U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended: March 31, 2010
or
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File Number: 001-15087
I.D. SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
22-3270799
|
|
|
|
(State or other jurisdiction of incorporation or
organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
One University Plaza, Hackensack,
|
|
|
New Jersey
|
|
07601
|
|
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(201) 996-9000
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
Non-accelerated filer
þ
|
|
Smaller reporting company
o
|
|
|
|
|
(Do not check if smaller reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).
Yes
o
No
þ
The number of shares of the registrants common stock, $0.01 par value per share, outstanding
as of the close of business on May 12, 2010 was 11,253,253.
INDEX
I.D. Systems, Inc. and Subsidiaries
PART I FINANCIAL INFORMATION
|
|
|
Item 1.
|
|
Financial Statements
|
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009*
|
|
|
2010
|
|
|
|
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,481,000
|
|
|
$
|
5,979,000
|
|
Investments short term
|
|
|
33,909,000
|
|
|
|
29,209,000
|
|
Accounts receivable, net of allowance
for doubtful accounts
of $106,000 and $123,000 in 2009 and 2010, respectively
|
|
|
3,252,000
|
|
|
|
5,470,000
|
|
Note and lease receivable current
|
|
|
|
|
|
|
254,000
|
|
Inventory, net
|
|
|
4,487,000
|
|
|
|
9,008,000
|
|
Interest receivable
|
|
|
97,000
|
|
|
|
131,000
|
|
Deferred
costs current
|
|
|
|
|
|
|
364,000
|
|
Prepaid expenses and other current assets
|
|
|
686,000
|
|
|
|
2,142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
61,912,000
|
|
|
|
52,557,000
|
|
|
|
|
|
|
|
|
|
|
Investments long term
|
|
|
6,752,000
|
|
|
|
4,392,000
|
|
Note and lease receivable less current portion
|
|
|
|
|
|
|
1,062,000
|
|
Deferred costs less current portion
|
|
|
|
|
|
|
761,000
|
|
Fixed assets, net
|
|
|
917,000
|
|
|
|
3,872,000
|
|
Goodwill
|
|
|
619,000
|
|
|
|
2,590,000
|
|
Intangible assets, net
|
|
|
375,000
|
|
|
|
5,816,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,575,000
|
|
|
$
|
71,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,094,000
|
|
|
$
|
6,145,000
|
|
Line of credit
|
|
|
11,638,000
|
|
|
|
9,451,000
|
|
Deferred revenue
|
|
|
501,000
|
|
|
|
1,264,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,233,000
|
|
|
|
16,860,000
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
461,000
|
|
|
|
1,884,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,694,000
|
|
|
|
18,744,000
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 30)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock; authorized 5,000,000 shares, $0.01 par value; none issued
|
|
|
|
|
|
|
|
|
Common stock; authorized 50,000,000 shares, $0.01 par value; 12,284,000
and 12,466,000 shares issued at December 31, 2009 and March 31, 2010,
respectively; shares outstanding, 11,075,000 and 11,253,000 at December
31, 2009 and March 31, 2010, respectively
|
|
|
120,000
|
|
|
|
121,000
|
|
Additional paid-in capital
|
|
|
103,596,000
|
|
|
|
104,052,000
|
|
Accumulated deficit
|
|
|
(36,859,000
|
)
|
|
|
(40,922,000
|
)
|
Accumulated other comprehensive loss
|
|
|
(60,000
|
)
|
|
|
(19,000
|
)
|
|
|
|
|
|
|
|
|
|
|
66,797,000
|
|
|
|
63,232,000
|
|
|
|
|
|
|
|
|
|
|
Treasury stock; 1,209,000 and 1,213,000 shares at cost in 2009 and 2010
|
|
|
(10,916,000
|
)
|
|
|
(10,926,000
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
55,881,000
|
|
|
|
52,306,000
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
70,575,000
|
|
|
$
|
71,050,000
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Derived from audited balance sheet as of December 31, 2009.
|
See accompanying notes to condensed consolidated financial statements.
1
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,378,000
|
|
|
$
|
2,023,000
|
|
Services
|
|
|
1,556,000
|
|
|
|
4,101,000
|
|
|
|
|
|
|
|
|
|
|
|
2,934,000
|
|
|
|
6,124,000
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
798,000
|
|
|
|
975,000
|
|
Cost of services
|
|
|
547,000
|
|
|
|
1,764,000
|
|
|
|
|
|
|
|
|
|
|
|
1,345,000
|
|
|
|
2,739,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,589,000
|
|
|
|
3,385,000
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
4,211,000
|
|
|
|
6,474,000
|
|
Research and development expenses
|
|
|
689,000
|
|
|
|
1,154,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,311,000
|
)
|
|
|
(4,243,000
|
)
|
Interest income
|
|
|
347,000
|
|
|
|
209,000
|
|
Interest expense
|
|
|
|
|
|
|
(30,000
|
)
|
Other (expense) income, net
|
|
|
(108,000
|
)
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,072,000
|
)
|
|
$
|
(4,063,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.28
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and diluted
|
|
|
10,895,000
|
|
|
|
11,185,000
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
2
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Stock
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
12,284,000
|
|
|
$
|
120,000
|
|
|
$
|
103,596,000
|
|
|
$
|
(36,859,000
|
)
|
|
$
|
(60,000
|
)
|
|
$
|
(10,916,000
|
)
|
|
$
|
55,881,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,063,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,063,000
|
)
|
Comprehensive loss
unrealized gain
on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,000
|
|
|
|
|
|
|
|
66,000
|
|
Foreign currency
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,022,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued pursuant to
exercise of stock options
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Issuance of restricted stock
|
|
|
181,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
withheld pursuant to stock issuances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
Stock based compensation
restricted stock
|
|
|
|
|
|
|
|
|
|
|
84,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,000
|
|
Stock based compensation
options
|
|
|
|
|
|
|
|
|
|
|
370,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
(Unaudited)
|
|
|
12,466,000
|
|
|
$
|
121,000
|
|
|
$
|
104,052,000
|
|
|
$
|
(40,922,000
|
)
|
|
$
|
(19,000
|
)
|
|
$
|
(10,926,000
|
)
|
|
$
|
52,306,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
I.D. Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,072,000
|
)
|
|
$
|
(4,063,000
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
|
|
|
|
16,000
|
|
Accrued interest income
|
|
|
32,000
|
|
|
|
(34,000
|
)
|
Stock-based compensation expense
|
|
|
559,000
|
|
|
|
454,000
|
|
Depreciation and amortization
|
|
|
138,000
|
|
|
|
432,000
|
|
Change in fair value of investments
|
|
|
108,000
|
|
|
|
|
|
Deferred rent expense
|
|
|
(5,000
|
)
|
|
|
|
|
Deferred revenue
|
|
|
475,000
|
|
|
|
802,000
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
177,000
|
|
|
|
|
|
Accounts receivable
|
|
|
2,762,000
|
|
|
|
1,011,000
|
|
Unbilled receivables
|
|
|
(32,000
|
)
|
|
|
|
|
Note and lease receivable
|
|
|
|
|
|
|
74,000
|
|
Inventory
|
|
|
(1,215,000
|
)
|
|
|
715,000
|
|
Prepaid expenses and other assets
|
|
|
(69,000
|
)
|
|
|
(483,000
|
)
|
Deferred costs
|
|
|
|
|
|
|
(494,000
|
)
|
Accounts payable and accrued expenses
|
|
|
(1,414,000
|
)
|
|
|
(1,360,000
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,556,000
|
)
|
|
|
(2,930,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Expenditures for fixed assets including website development costs
|
|
|
(198,000
|
)
|
|
|
(506,000
|
)
|
Business acquisition
|
|
|
|
|
|
|
(15,000,000
|
)
|
Purchase of investments
|
|
|
(16,474,000
|
)
|
|
|
(2,751,000
|
)
|
Maturities of investments
|
|
|
11,778,000
|
|
|
|
9,877,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,894,000
|
)
|
|
|
(8,380,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
3,000
|
|
Borrowing on line of credit
|
|
|
12,900,000
|
|
|
|
|
|
Principal payments on line of credit
|
|
|
(160,000
|
)
|
|
|
(2,187,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
12,740,000
|
|
|
|
(2,184,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
(8,000
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,290,000
|
|
|
|
(13,502,000
|
)
|
Cash and cash equivalents beginning of period
|
|
|
12,558,000
|
|
|
|
19,481,000
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
18,848,000
|
|
|
|
5,979,000
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
Noncash activities:
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investments
|
|
$
|
(45,000
|
)
|
|
$
|
66,000
|
|
|
|
|
|
|
|
|
Accrued contingent consideration
|
|
|
|
|
|
$
|
1,017,000
|
|
|
|
|
|
|
|
|
Shares withheld pursuant to stock issuance
|
|
$
|
65,000
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
Acquisition:
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
|
|
|
$
|
20,712,000
|
|
Liabilities assumed
|
|
|
|
|
|
|
(4,695,000
|
)
|
Less: contingent consideration potentially due
|
|
|
|
|
|
|
(1,017,000
|
)
|
|
|
|
|
|
|
|
|
Net cash paid in 2010
|
|
|
|
|
|
$
|
15,000,000
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
I.D. Systems, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2010
NOTE 1 The Company
I.D. Systems, Inc. and its subsidiaries (the Company, we, our or us) develop, market and
sell wireless solutions for managing and securing high-value enterprise assets. These assets
include industrial vehicles, including forklifts, airport ground support equipment, rental vehicles
and transportation assets, such as dry van trailers, refrigerated trailers, railcars and
containers. The Companys patented wireless asset management system addresses the needs of
organizations to control, track, monitor and analyze their assets. The Companys solutions enable
customers to achieve tangible economic benefits by making timely, informed decisions that increase
the security, productivity and efficiency of their operations. The Company outsources its hardware
manufacturing operations to contract manufacturers.
On January 7, 2010, the Company entered into a Membership Interest Purchase Agreement (the
Purchase Agreement) with General Electric Capital Corporation (GECC) and GE Asset Intelligence,
LLC (GEAI ), pursuant to which the Company acquired GEAIs telematics business (the GEAI
Business) through the purchase of 100% of the membership interests of Asset Intelligence, LLC
(AI), a newly formed, wholly owned subsidiary of GEAI into which substantially all of the assets,
including intellectual property, and liabilities of the GEAI Business had been transferred
immediately prior to the closing. Effective with the closing of the transaction, AI became a
wholly owned subsidiary of the Company. See Note 12 to the Unaudited Condensed Consolidated
Financial Statements.
Prior to the AI acquisition, the Company operated in a single reportable segment, which consisted
of the historical operations of I.D. Systems (IDS). Subsequent thereto, the Company has
determined that it has two reportable segments organized by product line: IDS and AI. The IDS
operating segment includes the Companys core wireless asset management systems operations: I.D.
Systems, Inc., I.D. Systems, GmbH, and Didbox Ltd. This core business develops, markets and sells
wireless solutions for managing and securing high-value enterprise assets such as industrial
trucks. The AI operating segment, which consists of Asset Intelligence, LLC, provides data-driven
telematics solutions for tracking and managing supply chain assets such as trailers and containers.
I.D. Systems, Inc. was incorporated in Delaware in 1993 and commenced operations in January 1994.
NOTE 2 Organization and Consolidation Policy
The unaudited interim condensed consolidated financial statements include the accounts of I.D.
Systems, Inc. and its wholly owned subsidiaries Asset Intelligence, LLC (AI), I.D. Systems, GmbH
(GmbH) and Didbox, Ltd. (Didbox) (collectively referred to as the Company). All material
intercompany balances and transactions have been eliminated in consolidation. The accompanying
unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP) for interim
financial information and with the instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by U.S. GAAP for complete financial statements. In the
opinion of management, such statements include all adjustments (consisting only of normal recurring
items) which are considered necessary for a fair presentation of the consolidated financial
position of the Company as of March 31, 2010, the consolidated results of its operations for the
three-month periods ended March 31, 2009 and 2010, respectively, the consolidated change in
stockholders equity for the three months ended March 31, 2010 and consolidated cash flows for the
three month-periods ended March 31, 2009 and 2010. The results of operations for the three-month
period ended March 31, 2010 are not necessarily indicative of the operating results for the full
year. We suggest that these financial statements be read in conjunction with the audited financial
statements and related disclosures for the year ended December 31, 2009 included in the Companys
Annual Report on Form 10-K for the year then ended.
NOTE 3 Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents unless they are legally or contractually
restricted. The Companys cash and cash equivalent balances exceed FDIC limits.
NOTE 4 Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The Company continually evaluates
estimates used in the preparation of the financial statements for reasonableness. The most
significant estimates relate to stock-based compensation arrangements, the fair value of
auction-rate securities and auction-rate securities rights (see Note 6 Fair Value
Measurements), acquisition accounting, realization of deferred tax assets, the impairment of
tangible and intangible assets, inventory reserves, bad debt reserves and warranty and deferred
revenue and costs. Actual results could differ from those estimates.
5
NOTE 5
Investments
The Companys investments include debt securities, U.S. Treasury Notes, government and state agency
bonds, corporate bonds and auction-rate securities, which are classified as either available for
sale, held to maturity or trading, depending on managements investment intentions relating to
these securities. Available for sale securities are marked-to-market based on quoted market values
of the securities, with the unrealized gain and (losses) reported as comprehensive income or
(loss). For the three months ended March 31, 2009 and 2010, the Company reported unrealized (loss)
gain of ($45,000) and $66,000, respectively, on available for sale securities in comprehensive
loss. Investments categorized as held to maturity are carried at amortized cost because the Company
has both the intent and the ability to hold these investments until they mature. The Company has
classified as short-term those securities that mature within one year, and all other securities are
classified as long-term.
The Companys investments include auction rate securities (ARS) and an auction rate securities
right (ARSR), each as described below.
The Company has classified its ARS investments and ARSR as trading securities. Trading securities
are carried at fair value, with unrealized holding gains and losses included in other income
(expense) on the Companys consolidated statements of operations.
At December 31, 2009 and March 31, 2010, the Company held approximately $19.4 million and $17.3
million fair value in ARS and ARSR, respectively. These ARS represent interests in collateralized
pools of student loan receivables issued by agencies established by counties, cities, states and
other municipal entities within the United States. Liquidity for these ARS is typically provided
by an auction process that resets the applicable interest rate at pre-determined
intervals. Starting in February 2008 and continuing through 2010, these securities failed to sell
at auction. These failed auctions represent liquidity risk exposure and are not defaults or credit
events. As a holder of the securities, the Company continues to receive interest on the ARS.
6
The Company purchased all of the ARS it holds from UBS AG (UBS). In October 2008, the
Company received a non-transferable offer (the Offer) from UBS for a put right (the ARSR)
permitting the Company to sell to UBS at par value all ARS previously purchased from UBS at a
future date (any time during a two-year period beginning June 30, 2010). The Offer also included a
commitment to loan the Company 75% of the UBS-determined value of the ARS at any time until the put
is exercised at a variable interest rate that will equal the lesser of: (i) the applicable
reference rate plus a spread set forth in the applicable credit agreement and (ii) the
then-applicable weighted-average interest or dividend rate paid to the Company by the issuer of the
ARS that is pledged to UBS as collateral. In November 2008, the Company accepted the Offer. In
exchange for the Offer, the Company provided UBS with a general release of claims (other than
certain consequential damages claims) concerning our ARS and granted UBS the right to purchase the
Companys ARS at any time for full par value. The Company intends to exercise its right under the
ARSR to put back the ARS to UBS at the time it becomes available.
The Companys right under the ARSR is in substance a put option with the strike price equal to the
par value of the ARS which is recorded as an asset, measured at fair value with the resultant gain
(loss) recognized in earnings. The Company has classified the ARS as trading securities. The
Company recognized the following gain or (loss) in the consolidated statement of operations for the
three months ended March 31, 2010 from the change in the fair value of these instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
Unrealized
|
|
|
|
|
|
|
Fair Value at
|
|
|
Purchases
|
|
|
Gain
|
|
|
Fair Value at
|
|
Three months ended March 31, 2010
|
|
January 1, 2010
|
|
|
(Sales)
|
|
|
(Loss)
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate Securities
|
|
$
|
17,876,000
|
|
|
$
|
(2,150,000
|
)
|
|
$
|
104,000
|
|
|
$
|
15,830,000
|
|
Auction Rate Securities Rights
|
|
|
1,499,000
|
|
|
|
|
|
|
|
(104,000
|
)
|
|
|
1,395,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain recorded for the
three months ended March 31, 2010
|
|
$
|
19,375,000
|
|
|
$
|
(2,150,000
|
)
|
|
$
|
|
|
|
$
|
17,225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the ARSR was based on an approach in which the present value of all expected
future cash flows was subtracted from the current fair market value of the security and the
resultant value was calculated as a future value at an interest rate reflective of counterparty
risk.
Given the substantial dislocation in the financial markets and among financial services companies,
there can be no assurance that UBS ultimately will have the ability to repurchase the Companys ARS
at par, or at any other price, as these rights will be an unsecured contractual obligation of UBS,
or that if UBS determines to purchase the Companys ARS at any time, the Company will be able to
reinvest the cash proceeds of any such sale at the same interest rate or dividend yield currently
being paid to the Company. Also, as a condition of accepting the ARSR, the Company was required to
sign a release of claims against UBS, which will prevent the Company from making claims against UBS
related to the Companys investment in ARS, other than claims for consequential damages.
7
The cost, gross unrealized gains (losses) and fair value of available for sale, held to
maturity and trading securities by major security type at March 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
Investments short term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate
|
|
$
|
17,225,000
|
|
|
|
|
|
|
$
|
(1,395,000
|
)
|
|
$
|
15,830,000
|
|
Auction rate securities right
|
|
|
|
|
|
$
|
1,395,000
|
|
|
|
|
|
|
|
1,395,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
17,225,000
|
|
|
|
1,395,000
|
|
|
|
(1,395,000
|
)
|
|
|
17,225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
503,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
507,000
|
|
Government agency
|
|
|
5,666,000
|
|
|
|
4,000
|
|
|
|
(3,000
|
)
|
|
|
5,667,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
|
6,169,000
|
|
|
|
8,000
|
|
|
|
(3,000
|
)
|
|
|
6,174,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Notes
|
|
|
1,525,000
|
|
|
|
|
|
|
|
|
|
|
|
1,525,000
|
|
Government agency bonds
|
|
|
3,253,000
|
|
|
|
|
|
|
|
|
|
|
|
3,253,000
|
|
Corporate bonds and commercial paper
|
|
|
1,032,000
|
|
|
|
|
|
|
|
|
|
|
|
1,032,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
|
5,810,000
|
|
|
|
|
|
|
|
|
|
|
|
5,810,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments short term
|
|
|
29,204,000
|
|
|
|
1,403,000
|
|
|
|
(1,398,000
|
)
|
|
|
29,209,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency bonds
|
|
|
769,000
|
|
|
|
|
|
|
|
|
|
|
|
769,000
|
|
Corporate bonds and commercial paper
|
|
|
3,623,000
|
|
|
|
|
|
|
|
|
|
|
|
3,623,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity securities
|
|
|
4,392,000
|
|
|
|
|
|
|
|
|
|
|
|
4,392,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments long term
|
|
|
4,392,000
|
|
|
|
|
|
|
|
|
|
|
|
4,392,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
33,596,000
|
|
|
$
|
1,403,000
|
|
|
$
|
(1,398,000
|
)
|
|
$
|
33,601,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above presents held to maturity investments at cost and
amortized cost. At March 31, 2010, the gross unrealized holding gains
for held to maturity securities were $44,000, short-term, and $99,000,
long-term.
NOTE 6 Fair Value Measurements
The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels. The following is a brief description of those
levels:
|
|
|
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
Level 2: Inputs other than quoted prices that are observable for
the asset or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in active
markets and quoted prices for identical or similar assets or
liabilities in markets that are not active.
|
|
|
|
|
Level 3: Unobservable inputs that reflect the reporting entitys own assumptions.
|
8
The following table summarizes the fair values of the Companys investments in the condensed
consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
March 31,
|
|
|
Basis of Fair Value Measurements
|
|
|
|
2010
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
739,000
|
|
|
$
|
739,000
|
|
|
|
|
|
|
|
|
|
Marketable securities short term
|
|
|
29,209,000
|
|
|
|
11,984,000
|
|
|
$
|
|
|
|
$
|
17,225,000
|
|
Marketable securities long term
|
|
|
4,392,000
|
|
|
|
4,392,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,340,000
|
|
|
$
|
17,115,000
|
|
|
$
|
|
|
|
$
|
17,225,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below includes a roll forward of the Companys investments in ARS and the ARSR classified
under Level 3 from January 1, 2010 to March 31, 2010:
|
|
|
|
|
Fair value, January 1, 2010
|
|
$
|
19,375,000
|
|
Net maturities
|
|
|
(2,150,000
|
)
|
Unrealized gain included in condensed consolidated statement of operations
|
|
|
|
|
|
|
|
|
Fair value, March 31, 2010
|
|
$
|
17,225,000
|
|
|
|
|
|
9
NOTE 7 Revenue Recognition
The Companys product revenue is derived from: (i) sales of our wireless asset management system,
which includes training and technical support; (ii) monitoring equipment and spare parts sold to
customers (for which title transfers on date of customer receipt) and from the related customer
service under contracts that generally provide for service over periods from one to five years;
(iii) post-contract maintenance and support agreements; and (iv) periodically, from leasing
arrangements.
Our wireless asset management system consists of on-asset hardware, communication infrastructure
and software. Revenue derived from the sale of our wireless asset management system is allocated to
each element based upon vendor specific objective evidence (VSOE) of the fair value of the element.
VSOE of the fair value is based upon the price charged when the element is sold separately. Revenue
is recognized as each element is earned based on the selling price of each element, and when there
are no undelivered elements that are essential to the functionality of the delivered elements. The
Companys system is typically implemented by the customer or a third party and, as a result,
revenue is recognized when title and risk of loss passes to the customer, which usually is upon
delivery of the system, persuasive evidence of an arrangement exists, sales price is fixed and
determinable, collectability is reasonably assured and contractual obligations have been satisfied.
In some instances, we are also responsible for providing installation services. The additional
installation services, which could be performed by third parties, are considered another element in
a multi-element deliverable and revenue for installation services is recognized at the time the
installation is provided. Training and technical support revenue are recognized at time of
performance.
The Company recognizes revenues from the sale of monitoring equipment when persuasive evidence of
an arrangement exists, delivery has occurred, the price is fixed or determinable, and
collectability is reasonably assured. These criteria include requirements that the delivery of
future products or services under the arrangement is not required for the delivered items to serve
their intended purpose. The Company has determined that the revenue derived from the sale of
monitoring equipment does not have stand alone value to the customer from the communication
services provided and the arrangements constitute a single unit of accounting. Under these
provisions, all of the Companys billings for equipment and the related cost are deferred,
recorded, and classified as a current and long-term liability and a current and long-term asset,
respectively. Deferred revenue and cost are recognized over the service contract life, beginning at
the time that a customer acknowledges acceptance of the equipment and service. The customer service
contracts typically range from one to five years. At December 31, 2009 and March 31, 2010, deferred
product revenue was $-0- and $1,944,000, respectively. During the three months ended March 31,
2010, the Company amortized deferred revenue of $80,000.
The service revenue for our monitoring equipment relates to charges for monthly messaging usage and
value-added features charges. The usage fee is a monthly fixed charge based on the expected
utilization according to the rate plan chosen by the customer. Service revenue generally commences
upon equipment installation and customer acceptance, and is recognized over the period such
services are provided.
Other revenue, which consists primarily of installation and freight charges, is recognized upon
equipment installation and customer acceptance for installation and upon shipment of equipment for
freight. Spare parts sales are reflected in product revenues and recognized on the date of customer
receipt of the part.
The Company also enters into post-contract maintenance and support agreements. Revenue is
recognized over the service period and the cost of providing these services is expensed as
incurred. At December 31, 2009 and March 31, 2010, deferred maintenance revenue was $962,000 and
$1,204,000, respectively.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on
a net basis and therefore are excluded from revenues in the condensed consolidated statements of
operations.
NOTE 8 Note Receivable and Net Investment in Sales-Type Lease
Notes receivable of $303,000 at March 31, 2010 relates to product financing arrangement that
exceeds one year and bears interest at 8%. Interest is recognized over the life of the note. The
Company does not require collateral for the notes. The Company has not and does not intend to sell
these receivables. Amounts collected on the note receivable is included in net cash provided by
operating activities in the condensed consolidated statements of cash flows. Unearned interest
income is amortized to interest income over the life of the note using the effective-interest
method.
Present
value of net investment in sales-type lease of $1,013,000 is for a five-year lease of the Companys product
and is reflected net of unearned income of $189,000 discounted at 8%. Scheduled maturities of minimum lease
payments outstanding as of March 31, 2010 are as follows:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
April December 2010
|
|
$
|
151,000
|
|
2011
|
|
|
216,000
|
|
2012
|
|
|
234,000
|
|
2013
|
|
|
253,000
|
|
2014
|
|
|
159,000
|
|
Thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,013,000
|
|
|
|
|
|
10
NOTE 9 Inventory
Inventory, which primarily consists of finished goods and components used in the Companys
products, is stated at the lower of cost or market using the first-in first-out (FIFO) method.
Inventories
as of December 31, 2009 and March 31, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Components
|
|
$
|
898,000
|
|
|
$
|
4,252,000
|
|
Finished goods
|
|
|
4,519,000
|
|
|
|
5,669,000
|
|
|
|
|
|
|
|
|
|
|
|
5,417,000
|
|
|
|
9,921,000
|
|
Less: Inventory reserves
|
|
|
(930,000
|
)
|
|
|
(913,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,487,000
|
|
|
$
|
9,008,000
|
|
|
|
|
|
|
|
|
Inventories as March 31, 2010 include approximately $4.9 million of inventory from the AI
acquisition (see Note 12). The fair value of the acquired inventory is provisional pending the
completion of the valuation of the assets acquired and liabilities assumed.
NOTE 10 Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation and amortization, and are summarized
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Equipment
|
|
$
|
1,011,000
|
|
|
$
|
1,031,000
|
|
Computer software and website development
|
|
|
414,000
|
|
|
|
2,565,000
|
|
Computer hardware
|
|
|
774,000
|
|
|
|
1,150,000
|
|
Furniture and fixtures
|
|
|
184,000
|
|
|
|
208,000
|
|
Automobiles
|
|
|
80,000
|
|
|
|
53,000
|
|
Leasehold improvements
|
|
|
514,000
|
|
|
|
645,000
|
|
Construction in process
|
|
|
|
|
|
|
566,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,977,000
|
|
|
|
6,218,000
|
|
Accumulated depreciation and amortization
|
|
|
(2,060,000
|
)
|
|
|
(2,346,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
917,000
|
|
|
$
|
3,872,000
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $138,000 and $288,000 for the three months ended March
31, 2009 and 2010, respectively.
NOTE 11 Capitalized Software Development and Website Development Costs
The Company capitalizes in fixed assets the costs of software development and website development.
Specifically, the assets comprise an implementation of Oracle Enterprise Resource Planning (ERP)
software, enhancements to the GE Veriwise
®
systems, and a customer interface website
(which is the primary tool used to provide data to our customers). The website employs updated web
architecture and improved functionality and features, including, but not limited to, customization
at the customer level, enhanced security features, custom virtual electronic geofencing of
landmarks, GPS-based remote mileage reporting, and richer mapping capabilities. The Company
capitalized the costs incurred during the development and enhancement stages of the software
and website development. Costs incurred during the planning and post implementation/operation
stages of development were expensed. The Company capitalized $-0- and $393,000 for website
enhancements for the three months ended March 31, 2009 and 2010, respectively. Amortization of
costs associated with computer software and website development was $30,000 and $132,000 for the
three months ended March 31, 2009 and 2010, respectively.
11
NOTE
12 Acquisitions, Goodwill and Other Intangible Assets
On October 19, 2009, the Company acquired Didbox Ltd. (Didbox), a privately held manufacturer and
marketer of vehicle operator identification systems based in the United Kingdom (UK). The
transaction was valued at approximately $660,000 and was structured with $534,000 paid up front in
cash and contingent consideration of $110,000 due in 12 months based upon achievement of certain
revenue and operating profit targets. The Company expects Didbox to meet the revenue and operating
profit targets. The contingent consideration will be evaluated at each reporting date and any
change in estimate will be recorded through earnings. The estimated potential undiscounted amount
of all future payments that could be required to be paid under the contingent consideration
arrangement is between $99,000 and $110,000. The Company incurred acquisition-related expenses of
approximately $43,000, which were included in selling, general and administrative expenses in the
consolidated statement of operations during the year ended December 31, 2009. The Didbox business
complements the Companys existing businesses by allowing access to the original equipment
manufacturer (OEM) dealer network in the UK, and offers the ability to add the I.D. Systems
solution set to its product line. In addition, the acquisition is expected to provide the Company
with access to a broader base of customers in Europe.
The Company has accounted for the Didbox transaction under the acquisition method of accounting and
recorded the assets and liabilities of the acquired business at their estimated fair values at the
date of acquisition. The excess of the purchase price over the estimated fair values of the net
assets acquired is recorded as goodwill. The goodwill is not expected to be deductible for tax
purposes. Allocation of the Didbox purchase price consists of the following:
|
|
|
|
|
Current assets
|
|
$
|
93,000
|
|
Other assets
|
|
|
36,000
|
|
Current liabilities
|
|
|
(104,000
|
)
|
Goodwill
|
|
|
419,000
|
|
Trademarks and tradenames
|
|
|
61,000
|
|
Customer list
|
|
|
56,000
|
|
Other intangibles
|
|
|
83,000
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
644,000
|
|
|
|
|
|
The results of operations of Didbox have been included in the consolidated statement of operations
as of the effective date of the acquisition. Pro forma results of operations have not been
presented because the effects of the acquisition were not material.
On January 7, 2010, the Company entered into a Membership Interest Purchase Agreement (the
Purchase Agreement) with General Electric Capital Corporation (GECC) and GE Asset Intelligence,
LLC (GEAI ), pursuant to which the Company acquired GEAIs telematics business (the GEAI
Business) through the purchase of 100% of the membership interests of Asset Intelligence, LLC (the
AI), a newly formed, wholly owned subsidiary of GEAI into which substantially all of the assets,
including intellectual property, and liabilities of the GEAI Business had been transferred
immediately prior to the closing. Effective with the closing of the transaction, AI became a
wholly owned subsidiary of the Company. In connection with the transaction, AI offered employment
to all of the former employees of the GEAI Business. The focus of AIs business is in trucking,
rail, marine and intermodal applications. The acquisition is expected to provide the Company with
access to a broader base of customers.
Under the terms of the Purchase Agreement, the Company paid consideration of $15 million in cash at
closing. In addition, the Company may be required to pay additional cash consideration of up to $2
million in or about February 2011, contingent upon the number of new units of telematics equipment
sold or subject to a binding order to be sold by AI during the year ending December 31, 2010. The
purchase price is subject to a working capital adjustment to be performed during 2010, pursuant to
which a portion of the cash consideration paid at closing may be returned to the Company to the
extent that the actual working capital of AI delivered at closing, determined in accordance with a
formula set forth in the Purchase Agreement, is less than $5.5 million.
The Company incurred acquisition-related expenses of approximately $1,355,000, of which $1,241,000
were included in selling, general and administrative expenses in 2009 and $114,000 during the three
months ended March 31, 2010.
The transaction was accounted for using the acquisition method of accounting and the purchase price
was assigned to the net assets acquired based on the fair value of such assets and liabilities at
the date of acquisition. The Company is in the process of finalizing the fair value of the assets
acquired and liabilities assumed, thus, the preliminary allocation of the purchase price may be
subject to change. The Company recorded $1,017,000 of contingent consideration based on the
estimated number of new units of telematics equipment expected to be sold in 2010. The contingent
consideration was estimated using a probability weighted calculation of the number of new units of
telematics equipment expected to be sold in 2010 discounted at 20.5%, which represents the Companys weighted-average
discount rate. The preliminary allocation
of the AI purchase price consists of the following:
|
|
|
|
|
Current assets, excluding inventory
|
|
$
|
4,709,000
|
|
Inventory
|
|
|
5,236,000
|
|
Other assets, net
|
|
|
3,211,000
|
|
Current liabilities
|
|
|
(4,695,000
|
)
|
Intangibles
|
|
|
5,585,000
|
|
Goodwill
|
|
|
1,971,000
|
|
Less: Contingent consideration
|
|
|
(1,017,000
|
)
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
15,000,000
|
|
|
|
|
|
12
The fair value of the assets acquired, liabilities assumed, acquired goodwill and intangible assets
is provisional pending the completion of the valuation of these assets. The goodwill arising from
the acquisition consists largely of the synergies and cost reductions through economies of scale
expected from combining the operations of the Company and AI. The goodwill is expected to be fully
deductible for tax purposes, except the contingent consideration which is deductible only when
paid.
The fair value of the current assets acquired includes trade accounts receivables with a fair value
of $3,272,000. The gross amount due is $3,966,000, of which $694,000 is expected to be
uncollectible.
The results of operations of AI have been included in the condensed consolidated statement of
operations as of the effective date of acquisition.
The following revenue and operating loss of AI were included in the Companys condensed
consolidated results of operations for the three months ended March 31, 2010:
|
|
|
|
|
Revenues
|
|
$
|
3,925,000
|
|
Operating loss
|
|
|
(774,000
|
)
|
The following table represents the combined pro forma revenue and earnings for the three
months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,124,000
|
|
|
$
|
6,366,000
|
|
Net loss
|
|
|
(4,063,000
|
)
|
|
|
(3,994,000
|
)
|
Net loss per share basic and diluted
|
|
|
(0.36
|
)
|
|
|
(0.36
|
)
|
The following table represents the combined pro forma revenue and earnings for the three months
ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Historical
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,934,000
|
|
|
$
|
9,809,000
|
|
Net loss
|
|
|
(3,072,000
|
)
|
|
|
(6,303,000
|
)
|
Net loss per share basic and diluted
|
|
|
(0.28
|
)
|
|
|
(0.58
|
)
|
The combined pro forma revenue and earnings for the three-month periods ended March 31, 2009 and
2010 were prepared as though the acquisition had occurred as of January 1, 2009 and 2010,
respectively. This summary is not necessarily indicative of what the results of operations would
have been had this business acquisition occurred during such period, nor does it purport to
represent results of operations for any future periods.
The changes in the carrying amount of goodwill from January 1, 2010 to March 31, 2010 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IDS
|
|
|
AI
|
|
|
Total
|
|
Balance of as January 1, 2010
|
|
$
|
619,000
|
|
|
|
|
|
|
$
|
619,000
|
|
Asset Intelligence acquisition
|
|
|
|
|
|
$
|
1,971,000
|
|
|
|
1,971,000
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
$
|
619,000
|
|
|
$
|
1,971,000
|
|
|
$
|
2,590,000
|
|
|
|
|
|
|
|
|
|
|
|
13
Identifiable intangible assets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Useful
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
March 31, 2010
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
11
|
|
|
$
|
4,506,000
|
|
|
$
|
(75,000
|
)
|
|
$
|
4,431,000
|
|
Tradename
|
|
|
5
|
|
|
|
361,000
|
|
|
|
(18,000
|
)
|
|
|
343,000
|
|
Non-competition agreement
|
|
|
3
|
|
|
|
175,000
|
|
|
|
(15,000
|
)
|
|
|
160,000
|
|
Technology
|
|
|
5
|
|
|
|
50,000
|
|
|
|
(4,000
|
)
|
|
|
46,000
|
|
Workforce
|
|
|
5
|
|
|
|
33,000
|
|
|
|
(3,000
|
)
|
|
|
30,000
|
|
Customer list
|
|
|
5
|
|
|
|
599,000
|
|
|
|
(32,000
|
)
|
|
|
567,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,724,000
|
|
|
|
(147,000
|
)
|
|
|
5,577,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list
|
|
|
|
|
|
|
104,000
|
|
|
|
|
|
|
|
104,000
|
|
Trademark and Tradename
|
|
|
|
|
|
|
135,000
|
|
|
|
|
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,000
|
|
|
$
|
|
|
|
|
239,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
5,963,000
|
|
|
|
(147,000
|
)
|
|
$
|
5,816,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Useful
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
December 31, 2009
|
|
Lives
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
5
|
|
|
$
|
50,000
|
|
|
$
|
(2,000
|
)
|
|
$
|
48,000
|
|
Workforce
|
|
|
5
|
|
|
|
33,000
|
|
|
|
(1,000
|
)
|
|
|
32,000
|
|
Customer list
|
|
|
5
|
|
|
|
56,000
|
|
|
|
|
|
|
|
56,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,000
|
|
|
|
(3,000
|
)
|
|
|
136,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer list
|
|
|
|
|
|
|
104,000
|
|
|
|
|
|
|
|
104,000
|
|
Trademark and Tradename
|
|
|
|
|
|
|
135,000
|
|
|
|
|
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239,000
|
|
|
$
|
|
|
|
|
239,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
378,000
|
|
|
|
(3,000
|
)
|
|
$
|
375,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31, 2009 and 2010 was $-0- and $144,000,
respectively. Future amortization expense for these intangible assets is as follows:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
|
April December 2010
|
|
$
|
425,000
|
|
2011
|
|
|
567,000
|
|
2012
|
|
|
567,000
|
|
2013
|
|
|
508,000
|
|
2014
|
|
|
504,000
|
|
NOTE 13 Net Loss Per Share of Common Stock
Net loss per share for the three months ended March 31, 2009 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,072,000
|
)
|
|
$
|
(4,063,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding basic
|
|
|
10,895,000
|
|
|
|
11,185,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.28
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
Basic loss per share is calculated by dividing net loss by the weighted-average number of common
shares outstanding during the period. Diluted loss per share reflects the potential dilution
assuming common shares were issued upon the exercise of outstanding options and the proceeds
thereof were used to purchase outstanding common shares. For the three months ended March 31, 2009
and 2010, the basic and diluted weighted-average shares outstanding are the same, since the effect
from the potential exercise of outstanding stock options of 2,596,000 and 2,707,000, respectively,
would have been anti-dilutive.
14
NOTE
14 Stock-based Compensation Plans
The Company adopted the 1995 Non-Qualified Stock Option Plan, pursuant to which the Company had the
right to grant options to purchase up to an aggregate of 1,250,000 shares of common stock. The
Company also adopted the 1999 Stock Option Plan, pursuant to which the Company had the right to
grant stock awards and options to purchase up to 2,813,000 shares of common stock. The Company also
adopted the 1999 Director Option Plan, pursuant to which the Company had the right to grant options
to purchase up to an aggregate of 600,000 shares of common stock. The 1995 Non-Qualified Stock
Option Plan expired during 2005 and the 1999 Stock and Director Option Plans expired during 2009
and the Company cannot issue additional options under these plans.
The Company adopted the 2007 Equity Compensation Plan, pursuant to which the Company may grant
options to purchase up to an aggregate of 2,000,000 shares of common stock. The Company also
adopted the 2009 Non-Employee Director Equity Compensation Plan, pursuant to which the Company may
grant options to purchase up to an aggregate of 300,000 shares of common stock. The plans are
administered by the Compensation Committee of the Companys Board of Directors, which has the
authority to determine, among other things, the term during which an option may be exercised (but
not more than 10 years), the exercise price of an option and the vesting provisions.
The Company recognizes all share-based payments in the statement of operations as an operating
expense, based on their fair values on the applicable grant date. As a result, the Company recorded
$514,000 and $370,000 in stock-based compensation expense for the three-month periods ended March
31, 2009 and 2010, respectively.
The following table summarizes the activity of the Companys stock options for the three months
ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
|
2,659,000
|
|
|
$
|
8.88
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
368,000
|
|
|
|
2.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,000
|
)
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(227,000
|
)
|
|
|
7.56
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(92,000
|
)
|
|
|
14.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
2,707,000
|
|
|
$
|
7.98
|
|
|
6 years
|
|
$
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,541,000
|
|
|
$
|
9.86
|
|
|
5 years
|
|
$
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
As of March 31, 2010, there was approximately $2,942,000 of unrecognized compensation cost
related to non-vested options granted under the Companys option plans. That cost is expected to be
recognized over a weighted-average period of 2.16 years.
The fair value of each option grant on the date of grant is estimated using the Black-Scholes
option-pricing model reflecting the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Expected volatility
|
|
|
56% - 60
|
%
|
|
|
54% - 76
|
%
|
Expected life of options
|
|
5 years
|
|
|
5 years
|
|
Risk free interest rate
|
|
|
2
|
%
|
|
|
2
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility is based on historical volatility of the Companys common stock and the
expected life of options is based on historical data with respect to employee exercise periods.
The weighted-average fair value of options granted during the three months ended March 31, 2009 and
2010 was $1.87 and $1.18, respectively. The total intrinsic value of options exercised during the
three months ended March 31, 2009 and 2010 was
$-0-
and $1,000, respectively.
The Company estimates forfeitures at the time of valuation and reduces expense ratably over the
vesting period. This estimate is adjusted periodically based on the extent to which actual
forfeitures differ, or are expected to differ, from the previous estimate.
NOTE
15 Restricted Stock
In 2006, Company began granting restricted stock to employees, whereby the employees are
contractually restricted from transferring the shares until they are vested. The stock is unvested stock and, upon vesting, there are no legal restrictions on the stock. The fair value of each
share is based on the Companys closing stock price on the date of the grant. A summary of all
non-vested shares for the three months ended March 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted -
|
|
|
|
|
|
|
|
Average
|
|
|
|
Non-vested
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested, beginning of year
|
|
|
172,000
|
|
|
$
|
3.78
|
|
Granted
|
|
|
181,000
|
|
|
|
2.84
|
|
Vested
|
|
|
(11,000
|
)
|
|
|
7.41
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested, end of period
|
|
|
342,000
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
The Company recorded $45,000 and $76,000 in stock-based compensation expense for the three month
periods ended March 31, 2009 and 2010, respectively, in connection with restricted stock grants. As
of March 31, 2010, there was $918,000 of total unrecognized compensation cost related to non-vested
shares. That cost is expected to be recognized over a weighted-average period of 2.6 years.
16
NOTE 16 Performance Shares
In June 2009, the Compensation Committee granted 233,000 performance shares to key employees
pursuant to the 2007 Equity Compensation Plan. The issuance of the shares of the Companys common
stock underlying the performance shares is subject to the achievement of stock price targets of the
Companys common stock at the end of a three-year measurement period ending in January 2012, with
the ability to achieve prorated performance shares during interim annual measurement periods from
January 31, 2009 to January 31, 2012. If the performance triggers are not met, the performance shares
will not vest and will automatically be returned to the 2007 Equity Compensation Plan. If the
performance triggers are met, then the shares will be issued to the employees. For the three months
ended March 31, 2010, the Company recorded $8,000 of stock-based compensation expense in connection
with the performance shares.
NOTE 17 Line of Credit
In October 2008, the Company received an offer (the Offer) from UBS for a put right (the ARSR)
permitting the Company to sell to UBS at par value all ARS held by the Company, all of which
were purchased by the Company from UBS, at a future date (any time during a two-year period
beginning June 30, 2010). Included as part of the Offer, the Company received a commitment to
obtain a loan for 75% of the UBS-determined value of the ARS at any time until the put option is
exercised at a variable interest rate (1.31% at March 31, 2010) that will equal the lesser of: (i)
the applicable reference rate plus a spread set forth in the applicable credit agreement and (ii)
the then-applicable weighted-average interest or dividend rate paid to the Company by the issuer of
the ARS that is pledged to UBS as collateral. The Company accepted the Offer in November 2008. In
March 2009, the Company borrowed $12,900,000 (which amount was equal to 75% of the UBS-determined
value of the ARS) against this credit facility. Principal payments, funded by receipt of ARS
principal, reduced the Companys obligation to $9,451,000 at March 31, 2010. This line of credit
facility is payable on demand.
NOTE 18 Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Accounts payable
|
|
$
|
1,824,000
|
|
|
$
|
2,716,000
|
|
Accrued warranty
|
|
|
|
|
|
|
1,737,000
|
|
Accrued contingent consideration
|
|
|
110,000
|
|
|
|
1,127,000
|
|
Other current liabilities
|
|
|
160,000
|
|
|
|
565,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,094,000
|
|
|
$
|
6,145,000
|
|
|
|
|
|
|
|
|
NOTE 19 Warranty
The Companys AI segment warrants its products against defects in materials and workmanship for a
period of 12 months from the date of acceptance of the product by the customer. The customers may
purchase an extended warranty providing coverage up to a maximum of 60 months. A provision for
estimated future warranty costs is recorded for expected or historical warranty matters related to
equipment shipped.
The following table summarizes warranty activity during the three months ended March 31, 2010:
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
Accrued warranty reserve, January 7, 2010 (date of acquisition)
|
|
$
|
2,053,000
|
|
Accrual for product warranties issued
|
|
|
38,000
|
|
Product replacements and other warranty expenditures
|
|
|
(296,000
|
)
|
Expiration of warranties
|
|
|
(58,000
|
)
|
|
|
|
|
Accrued warranty reserve, end of period
|
|
$
|
1,737,000
|
|
|
|
|
|
17
NOTE 20 Income Taxes
The Company accounts for income taxes under the asset and liability approach. Deferred tax assets
and liabilities are recognized for the expected future tax consequences attributed to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to reverse. As of March 31, 2010, the Company had provided a valuation allowance to fully reserve
its net operating loss carry forwards, primarily as a result of anticipated net losses for income
tax purposes.
NOTE 21 Fair Value of Financial Instruments
The carrying amounts of cash equivalents, accounts receivable, and investments in securities,
including ARS and the ARSR, are carried at fair value and accounts payable, line of credit, and
other liabilities approximate their fair values due to the short period to maturity of these
instruments. The fair value of the ARS was determined utilizing a discounted cash flow approach
and market evidence with respect to the ARS collateral, ratings and insurance to assess default
risk, credit spread risk and downgrade risk.
NOTE
22 Concentration of Customers
One customer accounted for 30% of the Companys revenue and 13% of the Companys accounts
receivable during the three-month period ended March 31, 2010.
Three customers accounted for 37%, 22%, and 12% of the Companys revenue during the three-month
period ended March 31, 2009. Two of these customers accounted for over 51% and 16% of the Companys
accounts receivable and unbilled receivables as of March 31, 2009.
NOTE 23 Stock Repurchase Program
On May 3, 2007, the Company announced that its Board of Directors had authorized the repurchase of
issued and outstanding shares of its common stock having an aggregate value of up to $10,000,000
pursuant to a stock repurchase program established pursuant to Rule 10b-18 under the Securities
Exchange Act of 1934, as amended. The amount and timing of such repurchases are dependent upon the
price and availability of shares, general market conditions and the availability of cash, as
determined at the discretion of the Companys management. The repurchases are funded from the
Companys working capital. The Companys stock repurchase program does not have an expiration
date, and the Company may discontinue or suspend the share repurchase program at any time. All
shares of common stock repurchased under the Companys stock repurchase program are held as
treasury stock. The Company did not purchase any shares of its common stock under the stock
repurchase program during the three-month period ended March 31, 2010. As of March 31, 2010, the
Company has purchased approximately 1,075,000 shares of its common stock in open market
transactions under the stock repurchase program for an aggregate purchase price of approximately
$9,970,000, or an average cost of $9.27 per share.
NOTE 24 Comprehensive Loss
Comprehensive loss includes net loss and unrealized losses on available-for-sale investments and
foreign currency translation gains and losses. Cumulative unrealized gains and losses on
available-for-sale investments are reflected as accumulated other comprehensive loss in
stockholders equity on the Companys condensed consolidated balance sheet. The components
of our comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Net Loss
|
|
$
|
(3,072,000
|
)
|
|
$
|
(4,063,000
|
)
|
Unrealized gain (loss) on available-for-sale marketable securities
|
|
|
(45,000
|
)
|
|
|
66,000
|
|
Foreign currency translation loss
|
|
|
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(3,117,000
|
)
|
|
$
|
(4,022,000
|
)
|
|
|
|
|
|
|
|
18
NOTE 25 Wholly Owned Foreign Subsidiaries
In May 2009, the Company formed an entity in Germany called I.D. Systems, GmbH (the GmbH). This
foreign entity is wholly owned by I.D. Systems, Inc. The GmbH financial statements are consolidated
with the financial statements of I.D. Systems, Inc.
For the three months ended March 31, 2010, the GmbHs operations resulted in net revenues of
$357,000 and a net loss of $7,000. Total assets were $766,000 as of March 31, 2010. The GmbH
operates in a local currency environment using the Euro as its functional currency.
Existing European sales orders/contracts prior to the formation of the GmbH and related accounting
activity will remain in I.D. Systems, Inc. until settled or completed. Existing European employees
and contractors and their related agreements were transferred to the GmbH in August 2009.
In October 2009, the Company acquired Didbox Ltd. (Didbox). This foreign entity is wholly owned
by I.D. Systems, Inc. and is headquartered in the United Kingdom. The Didbox financial statements
are consolidated with the financial statements of I.D. Systems, Inc. as of the effective date of
acquisition.
For the three months ended March 31, 2010, Didboxs operations resulted in net revenues of
$99,000 and net loss of $25,000. Total assets were $729,000 as of March 31, 2010. Didbox operates
in a local currency environment using the British Pound as its functional currency.
Income and expense accounts of foreign operations are translated at actual or weighted-average
exchange rates during the period. Assets and liabilities of foreign operations that operate in a
local currency environment are translated to U.S. dollars at the exchange rates in effect at the
balance sheet date, with the related translation gains or losses reported as components of
accumulated other comprehensive income/loss in consolidated stockholders equity. The translation
of the GmbHs and Didboxs financial statements at March 31, 2010 resulted in a translation loss of
$25,000 which is included in comprehensive loss in the condensed consolidated statement of changes
in stockholders equity.
Gains and losses resulting from foreign currency transactions are included in determining net
income or loss. For the three month periods ended March 31, 2009 and 2010, foreign currency
transaction losses of $2,000 and $18,000, respectively, are included as an offset to selling,
general and administrative expenses in the condensed consolidated statement of operations.
NOTE 26 Rights Agreement
In July 2009, the Company amended its Amended and Restated Certificate of Incorporation in order to
create a new series of preferred stock, to be designated the Series A Junior Participating
Preferred Stock (hereafter referred to as Preferred Stock). Shareholders of the Preferred Stock
will be entitled to certain minimum quarterly dividend rights, voting rights, and liquidation
preferences. Because of the nature of the Series A Preferred Stocks dividend, liquidation and
voting rights, the value of a share of Preferred Stock is expected to approximate the value of one
share of the Companys common stock.
In July 2009, the Company also adopted a shareholder rights plan (the Rights Plan), which
entitles the holders of the rights to purchase from the Company 1/1,000
th
(subject to
prospective anti-dilution adjustments) of a share of Preferred Stock of the Company at a purchase
price of $19.47 (a Right). The Rights Plan has a three-year term with the possibility of two
separate three-year renewals. Until a Right is exercised or exchanged in accordance with the
provisions of the rights agreement governing the Rights Plan, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation, the right to vote
for the election of directors or upon any matter submitted to stockholders of the Company or to
receive dividends or subscription rights. The Rights were registered with the Securities and
Exchange Commission in July 2009.
On June 29, 2009, the Board of Directors of the Company declared a dividend of one Right for each
outstanding share of common stock. The dividend was paid on July 13, 2009 to the stockholders of
record on that date.
NOTE 27 Severance Agreements
In September 2009, the Company entered into severance agreements with four of its executive
officers. The severance agreements, each of which is substantially identical in form, provide each
executive with certain severance and change in control benefits upon the occurrence of a Trigger
Event, as defined in the severance agreements. As a condition to the Companys obligations under
the severance agreements, each executive has executed and delivered to the Company a restrictive
covenants agreement.
19
Under the terms of the severance agreements, each executive is entitled to the following: (i) a
cash payment at the rate of the executives annual base salary as in effect immediately prior to
the Trigger Event for a period of 12 or 18 months, depending on the
executive, (ii) continued healthcare coverage during the severance period, (iii) partial
accelerated vesting of the executives previously granted stock options and restricted stock
awards, and (iv) an award of Performance Shares under the Restricted Stock Unit Award Agreement
previously entered into between the Company and the executive.
NOTE 28 Operating Segments
Prior to the Asset Intelligence (AI) acquisition in January 2010, the Company operated in a
single reportable segment, consisting of the historical operations of I.D. Systems, Inc. (IDS).
Subsequent thereto, the Company has determined that it has two reportable segments organized by
product line: IDS and AI. The IDS operating segment includes the Companys core wireless asset
management systems operations: I.D. Systems, Inc., I.D. Systems, GmbH, and Didbox Ltd. This core
business develops, markets and sells wireless solutions for managing and securing high-value
enterprise assets such as industrial trucks. The AI operating segment, which consists of Asset
Intelligence, LLC, provides data-driven telematics solutions for tracking and managing supply chain
assets such as trailers and containers.
The Company does not allocate indirect expenses, such as compensation to executives and corporate
personnel, professional fees, finance, and certain other operating costs to the individual
segments. These costs are included in the IDS operating segment. The total assets of each segment
are comprised of the assets of the subsidiaries operating in that segment.
A summary of segment information for the three-month periods ended March 31, 2009 and 2010 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2009
|
|
|
March 31, 2010
|
|
(In thousands)
|
|
IDS
|
|
|
AI
|
|
|
Total
|
|
|
IDS
|
|
|
AI
|
|
|
Total
|
|
Revenues
|
|
$
|
2,934,000
|
|
|
$
|
|
|
|
$
|
2,934,000
|
|
|
$
|
2,199,000
|
|
|
$
|
3,925,000
|
|
|
$
|
6,124,000
|
|
Depreciation and amortization
|
|
|
138,000
|
|
|
|
|
|
|
|
138,000
|
|
|
|
143,000
|
|
|
|
289,000
|
|
|
|
432,000
|
|
Operating loss
|
|
|
(3,072,000
|
)
|
|
|
|
|
|
|
(3,072,000
|
)
|
|
|
(3,289,000
|
)
|
|
|
(774,000
|
)
|
|
|
(4,063,000
|
)
|
Capital expenditures
|
|
|
(198,000
|
)
|
|
|
|
|
|
|
(198,000
|
)
|
|
|
(40,000
|
)
|
|
|
(466,000
|
)
|
|
|
(506,000
|
)
|
Segment assets
|
|
|
79,186,000
|
|
|
|
|
|
|
|
79,186,000
|
|
|
|
48,500,000
|
|
|
|
22,550,000
|
|
|
|
71,050,000
|
|
Note 29 Reduction in Work Force
As a result of the integration of AI, the Company will eliminate 39 positions,
representing approximately 32% of our total personnel, to be completed by July 31, 2010.
In order to earn a severance payment, affected employees must complete their transition duties and
execute a general release agreement. The total severance cost is expected to be approximately
$456,000. Charges for severance payments are expected to be incurred through the third quarter of
2010.
NOTE 30 Commitments and Contingencies
Except for normal operating leases, the Company is not currently subject to any material commitments or legal proceedings, nor, to
managements knowledge, is any material legal proceeding threatened against the Company.
NOTE 31 Subsequent Events:
On May 10, 2010, the Company entered into an office lease agreement for approximately 21,400
leasable square feet, which includes office space, storage space and data/server space in Woodcliff
Lake, New Jersey, to be used as the Companys corporate headquarters. Occupancy is expected to
occur during the third quarter of 2010. The base rent for the leased premises varies over the term
of the lease and generally ranges from approximately $457,200 to $534,700 per year. The Company
also will be responsible for its pro rata share of any operating expenses, taxes and insurance
expenses incurred in connection with the office building in which the leased premises are located.
The initial term of the lease agreement is for a period of ten years and seven months, and is
scheduled to commence on July 15, 2010 and to expire on February 28, 2021. Under the lease
agreement, the Company has the option to extend the term for up to two subsequent five-year
periods, provided that the base rent during any extension term will be at a market rate.
20
NOTE
32 Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 166 (Accounting
Standards Codification(ASC ) Topic 860 (ASC 860),
Accounting for Transfers of Financial
Assetsan amendment of FASB Statement No. 140
(SFAS 166). ASC 860 improves the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a transferors
continuing involvement, if any, in transferred financial assets. ASC 860 is effective as of the
beginning of each reporting entitys first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for interim and annual
reporting periods thereafter. The adoption of this guidance did not have a material impact on the
Companys consolidated financial position or results of operations.
In October 2009, the FASB issued ASU No. 2009-13,
Multiple-Deliverable Revenue Arrangements
. This
ASU establishes the accounting and reporting guidance for arrangements including multiple
revenue-generating activities. This ASU provides amendments to the criteria for separating
deliverables, measuring and allocating arrangement consideration to one or more units of
accounting. The amendments in this ASU also establish a selling price hierarchy for determining the
selling price of a deliverable. Significantly enhanced disclosures are also required to provide
information about a vendors multiple-deliverable revenue arrangements, including information about
the nature and terms, significant deliverables, and its performance within arrangements. The
amendments also require providing information about the significant judgments made and changes to
those judgments and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in this ASU are effective prospectively for
revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010. Early application is permitted. The Company is currently evaluating the impact that
the adoption of this ASU will have on its consolidated financial statements but only if adopted in
tandem with ASU 2009-14 (see below).
In October 2009, the FASB issued ASU No. 2009-14,
Certain Revenue Arrangements That Include
Software Elements
. This ASU changes the accounting model for revenue arrangements that include
both tangible products and software elements that are essential to the functionality and scopes
these products out of current software revenue guidance. The new guidance will include factors to
help companies determine what software elements are considered essential to the functionality.
The amendments will now subject software-enabled products to other revenue guidance and disclosure
requirements, such as guidance surrounding revenue arrangements with multiple deliverables. The
amendments in this ASU are effective prospectively for revenue arrangements entered into or
materially modified in the fiscal years beginning on or after June 15, 2010. Early application is
permitted. The Company is currently evaluating the impact that the adoption of this ASU will have
on its consolidated financial statements.
In January 2010, the FASB issued additional guidance for improving disclosures about fair value
measurement. Under this guidance, two new disclosures are required: (i) transfers in and out of
Level 1 and 2 measurements and the reasons for the transfers and (ii) a gross presentation of
activity within the Level 3 rollforward. The guidance is effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the rollforward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15,
2010. The adoption of this guidance did not have and is not expected to have a material impact on the
Companys consolidated results of operations or financial position.
In May 2009, and as amended in February 2010, new authoritative accounting literature established
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before the financial statements are issued or are available to be issued. This accounting
principle was effective for us as of June 30, 2009, and did not have a material impact on our
consolidated financial statements.
21
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial
Condition and Results of Operations
|
The following discussion and analysis of the consolidated financial condition and results of
operations of I.D. Systems, Inc. and its subsidiaries (I.D. Systems, the Company, we, our
or us) should be read in conjunction with the consolidated financial statements and notes thereto
appearing in Part I, Item 1 of this report. In the following discussions, most percentages and
dollar amounts have been rounded to aid presentation, and accordingly, all amounts are
approximations.
Cautionary Note Regarding Forward-Looking Statements
This report contains various forward-looking statements made pursuant to the safe harbor provisions
under the Private Securities Litigation Reform Act of 1995 and information that is based on
managements beliefs as well as assumptions made by and information currently available to
management. Although the Company believes that the expectations reflected in such forward-looking
statements are reasonable, the Company can give no assurance that such expectations will prove to
be correct. When used in this report, the words anticipate, believe, estimate, expect,
predict, project, and similar expressions or words, or the negatives of those words, are
intended to identify forward-looking statements. Readers are cautioned not to place undue reliance
on forward-looking statements, which speak only as of the date hereof, and should be aware that the
Companys actual results could differ materially from those described in the forward-looking
statements due to a number of factors, including business conditions and growth in the wireless
tracking industries, general economic conditions, lower than expected customer orders or variations
in customer order patterns, competitive factors including increased competition, changes in product
and service mix, and resource constraints encountered in developing new products, and other factors
described under Risk Factors set forth in the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2009 and other filings with the Securities and Exchange Commission (the
SEC). Any forward-looking statements regarding industry trends, product development and
liquidity and future business activities should be considered in light of these factors. Unless
otherwise required by law, the Company undertakes no obligation, and expressly disclaims any
obligation, to update or publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events, or otherwise.
The Company makes available through its internet website, free of charge, its Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports
and other filings made by the Company with the SEC, as soon as practicable after the Company
electronically files such reports and filings with the SEC. The Companys website address is
www.id-systems.com. The information contained in this website is not incorporated by reference in
this report.
Overview
We develop, market and sell wireless solutions for managing and securing high-value enterprise
assets. These assets include industrial vehicles, such as forklifts and airport ground support
equipment, rental vehicles, and transportation assets. Our patented wireless asset management
system addresses the needs of organizations to control, track, monitor and analyze their assets.
Our solutions enable our customers to achieve tangible economic benefits by making timely, informed
decisions that increase the security, productivity and efficiency of their operations.
We have focused our core business activities on two primary applications: industrial fleet
management and rental fleet management. Our solution for industrial fleet management allows our
customers to reduce operating costs and capital expenditures and to comply with certain safety
regulations by accurately and reliably measuring and controlling fleet activity. This solution also
enhances security at industrial facilities and areas of critical infrastructure, such as airports,
by controlling access to, and restricting the use of, vehicles and equipment. Our solution for
rental fleet management allows rental car companies to generate higher revenue by more accurately
tracking vehicle data, such as fuel consumption and odometer readings, and improve customer service
by expediting the rental and return processes. In addition to focusing on these core applications,
we have adapted, and intend to continue to adapt, our solutions to meet our customers broader
asset management needs.
We sell our system to both executive and division-level management. Typically, our initial system
deployment serves as a basis for potential expansion across the customers organization. We work
closely with customers to help maximize the utilization and benefits of our system and demonstrate
the value of enterprise-wide deployments.
We market and sell our solutions to a wide range of customers in the commercial and government
sectors. Our customers operate in diverse markets, such as automotive manufacturing, heavy
industry, retail and wholesale distribution, aerospace and defense, homeland security and vehicle
rental.
On January 7, 2010, we acquired the Asset Intelligence (AI) business unit of General Electric
Company, which provides trailer and container tracking solutions for manufacturers, retailers,
shippers and freight transportation providers. The focus of AI on trucking, rail, marine and
intermodal applications expands the scope of assets addressed by I.D. Systems solutions, and the
web and mobile communications technologies of AI are complementary to I.D. Systems portfolio of
wireless asset management patents.
22
AI has long-term communication contracts that provide us with a recurring revenue stream, which is
expected to help reduce quarterly revenue volatility. We expect that
AI will contribute $12 to $15
million to our U.S. GAAP revenue for 2010, including approximately $11 million from recurring
services. We expect the combined gross margins to remain consistent with our historical gross
margins. We have already achieved synergies integrating the AI unit into our core business and we
expect to reduce annual combined operating expenses by approximately $8 million. We expect the
annual operating expenses of the combined businesses to be approximately $22 million.
AI combines web-based software technologies with satellite and cellular communications to deliver
data-driven telematics solutions for supply chain asset management. These solutions help secure
and optimize the performance of trailers, railcars, containers, and the freight they carry,
enabling shippers and carriers to maximize security and efficiency throughout their supply chains.
AIs VeriWise product platform provides comprehensive real-time data for faster, more informed
decision-making in multiple supply chain applications:
|
|
|
Asset Optimizationcombining web-based asset visibility and
advanced telemetry data to monitor the condition of fleet assets,
streamline asset deployment, optimize utilization, and maximize
return on investment.
|
|
|
|
|
Cold Chain Managementmaintaining the condition and quality of
temperature-sensitive cargo from point A to point B, and all the
points in between.
|
|
|
|
|
Fleet Maintenanceutilizing sensor technologies, real-time data
and a wealth of transportation maintenance knowledge to help
control maintenance costs, improve preventative maintenance
practices, increase asset up-time, extend asset life, and reduce
overall cost of ownership.
|
|
|
|
|
Fuel Managementmonitoring key factors in fuel consumption, such
as tire pressure and engine idle time, to help optimize fuel
performance and reduce transportation costs.
|
|
|
|
|
Security & Safetyprotecting valuable assets and cargo throughout the supply chain.
|
As a
result of the integration of AI, we announced in March 2010 that we
will eliminate 39 positions within our
company, representing approximately 32% of our total personnel, to be completed by July 31, 2010.
In order to earn a severance payment, affected employees must complete their transition duties and
execute a general release agreement. The total severance cost is expected to be approximately
$456,000. Charges for severance payments are expected to be incurred through the third quarter of
2010.
Risks
During the three months ended March 31, 2010, we generated revenues of $6.1 million, and the
Wal-Mart Stores, Inc. accounted for 30% of our revenues. During the three months ended March 31,
2009, we generated revenues of $2.9 million, which does not include the acquisition of AI, and the
U.S. Postal Service, Wal-Mart Stores, Inc. and NACCO Materials Handling Group accounted for 37%,
22% and 12% of our revenues, respectively.
We are highly dependent upon sales of our system to a few customers. The loss of any of these key
customers, or any material reduction in the amount of our products they purchase during a
particular period, could materially and adversely affect our revenues for such period. Conversely,
a material increase in the amount of our products purchased by a key customer (or customers) during
a particular period could result in a significant increase in our revenues for such period, and
such increased revenues may not recur in subsequent periods. Some of these key customers, as well
as other customers of the Company, operate in markets that have suffered business downturns in the
past few years or may so suffer in the future, particularly in light of the current global economic
downturn, and any material adverse change in the financial condition of such customers could
materially and adversely affect our financial condition and results of operations. If we are unable
to replace such revenue from existing or new customers, the market price of our common stock could
decline significantly.
23
We expect that customers who utilize our solutions will do so as part of a large-scale
deployment of these solutions across multiple or all divisions of their organizations. A customers
decision to deploy our solutions throughout its organization will involve a significant commitment
of its resources. Accordingly, initial implementations may precede any decision to deploy our
solutions enterprise-wide. Throughout this sales cycle, we may spend considerable time and expense
educating and providing information to prospective customers about the benefits of our solutions.
The timing of the deployment of our solutions may vary widely and will depend on the specific
deployment plan of each customer, the complexity of the customers organization and the difficulty
of such deployment. Customers with substantial or complex organizations may deploy our solutions in
large increments on a periodic basis. Accordingly, we may receive purchase orders for significant
dollar amounts on an irregular and unpredictable basis. Because of our limited operating history
and the nature of our business, we cannot predict the timing or size of these sales and deployment
cycles. Long sales cycles, as well as our expectation that customers will tend to place large
orders sporadically with short lead times, may cause our revenues and results of operations to vary
significantly and unexpectedly from quarter to quarter.
Our ability to increase our revenues and generate net income will depend on a number of factors,
including, for example, our ability to:
|
|
|
increase sales of products and services to our existing customers;
|
|
|
|
|
convert our initial programs into larger or enterprise-wide purchases by our customers;
|
|
|
|
|
increase market acceptance and penetration of our products; and
|
|
|
|
|
develop and commercialize new products and technologies.
|
Additional risks and uncertainties to which we are subject are described in our Annual Report on
Form 10-K for the year ended December 31, 2009.
Critical Accounting Policies
For the three months ended March 31, 2010, there were no significant changes to the Companys
critical accounting policies as identified in its Annual Report on Form 10-K for the year ended
December 31, 2009.
24
Results of Operations
The following table sets forth, for the periods indicated, certain operating information expressed
as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Products
|
|
|
47.0
|
%
|
|
|
33.0
|
%
|
Services
|
|
|
53.0
|
|
|
|
67.0
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
27.2
|
|
|
|
15.9
|
|
Cost of services
|
|
|
18.6
|
|
|
|
28.8
|
|
|
|
|
|
|
|
|
|
|
|
45.8
|
|
|
|
44.7
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
54.2
|
|
|
|
55.3
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
143.5
|
|
|
|
105.7
|
|
Research and development expenses
|
|
|
23.5
|
|
|
|
18.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(112.9
|
)
|
|
|
(69.2
|
)
|
Interest income, net
|
|
|
11.8
|
|
|
|
3.4
|
|
Interest expense
|
|
|
|
|
|
|
(0.5
|
)
|
Other income
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(104.7
|
)%
|
|
|
(66.3
|
)%
|
|
|
|
|
|
|
|
25
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
REVENUES.
Revenues increased by $3.2 million, or 108.7%, to $6.1 million in the three months ended
March 31, 2010 from $2.9 million in the same period in 2009. The increase in revenue is principally
attributable to revenue of $3.9 million from AI which was acquired on January 7, 2010.
Revenues from products increased by $0.6 million, or 46.8%, to $2.0 million in the three
months ended March 31, 2010 from $1.4 million in the same period in 2009. Overall, the increase in
revenues was attributable to the AI product revenue of
$0.5 million, which consists principally of
$0.2 million of revenue from Wal-Mart Stores, Inc.
Revenues
from services increased by $2.5 million, or 163.6%, to $4.1
million in the three months
ended March 31, 2010 from $1.6 million in the same period in 2009. The increase in service revenue
is primarily attributable to a decrease in IDS service revenue of $0.9 million resulting from the
amount of services rendered to the United States Postal Service and Wal-Mart Stores, Inc., more
than offset by AI service revenue of $3.4 million which consists principally of Wal-Mart Stores,
Inc. and GE Trailer Fleet Services revenue of $1.5 million and $0.4 million, respectively.
COST
OF REVENUES.
Cost of revenues increased by $1.4 million, or
103.6%, to $2.7 million in the three
months ended March 31, 2010 from $1.3 million for the same period in 2009. The increase is
attributable to the increase in revenue in 2010. Gross profit was $3.4 million in 2010 compared to
$1.6 million in 2009. As a percentage of revenues, gross profit increased to 55.3% in 2010 from
54.2% in 2009
.
Cost of products increased by $0.2 million, or 22.2%, to $1.0 million in the three months
ended March 31, 2010 from $0.8 million in the same period in 2009. Gross profit for products was
$1.0 million in 2010 compared to $0.6 million in 2009. The increase in gross profit was
attributable to an increase of $0.1 million in the IDS gross profit and $0.3 million from AI. As a
percentage of product revenues, gross profit increased to 51.8% in 2010 from 42.0% in 2009. The
increase in gross profit as a percent of product revenue was due to an increase in the IDS gross
profit percentage to 45.6% in 2010 from 42.0% in 2009 and AI product revenue contributing a higher
gross profit percentage of 69.2% in 2010.
Cost of services increased by $1.3 million, or 222.5%, to $1.8 million, in the three months
ended March 31, 2010 from $0.5 million in the same period in 2010. Gross profit for services was
$2.3 million in 2010 compared to $1.0 million in 2009. The increase in gross profit was
attributable to a decrease of $0.6 million in the IDS gross profit and an increase of $1.9 million
from AI. As a percentage of service revenues, gross profit decreased to 57.0% in 2010 from 64.8% in
2009. The decrease in gross profit as a percent of service revenue was due to a decrease in the IDS gross
profit percentage to 51.1% in 2010 from 64.8% in 2009 and AI service revenue contributing a higher
gross profit percentage of 58.2% in 2010. The gross margin decrease in the IDS gross profit margin
was primarily due to a reduction in service revenue with fixed costs remaining constant driving the
margin down.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses
increased by $2.3 million, or 53.7%, to $6.5 million in the three months ended March 31, 2010
compared to $4.2 million in the same period in 2009. This increase was primarily attributable
to decreases in payroll related and stock-based compensation expense
of $0.4 million, more than offset
by AI selling, general and administrative expenses of $2.5 million which consists principally of
payroll-related and consulting expenses of $1.0 million and $0.8 million, respectively. As a
percentage of revenues, selling, general and administrative expenses decreased to 105.7% in the
three months ended March 31, 2010 from 143.5% in the same period in 2009, primarily due to the
increase in revenue from the AI acquisition.
RESEARCH
AND DEVELOPMENT EXPENSES.
Research and development expenses
increased by $0.5 million, or
67.5%, to $1.2 million in the three months ended March 31,
2010 from $0.7 million in the same period in
2009 due primarily to a decrease in payroll-related and stock compensation expense of $80,000 and
consulting expenses of $66,000, more than offset by AI research and development expenses of
$0.6 million which consists principally of payroll-related and consulting expenses of $0.4 million and
$0.1 million, respectively. As a percentage of revenues, research and development expenses
decreased to 18.8% in the three months ended March 31, 2010 from 23.5% in the same period in 2009,
primarily due to the increase in revenue from the AI acquisition.
26
INTEREST INCOME.
Interest income decreased by $138,000 to $209,000 in the three months ended March
31, 2010 from $347,000 in the same period in 2009. This decrease was attributable primarily to the
decrease in cash and investments and in the rate of interest earned on the Companys cash and
investments.
INTEREST EXPENSE.
Interest expense increased by $30,000 in the three months ended March 31, 2010
from $-0- in the same period in 2009. This increase was due to interest expense incurred on the
Companys line of credit borrowing facility, which was not in place until March 2009.
OTHER INCOME/EXPENSE.
Other income of $1,000 in the three months ended March 31, 2010 increased
$109,000 from other expense of $108,000 in the same period in 2009. The increase consists
principally of the change in the fair value of the Companys investment in auction rate securities
and the auction rate securities right.
NET LOSS.
Net loss was $4.1 million, or $(0.36) per basic and diluted share, for the three months
ended March 31, 2010 as compared to net loss of
$3.1 million, or $(0.28) per basic and diluted share,
for the same period in 2009. The increase in the net loss was due primarily to the reasons
described above.
Liquidity and Capital Resources
Historically, except for our line of credit borrowing of $12.9 million in the first quarter of
2009, the Companys capital requirements have been funded primarily from the net proceeds from the
sale of its securities, including the sale of its common stock upon the exercise of options and
warrants. As of March 31, 2010, the Company had cash and marketable securities, which include
auction rate securities and auction rate security rights of $39.6 million and working capital of
$36.0 million compared to $60.1 million and $47.7 million, respectively, as of December 31, 2009.
Operating Activities
Net cash
used in operating activities was $2.9 million for the three months ended March 31, 2010,
compared to net cash used in operating activities of $1.6 million for the same period in 2009. The
net cash used in operating activities for the three months ended March 31, 2010 reflects a net loss
of $4.1 million and includes non-cash charges of $0.5 million for stock-based compensation and $0.4
million for depreciation and amortization expense. Changes in working capital items, net of $5.3
million of working capital acquired in the AI transaction, included:
|
|
|
a decrease in accounts receivable of $1.0 million resulting from increased cash
collections and the overall decrease in revenue;
|
|
|
|
|
an increase in deferred costs, prepaid expenses and other assets of $1.0 million;
|
|
|
|
|
a decrease in inventory of $0.8 million; and
|
|
|
|
|
a decrease in accounts payable and accrued expenses of $1.4 million primarily
due to the timing of the payments to our vendors.
|
Investing Activities
Net cash used in investing activities was $8.4 million for the three months ended March 31, 2010,
compared to net cash used in investing activities of $4.9 million for the same period in 2009. The
change was due primarily to $15.0 million used for the purchase of AI and $0.5 million in fixed
asset additions partially offset by a net increase in maturities of investments of $7.0 million.
Financing Activities
Net cash used in financing activities was $2.2 million for the three months ended March 31, 2010,
compared to net cash provided by financing activities of $12.7 million for the same period in 2009.
The decrease was due to principal payments on the UBS line of credit of $2.2 million in 2010 and
the borrowing of $12.9 million from the UBS line of credit facility in 2009.
27
Capital Requirements
We believe that with the proceeds received from our public offering that was completed by us in
March 2006, the cash we have on hand and operating cash flows we expect to generate, we will have
sufficient funds available to cover our capital requirements for at least the next 12 months.
Our capital requirements depend on a variety of factors, including, but not limited to, the length
of the sales cycle, the rate of increase or decrease in our existing business base, the success,
timing, and amount of investment required to bring new products to market, revenue growth or
decline and potential acquisitions. Failure to generate positive cash flow from operations will
have a material adverse effect on our business, financial condition and results of operations. We
may determine in the future that we require additional funds to meet our long-term strategic
objectives, including for the completion of potential acquisitions. Any additional equity financing
may be dilutive to stockholders, and debt financing, if available, may involve significant
restrictive covenants, and we cannot assure you that such financing will be extended on terms
acceptable to us, or at all.
At December 31, 2009 and March 31, 2010, we held approximately $19.4 million and $17.2 million fair
value, respectively, in investments in ARS and ARSR. The Company purchased all the ARS it holds
from UBS. These ARS represent interests in collateralized pools of student loan receivables issued
by agencies established by counties, cities, states and other municipal entities within the United
States. Liquidity for these ARS is typically provided by an auction process that resets the
applicable interest rate at pre-determined intervals. Starting in February 2008 and continuing into
2010, these securities failed to sell at auction. Holders of the securities continue to receive
interest on the investments, and the securities continue to be auctioned at the pre-determined
intervals (typically every 28 days) until the auction succeeds, the issuer calls the securities, or
they mature. These failed auctions represent liquidity risk exposure and are not defaults or credit
events. A decline in the value of these securities that is not temporary could materially adversely
affect our liquidity and income.
In October 2008, we received a non-transferable offer (the Offer) from UBS for a put right (the
ARSR) permitting the Company to sell all of its ARS to UBS at a future date (any time during a
two-year period beginning June 30, 2010). The Offer also included a commitment to loan the
Company 75% of the UBS-determined value of the ARS at any time until the put is exercised at a
variable interest rate that will equal the lesser of: (i) the applicable reference rate plus a
spread set forth in the applicable credit agreement and (ii) the then-applicable weighted average
interest or dividend rate paid to the Company by the issuer of the ARS that is pledged to UBS as
collateral. In November 2008, the Company accepted the Offer. In exchange for the Offer, the
Company provided UBS with a general release of claims (other than certain consequential damages
claims) concerning the Companys ARS and granted UBS the right to purchase the Companys ARS at any
time for full par value. We intend to exercise our right under the ARSR to put back the ARS to UBS
at the time it becomes available.
In March 2009, the Company borrowed $12,900,000 (which amount was equal to 75% of the
UBS-determined value of the ARS) against the UBS line of credit facility. Principal payments from
the ARS maturities reduced this obligation to $9,451,000 at March 31, 2010. This line of credit
facility is payable on demand. The Company is paying interest on this obligation based upon the
methodology described above, which is partially offset by interest earned on the underlying ARS.
Given the dislocation in the financial markets and among financial services companies, there can be
no assurance that UBS ultimately will have the ability to repurchase the Companys ARS at par, or
at any other price, as these rights will be an unsecured contractual obligation of UBS, or that if
UBS determines to purchase the Companys ARS at any time, the Company will be able to reinvest the
cash proceeds of any such sale at the same interest rate or dividend yield currently being paid to
the Company under the ARS. Also, as a condition of accepting the ARSR, the Company was required to
sign a release of claims against UBS, which will prevent the Company from making claims against UBS
related to the Companys investment in ARS, other than claims for consequential damages.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a
current or future effect on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
28
Contractual Obligations
As of March 31, 2010, there have been no material charges in contractual obligations as disclosed
under the caption Contractual Obligations in Item 7 of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, except as noted below.
On May 10, 2010, the Company entered into an office lease agreement for approximately 21,400
leasable square feet, which includes office space, storage space and data/server space in Woodcliff
Lake, New Jersey, to be used as the Companys corporate headquarters. Occupancy is expected to
occur during the third quarter of 2010. The base rent for the leased premises varies over the term
of the lease and generally ranges from approximately $457,200 to $534,700 per year. The Company
also will be responsible for its pro rata share of any operating expenses, taxes and insurance
expenses incurred in connection with the office building in which the leased premises are located.
The initial term of the lease agreement is for a period of ten years and seven months, and is
scheduled to
commence on July 15, 2010 and to expire on February 28, 2021. Under the lease agreement, the
Company has the option to extend the term for up to two subsequent five-year periods, provided that
the base rent during any extension term will be at a market rate.
Inflation
Inflation has not had, nor is it expected to have, a material impact on our consolidated financial
results.
Impact of Recently Issued Accounting Pronouncements
The Company is subject to recently issued accounting standards, accounting guidance and disclosure
requirements. Note 32, Recent Accounting Standards, of Notes to Condensed Consolidated Financial
Statements, which is contained in Item 1 of Part I of this Quarterly Report on Form 10-Q, describes
these new accounting standards and is incorporated herein by reference.
29
|
|
|
Item 3.
|
|
Quantitative and Qualitative Disclosures About Market Risk
|
We are subject to market risk from changes in interest rates, which could affect our future results
of operations and financial condition. We manage our exposure to these risks through our regular
operating and financing activities. As of March 31, 2010, we had cash, cash equivalents and
marketable securities of $39.6 million.
Our cash and cash equivalents consist of cash, money market funds, and short-term investments with
original maturities of three months or less. As of March 31, 2010, the carrying value of our cash
and cash equivalents approximated fair value. In a declining interest rate environment, as
short-term investments mature, reinvestment occurs at less favorable market rates, negatively
impacting future investment income. We maintain our cash and cash equivalents with major financial
institutions; however, our cash and cash equivalent balances with these institutions exceed the
Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor on a systematic
basis the cash and cash equivalent balances in our operating accounts and adjust the balances as
appropriate, these balances could be impacted if one or more of the financial institutions with
which we deposit fails or is subject to other adverse conditions in the financial or credit
markets. To date, we have experienced no loss of principal or lack of access to our invested cash
or cash equivalents; however, we can provide no assurance that access to our invested cash and cash
equivalents will not be affected if the financial institutions in which we hold our cash and cash
equivalents fail or the financial and credit markets continue to deteriorate.
At March 31, 2010, we held approximately $17.2 million fair value, respectively, in investments in
ARS and ARSR. The Company purchased all the ARS it holds from UBS. These ARS represent interests
in collateralized pools of student loan receivables issued by agencies established by counties,
cities, states and other municipal entities within the United States. Liquidity for these ARS is
typically provided by an auction process that resets the applicable interest rate at pre-determined
intervals. Starting in February 2008 and continuing into 2010, these securities failed to sell at
auction. Holders of the securities continue to receive interest on the investments, and the
securities continue to be auctioned at the pre-determined intervals (typically every 28 days) until
the auction succeeds, the issuer calls the securities, or they mature. These failed auctions
represent liquidity risk exposure and are not defaults or credit events. A decline in the value of
these securities that is not temporary could materially adversely affect our liquidity and income.
In October 2008, we received a non-transferable offer (the Offer) from UBS for a put right (the
ARSR) permitting the Company to sell all of its ARS to UBS at a future date (any time during a
two-year period beginning June 30, 2010). The Offer also included a commitment to loan the
Company 75% of the UBS-determined value of the ARS at any time until the put is exercised at a
variable interest rate that will equal the lesser of: (i) the applicable reference rate plus a
spread set forth in the applicable credit agreement and (ii) the then-applicable weighted average
interest or dividend rate paid to the Company by the issuer of the ARS that is pledged to UBS as
collateral. In November 2008, we accepted the Offer. In exchange for the Offer, the Company
provided UBS with a general release of claims (other than certain consequential damages claims)
concerning the Companys ARS and granted UBS the right to purchase the Companys ARS at any time
for full par value. We intend to exercise our right under the ARSR to put back the ARS to UBS at
the time it becomes available.
30
There can be no assurance that UBS ultimately will have the ability to repurchase the Companys ARS
at par, or at any other price, as these rights will be an unsecured contractual obligation of UBS,
or that if UBS determines to purchase the Companys ARS at any time, the Company will be able to
reinvest the cash proceeds of any such sale at the same interest rate or dividend yield currently
being paid to the Company. Also, as a condition of accepting the ARSR, the Company was required to
sign a release of claims against UBS, which will prevent the Company from making claims against UBS
related to the Companys investment in ARS, other than claims for consequential damages.
|
|
|
Item 4.
|
|
Controls And Procedures
|
a. Disclosure controls and procedures.
During the quarter ended March 31, 2010, our management, including the principal executive officer
and principal financial officer, evaluated our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) related to the recording, processing, summarization and reporting of information in our
reports that we file with the Securities and Exchange Commission (SEC). These disclosure controls
and procedures have been designed to ensure that material information relating to us, including our
subsidiaries, is made known to our management, including these officers, by other of our employees,
and that this information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the SECs rules and forms. Due to the inherent
limitations of control systems, not all misstatements may be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the control.
Our controls and procedures can only provide reasonable, not absolute, assurance that the above
objectives have been met.
Based on their evaluation as of March 31, 2010, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) are effective as of March 31, 2010 to reasonably
ensure that the information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms and that information required to be disclosed by us in the reports
we file or submit under the Exchange Act is accumulated and communicated to our management,
including our principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
b. Changes in internal controls over financial reporting.
Except as set forth below, there have been no changes in our internal control over financial
reporting that occurred during the three months ended March 31, 2010 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
On January 7, 2010, we completed our acquisition of Asset Intelligence, LLC. We are currently
integrating policies, processes, people, technology and operations for the combined company.
Management will continue to evaluate our internal control over financial reporting as we execute
integration activities.
31
PART II OTHER INFORMATION
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors, in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009, as such factors could materially affect the Companys
business, financial condition, or future results. In the three months ended March 31, 2010, there
were no material changes to the risk factors disclosed in the Companys 2009 Annual Report on Form
10-K. The risks described in the Annual Report on Form 10-K are not the only risks that the
Company faces. Additional risks and uncertainties not currently known to the Company, or that the
Company currently deems to be immaterial, also may have a material adverse impact on the Companys
business, financial condition, or results.
|
|
|
Item 2.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
On May 3, 2008, the Company announced that its Board of Directors authorized the repurchase of
issued and outstanding shares of the Companys common stock having an aggregate value of up to
$10,000,000 pursuant to a share repurchase program established under Rule 10b-18 of the
Exchange Act. The amount and timing of such repurchases are dependent upon the price and availability
of shares, general market conditions and the availability of cash, as determined in the discretion
of our management. The repurchases are funded from our working capital. Our share repurchase
program does not have an expiration date, and we may discontinue or suspend the share repurchase
program at any time. All shares of common stock repurchased under our share repurchase program are
held as treasury stock.
The Company did not purchase any shares of its common stock under the repurchase program during the
three months ended March 31, 2010.
The following exhibits are filed with this Quarterly Report on Form 10-Q:
Exhibits:
|
|
|
|
|
|
2.1
|
|
|
Membership Interest Purchase Agreement, dated as
of January 7, 2010, by and among I.D. Systems,
Inc., General Electric Capital Corporation and GE
Asset Intelligence, LLC (incorporated by reference
to Exhibit 2.1 to the Current Report on Form 8-K
of I.D. Systems, Inc. (File No. 001-15087) filed
with the SEC on January 13, 2010).
|
|
|
|
|
|
|
10.1
|
|
|
Office Lease Agreement, dated as of May 10, 2010,
by and between IPC New York Properties, LLC, as
Landlord, and I.D. Systems, Inc., as Tenant.
|
|
|
|
|
|
|
31.1
|
|
|
Certification of Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
32
Signatures
In accordance with the requirements of the Exchange Act, the Registrant has caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
I.D. SYSTEMS, INC.
|
|
Dated: May 17, 2010
|
By:
|
/s/ Jeffrey M. Jagid
|
|
|
|
Jeffrey M. Jagid
Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
Dated: May 17, 2010
|
By:
|
/s/ Ned Mavrommatis
|
|
|
|
Ned Mavrommatis
|
|
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
33
INDEX TO EXHIBITS
|
|
|
|
|
|
2.1
|
|
|
Membership Interest Purchase Agreement, dated as of January 7, 2010, by and among I.D. Systems,
Inc., General Electric Capital Corporation and GE Asset Intelligence, LLC (incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K of I.D. Systems, Inc. (File No.
001-15087) filed with the SEC on January 13, 2010).
|
|
|
|
|
|
|
10.1
|
|
|
Office Lease Agreement, dated as of May 10, 2010, by and between IPC New York Properties, LLC, as
Landlord, and I.D. Systems, Inc., as Tenant.
|
|
|
|
|
|
|
31.1
|
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
31.2
|
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
32
|
|
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
Exhibit 10.1
TICE BUILDING
OFFICE LEASE AGREEMENT
BY AND BETWEEN
IPC NEW YORK PROPERTIES, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
(AS LANDLORD)
AND
I.D. SYSTEMS, INC.,
A DELAWARE CORPORATION
(AS TENANT)
DATED:
MAY 10
, 2010
TABLE OF CONTENTS
LEASE AGREEMENT
|
|
|
|
|
|
|
PAGE
|
|
|
|
|
|
|
ARTICLE I BASIC LEASE PROVISIONS AND LEASE OF PREMISES
|
|
|
1
|
|
ARTICLE II TERM AND POSSESSION
|
|
|
2
|
|
ARTICLE III RENT
|
|
|
4
|
|
ARTICLE IV SECURITY DEPOSIT
|
|
|
6
|
|
ARTICLE V OCCUPANCY AND USE
|
|
|
6
|
|
ARTICLE VI UTILITIES AND OTHER BUILDING SERVICES
|
|
|
7
|
|
ARTICLE VII REPAIRS, MAINTENANCE, ALTERATIONS, IMPROVEMENTS AND FIXTURES
|
|
|
7
|
|
ARTICLE VIII FIRE OR OTHER CASUALTY INSURANCE
|
|
|
8
|
|
ARTICLE IX EMINENT DOMAIN
|
|
|
10
|
|
ARTICLE X LIENS
|
|
|
10
|
|
ARTICLE XI RENTAL, PERSONAL PROPERTY AND OTHER TAXES
|
|
|
10
|
|
ARTICLE XII ASSIGNMENT AND SUBLETTING
|
|
|
10
|
|
ARTICLE XIII SUBORDINATION
|
|
|
11
|
|
ARTICLE XIV OMITTED
|
|
|
11
|
|
ARTICLE XV DEFAULTS AND REMEDIES
|
|
|
11
|
|
ARTICLE XVI LANDLORDS RIGHT TO RELOCATE TENANT
|
|
|
12
|
|
ARTICLE XVII HAZARDOUS MATERIAL, GOVERNMENTAL, INSURANCE AND ADA REQUIREMENTS
|
|
|
12
|
|
ARTICLE XVIII NOTICE AND PLACE OF PAYMENT
|
|
|
13
|
|
ARTICLE XIX MISCELLANEOUS GENERAL PROVISIONS
|
|
|
13
|
|
|
|
|
|
|
EXHIBIT A LEGAL DESCRIPTION
|
|
|
|
|
EXHIBIT B -1 OFFICE PREMISES FLOOR PLAN
|
|
|
|
|
EXHIBIT B-2 STORAGE PREMISE FLOOR PLAN
|
|
|
|
|
EXHIBIT C EXAMPLE OF THE ACCEPTANCE OF PREMISES AMENDMENT
|
|
|
|
|
EXHIBIT D LANDLORDS WORK
|
|
|
|
|
EXHIBIT E RULES AND REGULATIONS
|
|
|
|
|
EXHIBIT F EXTENSION OPTIONS
|
|
|
|
|
EXHIBIT G RIGHT OF FIRST REFUSAL
|
|
|
|
|
i
OFFICE LEASE AGREEMENT
between
IPC New York Properties, LLC, as Landlord
and
I.D. SYSTEMS, INC., as Tenant
THIS
OFFICE LEASE AGREEMENT
(Lease) is entered into and
made this 10th day of MAY 2010, by and
between
IPC NEW YORK PROPERTIES, LLC
, a Delaware limited liability company (Landlord), and
I.D.
SYSTEMS, INC.,
a Delaware corporation (Tenant).
WITNESSETH
WHEREAS,
Landlord is desirous of leasing the Premises, more fully described hereinafter, to
Tenant; and
WHEREAS,
Tenant is desirous of leasing the Premises, more fully described
hereinafter, from Landlord; and
WHEREAS,
both parties to this Lease have fully reviewed, understand and accept, unless waived
in writing hereunder, all provisions of this Lease; and
WHEREAS,
for good and valuable consideration, the receipt of which is hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
BASIC LEASE PROVISIONS AND LEASE OF PREMISES
1.01
Basic Lease Provisions.
The basic terms and definitions of this Lease are set
forth below:
|
|
|
|
|
A.
|
|
Building:
|
|
Tice Building
|
|
|
Street address:
|
|
123 Tice Boulevard
|
|
|
City:
|
|
Woodcliff Lake
|
|
|
State and Zip Code:
|
|
New Jersey 07677
|
|
|
|
|
|
|
|
Premises:
|
|
|
|
|
|
|
|
|
|
Office Premises:
|
|
Suite 101 on first (1
st
) floor of Building and depicted on Exhibit B-1
|
|
|
|
|
|
|
|
Storage Premises:
|
|
The caged storage area on the lower level of the Building and depicted on Exhibit B-2
|
|
|
|
|
|
|
|
Data Premises:
|
|
The data/server room on the lower level of the Building and depicted on
Exhibit B-2
|
|
|
|
|
|
B.
|
|
Total Leasable Area in the Building:
|
|
119,772 Leasable Square Feet (LSF)
|
|
|
|
|
|
|
|
Leasable Area of the Premises:
|
|
Office Premises: 18,700 Leasable Square Feet
|
|
|
|
|
|
|
|
|
|
Storage Premises: 1,114 LSF
|
|
|
|
|
|
|
|
|
|
Data Premises: 1,586 LSF
|
|
|
|
|
|
|
|
|
|
Total LSF of Premises: 21,400 LSF
|
|
|
|
|
|
|
|
Tenants Pro Rata Share:
|
|
17.87%
|
|
|
|
|
|
C.
|
|
Term (Paragraph 2.01):
|
|
10 Years and 7 months (total of 127 months)
|
|
|
|
|
|
|
|
Scheduled Commencement Date:
|
|
July 15, 2010
|
|
|
|
|
|
|
|
Scheduled Expiration Date:
|
|
February 28, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
|
Base Rent for Office Premises
|
|
Months of
|
|
Monthly Base
|
|
|
Annualized
|
|
|
|
(Paragraph 3.01):
|
|
Term
|
|
Rent
|
|
|
Base Rent
|
|
|
|
|
|
1-24
|
|
$
|
35,062.50
|
|
|
$
|
420,750.00
|
|
|
|
|
|
25-48
|
|
$
|
36,620.83
|
|
|
$
|
439,449.96
|
|
|
|
|
|
49-60
|
|
$
|
38,179.17
|
|
|
$
|
458,150.04
|
|
|
|
|
|
61-84
|
|
$
|
39,737.50
|
|
|
$
|
476,850.00
|
|
|
|
|
|
85-127
|
|
$
|
41,295.83
|
|
|
$
|
495,549.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Rent for Storage and Data Premises
|
|
Months of
|
|
Monthly Base
|
|
|
Annualized
|
|
(Paragraph 3.01):
|
|
Term
|
|
Rent
|
|
|
Base Rent
|
|
|
|
|
|
1-60
|
|
$
|
3,037.50
|
|
|
$
|
36,450.00
|
|
|
|
|
|
61-127
|
|
$
|
3,262.50
|
|
|
$
|
39,150.00
|
|
Prepaid Rent
|
|
$38,100.00 is due and
payable by Tenant upon execution of this Lease by Tenant. This amount
will be applied toward Tenants first months
rent.
|
Page 1
|
|
|
|
|
E.
|
|
Security Deposit (Paragraph 4.01):
|
|
$266,700.00, due and payable by Tenant upon
execution of this Lease by Tenant (subject to
reduction pursuant to Paragraph 4.01).
|
|
|
|
|
|
F.
|
|
Guarantor(s) (Paragraph 19.18):
|
|
N/A
|
|
|
|
|
|
G.
|
|
Addresses for Notices and Payments:
|
|
|
|
|
|
|
|
Notices to Tenant:
|
|
Notices to Landlord:
|
Prior to the Commencement Date:
|
|
|
|
|
|
|
IPC New York Properties, LLC
|
I.D. Systems, Inc.
|
|
15601 Dallas Parkway, Suite 600
|
One University Plaza
|
|
Addison, Texas 75001
|
6
th
Floor
|
|
Attn: Lease Administration
|
Hackensack, New Jersey 07601
|
|
|
Attention: Ned Mavrommatis
|
|
With a copy to:
|
|
|
|
|
|
After the Commencement Date:
|
|
IPC New York Properties, LLC
|
|
|
|
|
c/o Property Manager
|
I.D. Systems, Inc.
|
|
123 Tice Boulevard
|
123 Tice Boulevard. Suite 101
|
|
Woodcliff Lakes, New Jersey 07677
|
Woodcliff Lake, New Jersey 07677
|
|
|
Ned Mavrommatis
|
|
|
|
|
|
|
And with a copy of notices of default to:
|
In each case with a copy to:
|
|
|
|
|
|
|
Behringer Harvard REIT I, Inc.
|
With copy to: David M.
Watkins, Esquire
|
|
15601 Dallas Parkway, Suite 600
|
285 Closter Dock Road
|
|
Addison, Texas 75001
|
P.O. Box 304
Closter, New Jersey 07624
|
|
Attn: Chief Legal Officer
|
|
|
|
|
|
Billing to Tenant:
|
|
Payments to Landlord:
|
|
|
|
|
|
I.D. Systems, Inc.
|
|
IPC New York Properties, LLC
|
123 Tice Boulevard, Suite 101
|
|
PO Box 634885
|
Woodcliff Lake, New Jersey 07677
|
|
Cincinnati, Ohio 45263-4885
|
Ned Mavrommatis
|
|
Tax ID: 51-0381268
|
|
|
|
|
|
H.
|
|
Real Estate Broker (Paragraph 19.04):
|
|
CBRE for Landlord (Landlords Broker) and
Cushman & Wakefield for Tenant (Tenants
Broker)
|
1.02 Lease of Premises.
Landlord, in consideration of the rents and covenants hereinafter set forth,
does hereby
demise, let and lease to Tenant, and Tenant does hereby hire, take
and lease from Landlord, on the
terms and
conditions hereinafter set forth, the Premises, to have and to hold the same, with all
appurtenances, unto Tenant for
the term hereinafter specified.
1.03 Description of Building, Premises and Common Areas.
A.
The Building
. The number of leasable square feet in the Building is specified in
Paragraph 1.01B.
Any reference in this Lease to the term Building shall include any office building, the
Common Areas (as hereinafter
defined) and the land as described in the Legal Description attached as
EXHIBIT A
unless the context requires
otherwise.
B.
The Premises/Re-Measurement
. The premises consist of Office Premises and the
Storage
Premises described in Paragraph 1.01A and depicted on Exhibits
B-1 and B-2 hereto.
If prior to the
Commencement Date the Premises are re-measured using the above ANSI/BOMA standard and the
Premises are
determined to contain more or less LSF than set forth above, and neither party in good faith
objects to such
determination, then the parties will execute an amendment to this Lease amending the LSF of
the Premises and
adjusting all terms hereof affected thereby (e.g., Base Rent, Tenants Pro Rata Share).
C.
The
Common Areas
. The term Common Areas refers to the areas of the Building which
are
designated by Landlord for use in common by all Tenants of the Building and their respective
employees, agents,
customers, invitees and others, and includes, by way of illustration and not limitation,
entrances and exits, hallways
and stairwells, elevators, rest rooms, side-walks, driveways, parking areas, landscaped areas,
plaza and any other
areas as may be designated at any time by Landlord as part of the Common Areas of the
Building.
ARTICLE II
TERM AND POSSESSION
2.01
Commencement and Expiration.
The Term of this Lease shall be the period of time specified
in Paragraph 1.01C, commencing on the earlier to occur of (i) the date that the Landlords Work
(as defined in Exhibit D) is (or is deemed to be) Substantially Complete (as defined in Exhibit
D). or (ii) such earlier date as Tenant takes possession or commences use of the Premises for
business purposes (such earlier date being the Commencement Date). The Lease shall expire
without notice to Tenant on the Expiration Date, which will be the last day of the 127
th
complete calendar month of the Term (the Term including any partial month in which the
Commencement Date occurs). The Commencement Date and the Expiration Date shall be confirmed by
Landlord and Tenant by execution of an Acceptance of Premises Amendment in the form attached
hereto as Exhibit B.
Page 2
2.02 Construction of Tenant Finish Improvements and Possession.
Landlord will perform or cause to
be performed the Landlords Work, as defined in and pursuant to the Work Letter attached hereto as
EXHIBIT D
. Subject to Tenant Delays and Force Majeure, Landlord shall endeavor to
Substantially Complete the Landlords Work by the Scheduled Commencement Date; provided that
Landlord shall have no liability to Tenant for failing to Substantially Complete the Landlords
Work by the Scheduled Commencement Date, Tenants sole and exclusive remedy for such failure being
the postponement of the occurrence of the Commencement Date and the corresponding delay in the
accrual of Rent, and such shall constitute full settlement of all claims that Tenant might otherwise
have against Landlord by reason of the Premises not being ready for occupancy by Tenant on the
Scheduled Commencement Date. Notwithstanding, if the date of this Lease is on or prior to April 2,
2010 and Substantial Completion has not been achieved by the date that is one hundred (100) days
after the Scheduled Commencement Date for any reason other than Force Majeure or Tenant Delays,
then, Tenant shall have the right, exercisable only by written notice to Landlord at any time prior
to the occurrence of the Commencement Date, and as its sole and exclusive remedy, to terminate this
Lease, following which, and subject to Landlords return to Tenant of the Security Deposit, neither
party will have any further obligations to the other hereunder. Upon the occurrence of Substantial
Completion and delivery of possession of the Premises to Tenant, Landlord and Tenant shall execute
the Acceptance of Premises Amendment in the form of that attached
hereto as
EXHIBIT C
,
which, besides fixing the Commencement Date and Expiration Date, will contain acknowledgments that
Tenant has accepted the Premises in their then present condition, and that the Premises and the
Building are satisfactory in all respects except for the Punch List Items (as defined in the Work
Letter). If Tenant takes possession of the Premises other than for purposes of performing Tenants
Work (defined in Section 2.03 below). Tenant shall be deemed to have accepted the Premises even
though the Acceptance of Premises Amendment may not have yet been executed.
2.03 Tenants Work.
Other than Landlords Work, Tenant shall make all other necessary improvements
to the Premises to operate Tenants business including installation of voice data and
telecommunications equipment and cabling, all at Tenants sole cost (Tenants Work). Tenants
Work shall comply with all applicable statutes, ordinances, regulations and codes and shall
strictly comply with the requirements of Paragraph 7.03 hereof. Subject to scheduling and the
progress of Landlords construction of the Landlords Work, Landlord will, in its reasonable
discretion, allow Tenant access to the Premises fifteen (15) days prior to the estimated date for
Substantial Completion solely for purposes of performing the Tenants Work provided, however, that
Tenant shall not interfere with the completion of the Landlords Work and shall cause its
contractors to work in harmony with Landlord and its contractors. Tenants use or occupancy of the
Premises prior to the Commencement Date shall be subject to all of the terms and conditions of the
Lease, including, without limitation, the insurance requirements and indemnity obligations of the
Lease, but excluding those provisions regarding the payment of any scheduled Rent.
TENANT WILL HOLD
LANDLORD HARMLESS AND INDEMNIFY LANDLORD FOR ANY LOSS OR DAMAGE TO TENANTS OR LANDLORDS PROPERTY,
EQUIPMENT, FIXTURES OR MERCHANDISE, AND FOR ANY INJURY TO A PERSON RESULTING THEREFROM, EXCEPT TO
THE EXTENT CAUSED BY THE NEGLIGENCE OF LANDLORD OR ITS AGENTS.
2.04 Surrender of the Premises.
Upon the expiration or earlier termination of this Lease or upon
default or breach of this Lease by Tenant, Tenant shall immediately surrender the Premises and all
keys to the Premises to Landlord, together with all alterations, improvements and other property as
provided elsewhere herein, in broom-clean condition and in good order, condition and repair, except
for ordinary wear and tear and such damage as Tenant is not obligated to repair; failing this,
Landlord may restore the Premises to such condition at Tenants expense, and Tenant shall
immediately reimburse Landlord upon demand. Upon such expiration or termination, Tenant shall have
the right to remove its property (as described in Paragraph 7.04). Tenant shall promptly repair any
damage caused by any such removal, and shall restore the Premises to the condition existing prior
to the installation of the items so removed.
2.05 Holding Over.
If Tenant shall hold over after the expiration of the Term, it shall be deemed
to be occupying the Premises as a Tenant from month to month, which tenancy may be terminated as
provided by law. Tenant agrees that holding over beyond the Term shall cause irreparable damage to
Landlord and that it will be impossible to estimate or determine the damage that will be suffered
by Landlord in such an event. Therefore during such tenancy, Tenant agrees to pay to Landlord 125%
of the monthly Base Rent and Additional Rent payable for the last full month of the Term of the
first (1st) month of such holdover, 150% for the second month of such holdover, and 200%
thereafter, Tenant to otherwise be bound by all of the terms, covenants and conditions contained in
this Lease. If Tenant fails to surrender the Premises upon the termination of this Lease, in
addition to any other liabilities to Landlord arising therefrom Tenant shall indemnify and hold
Landlord harmless from loss or liability resulting from such failure from whatever source.
2.06 AS IS CONDITION.
Except as provided elsewhere in this Lease, by taking possession of the
Premises Tenant accepts the Premises in its as is condition and with all faults, and the Premises
is deemed in good order, condition, and repair provided, however, that Landlord shall correct
latent defects in the Landlords Work for a period of six (6) months after the Commencement Date
conditioned upon Tenant notifying Landlord of the discovery thereof within fifteen (15) days after
such defect was discovered. As used herein, a latent defect is a defect in the construction of
the Landlords Work that is not visible or otherwise discoverable by a reasonably diligent visual
inspection at the time the Landlords Work was otherwise Substantially Completed. Further, nothing
in this Section 2.06 relieves Landlord from the obligation to complete Punch-list Items determined
pursuant to the terms of the Work Letter attached hereto as
Exhibit D
. Landlord does not make and
Tenant does not rely upon any representation or warranty of any kind, express or implied, with
respect to the condition of the Premises (including habitability or fitness for any particular
purpose of the Premises).
TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, LANDLORD HEREBY
DISCLAIMS, AND TENANT WAIVES THE BENEFIT OF, ANY AND ALL IMPLIED WARRANTIES, INCLUDING IMPLIED
WARRANTIES OF HABITABILITY AND FITNESS OR SUITABILITY FOR A PARTICULAR PURPOSE.
2.07 Access to Data Premises.
Landlord will grant Tenant access to the Data Premises as soon as
Landlord and the current tenant of such space have terminated the existing lease for such space on
terms satisfactory to Landlord and Landlord has obtained actual possession of such space
conditioned, however, upon (i) Landlords mortgagee having approved of this Lease, (ii) Landlord
having received from Tenant the Security Deposit and the Prepaid Rent, and (iii) Tenant having
provided evidence of insurance required to be maintained by Tenant
hereunder. Tenants use and
occupancy of the Data Premises prior to the Commencement Date shall be subject to all of the terms
and conditions of this Lease except for Tenants obligation to pay Base Rent and Additional Rent
with respect thereto (however, Tenant will be required to pay for electricity service to the Data
Premises during such early occupancy pursuant to Paragraph 6.01 hereof).
Page 3
ARTICLE III
RENT
3.01 Base Rent.
Tenant shall pay to Landlord as Base Rent for the Premises the amounts
specified in Paragraph 1.01D for each of the Office Premises and the Storage and Data Premises,
payable in equal consecutive monthly installments as specified in
said Paragraph 1.01.D, in
advance, on or before the first day of each and every calendar month during the Term without
demand, notice or offset provided, however, that if the Commencement Date shall be a day other than
the first day of a calendar month, then the schedule of Base Rent set forth in Paragraph 1.01.D
will be measured from the first
(1
st
)
calendar month of the Term and Tenant shall pay
Base Rent for the fractional month in which the Commencement Date occurred at the rate otherwise
due for the first (1
st
) complete calendar month but prorated on the basis of the number
of days during the month this Lease was in effect in relation to the total number of days in such
month. Notwithstanding the forgoing, all Base Rent (but no other Rent) shall be conditionally
abated in its entirety for months one (1) through seven (7) of the Term (the Abatement Period).
To illustrate, if the Commencement Date is July 10, 2010, then the Abatement Period would commence
on the Commencement Date and end on February 9, 2011. However, If a default by Tenant under the
Lease occurs, then (i) if the Abatement Period has not expired or terminated, the Abatement Period
shall immediately terminate and Tenant shall immediately commence payment of full Base Rent, and
(ii) if Landlord terminates the Lease or Tenants possession of the Premises due to such default
Tenant shall pay to Landlord upon demand, for loss of the bargain and not as a penalty, all
previously abated Base Rent and Additional Rent Termination of the Abatement Period and the
obligation to repay abated Base Rent will be without limitation of Landlords other remedies for a
default by Tenant.
3.02
Additional Rent.
All other payments due under this Lease from Tenant shall be considered
additional rent (Additional Rent) and shall include the following:
A. Adjustments to Operating Expenses and Taxes:
1.
Definitions
:
(a)
Operating Expenses
shall mean the amount of any and all of Landlords direct costs, expenses
and disbursements of any kind and nature, incurred in connection with the management, operation,
maintenance and repair of the Building (including the Common Areas and the land described in
EXHIBIT A
) or any improvements situated on the land for a particular calendar year or
portion thereof, as determined by Landlord, together with all additional direct costs, expenses and
disbursements with respect to the management, operation and maintenance of the Building. If less
than ninety-five percent (95%) of the rentable square feet in the
Building is occupied, Operating
Expenses shall be adjusted to the amount which Landlord determines that it would have paid during
such year (including the Base Year) If the Building had been
ninety-five percent (95%) occupied.
Operating Expenses include by way of illustration but not limitation: water, sewer, electrical and
other utility charges for the Building and Common Areas, other than any utility charges for other
premises which are separately metered and paid directly by the tenant thereof; service and other
charges paid in connection with the operation and maintenance of the elevators and the heating,
ventilation and air-conditioning system; cleaning and other janitorial services; tools and
supplies; repair costs; landscape maintenance costs; snow removal; security services; license,
permit and inspection fees; management fees; auditing fees; wages and related employee benefits
payable for the maintenance and operation of the Building; and, in general, all other costs and
expenses which would generally be regarded as operating and maintenance costs and expenses,
including those which would normally be amortized over a period not to exceed five (5) years. There
shall also be included in the Operating Expenses the cost or portion thereof reasonably allocable
to any capital improvement made to the Building by Landlord after the date of this Lease which (i)
improves the operating efficiency of any system within the Building and thereby reduces Operating
Expenses, or (ii) is required under any governmental law or regulation that was not applicable to
the Building at the time it was constructed, or (iii) is installed pursuant to Paragraph 3.02B,
with such cost being amortized over such period of time and in such manner as Landlord shall
reasonably determine, together with interest on such cost or the unamortized balance thereof.
Operating Expenses shall not include (i) expenses for painting, redecorating or other work which
Landlord performs for any Tenant in the Building; (ii) expenses for repairs or other work
reimbursed by insurance proceeds; (iii) expenses incurred in leasing or procuring new tenants: (iv)
legal expenses incurred in enforcing the terms of any lease; (v) interest or amortization payments
on any mortgage or mortgages; (vi) Taxes: and (vii) Insurance.
(b)
Taxes
shall mean and include (i) any form of real estate tax or assessment, general, special,
ordinary or extraordinary, improvement bond or bonds imposed on the Building or a portion thereof
by any authority having a direct or indirect power to tax, including any city, county, state or
federal government or any school, agricultural, sanitary, fire, street, drainage or other
improvement district thereof against any legal or equitable interest of Landlord in the Building or
any portion thereof, (ii) taxes, assessments or fees in lieu of
the taxes described in (i); and
(iii) the reasonable costs incurred to reduce the taxes described in (i ii). Taxes excludes
federal income taxes and taxes paid under Paragraph 3.05 below.
(c)
Insurance
Expenses
shall mean insurance premiums on insurance coverage which is required to
be carried by Landlord or which Landlord may elect to carry at
Landlords discretion.
(d)
Tenants
Pro Rata Share
shall mean the percentage specified in Paragraph 1.01B.
(e)
Base Year
shall mean the calendar year in which the Lease commences.
(f)
Adjustment Year
shall mean any calendar year or portion thereof during the Term of the Lease
commencing with the year after the Base Year. In the event the last Adjustment Year is not a full
calendar year, the Additional Rent payable under Paragraph 3.02A.2 with respect to such partial
year shall be prorated.
(g)
Tenants Share of Expenses
means, for each Adjustment Year, the sum of money equal to
Tenants Pro Rata Share of an amount equal to the sum of (i) the Operating Expenses for such
Adjustment Year, less the Operating Expenses for the Base Year; (ii) Taxes for such Adjustment
Year, less the Taxes for the Base Year; and (iii) Landlords Insurance Expense for such Adjustment
Year, less Landlords Insurance Expense for the Base Year in no event shall Tenants Share of
Expenses or any individual item (i), (ii), or (iii) above be less than zero (0).
Page 4
2.
Payment Obligations
. Tenant shall pay as Additional Rent Tenants Share of
Expenses for each Adjustment Year. Prior to the beginning of each Adjustment Year, Landlord shall
advise Tenant of Landlords good faith estimate of the amount, if any, of Tenants Share of
Expenses for the upcoming Adjustment Year and Tenant shall pay to Landlord the estimated Tenant
Share of Expenses in equal monthly installments on the first day of each month during that
Adjustment Year together with the Base Rent.
3.
Succeeding Year Expenses
. Prior to the beginning of each Adjustment Year, Landlord
shall advise Tenant of the estimated amount, if any, of the increase in Operating Expenses, Taxes
and Insurance Expenses over the Base Year, for the upcoming calendar year, and Tenant shall pay to
Landlord Tenants Pro Rata Share of such estimated increase in equal monthly installments on the
first day of each month during that Adjustment Year together with the Base Rent. At the end of each
Adjustment Year, Landlord shall ascertain and advise Tenant of Tenants Pro Rata Share of the
actual amount of any increase in Operating Expenses. Taxes and Insurance for the preceding year and
any additional sum owed by Tenant to Landlord shall be paid to Landlord within thirty (30) days
following the receipt of Landlords notice thereof. Should any excess have been paid by Tenant to
Landlord for the preceding year, Landlord shall apply the excess toward sums due for the next
following calendar year.
B.
Improved Operating Efficiency
. If Landlord shall, at any time after the Commencement
Date, install a labor-saving device or other equipment, which improves the operating efficiency of
any system within the Building (such as an energy management computer system) and thereby limits
Operating Expenses or the cost of electricity to operate the Building, or limits future increases
in Operating Expenses or electrical costs, then Landlord may add to Operating Expenses an annual
amortization allowance based upon the costs of such equipment, plus interest on the unamortized
balance thereof, amortized in equal installments over such period as determined by generally
accepted accounting principals; provided, however, that the amount of such annual amortization
allowance and interest shall not exceed the annual cost or expense limitation attributed by
Landlord to such installed device or equipment, and in no event shall such amortization allowance
increase the sum of Operating Expenses over what it would have been if such labor-saving device or
other equipment had not been installed.
C.
Settlement
. As soon as practical after the end of each Adjustment Year, but no
later than one (1) year after the end of the applicable Adjustment Year, Landlord will provide
Tenant a statement of the actual Operating Expenses, Taxes and Insurance Expenses for such
year and the actual Tenants Share of Expenses (a Reconciliation Statement). If the
actual Tenants Share of Expenses exceeds the estimated Tenants Share of Expenses paid by Tenant
for the subject Adjustment Year, then Tenant shall pay the underpayment thereof to Landlord in a
lump sum as Rent within thirty (30) days after receipt of the Reconciliation Statement. If the
estimated Tenants Share of Expenses exceeds the actual Tenants Share of Expenses for the
Adjustment Year, then Landlord shall credit the overpayment against Tenants payment of Tenants
Share of Expenses next due until applied in full or, if no further payments are due and Tenant is
not in default under this Lease, refund such overpayment to Tenant. In the event Landlord has not
provided a Reconciliation Statement by the date one (1) year after the end of the applicable
Adjustment Year, Landlord shall forever forfeit the right to collect any underpayment of Tenants
Share of Expenses for such Adjustment Year. Landlords and Tenants obligations under this
Paragraph C survive the end of the Term.
D.
Dispute of Additional Rent
. Provided it is timely received as described above,
the Reconciliation Statement is conclusive, binds Tenant, and Tenant waives all rights to contest
the statement, except for items to which Tenant objects by written notice to Landlord given within
sixty (60) days after Tenants receipt of the Reconciliation Statement. If Tenant timely objects
to the Reconciliation Statement in any respect, Tenant and Landlord shall have thirty (30) days
after Landlords receipt of Tenants questions to amicably resolve them. If Tenant timely objects
to Landlords Reconciliation Statement and such objections are not amicably settled between
Landlord and Tenant within such thirty (30) period, Tenant, at its expense, shall have sixty (60)
days from the end of such thirty (30) day period to audit Landlords books and records relating to
the applicable category of Tenant Share of Expenses (
i.e.
, Insurance Expenses, Operating Expenses
or Taxes) for all or any part of the immediately preceding Adjustment Year. Any audit by Tenant
must be performed within such period by a reputable independent certified public accountant who is
experienced in auditing leases for operating expenses and otherwise reasonably acceptable to
Landlord and who is engaged by Tenant on a non-contingency fee basis. Tenant shall provide
Landlord with a copy of such audit upon completion. Landlord shall cooperate with the Tenant in
connection with such audit and shall make available its books and records relating to Operating
Expenses, Taxes and Insurance Expenses for the subject Adjustment Year upon not less than ten (10)
business days notice, during regular business hours, and at the location in the Memphis, Tennessee
metro area where Landlord customarily keeps such books and records. Under no circumstances will
Tenant be permitted to review or audit income tax records of Landlord or similar financial records
of Landlord as a business entity. Tenant recognizes that Landlords books and records are
confidential records and Tenant agrees not to disclose same or the results of its audit to any
third party (other than Landlord) except to its directors, officers, employees, affiliates,
subsidiaries, partners, lenders, insurers, auditors, agents, accountants, attorneys, financial
advisors, or to any parties required in response to summonses or subpoenas, or to any regulator,
organization of regulators or self-regulatory organization, or as required by applicable law or in
connection with any proceeding between Landlord and Tenant pertaining to same. Neither Tenant nor
its auditor shall be permitted to take from Landlords office any of Landlords books and records
without Landlords consent. In the event Tenants audit reflects that Landlord has overcharged
Tenant for the preceding calendar year, and Landlord does not in good faith dispute such audit,
Landlord shall credit the amount of such overcharge to future payments of the subject category of
expense to the extent of such overcharge or, if no such payments will be due, promptly reimburse
Tenant for such overcharge. If such audit reveals that Landlord has undercharged Tenant for
Tenants Share of Expenses, Tenant shall promptly pay Landlord the amount of such undercharge
within thirty (30) days after written demand by Landlord. The expense of Tenants audit shall be
borne by Tenant unless the agreed results of such audit determine that Additional Rent charged to
Tenant by Landlord for the period in question was more than five percent (5%) in excess of the
actual Additional Rent chargeable to Tenant as determined by the audit, in which case the actual
and reasonable expense of the audit shall be reimbursed by Landlord up to a maximum of $2,500.00 or
the lesser amount of any overcharge. Landlord will not under any circumstances be required to
retain or preserve records of expenses and Tenants Share of Expenses for more than twenty-four
(24) months after the end of the Adjustment Year to which they relate. Tenants objection to any
Reconciliation Statement will not relieve Tenant from the obligation to timely pay any Tenants
Share of Expenses, including any disputed portion thereof shown as underpaid in the Reconciliation
Statement, but Tenants obligations to pay any such disputed amounts Rent will be subject to
Tenants rights under this Paragraph 3.02D. In no event shall the provisions of this Paragraph 3.02
reduce the Base Rent specified in Paragraph 1.01D.
Page 5
3.03 Definition of Rent.
The Base Rent, Additional Rent and any other amounts of money to be paid by
Tenant to Landlord pursuant to the provisions of this Lease, including any sums due under any and
all Exhibits attached hereto, whether or not such payments are denominated Base Rent or Additional
Rent and whether or not they are to be periodic or recurring, shall be sometimes collectively
referred to as rent for purposes of this Lease; and any failure to pay any of the same as
provided in this Lease shall entitle Landlord to exercise all of the rights and remedies afforded
hereby or by law for the collection and enforcement of Tenants obligation to pay rent. Tenants
obligation to pay any such rent pursuant to the provisions of this Lease shall survive the
expiration or other termination of this Lease and the surrender of possession of the Premises after
any hold-over period and are covenants independent of any obligations or covenants of Landlord
herein.
3.04 Late Charge.
If any payment due Landlord under this lease has not been received by Landlord
when due, Tenant shall pay a late charge of five percent (5%) of the
amount of the late payment, and
an additional five percent (5%) late charge may be charged on the first day of each calendar month
thereafter until the delinquent payment has been paid in full; provided, that in no event shall the
charges permitted under this Paragraph 3.04 or elsewhere in this Lease, to the extent they are
considered to be interest under applicable law, exceed the maximum
lawful rate of interest. Notwithstanding the above, the first
(1
st
) late charge in each twelve (12) month
period of the Term
will be waived by Landlord provided that the delinquent installment of rent is received by Landlord
prior to the expiration of any notice and cure period provided for in Section 15.01(a).
3.05
Other Taxes.
Upon demand, Tenant will reimburse Landlord for taxes paid by Landlord on (i)
rent, (ii) Tenants occupancy of the Premises, or (iii) this Lease. If Tenant cannot lawfully
reimburse Landlord for these taxes, then to the extent not prohibited by applicable law, the Base
Rent will be increased to yield to Landlord the same amount after these taxes were imposed as
Landlord would have received before these taxes were imposed.
ARTICLE IV
SECURITY DEPOSIT
4.01
As security for the performance and observance by Tenant of all of its obligations under the
terms, condition and covenants of this Lease, Tenant has deposited with Landlord the sum specified
in Paragraph 1.01E, which sum shall be held by Landlord as a security deposit during the Term. If
Tenant performs and observes all of the terms, conditions and covenants of this Lease which are
required to be performed and observed by it, Landlord shall return the security deposit, or balance
thereof then held by Landlord, without interest, to Tenant within thirty (30) days after the
Expiration Date or after Tenant surrenders possession of the Premises, whichever is later. In the
event of a default by Tenant in the payment of rent or the performance or observance of any of the
other terms, conditions or covenants of this Lease, then Landlord may, at its option and without
notice, apply all or any part of the security deposit in payment of such rent or to cure any other
such default; and if Landlord does so, Tenant shall, upon request, deposit with Landlord the amount
so applied so that Landlord will have on hand at all times during the Term the full amount of the
security deposit, Landlord shall not be required to hold the security deposit as a separate
account, but may commingle it with Landlords other funds.
4.02
In the event of a sale or lease of the Building, Landlord shall have the right to transfer the
security deposit to its purchaser or Tenant, and Landlord shall thereupon be released by Tenant
from all responsibility for the return of such deposit; and, Tenant agrees to look solely to the
new purchaser or Tenant for the return of such deposit. In the event of an assignment of this Lease
by Tenant, the security deposit shall be deemed to be held by Landlord as a deposit made by the
assignee, and Landlord shall have no further responsibility of such deposit to the assignor.
4.03
If at the end of the third year of the Term no monetary event of default by Tenant has occurred
under the Lease, Landlord will return a portion of the Security Deposit in the amount of $76,087.50
back to Tenant. If at the end of the fifth year of the Term no monetary event of default by Tenant
has occurred under the Lease, Landlord will return an additional portion of the Security Deposit in
the amount of $76,087.50 back to Tenant. If a default occurs hereunder, there shall be no
reduction or return (or as applicable, any further reduction or return) of any portion of the
security deposit.
ARTICLE V
OCCUPANCY AND USE
5.01 Use of Premises.
The Office Premises shall be occupied and used exclusively as office space and
electronic laboratory and for the purposes incidental thereto, and shall not be used for any other
purpose. The Storage Premises shall be occupied and used exclusively as only for office storage
in connection with the Office Premises (and not any other premises). The Data Premises shall be
used exclusively for locating and operating Tenants servers and data/telecommunications equipment
and cabling serving the Office Premises and shall not be used for any other purpose Tenant will not
use or occupy or permit the use or occupancy of the Premises for any purpose which is forbidden by
law, ordinance or governmental or municipal regulation or order or which may be dangerous to life,
limb or property; or permit the maintenance of any public or private nuisance; or do or permit any
other thing which may disturb the quiet enjoyment of any other tenant of the Building; or keep any
substance or carry on or permit any operation which might emit offensive odors or conditions into
other portions of the Building or use any apparatus which might make undue noise or set up
vibrations in the Building; or permit anything to be done which would increase the fire and
extended coverage insurance rate on the Building or contents, provided that if there is any
increase in such rate by reason of acts of Tenant, then Tenant agrees to pay such increase promptly
upon demand therefor by Landlord Payment by Tenant of any such rate increase shall not be a waiver
of Tenants duty to comply herewith. Tenant shall not use the Premises in such a manner as to
disturb any asbestos contained in the Building.
5.02 Compliance with Building Rules and Regulations.
Rules and regulations governing the use and
occupancy of the Premises, the Common Areas and all other leased space in the Building have been
adopted by Landlord for the mutual benefit and protection of all the tenants in the Building (as
existing and modified from time to time, the Rules and Regulations). Tenant shall comply with and
conform to the Rules and Regulations currently in effect, which are set forth on
EXHIBIT E
attached hereto. Landlord shall have the right to amend the Rules and Regulations or to make new
Rules and Regulations from time to time in any reasonable manner. Any such amendments or additions
to the Rules and Regulations shall be set forth in writing and shall be given to Tenant, who shall
thereafter comply with and conform to the same.
5.03 Floor Loads.
Tenant shall not overload the floors of the Premises beyond their designed
weight-bearing capacity as determined by Landlord. Landlord reserves the right to direct the
positioning of all heavy equipment,
furniture and fixtures which Tenant desires to place in the Premises so as to distribute
property the weight thereof. Landlord may require the removal of any equipment or furniture
which exceeds the weight limits of the Building.
Page 6
5.04 Signs.
Unless otherwise expressly provided in the Lease. Tenant shall not inscribe, paint,
affix or display any signs, advertisements or notices on, in or around the Building, or in the
windows thereof, except for such Tenant identification information as Landlord permits to be
included or shown on or adjacent to the Tenant access door(s) to the Premises or on the Building
directory.
5.05 Access to and Inspection of the Premises.
Landlord, its employees and agents and any
mortgagee of the Building shall have the right to enter any part of the Premises at all
reasonable times for the purpose of examining or inspecting the same, showing the same to
prospective purchasers, mortgagees or tenants and for making such repairs, alterations or
improvements to the Premises or the Building as Landlord may deem necessary or desirable. Such
right of entry shall also include, but not be limited to, access to the Premises for purposes of
environmental inspections and sampling during regular business hours, or during other hours
either by agreement of the parties or in the event of any environmental emergency. If
representatives of Tenant shall not be present to open and permit such entry into the Premises at
any time when such entry if necessary or permitted hereunder, Landlord and its employees and
agents may enter the Premises by means of a master key or otherwise Landlord shall incur no
liability to Tenant for such entry nor shall such entry constitute an eviction of Tenant or a
termination of this Lease or entitle Tenant to any abatement of rent therefor.
5.06
Quiet Enjoyment.
Except as provided in Article XV hereof to the extent that it may be
applicable, if and so long as Tenant pays the prescribed rent and performs and observes all of
the terms, conditions, covenants and obligations of this Lease required to be performed or
observed by it hereunder. Tenant shall at all times during the term hereof have the peaceful and
quiet enjoyment, possession, occupancy and use of the Premises without any interference from
Landlord or any person or persons claiming the Premises by, through or under Landlord, subject to
any mortgages, underlying leases or other matters of record to which this Lease is or may become
subject.
ARTICLE VI
UTILITIES AND OTHER BUILDING SERVICES
6.01 Services to be Provided.
Landlord shall furnish Tenant without cost to Tenant except as
otherwise specifically provided in this Lease, during standard hours of operation, with utilities
and other building services, as provided in the Rules and Regulations, to the extent considered by
Landlord to be reasonably necessary for Tenants comfortable use and occupancy of the Office
Premises for general office use or as may be required by law or directed by governmental
authority. Tenant shall pay for replacement of all non-standard lamps, starters and ballasts
required as a result of normal usage, at the cost established from time to time by Landlord.
6.02 Premises Electrical Costs.
Tenants total consumption of electricity in the Premises will be
separately metered, including lighting and convenience outlets, pursuant to a submeter to be
installed (if not already existing) by Landlord at Tenants expense. Instead of including the cost
of electricity in Operating Expenses, Tenant shall pay to Landlord as Additional Rent the
Premises Electrical Costs, which means any and all actual costs of providing
electricity to the Premises. Premises Electrical Costs shall be billed monthly and shall be due
not later than ten (10) days after invoice from Landlord.
6.03 Additional Services.
If Tenant requests any other utilities or building services not
customarily provided by Landlord for the Building, then Landlord shall use reasonable efforts to
attempt to furnish Tenant with such additional utilities or building services. Landlord may impose
a reasonable charge for such additional utilities or building services, which shall be paid
monthly by Tenant at the same time the monthly installment of Base Rent is due.
6.04
Special Equipment.
Tenant shall obtain Landlords written consent prior to installing or
connecting any lights, machines or equipment (including but not limited to computers) which would
materially affect the normal operation, or exceed the designed capacity of, the Buildings
electrical or heating and air-conditioning systems. If Landlord determines that any such
equipment is in any way incompatible with the Buildings electrical or heating and
air-conditioning systems, then Landlord shall have the right, as a condition to granting its
consent, to install any machinery or equipment, or to make any modifications to the Buildings
electrical or heating and air-conditioning systems, or to require Tenant to make such
modifications to the equipment to be installed or connected, as Landlord considers to be
reasonably necessary. All costs expended by Landlord to install any such machinery or equipment
or to make any such modifications, and any such additional costs of operation and maintenance
occasioned thereby, shall be borne by Tenant, who shall, upon demand, reimburse Landlord for the
same as Additional Rent.
6.05 Interruption of Services.
Tenant understands, acknowledges and agrees that any one or more of
the utilities or other building services identified in Article VI may be interrupted by reason of
accident, emergency or other causes beyond Landlords control, or may be discontinued or
diminished temporarily by Landlord or other persons until certain repairs, alterations or
improvements can be made; that Landlord does not represent or warrant the uninterrupted
availability of such utilities or building services; and, that any such interruption shall not be
deemed an eviction or disturbance of Tenants right to possession, occupancy or use of the
Premises or any part thereof or render Landlord liable to Tenant for damages by abatement of rent
or otherwise or relieve Tenant from the obligation to perform its covenants under this Lease.
ARTICLE VII
REPAIRS, MAINTENANCE, ALTERATIONS, IMPROVEMENTS AND FIXTURES
7.01 Repair and Maintenance of Building.
Subject to Tenants obligations herein, Landlord shall
keep and maintain the Building in good order, condition and repair, including the roof, exterior
walls and windows, foundations, the Common Areas and the electrical, elevator, plumbing, heating,
ventilation and air-conditioning systems serving the Premises and other parts of the Building.
The cost of all such repairs shall be included by Landlord as part of the Operating Expenses,
except for those made to any electrical, plumbing, heating, ventilation and air-conditioning
components which have been installed in the Premises pursuant to
Paragraph 6.03, and except for
those made necessary by the negligence, misuse or default of Tenant, its employees, agents,
customers, or invitees in which event they shall be borne by Tenant, who shall be separately
billed and shall, upon demand, reimburse Landlord for the same as Additional Rent.
Page 7
7.02 Repair and Maintenance of Premises.
Tenant shall, at Tenants expense, keep and maintain the
Premises and all Leasehold Improvements in good order, condition and repair. Without limitation,
Tenant shall make any
structural, interior and exterior alterations, repairs and/or replacements to the
Premises required by any governmental entity or insurance carrier in connection with Tenants use
and/or occupancy of the Premises. Tenants work under this
Paragraph 7.02 (a) is subject to the
prior approval and supervision of Landlord, including without limitation, Landlords approval of
all contractors and subcontractors performing the work, (b) must be performed in compliance with
laws and the Building Rules and Regulations, and (c) must be performed in a first-class, lien free
and good and workmanlike manner. Without limiting Landlords
rights under Paragraph 15.02 below,
Landlord may, at its option and without obligation, elect to make any repairs required to be made
by Tenant outside of the Premises and any structural repairs otherwise Tenants responsibility and
Tenant shall reimburse Landlord for the cost thereof within fifteen (15) days after demand. As
used herein, Leasehold Improvements means all alterations and improvements made to the Premises
by Landlord pursuant to this Lease (as it may be amended) or by or otherwise on behalf of Tenant
including, without limitation, any initial alterations or improvements made to the Premises in
connection with Tenants initial occupancy thereof.
7.03 Alterations or Improvements.
Tenant may make, or permit to be made, alterations or
improvements to the Premises, but only if Tenant obtains the prior written consent of Landlord
after furnishing to Landlord and Landlords approval of the plans and specifications for such
alterations or improvements. Notwithstanding, Landlords advance approval is not required for any
non-material or cosmetic alterations or improvements Tenant elects to make to the Premises
provided that, (i) any such alteration or improvement does not exceed $25,000.00 in total cost,
(ii) such are not visible from the exterior of the Premises, (iii) such will not, in the
reasonable opinion of Landlord, affect or impact any Building systems
(e.g.
, elevator,
mechanical, HVAC, plumbing, electricity, life-saving) or any structural component of the Building,
and (iv) such do not require any governmental permits or approvals as a condition thereto. Without
limitation of the forgoing, all alterations and improvements by Tenant shall be made in accordance
with all applicable laws and building codes, in a good and workmanlike manner and in quality equal
to or better than the original construction of the Building and shall comply with such reasonable
requirements as Landlord considers necessary or desirable, including without limitation
requirements as to the manner in which and the times at which such work shall be done, the
contractor or subcontractors to be selected to perform such work, and contractor and subcontractor
insurance requirements. Tenant may not puncture the roof or interfere with the sprinkler system
without specific written permission from Landlord. Landlord shall have the right to approve all
contractors and subcontractors. Upon completion of any such work, including any work that did not
require Landlords consent, Tenant shall provide Landlord with as built plans (if applicable) in
AutoCAD format, copies of all construction contracts, and proof of payment for all labor and
materials. Tenant shall promptly pay all costs attributable to such alterations and improvements
and shall indemnify Landlord against any mechanics liens or other liens or claims filed or
asserted as a result thereof, as provided in Article X; and shall also indemnify Landlord against
any costs or expenses which may be incurred as a result thereof, as provided in Article X; and
shall also indemnify Landlord against any costs or expenses which may be incurred as a result of
building code violations attributable to such work. Tenant shall promptly repair any damage to the
Premises or the Building caused by any such alterations or improvements. Any alterations or
improvements to the Premises, except movable furniture and equipment and trade fixtures, shall
become a part of the realty and the property of Landlord and shall not be removed by Tenant except
as provided in Paragraph 2.03. If Landlords approval of any alterations or improvements is
required, (i) Tenant shall pay Landlord as rent ten percent (10%) of the total construction costs
of the alterations or improvements to cover review of Tenants plans and construction coordination
by Landlords own employees, and (ii) Tenant shall reimburse Landlord for the actual cost that
Landlord reasonably incurs to have engineers, architects or other professional consultants review
Tenants plans and work in progress, or inspect the completed alterations or improvements. This
Paragraph 7.03 does not apply to Landlords Work, which will be governed solely by the terms of
Exhibit D hereto.
7.04 Trade Fixtures.
Any trade fixtures installed on the Premises by Tenant at its own expense,
such as movable partitions, counters, shelving, showcases, mirrors and the like, may (and at the
request of Landlord shall) be removed on the Expiration Date or earlier termination of the Lease
provided that Tenant is not then in default, that Tenant bears the cost of such removal and
further that Tenant repairs at its own expense any and all damage to the Premises resulting from
such removal. If Tenant fails to remove any and all such trade fixtures from the Premises on the
Expiration Date or earlier termination of this Lease, all such trade fixtures shall become the
property of Landlord unless Landlord elects to require their removal, in which case Tenant shall
promptly remove same and restore the Premises to their prior condition, except for ordinary wear
and tear.
ARTICLE VIII
FIRE OR OTHER CASUALTY INSURANCE
8.01 Destruction of Premises.
If the Premises are damaged or destroyed, in whole or in part, at any
time during the Term by fire or other casualty and the Lease is not terminated pursuant to
Paragraph 8.02, Landlord with due diligence will repair and rebuild the Premises so that after
such work of repairing and rebuilding has been completed, the Premises shall be substantially the
same as that prior to such damage. Any provisions contained in this Lease requiring repairs,
rebuilding, restoration or reconstruction or providing for the use of insurance proceeds for any
purpose shall be subject to the rights of the mortgagee of Landlord. In the event more than fifty
percent (50%) of the Premises are damaged or destroyed and less than one (1) year is left in the
term of the Lease, Landlord, at its election, may terminate this Lease rather than repair the
Premises. Notwithstanding, Landlord shall not be required to restore any Leasehold Improvements.
Upon completion by Landlord of its restoration obligations, Tenant will repair and restore
Leasehold Improvements reasonably promptly to the condition existing prior to such damage and at
Tenants sole cost.
8.02 Irreparable Destruction of Building.
If the Building shall be damaged or destroyed to such an
extent that Landlord in its sole and absolute discretion, determines the Building to be
irreparably destroyed. Landlord shall give Tenant notice of such determination within sixty (60)
days after the date of such damage or destruction, and, in such event, this Lease shall terminate
on the date specified in such notice, and Landlord shall not be obligated to repair or rebuild.
8.03 Rental Abatement During Reconstruction.
If a casualty event causes damage or destruction of
the Premises or Building to the extent that the Premises shall have been rendered unfit for use
for Tenants business purposes, Landlord shall, in Landlords sole discretion, either (1)
relocate Tenant in another comparable building within a three (3) mile radius with comparable
office space and Landlord shall pay all reasonable uninsured moving expenses of said relocation
and rent shall remain as specified within this Lease; or (2) provide an abatement of Base Rent
and payment of Operating Expenses and Taxes which shall be made corresponding to the time during
which, and the extent to which, the Premises may not be used by Tenant for its business purposes.
The foregoing abatement
will terminate on the day that Landlord has completed its repair of the Premises and tenders
possession of the Premises to Tenant.
Page 8
8.04 Landlords Damage Obligations.
No damages, compensations, setoffs or claims shall be payable
by Landlord for inconvenience, loss of business or annoyance arising from any repair or
restoration of any portion of the Premises or of the Building required to be made by Landlord
under the provisions of this Article VIII. but this Paragraph shall not be construed to limit the
abatement of Tenants rent in accordance with
Paragraph 8.03 above. Landlord covenants with Tenant
that it shall use its best efforts to effect all such repairs promptly and in such manner as to
not unreasonably interfere with Tenants occupancy.
8.05
Indemnification.
Except as provided in Paragraph 8.09, Tenant shall assume the risk of, be
responsible for, have the obligation to insure against, and indemnify Landlord and hold it
harmless from any and all liability for any loss, damage, injury or death to person or property
occurring in the Premises, regardless of cause, except for that caused by the sole negligence of
Landlord and its employees, agents, customers and invitees; and, Tenant hereby releases Landlord
from any and all liability for the same Tenants obligation to indemnify Landlord hereunder shall
include the duty to defend against any claims asserted by reason of such loss, damage or injury
and to pay any judgments, settlements, costs, fees and expenses incurred in connection therewith.
Notwithstanding Landlords obligations hereunder, Tenant shall
bear the sole risk of any loss of
or damage to any personal property (including but not limited to, any furniture, machinery,
equipment, goods or supplies) of Tenant or which Tenant may have on the Premises and any trade
fixtures installed by or paid for by Tenant on the Premises and any Leasehold Improvements.
Landlord shall not be liable for any injury to or death of any person or any loss of or damage to
property sustained by Tenant, or by any other person(s) whatsoever, which may be caused by the
building or the Premises or any appurtenances thereto or thereof being out of repair, or by the
bursting or leakage of any water, gas, sewer, or steam pipes, or by theft or by any act or neglect
of any tenant or occupant of the building, or of any other person, or by any other cause of
whatsoever nature, unless, subject to Paragraph 8.09, caused by the negligence of Landlord or its
officers, agents or employees.
8.06 Tenants Insurance.
Tenant, in order to enable it to meet its obligation to insure against the
liabilities specified in this Lease, shall at all times during the Term carry, at its own expense,
one or more policies of general public liability and property damage insurance, issued by one or
more insurance companies acceptable to Landlord, with the following minimum coverage on an
occurrence basis:
|
|
|
|
|
A. Workers Compensation
|
|
|
|
As provided by Law.
|
|
|
|
|
|
B. Commercial General Liability
Insurance, Including Blanket
Contractual Liability, Broad Form
Property Damage, Personal Injury,
Completed Operations, Products
Liability and Fire Damage, or if
any such coverages are not in
effect when needed, such other
similar coverage as is then in
effect. Such policy(ies) shall
name Landlord and, the Building
property manager, each secured
lender, and any other party
reasonably designated by Landlord
as an additional insured (each an
Additional Insured).
|
|
|
|
Not less than
$3,000,000 Combined
Single Limit for
both Bodily Injury
and Property Damage.
|
|
|
|
|
|
C. Causes of loss special form
commercial property insurance
(including standard extended
coverage endorsement perils,
leakage from fire protective
devices and other water damage)
covering the full replacement cost
of the Leasehold Improvements and
Tenants personal property,
fixtures and equipment. Each of
these policies shall name Landlord
and each Additional Insured as
loss payee to the extent of their
interest in the Leasehold
Improvements.
|
|
|
|
|
|
|
|
|
|
D. Business interruption insurance
including leasehold interest
coverage for Tenants loss of
income or insurable gross profits
and covering continuation of rents
during any time the Premises is
untenantable, with a limit not
less than Tenants annual rent.
|
|
|
|
|
All insurance carried by Tenant shall be in a form approved by Landlord and in an insurance
company approved by Landlord, authorized to do business in the State and have a policy holders
rating of no less than A and with a financial class size of IX or better in the most current
edition of
Bests Insurance Reports.
Upon the commencement of this Lease and prior to the
expiration of any of its required insurance policies, and at interim dates upon Landlords
reasonable request, Tenant shall furnish Landlord with a certificate or certificates of insurance
confirming the existence and continuity of coverage. All policies maintained by Tenant in
conformance with the requirements of this Lease shall provide at least thirty (30) days advance
written notice to Landlord of cancellation, material change or intent not to renew and ten (10)
days notice to Landlord for non-payment. Should Tenant fail to carry such insurance and/or
furnish Landlord with a copy of all such certificates after a request to do so, Landlord shall
have the right to obtain such insurance and collect the cost thereof from Tenant as Additional
Rent or, at Landlords discretion, to evict Tenant and all its business operations from the
Premises, without liability to Landlord.
8.07 Landlords Insurance.
Landlord shall be responsible for insuring and shall at all times during
the Term carry, as an operating expense for the Building, a policy of insurance which insures the
Building, including the Premises (but excluding the Leasehold Improvements), against loss or damage
by fire or other casualty (namely, the perils against which insurance is afforded by the standard
insurance policy and extended coverage endorsement); provided, however, that Landlord shall not be
responsible for and shall not be obligated to insure against any loss or damage to any trade
fixtures or personal property installed by or paid for by Tenant on the Premises or any Leasehold
Improvements.
8.08 Waiver of Subrogation. LANDLORD AND TENANT HEREBY RELEASE EACH OTHER AND EACH OTHERS
EMPLOYEES, AGENTS, CUSTOMERS AND INVITEES FROM ANY AND ALL LIABILITY FOR ANY LOSS OR DAMAGE TO
PROPERTY OCCURRING IN, ON OR ABOUT OR TO THE PREMISES, THE BUILDING, IMPROVEMENTS TO THE BUILDING
OR PERSONAL PROPERTY WITHIN THE BUILDING BY REASON OF FIRE OR OTHER CASUALTY WHICH COULD BE INSURED
AGAINST UNDER A CAUSES OF LOSS-SPECIAL FORM PROPERTY INSURANCE POLICY, REGARDLESS OF
CAUSE, INCLUDING THE NEGLIGENCE (INCLUDING THE SOLE NEGLIGENCE) OF LANDLORD OR TENANT AND
THEIR EMPLOYEES, AGENTS, CUSTOMERS AND INVITEES.
Each party to this Lease shall obtain from its
respective insurance company a consent to this mutual waiver of subrogation/release, so as to prevent the invalidation of
insurance coverage by reason of this mutual waiver of subrogation/release, and shall provide the
other party a copy of any such consent.
Page 9
ARTICLE IX
EMINENT
DOMAIN
9.01
In the event the Building, or any portion thereof necessary, in the sole opinion of Landlord,
to the continued efficient and/or economically feasible use of the Building shall be taken or
condemned in whole of in part for public purposes, or sold to a condemning authority to prevent
taking, then the Term shall, at the option of Landlord, forthwith cease and terminate. All
compensation awarded for such taking or conveyance shall be the property of Landlord without any
deduction therefrom for any present or future estate of Tenant, and Tenant hereby assigns to
Landlord all its right, title and interest in and to any such award. All compensation awarded is
subject to the rights of Landlords mortgagee. However, Tenant shall have the right to recover from
such authority, but not from Landlord, such compensation as may be awarded to Tenant on account of
moving and relocation expenses and depreciation to and removal of Tenants trade fixtures and
personal property as long as such award does not diminish the award to Landlord.
ARTICLE X
LIENS
10.01
Tenant will keep the Premises and Building free and clear of all mechanics and
materialmens liens and other liens on account of work done for
Tenant or persons claiming under it.
Should any such lien be filed against the Premises and/or the Building, Landlord may, without
notice to Tenant, elect to obtain the release of each lien and any sums expended by Landlord shall
be immediately repaid to Landlord by Tenant together with interest at the rate of fifteen percent
(15%) per annum. Should Tenant elect to dispute the amount required to release such lien or the
quality of service provided by the contractor who placed the lien. Landlord shall have the right
to require Tenant to provide a bond or other security against such lien in form and content
acceptable to Landlord.
ARTICLE XI
RENTAL, PERSONAL PROPERTY AND OTHER TAXES
11.01
Tenant shall pay before delinquency any and all taxes, assessments, fees or charges,
including any sales, gross income, rental, business occupation or other taxes, levied or imposed
upon Tenants business operations in the Premises and any personal property or similar taxes
levied or imposed upon Tenants trade fixtures, Leasehold Improvements made by Tenant (excluding
any made in connection with Tenants initial occupancy of the Premises) or personal property
located within the Premises. In the event any such taxes, assessments, fees or charges are charged
to the account of, or levied or imposed upon the property of, Landlord, Tenant shall reimburse
Landlord for the same as Additional Rent. Notwithstanding the foregoing, Tenant shall have the
right to contest in good faith any such item and to defer payment, if permitted by applicable law,
until after Tenants liability therefor is finally determined.
ARTICLE XII
ASSIGNMENT AND SUBLETTING
12.01
Tenant may not assign or transfer this Lease or sublet the Premises or any part thereof unless
it first has obtained thirty (30) days prior written consent of Landlord, such not to be
unreasonably withheld. For purposes hereof a transfer requiring consent of Landlord shall include,
without limitation, any transaction resulting in a change of control of Tenant A change of
control shall mean the transfer of fifty-one percent (51%) or more of Tenants assets, shares
(excepting shares transferred in the normal course of public trading), membership interests,
partnership interests or other ownership interests of Tenant. Landlord shall have the option, upon
receipt of Tenants written request for Landlords consent to an assignment or subletting or other
transfer, to cancel this Lease as to the portion of the Premises proposed to be sublet, in
connection with any proposed subletting, or in its entirety with respect to any proposed assignment
or other transfer. This option shall be exercised, if at all, within thirty (30) days following
Landlords receipt of Tenants written request by delivery to Tenant of Landlords notice of
intention to exercise this option. In the event of any such assignment or subletting or other
transfer, Tenant shall nevertheless at all times remain fully responsible and liable for the
payment of rent and the performance and observance of all of Tenants other obligations under the
terms, conditions and covenants of this Lease. Without limitation, it will be reasonable for
Landlord to withhold consent to any assignment or subletting to a governmental authority or agency,
an organization enjoying sovereign or diplomatic immunity, a medical or dental practice or a user
that will attract a volume, frequency or type of visitor or employee to the Building which is not
consistent with the standards of a high quality office building or that will impose an excessive
demand on or use of the facilities or services of the Building, is a current tenant or subtenant of
the Building or is a prospective tenant to whom Landlord has offered to lease space in the Building.
12.02
Notwithstanding the terms of Section 12.01, and provided Tenant is not then in default or
breach of this Lease, Tenant may effect a assignment of the Lease or a subletting of the Premises
to a Permitted Transferee without Landlords prior consent, but with notice to Landlord prior to the
Permitted Transferees occupancy. Permitted Transferee means any person or entity that: (a)
either (1) controls, is controlled by, or is under common control with Tenant (for purposes hereof,
control shall mean ownership of not less than fifty one (51%) of all of the voting stock or legal
and equitable interest in the entity in question), (2) results from the merger or consolidation of
Tenant, or (3) acquires all or substantially all of the stock and/or assets of Tenant as a going
concern; (b) if an assignment, the assignee has a tangible net worth immediately following the
assignment of not less than the greater of (1) Tenants tangible net worth immediately before the
assignment, or (2) Tenants tangible net worth as of the execution of this Lease; and (c) will not,
by occupying the Premises, cause Landlord to breach any other lease or other agreement affecting
the Property.
12.03
No assignment or subletting of the Premises or any part thereof or any other transfer shall be
binding upon Landlord unless such assignee or subtenant or other transferee shall deliver to
Landlord an instrument (in recordable form, if requested) containing an agreement of assumption of
all of Tenants obligations under this Lease. Upon the occurrence of an event of default, if all or
any part of the Premises are then assigned or sublet, Landlord, in addition to any other remedies
provided by this Lease or by law, may, at its option, collect directly from the assignee or
subtenant all rent becoming due to Landlord by reason of the assignment or subletting. Any
collection by Landlord from the assignee or subtenant shall not be construed to constitute a
novation or release of Tenant from the further performance of its obligations under this Lease. In
the event Landlord consents to Tenant assigning or subletting all or a portion of the Premises or
any other transfer, then fifty percent (50%) of any rent accruing to Tenant as the result of such subletting or assignment which is in excess of the rent then being paid by Tenant, and any
other economic consideration received by or to be received by Tenant in connection with any
subletting or assignment, net of Tenants reasonable assignment
and subletting costs, shall be paid
to Landlord as Additional Rent.
Page 10
12.04
In the event Landlord consents to Tenant assigning or subletting all or a portion of the
Premises, or in the event of a permitted assignment or subletting under Section 12.03 above, (i)
both Tenant and the assignee/ subtenant shall be held responsible under all the terms and conditions
of this Lease including but not limited to the Rules and Regulations, and (ii) any right to extend
or any other option under this Lease shall terminate unless, however, the assignee or subtenant is
a Permitted Transferee.
12.05
Any assignment, subletting or other transfer by Tenant in violation of this Article XII shall
be void and of no effect.
ARTICLE XIII
SUBORDINATION
13.01
This Lease shall be subject and subordinate to any mortgage or deed of trust (an
Encumbrance) presently existing or hereafter placed upon the Building, and the recording of any
such mortgage or deed of trust shall make it prior and superior to this Lease regardless of the date
of execution or recording of either document. Tenant shall, at Landlords request, execute and
deliver to Landlord, without cost, any instrument which may be deemed necessary or desirable by
Landlord to confirm the subordination of this Lease; and, if Tenant fails or refuses to do so.
Landlord may execute such instrument in the name and as the act of Tenant. Notwithstanding the
foregoing, no default by Landlord under any such mortgage or deed of trust shall affect Tenants
rights hereunder so long as Tenant is not in default under this Lease. Tenant shall, in the event
any proceedings are brought forth for foreclosure of any such mortgage or deed of trust, attorn to
the purchaser upon any such foreclosure and recognize such purchaser as Landlord under this Lease.
13.02
Tenant agrees that in the event of a foreclosure of any mortgage or deed of trust affecting
the Premises, that in addition to Tenants attornment as set forth above in Paragraph 13.01, Tenant
shall not hold any mortgagee or beneficiary of any purchaser at a foreclosure sale responsible for
any defaults of any prior Landlord (including the original Landlord), or for the return of any
security deposit required hereby.
13.03
Upon written request from Tenant Landlord shall use reasonable efforts, at Tenants sole cost
and expense, to obtain from the then holder of any Encumbrance, a subordination, non-disturbance
and attornment agreement (SNDA) on such holders standard form thereof that provides that
foreclosure of the subject Encumbrance will not effect the validity of this Lease and that Tenants
right to possession of the Premises will not be disturbed for so long as no default occurs and such
other provisions as such holder may reasonably require as a standard condition to entering into an
SNDA. Notwithstanding, the obtaining of such SNDA shall not be a condition to this Lease or
Tenants obligations hereunder.
ARTICLE XIV
OMITTED
ARTICLE XV
DEFAULTS AND REMEDIES
15.01 Defaults by Tenant.
The occurrence of any one or more of the following events shall be a
default and breach of this Lease by Tenant:
A. Tenant shall fail to pay any payment of rent within five (5) business days after the same
shall be due and payable. No notice shall be required for default in payment.
B. Tenant shall fail to perform or observe any term, condition, covenant or obligation, other
than the payment of rent, required to be performed or observed by it under this Lease for a period
of thirty (30) days after notice thereof from Landlord; provided, however, that if the term,
condition, covenant or obligations to be performed by Tenant is of such nature that the same cannot
reasonably be performed within such thirty (30) day period, such default shall be deemed to have
been cured if Tenant commences such performance within said thirty (30) day period and thereafter
diligently completes such performance within thirty (30) additional days.
C. A trustee or receiver shall be appointed to take possession of substantially all of
Tenants assets in, on or about the Premises or of Tenants interest in this Lease (and Tenant does
not regain possession within sixty (60) days after such appointment); Tenant makes an assignment
for the benefit of creditors; substantially all of Tenants assets in, on or about the Premises or
Tenants interest in this Lease are attached or levied upon under execution (and Tenant does not
discharge the same within sixty (60) days thereafter); or, a petition in bankruptcy, insolvency, or
for reorganization or arrangement is filed by or against Tenant pursuant to any federal or state
statute (and, with respect to any such petition filed against it, Tenant fails to secure a stay or
discharge thereof within sixty (60) days after the filing of the same).
D. Tenant abandons or vacates Premises.
15.02 Remedies of Landlord.
Upon the occurrence of any event of default set forth in Paragraph
15.01, Landlord shall have the following rights and remedies, in addition to those allowed by law
or equity, any one or more of which may be exercised without further notice to or demand upon
Tenant:
A. Landlord may apply the security deposit and/or re-enter the Premises and cure any default
of Tenant, in which event Tenant shall, upon demand, reimburse Landlord as Additional Rent for any
reasonable costs and expenses which Landlord may incur to cure such default; and, Landlord shall
not be liable to Tenant for any loss or damage which Tenant may sustain by reason of Landlords
action. In the event Landlord should consult with or employ the services of legal counsel or bring
suit against Tenant for any default or enforcement of any terms of this Lease, Tenant shall be
liable for all such attorneys fees and litigation costs incurred by Landlord and the same shall
be recoverable against Tenant in addition to all other amounts that Landlord may recover.
Page 11
B.
Landlord may terminate this Lease as of the date of such default. Upon termination.
Tenant or any party leasing the Premises through Tenant, shall immediately surrender the Premises to Landlord.
Landlord may re-enter the Premises and dispossess Tenant or any other occupants of the Premises by
force, summary proceedings, ejectment or otherwise, and may remove their effects, without
prejudice to any other remedy which Landlord may have for possession or arrearage in rent. In
addition, Landlord may declare all past, present and future rent payments under this Lease to be
immediately due and payable. Landlord may re-let all or part of the Premises to another party on
terms and conditions which may vary from the terms of this Lease. Tenant shall be obligated to pay
to Landlord the difference between the rent provided for in any such subsequent lease and the rent
provided for in this Lease. No matter which remedy Landlord chooses, in its sole discretion, Tenant
shall be liable for all costs and expenses caused by Tenants default and Landlords re-entry and
re-letting, including but not limited to, all repairs, improvements, brokers and attorneys fees.
15.03 Default by Landlord and Remedies of Tenant
. It shall be a default and breach of this Lease by
Landlord if it shall fail to perform or observe any term, condition, covenant or obligation
required to be performed or observed by it under this Lease for a period of thirty (30) days after
notice thereof from Tenant, provided, however, that if the term, condition, covenant or obligation
to be performed by Landlord is of such a nature that the same cannot reasonably be performed within
such thirty (30) day period, such default shall be deemed to have been cured if Landlord commences
such performance within said thirty (30) day period and thereafter diligently undertakes to
complete the same. Upon the occurrence of any such default, Tenants sole remedies shall be actual
money damages (except as set forth in Paragraph 19.19) and specific performance, but Tenant shall
not be entitled to terminate this Lease or withhold or abate any rent due hereunder. Unless
prohibited by law, any claim, demand, right or defense by Tenant that arises out of this Lease or
the negotiations that preceded this Lease shall be barred unless Tenant commences an action
thereon, or interposes a defense by reason thereof, within six (6) months after the date of the
inaction, omission, event or action that gave rise to such claim, demand, right or defense; Tenant
acknowledges and understands, after having consulted with its legal counsel, that the purpose of
this sentence is to shorten the period within which Tenant would otherwise have to raise such
claims, demand, rights or defenses under applicable laws.
If Landlord shall be in default under this Lease, and if Tenant shall, as a consequence
thereof, recover
a
money judgment against Landlord, Tenant agrees that it shall look solely to
Landlords right, title and interest in and to the Building for the collection of such judgment;
and Tenant shall not look to any other property or assets of Landlord or Landlords partners,
members, shareholders and joint venturers, and their respective directors, officers, managers,
employees and agents (collectively, the Landlord Parties) in seeking either to enforce
Landlords obligations under this Lease or to satisfy a judgment for Landlords failure to perform
such obligations; and none of the Landlord Parties shall be personally liable for the performance
of Landlords obligations under this Lease. It is understood that in no event shall Tenant have any
right to (i) levy execution against any property of the Landlord Parties other than Landlords
interest in the Building as hereinbefore expressly provided or (ii) collect consequential damages
from Landlord. In the event of the sale or other transfer of Landlords right, title and interest
in the Premises or the Building, Landlord shall be released from all liability and obligations
hereunder.
15.04 Non-Waiver of Defaults
. The failure or delay by either party hereto to enforce or exercise at
any time any of the rights or remedies or other provisions of this Lease shall not be construed to
be a waiver thereof, nor affect the validity of any part of this Lease or the right of either party
thereafter to enforce each and every such right or remedy or other provision. No waiver of any
default and breach of this Lease shall be held to be a waiver of any other default and breach. The
receipt by Landlord of less than the full rent due shall not be construed to be other than a
payment on account of rent then due, nor shall any statement on Tenants check or any letter
accompanying Tenants check be deemed an accord and satisfaction, and Landlord may accept such
payment without prejudice to Landlords right to recover the balance of the rent due or to pursue
any other remedies provided in this Lease. No act or omission by Landlord or its employees or
agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept such a surrender shall be valid unless in writing and signed by Landlord.
ARTICLE XVI
LANDLORDS RIGHT TO RELOCATE TENANT
16.01
If the Total Leasable Area included in the Premises is less than twelve thousand (12,000)
square feet, Landlord shall have the right, at its option, upon at least thirty (30) days prior
written notice to Tenant, to relocate Tenant and to substitute for the Premises described herein
other space in the Building containing at least as much Leasable Area as the Premises. Such
substituted space shall be improved by Landlord, at its expense, with improvements, at least equal
in quantity and quality to those in the Premises. Landlord shall pay all reasonable expenses
incurred by Tenant in connection with such relocation, including costs of moving, door lettering,
telephone relocation and reasonable quantities of new stationery. Upon completion of the
relocation, Landlord and Tenant shall amend this Lease to change the description of the Premises
and any other matters pertinent thereto.
ARTICLE XVII
HAZARDOUS MATERIAL, GOVERNMENTAL, INSURANCE AND ADA REQUIREMENTS
17.01 Hazardous Material
. Tenant warrants and represents to Landlord that Tenant will comply with
all federal, state and local environmental laws, rules, regulations and statutes applicable to
Tenants use and occupancy of the Premises during the Term.
Tenant shall not cause or permit any Hazardous Material (as hereinafter defined) to be
brought upon, kept, or used in or about the Premises by Tenant, its agents, employees, contractors
or invitees, except for such Hazardous Material as is necessary to Tenants business provided that
Tenant has notified Landlord it will be bringing upon, keeping or using such Hazardous Material on
or about the Premises.
Any Hazardous Material permitted on the Premises as provided in this Article, and all
containers therefor, shall be used, kept, stored, and disposed of in a manner that complies with
all federal, state and local laws or regulations applicable to this Hazardous Material.
Tenant shall not discharge, leak, or emit, or permit to be discharged, leaked, or emitted,
any material into the atmosphere, ground, sewer system, or any body of water, if that material (as
is reasonably determined by Landlord, or any governmental authority) does or may pollute or
contaminate the same, or may adversely affect (a) the health, welfare, or safety of persons,
whether located on the Premises or elsewhere, or (b) the condition, use, or enjoyment of the
building or any other real or personal property.
Page 12
As used herein, the
term Hazardous Material means (a) a hazardous waste as defined by the
Resource Conservation a Recovery Act of 1976, as amended from time to time, and regulation
promulgated thereunder; (b) any hazardous substance as defined by the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and
regulations promulgated thereunder; (c) any oil, petroleum products, and their by-products, and
(d) any substance that is or becomes regulated by any federal, state, or local governmental
authority.
Tenant hereby agrees that it shall be fully liable for all costs and expenses related to the
use, storage, and disposal of Hazardous Material kept on the Premises by Tenant, and Tenant shall
give immediate notice to Landlord of any violation or potential violation of the provisions of
this Paragraph 17.01. Tenant shall defend, indemnify and hold harmless Landlord and its agents,
from and against any claims, demands, penalties, fines, liabilities, settlements, damages, costs,
or expenses (including, without limitation, attorneys and consultants fees, court costs, and
litigation expenses) of whatever kind or nature, known or unknown, contingent or otherwise,
arising out of or in any way related to (a) the presence, disposal, release, or threatened release
of any such Hazardous Material that is on, from, or affecting the soil, water, vegetation,
building, personal property, persons, animals, or otherwise; (b) any personal injury (including
wrongful death) or property damage (real or personal) arising out of or related to that Hazardous
Material;
(c) any lawsuit brought or threatened, settlement reached, or government order relating to that
Hazardous Material; or
(d) any violation of any laws applicable thereto. The provisions of this Article shall be in
addition to any other obligations and liabilities Tenant may have to Landlord at law or equity and
shall survive the transactions contemplated herein and shall survive termination of this Lease.
Landlord is given the right, but not the obligation, to inspect and monitor the Premises and
Tenants use of the Premises in order to confirm Tenants compliance with the terms of this
Paragraph 17.01. Landlord may require that Tenant deliver to Landlord concurrent with Tenants
vacating the Premises upon the expiration of this Lease, or any earlier vacation of the Premises
by Tenant, at Tenants expense, a certified statement by licensed engineers satisfactory to
Landlord, in form and substance satisfactory to Landlord, stating that Tenant, Tenants Work and
any alterations thereto and Tenants use of the Premises complied and conformed to all
environmental laws.
Landlord will, upon written request from Tenant, provide to Tenant any third party Hazardous
Material assessments or studies regarding the Building or the Land which were performed within the
three (3) year prior to the date of this Lease and which are in Landlords possession, all without
representation or warranty by Landlord.
17.02 Governmental and
Insurance Requirements.
Tenant shall, at its sole cost and expense, comply
with all of the requirements of any insurance carrier for the Building and of all county,
municipal, state, federal and other applicable governmental authorities, now in force or which may
hereafter be in force.
17.03 Americans with
Disabilities Act.
Any costs for alterations, additions or improvements
required to modify the Common Areas of the Building in conjunction with the Americans with
Disabilities Act (ADA), shall be paid by Landlord. Such alternations, additions or improvements
shall be made in the sole discretion of Landlord. Any alterations, additions or improvements
required to modify the Premises in conjunction with the ADA shall be approved by Landlord and paid
by Tenant. Within ten (10) days after receipt. Tenant shall advise Landlord in writing of any
notices alleging violation of ADA relating to any portion of the Building or the Premises.
ARTICLE XVIII
NOTICE AND PLACE OF PAYMENT
18.01 Notices.
Any notice by Tenant to Landlord must be in writing and served by overnight
delivery service (with confirmation of delivery), certified mail, postage prepaid, addressed to
Landlord at the place designated in Paragraph 1.01L, or at such other address as Landlord may
designate from time to time by written notice. Any notice by Landlord (which may be given by
Landlord or Landlords attorney or management company) to Tenant must be in writing and served by
overnight delivery service (with confirmation of delivery), certified mail, postage prepaid,
addressed to Tenant at the place designated in Paragraph 1.01L, or at such other address as Tenant
may designate from time to time by written notice to Landlord. All notices shall be effective upon
delivery or attempted delivery in accordance with this Paragraph 18.01.
18.02 Place of Payment.
All rent and other payments required to be made by Tenant to Landlord shall
be delivered or mailed to Landlords management agent at the address specified in Paragraph 1.01G
or any other address Landlord may specify from time to time by written notice given to Tenant.
ARTICLE XIX
MISCELLANEOUS GENERAL PROVISIONS
19.01 Roof Rights.
Except as otherwise provided in this Lease, Landlord shall have the exclusive
right to use all or any portion of the roof of the Building for any purpose. This Lease does not
grant any rights to light, view and/or air over the Premises or Building.
19.02 Estoppel Certificate.
Tenant agrees, at any time, and from time to time, upon not less than
ten (10) days prior notice by Landlord (and which ten (10) day period is not subject to any notice
and cure periods otherwise provided under this Lease), to execute, acknowledge and deliver to
Landlord, a statement in writing addressed to Landlord or other party designated by Landlord
certifying that this Lease is in full force and effect (or, if there have been modifications, that
the same is in full force and effect as modified and stating the modifications), stating the actual
commencement and expiration dates of the Lease, stating the dates to which rent and other charges,
if any, have been paid, that the Premises have been completed on or before the date of such
certificate and that all conditions precedent to the Lease taking effect have been carried out that,
Tenant has accepted possession, that the lease term has commenced, Tenant is occupying the Premises
and is open for business, stating whether or not there exists any default by either party in the
performance of any covenant, agreement, term, provision or condition contained in this Lease, and
if so, specifying each such default of which the signer may have knowledge and the claims or
offsets, if any, claimed by Tenant, and such other matters reasonably required by Landlord or any
prospective purchaser, mortgagee or beneficiary of the Building; it being intended that any such
statement delivered pursuant hereto may be relied upon by Landlord or a purchaser of Landlords
interest and by any mortgagee or beneficiary or prospective mortgagee or beneficiary of any
mortgage or deed of trust affecting the Premises or the Building. If Tenant does not deliver such
statement to Landlord within such ten (10) day period. Landlord, and any prospective purchaser or
encumbrancer, may conclusively presume and rely upon the following facts: (i) that the
terms and provisions of this Lease have not been changed except as otherwise represented by
Landlord, (ii) that this
Page 13
Lease has not been canceled or terminated except as otherwise represented by Landlord; (iii) that
not more than one months Base Rent or other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event, Tenant shall be estopped from denying
the truth of such facts. Tenant shall also, on ten (10) days written notice, provide an agreement
in favor of and in the form customarily used by such encumbrance holder, by the terms of which
Tenant will agree to give prompt written notice to any such encumbrance holder in the event of any
casualty damage to the Premises or in the event of any default on the part of Landlord under this
Lease, and will agree to allow such encumbrance holder a reasonable length of time after notice to
cure or cause the curing of such default before exercising Tenants right of self-help under this
Lease, if any, or terminating or declaring a default under this Lease. In the event Tenant fails
to timely deliver any document under this Paragraph 19.02, Landlord may charge Tenant a penalty of
Fifty Dollars ($50) for each day such delivery is delinquent.
19.03 Recording of Memorandum of Lease.
This Lease or a certificate or memorandum thereof prepared
by Landlord may at the option of Landlord be recorded. Tenant shall execute any such certificate,
short form lease or memorandum upon demand by Landlord. Tenant shall not be permitted to record
any certificate or memorandum of lease. Tenant will keep the terms of this Lease confidential and,
unless required by law, may not disclose the terms of this Lease to anyone other than Tenants
accountants, consultants, employees, officers, directors, partners, shareholders, members,
attorneys and lenders and then to the extent necessary to Tenants business.
19.04 Real Estate Broker.
Landlord and Tenant hereby represent and warrant that, other than the
Real Estate Brokers identified in Paragraph 1.01H (each of whom will be compensated by Landlord
pursuant to separate agreements with Landlord), no other party is entitled, as a result of the
actions or dealings of the respective party, to a commission or other fee resulting from the
negotiation or execution of this Lease. Accordingly, each party hereto covenants and agrees to
pay, hold harmless and indemnify the other party from and against any and all costs (including
reasonable attorneys fees), expense or liability for the breach of this representation and
warranty on its part and for any compensation, commissions and charges claimed by any broker or
other agent (other than the aforesaid brokers to be compensated by Landlord) with respect to this
Lease as a result of the representation or the negotiation thereof on behalf of such party.
19.05 Force Majeure.
In any case where either party hereto is required to do any act, delays
caused by or resulting from acts of God, war, civil commotion, fire, flood or other casualty,
labor difficulties, shortages of labor, materials or equipment, government regulations, unusually
severe weather or other causes beyond such partys reasonable control shall not be counted in
determining the time during which work shall be completed, whether such time be designated by a
fixed date, a fixed time or a reasonable time, and such time shall be deemed to be extended by
the period of such delay. The provisions of this Paragraph 19.05 shall not operate to excuse
Tenant from the prompt payment of Base Rent, Additional Rent or any other payments required by the
terms of this Lease.
19.06 Applicable Law; Venue.
This Lease and the rights and obligations of the parties arising
hereunder shall be construed in accordance with the laws of the State defined in Paragraph 1.01A.
Any legal action under this Lease shall be brought in the county where the Premises are located.
19.07 Entire Agreement; Preliminary Negotiations.
The Lease, the exhibits and addendum, if any, set
forth all the covenants, promises, agreements, conditions and understandings between Landlord and
Tenant concerning the Premises and there are no covenants, promises, agreements, conditions or
understandings, either oral or written, between them other than as herein set forth. All prior
communications, negotiations, arrangements, representations, agreements and understandings, whether
oral, written or both, between the parties hereto and their representatives, are merged herein and
extinguished, this Lease superseding and canceling the same. Except as herein otherwise provided,
no subsequent alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and executed by the party against which such
subsequent alteration, amendment, change or modification is to be enforced. Tenant hereby
acknowledges that (a) this Lease contains no restrictive covenants or exclusives in favor of Tenant;
(b) this Lease shall not be deemed or interpreted to contain, by implication or otherwise, any
warranty, representation or agreement on the part of Landlord that any particular tenant shall open
for business or occupy or continue to occupy any space in or adjoining the Building during the Term
of this Lease or any part thereof, and Tenant hereby expressly waives all claims with respect
thereto and acknowledges that Tenant is not relying on any such warranty, representation or
agreement by Landlord either as a matter of inducement in entering into this Lease or as a
condition of this Lease or as a covenant by Landlord;
(c) Landlord and/or its real estate agent, has
not made, and does not now make, any representations as to the past, present or future condition,
income, expenses, operation or any other matter or thing affecting or relating to the Premises
except as may be herein expressly set forth, and no such terms, agreements, covenants and
conditions were made by and between the parties hereto; (d) Tenant has satisfied itself that the
property described herein is property zoned and usable for the purpose for which Tenant is leasing
same; and (e) Tenant has obtained or satisfied itself that it can obtain a Certificate of Occupancy
and/or any other required permit(s) from any authority having jurisdiction over the Premises
confirming that Tenant may occupy the Premises for the purposes set forth in Paragraph 5.01.
19.08 Successors and Assigns.
This Lease and the respective rights and obligations of the parties
hereto shall inure to the benefit of and be binding upon the successors and assigns of the parties
hereto as well as the parties themselves; provided, however, that Landlord, its successors and
assigns shall be liable for and obligated to perform Landlords covenants under this Lease only
during and in respect of their successive periods of ownership during the Term.
19.09 Severability of Invalid Provisions.
If any provision of this Lease shall be held to be
invalid, void or unenforceable, the remaining provisions hereof shall not be affected or impaired,
and such remaining provisions shall remain in full force and effect.
19.10 Definition of the Relationship between the Parties.
Landlord shall not, by virtue of the
execution of this Lease or the leasing of the Premises to Tenant, become or be deemed a partner of
or joint venturer with Tenant in the conduct of Tenants business on the Premises or otherwise.
19.11 Certain Words, Gender and Headings.
As used in this Lease, the word person shall mean and
include, where appropriate an individual, corporation, partnership or other entity; the plural
shall be substituted for the singular and the singular for the plural, where appropriate; and words
of any gender shall include any other gender. The topical headings of the several paragraphs of
this Lease are inserted only as a matter of convenience and reference and do not affect, define,
limit or describe the scope or intent of this Lease.
Page 14
19.12 Name of Building.
Landlord shall have the right to change the name of the Building during
the Term or any extension thereof and shall have no obligation for any loss or damage to Tenant by
reason thereof.
19.13 Common Areas.
Tenant shall have the nonexclusive right, in common with others, to the use of
common entrances, lobbies, elevators, ramps, drives, stairs and similar access and service ways
and other Common Areas in the Building, subject to the Rules and Regulations.
19.14
Parking.
Subject to limitations and conditions established from time to time by Landlord,
Tenant shall be allocated the non-exclusive right to a maximum of 4.00 unreserved parking spaces
per 1,000 LSF of the Office Premises (initially seventy-eight (78) spaces) for its employees and
visitors, without charge, and in any parking area made available and designated for unreserved
parking generally for tenants and their employees and visitors at the Building. Upon Landlords
request, Tenant shall indicate which cars are designated to park in any one of the parking areas,
and Landlord shall have the right to require that a parking sticker or decal be affixed to those
cars so designated. Landlord may assign specific spaces and may reserve space for visitors, small
cars, handicapped individuals, and Tenant and its employees and visitors shall not park in any
such assigned and/or reserved spaces provided that Landlord ensures availability to Tenant of its
allocated parking spaces. Landlord reserves the right to temporarily
close all or a portion of the
parking areas in order to make repairs or perform maintenance.
19.15 Entity Authority.
If Tenant executes this Lease as a corporation, partnership or limited
liability company, each of the persons executing this Lease on behalf of Tenant does hereby
personally covenant and warrant that Tenant is a duly authorized and existing legal entity, that
Tenant has and is qualified to do business in the State, that the entity has full right and
authority to enter into this Lease and that each person signing on behalf of the entity was
authorized to do so.
19.16 Examination of Lease.
The submission of this lease form by Landlord for examination does not
constitute an offer to lease or a reservation of an option to lease. In addition, Landlord and
Tenant acknowledge that neither of them shall be bound by the representations, promises or
preliminary negotiations with respect to the Premises made by their respective employees or
agents. It is their intention that neither party be legally bound in any way until this Lease has
been fully executed by both Tenant and Landlord.
19.17 Financial Statements.
From time to time during the Term of this Lease, but not more often
than one (1) time per calendar year except in connection with a contemplated refinancing or sale of
the Building by Landlord, Tenant shall, upon ten (10) days prior written notice from Landlord,
provide Landlord with a current financial statement and financial statements for the two (2) years
prior to the current financial statement year. Such statements shall be prepared in accordance
with generally accepted accounting principles and, if such is the normal practice of Tenant, shall
be audited by an independent certified public accountant. Tenant consents to the delivery of such
financial statements by Landlord to lenders or prospective lenders or purchasers of the Building.
19.18 Omitted.
19.19 Consents and Approvals.
Whenever Landlords consent or approval is required herein or when
Tenant requests any processing or documentation of any assignment, subletting, license,
concession, creating of a security interest, granting of a collateral assignment, change of
ownership or other transfer, such consent or approval shall not be deemed given until Landlord has
provided such consent or approval in writing. Tenant shall pay to Landlord the amount of five
hundred dollars ($500.00) as an administrative fee in addition to Landlords reasonable attorneys
fees incurred in connection with Tenants request for Landlords consent, approval or other
action. Such administrative fee shall be paid to Landlord within five (5) business days of
Landlords consent, approval or other action else such consent, approval or other action shall be
null and void. Where the consent or approval of Landlord shall be required, such consent or
approval shall be granted in Landlords sole discretion, unless otherwise expressly provided. With
respect to any provision of this Lease which either expressly provides or is held to provide that
Landlord shall not unreasonably withhold or unreasonably delay any consent or approval. Tenant
shall not be entitled to make claim for, and Tenant expressly waives claim for, damages incurred by
Tenant by reason of Landlords failure to comply, it being understood and agreed that Tenants
sole remedy shall be an action for specific performance.
19.20 Jury Trial; Claims; Survival.
To the extent permitted by applicable law, and acknowledging
that the consequences of said waiver are fully understood, Tenant hereby expressly waives the
right to trial by jury in any action taken with respect to this Lease and waives the right to
interpose any set-off or counterclaim of any nature or description in any action or proceeding
instituted against Tenant pursuant to this Lease. Notwithstanding anything in this Lease to the
contrary, the representations and undertakings of Tenant under this Lease shall survive the
expiration or termination of this Lease regardless of the means of such expiration or termination.
19.21
No Prepayment.
Tenant shall not pay Base Rent, Additional Rent, or any other charges more than
thirty (30) days prior to the due date thereof. No prepayment of Base Rent, Additional Rent or
other charges, no assignment of this Lease and no agreement to modify so as to reduce the rent,
change the Term, or otherwise materially change the rights of the Landlord under this Lease, or to
relieve Tenant of any obligations or liability under this Lease, shall be valid unless consented to
in writing by Landlords mortgagees of record, if any.
19.22 OFAC Certification.
A. Tenant certifies that:
1. It is not acting, directly or indirectly, for or on behalf of any person, group, entity,
or nation named by any Executive Order or the United States Treasury
Department as a terrorist,
Specially Designated National and Blocked Person, or other banned or blocked person, entity,
nation, or transaction pursuant to any law, order, rule, or regulation that is enforced or
administered by the Office of Foreign Assets Control; and
2. It is not engaged in this transaction, directly or indirectly on behalf of, or instigating
or facilitating this transaction, directly or indirectly on behalf of, any such person, group,
entity, or nation.
B.
Indemnification
. Tenant hereby agrees to defend, indemnify, and hold harmless
Landlord from and
against any and all claims, damages, losses, risks, liabilities, and
expenses (including
attorneys fees and costs)
arising from or related to any breach of the foregoing certification.
Page 15
19.23 Independent Covenants TENANTS OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE
PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN, TENANT SHALL CONTINUE TO PAY THE RENT, WITHOUT ABATEMENT, DEMAND, SETOFF OR DEDUCTION,
NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR
IMPLIED.
19.24 Enforcement Costs.
If Landlord or Tenant brings any action against the other to enforce or
interpret any provision of this Lease (including any claim in a bankruptcy or an assignment for
the benefit of creditors), the prevailing party shall recover from the other reasonable costs and
attorneys fees incurred in such action.
19.25
Mortgagee Consent.
If a mortgagee of the Building has the right to consent to this Lease and
fails to give such consent on terms and conditions acceptable to Landlord in its sole and absolute
discretion, Landlord shall have the right, in its sole and absolute discretion, to terminate and
cancel this Lease within thirty (30) days following the date of this Lease. Such option shall be
exercisable by Landlord by written notice to Tenant of such termination, whereupon this Lease
shall be deemed cancelled and terminated, and both Landlord and Tenant shall be relieved of any
and all liabilities and obligations hereunder.
19.26
Monument Signage.
Landlord grants Tenant the right to install its tradename/corporate logo on
the Buildings multi-tenant monument sign located on Tice Blvd. subject to the following terms and
conditions:
(a) Tenants position on the monument sign shall be determined from the LSF occupied by
Tenant as compared to the LSF of other tenants having monument sign rights, with the tenant
occupying the most LSF in the Building from time to time having the right to the uppermost
position.
(b) The graphics, materials, color, design, lettering, lighting, size, specifications and
manner of affixing/installing Tenants monument signage shall be subject to Landlords prior
approval, and further subject to compliance with all laws, ordinances, restrictions of record and
easements affecting same (collectively, Sign Laws). Landlords approval of any monument signage
shall not constitute a representation by Landlord that any such signage complies with any
applicable Sign Laws;
(c) Tenant shall maintain all monument signage in good condition and repair. Tenant will be
responsible for all costs and expenses related to the installation, maintenance and removal or
replacement of all monument signage including, without limitation, design costs; provided that
initial design and installation costs may be included in Construction Costs. Landlord may, at its
option and upon notice to Tenant, undertake the maintenance of the monument signage to the extent
Landlord maintains all exterior tenant signage generally, in which case the costs thereof will be
billed back to Tenant and payable within thirty (30) days after billing by Landlord as Rent under
the Lease;
(d) At Landlords option, Tenants rights under this subsection (c) shall terminate upon (1)
the occurrence of a default, or (2) Tenants failure at any time to be leasing and, from and after
the Commencement Date, in actual occupancy of all of the Office Premises (the Occupancy
Requirement) for reasons other than casualty or permitted remodeling or repairs, or (3) in any
event, upon termination of this Lease or Tenants right to possession of the Premises. Upon the
occurrence of any such events and demand by Landlord, Tenant shall remove all of its monument
signage and repair any damage caused thereby at its sole cost and expense;
(e) Tenant must install its monument signage within six (6) months after the Commencement
Date, failing which Tenants rights to install such signage shall be subordinate to any other
monument sign rights granted by Landlord. Tenants monument signage rights are further subject and
subordinate to any competing or conflicting rights granted during any period during which Tenant
fails to meet the Occupancy Requirement or a default exists; and
(f) Tenants rights under this Section are personal to Tenant and may not be assigned or
transferred, and any attempted assignment or transfer in violation of this restriction shall be
null and void; provided, however, that (a) Tenants rights under this Section shall inure to the
benefit of a successor in interest to Tenant by merger or consolidation provided that such did not
require Landlords consent under the Lease, and (b) Tenant may assign its rights under this
Section to any assignee of Tenants interest in the Lease pursuant to an assignment that did not
require Landlords consent under the Lease. Any other attempted assignment or transfer by Tenant
of its rights under this Section shall be null and void and of no force and effect.
19.27
Termination of Existing Tenant Lease.
This Lease is expressly conditioned upon Landlord having
entered into an agreement with the existing tenant(s) of the Premises to terminate such lease(s)
and such tenant(s) vacating the Premises by not later than May 15, 2010, on terms and conditions
acceptable to Landlord in its sole discretion and, failing which, Landlord may terminate this Lease
by written notice Tenant and thereafter, and subject to Landlord returning the Security Deposit to
Tenant, neither Landlord nor Tenant shall have any rights or obligations one to the other.
19.28 Exhibits.
All exhibits attached hereto are incorporated and made a part hereof by reference.
[SIGNATURES FOLLOW ON NEXT PAGE.]
Page 16
IN WITNESS WHEREOF,
the parties hereto have executed this Lease as of the day and year first
written above.
|
|
|
|
|
TENANT:
|
I.D. SYSTEMS, INC. a Delaware corporation
|
|
|
By:
|
/s/ Ned Mavrommatis
|
|
|
|
Name: Ned Mavrommatis
|
|
|
|
Title: CFO
|
|
|
LANDLORD:
|
IPC NEW YORK PROPERTIES, LLC.
a Delaware
limited liability company
|
|
|
|
By:
|
IPC Commercial Properties,
LLC.
a
Delaware limited liability
company,
Its sole member
|
|
|
|
|
|
|
By:
|
/s/ Robert H. Thomas, Jr.
|
|
|
|
|
Name: Robert H. Thomas, Jr.
|
|
|
|
|
Title: Vice President
|
|
Signature Page
EXHIBIT D
WORK LETTER
1.
Landlords Work
. Subject to and upon the conditions hereinafter set forth,
Landlord agrees to construct or cause to be constructed within the Premises the Landlords Work,
which shall for purposes hereof be deemed to mean only the improvements which are described in
the Final CDs described below.
Tenant acknowledges and agrees that this Work Letter
constitutes the entire agreement of Landlord and Tenant with respect to the construction of the
Landlords Work and the preparation of the Premises for occupancy and that, except for Landlords
obligation to complete the Landlords Work, Landlord has no obligations to make any modifications,
alterations or improvements to the Premises pursuant to the Lease.
2.
Construction Drawings
. Reference is made hereby to the finish schedule and space
plans attached hereto as
Annex D-1
(collectively, the Finish Schedule and Space Plans)
prepared by Studio 1200 (Architect). Landlord and Tenant hereby acknowledge their approval of the
Finish Schedule and Space Plans. Any modification to the Finish Schedule and Space Plans shall be
subject to Landlords approval. As soon as practical after the date of the Lease, Tenant shall, at
its sole cost and expense, and at Tenants sole cost and expense, cause Architect to prepare from
the Finish Schedule and Space Plans and deliver to Landlord for Landlords approval, preliminary
architectural, mechanical and electrical working drawings, plans and specifications (collectively,
the Preliminary Construction Drawings or the Preliminary CDs) necessary to
complete the design and construction of improvements identified on or from the Finish
Schedule and Space Plans. Upon receipt of the Preliminary CDs. Landlord shall review the same
and notify Tenant in writing of any objections Landlord may have with respect thereto, such
objections to be made with specificity and in good faith. If Landlord does not object to any of
the Preliminary CDs (or subsequent revisions thereto) within seven
(7) days after receipt, Landlord
shall be deemed to have approved of same. Promptly upon receipt of Landlords objections to the
Preliminary CDs, if any, Tenant shall cause the Preliminary CDs to be revised in accordance with
Landlords objections and shall resubmit same to Landlord for approval. This procedure shall be
repeated until Landlord approves the Preliminary CDs (though Landlord shall have only three (3)
days to review and object to resubmitted Preliminary CDs). The Preliminary CDs finally approved
by Landlord are hereinafter referred to as the Final CDs and all improvements to be made to the
Premises or Building pursuant thereto is the Landlords Work.
3.
Cost of the Landlords Work
.
(a) As used herein the Cost of the Landlords Work means the actual cost to Landlord
of constructing the Landlords Work including, without limitation, (i) the cost of all
work,
labor, materials and supplies; (ii) the cost of all contractor fees and general conditions
and permitting costs/fees; and (iii) utilities used in the performance of the Landlords
Work, additional janitorial services, and related taxes and insurance costs. The Cost of
the Landlords Work does not include architectural, engineering and design fees including
but not limited to those incurred in connection with the preparation or review/revision of
any preliminary or final Finish Schedule and Space Plans, any mechanical, electrical and
plumbing drawings, or the Preliminary or Final CDs (collectively, Design Costs) or any
other Tenants Expenses (hereinafter defined). Landlord shall pay for the Cost of the
Landlords Work.
(b) As used herein. Tenants Expense means (i) any portion or incremental increase in
the Cost of the Landlords Work caused or due to changes to the Finish Schedule and Space
Plans requested by Tenant, or (ii) any portion or incremental increase in the Cost of the
Landlords Work caused or due to changes to the Preliminary CDs requested by Tenant that are
inconsistent with the Finish Schedule and Space Plans, (iii) Change Order Costs, (iv) if
Tenant requires any non-Building standard improvements or materials (and Landlord agrees
thereto) not set forth in the Final CDs, the Cost of the Landlords Work above what it would
have cost if only Building standard improvements had been constructed or Building standard
materials had been used, (v) any cost incurred due to Tenant Delays, (vi) the cost of all
Alternates (
i.e.
, Compressed Air for Labs
-$10,851.86,
Pre-Action Systems -$16,277.81; Card
Access System -$21,703.74; totaling $48,833.42 (the Alternates Cost), and (vii) all Design
Costs. Tenant shall contract with and directly engage the Architect and any other person
preparing any the Finish Schedule and Space Plans and the Preliminary and Final CDs and
shall be directly responsible for all Design Costs.
(c) If Landlord determines that the Cost of the Landlords Work will include any
Tenants Expense, Landlord will deliver to Tenant an itemization thereof (the Tenants
Expense Itemization) and Landlord shall not be required to commence construction of any of
the Landlords Work (or continue same, as applicable) until Tenant has approved of the
Tenants Expense Itemization and paid to Landlord the Tenants Expense identified therein.
If Tenant does not disapprove of the Tenants Expense Itemization in writing within three
(3) days after delivery thereof to Tenant by Landlord, Tenant shall be deemed to have
approved of the Tenants Expense Itemization in all respects. If Tenant expressly
disapproves of the Tenants Expense Itemization within such three (3) day period, then each
day elapsing between the expiration of such three (3) day period and the date on which
Tenant provides written approval of the Tenants Expense Itemization or the Final CDs are
revised by Change Order to remove any disapproved Tenants Expense shall be considered a day
of Tenant Delay. The statements of costs submitted to Landlord by Landlords
contractors, architects, engineers and consultants shall be conclusive for purposes of
determining the actual Cost of the Landlords Work and any Tenants Expense.
Notwithstanding the above, Tenant acknowledges and agrees that, if Tenant chooses any
Alternates, the related Alternates Costs are a proper Tenants Expense and will be paid for
by Tenant.
4.
Change Orders
. Changes in the Landlords Work may be accomplished only by a
Change Order (defined below). Prior to implementing any requested change to the Landlords Work,
Tenant shall have Architect prepare and deliver to Landlord (at Tenant sole cost and expense) for
Tenants and Landlords approval and execution a Change Order (herein so called) setting forth (i)
the requested change in the Landlords Work. Any such Change Order shall be subject to Landlords
approval, such approval not to be unreasonably withheld, conditioned or delayed unless the
requested change would adversely affect (in the reasonable discretion of Landlord) (a) the Building
structure or the Building systems, (b) the exterior appearance of the Building, or (c) the
appearance of the Buildings Common Areas or elevator lobby areas, in which case Landlord may
withhold its consent in its sole and absolute discretion. Further, Landlord shall not be required
to approve any Change Order until it has been revised to include; (i) the extent of the adjustment
in the total Cost of the Landlords Work, if any, including, without limitation, all of Landlords
extra costs associated with such changes, including, but not limited to, a construction management
fee in the amount of three percent (3.00%) of such increased costs (collectively, Change Order
Costs), and (ii) the estimated number of days of Tenant Delay in achieving Substantial Completion of the Landlords
Work due to the Change Order, if any, and Tenant has agreed to such in writing. If Tenant fails to
approve, execute and deliver to Landlord a Change Order otherwise approved by Landlord and pay all
Change Order Costs within three (3) days following receipt thereof. All Change Order Costs will be
included in Tenants Expense.
D-1
5.
Substantial Completion/Tenant Delay
. After the Tenant has paid any Tenants
Expense then required to be paid under this Work Letter including, without limitation, all Alternates Costs,
and Landlord has obtained all necessary building permits, Landlord shall enter into a contract
with a general contractor selected by Landlord (General Contractor) and cause the Landlords Work
to be performed in accordance with the Final CDs using Building standard materials (unless
otherwise provided in the Final CDs). As used herein Substantial Completion, Substantially
Completed, and any derivations thereof mean that the Landlords Work has been substantially
completed in accordance with the Final CDs as reasonably determined by Landlords construction
manager and Tenant may lawfully occupy the Premises. Substantial Completion shall have occurred
even though minor details of construction, decoration and mechanical adjustments and other
punch-list items remain to be completed (Punch-List Items). If Landlord shall be delayed in
achieving Substantial Completion of the Landlords Work as a result of any Tenant Delays which are
described in the Lease or this Work Letter, or upon the occurrence of any of the following events
(which events are also referred to herein as Tenant Delays):
(i) Tenants failure to furnish any information, document or approval required to be
furnished by Tenant to Landlord hereunder at the time and in the manner set forth herein or to take
any action or perform any obligation required hereby within an allotted time period; or
(ii) Tenants request or requirements for materials, finishes or installations
other than Landlords Building Standard which results in a delay in substantially completing
construction of the Landlords Work; or
(iii) Tenant requested Change Orders; or
(iv) The performance of any work in the Premises by Tenant
or any by a person, firm
or corporation employed by Tenant (
e.g.
, move-in, set up, testing, installation of
telecommunications and voice data equipment which results in a delay in substantially
completing construction of the Landlords Work (all such persons, firms or corporation
being subject to the approval of Landlord); or
(v) Tenants failure to pay Landlord any Tenants Expense at the time and in the
manner required by this Work Letter; or
(vi) Tenants failure to take any action in connection with obtaining a
certificate of occupancy for the Premises that must be taken by Tenant (
e.g.
, applications
for certificate of occupancy).
then, solely for purposes of determining the Commencement Date, the date of Substantial
Completion shall be moved forward one day for each day of Tenant Delay. Each calendar day of any
such delays will correspond to one day of Tenant Delay.
When
Landlord considers the Landlords Work in the Premises to be Substantially Completed,
Landlord will notify Tenant and within three (3) business days thereafter. Landlords
representative and Tenants representative shall conduct a walk-through of the Premises and
identify any Punch-List Items. Neither Landlords representative nor Tenants representative shall
unreasonably withhold his or her agreement on Punch-List items. Only one punch list will be
prepared. Tenant agrees that upon Substantial Completion of the Landlords Work and upon delivery
of possession of the Premises to Tenant, Tenant will (i) accept the Premises in its then existing
condition, subject only to the Punch-List Items, and (ii) execute and deliver to the Acceptance of
Premises Amendment in the form of that attached as
Exhibit C
to the Lease; provided that
the failure of Tenant to execute such agreement will not act to delay the occurrence of the
Commencement Date. Landlord shall use reasonable efforts to cause the General Contractor performing
the Landlords Work to complete all Punch-List items within thirty (30) days after agreement
thereon and Tenants execution of the Acceptance of Premises Amendment (and subject to Tenant
Delays and Force Majeure); provided, however, that Landlord shall not be obligated to engage
overtime labor in order to complete such items.
6.
Construction
Representatives
. Landlords and Tenants representatives
for coordination of construction and approval of change orders will be as follows, provided that either party may
change its representative upon written notice to the other:
|
|
|
|
|
|
|
Landlords Representative:
|
|
Juan Martinez
|
|
|
|
|
c/o CBRE
|
|
|
|
|
700 Alexander Park
|
|
|
|
|
Suite 301
|
|
|
|
|
Princeton, New Jersey 08540
|
|
|
|
|
Telephone: (609) 951-4248
|
|
|
|
|
Telecopy: (609) 951-0180
|
|
|
|
|
Email: Juan.Martinez@cbre.com
|
|
|
|
|
|
|
|
|
|
Tenants Representative:
|
|
|
|
|
|
|
|
|
|
|
|
c/o
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telephone:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecopy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Email:
|
|
|
|
|
|
|
|
|
|
|
|
7.
Defined
Terms
. Capitalized but undefined terms shall have the meaning set forth
for such terms in the Lease.
D-2
EXHIBIT F
EXTENSION OPTIONS
1.
Grant of Options to Extend
. Subject to the terms and conditions of this EXHIBIT F,
Tenant shall have two (2) options (each an Extension Option) to extend the Term as to all, but
not less than all of the Premises, for a term (each an Extension Term) of five (5) years each
commencing on the day after the expiration of the initial Term, with respect to the first (1
st
)
Extension Term, or the day after the expiration of the first (1
st
) Extension Term, with
respect to the second (2
nd
) Extension Term, if applicable. Tenant shall exercise an
Extension Option, if at all, only by written notice (an Extension Notice) delivered to Landlord
not less than twelve (12) or more than fifteen (15) months, prior to the then current Expiration
Date of the initial Term, with respect to the exercise of the first (1
st
) Extension
Option, or the Expiration Date of the first (1
st
) Extension Term, with respect to the exercise of
the second (2
nd
) Extension Option. Tenants exercise of an Extension Option shall be
irrevocable by Tenant. The terms and conditions of Tenants lease of the Premises during each
Extension Term shall be the same terms and conditions of the Lease as in effect immediately prior
to the commencement of such Extension Term, except as follows:
|
(a)
|
|
The Base Rent for the Extension Term shall be 100% of the Market Rate. The Market
Rate shall be Landlords good faith and reasonable estimate of the prevailing per annum
base rent rate per square foot of rentable area being charged as of the commencement date
of the subject Extension Term for each year of the subject Extension Term for renewing
net tenancies covering commercial office space of comparable size and quality to the
Premises in comparable buildings (Comparable Buildings) in the northern New Jersey
office market/trade area (the Market Area) taking into account all pertinent factors
including, without limitation, the creditworthiness of Tenant, the use, local and/or
floor level(s) within the building, the definition of rentable area, the term of the
extension, when the comparable rate was contracted for, any new base year or expense
stop, the number and cost of parking spaces, the quality, amenities, age and location of
the Comparable Buildings, the involvement or non-involvement of a broker, any improvement
allowances and tenant concessions, rent incentives, annual market escalations, and other
market conditions;
|
|
(b)
|
|
Tenant shall be entitled to receive the concessions or allowances included by
Landlord in determining the Market Rate.
|
|
(c)
|
|
No abatements or allowances applicable to any period prior to the subject Extension
Term; or other concessions applicable during any period prior to the subject Extension
Term, if any, shall apply during either Extension Term unless expressly agreed by
Landlord;
|
|
(d)
|
|
Subject to subparagraph (b) above, the Premises shall be accepted by Tenant for the
Extension Term in its
as is
condition and
with all faults
unless expressly agreed
otherwise by Landlord; and
|
|
(f)
|
|
After Tenants exercise of the first (1
st
) Extension Option, if at all, there
shall be only one (1) remaining Extension Option, and after the exercise of the second
(2
nd
) Extension Option, if at all, there shall be no remaining rights or options to
renew or extend the Term.
|
2.
Market Rate Notice and Arbitration
. Within twenty one (21) days after Landlord
receives Tenants Extension Notice, Landlord shall deliver a written notice (Market Rate
Proposal) to Tenant specifying the Market Rate and the Base Rent for the subject Extension Term.
Tenant, within fifteen (15) days after Landlord delivers the Market Rate Proposal, shall either (i)
give Landlord notice of Tenants unconditional acceptance of Landlords determination of Market
Rate for the subject Extension Term set forth in the Market Rate Proposal (an Acceptance Notice),
or (ii) give Landlord notice of Tenants rejection of Landlords determination of Market Rate for
the subject Extension Term set forth in the Market Rate Proposal (a Rejection Notice). If
Tenant timely delivers an Acceptance Notice, then the Market Rate (including, without limitation,
the Base Rent for the subject Extension Term), will be as set forth in the Market Rate Notice. If
Tenant does not timely deliver an Acceptance Notice or a Rejection Notice, Tenant will be deemed to
have timely delivered an Acceptance Notice. If Tenant timely delivers a Rejection Notice and
Landlord and Tenant, working in good faith, cannot agree on Market Rate for the subject Extension
Term by the date which is one hundred eighty (180) days prior to the then current Expiration Date
of the Lease (the Outside Agreement Date), then the Market Rate for the subject Extension Term
will be determined as follows:
(i) Within ten (10) days after the expiration of the Outside Agreement Date. Landlord and
Tenant shall each shall select a professional licensed commercial real estate broker of
its choice, and give the other party written notice of such brokers name, address and
telephone number. If either party fails to timely deliver to the other party written
notice of such partys selected broker, such party shall have no further right to select
a broker and the determination of the Market Rate by the single broker selected shall be
determinative for purposes hereof;
(ii) The two selected brokers shall attempt to mutually determine the Market Rate for
each year of the Extension Term and if the two (2) selected brokers agree on the Market
Rate, then the Market Rate for each such year shall be as determined by the two (2)
selected brokers. If the two (2) selected brokers cannot agree on the Market Rate within
thirty (30) days after their appointment, then the two (2) selected brokers shall
immediately select another, neutral broker and shall furnish Landlord and Tenant written
notice of such brokers name, address and telephone number. Each of the three (3)
selected brokers shall then individually determine Market Rate (considering the criteria
described above) and the Market Rate shall be the average of the closest two (2) of the
three (3) determinations of the Market Rate for the Extension Term;
(iii) If the procedure set forth above is implemented, and if for any reason whatsoever
the Market Rate has not been finally determined prior to the commencement of the Extension
extended Term, then the Market Rate initially estimated by Landlord shall be the Market Rate
for all purposes under the Lease until such time as the Market Rate is finally determined as
set forth above, and Landlord and Tenant shall, by appropriate payments or credits to the
other, correct any overpayment or underpayment which may have been made prior to such final
determination;
F-1
(iv) Each of Landlord and Tenant shall instruct their appointed broker to perform in good
faith and in a timely manner. Each of the selected brokers hereunder (including the third
appointed broker, if applicable) shall by profession be a licensed real estate broker who
has had, within the immediately
preceding fifteen (15) years, at least ten (10) years of commercial office building leasing
experience and who has negotiated to full execution at least ten (10) commercial office
leases of at least 10,000 LSF each in the Market Area within the two (2) year period ending
upon the then current Expiration Date and who does not have a conflict of interest in
representing either Landlord or Tenant and who is not concurrently involved in a transaction
in which a commission, fee or other compensation is anticipated to be payable to such broker
by a party hereto. Neither Landlord nor Tenant shall consult with such broker as to his or
her opinion as to the Market Rate prior to the appointment.
(v) Landlord and Tenant shall each bear the cost of their own broker and attorneys in
connection with the determination of the Market Rate. The cost of the third broker shall
be shared equally by Landlord and Tenant.
3.
Termination
. Tenants rights under this Exhibit shall automatically terminate: (i)
in the event that Tenant does not timely and properly exercise the Extension Option; or (ii) if the
Lease or Tenants right to possession of the Premises is terminated; or (iii) Tenant exercises any
right to terminate the Lease in its entirety) or to reduce the Premises, or (iv) a Transfer occurs
(other than a Transfer described in Paragraph 5(a) or (b) below. Each of such termination events
shall, at Landlords option, apply to terminate the Extension Option whether or not Tenant may have
theretofore delivered an otherwise valid Extension Notice. Landlord may, at its option, waive any
termination event.
4.
Conditions
. Tenants exercise of the Extension Option is conditioned upon: (i)
Tenant not being in monetary Default at the time of exercise of an Extension Option and on the
commencement date of the subject Extension Term, (ii) Tenant being in occupancy of substantially
all of the Premises and (iii) Tenants financial condition not having materially adversely changed
since the date of the Lease with respect to the first (1
st
) Extension Option, or since
the commencement of the first (1
st
) Extension Term, with respect to the second
(2
nd
) Extension Option. Additionally, if all of such conditions are not satisfied on the
day preceding the commencement of the subject Extension Term, then, at Landlords sole option, the
Extension Notice shall be null and void, the Term shall not be extended and the Lease will expire
upon the then scheduled Expiration Date.
5.
Prohibition on Assignment
. Tenants rights under this Exhibit are personal to
Tenant and may not be assigned or transferred, and any attempted assignment or transfer in
violation of this restriction shall be null and void; provided, however, that (a) Tenants rights
under this Exhibit shall inure to the benefit and may be exercised by a successor in interest to
Tenant by merger or consolidation provided that such did not require Landlords consent under the
Lease, and (b) Tenant may assign its rights under this Exhibit to any assignee of Tenants interest
in the Lease pursuant to an assignment that did not require Landlords consent under the Lease.
Any other attempted assignment or transfer by Tenant of its rights under this Exhibit shall be null
and void and of no force and effect.
6.
Lease Amendment
. Upon Tenants exercise of the Extension Option, and subject to the
terms and conditions of this Exhibit, the Term shall be extended for the subject Extension Term
without the necessity of the execution of any further instrument or document, although if requested
by Landlord or Tenant, Landlord and Tenant shall enter into a written agreement modifying and
supplementing the Lease in accordance with the provisions hereof; provided, however that Landlords
failure to prepare or Tenants failure to execute such amendment shall not affect the validity of
the exercise of the Extension Option or alter Tenants or Landlords obligations during the subject
Extension Term as determined hereby.
7.
Time of Essence
. With respect to all dates for exercising any rights and the
performance of any obligations in connection with the exercise or implementation of the Extension
Option, time shall be of the essence.
8.
Miscellaneous
. Capitalized but undefined terms used in this Exhibit shall have the
same meaning as set forth for such terms in the Lease.
F-2
EXHIBIT G
RIGHT OF FIRST REFUSAL
1.
Grant of Right of First Refusal
. As used herein, ROFR Space means all leasable
space on any floor on which any of the Office Premises is located from time to time and not
leased to Tenant from time to time. Subject to the terms and conditions set forth in this
Exhibit G (this Exhibit), if during the Term, and provided that there are not less than
five (5) years remaining in the Term, Landlord receives a bona fide third party offer from any
party for any ROFR Space that is contiguous with the Premises that Landlord desires to accept
(a Space Offer), Landlord grants Tenant the right of
first refusal (the ROFR), to lease
all, but not less than all, of the ROFR Space that is the subject of the Space Offer (the
Subject ROFR Space) and, at Landlords sole option, any other space that is to be leased by
such third party together with the Subject ROFR Space pursuant to such Space Offer (if any,
the Included Non-ROFR Space) on the terms and conditions set forth in this Exhibit. As used
herein the Subject ROFR Space and, if applicable, any Included Non-ROFR Space, is collectively
the ROFR Expansion Space). A bona fide offer need not take the form of a lease, but must at
least set forth the important terms of the proposed transaction, including all salient
economic terms, and a description and the LSF of the ROFR Expansion Space.
2.
ROFR Notice/Procedure for Exercise
. Upon Landlords receipt of a Space Offer that
Landlord desires to accept, Landlord shall deliver Tenant written notice thereof (a ROFR Notice),
such notice to include a summary of the terms of the Space Offer including, without limitation, a
description of the ROFR Expansion Space, the term, required base and additional rental, lease
concessions or rental abatements and improvement allowances and any other salient economic terms.
Tenant will have five (5) business days after receipt a ROFR Notice (the ROFR Exercise Period)
within which to give Landlord its unconditional notice (ROFR Exercise Notice) of its exercise of
the ROFR to lease all, but not less than all, of the ROFR Expansion Space on the same terms and
conditions set forth in ROFR Notice.
3.
Failure to Exercise
. If Tenant does not deliver a ROFR Exercise Notice within the
ROFR Exercise Period, Tenant will be conclusively presumed to have waived the ROFR with respect to
the ROFR Expansion Space, and Landlord will be free to lease the
Subject ROFR Space (alone or
together with any other space that is not ROFR Space) to anyone whom it desires and Tenant will
have no further rights to the Subject ROFR Space. However, if within such one hundred eighty
(180) day period Landlord desires to lease the Subject ROFR Space on materially more beneficial
terms than provided in ROFR Notice, Landlord shall re-offer the Subject Expansion Space on such
changed terms to Tenant on the terms of this Exhibit for the ROFR Exercise Period before leasing to
a third party. For purposes hereof, materially more beneficial terms means an effective rental
rate (taking into account amortization of allowances and rent credits on a straight line basis over
the applicable term) which is 95% or less than the base rent rate set forth in ROFR Notice.
4.
Expansion of Premises/Lease Amendment
. Provided that Tenant timely delivers a
ROFR Exercise Notice complying with the terms of Paragraph 2 above, and subject to the other terms
and conditions of this Exhibit, the ROFR Expansion Space will be deemed added to the Premises
effective as of the date specified in ROFR Notice and Tenant will accept the ROFR Expansion Space
in its
AS IS
condition without any obligation of Landlord to improve, alter or remodel the ROFR
Expansion Space, except as may be provided in ROFR Notice. Tenants lease of the ROFR Expansion
Space will be on the terms and conditions as are set forth in the ROFR Notice and herein and, to
the extent not addressed in the ROFR Notice or this Exhibit, on the same terms and conditions of
Tenants lease of the Premises at the time of the commencement of such expansion excluding any
abatements, options to extend, expand, or contract or rights of first refusal or first offer or
similar rights as may be included in the Lease or obligations to make any alterations or
improvements or provide or contribute allowances for same. Within thirty (30) days after Tenant
delivers Tenants ROFR Exercise Notice, Landlord and Tenant will execute an amendment to the Lease
evidencing the addition of the ROFR Expansion Space and the terms thereof provided, however, that
the failure of Landlord to prepare, or Tenant to execute, such an amendment shall not alter
Landlords or Tenants rights or obligations with respect to the ROFR Expansion Space.
5.
Termination of ROFR
. Without limitation of the terms of Paragraph 3 above, the ROFR
shall automatically terminate if (i) the Lease or Tenants right to possession of the Premises is
terminated, (ii) Tenant vacates the Premises (or a substantial part thereof) for in excess of
120-days days for reasons other than casualty or approved remodeling or repairs, or (iii) Tenant
effects any assignment of the Lease or subletting of the Premises except as described in Paragraph
7(a) or (b) below. Each of such termination events shall, at Landlords option, apply to terminate
the ROFR whether or not Tenant may have theretofore delivered an otherwise valid ROFR Exercise
Notice. Landlord may, at its option, waive any termination event.
6.
Conditions
. Landlord shall not be required to deliver a ROFR Notice and Tenant may
not exercise the ROFR (i) at any time that Tenant is in default; (ii) if Tenant is not itself
occupying all the Premises; (iii) if at the time Landlord receives the Space Offer there are less
than five (5) years remaining in the Term, or (iv) if Tenants financial condition has materially
adversely changed since the date of the Lease.
7.
Prohibition on Assignment
. Tenants rights under this Exhibit are personal to
Tenant and may not be assigned or transferred, and any attempted assignment or transfer in
violation of this restriction shall be null and void; provided, however, that (a) Tenants rights
under this Exhibit shall inure to the benefit and may be exercised by a successor in interest to
Tenant by merger or consolidation provided that such did not require Landlords consent under the
Lease, and (b) Tenant may assign its rights under this Exhibit to any assignee of Tenants interest
in the Lease pursuant to an assignment that did not require Landlords consent under the Lease.
Any other attempted assignment or transfer by Tenant of its rights under this Exhibit shall be null
and void and of no force and effect.
G-1
8.
Subordination
. Tenants ROFR is subordinate to all rights of renewal, extension,
expansion, relocation or first offer or refusal affecting the Subject ROFR Space or other rights to
lease the Subject ROFR Space which are in place as of commencement of the Extended Term (each a
Senior Right
and the holder thereof being a
Senior Right Holder
), and whether or not
exercised in strict accordance therewith, and further subject to the right of Landlord in its sole
and absolute discretion to renew existing tenants or occupants of the Subject ROFR Space whether or
not pursuant to options to extend previously granted or otherwise. Landlord shall not be required
to deliver any ROFR Notice until all Senior Rights Holders have waived their Senior Rights. If
Landlord delivers a ROFR Notice prior to such waiver and, whether or not Tenant delivers an ROFR
Exercise Notice with respect thereto, a Senior Right Holder later exercises its Senior Right, then
the ROFR Notice and any such ROFR Exercise Notice will be null and void. Further, Landlord shall
not be required to deliver any ROFR Notice with respect to any Space Offer made to, or received
from, an existing tenant of any Subject ROFR Space.
9.
Time of Essence
. With respect to all dates for exercising any rights and the
performance of any obligations in connection with the exercise or implementation of the ROFR, time
shall be of the essence.
10.
Miscellaneous
. Capitalized but undefined terms used in this Exhibit shall have the
same meaning as set forth for such terms in the Amendment of which this Exhibit is a part, or if
not defined in such Amendment, then in the Lease.
G-2