-----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, VIcruetCSBG6tglke1BuSo9jIrp2kTxSM/4UNjB04nN9cKplO3KeamU9ntb5sri2 y51HmMLXMo6RcP7ItQ++Gw== 0001047469-98-012047.txt : 19980330 0001047469-98-012047.hdr.sgml : 19980330 ACCESSION NUMBER: 0001047469-98-012047 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADYNE CORP CENTRAL INDEX KEY: 0000718573 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 112569467 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11685 FILM NUMBER: 98576214 BUSINESS ADDRESS: STREET 1: 5225 S 37TH ST CITY: PHOENIX STATE: AZ ZIP: 85040 BUSINESS PHONE: 6024379620 MAIL ADDRESS: STREET 1: 5225 S 37TH ST CITY: PHOENIX STATE: AZ ZIP: 85040 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR COMMISSION FILE NUMBER ENDED DECEMBER 31, 1997 0-11685
------------------------ RADYNE CORP. (Exact name of Registrant as specified in its charter) NEW YORK 11-2569467 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization)
5225 S. 37TH STREET, PHOENIX, ARIZONA 85040 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (602) 437-9620 SECURITIES REGISTERED UNDER SECTION 12 (B) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT: COMMON STOCK, $.002 PAR VALUE ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the voting stock held by non-affiliates (deemed by the registrant to be persons, along with members of their families, known to the registrant to beneficially own, exclusive of shares subject to options, less than 5% of the outstanding shares of the registrant's common stock) of the registrant as of March 4, 1998 was approximately $1,388,000. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a Court. Yes _X_ No ____ As of March 10, 1998, there were 5,931,346 shares of the registrant's common stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I DISCLOSURE CONCERNING FORWARD-LOOKING STATEMENTS All statements, other than statements of historical fact, included in the Letter of the President included in the Annual Report to Stockholders and in this Form 10-K, including without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business", are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Various economic and competitive factors could cause actual results to differ materially from those discussed in such forward-looking statements, including factors which are outside of the control of the Company, such as interest rates, foreign exchange rates and changes in raw material costs, along with other factors noted in this Form 10-K with respect to the Company's business. ITEM 1. BUSINESS GENERAL Radyne was incorporated in the State of New York on November 25, 1980. The Company's current address is 5225 South 37th Street, Phoenix, Arizona 85040 and its telephone number is (602) 437-9620. Radyne has been involved in the advanced design and production of digital data communications equipment and associated equipment for satellite telecommunications systems for over seventeen years. Since the Company's inception in 1980, Radyne has established itself as a supplier in the satellite ground equipment business. Radyne designs, manufactures and sells satellite modems, frequency converters, ancillary products and equipment racks containing integrated modems and supporting equipment for data communications. Although the Company was forced to file for Chapter 11 bankruptcy protection in April 1994, it successfully emerged from bankruptcy in December of that year upon the acquisition of approximately 91% of its Common Stock by Engineering and Technical Services, Inc. ("ETS"), then a major customer of Radyne. On August 12, 1996, ETS was acquired by Singapore Technologies Pte Ltd through its indirect wholly owned subsidiary, Stetsys US, Inc. ("ST"). As a result, approximately 91% of the Company's Common Stock is now held by ST and an affiliate thereof. See "Bankruptcy Reorganization" below. In 1995, ETS caused Radyne to install a new management team, which promptly moved the Company's operations from New York to Phoenix, Arizona and commenced the hiring of an almost all new staff of engineering, sales and support personnel, with funding advanced by ETS and subsequently ST and its affiliates. The new Radyne team has reinstituted Radyne's research, development and marketing programs and reinvigorated its product line. On June 16, 1997, the Company completed an offering of its Common Stock to its shareholders of record ("Rights Offering"). The Company sold a total of 2,171,625 shares of its Common Stock, including 144,100 shares to Directors and employees of the Company and its affiliates and 1,976,000 shares to an affiliate of ST, for $2.50 per share. The total proceeds of the Rights Offering were $5,429,063, partially offset by $335,696 in associated costs. OPERATING STRATEGY Radyne's operating strategy is to (i) continue to build on the experience, skills and customer access of its new management team, (ii) capitalize on its development of smaller, less costly satellite modems, and (iii) expand into market segments, such as rural telephone, private networks, government networks and compressed television transmission. See "Target Markets" below. 1 The Company's engineering staff and support facilities are dedicated to (i) maintaining the state-of-the-art status of Radyne's traditional products for the satellite ground equipment segment of the market, (ii) designing and enhancing products for emerging markets, such as rural telephony for developing areas, high-speed satellite communications, government data equipment and the growing private network market, and (iii) providing special configurations to satisfy customers' special needs. Radyne's modems cover data rates from 2.4 Kilobytes per second to 155 Megabytes per second. The Company's frequency converters handle all three frequency bands used in satellite communications. Radyne believes that most of its current line of modems and converters are smaller and lower priced than the previous generation of products, enabling large system installation in significantly less rack space than the products of the Company's competitors. The Company also markets redundancy switches which operate in conjunction with satellite modems and converters and provide automatic fault monitoring and switch over to standby equipment in the event of modem or converter failure. Radyne's line of frequency converter products is usable in virtually all earth stations for the conversion of intermediate frequencies to microwave frequencies for satellite transmission. These converters are competitively priced, small in size and offer either single, dual or all three bands used in the satellite industry. In addition to being offered to commercial customers, there is a military market for the three-band units. The Company's newer products include a low cost modem with expanded features and super fast acquisition capabilities, making it attractive for use in both private networks and rural telephone systems being offered in China, Indonesia and India, and a line of satellite frequency translators presently used for testing in satellite earth stations. The development of digital compression technology has allowed the transmission of television in a small bandwidth, which has made TV transmission by satellite more economical than ever before. Video compression allows many times more channels on a satellite than was previously the case, thus producing a market of major interest. This compression technology is used for transmission of TV to network facilities, distribution of cable TV to cable companies, high definition TV distribution and video teleconferencing. Radyne has developed modulator products to be used in conjunction with compression equipment and has been shipping these products for over one and one-half years with exceptional market acceptance. BANKRUPTCY REORGANIZATION In December 1994, Radyne emerged from protection under Chapter 11 of the Bankruptcy Code. The Company believes that the reasons for Radyne having sought bankruptcy protection have been neutralized by its new management team and interim financing sources. When Radyne filed its bankruptcy petition in April 1994, it was suffering from severe cash flow problems due to shrinking sales. Years of uninspired management and the failure to maintain the sort of research and development program which is necessitated by the fast-moving data communications industry had left Radyne with an aging product line and an inability to access emerging markets. On April 28, 1994, Radyne filed a petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of New York. Under Chapter 11, certain claims against the Company in existence prior to the filing were stayed while the Company continued business operations as debtor-in-possession. Claims secured against the Company's assets were also stayed, although the holders of such claims had the right to move the court for relief from the stay prior to the Company's reorganization plan being confirmed. Secured claims were secured primarily by liens on all of the Company's assets. The Company received approval from the Bankruptcy Court to pay certain of its pre-petition obligations, employee wages and benefits. Tax claims were rescheduled for payment in equal quarterly 2 installments of $9,600, with interest at 7%, over six years. A portion of these tax claims is the sole remaining pre-petition liability of the Company. On December 16, 1994, the Bankruptcy Court confirmed the Company's Plan of Reorganization effective at the close of business on December 16, 1994. The Plan, which has been consummated, called for the establishment of an escrow account from which to pay claims and provided for the following: (1) Exchange of Debt for Common Stock--The Company issued 17,000,000 (prior to a 1-for-5 Reverse Split) shares of previously authorized but unissued Common Stock to Radyne Florida (a special purpose subsidiary of ETS), which had previously purchased the Company's secured bank debt and the position of certain holders of secured promissory notes. This issuance of stock gave Radyne Florida approximately 91% of the Company's outstanding Common Stock. In exchange for the stock, the Company was discharged of $2,350,000 of debt owed to Radyne Florida. In addition, the 1,750,000 warrants held by Radyne Florida (purchased with the secured promissory notes) were cancelled. (2) Cancellation of Debt--Unsecured claims and capitalized lease obligations were settled as follows:
ORIGINAL TYPE OF CLAIM AMOUNT REDUCTIONS COMPROMISED - --------------------------------------------------- ------------ ------------ ------------- Accounts payable, accrued expenses, and capitalized lease obligations................................ $ 1,483,343 $ 1,111,872 $ 371,471 Convertible debentures and bridge notes............ 487,885 439,225 48,660 Taxes.............................................. 309,143 99,866 209,277 ------------ ------------ ------------- $ 2,280,371 $ 1,650,963 $ 629,408 ------------ ------------ ------------- ------------ ------------ -------------
(3) Other Claims--Priority Claims for wages of $53,786 were paid in full. Holders of the Company's Common Stock and options to purchase the Company's Common Stock had their interests significantly diluted by the distribution of Common Stock to Radyne Florida. Holders of warrants to purchase the Company's Common Stock exchanged the warrants for an aggregate of 53,437 shares of Common Stock. TARGET MARKETS Radyne has historically operated in an industry that has relatively few customers. Today, fewer than 1,000 customers make up the market for satellite data communication subsystems. Radyne's target markets include international telecommunications, high speed satellite communications, rural telephony and private network DAMA (demand assigned multiple access) users, as well as the United States Government. Currently, Radyne has a presence in the international telecommunications market, the DAMA products market and, with its new DM-45/DD-45 and MM-155 modems, the High- Speed Video Conferencing and High Definition Television markets but anticipates movement into the other markets in the near future. Of course, there can be no assurance that Radyne will succeed in capturing a significant share of these other markets. The international telecommunications market includes users of IDR (intermediate data rate), IBS (international business service) and open network satellite equipment. The IDR environment is primarily for voice traffic, while IBS is specific to business data traffic. In addition, the market includes customers for MUX (multiplexers), switches and peripheral equipment. The international telecommunications market should provide substantial business opportunities for Radyne in the near future. To illustrate the magnitude of the potential market for Radyne's satellite modems alone, the projected growth in transponders can be depicted as follows. A transponder is the part of the satellite that receives an uplink signal at one frequency, converts that signal's frequency, amplifies it and then retransmits the signal to the ground. 3 Satellites have an average of 24 transponders each. For each transponder, an average of 50 modems is required (25 on the transmitting side and 25 on the receiving end). Rural telephony and private network DAMA products require special communications equipment which is efficient for low traffic volume at many different locations. DAMA products allow many users to access the same channel on demand. Radyne serves the DAMA products segment of the market with its DMD-2400 modem. The DMD-2400 can be utilized in both rural telephony and private network systems. Rural telephony can be described as an intra-country telecommunications network linking many small villages or islands in a country like the Philippines, for example, ultimately allowing the villages to communicate with each other and the world. A private network can be described as a network in the commercial world. For example, many banks and other financial institutions, airlines, and large and multi-unit corporations have the need for satellite communications and may be linked via private networks. Additionally, the Company has developed the new DMD-2401 VSAT/SCPC Modem, which has enhanced features, to compliment the DMD-2400 products and to address other user requirements. The Company sells its DAMA/VSAT compatible products to system integrators (customers who make a business of supplying turnkey earth station operations for their customers), domestically and abroad, as components to systems that they have designed, as well as directly to end users. The Company offers these products for sale on a global basis and believes their use to be global. Radyne has entered the high-speed satellite communications market with various products that have been designed to incorporate the most advanced technologies available. Communications equipment in this segment possesses higher data rate capabilities of approximately 12-155 megabits per second, allowing much more data to be transmitted. Over the last year and one-half, the Company has introduced products such as the DVB- 3000 and DVB-3030 for the Digital Television industry, which are ideal for use in digital video hub uplinks, flyaway and mobile satellite news gathering applications. The DD-45 and DM-45 is a multi-purpose solution for Digital Video Broadcast and High Speed data transmission for use in, among other things, cable system backup/restoral-over-satellite and high data rate links. The Company's newest high-speed entrants are the DM-160 and MM-160 that offer an excellent solution for high data rate requirements. Also, our new MM-155 Microwave Modem is ideal for microwave link upgrades. Additionally, the United States Government has provided a significant market opportunity for Radyne as the defense budget shrinks and it becomes cost prohibitive for the government to develop its own products. Because of the expected growth in commercial off-the-shelf (COTS) and non-developmental item (NDI) procurement, Radyne has targeted the US Government as an important revenue source. PRINCIPAL PRODUCTS The following is a brief description of the Company's principal product lines. RCS-10/DMD-10 MODEM AND REDUNDANCY CONTROL SYSTEM The RCS-10 represents the new generation system which is replacing the RCS5000 family in Radyne's product line. It serves the same functions as the RCS5000, but with a number of notable improvements. Up to 30 modems can be combined in a single rack and each redundancy switch can control up to 10 modems. In addition to an expanded data rate range (9.6 Kbps to 8.448 Mbps compared to the RCS5000's 64 Kbps to 8.448 Mbps), the RCS-10 offers an improved display and menu structure and more options. DMD-4500 IBS/IDR SATELLITE MODEM This standard satellite modem provides selectable functions for Intelsat IDR, IBS and closed network services and is easily programmable by earth station personnel. Data rates may be selected in 8 Kbps steps between 48 Kbps and 8.448 Mbps. The DMD- 4500 can be used with a variety of redundancy switches and other options. 4 DMD-2401 SATELLITE MODEM (NEW PRODUCT) The DMD-2401 is a low cost, light weight (8 pounds), fast acquisition (under 20 second) modem. It is capable of data rates ranging from 9.6 Kbps to 2.048 Mbps in steps of 1 Bps. Digital signal processing eliminates virtually all on-board adjustments. This modem is designed to perform as both ends of a single channel per carrier link or as a VSAT remote site modem in a hub system. Its other applications include video conferencing, long distance learning, paging and news gathering. DVB-3000 AND DVB-3030 DIGITAL BROADCAST MODULATORS The DVB-3000 AND DVB-3030 are flexible, programmable digital video satellite modulators offering full compatibility with digital video standards. Their principal applications are for digital video hub uplinks, mobile satellite news gathering, video distribution and one-way data distribution. The DVB-3000 AND DVB-3030 are high speed, offering programmable data rates ranging from 1.0 to 30.0 Mbps and fixed data rates of 30 to 50 Mbps. They are frequency agile with a base range of 50 to 90 MHz and an optional range of 100 to 180 MHz in steps of 1.0 Hz. CONVERTERS, TRANSLATORS AND OTHER MICROWAVE PRODUCTS Radyne has a complete line of synthesized frequency up converters and down converters. The SFC6400 C-Band Up Converter converts data or video signals in the IF range of 50-180 MHz to uplink frequencies between 5.845 and 6.420 GHz. The SFC4200 C-Band Down Converter converts microwave carriers in the 3.62 to 4.20 GHz range to the IF range of 50-180 MHz. The Company believes that its SFC1450 Ku-Band Up Converter and the SFC1275G Ku-Band Global Down Converter offer low phase noise, superior standard transmit output compression and the only down converter to receive data and detect carrier power simultaneously. The SFC1468 Tri-Band Synthesized Up Converter is capable of converting signals in the IF range of 50-180 MHz to C, X and Ku band microwave uplink carriers. The SFC1274G Tri-Band Synthesized Down Converter does the reverse. The Company also offers a full line of Loop Test Translators, including C-Band, Ku-Band, X-Band and Tri-Band models. These are self contained frequency converters which perform transmit to receive loopback testing of earth station equipment. Following is a comparison of sales, by product category:
TWELVE MONTHS SIX MONTHS TWELVE MONTHS PRODUCT CATEGORY ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96 - --------------------------------------------- -------------- -------------- -------------- Modems and Peripherals....................... $ 11,605,016 $ 4,453,807 $ 3,626,398 Microwave Products........................... $ 1,841,836 $ 451,252 $ 203,125 -------------- -------------- -------------- Totals....................................... $ 13,446,852 $ 4,905,059 $ 3,829,523
MANUFACTURING The Company's products are to a certain extent assembled and tested at its Phoenix, Arizona facilities using subsystems and circuit boards supplied by subcontractors. Although the Company believes that it maintains adequate stock to reduce the procurement lead time for certain components, the Company's products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. In light of previous financial difficulties, Radyne had experienced some inflexibility on the part of certain suppliers in regard to credit terms for delivered components. Due to the Company's most recent history of credit performance, this inflexibility has subsided during the last fiscal period and the Company now enjoys an overall good working relationship with its vendors. However, in the event that such suppliers were to be unable or unwilling to fulfill the Company's requirements, the Company could experience an interruption in production until an alternative source of supply was developed. The Company maintains an inventory of certain chips and components and subassemblies to 5 limit the potential for such an interruption. The Company believes that there are a number of companies capable of providing replacements for the types of unique chips and customized components and subassemblies used in its products. SALES AND MARKETING The Company sells its products through international representatives, distributors and systems integrators which are supported by the Company's sales and marketing personnel. In-house direct sales by the Company are targeted toward large accounts, new accounts and the establishment of distributors in new markets. The Company has recently established new distribution or representation arrangements in the Middle East, South America, Asia and the Pacific Rim. The Company's direct sales force is comprised of 10 individuals in the marketing department, supported by systems and applications engineers. Direct sales activities are focused on expanding the Company's international sales by identifying emerging markets and establishing new distributor accounts. Additionally, the Company directly targets certain major accounts which may provide entry into new markets or lead to subsequent distribution arrangements. Such major accounts tend to be telecommunications agencies and major corporations in new international markets. The Company has a customer service and support group, which primarily supports distributors and is responsible for after-sale support and installation supervision. In certain instances the Company uses third party companies for installation and maintenance. Significant customers for the periods ended as indicated were as follows:
SIX-MONTHS TWELVE-MONTHS DECEMBER 31, TWELVE- MONTHS SIX-MONTHS DECEMBER 31, 1997 1996 JUNE 30, 1996 JUNE 30, 1995 --------------------- --------------------- --------------- --------------- Customer A............... 2.5% 1.6% 6.4% 22.0% Customer B............... 1.1 -0- -0- 15.3 Customer C............... 1.1 6.3 8.1 14.2 Customer D............... 2.7 15.6 12.7 11.7 Customer E............... 2.2 18.3 -0- -0- Customer F............... 14.5 -0- -0- -0-
No other customers represented more than 10% of the Company's sales. The Company's sales in its principal foreign markets for the year ended December 31, 1997 and for the six-month period ended December 31, 1996 consisted of the following percentages of total sales:
TWELVE MONTHS SIX MONTHS TWELVE MONTHS REGION ENDED 12-31-97 ENDED 12-31-96 ENDED 6-30-96 - --------------------------------------------- ------------------- ------------------- ------------------- Asia......................................... 32% 31% 24% Latin America................................ 12% 25% 6% Europe....................................... 7% 9% 20%
Export sales, as a percentage of total net sales, were about 46% in the six and one half month period ended June 30, 1995, about 50% in the fiscal year ended June 30, 1996, about 66% for the six month period ended December 31, 1996, and approximately 55% for the fiscal year ended December 31, 1997. The Company believes that this figure may rise in subsequent periods. The Company considers its ability to continue to make sales in developing markets to be important to its growth potential. However, there can be no assurance that the Company will succeed in its efforts to cultivate such markets. 6 COMPETITION The Company has a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC, the EFData division of California Microwave and Spar Aerospace, which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than Radyne. The Company estimates that the major competitors, in the main markets in which it operates, have the following market shares as compared to the Company's share:
VSAT GOV'T DATA COMPETITOR INTELSAT DIGITAL VIDEO NETWORKS EQUIPMENT - ----------------------------------------------- ------------- ----------------- ------------- --------------- EFData......................................... 35% 5% 25% 35% Comstream/Spar................................. 10 10 10 5 Hughes Network................................. 10 0 0 0 NEC............................................ 10 10 0 0 SSE/Fairchild.................................. 10 0 5 15 Radyne......................................... 15 25 5 5
The Company does not believe that any other single competitor has a greater than 10% market share for any of these product classes. However, the foregoing market share figures represent estimates based on the limited information available to the Company, and there can be no assurance of precision. The Company believes that it has been able to compete by concentrating its sales efforts in the international market, utilizing the resources of local distributors, and by emphasizing product features. However, most of the Company's competitors offer products which have one or more features or functions similar to those offered by the Company. The Company believes that the quality, performance and capabilities of its products, its ability to customize certain network functions and the relatively lower overall cost of its products, as compared to the costs generally offered by the Company's major competitors, have contributed to Radyne's ability to compete successfully. However, the Company's major competitors have the resources available to develop products with features and functions competitive with those offered by the Company. There can be no assurance that such competitors will not successfully develop such products or that the Company will be able to maintain a lower cost advantage for its products. Moreover, there can be no assurance that the Company will not experience increased competition in the future from these or other competitors currently unknown. EMPLOYEES As of February 5, 1998, the Company had 75 full time employees, including two executive officers, 55 in engineering, manufacturing and marketing operations, and 18 in administration. None of the Company's employees are represented by a union or governed by a collective bargaining agreement, and the Company believes that its relations with its employees are satisfactory. TECHNOLOGY The Company believes that improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Because patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change and because patent applications require public disclosure of information which may otherwise be subject to trade secret protection, Radyne has not obtained, and has no present intention to obtain, patents on existing products. However, there can be no assurance that the Company's technology will not be found to infringe upon the intellectual property of others. If the Company's technology should be found to impermissibly utilize the intellectual property of others, the Company's ability to utilize the technology could be materially restricted or prohibited. In such event, the Company might be required to obtain 7 licenses from third parties to utilize the patents or proprietary rights of others. No assurance can be given that any licenses required could be obtained on terms acceptable to the Company or at all. In addition, in such event, the Company could incur substantial costs in defending itself against infringement claims made by third parties or in enforcing its own intellectual property rights. ITEM 2. PROPERTIES The Company's sole office and production facility consists of a 16,337 square foot facility in Phoenix, Arizona. This facility is leased at an annual cost of approximately $88,000. The fixed term of the lease expires on March 30, 1998, after which the term becomes month-to-month at a 25% increase in rental rate. On November 6, 1997, the Board of Directors authorized the Company to enter into a contract for a new facility, which is expected to be available for occupancy in July 1998. The term of the lease is 10 years with options to renew. The lease provides for rent in the amount of $45,000 per month, subject to a nominal increase dependant upon costs of tenant improvements, for the first year with an escalation of 3% per year during years 2 through 10 (Note 9). The building is approximately 65,000 square feet in size (and is expandable to some degree) and the Company believes that this new facility will provide for the company's expected growth for the next ten years. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of securities holders during the three months ended December 31, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded in the over-the-counter market under the OTC Bulletin Board symbol "RADN" (prior to the January 1997 1-for-5 Reverse Split, the symbol was "RDYN"). However, there is no established trading market as actual transactions are infrequent. The following table sets forth the range of high and low trading prices as reported by the National Quotation Bureau, Inc. for the periods indicated. It should be noted that these quotations relate, to some extent, to periods prior to the Reverse Split. All pre-split quotations have accordingly been multiplied by 5. At March 24, 1998, the Company had approximately 450 shareholders of record. The Company believes that the number of beneficial owners is actually in excess of 1,300, due to the fact that a large number of shares are held in street name.
HIGH LOW ----------- --- 1996: First Quarter................................................................ 55/8 21/2 Second Quarter............................................................... 67/8 33/4 Third Quarter................................................................ 97/32 41/16 Fourth Quarter............................................................... 10 5 1997: First Quarter................................................................ 6 31/8 Second Quarter............................................................... 31/4 3 Third Quarter................................................................ 103/4 5 Fourth Quarter............................................................... 101/2 4
8 The Company has not paid dividends on the Common Stock since inception and does not intend to pay any dividends to its stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. The declaration of dividends in the future will be at the election of the Board of Directors and will depend upon the earnings, capital requirements and financial position of the Company, general economic conditions and other pertinent factors. ITEM 6. SELECTED FINANCIAL DATA The following selected statement of operations data for the year ended December 31, 1997,the six month period ended December 31, 1996, the year ended June 30, 1996, the six and one-half month period ended June 30, 1995 and the ten and one-half months ended December 16, 1994 and the selected balance sheet data at those dates, are derived from the Financial Statements of the Company and notes thereto audited by Deloitte & Touche LLP, independent certified public accountants for the Company. The selected statement of operations data for the year ended January 31, 1994 and the selected balance sheet data at January 31, 1994 are derived from the unaudited financial statements of the Company. These unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring accruals necessary for a fair presentation of the financial position and results of operations for the periods presented. Per share data and shares outstanding reflect an adjustment for the effects of the 1-for-5 reverse split of the Company's common stock, which became effective on January 9, 1997. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of the Company and notes thereto included elsewhere in this 10-K Annual Report. 9 STATEMENT OF OPERATIONS DATA PREDECESSOR COMPANY (1)
SIX MONTHS SIX-AND-ONE-HALF TEN-AND-ONE-HALF YEAR ENDED ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 16, 1997 1996 1996 1995 1994 ------------- ------------- ------------- ---------------- ---------------- Net Sales.............................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $ 1,861,262 $ 2,569,396 Cost of Sales.......................... 8,022,262 4,052,433 2,559,350 1,228,747 2,229,329 Gross Profit (loss).................... 5,424,590 852,626 1,270,173 632,515 340,067 Selling, general and administrative expense.............................. 4,242,138 1,437,971 1,843,576 961,162 1,658,388 Asset impairment charge (2)............ 421,000 Professional fees related to reorganization....................... 600,198 Research and development............... 2,262,066 808,025 1,794,823 Operating income (loss)................ (1,079,614) (1,814,370) (2,368,226) (328,647) (1,918,519) Interest expense....................... 677,102 255,604 256,871 36,209 118,235 Income (loss) before fresh start adjustments and extraordinary items................................ $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (2,036,754) Fresh start adjustments................ 1,598,841 Loss before extraordinary items and taxes on income...................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) $ (437,913) Extraordinary items (3)................ 2,699,156 Income (loss) before taxes............. (1,756,716) (2,069,974) (2,625,097) (364,856) 2,261,243 Net loss per share before extraordinary items................................ (0.35) (0.55) (0.70) (0.10) (1.33) Net Income (loss) per share............ (0.35) (0.55) (0.70) (0.10) 6.87 Weighted avg. number of outstanding shares............................... 5,012,664 3,750,699 3,742,227 3,729,721 329,020 YEAR ENDED JANUARY 31, 1994 ------------- Net Sales.............................. $ 4,966,617 Cost of Sales.......................... 5,620,108 Gross Profit (loss).................... (653,491) Selling, general and administrative expense.............................. 3,363,893 Asset impairment charge (2)............ Professional fees related to reorganization....................... Research and development............... 785,679 Operating income (loss)................ (4,803,063) Interest expense....................... 634,061 Income (loss) before fresh start adjustments and extraordinary items................................ $ (5,437,124) Fresh start adjustments................ Loss before extraordinary items and taxes on income...................... $ (5,437,124) Extraordinary items (3)................ Income (loss) before taxes............. (5,437,124) Net loss per share before extraordinary items................................ (21.30) Net Income (loss) per share............ (21.30) Weighted avg. number of outstanding shares............................... 255,169
- ------------------------ (1) The Company petitioned for bankruptcy protection in April 1994 and operated as a debtor-in-possession until December 16, 1994. (2) Consists of the writedown of designs and drawings in light of the introduction of replacement products. (3) Consists of $1,062,667 gain on exchange of debt for common stock and $1,636,489 gain on debt forgiveness. BALANCE SHEET DATA PREDECESSOR COMPANY
AT 12/31/97 AT 12/31/96 AT 6/30/96 AT 6/30/95 AT 12/16/94 ------------ ------------ ------------ ------------ ----------- Cash and cash equivalents............................ 569,692 186,488 971 2,109 256,398 Working capital (deficit)............................ 1,654,857 (5,851,527) (4,082,987) (1,343,018) (977,678) Total assets......................................... 10,231,617 6,572,917 3,272,686 3,452,999 3,084,394 Long-term liabilities................................ 4,649,404 161,968 130,414 168,304 192,603 Total liabilities.................................... 11,381,678 11,019,543 5,669,338 3,264,554 2,531,093 Stockholder equity (deficit)......................... (1,150,061) (4,446,626) (2,396,652) 188,445 553,301 AT 1/31/94 ------------ Cash and cash equivalents............................ 84,467 Working capital (deficit)............................ (2,284,575) Total assets......................................... 1,354,933 Long-term liabilities................................ 188,123 Total liabilities.................................... 3,612,875 Stockholder equity (deficit)......................... (2,257,942)
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL In reviewing the following material, the reader should take note of the fact that the respective periods being compared are of various durations. This is due to several changes in the Company's fiscal year. Upon emergence from bankruptcy on December 16, 1994, the predecessor company's fiscal year ended on that date. The adoption of the fiscal year of the Company's new parent (ETS) at that time created a fiscal period from December 17, 1994 through June 30, 1995, followed by a full year ended June 30, 1996. Upon becoming a subsidiary of ST in August of 1996, the Company adopted ST's fiscal year (the calendar year), creating a stub fiscal period from July 1 through December 31, 1996. RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1996. The Company's net sales increased 174% to $13,447,000 during the twelve month period ended December 31, 1997 from $4,905,000 during the six months ended December 31, 1996. This increase is primarily attributable to the increased time frame of the current period relative to the prior period and to the introduction of the Company's new product lines which have experienced exceptional market acceptance. The Company's cost of sales as a percentage of net sales decreased to 60% during the twelve months ended December 31, 1997 from 83% for the six months ended December 31, 1996. During the six months ended December 31, 1996, adjustments to inventory of approximately $491,000 (10% of sales) for obsolescence, of which $364,000 was related to the introduction of new products (which essentially rendered one entire older product line obsolete), and $340,000 (7% of sales) for start-up costs related to the introduction of new products were included in the cost of sales as old product lines were replaced with new product lines. These products included a new generation modem sub-system which makes use of the Company's proprietary technology from older products while adding features and reducing future manufacturing costs. Also, the Company has introduced and shipped new "Digital Video Broadcast" modems which have experienced exceptional acceptance in the marketplace. The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit") on sales of certain translator products developed by Merit. The royalty rate ranges from five to ten percent of the selling price. During the period ended December 31, 1997, the Company accrued $5,600 for royalty expenses, which were included in direct cost of goods sold. Selling, general and administrative costs increased to $4,242,000 or 32% of sales during the twelve months ended December 31, 1997 from $1,438,000 or 29% of sales for the six months ended December 31, 1996. The increase in expenses as a percentage of sales was primarily attributable to company growth and market expenses incurred for market penetration. The increase in pure dollars is also attributable to the increased time frame of the current period over the prior period. The Company recorded an "asset impairment charge" of $421,000 during the six months ended December 31, 1996, to reflect a valuation adjustment to Designs and Drawings which were partially impaired due to the introduction of new product lines. The valuation of designs and drawings is the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position ("SOP") 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE, and represents the excess reorganization value that has been applied to the acquired technology supporting the Company's products (Note 1 to the Financial Statements). Amortization of designs and drawings is computed using the straight-line method over an estimated useful life of 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) four to seven years. The remaining asset carries a net book value of $472,000 and will be amortized using the straight-line method over the remaining estimated useful life of one to four years. Research and development expenditures increased to $2,262,000 (17% of sales) during the twelve months ended December 31, 1997 from $808,000 (16% of sales) for the six months ended December 31, 1996. The increase in expenses was primarily attributable to the increased time frame of the current period over the prior period and to major development programs instituted during the fiscal year ended December 31, 1997. It is anticipated that the Company will continue to experience high R&D expenses as it positions itself, through the introduction of new products, to gain market share. As of the last day of the fiscal period, the Company held approximately $600,000 worth of inventory, in the form of finished goods in a ready-to-ship status (Note 3), on the shipping dock for two orders placed with the Company which were to be purchased with funds underlying international letters of credit. Due to unexpected difficulties, the letters of credit were not received by the end of the period reported on herein and so the products were not shipped. Subsequent to the year end, only one of those letters of credit has been received, for approximately one-half of the inventory (and about $450,000 in sales) while the other letter of credit is still pending. The pending letter of credit is to be issued by an Indonesian bank and it is possible that this letter of credit will not materialize, in which case the Company will be forced to sell these goods to other customers. The impact of these delayed letters of credit was to delay shipment, and revenue recognition, of approximately $945,000 in sales. Interest expense net of interest income increased to $677,000 (5% of sales) during the twelve months ended December 31, 1997 from $256,000 (5% of sales) for the six months ended December 31, 1996. The large increase in expense was primarily attributable to the increased time frame of the current period over the prior period. For the period ended December 31, 1997, the Company did not provide for income taxes, due to the net loss. The Company also did not provide for income taxes, for the six months ended December 31, 1996, due to net operating losses. For the twelve month period ended December 31, 1997, the Company had a net loss of ($1,757,000) as compared with a net loss of ($2,070,000) in the six month period ended December 31, 1996. The decrease was primarily attributable to increased sales with a lower percentage of cost of sales. "New Orders Booked" (firm, fixed orders from customers) for the twelve months ended December 31, 1997 were $15,788,000 as compared to $5,939,000 for the year ended December 31, 1996. This increase was as a result of the increased time frame of the current period over the prior period coupled with the increased effort, on the part of the Company, to rejuvenate its marketing strategy. The Company's "Backlog" of orders to be shipped (unshipped orders from the prior period (Backlog) plus New Orders Booked less orders shipped during the period) was $4,814,000 as of December 31, 1997, an increase of 95% over the $2,473,000 in Backlog as of December 31, 1996. The Company's Backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. Approximately $945,000 of this amount is due to the effect of the late letters of credit from two orders. One of these orders was from South America and has subsequently shipped. The other order is from Indonesia and has not shipped to date. This order is in jeopardy due to the current economic crisis in Asia and particularly Indonesia. If this order is cancelled, the Company will sell the inventory to other customers from which there are sufficient orders in house to deplete this inventory. The Company believes that while projected sales to certain Asian countries, including Indonesia, may be affected by the current economic crisis, sales to other regions, including domestic sales, should increase substantially during the 1998 fiscal year and more than offset any decline in sales to the Asian region. 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS SIX MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996. The Company's net sales increased 28% to $4,905,000 during the six month period ended December 31, 1996 from $3,830,000 during the twelve months ended June 30, 1996. This increase was primarily attributable to the introduction of the Company's new product lines which have experienced exceptional market acceptance. Volume in terms of units sold has increased with sales of products introduced since July 1, 1995 increasing from $434,000 for the period ended June 30, 1996 to $3,477,000 for the period ended December 31, 1996. The Company's cost of sales as a percentage of net sales increased to 83% during the six months ended December 31, 1996 from 67% for the fiscal year ended June 30, 1996. There were two primary reasons for this increase in percentage, both of which the Company considers largely extraordinary. First, there were adjustments to inventory of $491,000 (10% of sales) for obsolescence. Of this amount, $364,000 was related to the introduction of new products which essentially rendered one entire product line obsolete, $110,000 was related to ongoing product development and $17,000 was related to the valuation of excess materials on hand. Second, $340,000 (7% of sales) of start-up costs related to the introduction of new products were included in the cost of sales for the period ended December 31, 1996. These products included a new generation modem sub-system which makes use of the Company's proprietary technology from older products while adding features and reducing future manufacturing costs. Also, the Company introduced and shipped the new "Digital Video Broadcast" modem which has experienced exceptional market acceptance. Also contributing to the increase in cost of sales as a percentage of sales were freight charges related to international sales (2% of sales) and higher than anticipated warranty expense on some of the Company's older products (1% of sales). The Company is obligated to pay royalties to Merit Microwave, Inc. ("Merit") on sales of certain translator products developed by Merit. The royalty rate ranges from five to ten percent of the selling price. During the period ended December 31, 1996, the Company paid $2,200 for royalty expenses, which were included in direct cost of goods sold. Selling, general and administrative costs decreased to $1,438,000 or 29% of sales during the six months ended December 31, 1996 from $1,844,000 or 48% of sales for the fiscal year ended June 30, 1996. The decrease in expenses was primarily attributable to the decreased time frame of the latter period over the prior period and partially offset by increased costs related to the higher level of business that the Company experienced during the latter period. The Company recorded an "asset impairment charge" of $421,000 during the six month period ended December 31, 1996 to reflect a valuation adjustment to Designs and Drawings which were partially impaired due to the introduction of new product lines. Research and development expenditures decreased to $808,000 (16% of sales) during the six months ended December 31, 1996 from $1,795,000 (47% of sales) for the twelve months ended June 30, 1996. The decrease in expenses was primarily attributable to the decreased time frame of the latter period relative to the prior period. Additionally, the Company had embarked on a major development program during the fiscal year ended June 30, 1996, in order to regain a competitive posture after two fiscal periods during which the Company had made no development effort. Interest expense net of interest income decreased to $256,000 (5% of sales) during the six months ended December 31, 1996 from $257,000 (7% of sales) for the fiscal year ended June 30, 1996. The small decrease in expense was primarily attributable to the 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) decreased time frame of the latter period as compared to the prior period, offset by additional interest from the Company's increased debt level. For the six month period ended December 31, 1996, the Company did not provide for income taxes, due to the net loss. The Company also did not provide for income taxes for the twelve month period ended June 30, 1996, due to net operating losses. For the six month period ended December 31, 1996, the Company had a net loss of ($2,070,000) as compared with a net loss of ($2,625,000) in the twelve month period ended June 30, 1996. The decrease was primarily attributable to the decreased time frame of the latter period relative to the prior period as partially offset by the increase in cost of sales as a percentage of sales and the expenses of increased business activity, and the $421,000 asset impairment charge as discussed above. "New Orders Booked" (firm, fixed orders from customers) for the six months ended December 31, 1996 were $5,939,000 as compared to $4,184,000 for the year ended June 30, 1996. The Company's "Backlog" of orders to be shipped (orders from the prior period which had not yet been shipped plus New Orders Booked less orders shipped during the period) was $2,473,000 as of December 31, 1996, an increase of 72% over the $1,439,000 in Backlog as of June 30, 1996. The Company's Backlog consists of firm orders as evidenced by written contracts and/or purchase orders from customers. RESULTS OF OPERATIONS FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO SIX AND ONE-HALF MONTH PERIOD ENDED JUNE 30, 1995 The Company's net sales increased 206% to $3,830,000 during the period ended June 30, 1996 from $1,861,000 during the six and one-half months ended June 30, 1995 primarily due to the increased time frame of the later period being reported upon herein over the prior period. The Company's cost of sales as a percentage of net sales increased to 67% during the fiscal year ended June 30, 1996 from 66% for the six and one-half months ended June 30, 1995. Selling, general and administrative costs increased to $1,844,000 or 48% of sales during the fiscal year ended June 30, 1996 from $961,000 or 52% of sales for the six and one-half months ended June 30, 1995. The increase in expenses was primarily attributable to the increased time frame of the later period over the prior period. Research and development expenditures increased to $1,795,000 during the fiscal year ended June 30, 1996 from $-0- for the six and one-half months ended June 30, 1995. The Company embarked on a major development program during the fiscal year ended June 30, 1996, in order to regain a competitive posture after two fiscal periods during which the Company had made no development effort. Interest expense net of interest income increased to $257,000 (7% of sales) during the fiscal year ended June 30, 1996 from $36,000 (2% of sales) for the six and one-half months ended June 30, 1995, due primarily to increased borrowings. For the period ended June 30, 1996, the Company did not provide for income taxes, due to the net loss. The Company also did not provide for income taxes for the six and one-half month period ended June 30, 1995, due to net operating losses. For the twelve month period ended June 30, 1996, the Company had a net loss of ($2,625,000) as compared with a net loss of ($365,000) in the period ended June 30, 1995. The increase was primarily 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) attributable to the increased level of research and development expenditures and interest expense, along with the increased time frame of the later period over the prior period. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital was $1,654,857 at December 31, 1997, as compared to a deficit of ($5,852,000) at December 31, 1996, ($4,083,000) at June 30, 1996 and ($1,837,000) at December 31, 1995. The elimination of the deficit from December 31, 1996 was due primarily to $5,050,000 of net proceeds from the sale of Common Stock, pursuant to a Rights Offering to the Company's shareholders ("Rights Offering"), new bank borrowings of $9,500,000 ($4,500,000 of which is classified as long-term) and a decrease in accounts receivable and other current assets of approximately $400,000. This amount was partially offset by payments on notes payable under lines of credit agreements of $1,994,000 and payments on notes payable to affiliates of $6,600,000 and an approximately $611,000 decrease in accounts payable and accrued liabilities, and an increase of $3,399,000 in inventories. Net cash used in operating activities was $4,945,000 for the twelve month period ended December 31, 1997, as compared to $3,546,000 for the six months ended December 31, 1996, as compared to $2,581,000 used in the year ended June 30, 1996 and $938,000 used in the six and half months ended June 30, 1995. The principal causes for the difference in 1997 were the net loss for the period of $1,757,000 and increases in inventories, approximately $600,000 of which was in the form of finished goods which had been built in anticipation of two orders placed with the Company which were to be purchased with funds underlying international letters of credit. Due to unexpected difficulties, the letters of credit were not received by the end of the period reported on herein and so the products were not shipped. Subsequent to the year end, only one of those letters of credit has been received, for approximately one-half of the inventory (and about $450,000 in sales) while the other letter of credit is still pending. The pending letter of credit is to be issued by an Indonesian bank and it is possible that this letter of credit will not materialize, in which case the Company will be forced to sell these goods to other customers. The impact of these delayed letters of credit was to delay shipment, and revenue recognition, of approximately $945,000 in sales as discussed above. Cash used in investing activities, consisting of additions to equipment, amounted to $593,000 for the period ended December 31, 1997, $255,000 for the period ended December 31, 1996, $389,0000 for year ended June 30, 1996 and $119,000 for the six and one-half month period ended June 30, 1995. The current year's increase of $338,000 is consistent with management's plans to continue investment in research & development and Company growth. The Company has no material commitments to make capital expenditures in 1998 or thereafter. Certain leasehold improvements relative to the new facility (ITEM 2 and Note 9), if any, will be added to the landlord's cost basis of the property and amortized in the form of increased rent. The Company derived net cash from financing activities of $5,922,000 during the year ended December 31, 1997, $3,986,000 during the six month period ended December 31, 1996 and $2,969,000 during the year ended June 30, 1996, with the difference resulting from greater net borrowings and the proceeds from the sale of stock during the current period. As a result of the foregoing, the Company increased its cash balance by $383,000 for the twelve month period ended December 31, 1997, increased its cash balance by $186,000 for the six months ended December 31, 1996 and decreased its cash balance by $1,000 for the year ended June 30, 1996. A bank line of credit, in the amount of $5,000,000, was established for the Company with Bank of America NT&SA, Asian Banking Unit, by Stetsys US, Inc., the beneficial owner of 57.3% of the 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company's outstanding stock. As of December 31, 1997, the Company had drawn down $4,500,000 of the available funds in the form of demand loans. An affiliate of Stetsys US, Inc. issued a non-binding letter of awareness to the bank which replaced a previous guarantee. The interest rates on these loans ranged from 7.15625% to 8.5% per annum. The Company also has an uncommitted $5,500,000 credit facility with Citibank NA with respect to which the same affiliate of ST has also issued a non-binding letter of awareness. As of December 31, 1997, the Company had drawn down $5,000,000 of the available funds in the form of demand loans. Subsequent to the end of the period reported on herein, the bank line with Bank of America was terminated and paid in full by the proceeds of a loan from Stetsys US, Inc. in the amount of $4,618,272. The loan from Stetsys US, Inc. bears interest at the rate of 6.84375% per annum and matures on February 15, 1999. Another $500,000 loan was made by ST at the same interest rate and matures on January 4, 1999. The purpose of all of the above described loans has been to finance or refinance the capital needs associated with the Company's recent rapid sales and Backlog growth and the cost of research and development. To date, the Company's capital resources (as supplemented by loans from ST and its affiliates) have been sufficient to fund its operations and increased level of business. The Company believes that its bank credit lines and cash from operations are unlikely to be sufficient to fund its planned future operations and capital requirements for continued aggressive growth through the end of 1998. Therefore, in order to sustain a high rate of sales increases and new product development, management intends to formulate a plan for the Company to sell a substantial amount of additional Common Stock during the second or third quarter of this year. Of course there can be no assurance that the Company will be successful in offering such securities. If the Company were to be unable to raise sufficient capital, it might be necessary to delay or cut back on its plans for future growth. SUPPLEMENTARY INFORMATION YEAR 2000 COMPLIANCE The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2 digit year is commonly referred to as the Year 2000 Compliance (Year 2000) issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. The Company is in the process of communicating with others with whom it does significant business to determine their Year 2000 readiness and the extent to which the Company may be vulnerable to any third party Year 2000 issues. While there do not appear to be any issues for which the Company is not prepared, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company would not have a material adverse effect on the Company. In the opinion of the Company's management, the cost of addressing Year 2000 compliance will not be material. Management has studied the known problems of Year 2000 compliance and has found that in all material respects, the Company's existing software and hardware are compatible with Year 2000. Any future costs to comply with Year 2000 issues will be expensed in the period that the costs are incurred. IMPACT OF INFLATION The Company does not believe that inflation has had a material impact on revenues or expenses during the last four fiscal periods reported on herein. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements as of December 31, 1997, December 31, 1996, June 30, 1996 and June 30, 1995 are included in this report as listed in the Index to Financial Statements in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None reportable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES The directors and executive officers of the Company, their positions held with the Company, and their ages are as follows:
NAME AGE POSITION - ------------------------------------------- --- ------------------------------------------- Lim Ming Seong............................. 50 Director, Chairman of the Board Chan Wee Piak.............................. 42 Director Lee Yip Loi................................ 54 Director Robert A. Grimes........................... 45 Director Robert C. Fitting.......................... 62 Director and President Steven W. Eymann........................... 45 Executive Vice President Garry D Kline.............................. 48 Vice President of Finance
Each director is elected for a period of one year at the Company's annual meeting of stockholders and serves until the next meeting and until his successor is duly elected and qualified. Officers are elected by, and serve at the discretion of, the Board of Directors. The following is a brief summary of the background of each director, executive officer and certain key employees of the Company: DIRECTORS AND EXECUTIVE OFFICERS: LIM MING SEONG has a been a Director and Chairman of the Board of the Company since August 13, 1996 and is chairman of its Compensation Committee. He is the Chairman of ST and of Vertex Management, Inc., a member of the Singapore Technologies group, and he has been Group Director of Singapore Technologies Pte Ltd, an indirect parent of ST since February of 1995. From March 1992 until February 1995, he was Executive Director of Singapore Technologies Ventures Pte Ltd and from February 1990 to March 1992, he was Group President of Singapore Technologies Holdings Pte Ltd. Prior to that time he held various corporate and government positions, including Deputy Secretary in the Singapore Ministry of Defense from 1979 to 1986. LEE YIP LOI has been a Director of the Company since August 13, 1996 and is chairman of the Audit Committee and a member of the Compensation Committee of the Board. Mr. Lee is also a director of ST. He has been Regional Director (America) of Singapore Technologies Pte Ltd since March 1994 and, from May 1990 to January 1997, he was President of it's affiliate, Metheus Corporation. Prior to that time he held a number of managerial positions with such corporations as Morgan Guaranty Trust and Singapore Technologies Pte Ltd and government positions with the Singapore Ministries of Education, Defense, Culture and Home Affairs. CHAN WEE PIAK has been a Director since August 13, 1996 and is a member of the Compensation Committee of the Board. He is a director of ST and has been General Manager of Agilis Communication Technologies Pte Ltd, also a member of the Singapore Technologies group, since January 1992. From 17 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED) November 1989 to February 1992, he was General Manager of Chartered Microwave Pte Ltd. Prior to that time, he held various managerial positions in the Singapore Ministry of Defense and with Singapore Electronic and Engineering. ROBERT A. GRIMES, who is a member of the Audit and Compensation Committees of the Board, has served as a member of the Board of Directors since December, 1994. For the past seven years Mr. Grimes has also served as a member of the Board of Engineering and Technical Services, Inc. of which he was President until December 31, 1997. He was also the President of ST from February 24, 1997 to January 23, 1998. ROBERT C. FITTING has been President of the Company since February, 1995, became a Director of the Company in March, 1995 and is a member of the Audit Committee of the Board. Mr. Fitting has a Master of Electrical Engineering degree from New York University and a Bachelors with distinction from Penn State University. His professional career began at Bell Laboratories in 1962 where he spent six years developing innovative communication technologies. Mr. Fitting then joined the Motorola Government Electronics Division where he was an engineering manager. He published more than a dozen technical papers and was awarded a number of patents. He left Motorola in 1978 to build a new company under an agreement with Comtech Telecommunications. The new company was named Comtech Data Corporation, currently known as Fairchild Data Corporation. Mr. Fitting was the General Manager and President of Comtech Data Corporation from 1978 to 1984. He left Comtech to start a new company called EFData Corporation. As co-founder, CEO and President of EFData Corporation, Mr. Fitting built the company into a worldwide market leader in satellite communications equipment. While at EFData, Mr. Fitting won the "Arizona Entrepreneur of the Year" award in 1993 in the manufacturing/high technology category. STEVEN EYMANN has been Executive Vice President of the Company since February, 1995. Mr. Eymann graduated with honors and a Bachelor of Science in Electrical Engineering from the University of Nebraska. His professional career began at the Motorola Government Electronics Division where he was a design engineer, task leader and finally a project leader for the DSU-23/29B fuse development program. As project leader, he was responsible for project management, budgets, schedules, and design and testing of the fuse. He designed the computer-controlled automatic test set for factory testing based on an HP 9825 computer. The DSU-23/29B is an L-Band PN radar for accurate, low-cost altitude direction. In June of 1981, Mr. Eymann joined Comtech Data Corporation where he was Director of Product Development. He was responsible for budget, schedule and technical aspects of all new product development within Comtech. Prior to becoming the Director of Product Development, he served as a senior engineer with program and technical design responsibility. He left Comtech in 1984 to begin a new company called EFData Corporation. As co-founder and Vice President of EFData, Mr. Eymann was responsible for new product development and engineering management in the design and manufacture of high technology, military and commercial communications equipment. GARRY KLINE, Vice President of Finance, Chief Financial Officer and Secretary, joined the Company in September of 1995. From that time until July 1997 he was Secretary and Controller of the Company. From 1987 through 1995, Mr. Kline served as CFO and Controller of EFData Corporation. Prior to 1987, Mr. Kline served in various positions, including Vice President of Finance for Megatronics Inc., a publicly held printed circuit board manufacturer, Vice President of Operations for Vernal Lodging Associates, a hospitality management company, and General Partner of Tax and Accounting Computer Service, an accounting firm. CERTAIN KEY EMPLOYEES: PETER WEISSKOPF has been the President of the Microwave Products Division at Radyne since June, 1995. At Radyne, he is responsible for the operation of the microwave products division. His duties include 18 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES (CONTINUED) marketing, design and manufacture of existing and new microwave products as well as the administration of the division. Mr. Weisskopf has a Bachelor of Science in Computer and Electrical Engineering from George Mason University. He has worked as an engineer for several companies during his professional career, including Magnavox Data Systems, M/A-COM Linkabit and M/A-COM Active Assemblies Division. From 1990 to 1992, Mr. Weisskopf was an engineer at EFData Corporation, where he designed synthesized frequency converters for use in satellite communications. In 1992, Mr. Weisskopf founded Merit Microwave, Inc. As founder and President of this start-up firm, Mr. Weisskopf designed and marketed various microwave components and systems, including a complete line of satellite loopback test translators. ALAN POTTER has been the Vice President of Marketing for the Company since December 1995. His duties at Radyne include market research, neoteric product concepts, new corporate alliances and distribution systems in Europe and the Middle East. He joined Radyne after ten years with EFData as Sales Manager. Mr. Potter graduated from the University of Houston with honors, holding a Bachelor of Arts in Communications. After post graduate studies at the University of Massachusetts, Amherst, he began his professional career as an Associate Professor of Communications at the University of Texas at Houston. While there, in 1973, he developed and operated the first practical bi-directional coaxial cable network to simultaneously carry voice, data and video communications. He then designed, developed and managed a series of broadband cable television and data networks for Columbia Cable Television, Michelson Media and Cox Cable Communications. Mr. Potter joined Comtech Data in 1984 and, two years later, he followed Messrs. Fitting and Eymann to initiate the Sales and Marketing Department at EFData. He is currently an MBA candidate at the University of Phoenix. DAVE KOBLINSKI has been the Vice President of Operations for the Company since March, 1995. Mr. Koblinski has a Bachelor of Science in Business Administration from Arizona State University. He also holds a degree in Electronics Technology from Mesa Community College. His professional career began in 1982 at Comtech Data Corporation where he held the position of Customer Service Representative. He was responsible for repairs, field and telephone support of satellite data modems. From 1985 to 1995, Mr. Koblinski was the Senior Product Manager for EFData Corporation. His general responsibilities at EFData included relating customer requests and concerns to the factory. His direct responsibilities included the customer service, technical publication and order entry departments. Based solely upon a review of Forms 3, 4 and 5 and amendments thereto furnished to the registrant during the period from January 1,1997 to December 31, 1997, none of the officers or directors of the registrant or the beneficial owners of its equity securities failed to file reports on Forms 3, 4 or 5 required to be filed during such period or prior thereto, except that Form 4 Reports were filed late on one occasion by each of Stetsys Pte Ltd, Temasek Holdings (Private) Limited, Chan Wee Piak and Radyne Corp. ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION The Company's policy is to pay no compensation to directors for acting as such. The following table sets forth the compensation for services in all capacities to the Company for the period from the commencement of employment on March 1, 1995 through December 31, 1997 of the Company's President and Executive Vice President. No other executive officer or employee received total annual salary and bonus of more than $100,000. 19 ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED) SUMMARY COMPENSATION TABLE
YEAR ALL OTHER NAME AND PRINCIPAL POSITION ENDED(1) SALARY OPTIONS (#) COMPENSATION(2) - ----------------------------------------------------------- --------- ---------- ----------- ----------------- Robert C. Fitting. President............................... 12/31/97 $ 116,529 $ 1,165 12/31/96 $ 40,000 279,085 $ 435 06/30/96 $ 80,000 0 $ 738 06/30/95 $ 29,231 0 0 Steven Eymann Exec. Vice Pres.............................. 12/31/97 $ 111,162 $ 1,112 12/31/96 $ 40,000 279,085 $ 435 06/30/96 $ 80,000 0 $ 738 06/30/95 $ 29,231 0 0
- ------------------------ (1) Mr. Fitting's and Mr. Eymann's employment with the Company commenced on March 1, 1995, so the figures shown for the fiscal year ended June 30, 1995 reflect a four-month period. The Company's fiscal year has been changed to the calendar year, so the figures shown for the period ended December 31, 1996 reflect a period of six months. (2) Matching 401(k) plan contributions. STOCK OPTIONS No stock options were granted to the above executive officers during the fiscal period ended December 31, 1997. AGGREGATE OPTION EXERCISES IN 1997 AND HOLDINGS AT YEAR END The following table sets forth information concerning option exercises and option holdings for the fiscal period ended December 31, 1997 with respect to Robert C. Fitting, the President of the Company and Steven Eymann, the Executive Vice President. AGGREGATE OPTIONS EXERCISED IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE
VALUE OF UNEXERCISED, NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS HELD AT OPTIONS AT NUMBER OF DECEMBER 31, 1997 DECEMBER 31, 1997(2) SHARES ACQUIRED VALUE ---------------------------- ------------------------------ NAME ON EXERCISE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------- --------------- --------------- ------------- ------------- ------------- --------------- Robert C. Fitting.................. 0.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00 Steven Eymann...................... 4,000.00 $ 0.00 0.00 215,085 $ 0.00 $ 0.00
- ------------------------ (1) Based on the fair market value of the Common Stock on the exercise date, less the per share exercise price. (2) Based on the fair market value of the Common Stock of $2.50 per share, as determined by the Company's Board of Directors, less the per share exercise price. 20 ITEM 11. DIRECTOR AND EXECUTIVE COMPENSATION (CONTINUED) EMPLOYMENT AGREEMENTS Under the employment agreement between the Company and Mr. Fitting and Mr. Eymann, they will serve as President and Vice President of the Company until the earlier of June 30, 2000 or such time as the stock options described in the above table become fully exercisable. Pursuant to the agreement, the Company presently pays Mr. Fitting and Mr. Eymann annual salaries of $130,000 and $125,000, respectively, and has granted them the stock options described in the above table. Each of Mr. Fitting and Mr. Eymann has also agreed that if he exercises any of the stock options, he will not engage in any business which competes with the Company until after the second anniversary of his termination of employment with the Company, except in the case of involuntary termination without cause. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee consists of Messrs. Lim, Chan, Lee and Grimes. There were no interlocking relationships between the Company and other entities that might affect the determination of the compensation of the executive officers of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of the date hereof, the ownership of the Common Stock by (i) each person who is known by the Company to own of record or beneficially more than 5% of the outstanding Common Stock, (ii) each of the Company's directors and its President and Executive Vice President, and (iii) all directors and executive officers of the Company as a group. Except as otherwise indicated, the stockholders listed in the table have sole voting and investment powers with respect to the shares indicated.
NUMBER PERCENTAGE NAME AND ADDRESS OF SHARES OF CLASS - --------------------------------------------------------------------------------------- ---------- ------------- Stetsys US, Inc. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ 3,400,000 57.3% Stetsys Pte Ltd. c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ 5,376,000(1) 90.6% Steven Eymann 5225 S. 37th Street Phoenix, Arizona 85040............................... 4,000 * Robert C. Fitting 5225 S. 37th Street Phoenix, Arizona 85040........................... -- -- Robert A. Grimes 5225 S. 37th Street Phoenix, Arizona 85040............................ 5,500 * Lee Yip Loi c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ -- -- Chan Wee Piak c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ 10,000 * Lim Ming Seong c/o Singapore Technologies Pte Ltd 83 Science Park Drive #01-01/02 The Curie Singapore Science Park Singapore 118258........................................ -- -- All directors and executive officers of the Company as a group (4 persons)............. 21,000 *
- ------------------------ * Less than one percent. (1) The shares reported as owned by Stetsys Pte Ltd include the shares reported as beneficially owned by Stetsys US, Inc., of which Stetsys Pte Ltd is sole shareholder. 100% of the stock of Stetsys US, Inc. and Stetsys Pte Ltd is ultimately owned by the Minister for Finance (Incorporated) of Singapore. 21 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Sales to ETS for the twelve month period ended December 31, 1997, the six month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half period ended June 30, 1995 were $152,500, $307,300, $311,600 and $159,700, respectively. ETS is a wholly owned subsidiary of ST. During the fiscal year ended December 31, 1997, the six month period ended December 31, 1996 and the year ended June 30, 1996, respectively, the Company made sales to Agilis Communication Technologies Pte Ltd, another member of the Singapore Technologies group, of $540,500, $375,000 and $118,900. The General Manager of Agilis, Chan Wee Piak, is a Director of the Company. On August 12, 1996, Stetsys US, Inc. ("ST"), a member of the Singapore Technologies Pte Ltd ("STPL") group, acquired 100% of the outstanding common stock of ETS. (ST is a wholly owned Delaware subsidiary of Stetsys Pte Ltd, which is a wholly owned subsidiary of STPL. STPL is an indirect wholly owned subsidiary of Temasek Holdings (Private) Limited, which is in turn wholly owned by the Minister for Finance (Incorporated) of Singapore). Messrs. Lim Ming Seong, Lee Yip Loi and Chan Wee Piak are all both Directors of the Company and officers of other corporations in the STPL group. From February 24, 1997 to January 23, 1998, Robert A. Grimes, a Director of the Company, was also President of ST. On August 12, 1996, Singapore Technologies Electronics Pte Ltd ("STE"), another member of the STPL group, made an unsecured loan of $4,500,000 to the Company, the proceeds from which were used to pay down the loan payable to ETS. This loan, which bore interest at 8%, was repaid on February 10, 1997 from the proceeds of loans provided by Citibank NA and ST. Between November 8 and December 18, 1996, ST made loans to the Company in the aggregate principal amount of $2,100,000, with interest at 8% per annum and maturing in March, 1997. At or about maturity, the accrued interest on these loans was paid by the Company and the principal amounts were repaid with the proceeds of new loans maturing on April 30, 1997. These loans by ST to the Company, totaling $4,100,000 were repaid with proceeds of the Rights Offering. Interest expense on notes payable to affiliates was $148,000, $205,900 and $248,400 for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively, of which $-0-and $152,400 were included in accrued expenses in the accompanying balance sheet as of December 31, 1997 and 1996, respectively. Subsequent to December 31, 1997, ST made loans of $500,000 and $4,618,272 to the Company. The loans bear interest at 6.844% per annum with the principal and accrued interest due on January 4 and February 15, 1999, respectively. The proceeds of the $4,618,272 loan were used by the Company to repay a note payable under the above mentioned $5,000,000 line of credit agreement with Bank of America which was outstanding as of December 31, 1997 (Note 7). This line of credit, as to which an ST affiliate had issued a non-binding letter of awareness, was terminated at that time. The Company also has an uncommitted $5,500,000 line of credit from Citibank N.A. as to which the same ST affiliate has issued a non-binding letter of awareness. As of December 31, 1997, $5,000,000 had been drawn down in the form of demand loans under this line of credit. The Company has notes receivable from stockholders totaling $40,086. These notes bear interest at 4% and are due June 20, 1998. 22 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a) The following is an index of financial statements of Radyne Corp., financial statement schedules and exhibits included in Part IV, Item 14: FINANCIAL STATEMENTS Independent Auditors' Report.......................................................... F-1 Balance Sheets as at December 31, 1997 and 1996....................................... F-2 Statements of Operations for the Year Ended December 31, 1997, the Six-Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month Period Ended June 30, 1995............................................................ F-3 Statements of Stockholders' Capital Deficiency for the Year Ended December 31, 1997, the Six Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month Period Ended June 30, 1995......................................... F-4 Statements of Cash Flows for the Year Ended December 31, 1997, the Six-Month Period Ended December 31, 1996, the Year Ended June 30, 1996 and the Six and One-Half Month Period Ended June 30, 1995............................................................ F-5 Notes to Financial Statements......................................................... F-6
FINANCIAL SCHEDULES None
EXHIBITS - --------- 3.1* Restated Certificate of Incorporation 3.2* Bylaws, as amended and restated 10.1** 1996 Incentive Stock Option Plan 10.2*** Employment Agreement with Robert C. Fitting (Radyne Termsheet) 10.3 Lease dated November 11, 1997 27 Financial Data Schedule
- ------------------------ * Incorporated by reference from Registrant's report on Form 10-Q, filed March 11, 1997. ** Incorporated by reference from Registrant's Registration Statement on Form S-8, dated and declared effective on March 12, 1997. *** Incorporated by reference from Registrant's amended Registration Statement on Form S-1, dated May 9, 1997 and declared effective on May 12, 1997. b) Registrant filed no reports on Form 8-K during the period of October 1 through December 31, 1997. 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Radyne Corp. (Registrant) By: /s/ ROBERT C. FITTING ----------------------------------------- Robert C. Fitting, PRESIDENT Dated: 21 March, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf by the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE - ------------------------------ --------------------------- /s/ LIM MING SEONG Chairman of the Board of March 20, 1998 - ------------------------------ Directors Lim Ming Seong /s/ ROBERT C. FITTING President, Director March 20, 1998 - ------------------------------ Robert C. Fitting Vice President, Finance, March 20, 1998 /s/ GARRY D. KLINE Chief Financial - ------------------------------ (Principal Financial Garry D. Kline Officer) /s/ ROBERT A. GRIMES Director March 20, 1998 - ------------------------------ Robert A. Grimes /s/ LEE YIP LOI Director March 20, 1998 - ------------------------------ Lee Yip Loi /s/ CHAN WEE PIAK Director March 20, 1998 - ------------------------------ Chan Wee Piak 24 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Radyne Corp. Phoenix, Arizona We have audited the accompanying balance sheets of Radyne Corp. (the "Company") as of December 31, 1997 and 1996, and the related statements of operations, stockholders' capital deficiency and cash flows for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one- half-month period ended June 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP February 4, 1998 Phoenix, Arizona F-1 RADYNE CORP. BALANCE SHEETS DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 - ----------------------------------------------------------------------------------- ------------- ------------- CURRENT ASSETS: Cash and cash equivalents........................................................ $ 569,692 $ 186,488 Accounts receivable--trade, net of allowance for doubtful accounts of $15,000 (1997) and $13,000 (1996)...................................................... 2,359,443 2,733,902 Inventories (Note 3)............................................................. 5,389,920 1,991,360 Prepaid expenses................................................................. 68,076 19,280 Deferred offering costs.......................................................... 75,018 ------------- ------------- Total current assets........................................................... 8,387,131 5,006,048 ------------- ------------- PROPERTY AND EQUIPMENT--NET (NOTES 4 AND 8)........................................ 1,322,551 849,564 ------------- ------------- OTHER ASSETS: Designs and drawings--net of accumulated amortization of $705,404 (1997) and $475,696 (1996)................................................................ 471,935 701,643 Deposits......................................................................... 50,000 15,662 ------------- ------------- Total other assets............................................................. 521,935 717,305 ------------- ------------- TOTAL.............................................................................. $ 10,231,617 $ 6,572,917 LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY CURRENT LIABILITIES Note payable under line of credit agreement (Note 7)............................. $ 5,000,000 $ 1,993,820 Notes payable to affiliates (Note 6)............................................. 6,600,000 Obligations under capital leases (Note 8)........................................ 109,258 53,042 Accounts payable--trade.......................................................... 667,202 805,279 Accounts payable--affiliate...................................................... 16,062 436,362 Accrued expenses (Notes 5 and 6)................................................. 901,032 926,956 Taxes payable (Note 2)........................................................... 38,720 42,116 ------------- ------------- Total current liabilities...................................................... 6,732,274 10,857,575 NOTE PAYABLE UNDER LINE OF CREDIT AGREEMENT (NOTES 6 AND 7)........................ 4,500,000 OBLIGATIONS UNDER CAPITAL LEASES (NOTE 8).......................................... 93,543 81,016 TAXES PAYABLE (NOTE 2)............................................................. 55,861 80,952 ------------- ------------- Total liabilities.............................................................. 11,381,678 11,019,543 ------------- ------------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 7, 9 AND 12) STOCKHOLDERS' CAPITAL DEFICIENCY (NOTES 2 AND 13): Common stock, $.002 par value--authorized, 20,000,000 shares; issued and outstanding, 5,931,346 shares (1997) and 3,759,721 shares (1996)............... 11,862 7,519 ADDITIONAL PAID-IN CAPITAL....................................................... 5,694,806 605,782 ACCUMULATED DEFICIT.............................................................. (6,816,643) (5,059,927) NOTES RECEIVABLE FROM STOCKHOLDERS (NOTE 6)...................................... (40,086) ------------- ------------- Total stockholders' capital deficiency......................................... (1,150,061) (4,446,626) ------------- ------------- TOTAL.............................................................................. $ 10,231,617 $ 6,572,917 ------------- ------------- ------------- -------------
See notes to financial statements. F-2 RADYNE CORP. STATEMENTS OF OPERATIONS
SIX AND ONE- SIX-MONTH HALF-MONTH YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 ------------- ------------- ------------- ------------ Net Sales (Notes 6 and 11).................................. $ 13,446,852 $ 4,905,059 $ 3,829,523 $1,861,262 Cost of Sales (Note 6)...................................... 8,022,262 4,052,433 2,559,350 1,228,747 ------------- ------------- ------------- ------------ Gross Profit............................................ 5,424,590 852,626 1,270,173 632,515 Operating Expenses: Selling, general and administrative (Note 6).............. 4,242,138 1,437,971 1,843,576 961,162 Asset impairment charge (Note 1).......................... 421,000 Research and development.................................. 2,262,066 808,025 1,794,823 ------------- ------------- ------------- ------------ Total Operating Expenses.................................... 6,504,204 2,666,996 3,638,399 961,162 ------------- ------------- ------------- ------------ Loss from operations before interest expense................ (1,079,614) (1,814,370) (2,368,226) (328,647) Interest Expense--Net (Note 6).............................. 677,102 255,604 256,871 36,209 ------------- ------------- ------------- ------------ Net loss.................................................... $ (1,756,716) $ (2,069,974) $ (2,625,097) $ (364,856) ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Basic and diluted net loss per common share (Note 1)........ $ (.35) $ (.55) $ (.70) $ (.10) ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------ Weighted average number of common shares outstanding........ 5,012,664 3,750,699 3,742,227 3,729,721 ------------- ------------- ------------- ------------ ------------- ------------- ------------- ------------
See notes to financial statements F-3 RAYDYNE CORP. STATEMENTS OF STOCKHOLDERS' CAPITAL DEFICIENCY YEAR ENDED DECEMBER 31, 1997, SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF MONTH PERIOD ENDED JUNE 30, 1995
NOTES COMMON STOCK ADDITIONAL RECEIVABLE --------------------- PAID-IN FROM SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS TOTAL ---------- --------- ------------ ------------ ------------ ------------ BALANCE, DECEMBER 16, 1994 (Note 1)................................ 3,729,721 $ 7,459 $ 545,842 $ 553,301 Net loss.......................... $ (364,856) (364,856) ---------- --------- ------------ ------------ ------------ BALANCE, JUNE 30, 1995.............. 3,729,721 7,459 545,842 (364,856) 188,445 Shares issued to Merit Microwave (Note 6)........................ 20,000 40 39,960 40,000 Net loss.......................... (2,625,097) (2,625,097) ---------- --------- ------------ ------------ ------------ BALANCE, JUNE 30, 1996.............. 3,749,721 7,499 585,802 (2,989,953) (2,396,652) Additional shares issued to Merit Microwave (Note 6).............. 10,000 20 19,980 20,000 Net loss.......................... (2,069,974) (2,069,974) ---------- --------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 1996.......... 3,759,721 7,519 605,782 (5,059,927) (4,446,626) Issuance of common stock-net of issuance costs of $335,696...... 2,171,625 4,343 5,089,024 5,093,367 Promissory notes received in connection with issuance of stock (Note 6).................. $ (40,086) (40,086) Net loss.......................... (1,756,716) (1,756,716) ---------- --------- ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997.......... 5,931,346 $ 11,862 $ 5,694,806 $ (6,816,643) $ (40,086) $ (1,150,061) ---------- --------- ------------ ------------ ------------ ---------- --------- ------------ ------------ ------------
See notes to financial statements. F-4 RADYNE CORP. STATEMENTS OF CASH FLOWS
SIX AND ONE YEAR SIX-MONTH YEAR HALF-MONTH ENDED PERIOD ENDED ENDED PERIOD ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 ------------ ------------ ----------- ------------ Cash flows from operating activities: Net loss.................................................... $(1,756,716) $(2,069,974) ($2,625,097) $ (364,856) Adjustments to reconcile net loss to net cash used in operating activities: Loss on disposal of assets.............................. 2,122 Depreciation and amortization........................... 454,183 177,535 276,913 147,523 Asset impairment charge................................. 421,000 Changes in operating assets and liabilities: Accounts receivable....................................... 374,459 (2,450,031) 251,806 (202,687) Bankruptcy claims escrow.................................. 106,613 Prepaids and other current assets......................... 26,222 (73,872) 73,581 99,534 Employee relocation incentives and advances............... 112,353 (109,353) Inventories............................................... (3,398,560) (840,691) (247,843) (353,686) Deposits.................................................. (34,338) (7,650) (191,796) Accounts payable--trade................................... (138,077) 339,848 (113,243) 284,495 Accounts payable--affiliate............................... (420,300) 436,362 Accrued expenses.......................................... (25,924) 545,990 (253,337) (348,004) Taxes payable............................................. (28,487) (24,053) (56,063) (6,093) ------------ ------------ ----------- ------------ Net cash used in operating activities................... (4,945,416) (3,545,536) (2,580,930) (938,310) ------------ ------------ ----------- ------------ Cash flows from investing activities--Capital expenditures.... (593,072) (255,118) (388,770) (119,042) ------------ ------------ ----------- ------------ Cash flows from financing activities: Net borrowings from notes payable under line of credit agreements................................................ 7,506,180 1,993,820 Proceeds from notes payable to affiliates................... 4,600,000 6,600,000 3,052,912 853,206 Payments on note payable to affiliate....................... (11,200,000) (4,594,696) Net proceeds from sale of common stock...................... 5,053,281 Principal payments on capital lease obligations............. (37,769) (12,953) (84,350) (50,143) ------------ ------------ ----------- ------------ Net cash provided by financing activities............... 5,921,692 3,986,171 2,968,562 803,063 ------------ ------------ ----------- ------------ Net increase (decrease) in cash............................... 383,204 185,517 (1,138) (254,289) Cash and cash equivalents, beginning of period................ 186,488 917 2,109 256,398 ------------ ------------ ----------- ------------ Cash and cash equivalents, end of period...................... $ 569,692 $ 186,488 $ 971 $ 2,109 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Supplemental disclosures of cash flow information--Cash paid for interest................................................ $ 687,626 $ 72,258 $ 3,996 $ 7,059 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Supplemental disclosures of noncash investing and financing activities: The Company incurred capital lease obligations of $106,512 and $85,887 for new machinery and equipment for the year ended December 31, 1997 and the six-month period ended December 31, 1996, respectively........................... In December 1996, the Company issued an additional 10,000 shares of common stock in conjunction with the asset purchase from Merit Microwave, Inc. (Note 6)..............
See notes to financial statements. F-5 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business--Radyne Corp. (the "Company" or "Radyne") is located in Phoenix, Arizona and designs, manufactures, and sells products, systems, and crsoftware used for the transmission and reception of data over satellite and cable communication networks. Upon emergence from bankruptcy proceedings on December 16, 1994 (Note 2), the Company became a majority-owned subsidiary of Radyne, Inc., which was a wholly-owned subsidiary of Engineering and Technical Services, Inc. ("ETS"). On August 12, 1996, Singapore Technologies Pte Ltd. ("STPL") acquired 100 percent of the outstanding common stock of ETS through its indirect wholly owned subsidiary, Stetsys US, Inc. ("ST"). The purchase price for the ETS stock was $5,756,425. Subsequent to the acquisition of ETS by ST, Radyne, Inc. was merged into ETS, which in turn distributed all of its Radyne shares to ST. ETS did not push down any related purchase accounting adjustments since its ownership in the Company was less than 95 percent. As a result, the accompanying financial statements continue to reflect the historical accounts of the Company. The Company changed its fiscal year-end to December 31 to conform to the year-end of ST. UNAUDITED SUMMARIZED FINANCIAL INFORMATION Change in Fiscal Year--Effective August 12, 1996, the Company changed its fiscal year-end from June 30 to December 31, to conform to the year-end of ST. Summarized unaudited financial information for the six-months ended December 31, 1995 is as follows:
UNAUDITED ------------ Net sales....................................................................... $ 2,397,235 Gross profit.................................................................... 921,951 Net loss before income taxes.................................................... (583,887) Income taxes.................................................................... -- Net loss........................................................................ (583,887) Net loss per common share....................................................... (0.16)
Rights Offering--In November 1996, the Board of Directors approved the distribution to stockholders, other than the Company's principal stockholder, ST, of subscription rights for the purchase of up to 215,833 shares of the Company's common stock at a price of $2.50 per share. The Board of Directors further approved the distribution of subscription rights to an affiliate of ST to purchase up to 2,040,000 shares of the Company's common stock at a price of $2.50 per share. This Rights Offering became effective on May 12, 1997 and was concluded in June. ST's affiliate exercised 1,976,000 of its rights and individuals associated with such affiliate exercised another 34,000. An additional 51,525 rights issued to stockholders other than ST were exercised. In a related offering under the Company's Incentive Stock Option Plan, 110,100 shares of the Company's common stock were purchased by employees at $2.50 per share. Total proceeds received from the Rights Offering were partially offset by approximately $336,000 of associated costs. The proceeds from the exercise of these rights were used, in part, to satisfy notes payable to affiliates shown on the accompanying balance sheet at December 31, 1996. F-6 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash Equivalents--The Company considers all money market accounts with a maturity of 90 days or less to be cash equivalents. Revenue Recognition--The Company recognizes revenue upon shipment of product. Inventories, consisting of satellite modems and related products, are valued at the lower of cost (first-in, first-out) or market, including material, direct labor, and overhead costs. Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to operations as incurred, and improvements which extend the useful lives of the assets are capitalized. Depreciation and amortization of machinery and equipment are computed using the straight-line method over an estimated useful life of three to seven years. Designs and Drawings--The valuation of designs and drawings is the result of adjustments made by the Company to adopt Fresh Start reporting in accordance with AICPA Statement of Position ("SOP") 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and represents the excess reorganization value that has been applied to the acquired technology supporting the Company's products (Note 2). Amortization of designs and drawings is computed using the straight-line method over an estimated useful life of four to seven years. At December 31, 1996, the Company recognized a design and drawing impairment charge of $421,000, with no associated tax benefit. With the introduction of new products in October 1996, management determined that a portion of the technology related to the original designs and drawings would be phased out or modified with technology used in new products. Impairment was determined by comparing the amount of undiscounted projected future cash flows attributable to each product using the related technology to the carrying value of the asset. Projected future cash flows were estimated for a period approximating the estimated remaining lives of the long lived assets, based on products' earnings history, market conditions and assumptions reflected in internal operating plans and strategies. Research and Development--The cost of research and development is charged to expense as incurred. Income Taxes--Radyne will file a consolidated federal income tax return with ETS and ST through June 1997 (conclusion of the Rights Offering). Subsequent to June 1997, Radyne will file separate federal income tax returns. Income taxes have been computed as if the Company filed separate income tax returns for each year. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future consequences attributed to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences between income for financial and tax reporting purposes arise primarily from amortization of certain designs and drawings and accruals for warranty reserves and compensated absences. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-7 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concentration of Credit Risk--The Company maintains ongoing credit evaluations of its customers and generally does not require collateral. The Company provides reserves for potential credit losses and such losses have not exceeded management's expectations. Net Loss Per Common Share--The Company presents earnings per share in accordance with Statement of Financial Standards No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 prescribes a presentation of basic earnings per share, which is calculated utilizing only weighted average common shares outstanding, and a diluted earnings per share which gives effect to all dilutive potential common shares outstanding during the reporting periods. Per share amounts have been adjusted to reflect a 1- for-5 reverse stock split that occurred on January 9, 1997. Fair Value of Financial Instruments--The fair value of accounts receivable, accounts payable, and accrued expenses approximates the carrying value due to the short-term nature of these instruments. Management has estimated that the fair values of the notes payable, capital lease obligations, and taxes payable approximate the current balances outstanding, based on currently available rates for debt with similar terms. 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 as of the financial statement date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. New Accounting Pronouncements--The Financial Accounting Standards Board has issued SFAS No. 131 on Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. This standard requires that public companies report certain information about operating segments in their financial statements. It also establishes related disclosures about products and services, geographic areas, and major customers. The Company is currently evaluating what impact this standard will have on its disclosures. 2. REORGANIZATION On December 16, 1994, the Bankruptcy Court confirmed the Predecessor Company's Plan of Reorganization effective at the close of business on December 16, 1994. Under the Plan of Reorganization, tax claims were rescheduled for quarterly payments totaling approximately $9,600, with interest at 7 percent through September 2000. Under the provision of SOP 90-7, Radyne Corp., the Successor Company, was required to adopt Fresh Start reporting as of the close of business on December 16, 1994, because the reorganization value of the Predecessor Company was less than the total of all post-petition liabilities and prepetition allowed claims, and the preconfirmation stockholders retained less than 50 percent of the Successor Company's common stock. F-8 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 3. INVENTORIES Inventories consist of the following at December 31:
1997 1996 ------------ ------------ Raw materials and components...................................... $ 2,605,397 $ 1,108,019 Work-in-process................................................... 1,124,929 792,119 Finished goods.................................................... 1,950,594 577,222 Valuation allowance............................................... (291,000) (486,000) ------------ ------------ Total............................................................. $ 5,389,920 $ 1,991,360 ------------ ------------ ------------ ------------
4. PROPERTY AND EQUIPMENT Property and equipment at December 31 consist of the following:
1997 1996 ------------ ---------- Machinery and equipment............................................. $ 1,298,715 $ 731,778 Furniture and fixtures.............................................. 373,548 243,559 ------------ ---------- Total............................................................... $ 1,672,263 975,337 Less accumulated depreciation....................................... 349,712 125,773 ------------ ---------- Property and equipment--net......................................... $ 1,332,551 $ 849,564 ------------ ---------- ------------ ----------
5. ACCRUED EXPENSES Accrued expenses at December 31 consist of the following:
1997 1996 ---------- ---------- Wages and related payroll taxes....................................... $ 486,840 $ 356,624 Interest.............................................................. 183,968 194,492 Professional fees..................................................... 85,500 171,000 Warranty reserve...................................................... 105,000 139,775 Other................................................................. 39,724 65,065 ---------- ---------- Total accrued expenses................................................ $ 901,032 $ 926,956 ---------- ---------- ---------- ----------
6. RELATED PARTY TRANSACTIONS In June 1995, the Company acquired certain assets of Merit Microwave, Inc. ("Merit"), as well as the manufacturing rights to the Merit line of microwave products, which include translators and frequency converters. The purchase price of approximately $120,000 was allocated to inventory and machinery and equipment, and was paid by the issuance of 30,000 shares of the Company's stock ($40,000), cash of $60,000, and the assumption of a payable of $20,000. Under the terms of the agreement, the Company is F-9 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 6. RELATED PARTY TRANSACTIONS (CONTINUED) required to pay royalties to Merit of 5-10 percent on certain sales of microwave products. From June 1995 to December 31, 1997, the Company paid royalties of $10,200. In July 1995, the Company's manufacturing operations were moved to ETS pending the Company's relocation to Phoenix. As a result, the Company transferred $726,345 of inventory and $115,155 of machinery and equipment to ETS in exchange for an equal reduction in a loan payable to ETS, to facilitate the commencement of subcontract manufacturing by ETS. During September 1996, in recognition of the completion of the move to Phoenix and increase in staffing, the Board of Directors determined that the Company should resume direct manufacturing. To this end, the Company repurchased $22,100 of machinery and equipment from ETS and was obligated to purchase $348,000 of inventory from ETS, which ETS had acquired and or processed in the ordinary course of fulfilling purchase orders from the Company. However, as the Company's products were undergoing constant improvement, in September 1996, the Company considered it necessary to treat $70,000 of such inventory as obsolete and another $20,000 thereof as slow-moving. Ongoing product development rendered another $90,000 of this inventory obsolete shortly thereafter. Additional inventory of $457,000 and $2,461,500 was purchased from ETS during the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively. Sales to ETS for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995 were $152,500, $307,300, $311,600 and $159,700, respectively. Sales to Agilis Communication Technologies Pte Ltd. ("Agilis"), an affiliate of ST, amounted to $540,000, $375,000 and $118,900 for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively. Prior to 1997, ETS provided management services to Radyne, for which ETS charged Radyne $60,000, $120,000 and $65,000 for the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. Interest expense on notes payable to affiliates was $148,000, $205,900 and $248,400 for the year ended December 31, 1997, the six-month period ended December 31, 1996 and the year ended June 30, 1996, respectively, of which $-0-and $152,400 were included in accrued expenses in the accompanying balance sheet as of December 31, 1997 and 1996, respectively. Subsequent to December 31, 1997, an ST affiliate made loans of $5,118,272 to the Company. The loans bear interest at 6.844 percent per annum with the principal and accrued interest due in February 1999. The proceeds of the loan were used in part by the Company to repay a note payable under a line of credit agreement which was outstanding as of December 31, 1997 (Note 7). The Company has notes receivable from stockholders totaling $40,086. These notes bear interest at 4 percent and are due June 20, 1998. F-10 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 7. NOTES PAYABLE The Company had a note payable under a line of credit agreement with a bank that permitted outstanding borrowings of $4,500,000. At December 31, 1997, outstanding borrowings against the line were $4,500,000 plus accrued interest. Subsequent to December 31, 1997, the Company repaid the note and accrued interest with proceeds from affiliated debt (Note 6). The Company has a $5,500,000 credit agreement with a bank that includes $5,000,000 available under an uncommitted line of credit facility and facilities for bank guarantees and/or standby letters of credit up to $500,000. STPL has issued a nonbinding letter of awareness in connection with this credit agreement. Borrowings under the line of credit bear interest at a fluctuating rate equal to LIBOR or alternative Citibank's Quoted Rate plus 1 percent per annum (6.844 percent-6.938 percent as of December 31, 1997). At December 31, 1997, outstanding borrowings against the line were $5,000,000 plus accrued interest. The credit agreement requires that the Company maintain certain financial leverage ratios. This credit facility is an uncommitted line of credit which the bank may modify or cancel without prior notice. 8. OBLIGATIONS UNDER CAPITAL LEASES The Company leases machinery and equipment under capital leases. The net book value of the equipment, $258,536 at December 31, 1997 and $146,958 at December 31, 1996, is included in property and equipment in the accompanying balance sheets and is being depreciated over the estimated useful lives of the machinery and equipment. Payments on capital lease obligations at December 31 are due as follows: 1998.............................................................. $ 121,951 1999.............................................................. 81,453 2000.............................................................. 10,275 --------- Total minimum lease payments...................................... 213,679 Less amount representing interest................................. 10,878 --------- Present value of minimum lease payments........................... 202,801 Less current portion.............................................. 109,258 --------- Capital lease obligations due after one year...................... $ 93,543 --------- ---------
9. COMMITMENTS Rent expense was approximately $94,000, $44,000, $95,000 and $57,000 for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. During 1997, the Company entered into an agreement to lease a new building which is scheduled to be ready for occupancy in June 1998. Future minimum rentals under leases, including the new building lease, at December 31 are as follows: F-11 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 9. COMMITMENTS (CONTINUED) 1998............................................................ $ 351,000 1999............................................................ 548,200 2000............................................................ 564,600 2001............................................................ 581,500 2002............................................................ 599,000 Thereafter...................................................... 3,568,400 --------- Total........................................................... $6,212,700 --------- ---------
10. INCOME TAXES The following summary reconciles taxes (recovery) from operations at the federal statutory rate with the actual provision (recovery):
SIX AND SIX-MONTH ONE-HALF- YEAR PERIOD YEAR MONTH PERIOD ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 ------------ ------------ ----------- ------------- Income taxes (recovery) at statutory rate.............................. $ (597,000) $ (704,000) $ (893,000) $ (124,000) Increase (decrease) in income taxes (recovery) resulting from: State income tax benefit............ (64,000) (75,000) (95,000) Change in valuation allowance....... 613,000 775,000 988,000 117,600 Other adjustments................... 48,000 4,000 -- 6,400 ------------ ------------ ----------- ------------- Total............................... $ -- $ -- $ -- $ -- ------------ ------------ ----------- ------------- ------------ ------------ ----------- -------------
Deferred tax assets consisted of the following at December 31:
1996 1997 ------------ ------------ Gross deferred tax assets: Cumulative tax effect of net operating loss carryforwards......... $ 4,620,000 $ 3,930,000 Tax credits....................................................... 210,000 210,000 Temporary differences............................................. (107,000) (30,000) Valuation allowance............................................... (4,723,000) (4,110,000) ------------ ------------ Total............................................................. $ -- $ -- ------------ ------------ ------------ ------------
At December 31, 1997, the Company has net operating loss carryforwards of approximately $12,278,000 expiring in various years through 2013 and general business credit carryforwards of $210,000 F-12 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 10. INCOME TAXES (CONTINUED) expiring in various years through 2004 for utilization against taxable income/taxes payable of future periods, if any. Approximately $6,200,000 of the Company's net operating loss and tax credit carryforwards are subject to an annual limitation under Internal Revenue Code Section 382, in future years, as a result of changes in ownership of the Company's stock. Management believes that the inability to utilize net operating loss and tax credit carryforwards to offset future taxable income within the carryforward periods under existing tax laws and regulations is more likely than not. Accordingly, a 100 percent valuation allowance has been recorded against the net deferred tax asset as of December 31, 1997 and 1996. 11. SIGNIFICANT CUSTOMERS AND EXPORT SALES Sales to significant customers as a percentage of net sales are as follows:
SIX-MONTH SIX AND YEAR PERIOD ONE-HALF- YEAR MONTH PERIOD ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, 1997 1996 1996 1995 --------------- --------------- ------------- --------------- Customer A............................ 2.5% 1.6% 6.4% 22.0% Customer B............................ 1.1% -- -- 15.3% Customer C............................ 1.1% 6.3% 8.1% 14.2% Customer D............................ 2.7% 15.6% 12.7% 11.7% Customer E............................ 2.2% 18.3% -- -- Customer F............................ 14.5% -- -- --
No other customers represented greater than 10 percent of net sales during the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half- month period ended June 30, 1995. Export sales were 55 percent, 66 percent, 50 percent and 46 percent of net sales for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. Net sales to Asia, Latin America and Europe were 58 percent, 22 percent and 13 percent, respectively, of total export sales for the year ended December 31, 1997. Net sales to Asia and Latin America were 46 percent and 37 percent, respectively, of total export sales for the six-month period ended December 31, 1996. Net sales to Asia and Europe were 46 percent and 38 percent, respectively, of total export sales for the year ended June 30, 1996. 12. EMPLOYEE BENEFIT PLAN The Company has a qualified contributory 401(k) plan that covers all employees who have attained the age of 18 and are employed at the enrollment date. Matching contributions were $30,230, $8,576, $11,606 and $1,159 for the year ended December 31, 1997, the six-month period ended December 31, 1996, the year ended June 30, 1996 and the six and one-half-month period ended June 30, 1995, respectively. Each participant may elect to contribute up to 15 percent of his or her gross compensation up to the F-13 RADYNE CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SIX-MONTH PERIOD ENDED DECEMBER 31, 1996, YEAR ENDED JUNE 30, 1996 AND SIX AND ONE-HALF-MONTH PERIOD ENDED JUNE 30, 1995 12. EMPLOYEE BENEFIT PLAN (CONTINUED) maximum amount allowed by the Internal Revenue Service. The Company matches up to 1 percent of the employee's salary. 13. STOCK OPTIONS In November 1996, the Board of Directors adopted the 1996 Incentive Stock Option Plan (the "Plan"), which was approved by the stockholders on January 8, 1997. The Plan provides for the grant of options to employees of the Company to purchase up to 1,282,042 shares of common stock. The option price per share under the Plan may not be less than the fair market value of the stock (110 percent of the fair market value for an optionee who is a 10 percent stockholder) on the day the option is granted. At December 31, 1997, the Company had 690,665 options outstanding at an exercise price of $2.50 per share. 30,500 options are exercisable at the rate of 25 percent on each of the first four anniversaries of the grant date and expire on the tenth anniversary of the grant date. The remaining 660,165 options have been allocated among a group of 30 key employees. These options carry the right to a cash bonus of $1.72 per purchased share, payable upon exercise. One-third of these options will become exercisable, if and when the Company's earnings before interest and taxes (calculated without regard to any charge for compensation paid or payable under the Plan) for a period of four calendar quarters ("EBIT") exceeds $1,000,000. Another one-third of these options will become exercisable if and when EBIT exceeds $2,500,000 with the remaining one-third becoming exercisable if and when EBIT exceeds $6,000,000. The options become exercisable if EBIT exceeds the aforementioned prior to June 30, 2001. All options which become exercisable expire in November 2006. The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its Plan. The 660,165 options are considered variable options, as defined by the provisions of APB No. 25 and related interpretations. The Company will start recognizing compensation cost on variable arrangements when the future events become probable of occurring. The accrual of compensation cost under the variable arrangement has not commenced as it is unlikely that the award will be earned in the near future due to significant historical losses incurred by the Company. Accordingly, no compensation cost has been recognized for the fixed or variable portions of the Plan. Had compensation cost for the Plan been determined consistent with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net loss and loss per common share for the year ended December 31, 1997 would have been $2,028,121 and $.40, respectively. The Company's pro forma net loss and loss per common share for the six-month period ended December 31, 1996 would have been $2,115,074 and $.56, respectively. The fair value of options granted under the Plan was estimated on the date of grant with vesting periods ranging from two to four years using the Black-Scholes option-pricing model with the following weighted average assumptions used: no dividend yield, expected volatility of 118 percent-132 percent, risk free interest rate of 5.87 percent-6.83 percent, and expected lives of five years. Subsequent to December 31, 1997, the Company granted additional options to employees to purchase 204,000 shares of common stock at an exercise price of $2.50. F-14 EX-10.3 2 LEASE AGREEMENT EXHIBIT 10.3 LEASE AGREEMENT BASIC LEASE INFORMATION Date: November 11, 1997 Landlord: OMB Development I, L.L.C., an Arizona limited liability company Tenant: Radyne Corp., a New York corporation Premises (Section 1.1): The building to be constructed on the property by Landlord pursuant to this Lease, containing approximately 75,000 square feet (more or less) of building area Property (Section 1.1): Lots 1 and 2 of Southbank 7 and 8 as shown in Exhibit "A", containing approximately 208,000 square feet (more or less), located in Phoenix, Arizona Parking Spaces (Section 1.1): Two hundred ninety-five (295) exclusive spaces for cars Term (Section 2.1): Ten (10) years Extension Terms (Section 2.4): Two (2) five (5) year renewal options Commencement Date (Section 2.1): As defined in Section 2.1 Expiration Date (Section 2.1): As defined in Section 2.1 Base Rent (Section 4.1 (a)): $538,728 per year ($44,894 per month), as increased annually pursuant to Section 4.2 Tenant Improvement Charge As defined in Section 2.2 (Section 2.2): Tenant's Percentage Share (Section 4.1(b)): 100% Security Deposit (Section 2.1): $50,000.00 Rent Payment Address (Section 4.7): 8607 N. Timberlane Drive Scottsdale, Arizona 85258 Permitted Use of the Premises Design, engineering and assembly of satellite (Section 5.1): modems, frequency converters and ancillary products and related office uses Liability Insurance (Section 9.3 and 9.8): $2,000,000 - i - Landlord's Address (Section 18.1): 8607 N. Timberlane Drive Scottsdale, Arizona 85258 Tenant's Address (Section 18.1): Radyne Corp., at the address of the Premises. Real Estate Brokers (Section 19.5): CB Commercial Real Estate Exhibit "A" - Plan (s) Outlining the Premises and the Property Exhibit "B" - Work Letter Exhibit "C" - Memorandum Confirming Term Exhibit "D" - Subordination, Non-Disturbance and Attornment Agreement Exhibit "E" - Estoppel Certificate The foregoing Basic Lease Information is incorporated in and made a part of the Lease to which it is attached. If there is any conflict between the Basic Lease Information and the Lease, the Basic Lease Information shall control. OMB DEVELOPMENT I, L.L.C, RADYNE CORP., an Arizona limited liability company a New York corporation By: /s/ Harold H. Benware By: /s/ R.C. Fitting ------------------------- ------------------ Its: Manager Its: President - ii - TABLE OF CONTENTS ARTICLE PAGE ARTICLE 1 Premises...................................................1 1.1 Lease of Premises..........................................1 ARTICLE 2 Term.......................................................1 2.1 Term of Lease..............................................1 2.2 Landlord's Work............................................2 2.3 Adjustment of Commencement Date............................2 2.4 Extension Option...........................................2 2.5 Holding Over...............................................3 2.6 Lease Year.................................................3 ARTICLE 3 Security Deposit...........................................3 3.1 Security Deposit...........................................3 3.2 Application of Security Deposit............................3 ARTICLE 4 Rent.......................................................4 4.1 Base Rent and Additional Rent..............................4 4.2 Base Rent Increase.........................................4 4.3 Late Payment...............................................4 4.4 Taxes Payable by Tenant....................................5 4.5 Rent Payable Address.......................................5 ARTICLE 5 Use of Premises............................................6 5.1 Permitted Use..............................................6 5.2 Rules and Regulations......................................6 ARTICLE 6 Utilities and Services ....................................6 6.1 Tenant's Responsibilities..................................6 6.2 Abatement of Rent When Tenant Is Prevented From Using Premises........................................7 ARTICLE 7 Maintenance and Repairs....................................8 7.1 Quality of Construction - Standard for Maintenance, Repairs and Operations........................8 7.2 Obligations of Landlord....................................8 7.3 Obligations of Tenant......................................9 - iii - ARTICLE PAGE ARTICLE 8 Alterations by Tenant......................................10 8.1 No Alterations by Tenant...................................10 8.2 Landlord's Property........................................11 ARTICLE 9 Indemnification and Insurance..............................12 9.1 Landlord's Indemnification.................................12 9.2 Tenant's Indemnification...................................12 9.3 Tenant's Liability Insurance...............................12 9.4 Worker's Compensation Insurance............................13 9.5 Property Insurance.........................................13 9.6 General Requirements.......................................13 9.7 Waiver of Subrogation......................................14 9.8 Landlord's Liability Insurance.............................14 9.9 Exculpation of Members.....................................14 ARTICLE 10 Property Taxes.............................................15 10.1 Property Taxes.............................................15 ARTICLE 11 Compliance With Legal Requirements.........................16 11.1 Comply With Law............................................16 ARTICLE 12 Assignment or Sublease.....................................16 12.1 Prohibition................................................16 12.2 Landlord's Consent or Termination..........................17 12.3 Completion.................................................17 12.4 Tenant Not Released........................................17 ARTICLE 13 Entry by Landlord..........................................18 13.1 Entry......................................................18 ARTICLE 14 Event of Default and Remedies..............................18 14.1 Default by Tenant..........................................18 14.2 Termination................................................19 14.3 Continuation...............................................20 14.4 Remedies Cumulative........................................20 14.5 Tenant's Primary Duty......................................20 14.6 Abandoned Property.........................................20 14.7 Landlord Default...........................................21 - iv - ARTICLE PAGE ARTICLE 15 Damage or Destruction......................................21 15.1 Restoration................................................21 15.2 Termination of Lease.......................................21 ARTICLE 16 Eminent Domain.............................................22 16.1 Condemnation...............................................22 16.2 Award......................................................22 16.3 Definition of Taking.......................................23 ARTICLE 17 Subordination and Sale.....................................23 17.1 Subordination..............................................23 17.2 Sale of Property...........................................24 ARTICLE 18 Estoppel Certificate.......................................24 18.1 Required Certificate.......................................24 ARTICLE 19 Notices....................................................25 19.1 Method.....................................................25 ARTICLE 20 Miscellaneous..............................................25 20.1 General....................................................25 20.2 No Waiver..................................................25 20.3 Attorney's Fees............................................26 20.4 Exhibits...................................................26 20.5 Brokers....................................................26 20.6 Entire Agreement...........................................26 20.7 Duty to Act Reasonably.....................................26 20.8 Days.......................................................27 20.9 Counter Parts..............................................27 20.10 Arbitration................................................27 ARTICLE 21 Hazardous Materials........................................27 21.1 Definition of Hazardous Materials..........................27 21.2 Definition of Environmental Requirements...................27 21.3 Prohibited Activities......................................28 21.4 Notice of Violations.......................................28 21.5 Tenant Indemnification.....................................28 21.6 Landlord Indemnification...................................29 - v - ARTICLE PAGE 21.7 Permitted Activities.......................................29 ARTICLE 22 Fair Market Rental Rate....................................29 22.1 Determination of Fair Market Rental Rate...................29 ARTICLE 23 Guaranty...................................................32 23.1 Guaranty...................................................32 23.2 Authorization..............................................33 23.3 Waiver.....................................................33 Exhibit A - Plan (s) Outlining the Property Exhibit B - Work Letter Exhibit C - Memorandum Confirming Term Exhibit D - Subordination, Non-Disturbance and Attornment Agreement Exhibit E - Estoppel Certificate - vi - LEASE AGREEMENT THIS LEASE AGREEMENT is made as of November 11, 1997, by and between OMB DEVELOPMENT I, L.L.C., an Arizona limited liability company ("Landlord") and RADYNE CORP., a New York corporation ("Tenant"). WITNESSETH: ARTICLE 1 PREMISES 1.1 LEASE OF PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the covenants hereinafter set forth, to all of which Landlord and Tenant hereby agree, the space in the building specified in the BASIC LEASE INFORMATION ("Premises"), on the real property specified in the BASIC LEASE INFORMATION ("Property"), as shown on the plan (s) attached hereto as Exhibit "A" and by this reference incorporated herein. The Premises shall have located thereon two hundred ninety-five (295) exclusive parking spaces for cars. Landlord and Tenant agree that, for purposes of this Lease, the Premises and the Property, respectively, each contains the number of square feet specified in the BASIC LEASE INFORMATION, absent manifest error. Tenant shall be granted access to the Premises, and the parking area twenty-four (24) hours per day, seven (7) days per week, every day of the year. ARTICLE 2 TERM 2.1 TERM OF LEASE. The term of this Lease shall be the term specified in the BASIC LEASE INFORMATION, which shall commence on the date that Landlord has (a) Substantially Completed Landlord's Work as defined in the Work Letter attached hereto as Exhibit "B" and by this reference incorporated herein ("Work Letter"); and (b) delivered possession of the Premises to Tenant ("Commencement Date"); and, unless sooner terminated as hereinafter provided, this Lease shall end on the date that is ten (10) years after the Commencement Date ("Expiration Date"). The Commencement Date and the Expiration Date shall be adjusted pursuant to Section 2.3 of this Lease. Notwithstanding the foregoing, if Landlord has not Substantially Completed Landlord's Work and delivered possession of the Premises to Tenant by June 1, 1998 ("Initial Completion Date"), Landlord shall pay to Tenant on the actual Commencement Date an amount equal to the product of (i) One Thousand Five Hundred and 00/100 Dollars ($1,500.00), multiplied by (ii) the number of days following the Initial Completion Date to the date Landlord has Substantially Completed Landlord's Work. In addition, if Landlord has not Substantially Completed Landlord's Work by the date that is twelve (12) months after the date of this Lease ("Outside Completion Date"), Tenant shall have the right to terminate this Lease. The Initial Completion Date and the Outside Completion Date shall be extended by one (1) business day for each business day of delay in the Substantial Completion of the Premises that is caused by any Force Majeure Delay or Tenant Delay (which terms are defined in the Work Letter). 2.2 LANDLORD'S WORK. Landlord shall construct, and install in the Premises, the building and improvements to be constructed and installed by Landlord pursuant to the Work Letter. The terms Substantial Completion and Landlord's Work shall have the meanings assigned to them in the Work Letter. Landlord shall deliver possession of the Premises to Tenant on the date of Substantial Completion of Landlord's Work, and Tenant shall accept such delivery of the Premises, subject only to "punch-list" items - 2 - (minor details of construction, mechanical adjustments or decorations which do not materially interfere with the Tenant's use of the Premises). Landlord and Tenant acknowledge that the Landlord's Work includes the Tenant Improvements, which has the meaning assigned to it in the Work Letter. Landlord shall construct and install in the Premises the Tenant Improvements and shall pay the first One Million and 00/100 Dollars ($1,000,000.00) of the cost of the Tenant Improvements. In the event that the Tenant Improvements cost less than One Million and 00/100 Dollars ($1,000,000.00), Landlord shall pay to Tenant on the actual Commencement Date an amount equal to the difference between (i) One Million and 00/100 Dollars ($1,000,000.00), less (ii) the actual cost of the Tenant Improvements. In the event that the Tenant Improvements exceed the sum of One Million and 00/100 Dollars ($1,000,000.00), Tenant shall pay to Landlord as additional rent an amount equal to (i) the difference between (a) the actual cost of the Tenant Improvements and (b) One Million and 00/100 Dollars ($1,000,000.00), multiplied by (ii) .12 ("Annual Tenant Improvement Charge"). 2.3 ADJUSTMENT OF COMMENCEMENT DATE. If the Commencement Date as determined in accordance with Section 2.1 would not be the first day on the month and the Expiration Date would not be the last day of the month, then the actual Commencement Date shall be the first day of the next calendar month following the date so determined and the actual Expiration Date shall be the last day of the appropriate calendar month so the term of this Lease shall be the full term specified in the BASIC LEASE INFORMATION. The period of the fractional month between the date as determined in Section 2.1 and the actual Commencement Date as determined in this Section 2.3 shall be on and subject to all the covenants in this Lease and, on the date as determined in Section 2.1, Tenant shall pay to Landlord, as additional rent, the monthly Base Rent (based on the first month for which the Base Rent is to be paid) and all additional rent payable under Section 4.1 hereof, calculated on a per diem basis, for such period. Landlord and Tenant each shall, promptly after the actual Commencement Date and the actual Expiration Date have been determined, execute and deliver to the other a Memorandum Confirming Term in the form of Exhibit "C" attached hereto and by this reference incorporated herein that sets forth the actual Commencement Date and the actual Expiration Date for this Lease, but the term of this Lease shall commence and end in accordance with this Lease whether or not Memorandum Confirming Term is executed. 2.4 EXTENSION OPTION. Provided Tenant is not otherwise in default under the terms of this Lease, Tenant shall have the option to renew this Lease for two (2) consecutive terms of five (5) years each, by delivering notice to Landlord of Tenant's option to extend at least nine (9) months, prior to the end of the current term of this Lease, or any extension thereof. If Tenant fails to timely deliver to Landlord notice of Tenant's option to extend, then Tenant shall have waived its option to renew, and Tenant shall have no further right to extend the term of this Lease. If Tenant exercises its right to extend, the term of this Lease shall be extended for the applicable five (5) year periods and Tenant shall continue to lease the Premises on all of the terms and conditions of this Lease, except that: (a) the Base Rent payable by Tenant during the renewal term(s) shall be the greater of (i) the Fair Market Rental Rate, as defined in Article 22 hereof; or (ii) the Base Rent in effect at the expiration of the original term of this Lease, or any extension thereof, - 3 - whichever is applicable; and (b) after the renewal terms, Tenant shall have no further renewal options under this Lease. Notwithstanding the foregoing, if an Event of Default (as hereinafter defined) by Tenant occurs at any time from the date Tenant gives Landlord notice of its option to extend up to and including the first day of a renewal term, Landlord shall have the option of terminating the Lease on the Expiration Date provided in the BASIC LEASE INFORMATION. In such case, Tenant shall not be entitled to exercise its extension option. 2.5 HOLDING OVER. If Tenant holds possession of the Premises after the expiration of the term of this Lease, or after expiration of the renewal terms of this Lease if Tenant exercises its option to renew pursuant to Section 2.4 hereof, Tenant shall become a tenant from month to month under this Lease, but the Base Rent during such month to month tenancy shall be equal to one hundred fifty percent (150%) of the Base Rent in effect at the expiration of the term of this Lease. Landlord and Tenant each shall have the right to terminate such month to month tenancy by giving thirty (30) days' written notice of termination to the other at any time. Receipt of any rent or any other act in apparent affirmance of the tenancy provided for this Section 2.5 shall not operate as a waiver of the right to terminate this Lease for breach of any terms, covenants or obligations herein on Tenant's part to be performed. 2.6 LEASE YEAR. As used in this Lease, "Lease Year" shall mean each period of twelve (12) months from the Commencement Date (as adjusted in accordance with Section 2.3 hereof) during the term of this Lease. ARTICLE 3 LETTER OF CREDIT 3.1 LETTER OF CREDIT. Tenant shall obtain and deposit with Landlord an irrevocable letter of credit in the amount of Fifty Thousand and 00/100 Dollars ($50,000.00) ("Letter of Credit"), as partial security for Tenant's full and faithful performance of each and every term, condition, covenant and provision of this Lease. The Letter of Credit shall be issued by a bank qualified to do and doing business in the state where the Premises are located and shall be in a form acceptable to Landlord. The Letter of Credit shall provide that in the event Tenant defaults in the performance of any term, condition, covenant or provision hereof, Landlord may draw upon the whole or any part of the Letter of Credit for the curing of any default or to compensate Landlord for any loss or damage that Landlord may suffer because of Tenant's default. In no event shall Tenant use such Letter of Credit as payment for rent or any other sum payable under this Lease and any attempted use by Tenant of such Letter of Credit shall constitute a material breach of this Lease. 3.2 APPLICATION OF LETTER OF CREDIT. Any use or application of the Letter of Credit by Landlord shall be an addition to, and not substitution of or as an alternative to, any other rights or remedies Landlord may have at law or under this Lease, shall not prevent Landlord from pursuing its other rights and remedies hereunder or at law or equity, and shall not prevent Landlord from recovering damages in case of Tenant's default(s) in excess of the amount of the Letter of Credit drawn upon. In no event shall the Letter of - 4 - Credit be construed as a liquidation of the damages by the parties. If Landlord draws upon any portion of the Letter of Credit, Landlord shall notify Tenant, in writing, of the alleged default under this Lease and the amount of the Letter of Credit drawn upon by Landlord. Not later than ten (10) days after such notice to Tenant, Tenant shall obtain and deposit with Landlord a replacement Letter of Credit in an amount equal to the amount drawn by Landlord on the initial Letter of Credit, and Tenant's failure to do so shall be a material breach of this Lease. ARTICLE 4 RENT 4.1 BASE RENT AND ADDITIONAL RENT. Tenant shall pay to Landlord, without offset of deduction of any nature whatsoever except as expressly set forth in this Lease, the following amounts as rent for the Premises: (a) During the term of this Lease, Tenant shall pay to Landlord, as base monthly rent, the amount of monthly Base Rent specified in the BASIC LEASE INFORMATION, as increased annually pursuant to Section 4.2 hereof. (b) During the term of this Lease, Tenant shall pay to Landlord as additional rent: i. Tenant's Percentage Share specified in the BASIC LEASE INFORMATION of any Property Taxes (as hereinafter defined) paid by Landlord; ii. Tenant's Percentage Share specified in the BASIC LEASE INFORMATION of any Insurance Costs (as hereinafter defined) paid by Landlord; and iii. Annual Tenant Improvement Charge. (c) Throughout the term of this Lease, Tenant shall pay, as additional rent, all other amounts of money and charges required to be paid by Tenant under this Lease, whether or not such amounts of money or charges are designated "additional rent". As used in this Lease, "rent" shall mean and include all Base Rent and additional rent payable by Tenant in accordance with this Lease. 4.2 BASE RENT INCREASES. The annual Base Rent shall be adjusted on the first anniversary date of the Commencement Date (as adjusted pursuant to Section 2.3), and on each successive anniversary date thereof during the term of this Lease, including the renewal terms, if any (except for the first year of the renewal term, if any, in which case the Base Rent shall be adjusted in accordance with Section 2.4 hereof), to an amount equal to one hundred three percent (103%) of the annual Base Rent in effect during the immediately preceding year. 4.3 ADDITIONAL RENT PROCEDURES. The additional rent payable by Tenant pursuant to Section 3.1(b) hereof shall be paid in accordance with the following procedures: (a) Within ten (10) days of receipt of its Property Tax bills and within ten (10) days of receipt of notification of its Insurance Costs, Landlord shall - 5 - provide Tenant a copy of the Property Tax bills and Insurance Costs for the Property. (b) Tenant shall pay all Property Taxes and Insurance Costs at least ten (10) days prior to the date such Property Taxes and Insurance Costs become delinquent. Tenant shall promptly deliver to Landlord evidence that the Property Taxes and Insurance Costs have been paid. Tenant shall pay such Property Taxes and Insurance Costs commencing with the Commencement Date (as adjusted pursuant to Section 2.3) and throughout the term of the Lease and the renewal terms, if any. (c) If Tenant fails to timely pay all Property Taxes and Insurance Costs, or fails to furnish Landlord with written evidence of the payment of the Property Taxes and Insurance Costs, Landlord shall have the right to pay the Property Taxes and Insurance Costs and all Property Taxes and Insurance Costs paid by Landlord shall be payable by Tenant as additional rent upon demand. Tenant shall pay to Landlord, immediately upon demand, all costs incurred by Landlord as a result of Tenant's failure to timely pay all Property Taxes and Insurance Costs. If requested by any lender to whom Landlord has granted a security interest in the Property, or in the Event of Default by Tenant relative to the payment of Base Rent or any additional monthly rent more than once in any consecutive twelve (12) month period, Tenant shall pay to Landlord a sum equal to one-twelfth (1/12) of the annual Property Taxes and Insurance Costs payable by Tenant under this Lease. (d) Tenant shall be entitled to any refund, credit or adjustment to which Landlord is entitled. (e) If the term of this Lease ends on a day other than the last day of a calendar year, the amounts payable by Tenant under Section 4.1(b) hereof applicable to the calendar year in which such term ends shall be prorated according to the ratio that the number of days during the term of this Lease in such calendar year bears to three hundred sixty-five (365). Termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Section this 4.3 hereof to be performed after such termination. (f) Tenant shall have the right to contest the Property Taxes, at Tenant's cost and expense. Upon final determination of any contest relating to the Property Taxes, Tenant shall immediately reimburse Landlord for all Property Taxes. 4.4 LATE PAYMENT. Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Rent or additional monthly rent will cause Landlord to incur costs and expenses, the exact amount of which is extremely difficult and impractical to fix. Such costs and expenses will include administration and collection costs and processing and accounting expenses. Therefore, if any monthly installment of Base Rent or additional monthly rent is not received by Landlord within ten (10) days after such - 6 - installment is due, Tenant shall immediately pay to Landlord, in addition to such rent, a late charge equal to five percent (5%) of such delinquent installment. Landlord and Tenant agree that such late charge represents a reasonable estimate of such costs and expenses and is fair reimbursement to Landlord. In no event shall such late charge be deemed to grant Tenant a grace period or extension of time within which to pay any monthly rent or prevent Landlord from exercising any right or enforcing any remedy available to Landlord upon Tenant's failure to pay each installment of monthly rent due under this Lease when due, including the right to terminate this Lease and recover all damages from Tenant. 4.5 TAXES PAYABLE BY TENANT. Tenant shall reimburse Landlord upon demand for all taxes, assessments, excises, levies, fees and charges, including all payments related to the cost of providing facilities or services, whether or not now customary or within the contemplation of Landlord and Tenant, that are payable by Landlord and levied, assessed, charged, confirmed or imposed by any public or government authority upon, or measured by, or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises or the cost of value of any improvements made in or to the Premises by or for Tenant, regardless of whether title to such improvements is vested in Tenant or Landlord, (b) any rent, taxes and insurance payable under this Lease, including any gross income tax or excise tax levied by any public or government authority with respect to the receipt of any such rent, taxes and insurance, (c) possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. Such taxes, assessments, excises, levies, fees and charges shall not include net income (measured by the income of Landlord from all sources or from sources other than solely rent) or franchise taxes of Landlord. All taxes, assessments, excises, levies, fees and charges payable by Tenant under this Section 4.5 shall be deemed to be, and shall be paid as, additional rent. Tenant shall pay directly, prior to delinquency, any personal property taxes assessed with respect to Tenant's trade fixtures and personal property. 4.6 RENT PAYMENT ADDRESS. Tenant shall pay all Base Rent under Section 4.1 hereof to Landlord, in advance, on or before the first day of each and every calendar month during the term of this Lease. Tenant shall pay all additional rent under Section 4.1 hereof to Landlord on or before the date it is due. Tenant shall pay all rent to Landlord when due without notice, demand, deduction, abatement or offset, except as expressly provided herein, in lawful money of the United States of America, at the address for the payment of rent specified in the BASIC LEASE INFORMATION, or to such other person or at such other place as Landlord may from time to time designate in writing. 4.7 PROPERTY TAXES. For purposes of this Lease, "Property Taxes" shall mean taxes, assessments, excises, levies, fees and charges (and any tax, assessment, excise, levy, fee or charge levied wholly or partly in lieu thereof or as a substitute therefor or as an addition thereto) of every kind and description, general or special, ordinary or extraordinary, foreseen or unforeseen, secured or unsecured, whether or not now customary or within the contemplation of Landlord and Tenant, that are levied, assessed, - 7 - charged, confirmed or imposed by any public or government authority on or against, or otherwise with respect to, the Property or any part thereof or any personal property used in connection with the Property, which are attributable to the Property during the term of this Lease (collectively, the "Property Taxes"). Property Taxes shall not include any of the following: (i) Any state, federal, personal or corporate net income taxes (measured by the income of Landlord from all sources or from sources other than solely rent); (ii) Any estate or inheritance taxes; and (iii) Any franchise taxes. 4.8 INSURANCE COSTS. For purposes of this Lease, "Insurance Costs" shall mean all premiums and other charges for all property, earthquake, flood, loss of rental income, business interruption, liability and other insurance relating to the Property carried by Landlord, including the insurance required under Section 9.5 hereof. ARTICLE 5 USE OF THE PREMISES 5.1 PERMITTED USE. The Premises shall be used only for the Permitted Use of the Premises specified in the BASIC LEASE INFORMATION. Tenant shall not do or permit to be done in, on or about the Premises, nor bring or keep or permit to be brought or kept therein, anything that is prohibited by or will conflict with any law, ordinance, rule, regulation or order now in force or that may hereafter be enacted, or that is prohibited by any insurance policy carried by Landlord for the Premises, or will in any way increase the existing rate of (unless Tenant agrees to pay such increase), or disallow any fire rating or sprinkler credit, or cause a cancellation of, or affect, any insurance for the Premises. If Tenant causes any increase in the premium for any insurance covering the Premises carried by Landlord, Tenant shall pay to Landlord, on written demand as additional rent, the entire amount of such increase. Tenant shall not do or permit anything to be done in or about the Premises that will in any way unreasonably obstruct or unreasonably interfere with the rights of Landlord or any other tenant. Tenant shall not use or allow the Premises to be used for any unlawful activity, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or commit or suffer to be committed any waste in, on or about the Premises. Tenant shall not install any signs on the Premises without the written consent of Landlord, except that Tenant shall have the right to install a monument sign and a sign on the building, containing Tenant's name on Tenant's customary logo format subject to statutes including zoning ordinances, and all recorded private covenants, conditions and restrictions. Tenant shall, at Tenant's expense, remove all such signs prior to or upon termination of this Lease and repair any damage caused by the installation or removal of such signs. 5.2 RULES AND REGULATIONS. Tenant shall faithfully observe and fully comply with all reasonable, non-discriminatory rules and regulations ("Rules and Regulations") from time to time made in writing by Landlord for the safety, care, use and cleanliness of the - 8 - Property and the preservation of good order therein. If there is any conflict, this Lease shall prevail over the Rules and Regulations. ARTICLE 6 UTILITIES AND SERVICES 6.1 TENANT'S RESPONSIBILITIES. Tenant shall pay, directly to the appropriate supplier before delinquency, for all electricity, water, gas, heat, light, power, telephone, sewer, refuse disposal and other utilities and services supplied to the Premises, together with all taxes, assessments, surcharges and similar expenses relating to such utilities and services. Tenant shall furnish, at its cost and expense, the Premises with all telephone service, window washing, security service, janitor, scavenger and disposal services, and other services required by Tenant for the use of the Premises permitted by this Lease. Tenant shall furnish, at its cost and expense all electric light bulbs and tubes and restroom supplies used in the Premises. Landlord shall not be in default under this Lease or be liable for any damage or loss directly or indirectly resulting from, nor shall the rent be abated (except as provided in Section 6.2 hereof) or a constructive or other eviction be deemed to have occurred by reason of, any interruption of or failure to supply or delay in supplying any such utilities and services or any limitation, curtailment, rationing or restrictions on use of water, electricity, gas or any resource or form of energy or other service serving the Premises or the Property, whether such results from mandatory restrictions or voluntary compliance with guidelines. 6.2 ABATEMENT OF RENT WHEN TENANT IS PREVENTED FROM USING PREMISES. In the event that Tenant is prevented from using, and does not use, the Premises or any portion thereof for three (3) consecutive business days or ten (10) days in any twelve (12) month period ("Eligibility Period") as a result of any damage or destruction to the Premises which is not caused by Tenant or any repair, maintenance or alteration performed by Landlord after the Commencement Date and required by the Lease which is not caused by Tenant, that materially interferes with Tenant's use of the Premises, or any failure to provide access to the Premises or because of an eminent domain proceeding or because of the presence of Hazardous Materials in, on or around the Premises or the Property which is not caused by Tenant that could, in Tenant's reasonable business judgment, pose a health risk to occupants of the Premises then Tenant's rent shall be abated or reduced, as the case may be, after expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises or a portion thereof, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the Premises. However, in the event that Tenant is prevented from conducting, and does not conduct, its business in any portion of the Premises for a period of time in excess of the Eligibility Period, and the remaining portion of the Premises is not sufficient to allow Tenant to effectively conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after expiration of the Eligibility Period during which Tenant is so prevented from effectively conducting its business therein, the rent for the entire Premises shall be abated. If Tenant's right to abatement occurs because of an eminent domain taking and/or because of damage or destruction to the Premises or - 9 - Tenant's property, Tenant's abatement period shall continue until Tenant has been given sufficient time, and sufficient access to the Premises, to rebuild the portion of the Premises it is required to rebuild, if any, to install its property, furniture, fixtures, and equipment and to move in over one (1) weekend. To the extent Tenant is entitled to abatement because of an event covered by Sections 15.1 or 14.1, then the Eligibility Period shall not be applicable. If a dispute arises between Landlord and Tenant pursuant to this section, Landlord and Tenant shall meet and attempt in good faith to resolve such dispute. If after such meeting, Landlord and Tenant do not reach a resolution, either party may invite arbitration proceedings in accordance with Section 19.10 by giving the other party written notice thereof. ARTICLE 7 MAINTENANCE AND REPAIRS 7.1 QUALITY OF CONSTRUCTION - STANDARD FOR MAINTENANCE, REPAIRS AND OPERATION. Landlord hereby warrants to Tenant that the Property and the Premises to be constructed by Landlord or Landlord's contractor will be constructed and operated in a first-class manner, free of all asbestos containing materials ("ACM") and in full compliance with all governmental regulations, ordinances, and laws existing at the time of construction, including, but limited to, laws pertaining to disabled access and Environmental Requirements (as hereinafter defined) and all regulations and/or restrictions relating to the industrial center in which the Premises is located (collectively, the "Applicable Laws"). All warranties made by Landlord's contractor or any subcontractor with respect to the construction performed on the Property and/or Premises shall be made to Tenant and Landlord. Landlord will be fully responsible for making all alterations and repairs to the Property and the Premises, at Landlord's sole cost and expense, (i) required in order to comply with the Americans with Disabilities Act of 1990, 42 U.S.C. 12101 ET SEQ., as amended ("ADA"), (ii) required to remove any and all ACM discovered at any time to have existed in the Premises as of the Commencement Date, or (iii) resulting from or necessitated by the failure by Landlord and/or Landlord's contractor to comply with the Applicable Laws, or from Landlord's and/or Landlord's contractor's utilization of Hazardous Materials in violation of Applicable Laws or that pose a health risk to occupants of the Premises. Otherwise, Tenant shall maintain and operate the Property and, subject to Landlord's repair obligations set forth in Section 7.2 below, the Premises, in excellent condition and repair, shall operate, and provide services and security to, the Property, in a first-class manner comparable to other first-class warehouse facilities in the vicinity of the Property. 7.2 OBLIGATIONS OF LANDLORD. Landlord shall maintain and repair the foundations, the roof and all other structural aspects of the Premises, unless such repair or maintenance is required as a result of Tenant's negligence, in which case Landlord is only required to maintain and repair to the extent the costs of such maintenance and repair are covered by insurance proceeds received by Landlord therefor. Tenant shall give Landlord written notice of the need for any maintenance or repair for which Landlord is responsible, after which Landlord shall have a reasonable opportunity to perform the maintenance or make the repair, but in no event more than twenty-four (24) hours in the event of an emergency - 10 - and no more than thirty (30) days in other cases, unless Landlord commences such maintenance or repair within such thirty-day period, and thereafter diligently prosecutes such maintenance or repair to completion. If Landlord fails to perform any maintenance or make any repairs for which Landlord is responsible within such time periods, Tenant shall have the right to perform such maintenance or make such repairs at Landlord's expense. Landlord shall reimburse Tenant within fifteen (15) days after receipt of an invoice from Tenant for all expenses incurred by Tenant in performing such maintenance or making such repair, plus interest thereon at the rate of ten percent (10%) per annum ("Interest Rate") from the date incurred to the date paid, and if Landlord fails to do so, Tenant shall have the right to deduct such expenses from the next installment(s) of the rent coming due hereunder. Except as expressly provided in this Lease, Tenant waives its right under any statute to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. Except as expressly provided in this Lease, Tenant waives its rights under Arizona Revised Statutes Section 33-343 with respect to Landlord's obligations for tenantability of the Premises, and Tenant's right to cease paying rent and terminate the Lease. Any damage to any part of the Property for which Landlord is responsible that is caused by the negligence or willful misconduct of Tenant or any agent, officer, employee, contractor, licensee or invitee of Tenant shall be repaired by Landlord at Tenant's expense, and Tenant shall pay to Landlord, immediately upon billing by Landlord, as additional rent, the cost of such repairs incurred by Landlord plus interest thereon at the Interest Rate less any amounts of insurance proceeds received by Landlord therefor. 7.3 OBLIGATIONS OF TENANT. Tenant shall have, at all times during the term of this Lease and at Tenant's sole cost and expense, maintain and repair the Property and the Premises and every part thereof (except only the parts for which Landlord is expressly made responsible under this Lease) and all equipment, fixtures and improvements therein (including windows, glass, plate glass, doors, special fronts, entries, exterior walls, the interior surfaces of exterior walls, interior walls, floors, dock boards, truck doors, dock bumpers, plumbing fixtures and equipment, heating and air conditioning systems, electrical components and mechanical systems), landscaped areas and parking areas and keep of all of the foregoing clean and in good order and operating condition, ordinary wear and tear excepted. Tenant shall not damage the Premises or disturb the integrity and support provided by any wall. Tenant shall, at Tenant's expense, promptly repair any damage to the Premises caused by Tenant or any agent, officer, employee, contractor, licensee or invitee of Tenant. Tenant shall take good care of the Premises and keep the Premises free from dirt, rubbish, waste and debris at all times. Tenant shall not overload the floors in the Premises or exceed the load-bearing capacity of the floors in the Premises, which is 3,000 pounds. Tenant shall, at Tenant's expense, enter into a regularly scheduled preventative maintenance and service contract with a maintenance contractor approved in writing by Landlord for servicing all hot water, heating and air conditioning systems and equipment in the Premises. The maintenance and service contract shall include all services suggested by the equipment manufacturer and shall become effective (and a copy shall be delivered to Landlord) within thirty (30) days after the Commencement Date. Tenant shall, at the end of the term of this Lease, surrender to - 11 - Landlord the Premises and all alterations, additions, fixtures and improvements therein or thereto in the same condition as when received, ordinary wear and tear and casualty damage excepted. ARTICLE 8 ALTERATIONS OF THE PREMISES 8.1 NO ALTERATIONS BY TENANT. Tenant shall not make any alterations, additions or improvements in or to the Premises or any part thereof, or attach any fixtures or equipment thereto, without Landlord's prior written consent, which consent shall not be unreasonably withheld, conditioned or delayed. Notwithstanding the preceding sentence, Tenant may make alterations, additions or improvements costing less than Five Thousand and 00/100 Dollars ($5,000.00) in the aggregate, without Landlord's consent, provided such alterations, additions or improvements will not materially adversely affect the structural, exterior or roof elements of the Premises or the mechanical, electrical plumbing or life safety systems of the Premises, but Tenant shall give prior written notice of any such alterations, additions or improvements to Landlord. All alterations, additions and improvements (except improvements made pursuant to Exhibit "B", if any) in or to the Premises to which Landlord consents shall be made by Tenant at Tenant's sole cost and expense as follows: (a) Tenant shall submit to Landlord, for Landlord's written approval, complete plans and specifications for all work to be done by Tenant. Such plans and specifications shall be prepared by responsible architect(s) and engineer(s), shall comply with all applicable codes, laws, ordinances, rules and regulations, shall not materially adversely affect any systems, components or elements of the Premises, shall be in a form sufficient to secure the approval of all government authorities with jurisdiction over the Premises, and shall be otherwise satisfactory to Landlord in Landlord's reasonable discretion. Tenant shall pay all costs, including the fees and expenses of the architect(s) and engineer(s), in preparing such plans and specifications. (b) Landlord shall notify Tenant within five (5) days of Landlord's receipt of Tenant's request in writing whether Landlord approves, or disapproves, such plans and specifications, Landlord shall describe in writing the reasons for disapproval. Tenant may submit to Landlord revised plans and specifications for Landlord's prior written approval. (c) All subsequent changes in the plans and specifications approved by Landlord shall be subject to Landlord's prior written approval. If Tenant wishes to make any such changes in such approved plans and specifications, Tenant shall have such architect(s) and engineer(s) prepare plans and specifications for such change and submit them to Landlord for Landlord's written approval. Landlord shall notify Tenant in writing within five (5) days of Landlord's receipt of the revised plans and specifications whether Landlord approves, or disapproves, such changes - 12 - and, if Landlord disapproves such change, Landlord shall describe in writing the reasons for disapproval. Tenant may submit to Landlord revised plans and specifications for such change for Landlord's written approval. After Landlord's written approval of such change, such change shall become part of the plans and specifications approved by Landlord. (d) Tenant shall obtain and comply with all building permits and other governmental permits and approvals required in connection with the work. Tenant shall, through Tenant's contractor, perform the work substantially in accordance with (i) the plans and specifications approved in writing by Landlord, (ii) the permits obtained by Tenant, and (iii) all applicable codes, laws, ordinances, rules and regulations. Under no circumstances shall Landlord be liable to Tenant for any damage, loss, cost or expense incurred by Tenant on account of any plans and specifications, contractors or subcontractors, design of any work, construction of any work, or delay in completion of any work, except to the extent that the same results from a breach by Landlord of its obligations under this Lease or from Landlord's gross negligence or willful misconduct. (e) Tenant shall give written notice to Landlord of the date on which construction of any work will be commenced at least ten (10) days prior to such date. Tenant shall keep the Premises free from mechanics', materialmen's and all other liens arising out of any work performed, labor supplied, materials furnished or other obligations incurred by Tenant. Tenant shall promptly and fully pay and discharge all claims on which any such lien could be based; provided however, that the Tenant shall have the right to contest the amount or validity of any such lien, provided Tenant gives prior written notice of such contest to Landlord, prosecutes such contest by appropriate proceedings in good faith and with diligence, and, upon request by Landlord, furnishes such bond as may be required by law to protect the Premises from such lien. Landlord shall have the right to post and keep posted on the Premises any notices that may be provided by law or which Landlord may deem to be proper for the protection of Landlord and the Premises from such liens. (f) Landlord shall, at the time Tenant requests Landlord's consent to any alterations, addition or improvement, inform Tenant in writing whether Landlord will require the removal of the alteration, addition or improvement in question at the expiration or earlier termination of this Lease. If Landlord's consent is not required, Landlord shall have the right to provide to Tenant a written statement as to whether Landlord will require the removal of the alteration, addition or improvement in question at the expiration or earlier termination of this Lease. 8.2 LANDLORD'S PROPERTY. Except as otherwise agreed by the parties, all alterations, additions, fixtures and improvements made pursuant to Exhibit "B", whether temporary or permanent in character, made in or to the Premises by Landlord or Tenant, shall - 13 - become part of the Premises and Landlord's property. All moveable furniture, equipment, trade fixtures, computers, office machines, moveable partitions and other personal property shall remain the property of Tenant. Upon termination of this Lease, Tenant shall, at Tenant's expense, promptly remove all such moveable furniture, equipment, trade fixtures, computers, office machines, movable partitions and other personal property from the Premises and repair all damage caused by any such removal. ARTICLE 9 INDEMNIFICATION AND INSURANCE 9.1 LANDLORD'S INDEMNIFICATION. Landlord shall indemnify and defend Tenant against and hold Tenant harmless from all claims, demands, losses, costs and expenses, including reasonable attorneys' fees and disbursements, arising from or related to any defect on the Property in existence on the Commencement Date, or any default in the performance of Landlord's obligations, or any damage to any property or any bodily or personal injury, illness or death of any person occurring in, on or about the Premises or any part thereof, arising at any time, to the extent caused by the negligence or willful misconduct of Landlord. This Section 9.1 shall survive the termination of this Lease with respect to any damage, bodily or personal injury, illness or death occurring prior to such termination. 9.2 TENANT INDEMNIFICATION. Tenant shall indemnify and defend Landlord against and hold Landlord harmless from all claims, demands, liabilities, damages, losses, costs and expenses, including reasonable attorneys' fees and disbursements, arising from or related to any use or occupancy of the Premises, any default in the performance of Tenant's obligations, or any damage to any property (including property of employees and invitees of Tenant) or any bodily or personal injury, illness or death of any person (including employees and invitees of Tenant) occurring in, on or about the Premises or any part thereof arising at any time and from any cause whatsoever (except to the extent caused by the negligence or willful misconduct of Landlord) or occurring outside the Premises. This Section 9.2 shall survive the termination of this Lease with respect to any damage, bodily or personal injury, illness or death occurring prior to such termination. 9.3 TENANT'S LIABILITY INSURANCE. Tenant shall, at all times during the term of this Lease and at Tenant's sole cost and expense, obtain and keep in force comprehensive general liability, fire legal liability, and premises operations insurance with a minimum combined single limit in the amount specified in the BASIC LEASE INFORMATION per occurrence for bodily or personal injury to, illness of, or death of persons and damage to property occurring in, on or about the Premises, such insurance shall name Landlord and Landlord's mortgagees, if any, as additional insureds, subject to Section 9.6. Tenant shall, at Tenant's sole cost and expense, be responsible for insuring Tenant's furniture, equipment, fixtures, computers, office machines and other personal property. 9.4 WORKER'S COMPENSATION INSURANCE. Tenant shall, at all times during the term of this Lease and at Tenant's sole cost and expense, obtain and keep in force worker's compensation and employer's liability insurance in the state in which the Premises are located. - 14 - 9.5 PROPERTY INSURANCE. Landlord shall, at all times during the term of this Lease, at Tenant's cost and expense, obtain and keep in force (a) a policy or policies of insurance covering loss or damage to the Property, including the Premises but excluding Tenant's fixture, equipment and tenant improvements paid for by Tenant, in an amount equal to the full replacement value thereof (without deduction for depreciation), as the same may exist from time to time, providing protection against all perils included within the classification of "all risk", as such terms is used in the insurance industry, and specifically including fire, extended coverage, vandalism, malicious mischief, flood and earthquake ( in the event flood and/or earthquake coverage is required by the lender having a lien on the Property), special extended perils, debris removal, and containing the "Replacement Cost Endorsement"; (b) boiler and machinery insurance covering pressure vessels, air tanks, boilers, machinery, pressure piping, heating, ventilation and air conditioning equipment, and elevator and escalator equipment, provided the Premises contain equipment of such nature; and (c) plate glass insurance in such amounts as Landlord may reasonably determine if the Premises contain plate glass. 9.6 GENERAL REQUIREMENTS. All insurance required to be maintained by Tenant under this Article 9 may be maintained under blanket policies. All insurance required to be maintained by Tenant under this Article 9 and all renewals thereof shall be issued by good and responsible companies qualified to do and doing business in the state where the Premises are located and having a rating in Best's Insurance Guide of at least A-XI. Each policy to be maintained by Tenant shall expressly provide that the policy shall not be canceled or altered without thirty (30) days' prior written notice to Landlord and shall remain in effect notwithstanding any such cancellation or alteration until such notice shall have been given to Landlord and such period of thirty (30) days shall have expired. Notwithstanding anything herein to the contrary, Tenant shall have no obligation to insure against claims based on or arising from the negligence or willful misconduct of Landlord or Landlord's mortgagee. All insurance under this Article 9 to be maintained by Tenant shall name Landlord and Landlord's mortgagee, if any, as an additional insured, shall be primary and noncontributing with any insurance which may be carried by Landlord, and shall expressly provide that Landlord, although named as an additional insured, shall nevertheless be entitled to recover under the policy for any loss, injury or damage to Landlord, except for claims based on or arising from the negligence or willful misconduct of Landlord or Landlord's mortgagee. Upon the issuance of each such policy to be maintained by Tenant, Tenant shall deliver a certificate thereof to Landlord for retention by Landlord. If Tenant fails to insure or fails to furnish to Landlord upon written notice to do so any certificate thereof as required, Landlord shall have the right from time to time to effect such insurance for the benefit of Tenant or Landlord or both of them and all premiums paid by Landlord shall be payable by Tenant as additional rent on demand. Tenant shall pay to Landlord, immediately upon demand all costs incurred by Landlord as a result of Tenant's failure to obtain and maintain in effect the policies of insurance required under this Article 9. 9.7 WAIVER OF SUBROGATION. Tenant waives on behalf of all insurers under all policies of property, liability and other insurance (excluding worker's compensation) now of hereafter carried by Tenant insuring or covering the Premises, or any portion or any - 15 - contents thereof, or any operations therein, all rights of subrogation which any insurer might otherwise, if at all, have to any claims of Tenant against Landlord. Landlord waives on behalf of all insurers under all policies of property, liability and other insurance (excluding workers' compensation) now or hereafter carried by Landlord insuring or covering the Premises or any portion or any contents thereof, or any operations therein, all rights of subrogation which any insurer might otherwise, if at all, have to any claims of Landlord against Tenant. 9.8 LANDLORD'S LIABILITY INSURANCE. At Landlord's election and expense, Landlord may obtain and keep in force at all times during the term of this Lease comprehensive general liability, fire legal liability and premises operations insurance with a minimum combined single limit in the amount specified in the BASIC LEASE INFORMATION per occurrence for bodily or personal injury to, illness of, or death of persons and damage to property occurring in, on or about the Property. 9.9 EXCULPATION OF MEMBERS. Tenant hereby agrees that members ("Members") of Landlord shall not be personally liable solely as a result of acting as Members of Landlord for injury to Tenant's business, or any loss of income therefrom, or for damage to the goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers, or any other person in, on or about the Premises or Property or for any other loss or consequential damage of any nature whatsoever, nor shall the Members be liable for injury to the person of Tenant, Tenant's employees, agents or contractors, whether damage or injury is caused by results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, heating, ventilation, air conditioning, life safety, mechanical and/or electrical systems, or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising on the Premises or from other sources or places where the resulting damage or injury occurs on or about the Premises, and regardless of whether the cause of such damage or injury, or the means of repairing the same is inaccessible to Tenant. Notwithstanding the foregoing, this Section 9.9 shall have no effect if such damage or injury is caused by the gross negligence or willful misconduct of the Members. ARTICLE 10 COMPLIANCE WITH LEGAL REQUIREMENTS 10.1 COMPLY WITH LAW. Unless this Lease otherwise allocates the responsibility for compliance to Landlord, Tenant shall at Tenant's sole cost and expense, promptly comply with all laws, ordinances, rules, regulations, orders and other requirements of any government or public authority now in force or that may hereafter be in force, with all other requirements of any board of fire underwriters or other similar body now or hereafter constituted, and with all directions and certificates of occupancy issued pursuant to any law by any governmental agency or officer, insofar as any thereof relate to or are required by the condition, use of occupancy of the Premises or the operation, use or maintenance of any personal property, fixtures, machinery, equipment or improvements in the Premises, but Tenant shall not be required to make structural changes or changes - 16 - costing in excess of Ten Thousand and 00/100 Dollars ($10,000) cumulatively, unless such changes are related to or required by Tenant's acts or unique use of the Premises or by improvements made by or for Tenant. ARTICLE 112 ASSIGNMENT OR SUBLEASE 11.1 PROHIBITION. Tenant shall not, directly or indirectly, without the prior written consent of Landlord (which consent shall not be unreasonably withheld, delayed or conditioned), assign this Lease or any interest herein or sublease the Premises or any part thereof, or permit the use or occupancy of the Premises by any person or entity other than Tenant. Tenant shall not, directly or indirectly, without the prior written consent of Landlord (which consent shall not be unreasonably withheld, delayed or conditioned), pledge, mortgage or hypothecate this Lease or any interest herein. This Lease shall not, nor shall any interest herein, be assignable as to the interest of Tenant involuntarily or by operation of law without the prior written consent of Landlord. Any of the foregoing acts without such prior written consent of Landlord shall be void and shall, at the option of Landlord, constitute a default that entitles Landlord to terminate this Lease. Notwithstanding anything to the contrary contained herein, Tenant may assign this Lease at any time, or sublease all or part of the Premises, without Landlord's prior written consent, to any entity that acquires all or part of Tenant, or that is acquired in whole or in part by Tenant, or that is controlled directly or indirectly by Tenant, or that controls, directly or indirectly, Tenant ("Affiliate"), or that owns or is owned by an Affiliate, so long as such transaction was not entered into as a subterfuge to avoid the obligations or restrictions of this Lease. Tenant agrees that the instrument by which any assignment or sublease to which Landlord consents is accomplished shall expressly provide that the assignee or subtenant will perform all of the covenants to be performed by Tenant under this Lease (in the case of a sublease, only insofar as such covenants relate to the portion of the Premises subject to such sublease) as and when performance is due after the effective date of the sublease and that Landlord will have the right to enforce such covenants directly against assignee or subtenant. Any purported assignment or sublease without an instrument containing the foregoing provisions shall be void. Tenant shall in all cases, regardless whether such assignment requires the consent of Landlord, remain liable for the performance by any assignee or subtenant of all such covenants. 11.2 LANDLORD'S CONSENT OR TERMINATION. If Tenant wishes to assign this Lease or sublease all or any part of the Premises and Tenant is required to obtain Landlord's consent pursuant to Section 11.1, Tenant shall give written notice to Landlord identifying the intended assignee or subtenant by name and address and specifying all of the terms of the intended assignment or sublease. Tenant shall give Landlord such additional information concerning the intended assignee or subtenant (including complete financial statements and a business history) or the intended assignment or sublease (including true copies thereof) as Landlord requests. For a period of twenty (20) days after such written notice is given by Tenant, Landlord shall have the right, by giving written notice to Tenant, to consent in writing to the intended assignment or sublease, unless Landlord determines not to consent. If Landlord objects to such assignment or sublease, Landlord - 17 - shall notify Tenant in writing of the basis for Landlord's objection. Without limiting any other provision of this Article 11, Landlord's criteria for determining whether to consent to an assignment or sublease proposed by Tenant shall not be more stringent than the criteria Landlord is obligated to or would apply if another large creditworthy tenant of the Property was requesting such consent. If Landlord does not deliver notice of Landlord's consent or refusal to consent to Tenant within such twenty (20) day period, Landlord shall be deemed to have consented to such assignment or sublease. 11.3 COMPLETION. If Landlord consents in writing, Tenant may complete the intended assignment or sublease subject to the following covenants: (a) the assignment or sublease shall be on the same terms as set forth on the written notice given by Tenant to Landlord, (b) no assignment or sublease shall be valid until an executed duplicate original of such assignment or sublease, in compliance with Section 11.1 hereof has been delivered to Landlord; and (c) Tenant reaffirms in writing its continued liability for the performance by an assignee or subtenant of all of the covenants to be performed by Tenant under the Lease. 11.4 TENANT NOT RELEASED. No assignment or sublease whatsoever shall release Tenant from Tenant's obligations and liabilities under this Lease or alter the primary liability of Tenant to pay all rent and to perform all obligations to be paid and performed by Tenant. No assignments or sublease shall amend or modify this Lease in any respect, and every assignment and sublease shall be subject and subordinate to this Lease. The acceptance of rent by Landlord from any other person or entity shall not be deemed to be a waiver by Landlord of any provision of this Lease. Consent to one assignment or sublease shall not be deemed consent to any subsequent assignment or sublease. Tenant shall pay to Landlord all direct costs and shall reimburse Landlord for all reasonable expenses incurred by Landlord in connection with any assignment or sublease requested by Tenant, provided such costs and expenses do not exceed Five Hundred and 00/100 Dollars ($500.00). If any assignee, subtenant or successor of Tenant defaults in the performance of any obligation to be performed by Tenant under this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. ARTICLE 12 ENTRY BY LANDLORD 12.1 ENTRY. Landlord shall have the right to enter the Premises at any time during the Business Hours and upon at least twenty-four (24) hours' prior notice (except in the event of an emergency, in which case no prior notice shall be required), and at Tenant's option, accompanied at all times during such entry by an employee or representative of Tenant, to (a) inspect the Premises, (b) exhibit the Premises to prospective purchasers, lenders or tenants, (c) determine whether Tenant is performing all of Tenant's obligations, (d) supply any service to be provided by Landlord, (e) post notices of nonresponsibility, and, and (f) make any repairs to the Premises, or to make any repairs to utility services, provided all such work shall be done promptly as reasonably practicable and so as to cause as little interference to Tenant as reasonably practicable. Tenant may - 18 - designate certain areas of the Premises as "Secured Areas" should Tenant require such areas for the purposes of securing certain valuable property or confidential information. Landlord may not enter such Secured Areas except in the case of emergency or in the event of a Landlord inspection, in which case Landlord shall provide Tenant with three (3) days' written notice of the specific date and time of such Landlord inspection. Tenant waives all claims for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises or any other loss occasioned by such entry, except to the extent caused by Landlord's gross negligence or willful misconduct. Landlord shall have the right to use any and all means that Landlord may deem reasonably necessary to open all doors in, or about the Premises (excluding Tenant's vaults, safes and other Secured Areas designated in writing by Tenant) in an emergency to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by any such means shall not be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual on constructive, of Tenant from the Premises or any portion thereof. ARTICLE 13 EVENT OF DEFAULT AND REMEDIES 13.1 DEFAULT BY TENANT. The occurrence of any one or more of the following events ("Event of Default") shall constitute a breach of this Lease by Tenant: (a) Tenant fails to pay Base Rent, or any additional monthly rent under Section 4.1 hereof, or any additional rent or other amount of money or charge payable by Tenant hereunder as and when such rent becomes due and payable and such failure continues for more than ten (10) days after such rent or other amount of money or charge is due; or (b) Tenant fails to perform or breaches any other agreement or covenant of this Lease to be performed or observed by Tenant as and when performance or observance is due and such failure or breach continues for more than thirty (30) days after Landlord gives written notice thereof to Tenant; provided, however, that if, by the nature of such agreement or covenant, such failure or breach cannot reasonably be cured within such period of thirty (30) days, an Event of Default shall not exist as long as Tenant commences with due diligence and dispatch the curing of such failure or breach within such period of thirty (30) days and, having so commenced, thereafter prosecutes with diligence and dispatch and completes the curing of such failure or breach; or (c) Tenant (i) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy, insolvency or other debtors' relief law of any jurisdiction, (ii) makes an assignment for the benefit of its creditors, or (iii) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers of Tenant or of any substantial part of Tenant's property; or - 19 - (d) Without consent by Tenant, a court or government authority enters an order, and such order is not vacated within sixty (60) days, (i) appointing a custodian, receiver, trustee or other officer with similar powers with respect to Tenant or with respect to any substantial part of Tenant's property, or (ii) constituting an order for relief or approving a petition for relief or reorganization or arrangement or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy, insolvency or other debtors' relief law of any jurisdiction, or (iii) ordering the dissolution, winding-up or liquidation of Tenant; or (e) This Lease or any estate of Tenant hereunder is levied under any attachment or execution and such attachment or execution is not vacated within sixty (60) days; or (f) Tenant vacates or abandons the Property at any time prior to the expiration or earlier termination of this Lease except as permitted under the Lease. 13.2 TERMINATION. If an Event of Default occurs, Landlord shall have the right at any time to give a written termination notice to Tenant and, on the date specified in such notice, Tenant's right to possession shall terminate and this Lease shall terminate. Upon such termination, Landlord shall have the full and immediate right to possession of the Premises, and Landlord shall have the right to recover from Tenant all unpaid rent that had been earned at the time of termination, the present value of all unpaid rent for the balance of the term of this Lease after termination less the amount of such rental loss that Tenant proves could have been reasonably avoided, and all the detriment caused by Tenant's failure to perform all of Tenant's obligations under this Lease, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, the cost of necessary repair, renovation and alteration of the Premises and any real estate commissions actually paid. 13.3 CONTINUATION. If an Event of Default occurs, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due under this Lease. Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Lease, shall not constitute a termination of Tenant's right to possession unless written notice of termination is given by Landlord to Tenant. 13.4 REMEDIES CUMULATIVE. Upon the occurrence of an Event of Default, Landlord shall the right to exercise and enforce all rights and remedies granted or permitted by law. The remedies provided for in this Lease are cumulative and in addition to all other remedies available to Landlord at law or equity by statute or otherwise. Exercise by Landlord of any remedy shall not be deemed to be an acceptance or surrender of the Property by Tenant, either by agreement or by operation of law. Surrender of the Property can be affected only by the written agreement of Landlord and Tenant. - 20 - 13.5 TENANT'S PRIMARY DUTY. All agreements and covenants to be performed or observed by Tenant under this Lease shall be at Tenant's sole cost and expense and without any abatement of rent, except as expressly provided herein. If Tenant fails to pay any sum of money to be paid by Tenant or to perform any other act to be performed by Tenant under this Lease after notice and the passage of any applicable cure period, Landlord shall have the right, but shall not be obligated, and without waiving or releasing Tenant from any obligations of Tenant, to make any such payment or to perform any such other act on behalf of Tenant in accordance with this Lease. All sums so paid by Landlord and all necessary incidental costs shall be deemed additional rent hereunder and Tenant shall pay the same to Landlord on written demand, together with interest on all such sums from the date of expenditure by Landlord to the date of repayment by Tenant at the Interest Rate. 13.6 ABANDONED PROPERTY. If Tenant is dispossessed by process of law or otherwise, any movable furniture, equipment, trade fixtures or personal property belonging to Tenant and left in the Premises for more than thirty (30) days after Tenant is dispossessed of the Premises shall, at the option of Landlord, be deemed to be abandoned and become the property of Landlord, and Landlord shall have the right to sell or otherwise dispose of such personal property in any commercially reasonable manner. 13.7 LANDLORD DEFAULT. If Landlord defaults under this Lease, Tenant shall give written notice to Landlord specifying such default with particularity, and Landlord shall have thirty (30) days after receipt of such notice within which to cure such default, or, if such default cannot be cured within thirty (30) days, such additional period of time as is reasonably necessary to effectuate such cure, provided Landlord diligently and with dispatch pursues the cure to completion. If Landlord fails to cure any such default within the time periods specified herein, Tenant shall have the right to take all actions reasonably necessary to cure such default, at Landlord's expense. Landlord shall reimburse Tenant within fifteen (15) days after receipt of an invoice from Tenant for all expenses incurred by Tenant in curing such default, plus interest thereon at the Interest Rate from the date incurred to the date paid, and if Landlord fails to do so, Tenant shall have the right to deduct such expenses from the next installment(s) of rent coming due hereunder. ARTICLE 14 DAMAGE OR DESTRUCTION 14.1 RESTORATION. If the Property or Premises, or any part thereof, is damaged by fire or other casualty before the Commencement Date or during the term of this Lease, and this Lease is not terminated pursuant to Section 14.2 hereof, Landlord shall repair such damage and restore the Property and the Premises to substantially the same condition in which the Property and the Premises existed before the occurrence of such fire or other casualty and this Lease shall, subject to this Section 14.1, remain in full force and effect. If such fire or other casualty damages the Premises or an area of the Property necessary for Tenant's use and occupancy of the Premises, then, during the period the Premises are rendered unusable by such damage, Tenant shall be entitled to a reduction in - 21 - Base Rent in the proportion that the area of the Premises rendered unusable by such damage bears to the total area of the Premises. Landlord shall not be obligated to repair any damage to, or to make any replacement of, any movable furniture, equipment, trade fixtures or personal property in the Premises. Tenant shall, at Tenant's sole cost and expense, repair and replace all such movable furniture, equipment, trade fixtures and personal property. 14.2 TERMINATION OF LEASE. If the Premises, or any part thereof, is damaged by fire or other casualty before the Commencement Date or during the term of this Lease and (a) such fire or casualty occurs during the last twelve (12) months of the term of this Lease and the repair and restoration work to be performed by Landlord in accordance with Section 14.1 hereof cannot, as reasonably estimated by Landlord, by completed within four (4) months after the occurrence of such fire or other casualty, or (b) the repair and restoration work to be performed by Landlord in accordance with Section 14.1 hereof cannot, as reasonably estimated by Landlord, be completed within six (6) months after the occurrence of such fire or other casualty, then, in any such event, either Tenant or Landlord shall have the right, by giving written notice to the other party within sixty (60) days after the occurrence of such fire or other casualty, to terminate this Lease as of the date of such casualty. Landlord shall also have the right to terminate if the Premises is destroyed by an event for which Landlord is not required by this Lease to maintain insurance (exclusive of any deductible). If neither Landlord or Tenant exercises the right to terminate this Lease in accordance with this Section 14.2, Landlord shall repair such damage and restore the Premises in accordance with Section 14.1 hereof and this Lease shall, subject to Section 14.1 hereof, remain in full force and effect. A total destruction of the Premises shall automatically terminate this Lease effective as of the date of such total destruction. ARTICLE 15 EMINENT DOMAIN 15.1 CONDEMNATION. Landlord shall have the right to terminate this Lease if any part (but less than all) of the Premises or any substantial part of the Property (whether or not it includes the Premises) is taken by exercise of the power of eminent domain before the Commencement Date or during the term of this Lease. Tenant shall have the right to terminate this Lease if any portion of the Premises or the Property is taken by exercise of the power of eminent domain before the Commencement Date or during the term of this Lease and the remaining portion of the Property is not reasonably suitable for Tenant's purposes. In each such case, Landlord and Tenant shall exercise such termination right by giving written notice to the other within thirty (30) days after the date of such taking. If either Landlord or Tenant exercises such right to terminate this Lease in accordance with this Section 15.1, this Lease shall terminate as of the date of such taking. If neither Landlord nor Tenant exercises such right to terminate this Lease in accordance with this Section 15.1, this Lease shall terminate as to the portion of the Premises so taken as of the date of such taking and shall remain in force and effect as to the portion of the Premises not so taken, Landlord shall restore the Premises to as near the same condition as the Premises was in prior to the taking, and the Base Rent shall be reduced as of the date of - 22 - such taking in the proportion that the area of the Premises so taken bears to the total area of the Premises. If all of the Premises is taken by exercise of the power of eminent domain before the Commencement Date or during the term of this Lease, this Lease shall terminate as of the date of such taking. 15.2 AWARD. If all or any part of the Premises is taken by exercise of the power of eminent domain, all awards, compensation, damages, income, rent and interest payable in connection with such taking shall, except as expressly set forth in this Section 15.2, be paid to and become the property of Landlord, and Tenant hereby assigns to Landlord all of the foregoing. Tenant shall have the right to claim and receive directly from the entity exercising the power of eminent domain only the share of any award determined to be owing to Tenant for the taking of improvements installed by Tenant in the portion of the Premises so taken, for the taking of Tenant's movable furniture, equipment, trade fixtures and personal property, for loss of goodwill, for interference with or interruption of Tenant's business, for removal and relocation expenses and for the value of the leasehold estate created by this Lease and any unexpired term of this Lease; provided, however, such award shall not reduce the compensation otherwise payable to Landlord. 15.3 DEFINITION OF TAKING. As used herein, a "taking" means the acquisition of all or part of the Premises for a public use by exercise of the power of eminent domain or voluntary conveyance in lieu thereof and the taking shall be considered to occur as of the earlier of the date on which possession of the Premises (or part so taken) by the entity exercising the power of eminent domain is authorized as stated in an order for possession or the date on which title to the Premises (or part so taken) vests in the entity exercising the power of eminent domain. ARTICLE 16 SUBORDINATION AND SALE 16.1 SUBORDINATION. This Lease shall be subject and subordinate at all times to the lien of all mortgages and deeds of trust securing any amount or amounts whatsoever which may now exist or hereafter be placed on or against the Premises or on or against Landlord's interest or estate therein, all without the necessity of having further instruments executed by Tenant to effect such subordination. If Landlord or any mortgagee shall elect to have this Lease prior to the lien of its mortgage or deed of trust, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage or deed of trust. Tenant agrees to execute any documents required to effectuate such subordination or to make this Lease prior to the lien of any mortgage or deed of trust. Notwithstanding the foregoing, in the event of a foreclosure of any such mortgage or deed of trust or of any other action or proceeding for the enforcement thereof, or of any sale thereunder, this Lease shall not be terminated or extinguished, nor shall the rights and possession of Tenant hereunder be disturbed (except that, at any time when Event of Default by Tenant exists under this Lease, any person who acquires Landlord's interest hereunder shall have all of the rights and remedies provided under Article 13), and Tenant shall attorn to the person who acquires the Landlord's interest hereunder through any such mortgage or deed of trust. Tenant agrees to execute, acknowledge and deliver upon - 23 - demand such further instruments evidencing such subordination of this Lease to the lien of all such mortgages and deeds of trust as may reasonably be required by Landlord. Landlord shall provide Tenant with, and the effectiveness of this Section 16.1 is conditioned on Landlord's delivering to Tenant, a nondisturbance agreement conforming to the provisions of this Section 16.1, in the form attached hereto as Exhibit "D" and by this reference incorporated herein, from all current and future mortgagees, beneficiaries and ground lessors of Landlord. 16.2 SALE OF THE PROPERTY. If the original Landlord hereunder, or any successor owner of the Premises, sells or conveys the Premises, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease accruing after such sale or conveyance shall terminate and the original Landlord, or such successor owner, shall automatically be released therefrom, and thereupon all such liabilities and obligations shall be binding upon the new owner, provided such new owner has assumed in writing all obligations of the original Landlord under this Lease. Tenant agrees to attorn to such new owner. ARTICLE 17 ESTOPPEL CERTIFICATE 17.1 REQUIRED CERTIFICATION. At any time and from time to time, Tenant shall, within fifteen (15) days after written request by Landlord, execute, acknowledge and deliver to Landlord an estoppel certificate in the form attached hereto as Exhibit "E" and by this reference incorporated herein, certifying: (a) 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 date and nature of each modification); (b) the Commencement Date and the Expiration Date determined in accordance with Article 2 hereof and the date, if any, to which all rent and other sums payable hereunder have been paid; (c) that no notice has been received by Tenant of any default by Tenant hereunder which has not been cured, except as to default specified in such certificate; and (d) that Landlord is not in default under this Lease, except as to defaults specified in such certificate. Any such certificate may be relied upon by Landlord and any actual or prospective purchaser or mortgage lender of the Premises or any part thereof. If Tenant does not deliver such certificate to Landlord within such fifteen (15) day period, Tenant shall be estopped from making any claims to the contrary that: (a) this Lease is unmodified and in full force and effect; (b) the Commencement Date, the Expiration Date and the date to which rent has been paid all are as set forth on the estoppel certificate; (c) Tenant has not received any notice of default by Tenant under this Lease that has not been cured; and (d) Landlord is not in default under this Lease. Landlord hereby agrees to provide to Tenant an estoppel certificate signed by Landlord, containing the same types of information, and within the same periods of time, as are set forth in the estoppel certificate described above, except such changes as are reasonably necessary to reflect that the estoppel certificate is being granted and signed by Landlord to Tenant or Tenant's lender, assignee or sublessee, rather than from Tenant to Landlord or to Lender's lender or purchaser. In the event Landlord or Tenant requests that the other party hereto execute an estoppel certificate, the requesting party shall reimburse the other party for all direct - 24 - costs and reasonable expenses incurred by the other party in reviewing, negotiating and executing such estoppel certificate, provided such costs and expenses do not exceed Five Hundred and 00/100 Dollars ($500.00) per request. ARTICLE 18 NOTICES 18.1 METHOD. All requests, approvals, consents, notices and other communications given by Landlord or Tenant under this Lease shall be properly given only if made in writing and either deposited in the United States mail, postage prepaid, certified mail with return receipt requested, or delivered by hand (which may be through a messenger or recognized delivery, courier or air express service) and addressed as follows: To Landlord at the address of Landlord specified in the BASIC LEASE INFORMATION, or at such other place as Landlord may from time to time designate in a written notice to Tenant; and to Tenant at the address of Tenant specified in the BASIC LEASE INFORMATION, or at such other place as Tenant may from time to time designate in a written notice to Landlord. Such requests, approvals, consents, notices and other communications shall be effective on the date of receipt (evidenced by the certified mail receipt) if mailed or on the date of hand delivery if hand delivered. If any such request, approval, consent, notice or other communication is not received or cannot be delivered due to a change in the address of the receiving party of which notice was not previously given to the sending party or due to a refusal to accept by the receiving party, such request, approval, consent, notice or other communication shall be effective on the date delivery is attempted. Any request, approval, consent, notice or other communication under this Lease may be given on behalf of a party by the attorney for such party. ARTICLE 19 MISCELLANEOUS 19.1 GENERAL. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular and shall include, as appropriate, each of their employees, officers, agents, contractors, invitees and licensees. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". If there is more than one Tenant, the obligations hereunder imposed upon Tenant shall be joint and several. Time is of the essence of this Lease and each and all of its provisions. This Lease shall benefit and bind Landlord and Tenant and the permitted personal representatives, heirs, successors and assigns of Landlord and Tenant. If any provision of this Lease is determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force an effect. Neither Landlord nor Tenant shall record this Lease or any memorandum or short form of it, without the other party's consent. This Lease shall be governed by and construed in accordance with the laws of the state in which the Premises is located. 19.2 NO WAIVER. The waiver by Landlord or Tenant of any breach of any covenant in this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other covenant in this Lease, nor shall any custom or practice which may - 25 - grow up between Landlord and Tenant in the administration of this Lease be construed to waive or to lessen the right of Landlord or Tenant to insist upon the performance by Landlord or Tenant in strict accordance with this Lease. 19.3 ATTORNEY'S FEES. If there is any legal action or proceeding between Landlord and Tenant to enforce this Lease or to protect or establish any right or remedy under this Lease, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including reasonable attorneys' fees and disbursements, incurred by such prevailing party in such action or proceeding and in any appeal in connection therewith. If such prevailing party recovers a judgment in any such action, proceeding or appeal, such costs, expenses and attorneys' fees and disbursements shall be included in and as a part of such judgment. 19.4 EXHIBITS. Exhibit "A" (Plan(s) Outlining the Premises and Property), Exhibit "B" (Work Letter), Exhibit "C" (Memorandum Confirming Term), Exhibit "D" (Subordination, Non-Disturbance and Attornment Agreement) and Exhibit "E" (Estoppel Certificate) are attached hereto and made a part of this Lease. 19.5 BROKERS. Landlord shall pay all fees and expenses of the real estate brokers specified in the BASIC LEASE INFORMATION ("Brokers"), pursuant to a separate agreement between Landlord and Brokers. Each of Landlord and Tenant warrants and represents to the other party that Landlord or Tenant, as the case may be, has negotiated this Lease directly with the Brokers and has not authorized or employed, or acted by implication to authorize or to employ, any real estate broker other than Brokers to act for Landlord or Tenant, as the case may be, in connection with this Lease. 19.6 ENTIRE AGREEMENT. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, offers, agreements and understandings, oral or written, if any, between Landlord and Tenant or displayed by Landlord or Tenant with respect to the subject matter of this Lease and the Premises. There are no commitments, representations or assurances between Landlord and Tenant or between any real estate broker and Tenant other than those expressly set forth in this Lease and all reliance with respect to any commitments, representations or assurances is solely upon commitments, representations and assurances expressly set forth in this Lease. This Lease may not be amended or modified in any respect whatsoever except by an agreement in writing signed by Landlord and Tenant. 19.7 DUTY TO ACT REASONABLY. Any time the consent of Landlord or Tenant is required, such consent shall not be unreasonably withheld, conditioned or delayed, unless expressly provided otherwise herein. Whenever this Lease grants Landlord or Tenant the right to take action, exercise discretion, establish rules and regulations or make allocations or other determinations, Landlord and Tenant shall act reasonably and in good faith and take no action that might result in the frustration of the reasonable expectations of a sophisticated landlord and sophisticated tenant concerning the benefits to be enjoyed under this Lease. - 26 - 19.8 DAYS. All references herein to less than "ten (10) days" shall mean business days, and all references to "notice" shall mean written notice given in compliance with Section 18.1. All references in the Lease to "month" or "months" shall be deemed to include the actual number of days in such actual month or months. 19.9 COUNTERPARTS. This Lease may be signed in multiple counterparts which, when signed by all parties, shall constitute a binding agreement. 19.10 ARBITRATION. The initiation of arbitration proceedings pursuant to Section 6.2 shall be with the American Arbitration Association under the Commercial Arbitration Rules of the American Arbitration Association. The decision of the Arbitrator shall be final and binding on the parties and enforceable in a court of competent jurisdiction. The parties shall bear their respective attorneys' fees and costs in connection with such arbitration, except as the Arbitrator shall otherwise determine, and each such party shall bear one-half (1/2) of the fees and expenses of the Arbitrator and of the American Arbitration Association in connection with such arbitration. ARTICLE 20 HAZARDOUS MATERIALS 20.1 DEFINITION OF HAZARDOUS MATERIALS. As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste, or any pollutant or contaminate, or words of similar import, which is or becomes regulated by any local governmental authority, the state in which the Premises are located, or the United States Government. The term "Hazardous Material" includes, but is not limited to, any material or substance which is (i) designated as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1317), (ii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903), (iii) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Section 9601, et seq.), (iv) asbestos, (v) petroleum (including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, synthetic natural gas usable for fuel, or any mixture thereof), (vi) petroleum products, (vii) polychlorinated biphenyls, (viii) urea formaldehyde, (ix) radon gas, (x) radioactive matter, (xi) medical waste, and (xii) chemicals which may cause cancer or reproductive toxicity. 20.2 DEFINITION OF ENVIRONMENTAL REQUIREMENTS. As used herein, the term "Environmental Requirements" means all laws, ordinances, rules, regulations, orders and other requirements of any government or public authority now in force or which may hereinafter be in force relating to protection of human health or the environment from Hazardous Material, including all requirements pertaining to reporting, licensing, permitting, investigation and remediation of emissions, discharges, storage, disposal or releases of Hazardous Materials and all requirements pertaining to the protection of the health and safety of employees or the public with respect to Hazardous Material. 20.3 PROHIBITED ACTIVITIES. Tenant shall not directly or indirectly permit or conduct the handling, use, deposit, generation, treatment, storage or disposal in, on or - 27 - about the Premises or Property of any Hazardous Material in excess of permitted levels or reportable quantities under applicable Environmental Requirements without prior written notice to Landlord. Any such handling, use, deposit, generation, treatment, storage or disposal of any Hazardous Material permitted by Landlord hereunder shall be in compliance with all Environmental Requirements. 20.4 NOTICE OF VIOLATIONS. Tenant shall, within five (5) days after Tenant's receipt thereof, give written notice to Landlord of any notice or other communication regarding any (a) actual or alleged violation of Environmental Requirements by Tenant or with respect to the Premises, (b) actual or threatened migration of Hazardous Material from the Premises, or (c) the existence of Hazardous Material in or on the Premises or regarding any actual or threatened investigation, inquiry, lawsuit, claim, citation, directive, summons, proceedings, complaint, notice, order, writ or injunction relating to any of the foregoing. 20.5 TENANT INDEMNIFICATION. Tenant shall indemnify and defend Landlord against and hold Landlord harmless from all claims, demands, liabilities, damages, fines, encumbrances, liens, losses, costs and expenses, including reasonable attorneys' fees and disbursements, and costs and expenses of investigation, arising from or related to the existence on or after the Commencement Date of Hazardous Material brought in or on the Property by Tenant or the actual or threatened migration on or after the Commencement Date of Hazardous Material from the Property as a result of contamination caused by Tenant or the existence on or after the Commencement Date of a violation of Environmental Requirements by Tenant with respect to the Property. Notwithstanding the foregoing, Tenant shall not be required to indemnify, defend or hold harmless Landlord with respect to Hazardous Materials brought or migrating onto the Property or for violations of Environmental Requirements with respect to the Property, unless Tenant is responsible for bringing the Hazardous Materials onto the Property, for causing the migration or for the violation of Environmental Requirements. To the extent Tenant has an indemnification obligation under this Section 20.5, Tenant shall, to the reasonable satisfaction of Landlord, perform all remedial actions necessary to remove any Hazardous Material in or on the Property on or after the Commencement Date or to remedy the actual or threatened migration from the Property of any Hazardous Material or to remedy any actual or threatened violation of Environmental Requirements, provided such remedial action is required under Environmental Requirements. This Section 20.5 shall survive termination of this Lease. 20.6 LANDLORD INDEMNIFICATION. Landlord shall indemnify and defend Tenant against and hold Tenant harmless from all claims, demands, liabilities, damages, fines, encumbrances, liens, losses, costs and expenses, including reasonable attorneys' fees and disbursements, and costs and expenses of investigation, arising from or related to the existence prior to the Commencement Date of Hazardous Materials brought in, on or, under the Property by Landlord or the actual or threatened migration prior to the Commencement Date of Hazardous Materials from the Property as a result of contamination caused by Landlord or the existence prior to the Commencement Date of a violation of Environmental Requirements by Landlord with respect to the Property. - 28 - Notwithstanding the foregoing, Landlord shall not be required to indemnify, defend or hold harmless Tenant with respect Hazardous Materials brought or migrating onto the Property or for violations of Environmental Requirements with respect to the Property, unless Landlord is responsible for bringing the Hazardous Materials on to the Property, for causing the migration or for the violation of Environmental Requirements. To the extent Landlord has an indemnification obligation under this Section 20.6, Landlord shall, to the reasonable satisfaction of Tenant, perform all remedial actions necessary to remove any Hazardous Material in or on the Property or to remedy actual or threatened violation of Environmental Requirements, provided such remedial action is required under Environmental Requirements. This Section 20.6 shall survive termination of this Lease. 20.7 PERMITTED ACTIVITIES. Notwithstanding the foregoing, Landlord acknowledges and agrees that Tenant shall be permitted to store and use on the Premises from time to time certain Hazardous Material whose nature and quantities are customary in connection with the permitted uses of the Premises (and in connection with any permitted Alterations performed by Tenant), and that Tenant shall not be required to provide Landlord with specific notice of any storage or use; provided that Tenant shall at all times comply with all Environmental Requirements pertaining to any such Hazardous Material. ARTICLE 21 FAIR MARKET RENTAL RATE 21.1 DETERMINATION OF FAIR MARKET RENTAL RATE. For the proposes of the Lease the term "Fair Market Rental Rate" shall mean the annual amount per rentable square foot that is in effect for comparable period of time ("Comparable Transactions") at the Property, or if there are not a sufficient number of Comparable Transactions at the Property, what a comparable landlord of a first-class industry facility with comparable vacancy factors would accept in Comparable Transactions. In any determination of Comparable Transactions appropriate consideration shall be given to the annual rental rates per rentable square foot, the standard of measurement by which the rentable square footage is measured, the type of escalation clause (e.g., whether increases in additional rent are determined on a net or gross basis, and if gross, whether such increases are determined according to a base year or a base dollar amount expense stop), the extent of Tenant's liability under the Lease, abatement provisions reflecting free rent and/or no rent during the period of construction or subsequent to the commencement date as to the space in question, brokerage commissions, if any, that would be payable by Landlord in similar transactions, length of the Lease term, size and location of the premises being leased, building standard work and/or tenant improvement allowances, if any, and other generally applicable conditions of tenancy for such Comparable Transactions. The intent is that Tenant shall obtain the same rent and other economic benefits that Landlord would otherwise give in Comparable Transactions and that Landlord will make and receive the same economic payments and concessions that Landlord would otherwise make and receive in Comparable Transactions. If, for example, after applying the criteria set forth above, Comparable Transactions provide a new tenant with comparable space at Thirty- - 29 - Two and 00/100 Dollars ($32.00) per rentable square foot, with a current base year, three (3) months at no rent to construct improvements, four (4) months' free rent, Fifty and 00/100 Dollars ($50.00) per usable square foot tenant improvement allowance, a brokerage commission of Fifty Thousand and 00/100 Dollars ($50,000.00), and certain other generally applicable economic terms, the Fair Market Rental Rate for Tenant shall not be Thirty-Two and 00/100 Dollars ($32.00) per rentable square foot only, but shall be the equivalent of Thirty-Two and 00/100 Dollars ($32.00) per rentable square foot, the same base year, three (3) months at no rent to construct improvements or three (3) months' additional free rent in lieu of such construction, an additional four (4) months' free rent, Fifty and 00/100 Dollars ($50.00) per usable square foot tenant improvement allowance or payment in lieu of such allowance, a payment to Tenant's then broker of a Fifty Thousand and 00/100 Dollars ($50,000.00) brokerage commission (or if Tenant is not then represented by a broker, Tenant shall receive a rent credit on the amount of the brokerage commission that Landlord would have otherwise been required to pay) and such other generally applicable economic terms. Landlord shall determine the Fair Market Rental Rate by using its good faith judgment. Landlord shall provide written notice of such amount within fifteen (15) days (but in no event later than twenty (20) days) after Tenant provides the notice to Landlord exercising Tenant's extension option(s). Tenant shall have thirty (30) days ("Tenant's Review Period") after receipt of Landlord's notice of the new rental within which to accept such rental or to reasonably object thereto in writing. In the event Tenant objects, Landlord and Tenant shall attempt to agree upon such Fair Market Rental Rate, using their best good faith efforts. If Landlord and Tenant fail to reach agreement within fifteen (15) days following Tenant's Review Period ("Outside Agreement Date"), then each party shall place in a separate sealed envelope their final proposal as to Fair Market Rental Rate and such determination shall be submitted to arbitration in accordance with subsections (a) through (e) below. Failure of Tenant to so elect in writing within Tenant's Review Period shall conclusively be deemed its disapproval of the Fair Market Rental Rate determined by Landlord. In the event that Landlord fails to timely generate the initial written notice of Landlord's opinion of the Fair Market Rental Rate that triggers the negotiation period, then Tenant may commence such negotiations by providing the initial notice, in which event Landlord shall have fifteen (15) days "(Landlord's Review Period") after receipt of Tenant's notice of the new rental within which to accept such rental. In the event Landlord fails to accept in writing such rental proposed by Tenant, then such proposal shall be deemed rejected, and Landlord and Tenant shall attempt to agree upon such Fair Market Rental Rate, using their best good faith efforts. If Landlord and Tenant fail to reach agreement within fifteen (15) days following Landlord's Review Period (which shall be, in such event, the "Outside Agreement Date" in lieu of the above definition of such date), then each party shall place in a separate sealed envelope their final proposal as to Fair Market Rental Rate and determination shall be submitted to arbitration in accordance with subsections (a) through (e) below. Failure of Landlord to so elect in writing within Landlord's Review Period shall conclusively be deemed its disapproval of the Fair Market Rental Rate determined by Tenant. - 30 - If the final determination of the Fair Market Rental Rate has not been made prior to the date on which Tenant's obligation to pay rent during the renewal term commences, then, from such date until the date the final determination is made ("Interim Period"), Tenant shall pay estimated rent for the Premises at the rate applicable to the Premises during the month immediately preceding such rent commencement date. Once the final determination of the Fair Market Rental Rate has been made, if the rent payable by Tenant for the Premises pursuant to the Fair Market Rental Rate exceeds the rent paid by Tenant during the Interim Period, Tenant shall pay the excess to Landlord concurrently with its next installment of Base Rent, and, if the rent paid by Tenant during the Interim Period exceeds the rent payable by Tenant for the Premises pursuant to the Fair Market Rental Rate, then Landlord shall credit the excess against the Base Rent or additional rent next coming due under the Lease. (a) Landlord and Tenant shall meet with each other within five (5) business days of the Outside Agreement Date and exchange the sealed envelopes and then open such envelopes in each other's presence. If Landlord and Tenant do not mutually agree upon the Fair Market Rental Rate within five (5) business days of the exchange and opening of envelopes, then, within ten (10) business days of the exchange and opening of envelopes Landlord and Tenant shall agree upon and jointly appoint a single arbitrator who shall by profession be a real estate lawyer or broker who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of industrial properties in the vicinity of the Property. Neither Landlord nor Tenant shall consult with such broker or lawyer as to his or her opinion as to Fair Market Rental Rate prior to the appointment. The determination of the arbitrator shall be limited solely to the issue of whether Landlord's or Tenant's submitted Fair Market Rental Rate for the Premises is the closest to the actual Fair Market Rental Rate for the Premises as determined by the arbitrator, taking into account the requirements of this Article 21. Such arbitrator may hold such hearings and require such briefs as the arbitrator, in his or her sole discretion, determines necessary. In addition, Landlord and Tenant may submit to the arbitrator with a copy to the other party within five (5) business days after the appointment of the arbitrator any market data and additional information that such party deems relevant to the determination of Fair Market Rental Rate ("FMRR Data") and the other party may submit a reply in writing within five (5) business days after receipt of such FMRR Data. (b) The arbitrator shall, within thirty (30) days of his or her appointment, reach a decision as to whether the parties shall use Landlord's or Tenant's submitted Fair Market Rental Rate by choosing the submitted Fair Market Rental Rate that is closest to the actual Fair Market Rental for the Premises as determined by the arbitrator, and shall notify the Landlord and Tenant of such decision. (c) The decision of the arbitrator shall be binding upon Landlord and Tenant, except as provided below. - 31 - (d) If Landlord and Tenant fail to agree upon and appoint an arbitrator, then appointment of the arbitrator shall be made by the Presiding Judge of the Maricopa County Superior Court, or if he or she refuses to act, by any judge having jurisdiction over the parties. (e) The cost of arbitration shall be paid by Landlord and Tenant equally. In the event that Tenant objects to the Fair Marker Rental Rate as determined by the arbitration provision specified above, Tenant may elect to rescind its extension option election notice at any time within sixty (60) days following the establishment of the Fair Market Rental Rate as determined by such arbitration. In the event Tenant elects to terminate the Lease, Tenant shall reimburse Landlord for its reasonable attorneys' fees and reasonable costs associated with such arbitration. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease Agreement as of the date first hereinabove written. OMB DEVELOPMENT I, L.L.C, RADYNE CORP., an Arizona limited liability company a New York corporation By: /s/ Harold H. Benware By: /s/ R.C. Fitting --------------------------- ------------------ Its: Manager Its: President - 32 - EX-27 3 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE FORM 10-K FOR THE YEAR ENDED 12-31-97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 DEC-31-1997 569,692 0 2,374,443 (15,000) 5,389,920 8,387,920 1,672,263 (349,712) 10,231,617 6,732,274 4,649,404 0 0 11,862 (1,161,923) 10,231,617 13,446,852 13,446,852 8,022,262 8,022,262 6,502,204 2,000 677,102 (1,756,716) 0 (1,756,716) 0 0 0 (1,756,716) (0.350) (0.350) The Company has determined that its EPS-Primary and EPS-Diluted do not require restatement pursuant to Statement of Financial Accounting Standards No. 128. A 1-for-5 reverse split of the Company's Common Stock became effective on January 9, 1997. Prior Financial Data Schedules have not been restated for this reverse split.
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