shall default in performing any term of this Lease on the part of Tenant to be performed, which default may be cured by the expenditure of money, Landlord, at Landlord's option, may, but shall not be obligated, on behalf of Tenant, to expend such sums ass may be necessary to perform and fulfill such term. Any and all sums so expended by Landlord, with interest at the rate provided in Section 3 hereof from the date of such expenditure, shall be and be deemed to be Additional Rent and shall be repaid by Tenant to Landlord upon demand. No such payment or expenditure by Landlord shall be deemed a waiver of Tenant's default or affect any other remedy of Landlord by reason of such default; (g) if suit is brought for recovery of possession of the Premises, the recovery of Base Rent or other charges due under this Lease, or because of default in Tenant's performance of any other term of this Lease to be performed by Tenant, Tenant shall pay to Landlord all expense incurred in the prosecution of such suit, including reasonable attorneys' fees; and (h) if Landlord finds it necessary to employ the services of an attorney or any other professional in order to recover possession of the Premises, recover unpaid rent or other amounts due under the terms of this Lease, or enforce any other term of this Lease without the need to bring a lawsuit, Tenant shall pay to Landlord all expenses incurred by Landlord, including reasonable attorneys' fees. 21. HOLDING OVER: If Tenant or any party claiming under Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease without the consent of Landlord, then such tenancy shall be deemed to be a tenancy at will, but otherwise subject to all of the terms of this Lease, at a monthly Base Rent equal to one hundred fifty percent (150%) of the last monthly installment Base Rent payable by Tenant hereunder. 22. TAKING AND SURRENDER OF POSSESSION: Taking of possession of the Premises by Tenant shall be conclusive evidence that the Premises were in good order and in satisfactory condition when Tenant so took possession except for latent defects brought to Landlord's attention in writing within ten (10) days of the Commencement Date. No representation respecting the condition of the Premises or the Development has been made by Landlord to Tenant unless set forth herein or in the Work Letter, and no promise of Landlord to prepare, alter or improve the Premises shall be binding upon Landlord unless set forth herein or in the Work Letter. This Lease does not grant any rights to light or air over property except over public ways kept open by public authority, and Landlord shall not be liable to Tenant for any expense, injury, death, loss or damage resulting from the use of any public way or from any building, land or public or private way adjacent to the Development. At the expiration or earlier termination of this Lease, Tenant shall quit and surrender the Premises broom clean together with all installations, improvements and alterations (including partitions) which may have been installed by Landlord or Tenant. The Premises shall be in as good condition and repair as when possession was delivered to Tenant, or as the Premises may be placed by Tenant on or about the Commencement Date if Landlord delivers the Premises to Tenant in an "as is" condition, reasonable use and wear and loss or damage by fire, the elements or other casualty not resulting from the willful acts of Tenant, Tenant's agents, employees or invitees excepted. If Tenant fails to so surrender the Premises, Landlord may restore the Premises to the required condition and Tenant shall pay the cost thereof to Landlord within ten (10) days following receipt of Landlord's invoice for same. Tenant may remove carpeting laid by Tenant, provided Tenant also removes all nails, tacks, paper, glue, bases, and other vestiges of the carpeting and restores the floor surface to the condition existing before such carpeting was laid. If Tenant fails to remove Tenant's carpeting, trade fixtures, personal property, and/or equipment which it has a right to remove from the Premises prior to the expiration or earlier termination of this Lease, Tenant shall be conclusively presumed to have abandoned the same, and ownership thereof shall forthwith vest in Landlord without payment or credit to Tenant. In the alternative, Landlord, at Tenant's expense, may remove and dispose of any such items without liability to Tenant and without any obligation to keep or preserve such items. Any and all removal and disposal costs shall be paid to Landlord within ten (10) days after receipt by Tenant of Landlord's invoice for same. Tenant agrees to remove telephone system and all other electronic systems such as security systems, computer wiring and the like prior to vacating the premises. Failure to do so will be Landlord's authorization to engage a contractor to do so on behalf of Tenant, and Tenant will pay the cost thereof immediately upon receipt of the invoice. 23. ACCESS TO BUILDING: Tenant, Tenant's agents, employees, licenses, and invitees, desiring to enter or leave the Building at times other than during Business Hours, shall use such entrances or exits as may be designated by Landlord, and shall comply with security regulations established, from time to time, by Landlord with respect to identification, registration, method of signaling admission, etc., so as to establish the right of such persons to enter or to leave the Building. The provisions of this Section 23 shall not require Landlord to keep the Building open other than during Business Hours; provided, however, upon Landlord's prior written consent, Tenant may have twenty-four (24) hour per day, three hundred sixty-five (365) day per year access to the Building and the Premises. 24. SUBORDINATION OF LEASE/ESTOPPEL: This Lease is and shall be subject and subordinate to the lien of any mortgage, deed of trust and ground lease which may now or hereafter affect the Development or any part thereof and to all renewals, extensions or replacements thereof. Such priority shall be established automatically and no separate instrument shall be required to effectuate such subordination. Tenant, however, upon request by Landlord, shall execute any and all instruments deemed by Landlord necessary or advisable to subordinate this Lease and all rights given Tenant hereunder to any such mortgage, deed of trust or ground lease. Upon a sale, transfer, or assignment of Landlord's interest in the Development or any part thereof, including the Premises or an assignment of the rents derived therefrom or if any proceedings are brought for foreclosure or to exercise any power of sale under any mortgage or in the event of a cancellation or termination of any ground or underlying lease covering the Development or any part thereof, Tenant shall attorn to and recognize such transferee, purchaser, ground or underlying landlord or mortgagee as Landlord under this Lease. In addition, Tenant shall execute and deliver at any time, and from time to time, upon the request by Landlord or of any such holder, any instrument which, in the sole judgment of Landlord, may be necessary or appropriate to evidence such attornment. Tenant also shall execute, acknowledge and deliver. to Landlord, promptly upon request, a certificate certifying: (i) that this Lease is unmodified and in full force and effect or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the modifications; (ii) the dates, if any, to which Base Rent and other charges have been paid; (iii) to such other matters as may be requested by Landlord; and (iv) that such certificate may be relied upon by any prospective purchaser or mortgagee of the Development or any part thereof. If Tenant does not, within ten (10) days after request by Landlord, execute any instrument required by this Section 24, Tenant hereby appoints Landlord as Tenant's attorney-in-fact, such appointment being coupled with an interest, to execute any such instrument for and on behalf of Tenant. 25. SECURITY DEPOSIT: Tenant shall deposit with Landlord the sum of $9032.67, which sum shall be held by Landlord as a security deposit throughout the term of this Lease. If Tenant performs and observes all of the terms of this Lease to be performed and observed by Tenant, Landlord shall return the security deposit, or balance thereof then held by Landlord if Landlord has applied any of such deposit as permitted under this Lease, without interest, to Tenant within thirty (30) days after the date. on which this Lease expires or terminates or after Tenant surrenders possession of the Premises, whichever is later. If Tenant defaults in the payment of Base Rent or other charges or in the performance or observance of any of the other terms of this Lease, then Landlord may, at its option and without notice, apply all or any part of the security deposit in payment of such Base Rent -or other charges or to cure any other default. If Landlord does so, upon request of Landlord, Tenant shall deposit with Landlord the amount so applied so that Landlord shall have on hand at all times throughout the term of this Lease the full amount of the security deposit. Landlord shall not be required to hold the security deposit as a separate account, but may commingle such security deposit with Landlord's other funds. In the event of a sale or ground lease of the Development, Landlord shall have the right to transfer the security deposit to its purchaser or tenant and Landlord shall thereupon be released by Tenant from all responsibility for the return of such deposit. Tenant shall look solely to such purchaser or tenant for the return of such deposit. In the event of an assignment of this Lease by Landlord, the security deposit shall be deemed to be held by the assignee and Landlord shall have no further responsibility for the return of such deposit. 26. NOTICES: In every instance where it shall be necessary or desirable for Landlord or Tenant to serve any notice or demand upon the other, such notice or demand shall be deemed sufficiently given or made if in writing and sent to Landlord at 2001 Crocker Road Suite 420 Westlake, Ohio 44145 or sent to Tenant at the Premises by one (1) of the following methods: (i) by personal delivery along with a signed receipt of delivery; (ii) by certified, United States mail, postage prepaid, which shall be deemed accepted three (3) days following deposit in the United States mail; (iii) by major overnight courier service such as UPS, Airborne Express, etc., which shall be deemed accepted the next business day after being picked up from Landlord's or Tenant's offices or being delivered to such service, as the case may be; or (iv) by fax or other electronic transmission which shall be deemed accepted if evidenced by a confirmation ticket; provided a "hard copy" of such fax or other electronic transmission is sent by major overnight carrier for next day delivery. Failure to accept delivery of any such notice shall not void the validity or affect thereof. Wherever in. this Lease, in connection with the breach or performance of any of the terms of this Lease to be performed by Tenant, no period of time or notice is required, no notice shall be required as a prerequisite to the exercise of any right or remedy by Landlord. 27. RULES AND REGULATIONS: Tenant and Tenant's agents, employees and invitees shall faithfully observe and strictly comply with the Rules and Regulations attached hereto as Exhibit C and made a part hereof by reference, and with such further reasonable rules and regulations as Landlord may, after notice to Tenant, from time to time adopt. Nothing in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations against any other tenant of the Building, and Landlord shall not be liable to Tenant for violation of any such Rules or Regulations by any other tenant of the Building or the agents, employees, licensees or invitees of such other tenant. . 28. EXCULPATION: Notwithstanding anything to the contrary contained in this Lease, there shall be absolutely no personal liability of whatsoever nature imposed upon Landlord, its successors or assigns, any member/manager of Landlord, any partner of Landlord, whether general or limited, or their respective heirs, personal representatives, successors or assigns, or any mortgagee-in-possession with respect to any of the terms of this Lease. If Landlord shall commit a default or breach of any of the terms hereof and Tenant shall obtain a judgment against Landlord for such default or breach, Tenant's sole and exclusive remedy for the enforcement and collection of such judgment shall be the institution of foreclosure or other appropriate execution proceedings solely against Landlord's interest in the Development and regardless of whether or not such proceedings shall result in a complete satisfaction of Tenant's judgment, in no event (whether by proceedings at law, in equity, administrative proceedings or otherwise) shall any deficiency or other personal judgment be rendered or enforced against. Landlord, its successors and assigns, any member/manager of Landlord, any partner of Landlord, whether general or limited, or their respective heirs, personal representatives, successors or assigns, or any mortgagee-in possession. 29. WAIVER OF TRIAL BY JURY: Landlord and Tenant, hereby waive trial by jury in any action, proceeding or counterclaim brought by either of them against the other on any matter whatsoever arising out of or in any way connected with this Lease. 30. BROKER: Tenant represents and warrants to Landlord that no broker negotiated or was instrumental in negotiating or consummating this Lease except CB Richard Ellis who shall be paid by Landlord. Tenant shall indemnify and hold Landlord harmless from any claim of any other broker. 31. OFFER BY BROKER: If this Lease is offered to Tenant by a broker for Landlord, such offer shall be deemed to be made solely in the capacity of a broker and shall be subject to Landlord's acceptance of all of the terms set forth in this Lease and such offer shall not bind Landlord until such time as Landlord has executed this Lease and delivered an executed counterpart hereof to Tenant. 32. SECTION HEADINGS: The section headings appearing in this Lease are inserted only as a matter of convenience and for reference purposes, and in no way define, affect, limit or describe the scope or intent of this Lease or any Section hereof. 33. ENTIRE AGREEMENT; BINDING NATURE: This Lease and the Exhibits attached hereto contain the entire agreement between Landlord and Tenant with respect to the Premises and shall not be modified in any manner except in writing executed by both Landlord and Tenant or their respective successors-in-interest. If more than one person or entity or a combination thereof comprise "Tenant", their liability hereunder shall be joint and several. The terms of this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, legal representatives, successors and assigns. 34. NO WAIVER: (a) No receipt of money by Landlord from Tenant with . knowledge of the breach of any term of this Lease, after the termination hereof, after the service of any notice, after the commencement of any suit or after final judgment for possession of the Premises shall be deemed a waiver of such breach, or shall reinstate, continue or extend the term of this Lease or affect any such notice, demand or suit. (b) No delay on the part of Landlord in exercising any right, power or privilege hereunder shall operate . as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (c) No act done or statement made by Landlord or Landlord's agents or employees shall constitute a cancellation, termination or modification of this Lease, a waiver of any term hereof or relieve Tenant from Tenant's obligation to pay Base Rent or other charges unless confirmed in, or evidenced by, a writing, signed by landlord. 35. RECORDING: This Lease shall not be recorded, but on request of either party, Landlord and Tenant shall execute a memorandum of lease, which memorandum of lease may then be recorded in the office of the Cuyahoga County Recorder at the expense of the party desiring to do so. 36. RELOCATION: Landlord shall have the right to relocate the Premises to another part of the Building or to Metro II Office Building located at 555 Metro Park Place, Columbus, Ohio 43017 upon the following conditions: (a) the relocated premises shall be substantially the same in size, dimensions, configuration and decor as the Premises before such relocation, or shall be placed in such condition by Landlord at it sole cost and expense; (b) Landlord shall give Tenant not. less than sixty (60) days' written notice of Landlord's intention to so relocate Tenant; (c) the location of the personal property of Tenant in and upon the Premises shall be effected by Landlord at the time of such relocation at its sole cost and expense and during hours other than Business Hours to the extent reasonably possible; provided, however, if such relocation cannot be accomplished during hours other than Business Hours, Base Rent otherwise payable by Tenant to the extent allocable to that portion of the Premises which cannot be occupied and used by Tenant during Business Hours shall be abated; (d) Landlord shall reimburse Tenant for the reasonable out-ofpocket costs incurred by Tenant in changing Tenant's address on stationery, business cards, directories, advertising, and other such similar items; and Landlord shall pay for the cost of Tenant's voice and data wiring in the relocated premises. (e) Landlord shall not have the right to relocate Tenant pursuant to this Section 36 more than one (1) time during the initial term of this Lease and more than one (1) time during any renewal or extension thereof. Upon the occurrence of any relocation pursuant to this Section 36, Landlord and Tenant shall immediately execute an amendment to this Lease reflecting the relocation of the Premises, and, at the request of either party, an amendment to the memorandum of lease, if any, which amendment may thereafter be recorded. 37. QUIET ENJOYMENT: If Tenant shall pay the Base Rent and other charges payable by Tenant under this Lease and faithfully keep, perform and observe all of the terms of this Lease to be kept, performed and observed by Tenant, Tenant shall at all times during the term of this Lease have the peaceable and quiet enjoyment of the Premises without hindrance from Landlord or any person lawfully claiming under Landlord; subject, however, to the terms of this Lease and any instrument to which this Lease is subordinate. 38. OPTION TO RENEW :Tenant is granted One (1) one year Option To Renew. No later than six months (6) prior to the expiration of the current Lease term, Tenant shall notify Landlord in writing that Tenant is willing to lease the Premises for a period of one (1) additional year commencing at the end of the current Lease term. Said rental rate shall be as set forth in Paragraph three (3) of this Lease. In the event Tenant does not timely notify Landlord of its intention to exercise it's Option To Renew or in the event Tenant is now or was ever in default of the terms and conditions of this Lease beyond any applicable cure period, then in such case Landlord shall be under no obligation to lease to Tenant for an additional period and Tenant's Option To Renew shall be null and void In Witness Whereof, Tenant and Landlord have executed multiple counterparts of this Lease as of the day, month and year first above written. Witnesses as to Landlord: LANDLORD: CB PARTNERS LIMITED PARTNERSHIP, an Ohio limited partnership /s/ Kelly J. Matsko By: CABRO, INC., an Ohio corporation, - ------------------------------ general partner Print Name: Kelly J. Matsko /s/ Jill M. Walker By: /s/ James A. Carney - ------------------------------ ---------------------------------------- Print Name: Jill M. Walker James A. Carney, President Witnesses as to Tenant: TENANT: KARLNET, INC. /s/ Suzanne D. Hale By: /s/ Douglas Karl - ------------------------------ ---------------------------------------- Print Name: Suzanne D. Hale Douglas Karl, Chief Technical Officer /s/ Kelley C. Snyder - ------------------------------ Print Name: Kelley C. Snyder EX-10.36 5 ex10-36.txt Exhibit 10.36 FIRST AMENDMENT AND EXTENSION OF LEASE AGREEMENT ------------------------------------------------ THIS FIRST AMENDMENT AND EXTENSION OF LEASE AGREEMENT made and entered into this 14th day of Nov. 2002 by and between CB Partners Limited Partnership, an Ohio Limited Partnership (hereinafter referred to as "Landlord") and KarlNet, Inc., an Ohio Corporation (hereinafter referred to as "Tenant"). WITNESSETH: ----------- WHEREAS, a Lease dated January 30, 2001 (hereinafter referred to as "Lease") was entered into between Landlord and Tenant in which Tenant leased approximately 6,376 square feet of space from Landlord identified as Suite 100 ("the Premises") on the first floor of a certain premises in the Building known as at 525 Metro Place North, Dublin, Ohio, 43017. WHEREAS, Landlord and Tenant now wish to modify and extend the Lease for an additional period of five (5) years and three (3) months; and NOW THEREFORE, in consideration of the mutual covenants, conditions, and agreements hereinafter contained, Landlord and Tenant hereby agree as follows: 1. Paragraph I of the Lease shall be modified to reflect a term for an additional period of five (5) years and three (3) months, commencing on December 1, 2002, and ending on January 31, 2008 ("Extended Term"). 2. Paragraph 3 of the Lease shall be modified to reflect that Tenant shall pay to Landlord as Base Rent for the Premises during the Extended Term as follows:
- ------------------------------------------------------------------------------------------------------ Per Sq. Ft. Annual Monthly From To - ------------------------------------------------------------------------------------------------------ $13.00 $82,888.00 $6,907.33 December 1, 2002 November 30, 2003 - ------------------------------------------------------------------------------------------------------ $13.50 $86,076.00 $7173.00 December 1, 2003 November 30, 2004 - ------------------------------------------------------------------------------------------------------ $14.00 $89,264.00 $7438.67 December 1, 2004 November 30,2005 - ------------------------------------------------------------------------------------------------------ $14.75 $94,046.00 $7837.17 December 1, 2005 November 30, 2006 - ------------------------------------------------------------------------------------------------------ $15.50 $98,828.00 $8235.67 December 1, 2006 January 31, 2008 - ------------------------------------------------------------------------------------------------------
3. Tenant Improvement Allowance: ----------------------------- Landlord will provide up to $6.00 per square foot for Tenant Improvements installed by Tenant during the first two years of The Extended Term, provided Tenant abides by Rules and Regulations regarding any construction within-the Building. Landlord will reimburse Tenant within 30 days for said Tenant Improvements once lien waivers have been provided to Landlord for work done within the space. Tenant Improvement money must be used only to improve the space and shall not be spent on furnishings, fixtures or personal property. Tenant agrees to abide by Section 10 of the Lease. 4. Base Year: ---------- Paragraph 4 (a)(iv) shall be modified to read as follows: The term "Base Year" shall mean 2003. 5. HVAC: ----- Landlord shall have all units inspected at Landlord's cost and expense and if necessary repaired and balanced at Landlord's cost. 6. Option on First Floor Space: ---------------------------- RIGHT OF FIRST REFUSAL: During the Term and upon the terms and conditions set forth in this Section, Landlord grants to Tenant the right and option (the "Option") to lease any first floor space in the Building and which becomes available for lease during the Extend Term (the "Option Space") on the same terms and conditions (including but not limited to the Base Rent and TI), for the duration of the Extended Term as are then applicable to the Premises provided Tenant has given Landlord at least ten (10) business days notice that it desires to lease an Option Space that becomes available, then in such case Landlord shall offer the Option Space to Tenant and thereafter Tenant shall have five business days to commit in writing to lease all, and only all, of the Option Space on substantially the same terms and conditions as contained herein, except the term shall be for a period of not less than three (3) years from the date Tenant takes occupancy and rent and TI allowance shall be negotiated in good faith by the Parties to the . extent they extend the original Term. To the extent TI covers the time period of the original Term then the TI shall be that same as set forth herein, except TI shall be prorated on a straight line basis. In the event Tenant so commits to lease the Option Space, Landlord and Tenant shall, use good faith efforts to enter into a new lease (or an amendment to this lease) for the Option Space within 10 business days thereafter. In the event Landlord and Tenant fail to enter into such a lease within that ten (10) business day period, Tenant shall be deemed to have waived the Option and this paragraph shall be null and void. To the extent any Option Space is available at the execution of the Lease, Landlord agrees to provide Tenant with written notice upon receipt or oral request for a proposal to lease any Option Space to a third party. Landlord has previously granted a First Option on any space in the building to Cisco. Tenant acknowledges that this Option is subservient to Cisco's Option. To the extent Cisco exercises it's Option for space on the first floor Landlord shall not be obligated to lease to Tenant and shall not be in default of its obligations hereunder. Except as set forth above, all other Terms and Conditions of the above described Lease and Extension and Modifications shall remain the same and in full force and effect. LANDLORD: CB Partners Limited Partnership By: /s/ James A. Carney ------------------- James A. Carney TENANT: By: /s/ Douglas Karl ------------------- Its President EX-10.37 6 ex10-37.txt Exhibit 10.37 SECOND AMENDMENT AND EXTENSION OF LEASE AGREEMENT ------------------------------------------------- THIS SECOND AMENDMENT ENSION OF LEASE AGREEMENT, made and entered into this 22nd day of September, 2003, by and between CB Partners Limited Partnership, an Ohio limited partnership (hereinafter referred to as "Landlord") and KarINet, Inc., an Ohio corporation (hereinafter referred to as "Tenant"). WHEREAS, a Lease dated January 30, 2001 (hereinafter referred to as "Lease") was entered into between Landlord and Tenant in which Tenant leased approximately 6,376 square feet of the space from Landlord identified as Suite 100 (the "Premises") on the first floor of a certain premises in the Building known as 525 Metro Place North, Dublin, Ohio, 43017. WHEREAS, Landlord and Tenant entered into a First Amendment and Extension of Lease Agreement dated November 14, 2002, extending the term of lease to January 31, 2008; and WHEREAS, Landlord and Tenant now wish to modify the lease to include the use of Suite 150 for a limited time; and NOW THEREFORE, in consideration of the mutual covenants, condition and agreements hereinafter contained, Landlord and Tenant hereby agree as follows: 1. Tenant agrees to lease Suite 150 in MetroCenter I, 525 Metro Place North, consisting of 2,564 rentable square feet on a temporary basis (hereinafter 'Temporary Unit". 2. The term of lease for the Temporary Unit shall be for three months commencing October 1, 2003. At any time Landlord has the right to terminate Tenant's right to occupy Suite150 after giving Tenant thirty (30) days notice to vacate. After December 31, 2003, Tenant will have the right to terminate its right to occupy the Temporary Unit by giving thirty (30)' days prior written notice to Landlord. 3. Base rent for the Temporary unit shall be as follows: - -------------------------------------------------------------------------------- From To Amount/Month - -------------------------------------------------------------------------------- October 1, 2003 December31, 2003 $1,750.00 - -------------------------------------------------------------------------------- January 1, 2004 March 31, 2004 $2,100.00 - -------------------------------------------------------------------------------- April 1, 2004 June 30, 2004 $2,450.00 - -------------------------------------------------------------------------------- July 1, 2004 September 30, 2004 $3,000.00 - -------------------------------------------------------------------------------- October 1, 2004 January 31, 2008 $17.50/SF/Year - -------------------------------------------------------------------------------- 4. Tenant agrees to take the space in "as is" condition. Tenant also agrees that it will return the space in the same condition as it was turned over to Tenant upon occupancy. Any damage done to the Temporary Unit during Tenant's occupancy is Tenant's responsibility to repair at Tenant's cost. If Landlord has to repair or clean the space after Tenant vacates, Tenant agrees to pay all costs associated with said repair and/or cleaning. 5. Tenant agrees to allow Landlord and Landlord's real estate brokers access to the Temporary Unit from time to time to show it to any prospective tenants. Landlord agrees to call in advance of any showing to notify Tenant. In addition Landlord agrees to use a reasonable effort to minimize any disruption to Tenant. 6. SATELLITE AND COMMUNICATION EQUIPMENT: Notwithstanding any other provision of this Lease, but in all events subject to the provisions of Section10 hereof and the other terms and conditions hereinafter set forth, Tenant, at Tenant's sole cost and expense, shall have the right during the term of this Lease to install, operate, maintain, repair,. replace and remove, or cause to be installed, operated, maintained, repaired, replaced and removed, telecommunications equipment, including without limitation, cabling, wiring, antennae and other related equipment (the "Telecommunications Equipment") within the Premises and other interior portions of the Building, including the shafts, risers, raceways, service areas, and utility connections and on the roof thereof. The location and placement of the Telecommunications Equipment shall be (1) in accordance with plans and specifications therefore approved by Landlord at Tenant's cost and expense and (ii) performed under the supervision of Landlord's contractors or building manager if Landlord deems such supervision necessary; provided, however, any such installation by or for Tenant shall be undertaken in such a manner as- to leave adequate space in the Building and-on-the roof thereof for the telecommunication needs of Landlord and other tenants of the Building When installed and----during the operation thereof, the-Telecommunications Equipment shall be maintained by the Tenant in good condition and repair and shall not at any time affect, impede, disrupt or interrupt the operation of any equipment of Landlord or any other tenant of the Building or the Development or the use by Landlord or any tenant of the Building or the Development of any part thereof except as expressly permitted by Landlord. Any installation of the Telecommunications Equipment on the roof of the Building shall be undertaken in a manner which preserves and does not violate any roof warranty held by Landlord and, if necessary, shall be performed at the direction or under the supervision of Landlord's roof installer. In no event shall service, repairs or replacements be performed on any Telecommunications Equipment located outside of the Premises without notice to Landlord and supervision by Landlord's contractors, building manager or roof installer, as appropriate. Tenant shall reimburse Landlord for any costs incurred by Landlord in reviewing and/or approving Tenant's plans and Specifications for the Telecommunications Equipment and for any costs of supervisory personnel. Tenant acknowledges that the provisions of Section 13 of this Lease shall be applicable to the Telecommunications Equipment and Tenant's use thereof. In addition, if Tenant fails to maintain the Telecommunication Equipment or by virtue of Tenant's use thereof, the provisions of this Section or any other applicable section of this Lease are violated, Landlord shall have the right to correct immediately and without notice to Tenant any such violation at Tenant's sole cost and expense. Such corrective action may include, but shall not be limited to, the disconnection or removal of all or any portion of the Telecommunications Equipment. Upon the expiration or earlier termination of this tease, Tenant shall remove such of the Telecommunications Equipment as Landlord directs and repair any damage to the Premises and the Building caused thereby. Such removal obligation shall include the removal of all cabling, wiring and similar installations. 7. Except as expressly set forth herein the lease shall Continue upon the same terms and conditions as contained therein. IN WITNESS WHEREOF, the undersigned have set their hands as of the day and year first written above. WITNESS: LANDLORD: CB PARTNERS LIMITED PARTNERSHIP By: CABRO, INC., an Ohio corporation, general partner /s/ Kelly J. Matsko By: /s/ James A. Carney - ------------------- ------------------- James A. Carney, President WITNESS: TENANT: KARLNET, INC. /s/ James C. Longtine By: /s/ Douglas Karl - --------------------- ---------------- James C. Longtine Douglas Karl, President /s/ Kevin Harris - ---------------- Kevin Harris EX-10.38 7 ex10-38.txt Exhibit 10.38 THIRD AMENDMENT AND EXTENSION OF LEASE AGREEMENT ------------------------------------------------ THIS THIRD AMENDMENT ND EXTENSION OF LEASE AGREEMENT, made and entered into this 28th day of January, 2004, by and between CB Partners Limited Partnership, an Ohio limited partnership (hereinafter referred to as, "Landlord") and KarlNet, Inc., an Ohio corporation (hereinafter referred to as "Tenant"). WHEREAS, a Lease dated January 30, 2001 (hereinafter referred to as "Lease") was entered into between Landlord and Tenant in which Tenant leased approximately 6,376 square feet of the space from Landlord identified as Suite 100 (the "Premises") on the first floor of a certain premises in the Building known as 525 Metro Place North, Dublin, Ohio, 43017. WHEREAS, Landlord and Tenant entered into a First Amendment and Extension of Lease Agreement dated November 14, 2002, extending the term of lease to January 31, 2008; and WHEREAS, Landlord and Tenant entered into a Second Amendment and Extension of Lease Agreement dated September 22, 2003, to modify the lease to include the use of Suite 150 for a limited time; and WHEREAS, now Tenant wishes to Lease Suite 150 consisting of approximately 2,564 rentable square feet for a two year period and use a proportion of the Tenant Improvement Allowance allocated for Suite 100 to renovate Suite 150; and NOW THEREFORE, in consideration of the mutual covenants, condition and agreements hereinafter contained, Landlord and Tenant hereby agree as follows: 1. Tenant agrees to lease Suite 150 in Metro Center I, 525 Metro Place North, consisting of 2,564 rentable square feet 2. The term of lease for the for Suite 150 shall be two (2) years commencing February 1, 2004 and terminating on January 31, 2006 3. Tenant shall accept the space in an "as is" condition. 4. Base rent for Suite 150 shall be as follows: ---------------------------------------------------------------------------- From To Amount/Month ---------------------------------------------------------------------------- February 1, 2004 January 31, 2005 $2,564.00 ---------------------------------------------------------------------------- February 1, 2005 January 31, 2006 $2,670.83 ---------------------------------------------------------------------------- 5. Tenant shall be permitted to use a portion of the Tenant Improvement Allowance as described in Paragraph 3 of the First Amendment and Extension of Lease Agreement dated November 14, 2002 for use in Suite 150. This portion may not exceed seven thousand six hundred ninety two dollars ($7,692.00) or three months base rent for Suite 150. Tenant agrees to abide by Section 10 of the Lease. 6. Except as expressly set forth herein the lease shall continue upon the same terms and conditions as contained therein. WITNESS: LANDLORD: CB PARTNERS LIMITED PARTNERSHIP By: CABRO, INC., an Ohio corporation, general partner /s/ Kelly J. Matsko By: /s/ James A. Carney - ------------------- ------------------- James A. Carney, President WITNESS: TENANT: KARLNET, INC. /s/ Andrea D. Houser By: /s/ Douglas Karl - -------------------- ---------------- Andrea D. Houser Douglas Karl, President /s/ Kyle Crager - --------------- Kyle Crager EX-23.1 8 ex23-1.txt Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-30450, 333-65568, 333-73318, 333-104481 and 333-121445) of YDI Wireless, Inc. of our report dated February 25, 2005, relating to the consolidated financial statements and financial statement schedule of YDI Wireless, Inc. as of December 31, 2004 and 2003 which appears in the company's Annual Report on Form 10-K for the year ended December 31, 2004. /s/ Fitzgerald, Snyder & Co., P.C. Fitzgerald, Snyder & Co., P.C. McLean, Virginia March 30, 2005 EX-31.1 9 ex31-1.txt Exhibit 31.1 SECTION 302 CERTIFICATION I, Robert E. Fitzgerald, Chief Executive Officer of YDI Wireless, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of YDI Wireless, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ Robert E. Fitzgerald ------------------------ Robert E. Fitzgerald Chief Executive Officer EX-31.2 10 ex31-2.txt Exhibit 31.2 SECTION 302 CERTIFICATION I, Patrick L. Milton, Chief Financial Officer and Treasurer of YDI Wireless, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of YDI Wireless, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ Patrick L. Milton ------------------------------------- Patrick L. Milton Chief Financial Officer and Treasurer EX-32.1 11 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. ss.1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of YDI Wireless, Inc. (the "Company") for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned Robert E. Fitzgerald, Chief Executive Officer, and Patrick L. Milton, Chief Financial Officer and Treasurer, of the Company certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert E. Fitzgerald /s/ Patrick L. Milton - ------------------------------------- ------------------------------------- Robert E. Fitzgerald Patrick L. Milton Chief Executive Officer Chief Financial Officer and Treasurer Date: March 31, 2005 Date: March 31, 2005 -----END PRIVACY-ENHANCED MESSAGE-----