UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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S
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Annual
Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the
fiscal year ended April 30, 2007
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£
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
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For
the
transition period from __________________ to
______________________.
Commission
file number 001-33261
AEROVIRONMENT,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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95-2705790
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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181 W. Huntington
Drive, Suite 202
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Monrovia,
CA
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91016
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (626)
357-9983
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock, par value $0.0001 per share
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The
NASDAQ Stock Market
LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No
þ
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.
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Large
Accelerated Filer o
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Accelerated
Filer o
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Non-accelerated
Filer þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
The
initial public offering of the registrant's shares of common stock, par value
$0.0001 per share, took place on January 23, 2007, and its common stock began
trading on The NASDAQ Global Market on that same date. As such, the registrant's
common equity was not publicly traded as of October 27, 2006, the last business
day of its most recently completed second fiscal quarter.
As
of
June 13, 2007, the issuer had 18,875,957 shares of common stock, par value
$0.0001 per share, issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days
after
the conclusion of the registrant's fiscal year ended April 30, 2007, are
incorporated by reference into Part III of this
Form 10-K.
AEROVIRONMENT,
INC.
INDEX
TO FORM 10-K
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PART
I
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Page
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2
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16
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30
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30
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30
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30
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PART
II
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31
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32
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33
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41
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42
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64
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64
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64
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PART
III
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65
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65
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65
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65
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65
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PART
IV
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66
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PART
I
Forward-Looking
Statements
This
Annual Report on Form 10-K, or Annual Report, contains forward-looking
statements, which reflect our current views about future events and financial
results. We have made these statements in reliance on the safe harbor created
by
that Private Securities Litigation Reform Act of 1995 (set forth in Section
27A
of the Securities Act of 1933, as amended, or the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act).
Forward-looking statements include our views on future financial results,
financing sources, product development, capital requirements, market growth
and
the like, and are generally identified by terms such as "may," "will," "should,"
"could," "targets," "projects," "predicts," "contemplates," "anticipates,"
"believes," "estimates," "expects," "intends," "plans" and similar words.
Forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statement. These uncertainties
and
other factors include, among other things:
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unexpected
technical and marketing difficulties inherent in major research and
product development efforts;
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availability
of U.S. government funding for defense procurement and research and
development programs;
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the
potential need for changes in our long-term strategy in response
to future
developments;
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unexpected
changes in significant operating expenses, including components and
raw
materials;
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changes
in the supply, demand and/or prices for our
products;
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changes
in the regulatory environment; and
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general
economic and business conditions in the U.S. and elsewhere in the
world.
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Set
forth
below in Item 1A. Risk Factors are additional significant uncertainties and
other factors affecting forward-looking statements. The reader should understand
that the uncertainties and other factors identified in this Annual Report are
not a comprehensive list of all the uncertainties and other factors that may
affect forward-looking statements. We do not undertake any obligation to update
or revise any forward-looking statements or the list of uncertainties and other
factors that could affect those statements.
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Business.
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Overview
We
design, develop, produce and support a technologically-advanced portfolio of
small unmanned aircraft systems, or UAS, that we supply primarily to
organizations within the U.S. Department of Defense, or DoD, and fast charge
systems for electric industrial vehicle batteries that we supply to commercial
customers. We derive the majority of our revenue from these two business areas
and we believe that both the small UAS and fast charge markets are in the early
stages of development and have significant growth potential. Additionally,
we
believe that some of the innovative potential products in our research and
development pipeline will emerge as new growth platforms in the future, creating
market opportunities.
The
success we have achieved with our current products stems from our investment
in
research and development and our ability to invent and deliver advanced
solutions, utilizing our proprietary technologies, to help our government and
commercial customers operate more effectively and efficiently. Our core
technological capabilities, developed through over 35 years of innovation,
include lightweight aerostructures and electric propulsion systems, efficient
electric energy systems and storage, high-density energy packaging,
miniaturization, controls integration and systems engineering
optimization.
We
are
organized into three segments based on our business operations; UAS, PosiCharge
Systems, and Energy Technology Center, which focuses primarily on the
development of innovative, efficient electric energy technologies for internal
and external customers, and also develops, produces and supports a line of
electronic test equipment used for research and development
activities.
Our
Strategy
We
intend
to grow our business by maintaining leadership in the growing markets for small
UAS and fast charge systems and by creating new products that enable us to
enter
and lead new markets. Key components of this strategy include the
following:
Expand
our current solutions to existing and new
customers. Our small UAS and PosiCharge Systems
products and services are leaders in their respective North American markets.
We
intend to increase the penetration of our small UAS products within the
U.S. military, the military forces of allied nations and non-military
U.S. customers. We believe that the increased use of our small UAS in the
U.S. military will be a catalyst for increased demand by allied countries,
and that our efforts to pursue new applications will help to create non-military
opportunities. We similarly intend to increase the penetration of PosiCharge
fast charge systems into existing and new customers in North America and
globally.
Deliver
innovative solutions. Innovation is the primary driver
of our growth. We plan to continue research and development efforts to enable
us
to satisfy our customers through better, more capable products and services,
both in response to and in anticipation of their needs. We believe that by
continuing to invest in research and development, we will continue to deliver
innovative, new products that address market needs within and outside of our
current target markets, enabling us to create new opportunities for
growth.
Foster
our entrepreneurial culture and continue to attract, develop and retain
highly-skilled personnel. We have created a corporate
culture that encourages innovation and an entrepreneurial spirit, which helps
to
attract highly-skilled professionals. We intend to nurture this culture to
encourage the development of the innovative, highly technical solutions that
give us our competitive advantage. A core component of our culture is the
demonstration of trust and integrity in all of our interactions, contributing
to
a positive work environment and engendering trust among our
customers.
Preserve
our agility and flexibility. We are able to respond
rapidly to evolving markets and deliver new products and system capabilities
quickly, efficiently and affordably. We believe that this ability helps us
to
strengthen our relationships with customers. We intend to maintain our agility
and flexibility, which we believe to be important sources of differentiation
when we compete against larger companies and competitors with more extensive
resources.
Our
Customers
We
sell
the majority of our small UAS to organizations within the DoD, and the majority
of our PosiCharge Systems products to commercial customers. The
Energy Technology Center generates revenue from both government and commercial
customers. We act as a prime contractor for all of our small UAS
sales to the DoD.
During
our fiscal year ending April 30, 2007, approximately 56% of our sales were
made
to the U.S. Army pursuant to orders made under contract by the U.S. Army on
behalf of itself as well as several other services of the U.S.
Military. Other U.S. government agencies accounted for 27% of our
sales revenue, while purchases by foreign and commercial customers
accounted for the remaining 17% of sales revenue during our fiscal year ended
April 30, 2007.
Industry
Background
Small
UAS
The
market for our small UAS has grown significantly over the last several years
due
to the U.S. military's post-Cold War transformation, the demands of the global
war on terrorism. Following the end of the Cold War, the U.S. military began
its
transformation into a smaller, more agile force that fights through a network
of
observation, communication and precision targeting technologies. This
transformation accelerated following the terrorist attacks of September 11,
2001, as the U.S. military required improved observation and targeting of combat
enemies who operate in small groups, often embedded in dense population centers
or dispersed in remote locations. We believe that UAS, which range from large
systems, such as Northrop Grumman's Global Hawk and General Atomics' Predator,
to small systems, such as our Raven, are an integral part of this transforming
military force because they provide critical observation and communications
capabilities. Because our small UAS can provide real-time observation and
communication capabilities to these small units who directly control them,
the
market for our small UAS continues to expand. As we explore opportunities to
develop new markets for our small UAS such as border
surveillance
and petrochemical industry infrastructure monitoring, we expect further growth
through the introduction of UAS technology to non-military
applications.
PosiCharge
Systems
Our
PosiCharge Systems products, including our PosiCharge fast charge systems.
accessories, and installation and post-sale services, are designed to improve
productivity and safety for operators of electric industrial vehicles, such
as
forklifts and airport ground support equipment, by improving battery and fleet
management. Electric industrial vehicles, over 100,000 of which were
shipped in North America during 2006, are powered by large onboard batteries
that can consume up to 17 cubic feet and weigh up to 3,500 pounds. In
multi-shift fleet operations, traditional charging systems require users to
exchange vehicle batteries throughout the day because these batteries discharge
their energy through vehicle usage and there is insufficient vehicle downtime
to
recharge them during a shift. As a result, drivers must leave the
work area when the battery reaches a low state of charge and drive to a
dedicated battery changing room, which often occupies valuable floor space
and is frequently located far from a driver's work area. The driver or dedicated
battery attendant must then remove the battery from the vehicle, place it on
a
storage rack, connect it to a conventional battery charger, identify a
fully-charged battery, move it into the vehicle's battery compartment and
reconnect the battery to the motor before the driver may return to the work
area. These battery changes, which take place every day in thousands of
facilities around the world, result in reduced material movement and increased
operating costs. Furthermore, depending on the type of battery, conventional
battery chargers can require up to eight hours to recharge the battery, which
then must cool for up to an additional eight hours before it is ready to be
used again. Consequently, depending on vehicle usage and the number of shifts
in
an operation, a fleet may require more than one battery per vehicle, which
necessitates additional storage space, chargers and maintenance time. Moreover,
the high levels of heat generated by conventional battery chargers during their
normal use can cause excessive evaporation of the water contained in the battery
and damage to the battery's components. Over time, this evaporation of fluid
and
damage to components result in battery degradation and negatively affect the
battery's life.
Fast
charge technology, which charges a battery with a high electrical current while
the battery remains in the vehicle, eliminates the need for frequent battery
changing and a dedicated battery room. This approach increases productivity,
reduces operating costs and improves facility safety. The earliest
adopters of fast charge technology include the automotive and air transportation
industries. Large food and retail industry customers have more recently begun
to
utilize fast charge technology.
Our
Solutions
Small
UAS
Our
small
UAS, including Raven, Dragon Eye, Swift, Wasp
and Puma, are designed to provide
valuable Intelligence,
Surveillance and Reconnaissance, or ISR, including real-time tactical
reconnaissance, tracking, combat assessment and geographic data, directly to
the
small tactical unit or individual "warfighter," thereby increasing flexibility
in mission planning and execution. Our small unmanned aircraft wirelessly
transmit critical live video and other information generated by their payload
of
electro-optical or infrared sensors, enabling the operator to view and capture
images, during the day or at night, on a hand-held ground control unit. All
of
our ground control units allow the operator to control the aircraft by
programming it for GPS-based autonomous navigation using operator-designated
way-points and, with the exception of Dragon Eye's ground control unit,
also provide for manual flight operation. These ground control units are
designed for durability and ease of use in harsh environments and incorporate
a
user-friendly, intuitive graphical user interface. With the exception of
Dragon Eye, all of our small unmanned aircraft operate from a common
ground control unit.
All
of
our small UAS are designed to be man-portable, assembled without tools in less
than five minutes and launched and operated by one person with limited training
required. The efficient and reliable electric motors used in all of our small
UAS are powered by replaceable modular battery packs that can be changed in
seconds, enabling rapid return to flight. All of our small UAS can be recovered
through an autonomous landing feature that enables a controlled descent to
a
designated location.
In
military applications, our systems enable tactical leaders to observe the next
corner, intersection or ridgeline in real-time. This information facilitates
faster, safer movement through urban and mountainous environments and can enable
troops to act on intelligence rather than react to an attack. Moreover, by
providing this information, our small UAS reduce the risk to warfighters and
to
the surrounding population by providing the ability to tailor the military
response to the threat. U.S. military personnel regularly use our small
UAS, such as Raven, for force protection, combat enemy observation and
damage assessment missions. These reusable systems are easy to
transport,
assemble and operate and are relatively quiet when flying at typical operational
altitudes of 200 to 300 feet due to our efficient electric propulsion
systems. Furthermore, their small size makes them difficult to see from the
ground. In addition, the low cost of our small UAS makes it practical for
warfighters to deploy these assets directly.
Our
small
UAS solutions also include spare equipment, alternative payload modules,
batteries, chargers, repairs and Internet-enabled customer support. We provide
training by our highly-skilled instructors, who typically have extensive
military experience, and continuous refurbishment and repair services for our
products. We currently maintain a forward operating depot in Iraq to support
the
large fleet of our small UAS deployed there. By maintaining close contact with
our customers and users in the field, we gather critical feedback on our
products and incorporate that information into ongoing product development
and
research and development efforts. This approach enables us to improve our
solutions in response to, and in anticipation of, evolving customer
needs.
The
U.S.
Army projects its total demand for our Raven small UAS at approximately
1,900 new systems, of which we had delivered approximately 31% as of April
30,
2007. For the fiscal years ended April 30, 2007, 2006 and 2005, sales of
our UAS products and services accounted for 84%, 80% and 78%, respectively,
of
our revenue. Our UAS sales experienced annual growth rates of 32% and 35% for
the fiscal years ended April 30, 2007 and 2006, respectively, and a 33%
compounded annual growth rate for the three-year period ended April 30,
2007.
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Products
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Each
system in our small UAS portfolio typically includes three aircraft, a ground
control unit and an array of spare parts and accessories. Our small
UAS portfolio consists of the following products:
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Small
UAS Product
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Wingspan
(ft.)
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Weight
(lbs.)
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Recovery
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Standard
Sensors
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Range
(mi.)(1)
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Flight
Time
(min.)(1)
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Raven
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4.5
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4.2
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Vertical
autonomous landing capable
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Electro-optical
or infrared
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6.0
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90
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Dragon
Eye
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3.8
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5.9
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Horizontal
autonomous landing capable
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Electro-optical
or infrared
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3.0
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60
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Swift
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3.8
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5.9
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Horizontal
autonomous landing capable
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Electro-optical
or infrared
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3.0
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60
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Wasp
II
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1.3
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0.6
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Horizontal
autonomous landing capable (ground or water)
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Electro-optical
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2.4
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30
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Wasp
III
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2.4
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1.0
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Horizontal
autonomous landing capable (ground or water)
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Electro-optical
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5.0
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45
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Puma
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8.5
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12.5
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Vertical
autonomous landing capable (ground or water)
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Dual
electro-optical and infrared
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6.0
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150
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(1)
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Represents
minimum customer-mandated specifications for all operating conditions.
In
optimal conditions, the performance of our products may significantly
exceed these specifications.
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Maintenance
and Operations (Logistics)
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We
provide spare parts as well as repair, refurbishment and replacement services
for damaged small UAS through our logistics operation. We designed our logistics
operation to minimize supply chain delays and provide our customers with spare
parts, replacement aircraft and support whenever and wherever they need them.
We
developed an Internet-accessible logistics system that provides our customers
with the status of their returned products and their inventory that we help
manage. This secure system also provides recent parts and repairs history and
tracks usage data to enable inventory optimization forecasting. Our Simi Valley,
California facility, which also serves as the primary depot for repairs and
spare parts, is currently supplemented by a forward supply depot in Iraq. This
support portion of our business continues to grow rapidly as the total number
of
hours that our small UAS are utilized increases. For the fiscal year ended
April 30, 2007, our logistics operations accounted for 25% of our UAS
segment revenue.
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Training
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We
provide complete training services to support all of our small UAS. Our
highly-skilled instructors typically have extensive military experience. We
deploy training teams throughout the continental United States and abroad to
support our customers' wide variety of training needs on both production and
development stage systems.
PosiCharge
Systems
Developed
from our work on electric and hybrid electric vehicles and advanced battery
systems in the 1990s, PosiCharge Systems products include advanced fast charge
systems that eliminates frequent battery changing. PosiCharge fast charge
systems quickly and safely recharge industrial vehicle batteries while they
are
in the vehicle during regularly scheduled breaks and other times when the
vehicle is not in use, thereby maintaining a sufficient level of energy
throughout the workday. By eliminating battery changing, PosiCharge fast charge
systems improve supply chain productivity by returning time to the vehicle
operator to complete more work. Furthermore, because of their advanced efficient
energy capabilities, PosiCharge fast charge systems can reduce the amount of
electricity required to support electric industrial vehicles by several hundred
dollars per year per vehicle as compared to conventional battery chargers.
Many
customers who implement our fast charge systems in their facilities are able
to
re-purpose the battery changing room floor space for more productive activities
and create a safer working environment, as drivers or battery attendants no
longer need to exchange large, lead-acid batteries.
Developed
over years of advanced battery testing and usage, the proprietary battery
charging algorithms built into Posicharge fast charge systems, which are
tailored to battery type, brand and size, maximize the rate at which energy
is
sent into the battery while minimizing heat generation and its damaging effects.
We believe our work to develop these algorithms contributed to the major battery
manufacturers offering battery warranties for fast charge, which provided a
critical assurance to customers that fast charge systems would not harm their
batteries. In combination with a weekly equalization charge that balances all
the cells within the battery pack, our "intelligent" charging process enhances
the performance of batteries and helps them to achieve improved operation.
We
believe that competetive fast charge and conventional charge systems, which
lack
our current and voltage regulating tailored charge algorithms and monitoring
capabilities, may actually contribute to lower battery performance and lifespan
over time, ultimately resulting in higher battery costs and degraded vehicle
performance.
Our
complete line of fast charge products enables us to design customized system
solutions for each facility based on its shift schedule, workload, truck type
and battery type. By customizing the system to unique customer requirements,
we
can help to reduce the cost of implementing and operating fast charge systems
while maximizing the benefit of PosiCharge fast charge systems to our customers.
Our complete solution consists of system configuration, installation, training,
asset management and performance monitoring. Moreover, while fast charge
technology itself provides significant operational and financial benefits to
our
customers, we believe that our ability to integrate the system effectively
into
customer operations through installation services, asset management capabilities
and post-sale support increases the value proposition. We believe that this
"turnkey" approach to the fast charge market represents a potential source
of
competitive advantage.
We
project that PosiCharge Systems customers typically begin to realize cost
savings when compared to battery changing within the first twelve months of
operation. Operators of large fleets of electric industrial vehicles who use
PosiCharge fast charge systems in multiple settings, including factories,
distribution centers, cold storage facilities and airport tarmacs, include
Ford
Motor Company, SYSCO Corporation, Southwest Airlines and IKEA. For the fiscal
years ended April 30, 2007, 2006 and 2005, sales of PosiCharge Systems
products accounted for 10%, 14% and 15%, respectively, of our revenue. While
our
PosiCharge Systems sales experienced an annual growth rate of 27% for our fiscal
year ended April 30, 2006, revenue from PosiCharge Systems sales declined
approximately 12% during our fiscal year ended April 30, 2007, due
primarily to weakness in the U.S. automotive industry, an early adopter of
fast
charge technology. We continue to believe that the market for
PosiCharge fast charge systems is young and that continued diversification
of
our customer base will support increased penetration of this technology into
target markets.
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|
Products
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Our
PosiCharge fast charge systems and support products consist of the following:
PosiCharge
ELT. ELT, our original fast charge product, is designed
to safely deliver the highest current (up to 600 amps) to electric forklifts,
such as counterbalance or "sit-down" trucks, used in heavy-duty
applications.
PosiCharge
DVS. Capable of charging either one vehicle at a time
at up to 500 amps or two vehicles simultaneously at up to 320 amps each, DVS
is
designed to deliver lower up-front installation and ongoing utility costs when
compared to other single vehicle fast chargers. Because DVS is a high-current,
stand-alone system, it is capable of supporting a variety of specific charging
needs, including isolated vehicles in remote areas, smaller fleets requiring
smaller systems and heavy-duty applications with variable usage
patterns.
PosiCharge
MVS. MVS, a multiple-port, multi-vehicle fast charge
system, is designed for charging low-to-medium-duty electric industrial
vehicles, such as pallet jacks, reach trucks and tow motors, in distribution,
warehousing, and general manufacturing settings. Each system is capable of
charging up to 16 vehicles at the same time and is designed to deliver greater
cost-savings as the number of vehicles simultaneously charged increases, as
compared to competitive charging systems, which are currently capable of
charging only up to eight vehicles at the same time.
PosiCharge
SVS. A cost-effective, flexible fast charge solution
for single vehicle applications, the SVS lin of fast change systems has a
compact footprint and provides up to 500 amps of current through its single
port.
PosiCharge
GSE. Ruggedized for outdoor use in extreme weather
conditions, GSE is designed to deliver all the benefits of our MVS product
to
the airport ground support equipment market.
Accessories. In
addition to fast charge systems, we offer a variety of accessories to help
our
customers integrate PosiCharge into their operations. Single point, automatic
watering systems ensure that battery electrolyte is maintained at an optimal
level and that watering occurs at the optimal time, thereby contributing to
battery health and reducing labor costs associated with manual watering. Charge
indicator lights provide fleet supervisors with color codes visible from a
distance that indicate the status of the battery's charge. Battery-mounted
fans
for use with the heaviest-duty types of vehicles keep these batteries cool
to
improve battery performance. Cable management options and charger stands provide
customers the flexibility to install PosiCharge in the best
location.
Installation
and Post-Sale Services. We offer our customers
installation services for all of our PosiCharge fast charge systems. In
addition, we also offer service contracts, which we typically outsource to
authorized service providers located in close proximity to our customers, and
we
provide 24-hour technical telephone support, technician dispatch and service
coordination.
Energy
Technology Center
Our
Energy Technology Center produces and sells a line of advanced
electric load and sink systems used to test batteries, electric motors and
fuel
cell systems, and provides contract engineering services to internal and
external customers. In addition to generating revenue, these contract services
enhance our technical skills and capabilities, enabling us to conduct internal
research and development to support existing products and to create new products
to satisfy new market needs.
Contract
Engineering Services. We actively pursue internal and
externally funded projects that help us to strengthen our technological
capabilities. We submit bids to large research customers such as Lockheed
Martin, the U.S. Air Force and the U.S. Army for projects that we
believe have future commercial application. Contract engineering services
conducted through our Energy Technology Center represent a strategic source
of
innovation for us. Providing these services contributes to the development
and
enhancement of our technical competencies. In an effort to manage the ability
of
our key technical personnel to support multiple, high-value research and
development initiatives, we attempt to limit the volume of contract engineering
projects that we accept. This process enables us to focus these personnel on
projects we believe offer the greatest current and future value to our business.
Consequently, while these projects typically add to our operating margin, we
are
not seeking to grow this service offering at this time. A research and
development program that results in a revenue-generating product is typically
removed from the Energy Technology Center and organized into an existing or
new
product line. As a result, the revenue associated with such a product line
is reported in its own segment or as part of another segment, and not as a
part
of the Energy Technology Center segment.
Power
Processing Systems. Our Power Processing Systems
represent a mature product line of advanced electric load and sink systems
that
are used mainly by research and development organizations in the public and
private sectors to test batteries, electric motors and fuel cell systems.
Power
Processing Systems customers include many of the world's largest automotive
manufacturers, including General Motors, as well as departments of the
U.S. government.
For
the
fiscal years ended April 30, 2007, 2006 and 2005, sales by our Energy
Technology Group accounted for 6%, 6% and 7%, respectively, of our revenue.
Our
Energy Technology Group's sales experienced an annual growth rate of 15% for
each of our fiscal years ended April 30, 2007 and 2006, and a 15%
compounded annual growth rate for the three-year period ended April 30,
2007.
Backlog
Our
historical funded backlog at the dates shown consisted of the
following:
|
As
of April 30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Funded
|
|
$
|
60,889
|
|
|
$
|
79,699
|
|
Our
total
backlog is comprised of funded and unfunded amounts provided in our contracts.
We define funded backlog as unfilled firm orders for products and services
for
which funding currently is appropriated to us under the contract by the
customer. We expect that one hundred percent of our funded backlog will be
filled during our fiscal year ending April 30, 2008.
Our
unfunded backlog at April 30, 2007 and 2006 was approximately $478 million
and
$555 million, respectively. We define unfunded backlog as the total remaining
potential order amounts under cost reimbursable and fixed price
contracts with multiple one-year options, and indefinite delivery indefinite
quantity, or IDIQ, contracts.
Because
of possible future changes in delivery schedules and/or cancellations of orders,
backlog at any particular date is not necessarily representative of actual
sales
to be expected for any succeeding period, and actual sales for the year may
not
meet or exceed the backlog represented. As described under "Government
Contracting Process," a majority of our contracts do not currently obligate
the
U.S. government to purchase goods or services.
Financial
and Other Business Information
See
the
Segment Data at Note 13 of our Financial Statements for additional financial
information, including revenues and gross margin for each of our major business
segments.
Technology,
Research and Development
Technological
Competence and Intellectual Property
Our
company was founded by Dr. Paul B. MacCready, the Chairman of our board of
directors and an internationally renowned innovator who was instrumental in
creating our culture. This culture has enabled us to attract and
retain highly-motivated, talented employees and has established our reputation
as an innovator. This reputation for innovation has been acknowledged through
a
variety of awards and special citations, including Oak Ridge National
Laboratory's Small Business Innovator award in 2002, a "Cool Companies" award
from Fortune Magazine in 2004, the World Technology Award for Energy in 2004,
DARPA's Sustained Excellence by a Performer award in 2005 and Automotive News's
PACE award in 2006.
The
innovations of our company and our founder include, among others: the world's
first effective human-powered and manned solar-powered airplanes; the first
modern consumer electric car (the EV1 prototype for General Motors); the world's
highest flying airplane in level flight, Helios, a solar-powered UAS that
reached over 96,000 feet in 2001; and, more recently, the world's first
liquid hydrogen-powered UAS. The Smithsonian Institution has selected four
vehicles developed by us for its permanent collection. Our history of innovation
excellence is the result of our creative and skilled employees whom we encourage
to innovate and develop new technologies.
Our
primary areas of technological competence, UAS and efficient electric energy,
represent the sum of numerous technical skills and capabilities that help to
differentiate our approach and product offerings. The following table highlights
a number of our key technological capabilities:
|
UAS
Technology
|
|
Efficient
Electric Energy Technology
|
|
|
||
|
• Lightweight,
low speed aerostructures and propeller design
|
|
• Battery
management and chemistries
|
|
• Miniaturized
avionics and micro/nano unmanned aircraft systems
|
|
• Power
electronics and controls
|
|
• Image
stabilization and target tracking
|
|
• Lightweight
electric propulsion
|
|
• Unmanned
autonomous control systems
|
|
• Thermal
management
|
|
• Payload
integration
|
|
• High-density
energy packaging
|
|
• Hydrogen
propulsion systems and high-pressure-ratio
turbochargers
|
|
• Electric
power generation, storage and management
|
|
• Stratospheric
flight operations
|
|
• Charging
algorithms
|
|
• Fluid
dynamics
|
|
• On/off
grid controls
|
|
• System
integration and optimization
|
|
• Controls
integration and systems engineering
|
|
|
|
• System
integration and
optimization
|
We
follow
a formal process to evaluate new ideas and inventions that ultimately includes
review by our intellectual property and commercialization committees to
determine if a technology, product or solution is commercially feasible. The
committee members are selected by our Chief Executive Officer. Currently our
intellectual property committee consists of our Chief Executive Officer and
Chief Financial Officer. Our commercialization committee also consists of our
Chief Executive Officer and Chief Financial Officer. In addition, each of our
operating segments has its own internal evaluators who determine whether
potential commercialization opportunities and intellectual property
developments merit review by our intellectual property or commercialization
committee. A fundamental part of this process of innovation is a well-defined
screening process that helps business managers identify commercial opportunities
that support current or desired technological capabilities. Similarly, we manage
new product and business concepts through a rigorous commercialization process
that governs spending, resources, time and intellectual property considerations.
An important element of our commercialization process is ensuring that our
technology and business development activities are strongly linked to customer
needs in attractive growth markets. Throughout the process we revalidate our
customer requirement assumptions to ensure that the products and services we
ultimately deliver are of high value.
As
a
result of our commitment to research and development, we possess an extensive
portfolio of intellectual property in the form of patents, trade secrets,
copyrights and trademarks across a broad range of unmanned aircraft system
and
advanced energy technologies. As of April 30, 2007, we
had 73 issued patents, 38 in-process patents and
approximately 36 patents pending disclosure. In many cases, we opt to
protect our intellectual property through trade secrets as opposed to filing
for
patent protection in order to preserve the confidentiality of such intellectual
property.
The
U.S.
Government has licenses to our patented technology that was specifically
developed in performance of government contracts, and it may use or authorize
others to use the inventions covered by such patents for government
purposes.
While
our
intellectual property rights in the aggregate are important to the operation
of
our business segments, we do not believe that any existing patent, license
or
other intellectual property right is of such importance that its loss or
termination would have a material adverse effect on our business taken as a
whole.
Research,
Development and Commercialization Projects
One
important aspect of our technology research and development activity is the
development and commercialization of innovative solutions that we believe can
become new products and open opportunities for us to enter large new markets
or
accelerate the growth of our current products. We invest in an active pipeline
of these commercialization projects that range in maturity from technology
validation to early market adoption. We cannot predict when, if ever, these
projects will be successfully commercialized, or the level of capital
expenditures they could require, which could be substantial. Four new products
that we have been developing are described below.
Global
Observer is a high-altitude, long-endurance UAS under
development to address the critical need for affordable, 24-hour,
365-days-a-year persistent communications and ISR. The continuation of years
of
research with both our own and U.S. government sponsored developments funding,
the configuration now under development is being designed to operate at
65,000 feet for a week between landings. We expect the efficiency and
endurance (three to four times the longest flight time of existing fixed-wing
aerial options) of this UAS to provide for dramatically
lower
operating and total life cycle costs for missions where persistent
communications or surveillance is critical. The Global Observer
platform is intended to be the equivalent of a twelve-mile-high, low-cost,
redeployable satellite, providing a footprint of coverage of up to
600 miles in diameter and capable of providing a broad array of services,
including high-speed broadband data, video and voice relay and ISR. We expect
these capabilities to provide the foundation for multiple high-value
applications including communications relay and ISR missions for defense and
homeland security, storm tracking, telecommunications infrastructure, wildfire
detection/tracking and disaster recovery services. We continue to
develop and test key systems for this platform with a high degree of
success.
Switchblade. We
are developing a packaged UAS offering that is designed to deliver different
payloads in different sizes and configurations based on mission
requirements. One example of this offering is a single-use,
hand-held, small UAS with the ability to eliminate a target with minimal
collateral damage through the detonation of an onboard explosive upon impact.
This system would be launched by a single individual and operated through our
standard ground control unit. This version of Switchblade is being
designed to allow the operator to identify a threat using the ground control
unit, lock-on to the target via visual information on the screen, and neutralize
it by triggering an autonomous terminal guidance phase. We believe that recent
combat experience indicates that such a capability would be of great value
and could significant improve the ability to neutralize hostile elements, such
as snipers, machine guns and mortar launchers. Continued development
of this system has achieved desired milestones including demonstrating dynamic
target tracking and real-time aircraft course correction.
Digital
Data Link. We are developing a robust, packet-switched,
digital network module designed for extremely small size, weight, power and
latency requirements that would enable it to operate on our small UAS. By
switching to digital technology from the current analog technology employed
in
our small UAS, each small UAS will be enabled to operate as an IP-addressable
node on a broad, wireless network facilitating the transmission of information
between and among multiple small UAS, their operators and other remote parties.
Other advantages of the switch to digital technology include reduced bandwidth
usage for transmissions relative to analog transmissions, resulting in the
ability to simultaneously operate more small UAS in closer proximity than was
previously possible. Flight testing has successfully demonstrated
this capability using our small UAS to route data, voice and video.
Architectural
Wind. Recognizing the limited options available for
renewable energy generation in urban environments, our engineers and scientists
are utilizing our high-efficiency electric powertrain and propeller design
capabilities to create a new type of wind energy system that can be installed
on
buildings. The result is Architectural Wind, a small, modular wind
turbine designed to take advantage of wind over buildings to provide renewable
electricity in a more cost-effective manner. Initial market exploration has
revealed significant interest in this product, which has a visually compelling
design. A 4.8kW, early technology demonstrator system was installed on the
Adventure Aquarium in Camden, New Jersey in 2007.
For
the
fiscal years ended April 30, 2007, 2006 and 2005, our internal research and
development spending amounted to 8%, 12% and 9%, respectively, of our revenue,
and customer-funded research and development spending amounted to an additional
11%, 8% and 10%, respectively, of our revenue.
Sales
and Marketing
Our
marketing strategy is to increase awareness of our brand among key target market
segments and to associate AeroVironment with innovation, flexibility, agility
and the ability to deliver reliable new technology solutions that improve
operational effectiveness. Our reputation for innovation is a key component
of our brand and has been acknowledged through a variety of awards and
recognized in numerous articles in domestic and international publications.
We
have registered the trademarks AeroVironment® and
PosiCharge®
and have submitted several other applications for trademark registration,
including for AV, Global Observer and Architectural
Wind.
Small
UAS
We
organize our U.S. small UAS business development team members by customer
and product and have team members located in California, Colorado, Florida
and
Virginia, where they are in close proximity to customers they support.
Supporting our business development team members are our program managers,
who
are organized by product and focus on designing optimal solutions and contract
fulfillment, as well as internalizing feedback from customers and users. By
maintaining assigned points of contact with our customers, we believe that
we
are able to enhance our relationships, service existing contracts effectively
and gain vital feedback to improve our responsiveness and product
offerings.
PosiCharge
Systems
We
primarily sell our PosiCharge Systems products through a dedicated, direct
sales
force whose members are located in Arizona, California, Georgia, Illinois,
Michigan, Missouri. New York, North Carolina, Tennessee, Texas, the United
Kingdom and Germany, to address their respective regions or industries
efficiently. The sales team targets large entities with the potential for
domestic and international enterprise adoption of our solutions. In addition
to
our direct customer sales, we also employ a regional sales team that coordinates
distribution of PosiCharge fast charge systems through numerous battery dealers.
These dealers' relationships with, and proximity to, our customers' facilities
enable them to sell our solutions and provide post-sale service to our
customers. We believe that these dealers are well suited to address the large
number of smaller and geographically dispersed customers with industrial vehicle
fleets. When evaluating a facility for its ability to benefit from PosiCharge
fast charge systems, we perform a detailed analysis of the customer's
operations. This analysis allows us to quantify the benefit projected for a
PosiCharge system implementation, helping customers to determine for themselves
if the business case is sufficiently compelling.
International
Sales
We
are
increasing our sales efforts abroad and have employees in country or have
contracted with international sales representatives for our various segments
in
a variety of foreign markets, including Australia, Canada, East Asia, Europe
and
the Middle East. Our international sales accounted for approximately 5% of
our
revenue for the fiscal year ended April 30, 2007.
Manufacturing
and Operations
We
pursue
a common manufacturing strategy across our product lines, focusing on rapid
prototyping, supply chain management, final assembly, quality systems and
testing. Using concurrent engineering techniques within an integrated product
team structure, we rapidly prototype design concepts and products to produce
products at reduced cost and optimize our designs for manufacturing
requirements, mission capabilities and customer specifications. Within this
framework, we develop our products with feedback and input from manufacturing,
supply chain management, key suppliers, logistics personnel and customers.
We
rapidly incorporate this feedback and input into the design before tooling
is
finalized and full-rate production begins. As a result, we believe that we
can
significantly reduce the time required to move a product from its design phase
to full-rate production deliveries with high reliability, quality and
yields.
We
outsource certain production activities, such as the fabrication of structures
and the manufacture of subassemblies and payloads, to qualified suppliers with
whom we have long-term relationships. This outsourcing enables us to focus
on
final assembly and test processes for our products, ensuring high levels of
quality and reliability. We believe that our efficient supply chain is a
significant strength of our manufacturing strategy. We have forged strong
relationships with our key suppliers that we believe will allow us to continue
to grow our manufacturing capabilities and execute on our growth plans. We
continue to expand upon our suppliers' expertise to improve our existing
products and develop new solutions. We rely on both single and multiple
suppliers for certain components and subassemblies. See "Risk Factors — If
critical components of our products that we currently purchase from a small
number of suppliers or raw materials used to manufacture our products become
scarce or unavailable then we may incur delays in manufacturing and delivery
of
our products, which could damage our business" for more information. All of
our
manufacturing operations incorporate quality programs and processes to increase
acceptance rates, reduce lead times and lower cost.
UAS
Manufacturing and Operations
We
have
successfully developed the manufacturing infrastructure to execute production
of
both new small UAS products at low initial rates and high-volume, full-rate
production small UAS programs. For example, in 2003, we invested in the
infrastructure necessary to transition from low-rate prototype small UAS
production to full-rate production, successfully increasing production from
15
aircraft per month to 200 per month in only six months to meet customer
demand. By drawing upon experienced personnel from our PosiCharge and Energy
Technology Center groups and levering our prior ISO certification, integrated
supply chain strategy, document control systems, and process control
methodologies into this new manufacturing effort, we laid the groundwork for
a
high volume, efficient production environment. Presently, our small UAS
manufacturing is performed at our 85,000 square foot manufacturing facility
established in 2005 in Simi Valley, California. This ISO 9001:2000 certified
manufacturing facility is currently producing approximately 200 aircraft per
month and is designed to accommodate demand up to 1,000 aircraft per month.
ISO 9001:2000 refers to a set of voluntary standards for quality management
systems. These standards are established by the International Organization
for
Standardization, or ISO, to govern quality
management
systems used worldwide. Companies that receive ISO certification have passed
audits performed by a Registrar Accreditation Board-certified auditing company.
These audits evaluate the effectiveness of companies' quality management systems
and their compliance with ISO standards. Some companies and government agencies
view ISO certification as a positive factor in supplier
assessments.
PosiCharge
Systems Manufacturing and Operations
We
perform final assembly and testing of our PosiCharge fast charge systems at
a
20,000 square foot, ISO 9001:2000 certified facility located in Monrovia,
California. We designed this facility for flexibility, using a work cell model
for final assembly, and have included fixtures optimized for final
testing.
Competition
We
believe that the principal competitive factors in the markets for our products
and services include product performance, features, acquisition cost, lifetime
operating cost, including maintenance and support, ease of use, integration
with
existing equipment, quality, reliability, customer support, brand and
reputation.
The
market for small UAS is evolving rapidly and subject to changing technologies,
shifting customer needs and expectations and the potential introduction of
new
products. We believe that a number of established domestic and international
defense contractors have developed or are developing small UAS that have and
will continue to compete directly with our products. Some of these contractors
have significantly more financial and other resources than we possess. Our
current principal small UAS competitors include Advanced Ceramics Research,
Inc., Applied Research Associates, Inc., Elbit Systems Ltd., L-3 Communications
Holdings Inc. and Lockheed Martin Corporation. We do not view large UAS such
as
Northrop Grumman Corporation's Global Hawk, General Atomics, Inc.'s
Predator, The Boeing Company's ScanEagle and AAI Corporation's
Shadow as direct competitors because they
perform different missions
and are not hand launched and controlled, although we cannot be certain that
these platforms will not become direct competitors in the future.
The
primary direct competitors to PosiCharge Systems are other fast charge
suppliers, including Aker Wade Power Technologies LLC, Minit-Charger, a
subsidiary of Edison International, and PowerDesigners, LLC. Some of the major
industrial battery suppliers have begun to align themselves with fast charge
suppliers, creating a potentially more significant source of
competition.
In
addition, PosiCharge Systems competes against the traditional method of battery
changing. Competitors in this area include suppliers of battery changing
equipment and infrastructure, designers of battery changing rooms, battery
manufacturers and dealers who may experience reduced sales volume because
PosiCharge fast charge systems reduces or eliminate the need for extra
batteries.
Regulation
Due
to
the fact that we contract with the DoD and other agencies of the
U.S. government, we are subject to extensive federal regulations, including
the Federal Acquisition Regulations, Defense Federal Acquisitions Regulations,
Truth in Negotiations Act, Foreign Corrupt Practices Act, False Claims Act
and
the regulations promulgated under the DoD Industrial Security Manual, which
establishes the security guidelines for classified programs and facilities
as
well as individual security clearances.
In
addition, due to the nature of the products and services we provide, we are
subject to further U.S. government regulation, including by the Federal
Aviation Administration, or FAA, which regulates airspace for all air vehicles,
by the National Telecommunications and Information Administration and Federal
Communications Commission, which regulate the wireless communications upon
which
our small UAS depend, and under the International Traffic in Arms Regulations,
which regulate the export of controlled technical data, defense articles and
defense services. The FAA recently issued a clarification of its
existing policies stating that, in order to engage in public use of small
UAS in the U.S. National Airspace System, a public (government) operator must
obtain a Certificate of Authorization, or COA, from the FAA or fly in restricted
airspace. The FAA's COA approval process requires that the public
operator certify the airworthiness of the aircraft for its intended purpose,
that a collision with another aircraft or other airspace user is extremely
improbable, that the small UAS complies with appropriate cloud and terrain
clearances and that the operator or spotter of the small UAS is generally within
one half-mile laterally and 400 feet vertically of the small UAS while in
operation. Furthermore, the FAA's clarification of existing policy states that
the rules for radio-controlled hobby aircraft do not apply to public or
commercial use of small UAS. The FAA is in the process of drafting updated
regulations specifically for small UAS operations. We have engaged in
discussions with the FAA to help ensure that these new regulations allow for
the
maximum safe utilization of our small UAS.
In
2006,
the Defense Contract Management Agency, or DCMA, informed us that, under the
terms of our DoD contracts, the government parties with whom we are contracting
are required to obtain a COA for flight tests of our small UAS outside of
military restricted airspace. If our DoD customers are unable to obtain such
a
COA, we may not be able to perform our flight tests without incurring the
additional costs of transporting our small UAS products to military
installations where restricted airspace is available for testing.
Certain
of these regulations carry substantial penalty provisions, including suspension
or debarment from government contracting or subcontracting for a period of
time
if we are found to be in violation. We carefully monitor all of our contracts
and contractual efforts to minimize the possibility of any violation of these
regulations.
Furthermore,
our non-U.S. operations are subject to the laws and regulations of foreign
jurisdictions, which may include regulations that are more stringent than those
imposed by the U.S. government on our U.S. operations.
Also
in
2006, we were audited by the DCMA with respect to our system for the care,
control and accountability of government property. The DCMA identified certain
corrective actions to be taken with respect to our current system, which we
successfully implemented.
Government
Contracting Process
We
sell
the significant majority of our small UAS products and services as the prime
contractor under contracts with the U.S. government. Certain important
aspects of our government contracts are described below.
|
|
Bidding
Process
|
We
are
awarded government contracts either on a sole-source basis or through a
competitive bidding process. Most of our current government contracts were
awarded through a competitive bidding process. The U.S. government awards
competitive-bid contracts based on proposal evaluation criteria established
by
the procuring agency. Competitive-bid contracts are awarded after a formal
bid
and proposal competition among providers. Interested contractors prepare a
bid
and proposal in response to the agency's request for proposal or request for
information. A bid and proposal is usually prepared in a short time period
in
response to a deadline and requires the extensive involvement of numerous
technical and administrative personnel. Following award, competitive-bid
contracts may be challenged by unsuccessful bidders.
|
|
Funding
|
The
funding of U.S. government programs is subject to congressional
appropriations. Although multi-year contracts may be authorized in connection
with major procurements, Congress generally appropriates funds on a fiscal
year
basis, even though a program may continue for many years. Consequently, programs
are often only partially funded initially, and additional funds are committed
only as Congress makes further appropriations.
The
contracts for our full-rate production UAS are funded either through operational
needs statements or as programs of record. Operational needs statements
represent allocations of discretionary spending or reallocations of funding
from
other government programs. Funding for our production of initial Raven
deliveries was provided through operational needs statements, as
is the
case currently with our initial Puma deliveries. We define a program of
record as a program which, after undergoing extensive DoD review and product
testing, is included in the five-year government budget cycle, meaning that
funding will be allocated for purchases under these contracts during the
five-year cycle, absent affirmative action by the customer or Congress
to change the budgeted amount. Funding for these programs is approved
annually.
We
are
currently the sole provider and prime contractor under the only three programs
of record established by the DoD for small UAS. Each of the following
contracts was awarded under a program of record through a competitive bidding
process:
|
|
Ÿ
|
Our
2005 contract for Raven B, our next generation Raven
product, awarded under a U.S. Army/U.S. Special Operations
Command, or SOCOM, program of record known as the Small Unmanned
Aerial
System program, provides for purchases of up to $333.3 million
through 2010 and also allows for contract additions from the
U.S. Army/SOCOM or other U.S. military services. As of April 30,
2007, orders in the amount of approximately $123.4 million had been
placed with us.
|
|
|
Ÿ
|
Our
2003 contract for Dragon Eye, awarded under a U.S. Marine
Corps program of record known as the Small Unit Remote Scouting System,
or
SURSS, program, provides for purchases of up to $50.0 million through
2008. As of April 30, 2007, orders in the amount of approximately
$47.8 million had been placed with
us.
|
|
|
Ÿ
|
Our
2006 contract for Block III Wasp or BATMAV, awarded under a U.S.
Air Force
program of record known as the Beyond Line of Site, program, provides
for
purchases of up to $45 million over a period of five years. As
of April 30, 2007, orders in the amount of approximately $800,000
had been
placed with us.
|
|
|
Material
Government Contract
Provisions
|
All
contracts with the U.S. government contain provisions, and are subject to
laws and regulations, that give the government rights and remedies not typically
found in commercial contracts, including rights that allow the government
to:
|
|
Ÿ
|
terminate
existing contracts for convenience, which affords the U.S. government
the right to terminate the contract in whole or in part anytime it
wants
for any reason or no reason, as well as for
default;
|
|
|
Ÿ
|
reduce
or modify contracts or subcontracts, if its requirements or budgetary
constraints change;
|
|
|
Ÿ
|
cancel
multi-year contracts and related orders, if funds for contract performance
for any subsequent year become
unavailable;
|
|
|
Ÿ
|
claim
rights in products and systems produced by its contractors if the
contract
is cost reimbursable and the contractor produces the products or
systems
during the performance of the
contract;
|
|
|
Ÿ
|
adjust
contract costs and fees on the basis of audits completed by its
agencies;
|
|
|
Ÿ
|
suspend
or debar a contractor from doing business with the
U.S. government; and
|
|
|
Ÿ
|
control
or prohibit the export of products.
|
Generally,
government contracts are subject to oversight audits by government
representatives. Provisions in these contracts permit termination, in whole
or
in part, without prior notice, at the government's convenience or upon
contractor default under the contract. Compensation in the event of a
termination, if any, is limited to work completed at the time of termination.
In
the event of termination for convenience, the contractor may receive a certain
allowance for profit on the work performed.
|
|
Government
Contract Categories
|
We
have
three types of government contracts, each of which involves a different payment
methodology and level of risk related to the cost of performance. These basic
types of contracts are typically referred to as fixed-price contracts, cost
reimbursable contracts (including cost-plus-fixed fee, cost-plus-award fee,
and
cost-plus-incentive fee) and time-and-materials contracts.
In
some
cases, depending on the urgency of the project and the complexity of the
contract negotiation, we will enter into a Letter Contract prior to finalizing
the terms of a definitive fixed-price, cost reimbursable or time-and-materials
definitive contract. A Letter Contract is a written preliminary contractual
instrument that provides limited initial funding and authorizes us to begin
immediately manufacturing supplies or performing services while negotiating
the
definitive terms of the procurement.
Fixed-Price. These
contracts are not subject to adjustment by reason of costs incurred in the
performance of the contract. With this type of contract, we assume the risk
that
we will not be able to perform at a cost below the fixed-price, except for
costs
incurred because of contract changes ordered by the customer. Upon the
U.S. government's termination of a fixed-price contract, generally we would
be entitled to payment for items delivered to and accepted by the
U.S. government and, if the termination is at the U.S. government's
convenience, for payment of fair compensation for work performed plus the costs
of settling and paying claims by any terminated subcontractors, other settlement
expenses and a reasonable allowance for profit on the costs
incurred.
Cost
Reimbursable. Cost reimbursable contracts include cost-plus-fixed
fee contracts, cost-plus-award fee contracts and cost-plus-incentive fee
contracts. Under each type of contract, we assume the risk that we may not
be
able to recover costs if they are not allowable under the contract terms or
applicable regulations, or if the costs exceed the contract
funding.
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|
Ÿ
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Cost-plus-fixed
fee contracts are cost reimbursable contracts that provide for payment
of
a negotiated fee that is fixed at the inception of the contract.
This
fixed fee does not vary with actual cost of the contract, but may
be
adjusted as a result of changes in the work to be performed under
the
contract. This contract type poses less risk of loss than a fixed-price
contract, but our ability to win future contracts from the procuring
agency may be adversely affected if we fail to perform within the
maximum
cost set forth in the contract.
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|
|
Ÿ
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A
cost-plus-award fee contract is a cost reimbursable contract that
provides
for a fee consisting of a base amount (which may be zero) fixed at
inception of the contract and an award amount, based upon the government's
satisfaction with the performance under the contract. With this type
of
contract, we assume the risk that we may not receive the award fee,
or
only a portion of it, if we do not perform
satisfactorily.
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|
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Ÿ
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A
cost-plus-incentive fee contract is a cost reimbursable contract
that
provides for an initially negotiated fee to be adjusted later by
a formula
based on the relationship of total allowable costs to total target
costs.
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We
typically experience lower profit margins and lower risk under cost reimbursable
contracts than under fixed-price contracts. Upon the termination of a cost
reimbursable contract, generally we would be entitled to reimbursement of our
allowable costs and, if the termination is at the U.S. government's convenience,
a total fee proportionate to the percentage of work completed under the
contract.
Time-and-Materials.
Under
a
time-and-materials contract, our compensation is based on a fixed hourly rate
established for specified labor or skill categories. We are paid at the
established hourly rates for the hours we expend performing the work specified
in the contract. Labor costs, overhead, general and administrative costs and
profit are included in the fixed hourly rate. Materials, subcontractors, travel
and other direct costs are reimbursed at actual costs plus an amount for
material handling. We make critical pricing assumptions and decisions when
developing and proposing time-and-materials labor rates. We risk reduced
profitability if our actual costs exceed the costs incorporated into the
fixed hourly labor rate. One variation of a standard time-and-materials contract
is a time-and-materials, award fee contract. Under this type of contract, a
positive or negative incentive can be earned based on achievement against
specific performance metrics.
The
table
below shows our revenue for the periods indicated by government contract
type:
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|
|
Fiscal
Year Ended
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|
|||||||||
|
|
|
April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
||||||||||||
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Fixed-price
contracts
|
|
|
65
|
%
|
|
|
69
|
%
|
|
|
87
|
%
|
|
Cost
reimbursable contracts
|
|
|
34
|
%
|
|
|
31
|
%
|
|
|
12
|
%
|
|
Time-and-materials
contracts
|
|
|
1
|
%
|
|
|
—
|
%
|
|
|
1
|
%
|
|
|
|
|
Indefinite
Delivery Indefinite Quantity Contract
Form
|
The
U.S.
government frequently uses indefinite delivery, indefinite quantity contracts,
known as IDIQ contracts, and IDIQ-type contract forms such as cost reimbursable
and fixed price contracts with multiple one-year options, to obtain fixed-price,
cost reimbursable and time-and-materials contractual commitments to provide
products or services over a period of time pursuant to established general
terms
and conditions. At the time of the award of an IDIQ contract or IDIQ-type
contract, the U.S. Government generally commits to purchase only a minimal
amount of products or services from the contractor to whom such contract is
awarded.
After
award of an IDIQ contract, the U.S. Government may issue task orders for
specific services or products it needs. The competitive process to
obtain task orders under an award contract is limited to the pre-selected
contractors. If such contract has a single prime contractor, then the
award of task orders is limited to that contractor.
If
the
contract has multiple prime contractors, then the award of the task order is
competitively determined among only those prime contractors.
IDIQ
and
IDIQ-type contracts typically have multi-year terms and unfunded ceiling amounts
which enable, but do not commit, the U.S. government to purchase substantial
amounts of products and services from one or more contractors.
Employees
As
of
April 30, 2007, we had 495 full-time employees, of whom 149 were in
research and development, and engineering, 44 were in sales and marketing,
203
were in operations and 99 were general and administrative
personnel. We believe that we have a good relationship with our
employees.
Other
Information
AeroVironment,
Inc. was originally incorporated in the State of California in July 1971 and
reincorporated in Delaware in 2006. In January 2007, we
completed an initial public offering which resulted in the issuance of 5,252,285
shares of our common stock at a price of $17.00 per share, resulting in net
proceeds to the Company of approximately $80.5 million, after deducting
payment of underwriters' discounts and commissions and offering
expenses.
Our
principal executive offices are located at 181 W. Huntington Dr., Suite 202,
Monrovia, California 91016. Our telephone number is
(626) 357-9983. Our website home page on the Internet is
http://www.avinc.com. We make our website content available for
information purposes only. It should not be relied upon for investment purposes,
nor is it incorporated by reference into this Form 10-K.
We
make
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy statement for our annual
stockholders' meeting, as well as any amendments to those reports, available
free of charge through our website as soon as reasonably practical after we
electronically file that material with, or furnish it to, the SEC. You can
learn
more about us by reviewing our SEC filings. Our SEC reports can be accessed
through the investor relations page of our web site at
http://investor.avinc.com. These reports may also be obtained at the
SEC's public reference room at 100 F. Street, N.E., Washington, DC 20549. The
SEC also maintains a web site at www.sec.gov that contains reports, proxy
statements and other information regarding the Company.
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Risk
Factors.
|
We
rely heavily on sales to the U.S. government, particularly to agencies of the
Department of Defense.
Historically,
a significant portion of our total sales and substantially all of our small
UAS
sales have been to the U.S. government and its agencies. Sales to the U.S.
government, either as a prime contractor or subcontractor, represented
approximately 83% of our revenue for the fiscal year ended April 30, 2007.
The DoD, our principal U.S. government customer, accounted for approximately
80%
of our revenue for the fiscal year ended April 30, 2007. We believe that
the success and growth of our business for the foreseeable future will continue
to depend on our ability to win government contracts, in particular from the
DoD. Many of our government customers are subject to budgetary constraints
and
our continued performance under these contracts, or award of additional
contracts from these agencies, could be jeopardized by spending reductions
or
budget cutbacks at these agencies. The funding of U.S. government programs
is
uncertain and dependent on continued congressional appropriations and
administrative allotment of funds based on an annual budgeting process. We
cannot assure you that current levels of congressional funding for our products
and services will continue. Furthermore, all of our contracts with the U.S.
government are terminable by the U.S. government at will. A significant decline
in government expenditures generally, or with respect to programs for which
we
provide products, could adversely affect our business and prospects. Our
operating results may also be negatively impacted by other developments that
affect these government programs generally, including the
following:
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changes
in government programs that are related to our products and
services;
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adoption
of new laws or regulations relating to government contracting or
changes
to existing laws or regulations;
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Ÿ
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changes
in political or public support for security and defense
programs;
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delays
or changes in the government appropriations
process;
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uncertainties
associated with the war on terror and other geo-political matters;
and
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delays
in the payment of our invoices by government payment
offices.
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These
developments and other factors could cause governmental agencies to reduce
their
purchases under existing contracts, to exercise their rights to terminate
contracts at-will or to abstain from renewing contracts, any of which would
cause our revenue to decline and could otherwise harm our business, financial
condition and results of operations
Military
transformation and operational levels in Afghanistan and Iraq may affect future
procurement priorities and existing programs, which could limit demand for
our
UAS.
Following
the end of the Cold War, the U.S. military began a transformation of its
operational concepts, organizational structure and technologies in an effort
to
improve warfighting capabilities. The resulting shift in procurement priorities
toward achieving these capabilities, together with the current high level of
operational activity in Afghanistan and Iraq, have led to an increase in demand
for our small UAS. We cannot predict whether current or future changes in
priorities due to defense transformation or continuation of the current
nature and magnitude of operations in Afghanistan and Iraq will afford new
opportunities for our small UAS business in terms of existing, additional or
replacement programs. Furthermore, we cannot predict whether or to what extent
this defense transformation or current operational levels in Afghanistan or
Iraq
will continue. If defense transformation or operations in Afghanistan and Iraq
cease or slow down, then our business, financial condition and results of
operations could be impacted.
We
operate in evolving markets, which makes it difficult to evaluate our business
and future prospects.
UAS,
fast
charge systems and other energy technologies that we offer are sold in new
and
rapidly evolving markets. Accordingly, our business and future prospects are
difficult to evaluate. We cannot accurately predict the extent to which demand
for our products will increase, if at all. The challenges, risks and
uncertainties frequently encountered by companies in rapidly evolving markets
could impact our ability to do the following:
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generate
sufficient revenue to maintain
profitability;
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acquire
and maintain market share;
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manage
growth in our operations;
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develop
and renew contracts;
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attract
and retain additional engineers and other highly-qualified
personnel;
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successfully
develop and commercially market new
products;
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adapt
to new or changing policies and spending priorities of governments
and
government agencies; and
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access
additional capital when required and on reasonable
terms.
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If
we
fail to address these and other challenges, risks and uncertainties
successfully, our business, results of operations and financial condition would
be materially harmed.
We
face competition from other firms, many of which have substantially greater
resources.
The
defense industry is highly competitive and generally characterized by intense
competition to win contracts. Our current principal small UAS competitors
include Advanced Ceramics Research, Inc., Applied Research Associates, Inc.,
Elbit Systems Ltd., L-3 Communications Holdings Inc. and Lockheed Martin
Corporation. We do not view large UAS such as Northrop Grumman Corporation's
Global Hawk, General Atomics, Inc.'s Predator, The Boeing
Company's ScanEagle and AAI Corporation's Shadow as direct
competitors because they perform different missions and are not hand launched
and controlled, although we cannot be certain that these platforms will not
become
direct competitors in the future. Some of these firms have substantially greater
financial, management, research and marketing resources than we have. The
primary direct competitors to our PosiCharge business are other fast charge
suppliers, including Aker Wade Power Technologies LLC, Minit-Charger, a
subsidiary of Edison International, and PowerDesigners, LLC, as well as
industrial battery manufacturers who distribute fast charge systems from these
suppliers. Our competitors may be able to provide customers with different
or
greater capabilities or benefits than we can provide in areas such as technical
qualifications, past contract performance, geographic presence, price and the
availability of key professional personnel, including those with security
clearances. Furthermore, many of our competitors may be able to utilize their
substantially greater resources and economies of scale to develop competing
products and technologies, divert sales away from us by winning broader
contracts or hire away our employees by offering more lucrative compensation
packages. In the event that the market for small UAS, expands, we expect that
competition will intensify as additional competitors enter the market and
current competitors expand their product lines. In order to secure contracts
successfully when competing with larger, well-financed companies, we may be
forced to agree to contractual terms that provide for lower aggregate payments
to us over the life of the contract, which could adversely affect our margins.
In addition, larger diversified competitors serving as prime contractors may
be
able to supply underlying products and services from affiliated entities, which
would prevent us from competing for subcontracting opportunities on these
contracts. Our failure to compete effectively with respect to any of these
or
other factors could have a material adverse effect on our business,
prospects, financial condition or operating results.
If
the UAS and fast charge systems markets do not experience significant growth,
if
we cannot expand our customer base or if our products do not achieve broad
acceptance, then we will not be able to achieve our anticipated level of
growth.
For
the
fiscal year ended April 30, 2007, UAS and PosiCharge fast charge systems
accounted for 84% and 10% of our total revenue, respectively. We cannot
accurately predict the future growth rates or sizes of these markets. Demand
for
our products may not increase, or may decrease, either generally or in specific
markets, for particular types of products or during particular time periods.
We
believe the market for fast charge systems is young and has not yet matured
or
diversified. Moreover, there are only a limited number of major
programs under which the U.S. military, our primary customer, is currently
funding the development or purchase of UAS. Although we are seeking to expand
our customer base to include foreign governments, domestic non-military agencies
and commercial customers, we cannot assure you that our efforts will be
successful. The expansion of the UAS and fast charge systems markets in general,
and the market for our products in particular, depends on a number of factors,
including the following:
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customer
satisfaction with these types of systems as
solutions;
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the
cost, performance and reliability of our products and products offered
by
our competitors;
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customer
perceptions regarding the effectiveness and value of these types
of
systems;
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limitations
on our ability to market our small UAS products outside the United
States
due to U.S. government regulations;
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obtaining
timely regulatory approvals, including, with respect to our small
UAS
business, access to airspace and wireless spectrum;
and
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marketing
efforts and publicity regarding these types of
systems.
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Even
if
UAS and fast charge systems gain wide market acceptance, our products may not
adequately address market requirements and may not continue to gain market
acceptance. If these types of systems generally, or our products specifically,
do not gain wide market acceptance, then we may not be able to achieve our
anticipated level of growth and our revenue and results of operations would
suffer.
If
critical components of our products that we currently purchase from a small
number of suppliers or raw materials used to manufacture our products become
scarce or unavailable, then we may incur delays in manufacturing and delivery
of
our products, which could damage our business.
We
obtain
hardware components and various subsystems from a limited group of suppliers.
We
do not have long-term agreements with any of these suppliers that obligate
them
to continue to sell components or products to us. For example, L-3
Communications Holdings, which is one of our competitors, and Rockwell Collins,
are
currently
the sole supplier of our downlink transmitters/receivers and GPS modules,
respectively, of several of our small UAS provides, including
Raven. We also have several sole suppliers of PosiCharge Systems
product components and subsystems. Our reliance on these suppliers involves
significant risks and uncertainties, including whether our suppliers will
provide an adequate supply of required components of sufficient quality, will
increase prices for the components and will perform their obligations on a
timely basis.
In
addition, certain raw materials and components used in the manufacture of our
products are periodically subject to supply shortages, and our business is
subject to the risk of price increases and periodic delays in delivery. For
example, the airframes for our small UAS are made from certain nylon composites,
which experienced restrictions in available supply in 2005 due to increased
worldwide demand. Similarly, the market for electronic components is subject
to
cyclical reductions in supply. If we are unable to obtain components from
third-party suppliers in the quantities and of the quality that we require,
on a
timely basis and at acceptable prices, then we may not be able to deliver our
products on a timely or cost-effective basis to our customers, which could
cause
customers to terminate their contracts with us, increase our costs and seriously
harm our business, results of operations and financial condition. Moreover,
if
any of our suppliers become financially unstable, then we may have to find
new
suppliers. It may take several months to locate alternative suppliers, if
required, or to redesign our products to accommodate components from different
suppliers. We may experience significant delays in manufacturing and shipping
our products to customers and incur additional development, manufacturing and
other costs to establish alternative sources of supply if we lose any of these
sources or are required to redesign our products. We cannot predict if we will
be able to obtain replacement components within the time frames that we require
at an affordable cost, if at all.
Any
efforts to expand our product offerings beyond our current markets may not
succeed, which could negatively impact our operating
results.
We
have
focused on selling our small UAS to the U.S. military and our fast charge
systems to large industrial electric vehicle fleet operators primarily in North
America. We plan, however, to seek to expand our UAS sales into other government
and commercial markets and our fast charge systems sales into international
markets. Efforts to expand our product offerings beyond the markets that we
currently serve may divert management resources from existing operations and
require us to commit significant financial resources to unproven businesses
that
may not generate additional sales, either of which could significantly impair
our operating results.
Our
failure to obtain necessary regulatory approvals from the FAA or other
appropriate governmental agency may prevent us from expanding the sales of
our
small UAS to non-military customers in the United States and require us to
incur
additional costs in the testing of our products.
The
FAA
recently issued a clarification of its existing policies stating that, in order
to engage in public use of small UAS in the U.S. National Airspace
System, a public (government) operator must obtain a Certificate of
Authorization, or COA, from the FAA or fly in restricted airspace. The
FAA's COA approval process requires that the public operator certify
the airworthiness of the aircraft for its intended purpose, that a collision
with another aircraft or other airspace user is extremely improbable, that
the
small UAS complies with appropriate cloud and terrain clearances and that the
operator or spotter of the small UAS is generally within one half-mile laterally
and 400 feet vertically of the small UAS while in operation. Furthermore, the
FAA's clarification of existing policy states that the rules for
radio-controlled hobby aircraft do not apply to public or commercial use of
small UAS. The FAA is in the process of drafting updated regulations
specifically for small UAS operations, but we cannot assure you that these
regulations will allow the use of our small UAS by potential non-military
government and commercial customers. If the FAA does not modify its
regulations, we will experience increased costs to develop and test our small
UAS and may not be able to expand our sales of UAS beyond our military customers
and commercial users, which could harm our business prospects.
Recently,
the DCMA informed us that, under the terms of our DoD contracts, the government
parties with whom we are contracting are required to obtain a COA for flight
tests of our small UAS outside of restricted airspace. If our DoD customers
are
unable to obtain such a COA, we may not be able to perform our flight tests
without incurring the additional costs of transporting our small UAS products
to
military installations, when restricted airspace is available for testing,
which
could impair our operating results.
The
markets in which we compete are characterized by rapid technological change,
which requires us to develop new products and product enhancements, and could
render our existing products obsolete.
Continuing
technological changes in the market for our products could make our products
less competitive or obsolete, either generally or for particular applications.
Our future success will depend upon our ability to develop and introduce
a
variety of new capabilities and enhancements to our existing product offerings,
as well as introduce a variety of new product offerings, to address the changing
needs of the markets in which we offer our products. Delays in introducing
new
products and enhancements, the failure to choose correctly among technical
alternatives or the failure to offer innovative products or enhancements
at
competitive prices may cause existing and potential customers to purchase
our
competitors' products.
If
we are
unable to devote adequate resources to develop new products or cannot otherwise
successfully develop new products or enhancements that meet customer
requirements on a timely basis, our products could lose market share, our
revenue and profits could decline, and we could experience operating
losses.
We
expect to incur substantial research and development costs and devote
significant resources to identifying and commercializing new products, which
could significantly reduce our profitability and may never result in revenue
to
us.
Our
future growth depends on penetrating new markets, adapting existing products
to
new applications, and introducing new products that achieve market acceptance.
We plan to incur substantial research and development costs as part of our
efforts to design, develop and commercialize new products and enhance existing
products. We spent $13.9 million, or 8% of our revenue, in our fiscal year
ended April 30, 2007 on research and development activities and expect to
continue to spend significant funds on research and development in the future.
Because we account for research and development as an operating expense, these
expenditures will adversely affect our earnings in the future. Further, our
research and development program may not produce successful results, and our
new
products may not achieve market acceptance, create additional revenue or become
profitable, which could materially harm our business, prospects, financial
results and liquidity.
If
we are unable to manage our growth, our business could be adversely
affected.
Our
headcount and operations have grown rapidly. This rapid growth has placed,
and
will continue to place, a significant strain on our management and our
administrative, operational and financial infrastructure. From January 2004
through April 2007, we more than doubled the number of our employees. We
anticipate further growth of headcount and facilities will be required to
address increases in our product offerings and the geographic scope of our
customer base. Our success will depend in part upon the ability of our senior
management to manage this growth effectively. To do so, we must continue to
hire, train, manage and integrate a significant number of qualified managers
and
engineers. If our new employees perform poorly, or if we are unsuccessful in
hiring, training, managing and integrating these new employees, or retaining
these or our existing employees, then our business may suffer.
For
us to
continue our growth, we must continue to improve our operational, financial
and
management information systems. If we are unable to manage our growth while
maintaining our quality of service, or if new systems that we implement to
assist in managing our growth do not produce the expected benefits, then our
business, prospects, financial condition or operating results could be adversely
affected.
Our
earnings and profit margins may decrease based on the mix of our contracts
and
programs and other factors related to our contracts.
In
general, we perform our production work under fixed-price contracts and our
repair and customer-funded research and development work under cost-plus-fee
contracts. Under fixed-price contracts, we perform services under a contract
at
a stipulated price. Under cost-plus-fee contracts, which are subject to a
contract ceiling amount, we are reimbursed for allowable costs and paid a fee,
which may be fixed or performance based. We typically experience lower profit
margins under cost-plus-fee contracts than under fixed-price contracts, though
fixed-price contracts have higher risks. In general, if the volume of services
we perform under cost-plus-fee contracts increases relative to the volume of
services we perform under fixed-price contracts, we expect that our operating
margin will suffer. In addition, our earnings and margins may decrease depending
on the costs we incur in contract performance, our achievement of other contract
performance objectives and the stage of our performance at which our right
to
receive fees, particularly under incentive and award fee contracts, is
finally determined.
Our
senior management and key employees are important to our customer relationships
and overall business.
We
believe that our success depends in part on the continued contributions of
our
senior management and key employees. We rely on our executive officers, senior
management and key employees to generate business and execute programs
successfully. In addition, the relationships and reputation that members
of our
management team and key employees have established and maintain with government
defense personnel contribute to our ability to maintain good customer relations
and to identify new business opportunities. We do not have employment agreements
with any of our executive officers or key employees, and these individuals
could
terminate their employment with us at any time. The loss of any of our executive
officers, members of our senior management team or key employees could
significantly delay or prevent the achievement of our business objectives
and
could materially harm our business and customer relationships and impair
our
ability to identify and secure new contracts and otherwise manage our
business.
We
must recruit and retain highly-skilled employees to succeed in our competitive
business.
We
depend
on our ability to recruit and retain employees who have advanced engineering
and
technical services skills and who work well with our customers. These employees
are in great demand and are likely to remain a limited resource in the
foreseeable future. If we are unable to recruit and retain a sufficient number
of these employees, then our ability to maintain our competitiveness and grow
our business could be negatively affected. In addition, because of the highly
technical nature of our products, the loss of any significant number of our
existing engineering personnel could have a material adverse effect on our
business and operating results. Moreover, some of our U.S. government contracts
contain provisions requiring us to staff a program with certain personnel the
customer considers key to our successful performance under the contract. In
the
event we are unable to provide these key personnel or acceptable substitutes,
the customer may terminate the contract.
Our
business may be dependent upon our employees obtaining and maintaining required
security clearances.
Certain
of our U.S. government contracts require our employees to maintain various
levels of security clearances, and we are required to maintain certain facility
security clearances complying with DoD requirements. The DoD has strict security
clearance requirements for personnel who work on classified programs. Obtaining
and maintaining security clearances for employees involves a lengthy process,
and it is difficult to identify, recruit and retain employees who already hold
security clearances. If our employees are unable to obtain security clearances
in a timely manner, or at all, or if our employees who hold security clearances
are unable to maintain the clearances or terminate employment with us, then
a
customer requiring classified work could terminate the contract or decide
not to renew it upon its expiration. In addition, we expect that many of the
contracts on which we will bid will require us to demonstrate our ability to
obtain facility security clearances and employ personnel with specified types
of
security clearances. To the extent we are not able to obtain facility security
clearances or engage employees with the required security clearances for a
particular contract, we may not be able to bid on or win new contracts, or
effectively rebid on expiring contracts.
Cost
overruns on our contracts could subject us to losses, decrease our operating
margins and adversely affect our future business.
Fixed-price
contracts represented approximately 65% of our revenue for the fiscal year
ended
April 30, 2007. If we fail to anticipate technical problems, estimate costs
accurately or control costs during our performance of fixed-price contracts,
then we may incur losses on these contracts because we absorb any costs in
excess of the fixed price. Under cost-plus-fee contracts, if costs exceed the
contract ceiling or are not allowable under the provisions of the contract
or
applicable regulations, then we may not be able to obtain reimbursement for
all
such costs. Under time and materials contracts, we are paid for labor at
negotiated hourly billing rates and for certain expenses. Under each type of
contract, if we are unable to control the costs we incur in performing under
the
contract, then our financial condition and results of operations could be
materially adversely affected. Cost overruns also may adversely affect our
ability to sustain existing programs and obtain future contract
awards.
Our
products are complex and could have unknown defects or errors, which may give
rise to claims against us, diminish our brand or divert our resources from
other
purposes.
Our
UAS
rely on complex avionics, sensors, user-friendly interfaces and
tightly-integrated, electromechanical designs to accomplish their missions,
and
our fast charge systems and energy systems often rely upon the application
of
intellectual property for which there may have been little or no prior
commercial application. Despite testing, our products have contained defects
and
errors and may in the future contain defects, errors or performance problems
when first introduced, when new versions or enhancements are released, or even
after these products have
been
used
by our customers for a period of time. These problems could result in expensive
and time-consuming design modifications or warranty charges, delays in the
introduction of new products or enhancements, significant increases in our
service and maintenance costs, exposure to liability for damages, damaged
customer relationships and harm to our reputation, any of which could materially
harm our results of operations and ability to achieve market acceptance. In
addition, increased development and warranty costs could be substantial and
could reduce our operating margins.
The
existence of any defects, errors, or failures in our products or the misuse
of
our products could also lead to product liability claims or lawsuits against
us.
A defect, error or failure in one of our UAS could result in injury, death
or
property damage and significantly damage our reputation and support for UAS
in
general. While our fast charge systems include certain safety mechanisms, these
systems can deliver up to 600 amps of current in their application, and the
failure, malfunction or misuse of these systems could result in injury or death.
Although we maintain insurance policies, we cannot assure you that this
insurance will be adequate to protect us from all material judgments and
expenses related to potential future claims or that these levels of insurance
will be available in the future at economical prices or at all. A successful
product liability claim could result in substantial cost to us. Even if we
are
fully insured as it relates to a claim, the claim could nevertheless diminish
our brand and divert management's attention and resources, which could have
a
negative impact on our business, financial condition and results of
operations.
The
operation of UAS in urban environments may be subject to risks, such as
accidental collisions and transmission interference, which may limit demand
for
our UAS in such environments and harm our business and operating
results.
Urban
environments may present certain challenges to the operators of UAS. UAS may
accidentally collide with other aircraft, persons or property, which could
result in injury, death or property damage and significantly damage the
reputation of and support for UAS in general. While we are aware of only one
instance of an accidental collision involving an UAS to date, as the usage
of
UAS has increased, particularly by military customers in urban areas of
Afghanistan and Iraq, the danger of such collisions has increased. Furthermore,
the number of UAS that can operate simultaneously in a given geographic area
is
limited by the allocated frequency spectrum available. In addition, obstructions
to effective transmissions in urban environments, such as large buildings,
may
limit the ability of the operator to utilize the aircraft for its intended
purpose. The risks or limitations of operating UAS in urban environments may
limit their value in such environments, which may limit demand for our UAS
and
consequently materially harm our business and operating results.
Our
quarterly operating results may vary widely.
Our
quarterly revenue, cash flow and operating results have and may continue to
fluctuate significantly in the future due to a number of factors, including
the
following:
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fluctuations
in revenue derived from government contracts, including cost-plus-fee
contracts and contracts with a performance-based fee
structure;
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the
size and timing of orders from military and other governmental agencies,
including increased purchase requests from government customers for
equipment and materials in connection with the U.S. government's
fiscal
year end, which may affect our quarterly operating
results;
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the
mix of products that we sell in the
period;
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seasonal
fluctuations in customer demand for some of our products or
services;
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unanticipated
costs incurred in the introduction of new
products;
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fluctuations
in the adoption of our products in new
markets;
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changes
in the level of tax credits available for research and development
spending;
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cancellations,
delays or contract amendments by our governmental agency customers;
and
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changes
in policy or budgetary measures that adversely affect our governmental
agency customers.
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Changes
in the volume of products and services provided under existing contracts
and the
number of contracts commenced, completed or terminated during any quarter
may
cause significant variations in our cash flow from operations because a
relatively large amount of our expenses are fixed. We incur significant
operating expenses during the start-up and early stages of large contracts
and
typically do not receive corresponding payments in that same quarter. We
may also incur significant or unanticipated expenses when contracts expire
or
are terminated or are not renewed. In addition, payments due to us from
government agencies may be delayed due to billing cycles or as a result of
failures of governmental budgets to gain congressional and presidential
administration approval in a timely manner.
Shortfalls
in available external research and development funding could adversely affect
us.
We
depend
on our research and development activities to develop the core technologies
used
in our small UAS and PosiCharge products and for the development of our future
products. A portion of our research and development activities depends on
funding by commercial companies and the U.S. government. U.S. government and
commercial spending levels can be impacted by a number of variables, including
general economic conditions, specific companies' financial performance and
competition for U.S. government funding with other U.S. government-sponsored
programs in the budget formulation and appropriation processes. Moreover, the
U.S., state and local governments provide energy rebates and incentives to
commercial companies, which directly impact the amount of research and
development that companies appropriate for energy systems. To the extent
that these energy rebates and incentives are reduced or eliminated, company
funding for research and development could be reduced. Any reductions in
available research and development funding could harm our business, financial
condition and operating results.
Volatility
and cyclicality in the market for electric industrial vehicles could adversely
affect us.
Our
PosiCharge Systems products, which accounted for 10% of our revenue during
the
fiscal year ended April 30, 2007, are purchased primarily by operators of
fleets of electric industrial vehicles, such as forklift trucks and airport
ground support equipment. Consequently, our ability to remain profitable depends
in part on the varying conditions in the market for electric industrial
vehicles. This market is subject to volatility as it moves in response to cycles
in the overall business environment and it is also particularly sensitive to
the
industrial, food and beverage, retail and air travel sectors, which generate
a
significant portion of the demand for such vehicles. Sales of electric
industrial vehicles have historically been cyclical, with demand affected by
such economic factors as industrial production, construction levels, demand
for
consumer and durable goods, interest rates and fuel costs. A significant decline
in demand for electric industrial vehicles could adversely affect our revenue
and prospects, which would harm our business, financial condition and operating
results.
Our
fast charge business is dependent upon our relationships with battery dealers
and other third parties with whom we do not have exclusive
arrangements.
To
remain
competitive in the market for fast charge systems, we must maintain our access
to potential customers and ensure that the service needs of our customers are
met adequately. In many cases, we rely on battery dealers for access to
potential PosiCharge Systems customers. Currently, several of our fast charge
system competitors are working with battery manufacturers to sell fast charge
systems and batteries together. Cooperative agreements between our competitors
and battery manufacturers could restrict our access to battery dealers and
potential PosiCharge Systems customers, adversely affecting our revenue and
prospects. Additionally, we rely on outside service providers to perform
post-sale services for our PosiCharge customers. If these service providers
fail
to perform these services as required or discontinue their business with us,
then we could lose customers to competitors, which would harm our business,
financial condition and operating results.
We
work in international locations where there are high security risks, which
could
result in harm to our employees and contractors or substantial
costs.
Some
of
our services are performed in high-risk locations, such as Iraq and Kuwait,
where the country or location is suffering from political, social or economic
issues, or war or civil unrest. For example, we currently maintain a forward
operating depot in Iraq, located in a U.S. government installation and typically
staffed by three of our employees. In addition, we have occasionally had
trainers temporarily assigned in Kuwait. During the last fiscal year, we had
five trainers assigned in Kuwait for a period of 30 days. In those locations
where we have employees or operations, we may incur substantial costs to
maintain the safety of our personnel. Despite these precautions, the safety
of
our personnel in these locations may continue to be at risk, and we may in
the
future suffer the loss of employees and contractors, which could harm our
business and operating results.
We
may not be able to obtain capital when desired on favorable terms, if at
all, or
without dilution to our stockholders.
We
operate in emerging and rapidly evolving markets, which makes our prospects
difficult to evaluate. It is possible that we may not generate sufficient
cash
flow from operations or otherwise have the capital resources to meet our
future
capital needs. If this occurs, then we may need additional financing to pursue
our business strategies, including to:
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hire
additional engineers and other
personnel;
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develop
new or enhance existing products;
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enhance
our operating infrastructure;
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fund
working capital requirements;
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acquire
complementary businesses or technologies;
or
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otherwise
respond to competitive pressures.
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If
we
raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders could be significantly
diluted, and these newly-issued securities may have rights, preferences or
privileges senior to those of existing stockholders. We cannot assure you that
additional financing will be available on terms favorable to us, or at all.
Our
existing line of credit contains, and future debt financing may contain,
covenants or other provisions that limit our operational or financial
flexibility. In addition, certain of our customers require that we obtain
letters of credit to support our obligations under some of our
contracts.
Our
existing letter-of-credit provider requires that we hold cash in an amount
equal
to the amount of our outstanding letters of credit as collateral. Continued
access to letters of credit may be important to our ability to regain and win
contracts in the future. If adequate funds are not available or are not
available on acceptable terms, if and when needed, then our ability to fund
our
operations, take advantage of unanticipated opportunities, develop or enhance
our products, or otherwise respond to competitive pressures would be
significantly limited.
Our
international business poses potentially greater risks than our domestic
business.
We
derived approximately 5% of our revenue from international sales during the
three fiscal years ended April 30, 2007. We expect to derive an
increasing portion of our revenue from international sales. Our international
revenue and operations are subject to a number of material risks, including
the
following:
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the
unavailability of, or difficulties in obtaining any, necessary
governmental authorizations for the export of our UAS products to
certain
foreign jurisdictions;
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changes
in regulatory requirements that may adversely affect our ability
to sell
certain products or repatriate profits to the
U.S.;
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the
complexity and necessity of using foreign representatives and
consultants;
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difficulties
in enforcing agreements and collecting receivables through foreign
legal
systems and other relevant legal issues, including fewer legal protections
for intellectual property;
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potential
fluctuations in foreign economies and in the value of foreign currencies
and interest rates;
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potential
preferences by prospective customers to purchase from local (non-U.S.)
sources;
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general
economic and political conditions in the markets in which we
operate;
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laws
or regulations relating to non-U.S. military contracts that favor
purchases from non-U.S. manufacturers over U.S.
manufacturers;
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the
imposition of tariffs, embargoes, export controls and other trade
restrictions; and
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different
and changing legal and regulatory requirements in the jurisdictions
in
which we currently operate or may operate in the
future.
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Negative
developments in any of these areas in one or more countries could result in
a
reduction in demand for our products, the cancellation or delay of orders
already placed, threats to our intellectual property, difficulty in collecting
receivables and a higher cost of doing business, any of which could negatively
impact our business, financial condition or results of operations. Moreover,
our
sales, including sales to customers outside the U.S., are denominated in
dollars, and downward fluctuations in the value of foreign currencies relative
to the U.S. dollar may make our products more expensive than other products,
which could harm our business.
Potential
future acquisitions could be difficult to integrate, divert the attention of
key
personnel, disrupt our business, dilute stockholder value and impair our
financial results.
We
intend
to consider strategic acquisitions that would add to our customer base,
technological capabilities or system offerings. Acquisitions involve numerous
risks, any of which could harm our business, including the
following:
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difficulties
in integrating the operations, technologies, products, existing contracts,
accounting and personnel of the target company and realizing the
anticipated synergies of the combined
businesses;
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difficulties
in supporting and transitioning customers, if any, of the target
company;
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diversion
of financial and management resources from existing
operations;
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the
price we pay or other resources that we devote may exceed the value
we
realize, or the value we could have realized if we had allocated
the
purchase price or other resources to another
opportunity;
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risks
of entering new markets in which we have limited or no
experience;
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potential
loss of key employees, customers and strategic alliances from either
our
current business or the target company's
business;
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assumption
of unanticipated problems or latent liabilities, such as problems
with the
quality of the target company's products;
and
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inability
to generate sufficient revenue to offset acquisition
costs.
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Acquisitions
also frequently result in the recording of goodwill and other intangible assets
which are subject to potential impairments in the future that could harm our
financial results. In addition, if we finance acquisitions by issuing equity,
or
securities convertible into equity, then our existing stockholders may be
diluted, which could lower the market price of our common stock. If we finance
acquisitions through debt, then such future debt financing may contain covenants
or other provisions that limit our operational or financial flexibility. As
a
result, if we fail to properly evaluate acquisitions or investments, then we
may
not achieve the anticipated benefits of any such acquisitions, and we may incur
costs in excess of what we anticipate. The failure to successfully evaluate
and
execute acquisitions or investments or otherwise adequately address these risks
could materially harm our business and financial results.
Environmental
laws and regulations and unforeseen costs could impact our future
earnings.
The
manufacture and sale of our products in certain states and countries may subject
us to environmental and other regulations. For example, we obtain a significant
number of our electronics components from companies located in East Asia, where
environmental rules may be less stringent than in the United States. Over time,
the countries where these companies are located may adopt more stringent
environmental regulations, resulting in an increase in our manufacturing costs.
Furthermore, certain environmental laws, including the U.S. Comprehensive,
Environmental Response, Compensation and Liability Act of 1980, impose strict,
joint and several liability on current and previous owners or operators of
real
property for the cost of removal or remediation of hazardous substances and
impose liability for damages to natural resources. These laws often impose
liability even if the owner or operator did not know of, or was not responsible
for, the release of such hazardous substances. These
environmental
laws also assess liability on persons who arrange for hazardous substances
to be
sent to disposal or treatment facilities when such facilities are found to
be
contaminated. Such persons can be responsible for cleanup costs even if they
never owned or operated the contaminated facility. Although we have not yet
been
named a responsible party at a contaminated site, we could be named a
potentially responsible party in the future. We cannot assure you that such
existing laws or future laws will not have a material adverse effect on our
future earnings or results of operations.
Our
business and operations are subject to the risks of earthquakes and other
natural catastrophic events.
Our
corporate headquarters, research and development and manufacturing operations
are located in Southern California, a region known for seismic activity and
wild
fires. A significant natural disaster, such as an earthquake, fire or other
catastrophic event, could severely affect our ability to conduct normal business
operations, and as a result, our future operating results could be
materially and adversely affected.
Risks
Related to Our U.S. Government Contracts
We
are subject to extensive government regulation, and our failure to comply with
applicable regulations could subject us to penalties that may restrict our
ability to conduct our business.
As
a
contractor to the U.S. government, we are subject to and must comply with
various government regulations that impact our revenue, operating costs, profit
margins and the internal organization and operation of our business. The most
significant regulations and regulatory authorities affecting our business
include the following:
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the
Federal Acquisition Regulations and supplemental agency regulations,
which
comprehensively regulate the formation and administration of, and
performance under, U.S. government
contracts;
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the
Truth in Negotiations Act, which requires certification and disclosure
of
all factual cost and pricing data in connection with contract
negotiations;
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the
False Claims Act and the False Statements Act, which impose penalties
for
payments made on the basis of false facts provided to the government
and
on the basis of false statements made to the government,
respectively;
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the
Foreign Corrupt Practices Act, which prohibits U.S. companies from
providing anything of value to a foreign official to help obtain,
retain
or direct business, or obtain any unfair
advantage;
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the
National Telecommunications and Information Administration and the
Federal
Communications Commission, which regulate the wireless spectrum
allocations upon which UAS depend for operation and data transmission
in
the U.S.;
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the
Federal Aviation Administration, which is in the process of drafting
regulations specifically for small UAS operation in the
U.S.;
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the
International Traffic in Arms Regulations, which regulate the export
of
controlled technical data, defense articles and defense services
and
restrict from which countries we may purchase materials and services
used
in the production of certain of our products;
and
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laws,
regulations and executive orders restricting the use and dissemination
of
information classified for national security purposes and the exportation
of certain products and technical
data.
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Also,
we
need special security clearances and regulatory approvals to continue working
on
certain of our projects with the U.S. government. Classified programs generally
will require that we comply with various executive orders, federal laws and
regulations and customer security requirements that may include restrictions
on
how we develop, store, protect and share information, and may require our
employees to obtain government security clearances. Our failure to comply with
applicable regulations, rules and approvals or misconduct by any of our
employees could result in the imposition of fines and penalties, the loss of
security clearances, the loss of our government contracts or our suspension
or
debarment from contracting with the U.S. government generally, any of which
would harm our business, financial condition and results of operations. We
are
also subject to certain regulations of comparable government agencies in other
countries, and our failure to comply with these non-U.S. regulations could
also
harm our business, financial condition or results of operations.
Our
business could be adversely affected by a negative audit by the U.S.
government.
U.S.
government agencies, primarily the Defense Contract Audit Agency, or DCAA,
and
the DCMA, routinely audit and investigate government contractors. These agencies
review a contractor's performance under its contracts, cost structure and
compliance with applicable laws, regulations and standards. These agencies
also
may review the adequacy of, and a contractor's compliance with, its internal
control systems and policies, including the contractor's purchasing, property,
estimating, compensation and management information systems. Any costs found
to
be improperly allocated to a specific contract will not be reimbursed, while
such costs already reimbursed must be refunded. If an audit of our business
were
to uncover improper or illegal activities, then we could be subject to civil
and
criminal penalties and administrative sanctions, including termination of
contracts, forfeiture of profits, suspension of payments, fines and
suspension or prohibition from doing business with the U.S. government. In
addition, we could suffer serious harm to our reputation if allegations of
impropriety or illegal acts were made against us, even if the allegations were
inaccurate. If any of the foregoing were to occur, our financial condition
and
operating results could be materially adversely affected.
During
our fiscal year ended April 30, 2007, we were audited by the DCMA with respect
to our system for the care, control and accountability of government property.
The DCMA identified certain corrective actions to be taken with respect to
our
system, which we have implemented. Although we successfully implemented these
corrective actions, we cannot assure you that the DCMA will not require
additional corrective actions in the future. The failure to comply with
requirements for government contractors in the future would adversely affect
our
ability to do business with the U.S. government and could harm our business
and
operating results.
Some
of our contracts with the U.S. government allow it to use inventions developed
under the contracts and to disclose technical data to third parties, which
could
harm our ability to compete.
Some
of
our contracts allow the U.S. government to use, royalty-free, or have others
use, inventions developed under those contracts on behalf of the government.
Some of the contracts allow the federal government to disclose technical data
without constraining the recipient on how those data are used. The ability
of
third parties to use patents and technical data for government purposes creates
the possibility that the government could attempt to establish alternative
suppliers or to negotiate with us to reduce our prices. The potential that
the
government may release some of the technical data without constraint creates
the
possibility that third parties may be able to use this data to compete with
us,
which could have a material adverse effect on our business, results of
operations or financial condition.
U.S.
government contracts are generally not fully funded at inception and contain
certain provisions that may be unfavorable to us, which could prevent us from
realizing our contract backlog and materially harm our business and results
of
operations.
DoD
contracts typically involve long lead times for design and development, and
are
subject to significant changes in contract scheduling. Congress generally
appropriates funds on a fiscal year basis even though a program may continue
for
several years. Consequently, programs are often only partially funded initially,
and additional funds are committed only as Congress makes further
appropriations. The termination or reduction of funding for a government program
would result in a loss of anticipated future revenue attributable to that
program.
As
of
April 30, 2007, we had funded U.S. government contract backlog of
$60.9 million and estimated unfunded U.S. government contract backlog of
$478 million. The actual receipt of revenue on awards included in backlog
may never occur or may change because a program schedule could change or the
program could be canceled, or a contract could be reduced, modified or
terminated early.
In
addition, U.S. government contracts generally contain provisions permitting
termination, in whole or in part, at the government's convenience or for
contractor default. Since a substantial majority of our revenue is dependent
on
the procurement, performance and payment under our U.S. government contracts,
the termination of one or more critical government contracts could have a
negative impact on our results of operations and financial condition.
Termination arising out of our default could expose us to liability and have
a
material adverse effect on our ability to re-compete for future contracts and
orders. Moreover, several of our contracts with the U.S. government do not
contain a limitation of liability provision, creating a risk of responsibility
for indirect, incidental damages and consequential damages. These provisions
could cause substantial liability for us, especially given the use to which
our
products may be put.
U.S.
government contracts are subject to a competitive bidding process that can
consume significant resources without generating any
revenue.
U.S.
government contracts are frequently awarded only after formal, protracted
competitive bidding processes and, in many cases, unsuccessful bidders for
U.S.
government contracts are provided the opportunity to protest contract awards
through various agency, administrative and judicial channels. We derive
significant revenue from U.S. government contracts that were awarded through
a
competitive bidding process. Much of the UAS business that we expect to seek
in
the foreseeable future likely will be awarded through competitive bidding.
Competitive bidding presents a number of risks, including the
following:
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the
need to bid on programs in advance of the completion of their design,
which may result in unforeseen technological difficulties and cost
overruns;
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the
substantial cost and managerial time and effort that must be spent
to
prepare bids and proposals for contracts that may not be awarded
to
us;
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the
need to estimate accurately the resources and cost structure that
will be
required to service any contract we are awarded;
and
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the
expense and delay that may arise if our competitors protest or challenge
contract awards made to us pursuant to competitive bidding, and the
risk
that any such protest or challenge could result in the delay of our
contract performance, the distraction of management, the resubmission
of
bids on modified specifications, or in termination, reduction or
modification of the awarded
contract.
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We
may
not be provided the opportunity to bid on contracts that are held by other
companies and are scheduled to expire if the government extends the existing
contract. If we are unable to win particular contracts that are awarded through
a competitive bidding process, then we may not be able to operate in the market
for goods and services that are provided under those contracts for a number
of
years. If we are unable to win new contract awards over any extended period
consistently, then our business and prospects will be adversely
affected.
Risks
Related to Our Intellectual Property
If
we fail to protect, or incur significant costs in defending, our intellectual
property and other proprietary rights, our business, financial condition, and
results of operations could be materially harmed.
Our
success depends, in large part, on our ability to protect our intellectual
property and other proprietary rights. We rely primarily on patents, trademarks,
copyrights, trade secrets and unfair competition laws, as well as license
agreements and other contractual provisions, to protect our intellectual
property and other proprietary rights. However, a significant portion of
our technology is not patented, and we may be unable or may not seek to obtain
patent protection for this technology. Moreover, existing U.S. legal standards
relating to the validity, enforceability and scope of protection of intellectual
property rights offer only limited protection, may not provide us with any
competitive advantages, and may be challenged by third parties. The laws of
countries other than the United States may be even less protective of
intellectual property rights. Accordingly, despite our efforts, we may be unable
to prevent third parties from infringing upon or misappropriating our
intellectual property or otherwise gaining access to our technology.
Unauthorized third parties may try to copy or reverse engineer our products
or
portions of our products or otherwise obtain and use our intellectual property.
Moreover, many of our employees have access to our trade secrets and other
intellectual property. If one or more of these employees leave us to work for
one of our competitors, then they may disseminate this proprietary information,
which may as a result damage our competitive position. If we fail to protect
our
intellectual property and other proprietary rights, then our business, results
of operations or financial condition could be materially harmed.
In
addition, affirmatively defending our intellectual property rights and
investigating whether we are pursuing a product or service development that
may
violate the rights of others may entail significant expense. We have not found
it necessary to resort to legal proceedings to protect our intellectual
property, but may find it necessary to do so in the future. Any of our
intellectual property rights may be challenged by others or invalidated through
administrative processes or litigation. If we resort to legal proceedings to
enforce our intellectual property rights or to determine the validity and scope
of the intellectual property or other proprietary rights of others, then the
proceedings could result in significant expense to us and divert the attention
and efforts of our management and technical employees, even if we
prevail.
We
may be sued by third parties for alleged infringement of their proprietary
rights, which could be costly, time-consuming and limit our ability to use
certain technologies in the future.
We
may
become subject to claims that our technologies infringe upon the intellectual
property or other proprietary rights of third parties. Any claims, with or
without merit, could be time-consuming and expensive, and could divert our
management's attention away from the execution of our business plan. Moreover,
any settlement or adverse judgment resulting from these claims could require
us
to pay substantial amounts or obtain a license to continue to use the disputed
technology, or otherwise restrict or prohibit our use of the technology. We
cannot assure you that we would be able to obtain a license from the third
party
asserting the claim on commercially reasonable terms, if at all, that we would
be able to develop alternative technology on a timely basis, if at all, or
that
we would be able to obtain a license to use a suitable alternative technology
to
permit us to continue offering, and our customers to continue using, our
affected product. An adverse determination also could prevent us from offering
our products to others. Infringement claims asserted against us may have a
material adverse effect on our business, results of operations or financial
condition.
Risks
Relating to Securities Markets and Investment in Our Stock
Our
common stock has only been publicly traded since January 23, 2007 and the
price of our common stock may fluctuate
significantly.
There
has
only been a public market for our common stock since January 23, 2007. The
market prices for securities of emerging technology companies have historically
been highly volatile, and the market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market price of our common stock may
fluctuate significantly in response to a number of factors, most of which we
cannot control, including the following:
|
|
Ÿ
|
U.S.
government spending levels, both generally and by our particular
customers;
|
|
|
Ÿ
|
The
volume of operational activity by the U.S.
military;
|
|
|
Ÿ
|
delays
in the payment of our invoices by government payment offices, resulting
in
potentially reduced earnings during a particular fiscal
quarter;
|
|
|
Ÿ
|
announcements
of new products or technologies, commercial relationships or other
events
relating to us or our industry or our
competitors;
|
|
|
Ÿ
|
failure
of any of our key products to gain market
acceptance;
|
|
|
Ÿ
|
variations
in our quarterly operating results;
|
|
|
Ÿ
|
perceptions
of the prospects for the markets in which we
compete;
|
|
|
Ÿ
|
changes
in general economic conditions;
|
|
|
Ÿ
|
changes
in securities analysts' estimates of our financial
performance;
|
|
|
Ÿ
|
regulatory
developments in the U.S. and foreign
countries;
|
|
|
Ÿ
|
fluctuations
in stock market prices and trading volumes of similar
companies;
|
|
|
Ÿ
|
news
about the markets in which we compete or regarding our
competitors;
|
|
|
Ÿ
|
terrorist
acts or military action related to international conflicts, wars
or
otherwise;
|
|
|
Ÿ
|
sales
of large blocks of our common stock, including sales by our executive
officers, directors and significant stockholders;
and
|
|
|
Ÿ
|
additions
or departures of key personnel.
|
In
addition, the equity markets in general, and Nasdaq in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of those companies. Further,
the market prices of securities of emerging technology companies have been
particularly volatile. These broad market and industry factors may affect
the market price of our common stock adversely, regardless of our operating
performance. In the past, following periods of volatility in the market price
of
a company's securities, securities class action litigation often has been
instituted against that company. This type of litigation, if instituted against
us, could result in substantial costs and a diversion of management's attention
and resources.
Our
management, whose interests may not be aligned with yours, is able to control
the vote on all matters requiring stockholder
approval.
As
of
June 15, 2007, our directors, executive officers and their affiliates
collectively beneficially owned 10,294,190 shares, or approximately 52%, of
our
total outstanding shares of common stock. Accordingly, our directors and
executive officers as a group may control the vote on all matters requiring
stockholder approval, including the election of directors. The interests of
our
directors and executive officers may not be fully aligned with yours. Although
there is no agreement among our directors and executive officers with respect
to
the voting of their shares, this concentration of ownership may delay, defer
or
even prevent a change in control of our company, and make transactions more
difficult or impossible without the support of all or some of our directors
and
executive officers. These transactions might include proxy contests, tender
offers, mergers or other purchases of common stock that could give you the
opportunity to realize a premium over the then-prevailing market price for
shares of our common stock.
|
Unresolved
Staff Comments.
|
Not
Applicable.
|
Properties.
|
All
of
our facilities are leased. Our corporate headquarters are located in Monrovia,
California where we lease approximately 13,000 square feet under an
agreement expiring in September 2010. We have several other leased facilities
in
Monrovia that house our PosiCharge and Energy Technology Center businesses.
These facilities have total square footage of approximately 64,000 square
feet and leases that expire between the end of 2007 and 2010.
Our
principal UAS facilities are located in Simi Valley, California. They currently
consist of an 85,000 square foot research and development, manufacturing
and logistics facility, the lease for which expires in 2009, a 26,000 square
foot dedicated research and development facility, the lease for which expires
in
October 2007, and a new 105,000 square foot manufacturing, research and
development facility, the lease for which expires in 2012. We expect
to move much of our UAS research and development and administrative operations
to the new facility by late 2007.
We
additionally have small leased offices in Arizona, Florida, Hawaii and Virginia
for training, business development and sales, and lease arrangements with
several test flight fields in California. We believe that our current leased
facilities and additional or alternative space available to us will be adequate
to meet our needs for the foreseeable future.
|
Legal
Proceedings.
|
We
are
not currently a party to any material legal proceedings. We are, however,
subject to lawsuits from time to time in the ordinary course of
business.
|
Submission
of Matters to a Vote of Securities
Holders.
|
No
matters were submitted during the fourth quarter of our fiscal year ending
April
30, 2007 to a vote of security holders through solicitation of proxies or
otherwise.
Part
II
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities.
|
Common
Stock
On
January 23, 2007, our common stock was listed on The NASDAQ Global Market under
the symbol "AVAV." Prior to January 23, 2007, there was no
established trading market for our common stock. The following table
sets forth, for the periods indicated, the high and low sales prices for our
common stock from January 23, 2007 through April 30, 2007. The
following quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
|
High
|
Low
|
|||||||
|
Fiscal
Year Ended April 30, 2007
|
||||||||
|
January
23, 2007 – January 27, 2007
|
$ |
26.22
|
$ |
22.60
|
||||
|
Fourth
Quarter
|
24.50
|
20.50
|
||||||
On
June
13, 2007, the closing sales price of our common stock as reported on the NASDAQ
Global Market was $22.01 per share. As of June 13 2007, there were
approximately 52 holders of record of our common stock.
Dividends
We
currently intend to retain all future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in
the foreseeable future. Our debt agreement prohibits us from paying any
dividends to our stockholders. Any future determination related to dividend
policy will be made at the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial condition,
capital requirements, contractual restrictions and such other factors as our
board of directors deems relevant.
Stock
Price Performance Graph
The
following graph sets forth the total cumulative stockholder return on our common
stock since our initial public offering beginning on January 23, 2007 as
compared to the Russell 2000 Index and the SPADES Index. This graph assumes
a
$100 investment in the Company's common stock at our initial public offering
price of $17.00 per share. Historical stock performance is not necessarily
indicative of future price performance.
The
following table shows the value of $100 invested on January 23, 2007 in
AeroVironment Inc., the Russell 2000 Index, and the SPADES Index.
|
Performance
Graph Table ($)
|
||||||||||
|
January
23, 2007
|
January
31, 2007
|
February
28, 2007
|
March
30, 2007
|
April
30, 2007
|
||||||
|
AeroVironment,
Inc.
|
100
|
135
|
125
|
134
|
126
|
|||||
|
Russell
2000 Index
|
100
|
103
|
102
|
103
|
105
|
|||||
|
SPADES
Index
|
100
|
103
|
103
|
104
|
108
|
|||||
The
stock
price performance shown on the graph above is not necessarily indicative of
future price performance. Factual material was obtained from sources believed
to
be reliable, but the Company is not responsible for any errors or omissions
contained therein. No portions of this graph shall be deemed incorporated by
reference into any filing under the Securities Act, or the Exchange Act through
any general statement incorporating by reference in its entirety the report
in
which this graph appears, except to the extent that we specifically incorporate
this graph or a portion of it by reference. In addition, this graph shall not
be
deemed filed under either the Securities Act or the Exchange Act.
Use
of Proceeds from Initial Public Offering
The
Securities & Exchange Commission, or SEC, declared our Registration
Statement on Form S-1 effective on January 22, 2007. The underwriters were
Goldman, Sachs & Co., Friedman, Billings, Ramsey & Co., Inc., Jefferies
Quarterdeck, a division of Jefferies & Company, Inc., Raymond James &
Associates, Inc., Stifel, Nicolaus & Company, Incorporated and Thomas Weisel
Partners LLC.
We
completed our initial public offering on January 26, 2007. All 7,705,000
shares of common stock registered under the Registration Statement, which
consisted of 5,252,285 shares of common stock offered by us and 2,452,715 shares
offered by certain of our stockholders, were sold at a price to the public
of
$17.00 per share.
The
aggregate estimated net proceeds to us were $80.5 million, after deducting
payment of underwriters' discounts and commissions and offering expenses. The
use of proceeds have been consistent with the use of proceeds described in
the
final prospectus we filed with the SEC pursuant to Rule 424(b) of the Securities
Act of 1933, as amended, on January 23, 2007.
|
Selected
Consolidated Financial
Data
|
The
following selected financial data should be read in conjunction with our
consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations, and should be read
in
conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included in Item 8, "Financial Statements and
Supplementary Data" of this Form 10-K in order to understand fully factors
that
may affect the comparability of the financial data presented below.
|
|
Year
Ended April 30,
|
|||||||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
|
(In
thousands, except per share data)
|
|||||||||||||||||||
|
Consolidated
Income Statement Data:
|
|
|
|
|
|
|||||||||||||||
|
Revenue
|
$ |
173,721
|
$ |
139,357
|
$ |
105,155
|
$ |
47,680
|
$ |
45,817
|
||||||||||
|
Net
income
|
$ |
20,718
|
$ |
11,208
|
$ |
14,570
|
$ |
2,171
|
$ |
541
|
||||||||||
|
|
||||||||||||||||||||
|
Earnings
per common share:
|
||||||||||||||||||||
|
Basic
|
$ |
1.39
|
$ |
0.86
|
$ |
1.15
|
$ |
0.19
|
$ |
0.05
|
||||||||||
|
Diluted
|
$ |
1.22
|
$ |
0.75
|
$ |
1.05
|
$ |
0.18
|
$ |
0.04
|
||||||||||
|
Weighted
average common shares outstanding (basic):
|
$ |
14,947
|
$ |
13,012
|
$ |
12,675
|
$ |
11,539
|
$ |
11,583
|
||||||||||
|
Weighted
average common shares outstanding (diluted):
|
$ |
16,992
|
$ |
14,874
|
$ |
13,847
|
$ |
12,094
|
$ |
12,040
|
||||||||||
|
Balance
Sheet Data
|
||||||||||||||||||||
|
Total
assets
|
$ |
168,177
|
$ |
64,950
|
$ |
50,440
|
$ |
26,464
|
$ |
14,385
|
||||||||||
|
Long-term
obligations
|
$ |
541
|
$ |
2,617
|
$ |
1,500
|
$ |
1,000
|
$ |
422
|
||||||||||
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
|
Introduction
The
following discussion of our financial condition and results of operations should
be read in conjunction with the our "Selected Consolidated Financial Data"
and
our consolidated financial statements and notes thereto included herein as
Item
8. This discussion contains forward-looking statements. Refer to
"Forward-Looking Statements" on page 2 and "Risk Factors" beginning on page
16, for a discussion of the uncertainties, risks, and assumptions associated
with these statements.
Overview
We
design, develop, produce and support a technologically-advanced portfolio of
small unmanned aircraft systems, or UAS, that we supply primarily to
organizations within the U.S. Department of Defense, or DoD, and fast charge
systems for electric industrial vehicle batteries that we supply to commercial
customers. We derive the majority of our revenue from these two business areas
and we believe that both the small unmanned aircraft systems, or UAS, and
fast charge markets are in the early stages of development and have significant
growth potential. Additionally, we believe that some of the innovative potential
products in our research and development pipeline will emerge as new growth
platforms in the future, creating market opportunities.
The
success we have achieved with our current products stems from our investment
in
research and development and our ability to invent and deliver advanced
solutions, utilizing our proprietary technologies, to help our government and
commercial customers operate more effectively and efficiently. Our core
technological capabilities, developed through over 35 years of innovation,
include lightweight aerostructures and electric propulsion systems, efficient
electric energy systems and storage, high-density energy packaging,
miniaturization, controls integration and systems engineering
optimization.
We
are
organized into three segments based on our business operations; UAS, PosiCharge
Systems, and Energy Technology Center, which focuses primarily on the
development of innovative, efficient electric energy technologies for internal
and external customers, and also markets a line of electronic test equipment
used for research and development activities.
Revenue
We
generate our revenue primarily from the sale and support of our small UAS and
PosiCharge solutions. Support for our small UAS customers includes training,
customer support and product repair and replacement work, which we refer to
collectively as our logistics operation. We derive most of our small UAS revenue
from fixed-price and cost-plus-fee contracts with the U.S. government and most
of our PosiCharge revenue from sales and service to commercial customers. We
also generate revenue from our Energy Technology Center through the provision
of
contract development and engineering services, the sale of our power processing
systems and license fees.
Cost
of Sales
Cost
of
sales consists of direct costs and allocated indirect costs. Direct costs
include labor, materials, travel, subcontracts and other costs directly related
to the execution of a specific contract. Indirect costs include overhead
expenses, fringe benefits and other costs that are not directly related to
the
execution of a specific contract.
Gross
Margin
Gross
margin is equal to revenue minus cost of sales. We use gross margin as a
financial metric to help us understand trends in our direct costs and allocated
indirect costs when compared to the revenue we generate.
Research
and Development Expense
Research
and development, or R&D, is an integral part of our business model. We
conduct significant internally funded research and development and anticipate
that research and development expense will continue to increase in absolute
dollars for the foreseeable future. Our UAS research and development activities
focus specifically on creating capabilities that support our existing small
UAS
product portfolio as well as new UAS platforms. These activities are funded
both
externally by customers and internally. In addition, we currently have a number
of potential products in various stages of development and commercialization
within our research and development program.
Selling,
General and Administrative
Our
selling, general and administrative expenses, or SG&A, include salaries and
other expenses related to selling, marketing and proposal activities, and other
administrative costs. SG&A is an important financial metric that we
analyze to help us evaluate the contribution of our selling, marketing and
proposal activities to revenue generation.
Other
Income and Expenses
Other
income and expenses includes interest income and interest expense.
Income
Tax Expense
Beginning
in the fiscal year ended April 30, 2005, our effective tax rates were
substantially lower than the statutory rates primarily due to research and
development tax credits. The federal research and development tax credit expired
in December 2005, but was reinstated for two years beginning retroactively
on January 1, 2006.
Critical
Accounting Policies and Estimates
Management's
Discussion and Analysis of Financial Condition and Results of Operations
discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S.. When
we
prepare these consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Some of our accounting policies require that we
make subjective judgments, including estimates that involve matters that are
inherently uncertain. Our most critical estimates include those related to
revenue recognition, inventories and reserves for excess and obsolescence,
our
supplemental executive retirement plan, self-insured liabilities, accounting
for
stock-based awards, and income taxes. We base our estimates and judgments on
historical experience and on various other factors that we believe to be
reasonable under the circumstances, the results of which form the basis for
our
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Our actual results may differ from these
estimates under different assumptions or conditions.
We
believe the following critical accounting estimates affect our more significant
judgments and estimates used in preparing our consolidated financial statements.
See Note 1 of the Notes to Consolidated Financial Statements for our
Organization and Significant Accounting Policies. There have been no material
changes made to the critical accounting estimates during the periods presented
in the consolidated financial statements.
Revenue
Recognition
Significant
management judgments and estimates must be made and used in connection with
the
recognition of revenue in any accounting period. Material differences in the
amount of revenue in any given period may result if these judgments or estimates
prove to be incorrect or if management's estimates change on the basis of
development of the business or market conditions.
The
substantial majority of our revenue is generated pursuant to written contractual
arrangements to design, develop, manufacture and/or modify complex products,
and
to provide related engineering, technical and other services according to
customer specifications. These contracts may be fixed-price or
cost-reimbursable. We consider all contracts for treatment in accordance with
Financial Accounting Standards Board Emerging Issues Task Force No. 00-21,
"Revenue Arrangements with Multiple Deliverables," or EITF 00-21. EITF 00-21
provides for deferral to
higher
authoritative guidance, including American Institute of Certified Public
Accountants Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, " or SOP 81-1,
under which the majority of our contracts are properly accounted for. Contracts
which provide for multiple deliverables to which SOP 81-1 does not apply
are accounted for in accordance with the provisions of EITF 00-21.
Revenue
from product sales not under contractual arrangement is recognized at the
time
title and the risk and rewards of ownership pass, which typically occurs
when
the products are shipped and collection is reasonably
assured.
Revenue
and profits on fixed-price contracts are recognized using
percentage-of-completion methods of accounting. Revenue and profits on
fixed-price production contracts, whose units are produced and delivered in
a
continuous or sequential process, are recorded as units are delivered based
on
their selling prices, or the units-of-delivery method. Revenue and profits
on
other fixed-price contracts with significant engineering as well as production
requirements are recorded based on the ratio of total actual incurred costs
to
date to the total estimated costs for each contract, or the cost-to-cost method.
Under percentage-of-completion methods of accounting, a single estimated total
profit margin is used to recognize profit for each contract over its entire
period of performance, which can exceed one year. Accounting for revenue and
profits on a fixed-price contract requires the preparation of estimates of
(1) the total contract revenue, (2) the total costs at completion,
which is equal to the sum of the actual incurred costs to date on the contract
and the estimated costs to complete the contract's statement of work and
(3) the measurement of progress towards completion. The estimated profit or
loss at completion on a contract is equal to the difference between the total
estimated contract revenue and the total estimated cost at completion. Under
the
units-of-delivery method, sales on a fixed-price type contract are recorded
as
the units are delivered during the period based on their contractual selling
prices. Under the cost-to-cost method, sales on a fixed-price type contract
are
recorded at amounts equal to the ratio of actual cumulative costs incurred
divided by total estimated costs at completion, multiplied by (A) the total
estimated contract revenue, less (B) the cumulative sales recognized in
prior periods. The profit recorded on a contract in any period using either
the
units-of-delivery method or cost-to-cost method is equal to (X) the current
estimated total profit margin multiplied by the cumulative sales recognized,
less (Y) the amount of cumulative profit previously recorded for the
contract. In the case of a contract for which the total estimated costs exceed
the total estimated revenue, a loss arises, and a provision for the entire
loss
is recorded in the period that it becomes evident. The unrecoverable costs
on a
loss contract that are expected to be incurred in future periods are recorded
in
the program cost.
Revenue
and profits on
cost-reimbursable type contracts are recognized as costs are incurred on the
contract, at an amount equal to the costs plus the estimated profit on those
costs. The estimated profit on a cost-reimbursable contract is generally fixed
or variable based on the contractual fee arrangement.
We
review
cost performance and estimates to complete at least quarterly and in many cases
more frequently. Adjustments to original estimates for a contract's revenue,
estimated costs at completion and estimated profit or loss are often required
as
work progresses under a contract, as experience is gained and as more
information is obtained, even though the scope of work required under the
contract may not change, or if contract modifications occur. The impact of
revisions in profit estimates for all types of contracts are recognized on
a
cumulative catch-up basis in the period in which the revisions are made. Amounts
representing contract change orders or claims are included in revenue only
when
they can be reliably estimated and their realization is probable. Incentives
or
penalties and awards applicable to performance on contracts are considered
in
estimating revenue and profit rates, and are recorded when there is sufficient
information to assess anticipated contract performance. Revenue on arrangements
that are not within the scope of SOP 81-1 are recognized in accordance with
the SEC Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements."
Inventories
and Reserve for Excess and Obsolescence
Our
policy for valuation of inventory, including the determination of obsolete
or
excess inventory, requires us to perform a detailed assessment of inventory
at
each balance sheet date, which includes a review of, among other factors, an
estimate of future demand for products within specific time horizons, valuation
of existing inventory, as well as product lifecycle and product development
plans. Inventory reserves are also provided to cover risks arising from
slow-moving items. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and
the estimated market value based on assumptions about future demand and market
conditions. We may be required to record additional inventory write-downs
if actual market conditions are less favorable than those projected by our
management.
Supplemental
Executive Retirement Plan Obligation
We
maintained a supplemental executive retirement plan, or SERP, which is a
non-qualified defined benefit plan for Dr. MacCready, our founder and
Chairman of our board of directors until January 23, 2007. The plan was
non-contributory and non-funded. Pension expense was determined using various
actuarial cost methods to estimate the total benefits ultimately payable to
the plan beneficiary, and this amount was accrued as a liability on our balance
sheet until termination of the SERP. We reviewed the actuarial assumptions
used
to calculate pension costs annually. In January, the SERP terminated without
any
payment or promise of future payment to Dr. MacCready, which resulted in a
reversal of the related accrued expense of approximately $2.2 million for
the fiscal year ended April 30, 2007.
Self-Insured
Liability
We
are
self-insured for employee medical claims, subject to individual and aggregate
stop-loss policies. We estimate a liability for claims filed and incurred but
not reported claims based upon recent claims experience and an analysis of
the
average period of time between the occurrence of a claim and the time it is
reported to and paid by us. We perform an annual evaluation of this policy
and
have determined that for all prior years during which this policy has been
in
effect there have been cost advantages to this policy, as compared to obtaining
commercially available employee medical insurance. However, actual results
may
differ materially from those estimated and could have a material impact on
our
consolidated financial statements.
Income
Taxes
We
are
required to estimate our income taxes, which includes estimating our current
income taxes as well as measuring the temporary differences resulting from
different treatment of items for tax and accounting purposes. We currently
have
significant deferred assets, which are subject to periodic recoverability
assessments. Realizing our deferred tax assets principally depends on our
achieving projected future taxable income. We may change our judgments regarding
future profitability due to future market conditions and other factors, which
may result in recording a valuation allowance against those deferred tax
assets.
Fiscal
Periods
Our
fiscal year ends on April 30 and our fiscal quarters end on the last Saturday
of
July, October and January.
Results
of Operations
The
following table sets forth certain historical consolidated income statement
data
expressed in dollars (in thousands) and as a percentage of revenue for the
periods indicated. Certain amounts may not calculate due to
rounding.
|
|
|
Fiscal
Year Ended April 30,
|
|
|||||||||||||||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
||||||||||||||||||||||||
|
Revenue
|
|
$
|
173,721
|
|
|
|
100%
|
|
|
$
|
139,357
|
|
|
|
100%
|
|
|
$
|
105,155
|
|
|
|
100%
|
|
|
Cost
of sales
|
|
|
105,239
|
|
|
|
61%
|
|
|
|
82,598
|
|
|
|
59%
|
|
|
|
58,549
|
|
|
|
56%
|
|
|
Gross
margin
|
|
|
68,482
|
|
|
|
39%
|
|
|
|
56,759
|
|
|
|
41%
|
|
|
|
46,606
|
|
|
|
44%
|
|
|
Research
and development
|
|
|
13,940
|
|
|
|
8%
|
|
|
|
16,098
|
|
|
|
12%
|
|
|
|
9,799
|
|
|
|
9%
|
|
|
Selling,
general and administrative
|
|
|
24,041
|
|
|
|
14%
|
|
|
|
24,810
|
|
|
|
18%
|
|
|
|
16,733
|
|
|
|
16%
|
|
|
Income
from operations
|
|
|
30,501
|
|
|
|
18%
|
|
|
|
15,851
|
|
|
|
12%
|
|
|
|
20,074
|
|
|
|
19%
|
|
|
Interest
income
|
|
|
1,707
|
|
|
|
1%
|
|
|
|
333
|
|
|
|
0%
|
|
|
|
61
|
|
|
|
0%
|
|
|
Interest
expense
|
|
|
(6
|
)
|
|
|
0%
|
|
|
|
(127
|
)
|
|
|
0%
|
|
|
|
(110
|
)
|
|
|
0%
|
|
|
Income
before income taxes
|
|
|
32,202
|
|
|
|
19%
|
|
|
|
16,057
|
|
|
|
12%
|
|
|
|
20,025
|
|
|
|
19%
|
|
|
Income
tax expense
|
|
|
11,484
|
|
|
|
7%
|
|
|
|
4,849
|
|
|
|
3%
|
|
|
|
5,455
|
|
|
|
5%
|
|
|
Net
income
|
|
$
|
20,718
|
|
|
|
12%
|
|
|
$
|
11,208
|
|
|
|
8%
|
|
|
$
|
14,570
|
|
|
|
14%
|
|
Our
operating segments are UAS, PosiCharge Systems and our Energy Technology Center.
The accounting policies for each of these segments are the same. In addition,
a
significant portion of our research and development, selling, general and
administrative, and general overhead resources are shared across our
segments.
The
following table sets forth our revenue and gross margin generated by each
operating segment for the periods indicated:
|
|
|
Fiscal
Year Ended April 30,
|
|
||||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
|
(In
thousands)
|
|||||||||||
|
|
|||||||||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAS
|
|
$
|
146,538
|
|
|
$
|
111,104
|
|
|
$
|
82,249
|
|
|
|
PosiCharge
Systems
|
|
|
17,575
|
|
|
|
19,928
|
|
|
|
15,642
|
|
|
|
Energy
Technology Center
|
|
|
9,608
|
|
|
|
8,325
|
|
|
|
7,264
|
|
|
|
Total
|
|
$
|
173,721
|
|
|
$
|
139,357
|
|
|
$
|
105,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAS
|
|
$
|
57,591
|
|
|
$
|
44,558
|
|
|
$
|
37,235
|
|
|
|
PosiCharge Systems
|
|
|
6,096
|
|
|
|
8,062
|
|
|
|
5,846
|
|
|
|
Energy
Technology Center
|
|
|
4,795
|
|
|
|
4,139
|
|
|
|
3,525
|
|
|
|
Total
|
|
$
|
68,482
|
|
|
$
|
56,759
|
|
|
$
|
46,606
|
|
|
Fiscal
Year Ended April 30, 2007 Compared to Fiscal Year Ended April 30,
2006
Revenue.
Revenue for the fiscal year ended April 30, 2007 was $173.7 million, as
compared to $139.4 million for the fiscal year ended April 30, 2006,
representing an increase of $34.3 million, or 25%. UAS revenue increased
$35.4 million to $146.5 million for the fiscal year ended April 30,
2007, largely due to increases in UAS product sales, services and
customer-funded R&D. The increase in product
sales resulted from higher manufacturing volume associated with our progression
to full-rate production resulting from the completion of customer testing and
evaluation of our Raven B product. PosiCharge Systems revenue decreased
by $2.3 million to $17.6 million for the fiscal year ended April 30,
2007, primarily due to a reduction in installations of our PosiCharge Systems
products among automotive customers. Energy Technology Center revenue
increased by $1.3 million to $9.6 million in the fiscal year ended
April 30, 2007, primarily due to higher sales of power processing test
equipment.
Cost
of Sales. Cost of sales for the fiscal year ended April 30, 2007
was $105.2 million, as compared to $82.6 million for the fiscal year ended
April 30, 2006, representing an increase of $22.6 million, or 27%. The
increase in cost of sales was caused primarily by higher UAS cost of sales
of
$22.4 million and higher Energy Technology Center cost of sales of $0.6
million, partially offset by lower PosiCharge Systems cost of sales of
$0.4 million. The increase in UAS cost of sales was largely due to growth
in our UAS product deliveries, increased logistics services, and an increase
in
customer-funded Research and Development. The increase in Energy
Technology Center cost of sales primarily reflects an increase in sales of
our
power processing test equipment.
Gross
Margin. Gross margin for the fiscal year ended April 30, 2007 was
$68.5 million, as compared to $56.7 million for the fiscal year ended
April 30, 2006, representing an increase of $11.8 million, or 21%. As a
percentage of revenue, gross margin decreased from 41% to
39%. UAS gross margin increased $13.0 million to $57.6 million
for the fiscal year ended April 30, 2007. As a percentage of revenue, gross
margin for UAS decreased from 40% to 39%. PosiCharge Systems gross
margin decreased $2.0 million to $6.1 million for the fiscal year
ended April 30, 2007, due to lower sales volume and higher manufacturing support
costs. As a percentage of revenue, PosiCharge Systems
gross margin decreased from 41% to 35%. Energy Technology Center gross
margin increased $0.7 million to $4.8 million for the fiscal year
ended April 30, 2007, primarily due to higher sales of power processing test
equipment. As a percentage of revenue, Energy Technology Center gross margin
was
50% for the fiscal years ended April 30, 2007 and April 30, 2006.
Research
and Development. R&D expense for the fiscal year ended April
30, 2007 was $13.9 million, or 8% of revenue, which was lower than R&D
expense of $16.1 million, or 12% of revenue, for the fiscal year ended
April 30, 2006 primarily due to a shift of engineering resources to
customer-funded R&D work. Customer-funded R&D work for the
fiscal year ended April 30, 2007 increased $7.7 million, or 66%, to $19.4
million.
Selling,
General and Administrative. SG&A expense for the fiscal year
ended April
30,
2007 was $24.0 million,
or 14% of revenue, which included the reversal of expenses associated with
the
SERP of $2.2 million. Excluding the effect of the SERP on SG&A for
both fiscal years, SG&A expense increased to $26.2 million, or 15%
of
revenue for our fiscal year ended April 30, 2007, compared to SG&A expense
of $22.6 million, or 16% of revenue, in the fiscal year ended April 30,
2006. The increase in SG&A expense of $3.7 million was caused primarily
by the addition of administrative and marketing infrastructure necessary to
continue to grow our business.
Income
Tax Expense. Our effective income tax rate was 35.7% for the
fiscal year ended April 30, 2007, as compared to 30.2% for the fiscal year
ended
April 30, 2006. This increase was largely due to lower federal research and
development tax credits as a percentage of revenue.
Fiscal
Year Ended April 30, 2006 Compared to Fiscal Year Ended April 30,
2005
Revenue. Revenue
for the fiscal year ended April 30, 2006 was $139.4 million, as
compared to $105.2 million for the fiscal year ended April 30, 2005,
representing an increase of $34.2 million, or 33%. UAS revenue increased
$28.9 million to $111.1 million for the fiscal year ended
April 30, 2006, largely due to the continued growth of our logistics
operations, which were launched in the fiscal year ended April 30, 2005 and
accounted for $20.1 million of the increase in UAS revenue. The remaining
increase in UAS revenue of $8.8 million was due to an increase in product
sales. PosiCharge Systems revenue increased by $4.3 million to
$19.9 million for the fiscal year ended April 30, 2006 primarily due
to acceptance of PosiCharge into multiple facilities operated by one of our
existing customers. Energy Technology Center revenue increased by
$1.1 million to $8.3 million in the fiscal year ended April 30,
2006, primarily due to an increase in sales of power processing test
equipment.
Cost
of Sales. Cost of sales for the fiscal year ended
April 30, 2006 was $82.6 million, as compared to $58.5 million
for the fiscal year ended April 30, 2005, representing an increase of
$24.1 million, or 41%. The increase in cost of sales was caused by higher
UAS cost of sales of $21.5 million, higher PosiCharge Systems cost of sales
of $2.1 million, and higher Energy Technology Center cost of sales of
$0.4 million. The increase in UAS cost of sales was largely due to a full
year of our logistics activities. The increase in PosiCharge Systems cost of
sales was primarily due to the continued adoption of our fast charge
systems.
Gross
Margin. Gross margin for the fiscal year ended
April 30, 2006 was $56.8 million, as compared to $46.6 million
for the fiscal year ended April 30, 2005, representing an increase of
$10.2 million, or 22%. UAS gross margin increased $7.3 million to
$44.6 million for the fiscal year ended April 30, 2006. As a
percentage of revenue, gross margin for UAS decreased from 45% to 40%, largely
due to a reduction in pricing on UAS production orders in the fiscal year ended
April 30, 2006 and an increase in cost-plus-fee contracts relative to
fixed-price contracts, the former of which tend to have lower gross margins,
as
described more fully in "Government Contracting Process." The lower pricing
also
reflected the pass-through of manufacturing cost efficiencies to our customers.
PosiCharge Systems gross margin increased $2.2 million to $8.1 million
for the fiscal year ended April 30, 2006, due to the increase in sales
volume. As a percentage of revenue, PosiCharge Systems gross margin increased
from 37% to 40% for the fiscal year ended April 30, 2006, due to the
achievement of direct and indirect cost efficiencies coincident with higher
sales volume. Energy Technology Center gross margin increased $0.6 million
to $4.1 million for the fiscal year ended April 30, 2006, primarily
due to increased sales of power processing test equipment. As a percentage
of
revenue, Energy Technology Center gross margin increased from 49% to 50% for
the
fiscal year ended April 30, 2006, primarily due to the higher sales mix of
equipment sales compared to customer-funded research and development
work.
Research
and Development. R&D expense for the fiscal year
ended April 30, 2006 was $16.1 million (or 12% of revenue), compared
to R&D expense of $9.8 million (or 9% of revenue) for the fiscal year
ended April 30, 2005. The increase in R&D expense reflected our
investment in improvement and expansion of existing product lines and
development of new product opportunities.
Selling,
General and
Administrative. SG&A
expense for the fiscal year ended April 30, 2006 was $24.8 million (or
18% of revenue), compared to SG&A expense of $16.7 million (or 16% of
revenue) in the fiscal year ended April 30, 2005. The increase in SG&A
expense of $8.1 million was caused primarily by the added administrative
and marketing infrastructure necessary to support the growth in our business
volume and to enhance the documentation of our internal controls. Further,
the
increase in SG&A expense partially reflects the lag in SG&A
infrastructure growth relative to the revenue growth we experienced in the
fiscal year ended April 30, 2005. As a percentage of revenue, SG&A
expense increased to 18% in the fiscal year ended April 30, 2006, primarily
due to the establishment of a supplemental executive retirement plan for
Dr. MacCready, our founder and Chairman of our board of directors. The
expense associated with this plan was $2.2 million (or 2% of revenue) in
2006.
Income
Tax Expense. Our effective income tax rate was 30.2%
for the fiscal year ended April 30, 2006, as compared to 27.2% for the
fiscal year ended April 30, 2005. The increase was due to a reduction in
the federal research and development tax credit computed based on the expiration
of the tax credit on December 31, 2005. The
tax
credit was reinstated for two years beginning retroactively on January 1,
2006. Consequently, we made an adjustment to our effective tax rate in the
fiscal period during which the tax credit was reinstated, the quarter ended
January 27, 2007.
Liquidity
and Capital Resources
We
currently have no material cash commitments, except for normal recurring trade
payables, accrued expenses and ongoing research and development costs, all
of
which we anticipate funding through our existing working capital, funds provided
by operating activities and our working capital line of credit. The majority
of
our purchase obligations are pursuant to funded contractual arrangements with
our customers. In addition, we do not currently anticipate
significant investment in property, plant and equipment, and we believe
that our existing cash, cash equivalents, cash provided by operating activities,
funds available through our working capital line of credit and other financing
sources will be sufficient to meet our anticipated working capital, capital
expenditure and debt service requirements, if any, during the next twelve
months. There can be no assurance, however, that our business will continue
to
generate cash flow at current levels. If we are unable to generate sufficient
cash flow from operations, then we may be required to sell assets, reduce
capital expenditures or obtain additional financing.
Our
primary liquidity needs are for financing working capital, investing in capital
expenditures, supporting product development efforts, introducing new products
and enhancing existing products, and marketing acceptance and adoption of our
products and services. Our future capital requirements, to a certain extent,
are
also subject to general conditions in or affecting the defense industry and
are
subject to general economic, political, financial, competitive, legislative
and
regulatory factors that are beyond our control. Moreover, to the extent that
existing cash, cash equivalents, cash from operations, and cash from short-term
borrowing are insufficient to fund our future activities, we may need to raise
additional funds through public or private equity or debt financing. Although
we
are currently not a party to any agreement or letter of intent with respect
to
potential investment in, or acquisitions of, businesses, services or
technologies, we may enter into these types of arrangements in the future,
which
could also require us to seek additional equity or debt financing.
Our
working capital requirements vary by contract type. On cost-plus-fee programs,
we typically bill our incurred costs and fees monthly as work progresses, and
therefore working capital investment is minimal. On fixed-price contracts,
we
typically are paid as we deliver products, and working capital is needed to
fund
labor and expenses incurred during the lead time from contract award until
contract deliveries begin.
Cash
Flows
The
following table provides our cash flow data as of:
|
|
|
Fiscal
Year Ended April 30,
|
|
|||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
|
(In
thousands)
|
||||||||||
|
Net
cash provided by operating activities
|
|
$
|
15,022
|
|
|
$
|
13,353
|
|
|
$
|
8,644
|
|
|
Net
cash used in investing activities
|
|
$
|
91,348
|
|
$
|
4,190
|
|
$
|
3,533
|
|||
|
Net
cash provided by (used in) financing activities
|
|
$
|
81,858
|
|
|
$
|
(3,835
|
)
|
|
$
|
1,639
|
|
Cash
Provided by Operating Activities. Net cash provided by operating
activities for the fiscal year ended April 30, 2007 increased by
$1.6 million to $15.0 million, compared to net cash provided by
operating activities of $13.4 million for the fiscal year ended April 30,
2006. This increase in net cash provided by operating activities was primarily
due to higher net income of $9.5 million, lower deferred taxes of $2.3 million,
and higher depreciation costs of $0.9 million partially offset by increased
working capital needs of $6.8 million and the reversal of the prior year SERP
of
$4.4 million.
Net
cash
provided by operating activities for the fiscal year ended April 30, 2006
increased by $4.8 million to $13.4 million, compared to
$8.6 million for the fiscal year ended April 30, 2005. The increase in
net cash provided by operating activities was primarily due to improved working
capital of $9.2 million, an accrual for long-term retirement costs of
$2.2 million and increased depreciation and amortization of
$0.9 million, partially offset by lower net income of $3.3 million.
Accounts receivable was higher at April 30, 2006 than at April 30,
2005, primarily due to overall higher sales volume for the fiscal year ended
April 30, 2006. Inventories were roughly the same at April 30, 2006
and at April 30, 2005.
Cash
Used in Investing Activities. Net cash used in investing
activities was $91.3 million for the fiscal year ended April 30, 2007, compared
to $4.2 million for the fiscal year ended April 30, 2006. During the fiscal
year ended April 30, 2007, we invested cash in tax-exempt municipal securities
totaling $88.3 million. In addition, during the fiscal year ended
April 30, 2007 and April 30, 2006, we used cash to purchase property and
equipment totaling $3.0 million and $4.2 million, respectively.
Net
cash
used in investing activities increased $0.7 million to $4.2 million
for the fiscal year ended April 30, 2006, compared to $3.5 million for
the fiscal year ended April 30, 2005. The increase in net cash used in
investing activities was primarily due to increased purchases of property and
equipment of $0.6 million, primarily for the expansion of our UAS
business.
Cash
Provided by Financing Activities. Net
cash provided by financing activities increased $85.7 million to
$81.9 million for the fiscal year ended April 30, 2007, compared to net
cash used by financing activities of $3.8 million for the fiscal year ended
April 30, 2006. During the fiscal year ended April 30, 2007, we
received net proceeds from our initial public offering of $80.5 million.
Long-term debt payments, net of borrowings, during the fiscal year ended April
30, 2007 decreased by $2.5 million, compared to the fiscal year ended April
30, 2006. In addition, we fulfilled the delivery terms outlined in a standby
letter of credit that allowed us to release $1.1 million of restricted
cash.
Net
cash
used in financing activities increased $5.4 million to $3.8 million
for the fiscal year ended April 30, 2006, compared to net cash provided by
financing activities of $1.6 million for the fiscal year ended
April 30, 2005. The increase in net cash used in financing activities was
primarily due to paying down our long term debt of $2.0 million and the
transfer of $1.5 million to restricted cash to secure standby letters of
credit established for the benefit of our customers, partially offset by no
debt
borrowings and a decrease of $0.6 million received from stock option
exercises. At April 30, 2006, as a result of our strategy to pay down debt,
we had no long term debt.
Line
of Credit and Term Loan Facilities
We
have a
revolving line of credit with a bank, under which we may borrow up to
$16.5 million. Borrowings bear interest at the bank's prime commercial
lending rate, which was 8.25% as of April 30, 2007. The line of credit is
secured by substantially all of our assets. All principal plus accrued but
unpaid interest on the line of credit is due August 31, 2007. We had no
outstanding balance on the line of credit as of April 30, 2007.
Contractual
Obligations
The
following table describes our commitments to settle contractual obligations
as
of April 30, 2007:
|
|
|
Payments
Due By Period
|
|
|||||||||||||||||
|
|
Total
|
|
|
Less
Than
1 Year
|
|
|
1
to 3 Years
|
|
|
3
to 5 Years
|
|
|
More
Than
5 Years
|
|||||||
|
|
|
(In
thousands)
|
|
|||||||||||||||||
|
|
||||||||||||||||||||
|
Operating
lease obligations
|
|
$
|
9,016
|
|
|
$
|
2,646
|
|
|
$
|
4,268
|
|
|
$
|
1,961
|
|
|
$
|
141
|
|
|
Purchase
obligations(1)
|
|
|
24,288
|
|
|
|
24,288
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,304
|
|
|
$
|
26,934
|
|
|
$
|
4,268
|
|
|
$
|
1,961
|
|
|
$
|
141
|
|
|
(1)
|
Consists
of all non-cancelable purchase orders as of April 30,
2007.
|
We
have
entered into standby letter-of-credit agreements and bank guarantee agreements
with financial institutions and customers primarily relating to the guarantee
of
our future performance on certain contracts to provide products and services
and
to secure advance payments we have received from certain international
customers. As of April 30, 2007, we had standby letters of credit totaling
$389,000 without any claims against such letters of credit. These letters of
credit expire upon release by the customer.
Off-Balance
Sheet Arrangements
As
of
April 30, 2007, we had no off-balance sheet arrangements as defined in
Item 303(a)(4) of the SEC's Regulation S-K.
Inflation
Our
operations have not been, and we do not expect them to be, materially affected
by inflation. Historically, we have been successful in adjusting prices to
our
customers to reflect changes in our material and labor costs.
New
Accounting Standards
In
February 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 155, Accounting for
Certain Hybrid Financial Instruments, or SFAS 155. SFAS 155
establishes, among other things, the accounting for certain derivatives embedded
in other financial instruments. This statement permits fair value remeasurement
for any hybrid financial instrument containing an embedded derivative that
would
otherwise require bifurcation. It also requires that beneficial interests in
securitized financial assets be accounted for in accordance with SFAS 133.
SFAS
155 is effective for fiscal years beginning after September 15, 2006, and
is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows.
In
July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes — an interpretation of FASB
Statement No. 109, or FIN 48, which clarifies what criteria must be
met prior to recognition of the financial statement benefit of a position taken
in a tax return. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Also, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosure, and transition. The adoption of FIN 48 will be
effective for years beginning after December 15, 2006, and we will be
required to adopt FIN 48 on May 1, 2007. We do not anticipate the adoption
of
FIN 48 will have a material effect on our consolidated financial position,
results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, or SFAS 157, which provides enhanced guidance for using fair
value to measure assets and liabilities. The standard also expands the amount
of
disclosure regarding the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair
value but does not expand the use of fair value in any new circumstances. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. We do not anticipate the adoption of SFAS 157 will have a
material effect on our consolidated financial position, results of
operations and cash flows.
In
February 2007, the FASB issued, SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, or SFAS 159, which is effective
as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a
fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of SFAS 157. We do not anticipate
the adoption of SFAS 159 will have a material effect on our consolidated
financial position, results of operations or cash flows
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Interest
Rate Risk
It
is our
policy not to enter into interest rate derivative financial instruments. We
do
not currently have any significant interest rate exposure.
Foreign
Currency Exchange Rate Risk
Since
a
significant part of our sales and expenses are denominated in U.S. dollars,
we have not experienced significant foreign exchange gains or losses to date,
and do not expect to incur significant foreign exchange gains or losses in
the
future. We occasionally engage in forward contracts in foreign currencies to
limit our exposure on non-U.S. dollar transactions.
|
Financial
Statements and Supplementary
Data.
|
AeroVironment,
Inc.
Audited
Consolidated Financial Statements
Index
to Consolidated Financial Statements and Supplementary
Data
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
43
|
|
Consolidated
Balance Sheets at April 30, 2007 and 2006
|
44
|
|
Consolidated
Statements of Income for the Years Ended April 30, 2007, 2006
and
2005
|
45
|
|
Consolidated
Statements of Stockholders' Equity for the Years Ended April
30, 2007,
2006 and 2005
|
46
|
|
Consolidated
Statements of Cash Flows for the Years Ended April 30, 2007,
2006, and
2005
|
47
|
|
Notes
to Consolidated Financial Statements
|
48
|
|
Quarterly
Results of Operations (Unaudited)
|
62
|
Supplementary
Data
|
Financial
Statement Schedule: Schedule II – Valuation and Qualifying
Accounts
|
63
|
All
other schedules are omitted because they are not applicable, not required or
the
information required is included in the Consolidated Financial Statements,
including the notes thereto.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders of
AeroVironment,
Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of AeroVironment, Inc.
and
subsidiaries as of April 30, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended April 30, 2007. Our audits also included the
financial statement schedule listed in the Index at Item 15(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform
an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AeroVironment,
Inc. and subsidiaries at April 30, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years
in
the period ended April 30, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, AeroVironment,
Inc. and subsidiaries changed their method of accounting for Share-Based
Payment in accordance with Statement of Financial Accounting Standards No.
123
(revised 2004) on May 1, 2006.
| /s/ Ernst & Young LLP | |
| Los Angeles, California | |
| June 27, 2007 | |
AEROVIRONMENT,
INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands except share data)
|
|
|
April 30,
|
|
|||||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
||||||||
|
Assets
|
||||||||
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
20,920
|
|
|
$
|
15,388
|
|
|
Restricted
cash
|
|
|
389
|
|
|
|
1,532
|
|
|
Short-term
investments
|
88,325
|
—
|
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $149
at April 30,
2007 and $86 at April 30, 2006
|
|
|
7,691
|
|
|
|
21,582
|
|
|
Unbilled
receivables and retentions
|
|
|
26,494
|
|
|
|
4,843
|
|
|
Inventories,
net
|
|
|
14,015
|
|
|
|
11,453
|
|
|
Deferred
income taxes
|
|
|
1,730
|
|
|
|
1,261
|
|
|
Prepaid
expenses and other current assets
|
|
|
1,504
|
|
|
|
621
|
|
|
Total
current assets
|
|
|
161,068
|
|
|
|
56,680
|
|
|
Property
and equipment, net
|
|
|
6,229
|
|
|
|
6,098
|
|
|
Deferred
income taxes
|
|
|
761
|
|
|
|
2,053
|
|
|
Other
assets
|
|
|
119
|
|
|
|
119
|
|
|
Total
assets
|
|
$
|
168,177
|
|
|
$
|
64,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
||||||||
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
16,024
|
|
|
$
|
8,521
|
|
|
Wages
and related accruals
|
|
|
8,942
|
|
|
|
8,450
|
|
|
Customer
advances
|
|
|
139
|
|
|
|
9,031
|
|
|
Income
taxes payable
|
4,564
|
—
|
||||||
|
Other
current liabilities
|
|
|
1,544
|
|
|
|
2,028
|
|
|
Total
current liabilities
|
|
|
31,213
|
|
|
|
28,030
|
|
|
Deferred
rent
|
|
|
541
|
|
|
|
408
|
|
|
Long-term
retirement costs
|
|
|
—
|
|
|
|
2,209
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value:
|
||||||||
|
Authorized
shares —
10,000,000;
none issued or outstanding
|
||||||||
|
Common
stock, $0.0001 par value:
|
|
|
|
|
|
|
|
|
|
Authorized
shares — 100,000,000
|
|
|
|
|||||
|
Issued
and outstanding shares — 18,875,957 shares at April 30, 2007 and
13,283,770 at April 30, 2006
|
|
|
2
|
|
|
|
—
|
|
|
Additional
paid-in capital
|
83,611
|
2,211
|
||||||
|
Retained
earnings
|
|
|
52,810
|
|
|
|
32,092
|
|
|
Total
stockholders' equity
|
|
|
136,423
|
|
|
|
34,303
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
168,177
|
|
|
$
|
64,950
|
|
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands except share and per share data)
|
|
Year
Ended April 30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
||||||||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
116,361
|
|
|
$
|
98,664
|
|
|
$
|
85,291
|
|
|
Contract
services
|
|
|
57,360
|
|
|
|
40,693
|
|
|
|
19,864
|
|
|
|
|
|
173,721
|
|
|
|
139,357
|
|
|
|
105,155
|
|
|
Cost
of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
|
67,410
|
|
|
|
55,483
|
|
|
|
39,123
|
|
|
Contract
services
|
|
|
37,829
|
|
|
|
27,115
|
|
|
|
19,426
|
|
|
|
|
|
105,239
|
|
|
|
82,598
|
|
|
|
58,549
|
|
|
Gross
margin
|
|
|
68,482
|
|
|
|
56,759
|
|
|
|
46,606
|
|
|
Research
and development
|
|
|
13,940
|
|
|
|
16,098
|
|
|
|
9,799
|
|
|
Selling,
general and administrative
|
|
|
24,041
|
|
|
|
24,810
|
|
|
|
16,733
|
|
|
Income
from operations
|
|
|
30,501
|
|
|
|
15,851
|
|
|
|
20,074
|
|
|
Other
income (expense)
|
||||||||||||
|
Interest
income
|
|
|
1,707
|
|
|
|
333
|
|
|
|
61
|
|
|
Interest
expense
|
|
|
(6
|
)
|
|
|
(127
|
)
|
|
|
(110
|
)
|
|
Income
before income taxes
|
|
|
32,202
|
|
|
|
16,057
|
|
|
|
20,025
|
|
|
Provision
for income taxes
|
|
|
11,484
|
|
|
|
4,849
|
|
|
|
5,455
|
|
|
Net
income
|
|
$
|
20,718
|
|
|
$
|
11,208
|
|
|
$
|
14,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.39
|
|
|
$
|
0.86
|
|
|
$
|
1.15
|
|
|
Diluted
|
|
$
|
1.22
|
|
|
$
|
0.75
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,946,502
|
|
|
|
13,011,639
|
|
|
|
12,674,585
|
|
|
Diluted
|
|
|
16,992,012
|
|
|
|
14,873,651
|
|
|
|
13,847,223
|
|
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In
thousands except share data)
|
|
|
Common
Stock
|
Additional
|
Retained
|
|
|
||||||||||||||
|
|
|
Shares
|
|
|
Amount
|
Paid-In
Capital
|
Earnings
|
|
|
Total
|
|
|||||||||
|
|
||||||||||||||||||||
|
Balance
at April 30, 2004
|
|
|
11,554,301
|
|
|
|
—
|
|
$
|
1,200
|
$
|
6,314
|
|
$
|
7,514
|
|
||||
|
Stock
options exercised
|
|
|
1,568,303
|
|
|
|
—
|
|
780
|
—
|
|
|
780
|
|
||||||
|
Stock
repurchased
|
|
|
(184,742
|
)
|
|
|
—
|
(141
|
)
|
—
|
|
|
(141
|
)
|
||||||
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
—
|
14,570
|
|
|
14,570
|
|
||||||
|
Balance
at April 30, 2005
|
|
|
12,937,862
|
|
|
|
—
|
|
1,839
|
20,884
|
|
|
22,723
|
|
||||||
|
Stock
options exercised
|
|
|
345,908
|
|
|
|
—
|
|
197
|
—
|
|
|
197
|
|
||||||
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
175
|
—
|
|
|
175
|
|
||||||
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
—
|
11,208
|
|
|
11,208
|
|
||||||
|
Balance
at April 30, 2006
|
|
|
13,283,770
|
|
|
|
—
|
|
2,211
|
32,092
|
|
|
34,303
|
|
||||||
|
Stock
options exercised
|
|
|
346,939
|
|
|
|
—
|
|
220
|
—
|
|
|
220
|
|
||||||
|
Tax
benefit from exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
629
|
—
|
|
|
629
|
|
||||||
|
Stock
repurchased
|
|
|
(7,037
|
)
|
|
|
—
|
|
—
|
—
|
|
|
—
|
|
||||||
|
Stock
based compensation
|
|
|
—
|
|
|
|
—
|
|
58
|
—
|
|
|
58
|
|
||||||
|
Issuance
of stock in initial public offering, net
of offering costs
|
|
|
5,252,285
|
|
|
|
2
|
|
80,493
|
—
|
|
|
80,495
|
|
||||||
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
—
|
20,718
|
|
|
20,718
|
|
||||||
|
Balance
at April 30, 2007
|
|
|
18,875,957
|
|
|
2
|
|
$
|
83,611
|
$
|
52,810
|
|
$
|
136,423
|
|
|||||
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
ended April 30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
||||||||||||
|
Operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,718
|
|
$
|
11,208
|
|
|
$
|
14,570
|
|
|
|
Adjustments
to reconcile net income to net cash and cash equivalents provided
by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Depreciation
and amortization
|
|
|
2,897
|
|
|
1,999
|
|
|
|
1,053
|
|
|
|
Long-term
retirement costs
|
|
|
(2,209
|
)
|
|
|
2,209
|
|
|
|
—
|
|
|
Provision
for doubtful accounts
|
|
|
63
|
|
|
|
(2
|
)
|
|
|
53
|
|
|
Deferred
income taxes
|
823
|
(1,457
|
)
|
(754
|
)
|
|||||||
|
Stock-based
compensation
|
58
|
—
|
—
|
|||||||||
|
Tax
benefit from exercise of stock options
|
|
|
629
|
|
|
175
|
|
|
|
—
|
|
|
|
(Gain)
loss on disposition of property and equipment
|
|
|
(5
|
)
|
|
|
268
|
|
|
|
(4
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
||
|
Accounts
receivable
|
|
|
13,828
|
|
|
(2,202
|
)
|
|
|
(9,139
|
)
|
|
|
Unbilled
receivables and retentions
|
|
|
(21,651
|
)
|
|
|
(4,055
|
)
|
|
|
4,118
|
|
|
Inventories
|
|
|
(2,562
|
)
|
|
|
52
|
|
|
|
(6,824
|
)
|
|
Prepaid
expenses and other assets
|
|
|
(883
|
)
|
|
|
1,937
|
|
|
|
(2,220
|
)
|
|
Accounts
payable
|
|
|
7,503
|
|
|
(752
|
)
|
|
|
3,828
|
|
|
|
Customer
advances
|
|
|
(8,892
|
)
|
|
|
(701
|
)
|
|
|
4,614
|
|
|
Other
liabilities
|
|
|
4,705
|
|
|
4,674
|
|
|
|
(651
|
)
|
|
|
Net
cash and cash equivalents provided by operating activities
|
|
|
15,022
|
|
|
13,353
|
|
|
|
8,644
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
|
|
||
|
Acquisition
of property and equipment
|
|
|
(3,038
|
)
|
|
|
(4,190
|
)
|
|
|
(3,541
|
)
|
|
Purchase
of short-term investments
|
(249,450
|
)
|
—
|
—
|
||||||||
|
Sale
of short-term investments
|
161,125
|
—
|
—
|
|||||||||
|
Proceeds
from sale of property and equipment
|
|
|
15
|
|
|
—
|
|
|
|
8
|
|
|
|
Net
cash and cash equivalents used in investing activities
|
|
|
(91,348
|
)
|
|
|
(4,190
|
)
|
|
|
(3,533
|
)
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
|
|
||
|
Transfer
from (to) restricted cash
|
|
|
1,143
|
|
|
(1,532
|
)
|
|
|
—
|
|
|
|
Repayments
of line of credit
|
(6,232
|
)
|
—
|
—
|
||||||||
|
Proceeds
from line of credit
|
6,232
|
—
|
—
|
|||||||||
|
Payment
of long-term debt
|
|
|
—
|
|
|
(2,500
|
)
|
|
|
(500
|
)
|
|
|
Proceeds
from long-term debt
|
|
|
—
|
|
|
—
|
|
|
|
1,500
|
|
|
|
Exercise
of stock options
|
|
|
220
|
|
|
197
|
|
|
|
780
|
|
|
|
Repurchase
of common stock
|
—
|
—
|
(141
|
)
|
||||||||
|
Net
proceeds from initial public offering
|
|
|
80,495
|
|
|
—
|
|
|
|
—
|
||
|
Net
cash and cash equivalents provided by (used in) financing
activities
|
|
|
81,858
|
|
|
(3,835
|
)
|
|
|
1,639
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
5,532
|
|
|
5,328
|
|
|
|
6,750
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
15,388
|
|
|
10,060
|
|
|
|
3,310
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$
|
20,920
|
|
$
|
15,388
|
|
|
$
|
10,060
|
|
|
|
Supplemental
disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6
|
|
|
$
|
139
|
|
|
$
|
93
|
|
|
Income
taxes
|
|
$
|
6,211
|
|
|
$
|
3,229
|
|
|
$
|
8,040
|
|
See
accompanying notes to consolidated financial statements.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Organization
and Significant Accounting
Policies
|
Organization
AeroVironment,
Inc., a Delaware corporation, is engaged in design, development and production
of unmanned aircraft systems and energy technologies for various industries
and
governmental agencies.
Significant
Accounting Policies
|
|
Principles
of Consolidation
|
The
accompanying consolidated financial statements include the accounts of
AeroVironment, Inc. and its wholly-owned subsidiaries: AV S.r.l., Skytower,
LLC,
Skytower Inc., AILC, Inc. and Regenerative Fuel Cell Systems, LLC (collectively
referred to herein as the "Company"). All intercompany balances and transactions
have been eliminated in consolidation.
|
|
Segments
|
The
Company's products are sold and divided among three reportable segments, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 131,
Disclosures about Segments of an Enterprise and Related Information, to
reflect the Company's strategic goals. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the Chief Operating Decision Maker
("CODM") in deciding how to allocate resources and in assessing performance.
The
Company's CODM is the Chief Executive Officer who reviews the revenue and gross
margin results for each of these segments in making decisions about allocating
resources, including the focus of research and development activities, and
assessing performance. The Company's reportable segments are business units
that
offer different products and services and are managed separately.
|
|
Use
of Estimates
|
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States requires management to
make
estimates and assumptions. These estimates and assumptions 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 revenue and expenses during the reporting period. Significant
estimates made by management include, but are not limited to, valuation of:
inventory, deferred tax assets and liabilities, useful lives of property, plant
and equipment, and estimates of anticipated contract costs and revenue utilized
in the revenue recognition process. Actual results could differ
from those estimates.
|
|
Cash
Equivalents
|
The
Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents. The
Company's cash equivalents are comprised of money market funds and certificates
of deposit of major financial institutions.
Investments
The
Company’s short-term investments are accounted for under Statement of Financial
Accounting Standard No. 115, Accounting for Certain Investments in Debt
and Equity Securities (“SFAS 115”) as available-for-sale and reported at
fair value which approximates cost.
As
of
April 30, 2007, the Company’s short-term investments consisted entirely of
investment grade auction rate municipal notes and bonds with maturities that
could range from 16 to 40 years. These investments have characteristics similar
to short-term investments, because at pre-determined intervals, generally
ranging from 7 to 35 days, there is a new auction process at which the interest
rates for these securities are reset to current interest rates.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At
the
end of such period, the Company chooses to roll-over its holdings or redeem
the
investments for cash. A market maker facilitates the redemption of the
securities and the underlying issuers are not required to redeem the investment
within 365 days.
Due
to
the frequent nature of the reset feature, the investment’s market price
approximates its fair value; there are no realized or unrealized gains or
losses
associated with these investments. Interest earned from short-term
investments is recorded in interest income.
Management
determines the appropriate classification of securities at the time of purchase
and re-evaluates such designation as of each balance sheet date.
|
|
Restricted
Cash
|
Restricted
cash of approximately $389,000 and $1,532,000, as of April 30, 2007 and
2006, respectively, represents deposits with a bank to secure standby letters
of
credit aggregating approximately $389,000 and $1,652,000, as of April 30,
2007 and 2006, respectively, established for the benefit of the Company's
customers. The restriction on cash will be released upon expiration of the
standby letters of credit. The standby letters of credit will expire when the
Company's customers provide product acceptance and release their interest in
the
letters of credit. As of April 30, 2007 and 2006, there were no
claims relevant to the letters of credit.
|
|
Fair
Values of Financial
Instruments
|
Fair
values of cash and cash equivalents, restricted cash, short-term investments,
accounts receivable, unbilled receivables and retentions approximate cost due
to
the short period of time to maturity.
|
|
Concentration
of Credit Risk
|
Financial
instruments that potentially subject the Company to concentration of credit
risk
consist primarily of accounts receivable. The Company's revenue and accounts
receivable are with a limited number of corporations and governmental entities.
In the aggregate, 80%, 77% and 74% of the Company's revenue came from agencies
of the U.S. government for the years ended April 30, 2007, 2006 and
2005, respectively. These agencies accounted for 52% and 77% of the accounts
receivable balances at April 30, 2007 and 2006, respectively. One such
agency, the U.S. Army, accounted for 56%, 54% and 43% of the Company's
consolidated revenue for the years ended April 30, 2007, 2006 and 2005
respectively. The U.S. Army accounted for approximately 66%, 66% and 55% of
UAS reportable segment sales in fiscal year 2007, 2006 and 2005 respectively.
The Company performs ongoing credit evaluations of its commercial customers
and
maintains an allowance for potential losses.
|
|
Accounts
Receivable, Unbilled Receivables and
Retentions
|
Accounts
receivable represents primarily U.S. government, and to a lesser extent
commercial receivables, net of allowances for doubtful accounts. Unbilled
receivables represent costs in excess of billings on incomplete contracts and,
where applicable, accrued profit related to government long-term contracts
on
which revenue has been recognized, but for which the customer has not yet
been billed. Retentions represent amounts withheld by customers until contract
completion. The Company determines the allowance for doubtful accounts based
on
historical customer experience and other currently available evidence. When
a specific account is deemed uncollectible, the account is written off against
the allowance. The allowance for doubtful accounts reflects the Company's best
estimate of probable losses inherent in the accounts receivable balance; such
losses have been within management's expectations. An account is deemed past
due
based on contractual terms rather than on how recently payments have been
received.
|
|
Inventories
|
Inventories
are stated at the lower of cost (using the weighted average costing method)
or
market value. Inventory write-offs and write-down provisions are provided to
cover risks arising from slow-moving items or technological obsolescence and
for
market prices lower than cost. The Company periodically evaluates the quantities
on hand relative to current and historical selling prices and historical and
projected sales volume. Based on this evaluation, provisions are made to write
inventory down to its market value.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
Long-Lived
Assets
|
Property
and equipment are carried at cost. Depreciation of property and equipment,
including amortization of leasehold improvements, are provided using the
straight-line method over the following estimated useful lives:
|
|
|
|
Assets
held for lease
|
2
to 5 years
|
|
Machinery
and equipment
|
3 years
|
|
Computer
equipment and software
|
2
to 3 years
|
|
Furniture
and fixtures
|
3 years
|
|
Leasehold
improvements
|
Lesser
of useful life or term of
lease
|
Maintenance,
repairs and minor renewals are charged directly to expense as incurred.
Additions and betterments to property, plant and equipment are capitalized
at
cost. When the Company disposes of assets, the applicable costs and accumulated
depreciation and amortization thereon are removed from the accounts and any
resulting gain or loss is included in selling, general and administrative
expense in the period incurred. Depreciation and amortization expense on
property, plant and equipment was approximately $2,897,000, $1,999,000 and
$1,053,000 for the years ended April 30, 2007, 2006 and 2005,
respectively.
The
Company reviews the recoverability of its long-lived assets as required by
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, ("SFAS 144") whenever events
or changes in circumstances indicate that the carrying amount of such assets
may
not be recoverable. The estimated future cash flows are based upon, among other
things, assumptions about expected future operating performance, and may differ
from actual cash flows. If the sum of the projected undiscounted cash flows
(excluding interest) is less than the carrying value of the assets, the assets
will be written down to the estimated fair value in the period in which the
determination is made. At April 30, 2007 and 2006, and during the years
ended April 30, 2007, 2006 and 2005, no indicators of impairment were
identified and no impairment reserve was recorded.
|
|
Product
Warranty
|
The
Company accrues an estimate of its exposure to warranty claims based upon both
current and historical product sales data and warranty costs incurred. Product
warranty reserves were recorded in other current liabilities.
|
|
Self-Insurance
Liability
|
The
Company is self-insured for employee medical claims, subject to individual
and
aggregate stop-loss policies. The Company estimates a liability for claims
filed
and incurred but not reported claims based upon recent claims experience and
an
analysis of the average period of time between the occurrence of a claim and
the
time it is reported to and paid by the Company. As of April 30, 2007 and
2006, the Company estimated and recorded a self insurance liability in wages
and
related accruals of approximately $200,000 and $238,000
respectively.
|
|
Income
Taxes
|
The
Company accounts for income taxes in accordance with Financial Accounting
Standard Board ("FASB") Statement No. 109, Accounting for Income
Taxes. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets
and
liabilities that will result in taxable or deductible amounts in the future.
The
provision for income taxes reflects the taxes to be paid for the period and
the
change during the period in the deferred income tax assets and liabilities.
The
Company records a valuation allowance to reduce the deferred tax assets to
the
amount of future tax benefit that is more likely then not to be
realized.
|
|
Customer
Advances and Amounts in Excess of Cost
Incurred
|
The
Company receives advances, performance-based payments and progress payments
from
customers that may exceed costs incurred on certain contracts, including
contracts with agencies of the U.S. government. These advances are
classified as advances from customers and will be offset against
billings.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
|
Revenue
Recognition
|
The
substantial majority of the Company's revenue is generated pursuant to written
contractual arrangements to design, develop, manufacture and/or modify complex
products, and to provide related engineering, technical and other services
according to the specifications of the buyers (customers). These contracts
may
be fixed price or cost-reimbursable. The Company considers all contracts for
treatment in accordance with FASB Emerging Issues Task Force No. 00-21,
Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF
00-21 provides for deferral to higher authoritative guidance, including American
Institute of Certified Public Accountants Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts ("SOP 81-1"), under which the majority of the Company's
contracts are properly accounted for. Contracts which provide for multiple
deliverables to which SOP 81-1 does not apply are accounted for in
accordance with the provisions of EITF 00-21.
EITF
00-21 addresses accounting for arrangements under which a vendor will perform
multiple revenue-generating activities. Under EITF 00-21, revenue arrangements
with multiple deliverables should be divided into separate units of accounting
if the deliverables have value to the customer on a stand-alone basis; there
is
objective and reliable evidence of the fair value of the undelivered item(s);
and, if the arrangement includes a general right of return, delivery or
performance of the undelivered item(s) is considered probable and substantially
in the control of the vendor. The Company occasionally enters into arrangements
that consist of installation and repair contracts associated with hardware
sold
by the Company.
Such
arrangements consist of separate contractual arrangements and are divided into
separate units of accounting where the delivered item has value to the customer
on a stand-alone basis and there is objective and reasonable evidence of the
fair value of the installation contract. Consideration is allocated among the
separate units of accounting based on their relative fair values.
Product
sales revenue is composed of revenue recognized on contracts for the delivery
of
production hardware and related activities. Contract services revenue is
composed of revenue recognized on contracts for the provision of services,
including repairs, training, engineering design, development and prototyping
activities.
Revenue
from cost-plus-fee contracts are recognized on the basis of costs incurred
during the period plus the fee earned. Revenue from fixed-price contracts are
recognized on the percentage-of-completion method. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance. Unbilled receivables represent costs incurred and related profit
on
contracts not yet billed to customers, and are invoiced in subsequent
periods.
Product
sales revenue are recognized on the percentage-of-completion method or upon
transfer of title to the customer, which is generally upon shipment. Shipping
and handling costs incurred are included in cost of sales.
Revenue
and profits on fixed-price production contracts, where units are produced and
delivered in a continuous or sequential process, are recorded as units are
delivered based on their selling prices (the "units-of-delivery method").
Revenue and profits on other fixed-price contracts with significant engineering
as well as production requirements are recorded based on the ratio of total
actual incurred costs to date to the total estimated costs for each contract
("the cost-to-cost method"). Accounting for revenue and profits on a fixed-price
contract requires the preparation of estimates of (1) the total contract
revenue, (2) the total costs at completion, which is equal to the sum of
the actual incurred costs to date on the contract and the estimated costs to
complete the contract's statement of work and (3) the measurement of
progress towards completion. The estimated profit or loss at completion on
a
contract is equal to the difference between the total estimated contract revenue
and the total estimated cost at completion. Under the units-of-delivery method,
sales on a fixed-price type contract are recorded as the units are delivered
during the period based on their contractual selling prices. Under the
cost-to-cost method, sales on a fixed-price type contract are recorded at
amounts equal to the ratio of actual cumulative costs incurred divided by total
estimated costs at completion, multiplied by (i) the total estimated
contract revenue, less (ii) the cumulative sales recognized in prior
periods. The profit recorded on a contract in any period using either the
units-of-delivery method or cost-to-cost method is equal to (i) the current
estimated total profit margin multiplied by the cumulative sales recognized,
less (ii) the amount of cumulative profit previously recorded for the
contract. In the case of a contract for which the total estimated costs exceed
the total estimated revenue, a loss arises, and a provision for the entire
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loss
is
recorded in the period that it becomes evident. The unrecoverable costs on
a loss contract that are expected to be incurred in future periods are
recorded
in the program cost.
Significant
management judgments and estimates must be made and used in connection with
the
recognition of revenue in any accounting period. Material differences in the
amount of revenue in any given period may result if these judgments or estimates
prove to be incorrect or if management's estimates change on the basis of
development of the business, market conditions or other factors. Management
judgments and estimates have been applied consistently and have been reliable
historically.
|
|
Stock-Based
Compensation
|
Prior
to
May 1, 2006, the Company accounted for incentive stock plans in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"), and related Interpretations, as permitted
by FASB Statement No. 123, Accounting for Stock Based
Compensation. No stock based employee compensation was reflected in net
income, as all options granted under those plans had an exercise price equal
to
the fair value of the underlying common stock on the date of grant. Effective
May 1, 2006 the Company adopted the fair value recognition provisions of
FASB Statement No. 123(R), Share-Based Payment, using the
modified prospective-transition.
The
following table illustrates the impact on net earnings and earnings per common
share if the fair value method had been applied for all periods
presented.
|
Year
ended April 30,
|
||||||||
|
2006
|
2005
|
|||||||
|
(In
thousands except share
|
||||||||
|
and
per share data)
|
||||||||
|
Pro
forma:
|
|
|
||||||
|
Net
income — as reported
|
$ |
11,208
|
$ |
14,570
|
||||
|
Stock
based compensation, net of tax
|
(114 | ) | (42 | ) | ||||
|
|
||||||||
|
Net
income — pro forma
|
$ |
11,094
|
$ |
14,528
|
||||
|
|
||||||||
|
Earnings
per share data
|
||||||||
|
Basic —
reported
|
$ |
0.86
|
$ |
1.15
|
||||
|
Basic —
pro forma
|
$ |
0.85
|
$ |
1.15
|
||||
|
Diluted —
reported
|
$ |
0.75
|
$ |
1.05
|
||||
|
Diluted —
pro forma
|
$ |
0.75
|
$ |
1.05
|
||||
|
Weighted
average shares outstanding used in computation:
|
||||||||
|
Basic
|
13,011,639
|
12,674,585
|
||||||
|
Diluted
|
14,873,651
|
13,847,223
|
||||||
The
fair
value of each option grant is estimated on the date of grant using the minimum
value option pricing model, with the following assumptions
used: risk-free interest rate of 6.75% and 4.0% for the years ended
April 30, 2006 and 2005, respectively, an expected options life of five and
five
years after vesting for the years ended April 30, 2006 and 2005, respectively,
and no expected dividends.
|
|
Share
Repurchases
|
The
Company repurchased shares in accordance with various repurchase agreements
prior to the termination of such agreements upon the consummation of the
Company's initial public offering on January 26, 2007. Such agreements gave
the
Company the right to repurchase shares from employees upon their separation
from
the Company and specified the terms of such repurchase. These repurchase
agreements, which were entered into by employees in connection with grants
of
options by the Company pursuant to its stock-based compensation plans,
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provided
that the Company had the option to repurchase shares from such employees
at a
price that was equal to either (i) the price paid for shares of the Company's
common stock in a substantial transaction that occurred in the last year
or (ii)
in the event that no such substantial transaction had occurred in the last
year,
at a price based upon a multiple of the Company's pre-tax profits. This
repurchase price was intended to approximate the fair market value of the
repurchased shares. In the event that shares were repurchased within six
months
of exercise, compensation expense was recorded in accordance with FASB
interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation ("FIN 44"). The Company recognized
compensation expense related to shares repurchased within six months of
exercise
of approximately $12,000, $234,000 and $188,000 for the years ended April
30, 2007, 2006 and 2005, respectively.
Repurchased
shares are restored to the status of authorized but unissued
shares.
|
|
Research
and Development
|
Internally
funded research and development costs ("IRAD") sponsored by the Company relate
to both U.S. government products and services and those for commercial and
foreign customers. IRAD costs for the Company's businesses that are
U.S. government contractors are recoverable indirect contract costs that
are allocated to the U.S. government contracts in accordance with
U.S. government procurement regulations.
Customer-funded
research and development costs are incurred pursuant to contracts (revenue
arrangements) to perform research and development activities according to
customer specifications. These costs are direct contract costs and are expensed
to cost of sales when the corresponding revenue is recognized, which is
generally as the research and development services are performed. Revenues
from
customer-funded research and development were approximately $19,438,000,
$11,568,000 and $10,641,000 for the years ended April 30, 2007,
2006 and 2005, respectively. The related costs of sales for customer-funded
research and development totaled approximately $13,460,000, $8,184,000
and $5,390,000 for the years ended April 30, 2007, 2006 and
2005, respectively.
|
|
Lease
Accounting
|
The
Company accounts for its leases under the provisions of SFAS No. 13,
Accounting for Leases, and subsequent amendments, which require that
leases be evaluated and classified as operating leases or capital leases for
financial reporting purposes. Certain operating leases contain rent escalation
clauses, which are recorded on a straight-line basis over the initial term
of
the lease with the difference between the rent paid and the straight-line rent
recorded as a deferred rent liability. Lease incentives received from landlords
are recorded as deferred rent liabilities and are amortized on a straight-line
basis over the lease term as a reduction to rent expense. Deferred rent
liabilities were approximately $541,000 and $408,000 as of April 30, 2007
and 2006, respectively.
|
|
Advertising
Costs
|
Advertising
costs consist of tradeshows and other marketing activities, and are expensed
as
incurred. Advertising expenses included in selling, general and administrative
expenses were approximately $338,000, $266,000, and $423,000 for the years
ended
April 30, 2007, 2006 and 2005, respectively.
|
|
Earnings
Per Share
|
Basic
earnings per share are computed using the weighted-average number of common
shares outstanding and excludes any anti-dilutive effects of options, warrants
and convertible securities. The dilutive effect of potential common shares
outstanding is included in diluted earnings per share.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
reconciliation of diluted
to basic
shares is as follows:
|
|
Year
Ended April 30,
|
|
||||||||||
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
||||
|
|
||||||||||||
|
Numerator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
20,718,000
|
|
|
$
|
11,208,000
|
|
|
$
|
14,570,000
|
|
|
Denominator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
|
|
|
14,946,502
|
|
|
|
13,011,639
|
|
|
|
12,674,585
|
|
|
Dilutive
effect of employee stock options
|
|
|
2,045,510
|
|
|
|
1,862,012
|
|
|
|
1,172,638
|
|
|
Denominator
for diluted earnings per share
|
|
|
16,992,012
|
|
|
|
14,873,651
|
|
|
|
13,847,223
|
|
During
the years ended April 30, 2007, 2006 and 2005, there were no stock options
that were anti-dilutive to earnings per share.
Recently
Issued Accounting Standards
In
February 2006, the FASB issued Statement of Financial Accounting Standards
No. 155, Accounting for Certain Hybrid Financial Instruments
("SFAS 155"). SFAS 155 establishes, among other things, the accounting for
certain derivatives embedded in other financial instruments. This statement
permits fair value remeasurement for any hybrid financial instrument containing
an embedded derivative that would otherwise require bifurcation. It also
requires that beneficial interests in securitized financial assets be accounted
for in accordance with SFAS 133. SFAS 155 is effective for fiscal years
beginning after September 15, 2006, and is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In
July 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes — an interpretation
of FASB Statement No. 109 ("FIN 48"), which clarifies what criteria
must be met prior to recognition of the financial statement benefit of a
position taken in a tax return. The Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return.
Also, the Interpretation provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The adoption of FIN 48 will be effective for years beginning after
December 15, 2006, and the Company will be required to adopt this
Interpretation on May 1, 2007. The Company does not anticipate the adoption
of FIN 48 will have a material effect on its consolidated financial position,
results of operations or cash flows.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements ("SFAS 157") which provides enhanced guidance for using fair
value to measure assets and liabilities. The standard also expands the amount
of
disclosure regarding the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. The standard applies whenever
other standards require (or permit) assets or liabilities to be measured at
fair
value but does not expand the use of fair value in any new circumstances. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company does not anticipate the adoption of SFAS 157 will have a
material effect on its consolidated financial position, results of operations
and cash flows.
In
February 2007, the FASB issued, SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which is effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to
apply the provisions of SFAS 157. The Company does not anticipate the adoption
of SFAS 159 will have a material effect on its consolidated financial position,
results of operations or cash flows.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
2.
|
Inventories,
net
|
Inventories
consist of the following:
|
|
|
April 30,
|
|
|||||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
|
(In
thousands)
|
|
|||||
|
|
||||||||
|
Raw
materials
|
|
$
|
5,418
|
|
|
$
|
4,750
|
|
|
Work
in process
|
|
|
3,514
|
|
|
|
2,413
|
|
|
Finished
goods
|
|
|
6,221
|
|
|
|
5,103
|
|
|
Inventories,
gross
|
|
|
15,153
|
|
|
|
12,266
|
|
|
Reserve
for inventory obsolescence
|
|
|
(1,138
|
)
|
|
|
(813
|
)
|
|
Inventories,
net
|
|
$
|
14,015
|
|
|
$
|
11,453
|
|
|
3.
|
Property
and Equipment, net
|
Property
and equipment consist of the following:
|
|
|
April 30,
|
|
|||||
|
|
|
2007
|
|
|
2006
|
|
||
|
|
|
(In
thousands)
|
|
|||||
|
|
||||||||
|
Assets
held for lease
|
|
$
|
998
|
|
|
$
|
998
|
|
|
Leasehold
improvements
|
|
|
1,742
|
|
|
|
1,556
|
|
|
Machinery
and equipment
|
|
|
6,982
|
|
|
|
5,163
|
|
|
Furniture
and fixtures
|
|
|
1,549
|
|
|
|
1,347
|
|
|
Computer
equipment and software
|
|
|
5,568
|
|
|
|
5,387
|
|
|
Construction
in process
|
|
|
707
|
|
|
|
560
|
|
|
|
|
|
17,546
|
|
|
|
15,011
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(11,317
|
)
|
|
|
(8,913
|
)
|
|
Property
and equipment, net
|
|
$
|
6,229
|
|
|
$
|
6,098
|
|
|
4.
|
Warranty
Reserves
|
Warranty
reserve activity is summarized as follows:
|
|
April 30,
|
|
||||||
|
|
2007
|
|
|
2006
|
|
|||
|
|
(In
thousands)
|
|
||||||
|
|
||||||||
|
Beginning
balance
|
|
$
|
344
|
|
|
$
|
282
|
|
|
Warranty
expense
|
|
|
646
|
|
|
|
589
|
|
|
Warranty
costs incurred
|
|
|
(727
|
)
|
|
|
(527
|
)
|
|
Ending
balance
|
|
$
|
263
|
|
|
$
|
344
|
|
|
5.
|
Bank
Borrowings
|
The
Company has a working capital line of credit with a bank, which was amended
on
June 16, 2006 to increase the borrowing limit from $10,000,000 to $16,500,000.
Borrowings bear interest at the bank's prime commercial lending rate, which
was
8.25% and 7.75% as of April 30, 2007 and 2006, respectively. The line of
credit is secured by substantially all of the Company's assets. Payment of
amounts outstanding is made at the Company's discretion. All
principal plus accrued interest is due August 31, 2007. The Company had no
outstanding balance on the line of credit as of April 30, 2007 and
2006.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
credit agreement contains certain financial covenants and conditions
which
require, among other things, that the Company maintain certain tangible
net
worth and cash flow ratios. The credit agreement also restricts the Company
from
paying any dividends to stockholders. The Company was in compliance with
these
covenants as of April 30, 2007 and 2006.
|
6.
|
Employee
Savings Plan
|
The
Company has an employee 401(k) savings plan covering all eligible employees.
The
Company expensed approximately $1,140,000, $918,000 and $724,000 in
contributions to the plan for the years ended April 30, 2007, 2006 and
2005, respectively. Annual contributions are at the discretion of
management.
|
7.
|
Supplemental
Executive Retirement Plan
|
On
May 19, 2005, the Company implemented a Supplemental Executive Retirement
Plan ("SERP"), which is a non-qualified executive benefit plan in which the
Company agreed to pay the Chairman of the Board (the "Chairman") additional
benefits at retirement. The SERP is an unfunded plan, which means that there
are
no specific assets set aside by the Company. The Chairman had no rights under
the agreement beyond those of a general creditor of the Company. During the
year
ended April 30, 2006, the Company recognized approximately $2,209,000 of
selling, general and administrative expense charged to operations and recorded
such expense as a long-term liability in connection with this plan. The SERP
was
fully vested on May 19, 2006, the first anniversary of the Chairman's
participation. Pursuant to the terms of the agreement, upon the completion
of
the Company's initial public offering of equity securities, all benefits to
be
paid under the SERP were forfeited. Accordingly, the long-term liability of
$2,209,000 was reversed in January 2007 and recorded as a reduction to
selling, general, and administrative expense.
|
8.
|
Equity
|
On
January 26, 2007, the Company completed its initial public offering, consisting
of 5,252,285 shares of common stock. As part of the offering, an additional
2,452,715 shares were sold by selling stockholders. A total of 7,705,000 shares
were sold at a public offering price of $17.00, resulting in net proceeds to
the
Company of approximately $80.5 million, after deducting payment of underwriters'
discounts and commissions and offering expenses.
In
connection with the initial public offering, the Company reincorporated in
Delaware, effective on December 6, 2006, and effected a 7.0378-to-one stock
split on January 18, 2007. All share and per share data, including prior period
data as appropriate, have been adjusted to reflect this split.
|
9.
|
Stock-Based
Compensation
|
The
Company adopted SFAS 123R effective May 1, 2006. Because the Company
historically used the minimum value method of measuring stock options,
implementation of SFAS 123R applies prospectively to new awards after adoption.
No expense is recognized for options granted prior to adoption. For the year
ended April 30, 2007, the Company recorded stock-based compensation expense
for
options that vested of approximately $58,000.
On
January 14, 2007, the stockholders of the Company approved the 2006 Equity
Incentive Plan (the "2006 Plan"), effective January 21, 2007, for officers,
directors, key employees and consultants. Under the 2006 Plan, incentive stock
options, nonqualified stock options, restricted stock awards, stock appreciation
right awards, performance share awards, performance stock unit awards, dividend
equivalents awards, stock payment awards, deferred stock awards, restricted
stock unit awards, other stock-based awards, performance bonus awards or
performance-based awards may be granted at the discretion of a committee, which
consists of outside directors. A maximum of 3,684,157 shares of stock may be
issued pursuant to awards under the 2006 Plan. The maximum number of shares
of
common stock with respect to one or more awards that may be granted to any
one
participant during any twelve month period is 950,000. A maximum of $9,500,000
may be paid in cash as a performance-based award. The exercise price for any
incentive stock option shall not be less than 100% of the fair market value
on
the date of grant. At April 30, 2007, no awards had been issued under the 2006
Plan. Vesting of awards is established at the time of grant.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
Company had an equity incentive plan (the "2002 Plan") for officers, directors
and key employees. Under the 2002 Plan, incentive stock options or nonqualified
stock options were granted, as determined by the administrator at the time
of
grant. Stock purchase rights were also granted under the 2002 Plan. Options
under the 2002 Plan were granted at their fair market value (as determined
by
the board of directors). The options become exercisable at various times over
a
five-year period from the grant date. The 2002 Plan was terminated on the
effective date of the 2006 Plan. Awards outstanding under the 2002 Plan remain
outstanding and exercisable; no additional awards may be made under the 2002
Plan.
The
Company had a 1992 nonqualified stock option plan (the "1992 Plan") for certain
officers and key employees. Options under the 1992 Plan were granted at their
fair market value (as determined by the board of directors) at the date of
grant
and became exercisable at various times over a five-year period from the grant
date. The 1992 Plan expired in August 2002.
The
Company had a 1994 nonqualified stock option plan (the "1994 Directors' Plan")
for the directors of the Company. Options under the 1994 Directors' Plan were
granted at their fair market value (as determined by the board of directors)
at
the date of grant and became exercisable on the date of grant. The 1994
Directors' Plan expired in June 2004.
The
fair
value of stock options granted was estimated at the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions for the year ended April 30, 2007:
|
Year Ended
April
30, 2007
|
||||
|
Expected
term (in years)
|
6.5
|
|||
|
Expected
volatility
|
22.41 | % | ||
|
Risk-free
interest rate
|
4.56 | % | ||
|
Expected
dividend
|
—
|
|||
|
Weighted
average fair value at grant date
|
$ |
4.12
|
||
The
expected term of stock options represents the weighted average period the
Company expects the stock options to remain outstanding, using a midpoint model
based on the Company's historical exercise and post-vesting cancellation
experience and the remaining contractual life of its outstanding
options.
The
expected volatility is based on peer group volatility in the absence of
historical market data for the Company's stock, as permitted under SFAS 123R.
The peer group volatility was derived based on historical volatility of a
comparable peer group index consisting of companies operating in a similar
industry.
The
risk
free interest rate is based on the implied yield on a U.S. Treasury zero-coupon
bond with a remaining term that approximates the expected term of the
option.
The
expected dividend yield of zero reflects that the Company has not paid any
cash
dividends since inception and does not anticipate paying cash dividends in
the
foreseeable future.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information
related to the stock option plans at April 30, 2007,
2006 and 2005, and for the years then ended is as follows:
|
|
2002
Plan
|
|
|
1994 Directors'
Plan
|
|
|
1992
Plan
|
|
||||||||||||||||
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|||||||
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|||||||
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|||||||
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|||||||
|
|
||||||||||||||||||||||||
|
Outstanding
at April 30, 2004
|
|
|
943,066
|
|
|
|
0.65
|
|
|
|
1,338,167
|
|
|
|
0.51
|
|
|
|
2,955,876
|
|
|
|
0.53
|
|
|
Options
granted
|
|
|
429,306
|
|
|
|
0.78
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Options
exercised(1)
|
|
|
(74,601
|
)
|
|
|
0.68
|
|
|
|
(1,267,789
|
)
|
|
|
0.51
|
|
|
|
(466,606
|
)
|
|
|
0.41
|
|
|
Options
canceled
|
|
|
(7,038
|
)
|
|
|
0.64
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,668
|
)
|
|
|
0.59
|
|
|
Outstanding
at April 30, 2005
|
|
|
1,290,733
|
|
|
|
0.69
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,476,602
|
|
|
|
0.55
|
|
|
Options
granted
|
|
|
443,381
|
|
|
|
2.13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Options
exercised(1)
|
|
|
(64,396
|
)
|
|
|
0.67
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(427,898
|
)
|
|
|
0.54
|
|
|
Options
canceled
|
|
|
(33,078
|
)
|
|
|
0.78
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
at April 30, 2006
|
|
|
1,636,640
|
|
|
|
1.08
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,048,704
|
|
|
|
0.56
|
|
|
Options
granted
|
|
|
123,162
|
|
|
|
11.79
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Options
exercised(1)
|
|
|
(204,858
|
)
|
|
|
0.69
|
|
|
|
(35,189
|
)
|
|
|
0.59
|
|
|
|
(106,998
|
)
|
|
|
0.59
|
|
|
Options
canceled
|
|
|
(22,521
|
)
|
|
|
4.39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
at April 30, 2007
|
|
|
1,532,423
|
|
|
|
1.95
|
|
|
|
35,189
|
|
|
|
0.59
|
|
|
|
1,941,706
|
|
|
|
0.55
|
|
|
Options
exercisable at April 30, 2005
|
|
|
323,739
|
|
|
|
0.65
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,371,035
|
|
|
|
0.55
|
|
|
Options
exercisable at April 30, 2006
|
|
|
519,038
|
|
|
|
0.67
|
|
|
|
70,378
|
|
|
|
0.59
|
|
|
|
2,048,704
|
|
|
|
0.56
|
|
|
Options
exercisable at April 30, 2007
|
|
|
649,894
|
|
|
|
0.87
|
|
|
|
35,189
|
|
|
|
0.59
|
|
|
|
1,941,706
|
|
|
|
0.55
|
|
(1)
Options exercised as presented in the table above include same day repurchase
transactions which have no impact on share amounts and are therefore excluded
from stock options exercised in the Consolidated Statements of Stockholders'
Equity.
The
total
intrinsic value of all options exercised during the years ended April 30, 2007,
2006 and 2005 were approximately $589,000, $807,000, and $639,000.
A
summary
of the status of the Company's non-vested stock options as of April 30, 2007
and
the year then ended is as follows:
|
Non-vested
Options
|
Shares
|
Weighted
Average
Grant
Date
Fair Value
|
||||||
|
Non-vested
at April 30, 2006
|
1,107,730
|
$ |
-
|
|||||
|
Granted
|
123,149
|
$ |
4.12
|
|||||
|
Cancelled
|
(18,296 | ) | $ |
1.58
|
||||
|
Vested
|
(330,052 | ) | $ |
-
|
||||
|
Non-vested
at April 30, 2007
|
882,531
|
$ |
0.54
|
|||||
As
of
April 30, 2007, there was approximately $420,000 of total unrecognized
compensation cost related to non-vested share-based compensation awards granted
under the stock option plans. That cost is expected to be recognized
over a approximately a 4-year period or a weighted average period of
approximately 4 years.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Proceeds
from all option exercises under all stock option plans for the years ended
April
30, 2007, 2006 and 2005 were approximately $220,000, $197,000 and $780,000,
respectively. The tax benefit realized from option exercises during
the years ended April 30, 2007, 2006 and 2005 was approximately $629,000,
$175,000, and $0 respectively.
The
following tabulation summarizes certain information concerning outstanding
and
exercisable options
at
April 30, 2007:
|
|
Options
Outstanding
|
|
|
|||||||||||||||||||
|
|
|
Weighted
|
|
|
|
|||||||||||||||||
|
|
|
Average
|
|
Options
Exercisable
|
||||||||||||||||||
|
|
|
Remaining
|
Weighted
|
|
Weighted
|
|||||||||||||||||
|
Range
of
|
As
of
|
Contractual
|
Average
|
As
of
|
Average
|
|||||||||||||||||
|
Exercise
|
April 30,
|
Life
In
|
Exercise
|
April 30,
|
Exercise
|
|||||||||||||||||
|
Prices
|
2007
|
Years
|
Price
|
2007
|
Price
|
|||||||||||||||||
| $ |
0.37
|
344,849
|
6.15
|
$ |
0.37
|
344,849
|
$ |
0.37
|
||||||||||||||
|
0.59
|
1,632,046
|
4.89
|
0.59
|
1,632,046
|
0.59
|
|||||||||||||||||
|
0.64-0.78
|
977,169
|
6.13
|
0.70
|
562,637
|
0.68
|
|||||||||||||||||
|
2.13
|
439,142
|
8.48
|
2.13
|
87,257
|
2.13
|
|||||||||||||||||
|
11.79
|
116,112
|
9.40
|
11.79
|
—
|
—
|
|||||||||||||||||
| $ |
0.37-11.79
|
3,509,318
|
5.96
|
$ |
1.16
|
2,626,789
|
$ |
0.63
|
||||||||||||||
The
remaining weighted average contractual life of exercisable options at April
30,
2007 was 5.39 years.
|
10.
|
Income
Taxes
|
A
reconciliation of income tax expense computed using the U.S. federal
statutory rates to actual income tax expense is as follows:
|
|
|
Year
Ended April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
||||||||||||
|
U.S. federal
statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State
and local income taxes, net of federal benefit
|
|
|
5.4
|
|
|
|
5.5
|
|
|
|
5.7
|
|
|
R&D
credit
|
|
|
(3.9
|
)
|
|
|
(11.8
|
)
|
|
|
(14.1
|
)
|
|
Other
|
|
|
(0.8
|
)
|
|
|
1.4
|
|
|
|
0.6
|
|
|
Effective
income tax rate
|
|
|
35.7
|
%
|
|
|
30.2
|
%
|
|
|
27.2
|
%
|
The
components of the provision for income taxes are as follows:
|
|
|
Year
ended April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||||
|
|
||||||||||||
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,066
|
|
|
$
|
5,375
|
|
|
$
|
5,724
|
|
|
State
|
|
|
3,595
|
|
|
|
931
|
|
|
|
478
|
|
|
|
|
|
10,661
|
|
|
|
6,306
|
|
|
|
6,202
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
18
|
|
|
|
979
|
|
|
|
(209
|
)
|
|
State
|
|
|
923
|
|
|
|
476
|
|
|
|
(626
|
)
|
|
|
|
|
941
|
|
|
(1,455
|
)
|
|
|
(835
|
)
|
|
|
Change
in valuation allowance
|
|
|
(118
|
)
|
|
|
(2
|
)
|
|
|
88
|
|
|
Total
income tax expense
|
|
$
|
11,484
|
|
|
$
|
4,849
|
|
|
$
|
5,455
|
|
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant
components of the Company's deferred income tax assets are as
follows:
|
|
April 30,
|
|
||||||
|
|
2007
|
|
|
2006
|
|
|||
|
|
(In
thousands)
|
|
||||||
|
|
||||||||
|
Deferred
income tax assets:
|
|
|
|
|
|
|
|
|
|
Book
over tax depreciation
|
|
$
|
755
|
|
|
$
|
411
|
|
|
Accrued
expenses
|
|
|
1084
|
|
|
|
1,672
|
|
|
Exercise
of nonqualified stock options
|
|
|
—
|
|
|
|
171
|
|
|
Allowances,
reserves, and other
|
|
|
646
|
|
|
|
391
|
|
|
Research
and development credit carryforwards
|
|
|
—
|
|
|
|
663
|
|
|
Net
operating loss and other
|
|
|
89
|
|
|
|
207
|
|
|
|
|
2,574
|
|
|
|
3,515
|
|
|
|
Less:
valuation allowance
|
|
|
(83
|
)
|
|
|
(201
|
)
|
|
Total
deferred income tax assets
|
|
$
|
2,491
|
|
|
$
|
3,314
|
|
The
Company's California net operating loss carryforwards of approximately $77,000
expire in 2007 and 2008. The Company has established a valuation allowance
against its California capital loss carryforward, as it is unlikely that such
assets will be fully utilized.
|
11.
|
Related
Party Transactions
|
Pursuant
to a consulting agreement, the Company paid a board member approximately
$245,000, $258,000 and $242,000 during the years ended April 30, 2007, 2006
and
2005, respectively, for consulting services independent of his board service.
The agreement stipulates the payment of approximately $16,000 plus expenses
per
month, in exchange for consulting services.
During
the year ended April 30, 2006, the Company employed the services of Summit
Selling Systems, Inc. ("Summit"), and accordingly paid Summit approximately
$35,000. One of the Company's board members has a beneficial interest in Summit.
The Company did not employ the services of Summit during the fiscal years ended
April 30, 2007 or 2005.
|
12.
|
Commitments
and Contingencies
|
Commitments
The
Company's operations are conducted in leased facilities. Following is a summary
of non-cancelable operating lease commitments:
|
|
Year
ending
|
|
||
|
|
April 30
|
|
||
|
|
(In
thousands)
|
|
||
|
|
||||
|
2008
|
|
$
|
2,646
|
|
|
2009
|
|
|
2,419
|
|
|
2010
|
|
|
1,849
|
|
|
2011
|
|
|
1,116
|
|
|
2012
|
|
|
845
|
|
|
Thereafter
|
|
|
141
|
|
|
|
$
|
9,016
|
|
|
Rental
expense under operating leases was approximately $2,331,000, $1,723,000 and
$1,428,000 for the years ended April 30, 2007, 2006 and 2005,
respectively.
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Contingencies
The
Company is subject to legal proceedings and claims which arise out of
the
ordinary course of its business. Although occasional adverse decisions
or
settlements may occur, the Company, in consultation with legal counsel,
believes
that the final disposition of such matters will not have a material adverse
effect on the consolidated financial position, results of operations
or cash
flows of the Company.
Contract
Cost Audits
Payments
to the Company on government cost reimbursable contracts are based on
provisional, or estimated indirect rates, which are subject to an annual audit
by the Defense Contract Audit Agency ("DCAA"). The cost audits result in the
negotiation and determination of the final indirect cost rates that the Company
may use for the period(s) audited. The final rates, if different from the
provisional rates, may create an additional receivable or liability for the
Company. The Company's revenue recognition policy calls for revenue recognized
on all cost reimbursable government contracts to be recorded at actual rates
unless collectibility is not reasonably assured.
|
13.
|
Segment
Data
|
The
Company's product segments are as follows:
|
|
Ÿ
|
Unmanned
Aircraft Systems ("UAS") — The UAS segment consists primarily of the
design and manufacture of small unmanned aircraft systems
solutions.
|
|
|
Ÿ
|
PosiCharge
Systems ("PosiCharge") — The PosiCharge segment supplies fast charge
systems for users of electric industrial vehicle
batteries.
|
|
|
Ÿ
|
Energy
Technology Center — The Energy Technology Center segment
consists of energy development projects and power processing test
equipment product sales.
|
The
accounting policies of the segments are the same as those described in
Note 1, "Summary of Significant Accounting Policies." Because the products
they design and sell generally define the operating segments, they do not make
sales to each other. Depreciation and amortization related to the manufacturing
of goods is included in gross margin for the segments. The Company does not
discretely allocate assets to its operating segments, nor does the CODM evaluate
operating segments using discrete asset information. Consequently, the Company
operates its financial systems as a single segment for accounting and control
purposes, maintains a single indirect rate structure across all segments, has
no
inter-segment sales or corporate elimination transactions, and maintains only
limited financial statement information by segment.
The
segment results are as follows:
|
|
|
Year
Ended April 30,
|
|
|||||||||
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|||
|
|
|
(In
thousands)
|
|
|||||||||
|
|
||||||||||||
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UAS
|
|
$
|
146,538
|
|
$
|
111,104
|
|
|
$
|
82,249
|
|
|
|
PosiCharge
|
|
|
17,575
|
|
|
19,928
|
|
|
|
15,642
|
|
|
|
Energy
Technology Center
|
|
|
9,608
|
|
|
8,325
|
|
|
|
7,264
|
|
|
|
Total
|
|
|
173,721
|
|
|
139,357
|
|
|
|
105,155
|
|
|
|
Gross
margin:
|
|
|
|
|
|
|
|
|
|
|
||
|
UAS
|
|
|
57,591
|
|
|
44,558
|
|
|
|
37,235
|
|
|
|
PosiCharge
|
|
|
6,096
|
|
|
8,062
|
|
|
|
5,846
|
|
|
|
Energy
Technology Center
|
|
|
4,795
|
|
|
4,139
|
|
|
|
3,525
|
|
|
|
Total
|
|
|
68,482
|
|
|
56,759
|
|
|
|
46,606
|
|
|
|
Research
and development
|
|
|
13,940
|
|
|
16,098
|
|
|
|
9,799
|
|
|
|
Selling,
general and administrative
|
|
|
24,041
|
|
|
24,810
|
|
|
|
16,733
|
|
|
|
Income
from operations
|
|
|
30,501
|
|
|
15,851
|
|
|
|
20,074
|
|
|
|
Interest
income
|
|
|
1,707
|
|
|
333
|
|
|
|
61
|
|
|
|
Interest
expense
|
|
|
(6
|
)
|
|
|
(127
|
)
|
|
|
(110
|
)
|
|
Income
before income taxes
|
|
$
|
32,202
|
|
$
|
16,057
|
|
|
$
|
20,025
|
|
|
AEROVIRONMENT,
INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Geographic
Information
Sales
to
non-U.S. customers accounted for 4.6%, 1.5% and 4.5% of revenue for the fiscal
years ended April 30, 2007, 2006 and 2005, respectively.
Quarterly
Results of Operations (Unaudited)
The
following tables present selected unaudited consolidated financial data for
each
of the eight quarters in the two-year period ended April 30, 2007. In the
Company's opinion, this unaudited information has been prepared on the same
basis as the audited information and includes all adjustments (consisting of
only normal recurring adjustments) necessary for a fair statement of the
financial information for the period presented.
|
|
|
Three
Months Ended
|
|
|||||||||||||
|
|
|
July 29,
|
|
|
October 28,
|
|
|
January 27,
|
|
|
April 30,
|
|
||||
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
||||
|
|
|
(In
thousands except per share data)
|
|
|||||||||||||
|
|
||||||||||||||||
|
Year
ended April 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
31,557
|
|
|
$
|
45,189
|
|
|
$
|
46,275
|
|
|
$
|
50,700
|
|
|
Gross
margin
|
|
$
|
11,986
|
|
|
$
|
17,770
|
|
|
$
|
19,636
|
|
|
$
|
19,090
|
|
|
Net
income
|
|
$
|
1,365
|
|
|
$
|
4,894
|
|
|
$
|
8,889
|
|
|
$
|
5,570
|
|
|
Net
income per share — Basic (1)
|
|
$
|
0.10
|
|
|
$
|
0.36
|
|
|
$
|
0.65
|
|
|
$
|
0.30
|
|
|
Net
income per share — Diluted (1)
|
|
$
|
0.09
|
|
|
$
|
0.31
|
|
|
$
|
0.57
|
|
|
$
|
0.27
|
|
|
|
|
Three
Months Ended
|
|
|||||||||||||
|
|
|
July 30,
|
|
|
October 29,
|
|
|
January 28,
|
|
|
April 30,
|
|
||||
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
||||
|
|
|
(In
thousands except per share data)
|
|
|||||||||||||
|
|
||||||||||||||||
|
Year
ended April 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
30,751
|
|
|
$
|
42,550
|
|
|
$
|
35,468
|
|
|
$
|
30,588
|
|
|
Gross
margin
|
|
$
|
11,156
|
|
|
$
|
17,661
|
|
|
$
|
15,528
|
|
|
$
|
12,414
|
|
|
Net
income (loss)
|
|
$
|
1,293
|
|
|
$
|
6,054
|
|
|
$
|
4,393
|
|
|
$
|
(532
|
)
|
|
Net
income (loss) per share — Basic (1)
|
|
$
|
0.10
|
|
|
$
|
0.47
|
|
|
$
|
0.34
|
|
|
$
|
(0.04
|
)
|
|
Net
income (loss) per share — Diluted (1)
|
|
$
|
0.09
|
|
|
$
|
0.41
|
|
|
$
|
0.30
|
|
|
$
|
(0.04
|
)
|
(1)
Earnings per share is computed independently for each of the quarters presented.
The sums of the quarterly earnings per share in fiscal 2007 and 2006 do not
equal the total earnings per share computed for the year due to
rounding.
SUPPLEMENTARY
DATA
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
||||||||
|
Description
|
|
Balance
at
Beginning
of
Period
|
|
|
Charged
to
Costs
and
Expenses
|
|
|
Charged
to
Other
Accounts
|
|
|
Deductions
|
|
|
Balance
at
End
of
Period
|
|
|||||
|
|
||||||||||||||||||||
|
Allowance
for doubtful accounts for the year ended April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
35
|
|
|
$
|
159
|
|
|
$
|
—
|
|
|
$
|
(106
|
)
|
|
$
|
88
|
|
|
2006
|
|
$
|
88
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
86
|
|
|
2007
|
|
$
|
86
|
|
|
$
|
67
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
149
|
|
|
Warranty
reserve for the year ended April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
160
|
|
|
$
|
315
|
|
|
$
|
—
|
|
|
$
|
(193
|
)
|
|
$
|
282
|
|
|
2006
|
|
$
|
282
|
|
|
$
|
589
|
|
|
$
|
—
|
|
|
$
|
(527
|
)
|
|
$
|
344
|
|
|
2007
|
|
$
|
344
|
|
|
$
|
646
|
|
|
$
|
—
|
|
|
$
|
(727
|
)
|
|
$
|
263
|
|
|
Reserve
for inventory excess and obsolescence for the year ended
April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
593
|
|
|
$
|
2,355
|
|
|
$
|
1,537
|
|
|
$
|
(3,353
|
)
|
|
$
|
1,132
|
|
|
2006
|
|
$
|
1,132
|
|
|
$
|
—
|
|
|
$
|
505
|
|
|
$
|
(824
|
)
|
|
$
|
813
|
|
|
2007
|
|
$
|
813
|
|
|
$
|
325
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
1,138
|
|
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
Not
applicable.
|
Controls
and Procedures.
|
Controls
and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. As required by Rule 13a-15(b) under the Exchange Act,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our Chief Executive Officer
and
Chief Financial Officer concluded that, as of the end of the period covered
by
this report, our disclosure controls and procedures were effective and were
operating at a reasonable assurance level.
Management's
Report on Internal Control Over Financial Reporting
This
annual report does not include a report of management's assessment regarding
internal control over financial reporting or an attestation report of our
independent registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly
public companies.
Internal
Control Over Financial Reporting
There
were no changes in our internal control over financial reporting or in other
factors identified in connection with the evaluation required by paragraph
(d)
of Exchange Act Rules 13a-15 or 15d-15 that occurred during the quarter ended
April 30, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
Other
Information.
|
None.
PART
III
|
Directors,
Executive Officers, and Corporate
Governance.
|
Certain
information required by Item 401 of Regulation S-K will be included in the
Proxy Statement for our 2007 Annual Meeting of Stockholders, and that
information is incorporated by reference herein.
Codes
of Ethics
We
have
adopted a Code of Business Conduct and Ethics (a "Code of Conduct"). The Code
of
Conduct is posted on our website, www.avinc.com. We intend to disclose on our
website any amendments to, or waivers of, the Code of Conduct covering our
Chief
Executive Officer, Chief Financial Officer and/or Controller promptly following
the date of such amendments or waivers. A copy of the Code of Conduct may be
obtained upon request, without charge, by contacting our Secretary at (626)
357-9983 or by writing to us at AeroVironment, Inc., Attn: Secretary, 181 W.
Huntington Dr., Suite 202, Monrovia, CA 91016. The information contained or
connected to our website is not incorporated by reference into this annual
report on Form 10-K and should not be considered part of this or any reported
filed with the SEC.
No
family
relationships exist among any of the executive officers, directors or director
nominees.
There
have been no material changes to the procedures by which security holders may
recommend nominees to our board of directors.
The
information required by Item 407(d)(4) and (d)(5) of Regulation S-K will be
included in the Proxy Statement for our 2007 Annual Meeting of Stockholders,
and
that information is incorporated by reference herein.
|
Executive
Compensation.
|
The
information required by Item 402 and Item 407(e)(4) amd (5) of Regulation
S-K will be included in the Proxy Statement for our 2007 Annual Meeting of
Stockholders, and that information is incorporated by reference
herein.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
information required by Item 403 of Regulation S-K will be included in the
Proxy Statement for our 2007 Annual Meeting of Stockholders, and that
information is incorporated by reference herein.
|
Item13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The
information required by Item 404 and Item 407(a) of Regulation S-K will be
included in the Proxy Statement for our 2007 Annual Meeting of Stockholders,
and
that information is incorporated by reference herein.
|
Principal
Accounting Fees and
Services.
|
The
information required by Item 14 will be included in the Proxy Statement for
our 2007 Annual Meeting of Stockholders, and that information is incorporated
by
reference herein.
PART
IV
|
Exhibits,
Financial Statement
Schedules
|
|
(a)
|
The
following are filed as part of this Annual Report on Form 10-K:
|
|
1.
|
Financial
Statements
|
The
following consolidated financial statements are included in
Item 8:
|
|
Ÿ
|
Report
of Independent Registered Public Accounting
Firm
|
|
|
Ÿ
|
Consolidated
Balance Sheets at April 30, 2007
and 2006
|
|
|
Ÿ
|
Consolidated
Statements of Income for the Years ended April 30, 2007, 2006 and
2005
|
|
|
Ÿ
|
Consolidated
Statements of Stockholders' Equity for the Years ended April 30,
2007,
2006 and 2005
|
|
|
Ÿ
|
Consolidated
Statements of Cash Flows for the Years ended April 30, 2007, 2006
and
2005
|
|
|
Ÿ
|
Notes
to Consolidated Financial
Statements
|
|
2.
|
Financial
Statement Schedules
|
The
following Schedule is included in Item 8:
|
|
Ÿ
|
Schedule
II – Valuation and Qualifying
Accounts
|
All
other
schedules have been omitted since the required information is not present,
or
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or the Notes thereto.
Exhibits
– See Item 15(b) of this report below.
|
(b)
|
Exhibits
|
|
Exhibit
Number
|
Exhibit
|
||
|
3.1
|
(1)
|
Amended
and Restated Certificate of Incorporation of AeroVironment,
Inc.
|
|
|
3.3
|
(1)
|
Amended
and Restated Bylaws of AeroVironment, Inc.
|
|
|
4.1
|
(2)
|
Form
of AeroVironment, Inc.'s Common Stock Certificate
|
|
|
4.2
|
(2)
|
Proxy
for Common Stock of AeroVironment, Inc., dated January 8, 1993,
between Marshall MacCready and Paul B. MacCready
|
|
|
4.3
|
(2)
|
Proxy
for Common Stock of AeroVironment, Inc., dated January 14, 1993,
between Tyler MacCready and Paul B. MacCready
|
|
|
4.4
|
(2)
|
Proxy
for Common Stock of AeroVironment, Inc., dated January 14, 1993,
between Parker MacCready and Paul B. MacCready
|
|
|
10.1
|
#(2)
|
Form
of Director and Executive Officer Indemnification
Agreement
|
|
|
10.2
|
#(2)
|
AeroVironment,
Inc. Nonqualified Stock Option Plan
|
|
|
10.3
|
#(2)
|
Form
of Nonqualified Stock Option Agreement pursuant to the AeroVironment,
Inc.
Nonqualified Stock Option Plan
|
|
|
10.4
|
#(2)
|
AeroVironment,
Inc. Directors' Nonqualified Stock Option Plan
|
|
|
10.5
|
#(2)
|
Form
of Directors' Nonqualified Stock Option Agreement pursuant
to the
AeroVironment, Inc. Directors' Nonqualified Stock Option
Plan
|
|
|
10.6
|
#(2)
|
AeroVironment,
Inc. 2002 Equity Incentive Plan
|
|
|
10.7
|
#(2)
|
Form
of AeroVironment, Inc. 2002 Equity Incentive Plan Stock Option
Agreement
|
|
|
10.8
|
#(2)
|
AeroVironment,
Inc. 2006 Equity Incentive Plan
|
|
|
10.9
|
#(2)
|
Form
of Stock Option Agreement pursuant to the AeroVironment,
Inc. 2006 Equity
Incentive Plan
|
|
|
10.10
|
*#(2)
|
Form
of Performance Based Bonus Award pursuant to the AeroVironment,
Inc. 2006
Equity Incentive Plan
|
|
|
10.11
|
#(2)
|
AeroVironment,
Inc. Supplemental Executive Retirement Plan, dated May 19,
2005
|
|
|
10.12
|
(2)
|
Sublease
Agreement, dated February 17, 2005, among AeroVironment, Inc., L-3
Communications Corporation and Thermotrex Corporation, for
the property
located at 900 Enchanted Way, Simi Valley, California
93065
|
|
|
10.13
|
(2)
|
Standard
Industrial/Commercial Single-Tenant Lease, dated August 8, 2005,
between AeroVironment, Inc. and FKT Associates, for the property
located
at 1960 Walker Ave., Monrovia, California 91016
|
|
|
Standard
Industrial/Commercial Single-Tenant Lease, dated February
12, 2007,
between AeroVironment, Inc. and OMP Industrial Moreland,
LLC, for the
property located at 85 Moreland Road, Simi Valley, California,
including
the addendum thereto.
|
|||
|
10.15
|
(2)
|
Business
Loan Agreement, dated June 16, 2005, between AeroVironment, Inc. and
California Bank & Trust
|
|
|
10.16
|
†(2)
|
AV
Direct Project Request, dated July 7, 2005, between AeroVironment,
Inc. and Marine Corps System Command
|
|
|
10.17
|
†(2)
|
Award
Contract, dated December 22, 2005, between AeroVironment, Inc. and
Marine Corps System Command
|
|
|
10.18
|
†(2)
|
Award
Contract, dated August 15, 2005, between AeroVironment, Inc. and
U.S. Army Aviation & Missile Command
|
|
|
10.19
|
†(2)
|
Award
Contract, dated September 21, 2004, between AeroVironment, Inc. and
Natick Contracting Division
|
|
|
10.20
|
†(2)
|
Award
Contract, dated January 2, 2004, between AeroVironment, Inc. and
U.S. Army Aviation & Missile Command
|
|
|
10.21
|
#(2)
|
Standard
Consulting Agreement, dated February 1, 2004, between AeroVironment,
Inc. and Charles R. Holland
|
|
|
10.22
|
*#(2)
|
Standard
Consulting Agreement, dated November 1, 2005, between AeroVironment,
Inc. and Charles R. Holland
|
|
|
10.23
|
#(2)
|
Promissory
Note, dated June 30, 2004, between AeroVironment, Inc. and Timothy E.
Conver
|
|
|
10.24
|
#(2)
|
Retiree
Medical Plan
|
|
|
21.1
|
(2)
|
Subsidiaries
of AeroVironment, Inc.
|
|
|
Consent
of Ernst & Young LLP, independent registered public accounting
firm
|
|||
|
24.1
|
Power
of Attorney (incorporated by reference to the signature page
of this
report on Form 10-K)
|
||
|
Certification
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934
|
|||
|
Certification
Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934
|
|||
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
|
(1)
Incorporated
by
reference herein to the exhibits to the Company's Quarterly Report on Form
10-Q
filed March 9, 2007 (File No. 001-33261)
(2)
Incorporated
by
reference herein to the exhibits to the Company's Registration Statement on
Form S-1 (File No. 333-137658)
†Confidential
treatment has been requested for portions of this exhibit.
#Indicates
management contract or compensatory plan.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
AEROVIRONMENT,
INC.
|
||
|
Date:
June 29, 2007
|
/s/ Timothy E. Conver | |
|
By:
|
Timothy
E. Conver
|
|
|
Its:
|
Chief
Executive Officer and President
|
|
|
(Principal
Executive
Officer)
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
||
|
/s/
Timothy E. Conver
|
||||
|
Timothy
E. Conver
|
President
and Chief Executive Officer and Director (Principal Executive
Officer)
|
June
29, 2007
|
||
|
/s/
Stephen C. Wright
|
||||
|
Stephen
C. Wright
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
June
29, 2007
|
||
|
/s/
Paul B. MacCready
|
||||
|
Paul
B. MacCready
|
Chairman
of the Board of Directors
|
June
29, 2007
|
||
|
/s/
Joseph F. Alibrandi
|
||||
|
Joseph
F. Alibrandi
|
Director
|
June
29, 2007
|
||
|
/s/
Kenneth R. Baker
|
||||
|
Kenneth
R. Baker
|
Director
|
June
29, 2007
|
||
|
/s/
Arnold L. Fishman
|
||||
|
Arnold
L. Fishman
|
Director
|
June
29, 2007
|
||
|
/s/
Murray Gell-Mann
|
||||
|
Murray
Gell-Mann
|
Director
|
June
29, 2007
|
||
|
/s/
Charles R. Holland
|
||||
|
Charles
R. Holland
|
Director
|
June
29, 2007
|
68
AIR
COMMERCIAL REAL ESTATE
ASSOCIATIONSTANDARD
INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE — NET
(DO
NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
|
1.
|
Basic
Provisions (“Basic
Provisions”).
|
1.1 Parties:
This Lease (“Lease”), dated for reference purposes only February 12, 2007
is
made
by and between OMP INDUSTRIAL MORELAND, LLC, a Delaware limited liability
company. (“Lessor”) and AEROVIRONMENT,
INC, a Delaware corporation (“Lessee”), (collectively the “Parties,” or
individually a “Party”).
1.2 Premises:
That certain real property, including all improvements therein or to be provided
by Lessor under the terms of this Lease, and commonly known as 85 Moreland
Road,
Simi Valley, California located
in the County of Ventura, State of California, and generally
described as (describe briefly the nature of the property and, if applicable,
the “Project”, if the property is located within a Project) containing
a 105,083 square foot industrial building together with other
improvements located thereon (“Premises”). (See also Paragraph 2)
1.3 Term:
five (5) years and four (4) months (“Original Term”)
commencing March 1, 2007 (“Commencement Date”) and ending June 30,
2012 (“Expiration Date”). (See also Paragraph 3)
1.4 Early
Possession: February 14, 2007 (“Early Possession Date”). (See also
Paragraphs 3.2 and 3.3)
1.5 Initial
Base Rent: $70,405.61 per month (“Base Rent”), payable on the first
(1st) day of each month on the Commencement Date. (See also Paragraph
4)
x If this
box is checked, there are provisions in this Lease for the Base Rent to be
adjusted.
1.6 Base
Rent and Other Monies Paid Upon Execution:
(a) Base
Rent:
$70,405,61 for the period fourth (4th) full, month of the
Term.
(b) Security Deposit: $None (“Security
Deposit”). (See also Paragraph 5)
(c) Association
Fees:
$None for the period None
(d) Other:
None for
None
(e) Total
Due Upon Execution
of this Lease: $20,405. 61. (based on the Base Rent credit described in Section
4 of the Addendum)
1.7 Agreed
Use : distribution, manufacturing, and warehousing of aerospace
products , subject, however, to all Applicable Requirements. (See also Paragraph
6)
1.8 Insuring
Party: Lessor is the “Insuring Party” unless otherwise stated herein.
(See also Paragraph 8)
1.9 Real
Estate Brokers: (See also Paragraph 15)
(a) Representation:
The following real estate brokers (the “Brokers”) and brokerage relationships
exist in this transaction (check applicable boxes):
x Cushman
&
Wakefield represents Lessor exclusively (“Lessor’s
Broker”);
x Studley,
Inc.
represents Lessee exclusively (Lessee’s Broker”); or
__ N/A represents both Lessor and Lessee (“Dual
Agency”).
(b) Payment
to
Brokers: Upon execution and delivery of this Lease by both Parties,
Lessor shall pay to the Broker the fee agreed to in their separate written
agreement for the brokerage services rendered by the Brokers.
1.10 Guarantor.
The obligations of the Lessee under this Lease are to be guaranteed by None
_______________ (“Guarantor”).
(See also Paragraph 37)
1.11 Attachments.
Attached hereto are the following, all of which constitute a part of this
Lease:
x an
Addendum consisting of Paragraphs 1 through 10
PAGE 1 OF 18
|
INITIALS
|
INITIALS
|
|
©2001
– AIR COMMERCIAL REAL ESTATE ASSCOCIATION
|
FORM
STN-9-3/06E
|
|
o
|
a
plot plan depicting the Premises
(Exhibit A);
|
|
o
|
a
current set of the Rules and
Regulations;
|
|
o
|
a
Work Letter;
|
|
x
|
other
(specify): Exhibit “B” Environmental
Questionnaire
|
2. Premises.
2.1 Letting.
Lessor hereby teases to Lessee, and Lessee hereby leases from Lessor, the
Premises, for the term, at the rental, and upon all of the terms, covenants
and
conditions set forth in this Lease. Unless otherwise provided herein, any
statement of size set forth in this Lease, or that may have been used in
calculating Rent, is an approximation which the Parties agree is reasonable
and
any payments based thereon are not subject to revision whether or not the actual
size is more or less. Note: Lessee is advised to verify the actual size prior
to
executing this Lease. Subject to (I) all of the terms and conditions of this
Lease, (II) Force Majeure events, (III) Lessor’s commercially reasonable
security requirements, and (lV) the Applicable Requirements, Lessee shall have
access to the Premises twenty-four (24) hours per day, seven (7) days per week
throughout the Lease Term.
2.2 Condition.
Lessor shall deliver the Premises to Lessee broom clean and free of debris
on
the Commencement Date or the Early Possession Date, whichever first occurs
(“Start Date”), and, so long as the required service contracts described in
Paragraph 7.1(b) below are obtained by Lessee and
in effect within thirty days following the Start Date, warrants that the
existing electrical, plumbing, fire sprinkler, lighting, heating. ventilating
and air conditioning systems (“HVAC”), loading doors, sump pumps, if any, and
all other such elements in the Premises, other than those constructed by Lessee,
shall be in good operating condition on said date, that the structural elements
of the roof, bearing walls and foundation of any buildings on the Premises
(the
“Building”) shall be free of material defects, and that the Premises do not
contain hazardous levels of any mold or fungi defined as toxic under applicable
state or federal law. If a non-compliance with said warranty exists as of the
Start Date, Lessor shall, as Lessor’s sole obligation with respect to such
matter, except as otherwise provided in this Lease, promptly after receipt
of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, malfunction or failure, rectify same at Lessor’s
expense. The warranty periods shall be as follows: (i) 90 days as to the HVAC
systems, and (ii) 9O days as to the remaining systems and other elements of
the
Building. If Lessee does not give Lessor the required notice within the
appropriate warranty period, correction of any such non-compliance, malfunction
or failure shall be the obligation of Lessee at Lessee’s sole cost and
expense.
2.3 Compliance.
Lessor warrants that to the best of its knowledge the improvements on
the Premises comply with the building codes, applicable laws, covenants or
restrictions of record, regulations, and ordinances (“Applicable Requirements”)
that were in effect as of the date hereof. Said warranty does
not apply to the use to which Lessee will put the Premises, modifications which
may be required by the Americans with Disabilities Act or any similar laws
as a
result of Lessee’s use (see Paragraph 50), or to any Alterations or Utility
Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee.
NOTE: Lessee is responsible for determining whether or not the Applicable
Requirements, and especially the zoning, are appropriate for Lessees intended
use, and acknowledges that past uses of the Premises may no longer be allowed.
If the Premises do not comply with said warranty, Lessor shall, except as
otherwise provided, promptly after receipt of written notice from Lessee setting
forth with specificity the nature and extent of such non-compliance, rectify
the
same at Lessor’s expense. If Lessee does not give Lessor written notice of a
non-compliance with this warranty within 90 days following the Start Date,
correction of that non-compliance shall be the obligation of Lessee at Lessee’s
sole cost and expense. If the Applicable Requirements are hereafter changed
so
as to require during the term of this Lease the construction of an addition
to
or an alteration of the Premises and/or Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical modification of
the
Unit, Premises and/or Building (“Capital Expenditure”), Lessor and Lessee shall
allocate the cost of such work as follows:
(a) Subject
to Paragraph 2.3(c)
below, if such Capital Expenditures are required as a result of the specific
and
unique, use of the Premises by Lessee as compared with uses by tenants in
general, Lessee shall be fully responsible for the cost thereof, provided,
however that if such Capital Expenditure is required during the last 2 years
of
this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead
terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days
after receipt of Lessee’s termination notice that Lessor has elected to pay the
difference between the actual cost thereof and an amount equal to 6 months’ Base
Rent. If Lessee elects termination, Lessee shall immediately cease the use
of
the Premises which requires such Capital Expenditure and deliver to Lessor
written notice specifying a termination date at least 90 days thereafter. Such
termination date shall, however, in no event be earlier than the last day that
Lessee could legally utilize the Premises without commencing such Capital
Expenditure.
(b) If
such Capital Expenditure is
not the result of the specific and unique use of the Premises by Lessee (such
as, governmentally mandated seismic modifications), then Lessor shall pay for
such Capital Expenditure and Lessee shall only be obligated to pay, each month
during the remainder of the term of this Lease, on the date that on which the
Base Rent is due, an amount equal to 144th of the portion of such costs
reasonably attributable to the Premises. Lessee shall pay Interest on the
balance but may prepay its obligation at any time. If, however, such Capital
Expenditure is required during the last 2 years of this Lease or if Lessor
reasonably determines that it is not economically feasible to pay Its share
thereof, Lessor shall have the option to terminate this Lease upon 90 days
prior
written notice to Lessee unless Lessee notifies Lessor, in writing, within
10
days after receipt of Lessor’s termination notice that Lessee will pay for such
Capital Expenditure. If Lessor does not elect to terminate, and fails to tender
its share of any such Capital Expenditure, Lessee may advance such funds and
deduct same, with Interest, from Rent until Lessor’s share of such costs have
been fully paid. If Lessee is unable to finance Lessor’s share, or if the
balance of the Rent due and payable for the remainder of this Lease is not
sufficient to fully reimburse Lessee on an offset basis, Lessee shall have
the
right to terminate this Lease upon 30 days written notice to
Lessor.
(c) Notwithstanding
the above, the
provisions concerning Capital Expenditures are intended to apply only to
non-voluntary, unexpected, and new Applicable Requirements. If the Capital
Expenditures are instead triggered by Lessee as a result of an actual or
proposed change in use, change in intensity of use, or modification to the
Premises then, and in that event, Lessee shall either (i) immediately cease
such
changed use or intensity of use and/or take such other steps as may be necessary
to eliminate the requirement for such Capital Expenditure, or (ii) complete
such
Capital Expenditure at its own expense. Lessee shall not, however, have any
right to terminate this Lease.
2.4 Acknowledgements. Lessee
acknowledges that: a) it has satisfied itself with respect to the
condition of the Premises (including but not limited to the electrical, HVAC
and
fire sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements and the Americans with Disabilities Act), and their
suitability for Lessee’s intended use,(b) Lessee has made such investigation as
it deems necessary with reference to such matters and assumes all responsibility
therefore as the same relate to its occupancy of the Premises, and (c) neither
Lessor, nor Lessor’s agents have made any oral or written representations or
warranties with respect to said matters other than as set forth in this
Lease.
|
PAGE
2 OF 18
|
|||
|
INITIALS
|
INITIALS
|
||
|
©2001
- AIR COMMERCIAL REAL ESTATE ASSOCIATION
|
FORM
STN-9-3/06E
|
||
2.5 Lessee
as
Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2
shall be of no force or effect if immediately prior to the Start Date Lessee
was
the owner or occupant of the Premises. In such event, Lessee shall be
responsible for any necessary corrective work.
|
3.
|
Term.
|
3.1 Term.
The
Commencement Date, Expiration Date and Original Term of this Lease are as
specified in Paragraph 1.3.
3.2 Early
Possession. If Lessee totally or partially occupies
the Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other terms of
this
Lease (including but not limited to the obligations to pay insurance premiums
and to maintain the Premises) shall be in effect during such period. Any such
early possession shall not affect the Expiration Date.
3.3 Delay
In
Possession. Lessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises to Lessee
by the Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession by such date, Lessor shall not be subject to any liability therefore,
nor shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until Lessor
delivers possession of the Premises and any period of rent abatement that Lessee
would otherwise have enjoyed shall run from the date of delivery of possession
and continue for a period equal to what Lessee would otherwise have enjoyed
under the terms hereof, but minus any days of delay caused by the acts or
omissions of Lessee. If possession is not delivered within 60 days after the
Commencement Date, Lessee may, at its option, by notice in writing within 10
days after the end of such 60 day period, cancel this Lease, in which event
the
Parties shall be discharged from all obligations hereunder. if such written
notice is not received by Lessor within said 10 day period, Lessee’s right to
cancel shall terminate. If possession of the Premises is not delivered within
120 days after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 Lessee
Compliance. Lessor shall not be required to deliver possession of the
Premises to Lessee until Lessee complies with its obligation to provide evidence
of insurance (Paragraph 8.5). ‘Pending delivery of such evidence, Lessee shall
be required to perform all of its obligations under this Lease from and after
the Start Date, including the payment of Rent, notwithstanding Lessor’s election
to withhold possession pending receipt of such evidence of insurance. Further,
if Lessee is required to perform any other conditions prior to or concurrent
with the Start Date, the Start Date shall occur but Lessor may elect to withhold
possession until such conditions are satisfied.
|
4.
|
Rent.
|
4.1. Rent
Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease (except for the Security Deposit) are deemed to be rent
(“Rent”).
4.2 Payment.
Lessee shall cause payment of Rent to be received by Lessor in lawful money
of
the United States, without offset or deduction (except as specifically permitted
in this Lease), on or before the day on which it is due. All monetary amounts
shall be rounded to the nearest whole dollar. In the event that any invoice
prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver
and Lessee shall be obligated to pay the amount set forth In this Lease. Rent
for any period during the term hereof which is for less than one full calendar
month shall be prorated based upon the actual number of days of said month.
Payment of Rent shall be made to Lessor at its address stated herein or to
such
other persons or place as Lessor may from time to time designate in writing.
Acceptance of a payment which is less than the amount then due shall not be
a
waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s
endorsement of any check so stating. In the event that any check, draft, or
other instrument of payment given by Lessee to Lessor is dishonored for any
reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late
Charge and Lessor, at its option, may require all future Rent be paid by
cashier’s check. Payments will be applied first to accrued late charges and
attorney’s fees, second to accrued interest, then to Base Rent and any
additional rent, and any remaining amount to any other outstanding charges
or
costs.
5. Security
Deposit. Lessee shall
deposit with Lessor upon execution hereof the Security Deposit (if any) as
security for Lessee’s faithful performance of its obligations under this Lease.
If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor
may
use, apply or retain all or any portion of said Security Deposit for the payment
of any amount due already due Lessor, for Rents which will be due in the future,
and! or to reimburse or compensate Lessor for any liability, expense, loss
or
damage which Lessor may suffer or Incur by reason thereof. If Lessor uses or
applies all or any portion of the Security Deposit, Lessee shall within 10
days
after written request therefore deposit monies with Lessor sufficient to restore
said Security Deposit to the full amount required by this Lease. If the Base
Rent increases during the term of this Lease, Lessee shall, upon written request
from Lessor, deposit additional monies with Lessor so that the total amount
of
the Security Deposit shall at all times bear the same proportion to the
increased Base Rent as the initial Security Deposit bore to the initial Base
Rent. Should the Agreed Use be amended to accommodate a material change in
the
business of Lessee or to accommodate a sublessee or assignee, Lessor shall
have
the right to increase the Security Deposit to the extent necessary, in Lessor’s
reasonable judgment, to account for any increased wear and tear that the
Premises may suffer as a result thereof, if a change in control of Lessee occurs
during this Lease and following such change the financial condition of Lessee
is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit
such additional monies with Lessor as shall be sufficient to cause the Security
Deposit to be at a commercially reasonable level based on such change in
financial condition. Lessor shall not be required to keep the Security Deposit
separate from its general accounts. Within 90 days after the expiration or
termination of this Lease, Lessor shall return that portion of the Security
Deposit not used or applied by Lessor. No part of the Security Deposit shall
be
considered to be held in trust, to bear interest or to be prepayment for any
monies to be paid by Lessee under this Lease.
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INITIALS
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©2001
- AIR COMMERCIAL REAL ESTATE ASSOCIATION
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FORM
STN-9-3/06E
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6.
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Use.
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6.1 Use.
Lessee shall use and occupy the Premises only for the Agreed Use, or any other
legal use which is reasonably comparable thereto, and for no other purpose.
Lessee shall not use or permit the use of the Premises in a manner that is
unlawful, creates damage, waste or a nuisance, or that disturbs occupants of
or
causes damage to neighboring premises or properties. Other than guide, signal
and seeing eye dogs, Lessee shall not keep or allow in the Premises any pets,
animals, birds, fish, or reptiles. Lessor shall not unreasonably withhold or
delay its consent to any written request for a modification of the Agreed Use,
so long as the same will not impair the structural integrity of the improvements
on the Premises or the mechanical or electrical systems therein, and/or is
not
significantly more burdensome to the Premises. If Lessor elects to withhold
consent, Lessor shall within 7 days after such request give written notification
of same, which notice shall include an explanation of Lessor’s objections to the
change in the Agreed Use.
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6.2
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Hazardous
Substances.
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(a) Reportable
Uses Require Consent. The term “Hazardous Substance”
as used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises,
is
either: (i) potentially injurious to the public health, safety or welfare,
the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substances shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, and/or crude oil or any products, by-products or fractions
thereof. Lessee shall not engage in any activity in or on the Premises which
constitutes a Reportable Use of Hazardous Substances without the express prior
written consent of Lessor and timely compliance (at Lessee’s expense) with all
Applicable Requirements. “Reportable Use” shall mean (i) the installation or use
of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and/or
(iii) the presence at the Premises of a Hazardous Substance with respect to
which any Applicable Requirements requires that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, ordinary office
supplies (copier toner, liquid paper, glue, etc.) and common household cleaning
materials, so long as such use is in compliance with all Applicable
Requirements, is not a Reportable Use, and does not expose the Premises or
neighboring property to any meaningful risk of contamination or damage or expose
Lessor to any liability therefore. In addition, Lessor may condition its consent
to any Reportable Use upon receiving such additional assurances as Lessor
reasonably deems necessary to protect itself, the public, the Premises and/or
the environment against damage, contamination, injury and/or liability,
including, but not limited to, the installation (and removal on or before Lease
expiration or termination) of protective modifications (such as concrete
encasements) and/or increasing the Security Deposit.
(b) Duty
to Inform Lessor. If Lessee knows, or has reasonable cause to believe,
that a Hazardous Substance has come to be located in, on, under or about the
Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor, and provide Lessor
with
a copy of any report, notice, claim or other documentation which it has
concerning the presence of such Hazardous Substance.
(c) Lessee
Remediation. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under, or about the Premises (including
through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s
expense, comply with all Applicable Requirements and take all investigatory
and/or remedial action reasonably recommended, whether or not formally ordered
or required, for the cleanup of any contamination of, and for the maintenance,
security and/or monitoring of the Premises or neighboring properties, that
was
caused or materially contributed to by Lessee, or pertaining to or involving
any
Hazardous Substance brought onto the Premises during the term of this Lease,
by
or for Lessee, or any third party.
(d) Lessee
Indemnification. Lessee shall indemnify, defend and hold Lessor, its
agents, employees, lenders and ground lessor, if any, harmless from and against
any and all loss of rents and/or damages, liabilities, judgments, claims,
expenses, penalties, and attorneys’ and consultants’ fees arising out of or
involving any Hazardous Substance brought onto the Premises by or for Lessee,
or
any third party (provided, however, that Lessee shall have no liability under
this Lease with respect to underground migration of any Hazardous Substance
under the Premises from adjacent properties not caused or contributed to by
Lessee). Lessee’s obligations shall include, but not be limited to, the effects
of any contamination or injury to person, property or the environment created
or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination
of
this Lease. No termination, cancellation or release agreement entered
into by Lessor and Lessee shall release Lessee from its obligations under this
Lease with respect to Hazardous Substances, unless specifically so agreed by
Lessor in writing at the time of such agreement.
(e) Lessor
Indemnification. Lessor and its successors and assigns shall
indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the
cost
of remediation, which result from Hazardous Substances which existed on the
Premises prior to Lessee’s occupancy or which are caused by the gross negligence
or willful misconduct of Lessor, its agents or employees. Lessor’s obligations,
as and when required by the Applicable Requirements, shall include, but not
be
limited to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this
Lease.
(f) Investigations
and Remediations. Lessor shall retain the responsibility and pay for
any Investigations or remediation measures required by governmental entities
having jurisdiction with respect to the existence of Hazardous Substances on
the
Premises prior to Lessee’s occupancy, unless such remediation measure is
required as a result of Lessee’s use (including “Alterations”, as defined in
paragraph 7.3(a) below) of the Premises, in which event Lessee shall be
responsible for such payment. Lessee shall cooperate fully in any such
activities at the request of Lessor, including allowing Lessor and Lessors
agents to have reasonable access to the Premises at reasonable times in order
to
carry out Lessor’s investigative and remedial responsibilities,
(g) Lessor
Termination Option. If a Hazardous Substance Condition (see Paragraph
9.1(e)) occurs during the term of this Lease, unless Lessee is legally
responsible therefore (in which case Lessee shall make the investigation and
remediation thereof required by the Applicable Requirements and this Lease
shall
continue in full force and effect, but subject to Lessor’s rights under
Paragraph 8.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i)
investigate and remediate such Hazardous Substance Condition, if required,
as
soon as reasonably possible at Lessor’s expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to remediate
such condition exceeds 12 times the then monthly Base Rent or $100,000,
whichever is greater, give written notice to Lessee, within 30 days after
receipt by Lessor of knowledge of the occurrence of such Hazardous Substance
Condition, of Lessor’s desire to terminate this Lease as of the date 60 days
following the date of such
notice. In the event Lessor elects to give a termination notice, Lessee may,
within 10 days thereafter, give written notice to Lessor of Lessee’s commitment
to pay the amount by which the cost of the remediation of such Hazardous
Substance Condition exceeds an amount equal to 12 times the then monthly Base
Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said
funds or satisfactory assurance thereof within 30 days following such
commitment. In such event, this Lease shall continue in full force and effect,
and Lessor shall proceed to make such remediation as soon as reasonably possible
after the required funds are available. If Lessee does not give such notice
and
provide the required funds or assurance thereof within the time provided, this
Lease shall terminate as of the date specified in Lessor’s notice of
termination,
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INITIALS
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©2001
- AIR COMMERCIAL REAL ESTATE ASSOCIATION
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FORM
STN-9-3/06E
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6.3 Lessee’s
Compliance with Applicable Requirements. Except as otherwise provided
in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in
a timely manner, materially comply with all Applicable Requirements, the
requirements of any applicable fire insurance underwriter or rating bureau,
and
the recommendations of Lessor’s engineers and/or consultants which relate in any
manner to (he such Requirements, without regard to whether such Requirements
are
now in effect or become effective after the Start Date. Lessee shall, within
10
days after receipt of Lessor’s written request, provide Lessor with copies of
all permits and other documents, and other information evidencing Lessee’s
compliance with any Applicable Requirements specified by Lessor, and shall
immediately upon receipt, notify Lessor in writing (with copies of any documents
involved) of any threatened or actual claim, notice, citation, warning,
complaint or report pertaining to or involving the failure of Lessee or the
Premises to comply with any Applicable Requirements. Likewise, Lessee shall
immediately give written notice to Lessor of: (i) any water damage to the
Premises and any suspected seepage, pooling, dampness or other condition
conducive to the production of mold; or (ii) any mustiness or other odors that
might indicate the presence of mold in the Premises.
6.4 Inspection
; Compliance. Lessor and Lessor’s “Lender” (as defined in Paragraph 30)
and consultants shall have the right to enter into Premises at any time, in
the
case of an emergency, and otherwise at reasonable times after reasonable notice,
for the purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease. The cost of any such inspections shall
be
paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous
Substance Condition (see paragraph 9.1) is found to exist or be imminent, or
the
inspection is requested or ordered by a governmental authority. In such case,
Lessee shall upon request reimburse Lessor for the cost of such inspection,
so
long as such inspection is reasonably related to the violation or
contamination. In addition, Lessee shall provide copies of all
relevant material safety data sheets (MSDS) to Lessor within 10 days of the
receipt of a written request therefore.
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7.
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Maintenance;
Repairs, Utility Installations; Trade Fixtures and
Alterations.
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7.1
|
Lessee’s
Obligations.
|
(a)
In General. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable
Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee’s sole expense, keep the Premises,
Utility Installations (intended for Lessee’s exclusive use, no matter where
located), and Alterations in good order, condition and repair (whether or not
the portion of the Premises requiring repairs, or the means of repairing the
same, are reasonably or readily accessible to Lessee, and whether or not the
need for such repairs occurs as a result of Lessee’s use, any prior use, the
elements or the age of such portion of the Premises), including, but not limited
to, all equipment or facilities, such as plumbing, HVAC equipment, electrical,
lighting facilities, boilers, pressure vessels, fire protection system,
fixtures, walls (interior and exterior), ceilings, roof membrane,
floors, windows, doors, plate glass, skylights, landscaping, driveways, parking
lots, fences, retaining walls, signs, sidewalks and parkways located in, on,
or
adjacent to the Premises. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices,
specifically including the procurement and maintenance of the service contracts
required by Paragraph 7.1(b) below. Lessee’s obligations shall include
restorations, replacements or renewals when necessary to keep the Premises
and
all improvements thereon or a part thereof in good order, condition and state
of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition (including, e.g. graffiti
removal) consistent with the exterior appearance of other similar facilities
of
comparable age and size in the vicinity, including, when necessary, the exterior
repainting of the Building.
(b)
Service Contracts. Lessee shall, at Lessee’s sole expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) parking lot, landscaping and irrigation systems,
(v) roof covering and drains, (vi) clarifiers (vii) basic utility feed to the
perimeter of the Building, and (viii) any other equipment, if reasonably
required by Lessor. However, Lessor reserves the right, upon notice to Lessee,
to procure and maintain any or all of such service contracts, and Lessee shall
reimburse Lessor, upon demand, for the cost thereof.
(c)
Failure to Perform. If Lessee fails to perform Lessee’s
obligations under this Paragraph 7.1, Lessor may enter upon the Premises after
10 days’ prior written notice to Lessee (except in the case of an emergency, in
which case no notice shall be required), perform such obligations on Lessee’s
behalf, and put the Premises in good order, condition and repair, and Lessee
shall promptly pay to Lessor a sum equal to 115% of the cost
thereof.
(d)
Replacement. Subject to Lessee’s indemnification of Lessor as
set forth in Paragraph 8.7 below, and without relieving Lessee of liability
resulting from Lessee’s failure to exercise and perform good maintenance
practices, if an item described in Paragraph 7.1(b) cannot be repaired other
than at a cost which is in excess of 50% of the cost of replacing such item,
then such item shall be replaced by Lessor, end the cost thereof shall be
prorated between the Parties and Lessee shall only be obligated to pay, each
month during the remainder of the term of this Lease, on the date on which
Base
Rent is due, an amount equal to the product of multiplying the cost of such
replacement by a fraction, the numerator of which is one, and the denominator
of
which is 144 (i.e. 1/144th of the cost per month). Lessee shall pay Interest
on
the unamortized balance but may prepay its obligation at any time, provided,
however, that the denominator for purposes of any roof replacement
shall be 300.
7.2 Lessor’s
Obligations. Subject to the provisions of Paragraphs 2.2 (Condition),
2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is
intended by the Parties hereto that Lessor have no obligation, in any manner
whatsoever, to repair and maintain the Premises, or the equipment therein,
all
of which obligations are intended to be that of the Lessee: provided, however,
that Lessor shall, at its sole cost and expense, be responsible for the
structure of the building (including the structural portions of the roof
(excluding the roof membrane)) unless the necessity for repairs to the same
are
necessitated due to Lessee’s acts or omissions (in which event Lessee shall be
responsible for the same). It is the intention of the
Parties that the terms of this Lease govern the respective obligations of the
Parties as to maintenance and repair of the Premises, and they expressly waive
the benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease.
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Initials
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©2001
- AIR COMMERCIAL REAL ESTATE ASSOCIATION
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FORM
STN-9-3/OBE
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7.3 Utility
Installations; Trade Fixtures; Alterations.
(a) Definitions.
The term “Utility Installations” refers to all floor and window
coverings, air and/or vacuum lines, power panels, electrical distribution,
security and fire protection systems, communication cabling, lighting fixtures,
HVAC equipment, plumbing, and fencing in or on the Premises. The term
“Trade Fixtures” shall mean Lessee’s machinery and equipment
that can be removed without doing material damage to the Premises. The term
“Alterations” shall mean any modification of the improvements,
other than Utility Installations or Trade Fixtures, whether by addition or
deletion. “Lessee Owned Alterations and/or Utility
Installations” are defined as Alterations and/or Utility Installations
made by Lessee that are not yet owned by Lessor pursuant to Paragraph
7.4(a).
(b) Consent.
Lessee shall not make any Alterations or Utility Installations to the Premises
without Lessor’s prior written consent. Lessee may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof)
without such consent but upon notice to Lessor, as tong as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof
or
any existing walls, will not affect the electrical, plumbing, HVAC, and/or
life
safety systems, and the cumulative cost thereof during this Lease as extended
does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum
equal to one month’s Base Rent in any one year. Notwithstanding the foregoing,
Lessee shall not make or permit any roof penetrations and/or install anything
on
the roof without the prior written approval of Lessor. Lessor may, as a
precondition to granting such approval, require Lessee to utilize a contractor
chosen and/or approved by Lessor. Any Alterations or Utility Installations
that
Lessee shall desire to make and which require the consent of the Lessor shall
be
presented to Lessor in written form with detailed plans. Consent shall be deemed
conditioned upon Lessee’s: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with
all
conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount in excess of one month’s Base Rent, Lessor may
condition its consent upon Lessee providing a lien and completion bond in an
amount equal to 150% of the estimated cost of such Alteration or Utility
Installation and/or upon Lessee’s posting an additional Security Deposit with
Lessor.
(c) Liens
Bonds. Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use
on
the Premises, which claims are or may be secured by any mechanic’s or material
men’s lien against the Premises or any interest therein. Lessee shall give
Lessor not less than 10 days notice prior to the commencement of any work in,
on
or about the Premises, and Lessor shall have the right to post notices of
non-responsibility. If Lessee shall contest the validity of any such
lien, claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy
any
such adverse judgment that may be rendered thereon before the enforcement
thereof. If Lessor shall require, Lessee shall furnish a surety bond in an
amount equal to 150% of the amount of such contested lien, claim or demand,
indemnifying Lessor against liability for the same. If Lessor elects to
participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and
costs.
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7.4
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Ownership;
Removal; Surrender; and
Restoration.
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(a) Ownership.
Subject to Lessor’s right to require removal or elect ownership as hereinafter
provided, all Alterations and Utility Installations made by Lessee shall be
the
property of Lessee, but considered a part of the Premises. Lessor may, at any
time, elect in writing to be the owner of all or any specified part of the
Lessee Owned Alterations and Utility Installations, Unless otherwise instructed
per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility
Installations shall, at the expiration or termination of this Lease, become
the
property of Lessor and be surrendered by Lessee with the Premises.
(b) Removal.
By delivery to Lessee of written notice from Lessor not earlier than
90
and not later than 30 days prior to the end of the term of this Lease, Lessor
may require that any or all Lessee Owned Alterations or Utility installations
be
removed by the expiration or termination of this Lease. Lessor may require
the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent.
(c) Surrender;
Restoration. Lessee shall surrender the Premises by the Expiration Date
or any earlier termination date, with all of the improvements, parts and
surfaces thereof broom clean and free of debris, and in good operating order,
condition and state of repair, ordinary wear and tear excepted. “Ordinary wear
and tear” shall not include any damage or deterioration that would have been
prevented by good maintenance practice. Notwithstanding the foregoing, if this
Lease is for 12 months or less, then Lessee shall surrender the Premises in
the
same condition as delivered to Lessee on the Start Date with NO allowance for
ordinary wear and tear. Lessee shall repair any damage occasioned by the
installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations
and/or Utility Installations, furnishings, and equipment as well as the removal
of any storage tank installed by or for Lessee, Lessee shall completely remove
from the Premises any and all Hazardous Substances brought onto the Premises
by
or for Lessee, or any third party (except Hazardous Substances which were
deposited via underground migration from areas outside of the Premises, or
if
applicable, the Premises) even if such removal would require Lessee to perform
or pay for work that exceeds statutory requirements. Trade Fixtures shall remain
the property of Lessee and shall be removed by Lessee. Any personal property
of
Lessee not removed on or before the Expiration Date or any earlier termination
date shall be deemed to have been abandoned by Lessee and may be disposed of
or
retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate
the Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of Paragraph
26 below.
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8.
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Insurance;
Indemnity.
|
8.1 Payment
For
Insurance. Lessee shall pay for all insurance required under Paragraph
8 except to the extent of the cost attributable to liability insurance carried
by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence.
Premiums for policy periods commencing prior to or extending beyond the Lease
term shall be prorated to correspond to the Lease term. Payment shall be made
by
Lessee to Lessor within 30 days following receipt of an
invoice,
8.2 Liability
Insurance.
(a)
Carried by Lessee. Lessee shall obtain and keep in force a
Commercial General Liability policy of insurance protecting Lessee and Lessor
as
an additional insured against claims for bodily injury, personal injury and
property damage based upon or arising out of the ownership, use, occupancy
or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be on an occurrence basis providing single limit coverage in an amount
not
less than $1,000,000 per occurrence with an annual aggregate of not less than
$5,000,000, Lessee shall add Lessor as an additional insured by means of an
endorsement at least as broad as the Insurance Service Organization’s
“Additional Insured-Managers or Lessors of
Premises” Endorsement and coverage shall also be extended
to include damage caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease
as an “insured contract” for the performance of Lessee’s indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee
shall
provide an endorsement on its liability policy(is) which provides that its
insurance shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance
only.
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©2001
- AIR COMMERCIAL REAL ESTATE
ASSOCIATION
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FORM
STN.9.3/06E
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(b)
Carried by Lessor. Lessor shall at Lessee’s sole
cost and expense have the right, but not the obligation, to
maintain liability insurance and such other Insurance that may be required
by
any lender of Lessor, which insurance shall be in addition
to,
and not in lieu of, the insurance required to be maintained by Lessee. Lessee
shall not be named as an additional insured therein.
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8.3
|
Property
Insurance - Building, Improvements and Rental
Value.
|
(a)
Building and Improvements. The insuring Party shall, at
Lessee’s sole cost and expense, obtain and keep in force a policy or policies in
the name of Lessor, with loss payable to Lessor, any ground-lessor, and to
any
Lender insuring loss or damage to the Premises. The amount of such Insurance
shall be equal to the full insurable replacement cost of the Premises, as the
same shall exist from time to time, or the amount required by any Lender, but
in
no event more than the commercially reasonable and available insurable value
thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations
and
Utility Installations, Trade Fixtures, and Lessee’s personal property shall be
insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage
is
available and commercially appropriate, such policy or policies shall insure
against all risks of direct physical loss or damage (except the perils of flood
and/or earthquake unless required by a Lender or otherwise desired by Lessor),
including coverage for debris removal and the enforcement of any Applicable
Requirements requiring the upgrading, demolition, reconstruction or replacement
of any portion of the Premises as the result of a covered loss. Said policy
or
policies shall also contain an agreed valuation provision in lieu of any
coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index
for
All Urban Consumers for the city nearest to where the Premises are located.
If
such insurance coverage has a deductible clause, the deductible amount shall
not
exceed $1,000 per occurrence, and Lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b)
Rental Value. The Insuring Party shall obtain and keep in force
a policy or policies in the name of Lessor with loss payable to Lessor and
any
Lender, insuring the loss of the full Rent for one year with an extended period
of indemnity for an additional 180 days (“Rental Value insurance”). Said
insurance shall contain an agreed valuation provision in lieu of any coinsurance
clause, and the amount of coverage shall be adjusted annually to reflect the
projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee
shall be liable for any deductible amount in the event of such
loss.
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8.4
|
Lessee’s
Property; Business Interruption
Insurance.
|
(a)
Property Damage. Lessee shall obtain and maintain insurance
coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned
Alterations and Utility Installations. Such insurance shall be full replacement
cost coverage with a deductible of not to exceed $1,000 per
occurrence. Lessee shall provide Lessor with written
evidence that such insurance is in force,
(b)
Business Interruption. Lessee shall obtain and maintain loss of
income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Lessee or attributable to
prevention of access to the Premises as a result of such perils.
(c)
No Representation of Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee’s property, business operations or
obligations under this Lease.
8.5 Insurance
Policies. Insurance required herein shall be by companies duly licensed
or admitted to transact business in the state where the Premises are located,
and maintaining during the policy term a “General Policyholders Rating” of at
least A-, VI, as set forth in the most current issue of “Best’s Insurance
Guide”, or such other rating as may be required by a Lender. Lessee shall not do
or permit to be done anything which invalidates the required insurance policies.
Lessee shall, prior to the Start Date, deliver to Lessor certified copies of
policies of such insurance or certificates evidencing the existence and amounts
of the required insurance. No such policy shall be cancelable or subject to
modification except after 30 days prior written notice to Lessor. Lessee shall
use good faith efforts to furnish Lessor with evidence of
renewals or “insurance binders” evidencing renewal thereof prior to the
expiration of such policies. In the event Lessor does not receive such evidence
within ten (10) days after such expiration, then Lessor may order such insurance
and charge the cost thereof to Lessee, which amount shall be payable by Lessee
to Lessor upon demand. Such policies shall be for a term of at least one year,
or the length of the remaining term of this Lease, whichever is less. If either
Party shall fail to procure and maintain the insurance required to be carried
by
it, the other Party may, but shall not be required to, procure and maintain
the
same.
8.6 Waiver
of Subrogation.
Without affecting any other rights or remedies, Lessee and Lessor each hereby
release and relieve the other, and waive their entire right to recover damages
against the other, for loss of or damage to its property arising out of or
incident to the perils required to be insured against herein. The effect of
such
releases and waivers is not limited by the amount of insurance carried or
required, or by any deductibles applicable hereto. The Parties agree to have
their respective property damage insurance carriers waive any right to
subrogation that such companies may have against Lessor or Lessee, as the case
may be, so long as the insurance is not invalidated thereby.
8.7 Indemnity.
Except for
Lessor’s gross negligence or willful misconduct, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s
master or ground lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’
and consultants’ fees, expenses and/or liabilities (collectively, “Claims”)
arising out of, involving, or in connection with, the use and/or occupancy
of
the Premises by Lessee. If any action or proceeding is brought against Lessor
by
reason of any of the foregoing matters, Lessee shall upon notice defend the
same
at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid
any
such claim in order to be defended or indemnified,
8.8 Exemption
of Lessor and its
Agents from Liability. Notwithstanding the negligence or
breach of this Lease by Lessor or its agents, neither
Lessor nor its agents shall be liable under any circumstances for: (i) injury
or
damage to the person or goods, wares, merchandise or other property of Lessee,
Lessee’s employees, contractors, invitees, customers, or any other person in or
about the Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, indoor air quality, the presence
of mold or from the breakage, leakage, obstruction or other defects
of pipes,
fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or
from
any other cause, whether the said injury or damage results from conditions
arising upon the Premises or upon other portions of the building of which the
Premises are a part, or from other sources or places, (ii) any damages arising
from any act or neglect of any other tenant of Lessor or from the failure of
Lessor or its agents to enforce the provisions of any other lease in the
Project, or (iii) injury to Lessee’s business or for any loss of income or
profit there from. Instead, it is intended that Lessee’s sole recourse in the
event of such damages or injury be to file a claim on the insurance policy(is)
that Lessee is required to maintain pursuant to the provisions of paragraph
8.
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8.9 Failure
to
Provide insurance. Lessee acknowledges that any failure on its part to
obtain or maintain the insurance required herein will expose Lessor to risks
and
potentially cause Lessor to incur costs not contemplated by this Lease, the
extent of which will be extremely difficult to ascertain. Accordingly, for
any
month or portion thereof that Lessee does not maintain the required insurance
and/or does not provide Lessor with the required binders or certificates
evidencing the existence of the required insurance, and If such failure
continues for five (5) days’ after Lessor’s notice to lessee of such failure,
the Base Rent shall be automatically increased, without any requirement for
notice to Lessee, by an amount equal to 10% of the then existing Base Rent
or
$100, whichever is greater. The parties agree that such increase in Base Rent
represents fair and reasonable compensation for the additional risk/costs that
Lessor will incur by reason of Lessee’s failure to maintain the required
insurance. Such increase in Base Rent shall in no event constitute a waiver
of
Lessee’s Default or Breach with respect to the failure to maintain such
insurance, prevent the exercise of any of the other rights and remedies granted
hereunder, nor relieve Lessee of its obligation to maintain the insurance
specified in this Lease.
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9.
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Damage
or Destruction.
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9.1
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Definitions.
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(a)
“Premises Partial Damage” shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, which can reasonably be repaired in 6 months or less
from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within 30 days from the date of the damage or destruction as to whether or
not
the damage is Partial or Total. Notwithstanding the foregoing, Premises Partial
Damage shall not include damage to windows, doors, and/or other similar items
which Lessee has the responsibility to repair or replace pursuant to the
provisions of Paragraph 7.1.
(b)
“Premises Total Destruction” shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which cannot reasonably be repaired in 6 months or less
from
the date of the damage or destruction. Lessor shall notify Lessee in writing
within 30 days from the date of the damage or destruction as to whether or
not
the damage is Partial or Total.
(c)
“Insured Loss” shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations
and Trade Fixtures, which was caused by an event required to be covered by
the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.
(d)
“Replacement Cost” shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of Applicable Requirements, and without
deduction for depreciation.
(e)
“Hazardous Substance Condition” shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by,
a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises which requires repair, remediation, or restoration.
9.2 Partial
Damage - Insured Loss. If a Premises Partial Damage that is an Insured
Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not
Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations)
as soon as reasonably possible and this Lease shall continue in full force
and
effect; provided, however, that Lessee shall, at Lessor’s election, make the
repair of any damage or destruction the total cost to repair of which is $10,000
or less, and, in such event, Lessor shall make any applicable insurance proceeds
available to Lessee on a reasonable basis for that purpose. Notwithstanding
the
foregoing, if the required insurance was not in force or the insurance proceeds
are not sufficient to effect such repair, the Insuring Party shall promptly
contribute the shortage in proceeds (except as to the deductible which is
Lessee’s responsibility) as and when required to complete said repairs. In the
event, however, such shortage was due to the fact that, by reason of the unique
nature of the improvements full replacement cost insurance coverage was not
commercially reasonable and available, Lessor shall have no obligation to pay
for the shortage in insurance proceeds or to fully restore the unique aspects
of
the Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within 10 days following receipt of written notice
of such shortage and request therefore. If Lessor receives said funds or
adequate assurance thereof within said 10 day period, the party responsible
for
making the repairs shall complete them as soon as reasonably possible and this
Lease shall remain in full force and effect. If such funds or assurance are
not
received, Lessor may nevertheless elect by written notice to Lessee within
10
days thereafter to: (i) make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case this
Lease
shall remain in full force and effect, or (ii) have this Lease terminate 30
days
thereafter. Lessee shall not be entitled to reimbursement of any funds
contributed by Lessee to repair any such damage or destruction. Premises Partial
Damage due to flood or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 Partial
Damage - Uninsured Loss. If a Premises Partial Damage that is not an
Insured Loss occurs, unless caused by a negligent or willful act of Lessee
(in
which event Lessee shall make the repairs at Lessee’s expense), Lessor may
either: (i) repair such damage as soon as reasonably possible at Lessor’s
expense, in which event this Lease shall continue in full force and effect,
or
(ii) terminate this Lease by giving written notice to Lessee within 30 days
after receipt by Lessor of knowledge of the occurrence of such damage. Such
termination shall be effective 60 days following the date of such notice. in
the
event Lessor elects to terminate this Lease, Lessee shall have the right within
10 days after receipt of the termination notice to give written notice to Lessor
of Lessee’s commitment to pay for the repair of such damage without
reimbursement from Lessor. Lessee shall provide Lessor with said funds or
satisfactory assurance thereof within 30 days after making such commitment.
In
such event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible after the required
funds are available. If Lessee does not make the required commitment, this
Lease
shall terminate as of the date specified in the termination notice.
9.4 Total
Destruction.
Notwithstanding any other provision hereof, if a Premises Total Destruction
occurs, this Lease shall terminate 60 days following such Destruction, If the
damage or destruction was caused by the gross negligence or willful misconduct
of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee,
except as provided in Paragraph 8.6.
9.5 Damage
Near
End of Term. If at any time during the last 6 months of this Lease
there is damage for which the cost to repair exceeds one month’s Base Rent,
whether or not an Insured Loss, Lessor may terminate this Lease effective 60
days following the date of occurrence of such damage by giving a written
termination notice to Lessee within 30 days after the date of occurrence of
such
damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by, (a) exercising such option and (b) providing Lessor
with
any shortage in insurance proceeds (or adequate assurance thereof) needed to
make the repairs on or before the earlier of (i) the date which is 10 days
after
Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease,
or (ii) the day prior to the date upon which such option expires. If Lessee
duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor’s commercially reasonable expense, repair such damage as soon
as reasonably possible and this Lease shall continue in full force and effect.
lf Lessee fails to exercise such option and provide such funds or assurance
during such period, then this Lease shall terminate on the date specified in
the
termination notice and Lessee’s option shall be extinguished.
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9.6
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Abatement
of Rent; Lessee’s
Remedies.
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(a)
Abatement. In the event of Premises Partial Damage or Premises
Total Destruction or a Hazardous Substance Condition for which Lessee is not
responsible under this Lease, the Rent payable by Lessee for the period required
for the repair, remediation or restoration of such damage shall be abated in
proportion to the degree to which Lessee’s use of the Premises is impaired, but
not to exceed the proceeds received from the Rental Value Insurance (which
Rental Value insurance shall be substantially consistent with such insurance
maintained by other institutional quality lessors of comparable commercial
properties). All other obligations of Lessee hereunder shall be performed by
Lessee, and Lessor shall have no liability for any such damage, destruction,
remediation, repair or restoration except as provided herein.
(b)
Remedies. If Lessor shall be obligated to repair or restore the
Premises and does not commence, in a substantial
and meaningful way, such repair or restoration within 90
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and
to
any Lenders of which Lessee has actual notice, of Lessee’s election to terminate
this Lease on a date not less than 60 days following the giving of such notice.
If Lessee gives such notice and such repair or restoration is not commenced
within 30 days thereafter, this Lease shall terminate as of the date specified
in said notice. If the repair or restoration is commenced within such 30 days,
this Lease shall continue in full force and effect. “Commence” shall mean either
the unconditional authorization of the preparation of the required plans, or
the
beginning of the actual work on the Premises, whichever first
occurs.
9.7 Termination;
Advance Payments. Upon termination of this Lease pursuant to Paragraph
6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance
Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee’s Security Deposit as has not
been, or is not then required to be, used by Lessor.
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10.
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Real
Property Taxes.
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10.1 Definition.
As used herein, the term “Real Property Taxes” shall include
any form of assessment; real estate, general, special, ordinary or
extraordinary, or rental levy or tax (other than inheritance, personal income
or
estate taxes); improvement bond; and/or license fee imposed upon or levied
against any legal or equitable interest of Lessor in the Premises or the
Project, Lessor’s right to other income therefrom, and/or Lessor’s business of
leasing, by any authority having the direct or indirect power to tax and where
the funds are generated with reference to the Building address and where the
proceeds so generated are to be applied by the city, county or other local
taxing authority of a jurisdiction within which the Premises are located. Real
Property Taxes shall also include any tax, fee, levy, assessment or charge,
or
any increase therein: (i) imposed by reason of events occurring during the
term
of this Lease, including but not limited to, a change in the ownership of the
Premises, and (ii) levied or assessed on machinery or equipment provided by
Lessor to Lessee pursuant to this Lease,
10.2 Payment
of
Taxes. In addition to Base Rent, Lessee shall pay to Lessor an amount
equal to the Real Property Tax installment due at least 20 days prior to the
applicable delinquency date. If any such installment shall cover any period
of
time prior to or after the expiration or termination of this Lease, Lessee’s
share of such installment shall be prorated. In the event Lessee incurs a late
charge on any Rent payment, Lessor may estimate the current Real Property Taxes,
and require that such taxes be paid in advance to Lessor by Lessee monthly
in
advance with the payment of the Base Rent. Such monthly payments shall be an
amount equal to the amount of the estimated installment of taxes divided by
the
number of months remaining before the month in which said installment becomes
delinquent. When the actual amount of the applicable tax bill is known, the
amount of such equal monthly advance payments shall be adjusted as required
to
provide the funds needed to pay the applicable taxes. If the amount collected
by
Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall
pay Lessor, upon demand, such additional sum as is necessary. Advance payments
may be intermingled with other moneys of Lessor and shall not bear interest
In
the event of a Breach by Lessee in the performance of its obligations under
this
Lease, then any such advance payments may be treated by Lessor as an additional
Security Deposit.
10.3 Joint
Assessment. If the Premises are not separately assessed, Lessee’s
liability shall be an equitable proportion of the Real Property Taxes for all
of
the land and improvements included within the tax parcel assessed, such
proportion to be conclusively determined by Lessor from the respective
valuations assigned in the assessor’s work sheets or such other information as
may be reasonably available.
10.4 Personal
Property Taxes. Lessee shall pay, prior to delinquency, all taxes
assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and
Utility Installations, Trade Fixtures, furnishings, equipment and all other
personal property to be assessed and billed separately from the real property
of
Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real
property, Lessee shall pay Lessor the taxes attributable to Lessee’s property
within 10 days after receipt of a written statement setting forth the taxes
applicable to Lessee’s property.
11. Utilities
and Services. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered or billed to Lessee, Lessee shall pay a reasonable
proportion, to be determined by Lessor, of all charges jointly metered or
billed. There shall be no abatement of rent and Lessor shall not be liable
in
any respect whatsoever for the inadequacy, stoppage, interruption or
discontinuance of any utility or service due to riot, strike, labor dispute,
breakdown, accident, repair or other cause beyond Lessor’s reasonable control or
in cooperation with governmental request or directions.
12. Assignment
and Subletting.
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12.1
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Lessor’s
Consent Required.
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(a)
Lessee shall not voluntarily or by operation of taw assign, transfer, mortgage
or encumber (collectively, “assign or assignment”) or sublet all or any part
of Lessee’s interest in this Lease or in the Premises without Lessor’s prior
written consent.
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(b) Unless
Lessee is a corporation
and its stock is publicly traded on a national stock exchange, a change in
the
control of Lessee shall constitute an assignment requiring consent. The
transfer, on a cumulative basis, of 25% or more of the voting control of Lessee
shall constitute a change in control for this purpose.
(c) Except
as otherwise provided in
Section 8 of the addendum, the involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee’s assets occurs, which
results or will result in a reduction of the Net Worth of Lessee by an amount
greater than 25% of such Net Worth as it was represented at the time of the
execution of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction
or
transactions constituting such reduction, whichever was or is greater, shall
be
considered an assignment of this Lease to which Lessor may withhold its consent.
“Net Worth of Lessee” shall mean the net worth of Lessee (excluding any
guarantors) established under generally accepted accounting
principles.
(d) An
assignment or subletting
without consent shall, at Lessor’s option, be a Default curable after notice per
Paragraph 13.1(c), or a noncurable Breach without
the necessity of any notice and grace period. If Lessor elects to treat such
unapproved assignment or subletting as a noncurable Breach, Lessor may either:
(i) terminate this Lease, or (ii) upon 30 days written notice, increase the
monthly Base Rent to 110% of the Base Rent then in effect. Further, in the
event
of such Breach and rental adjustment, (i) the purchase price of any option
to
purchase the Premises held by Lessee shall be subject to similar adjustment
to
110% of the price previously in effect, and (ii) all fixed and non-fixed rental
adjustments scheduled during the remainder of the Lease term shall be increased
to 110% of the scheduled adjusted rent.
(e)
Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to
compensatory damages and/or Injunctive relief.
(f)
Lessor may reasonably withhold consent to a proposed assignment or subletting
if
Lessee is in Default at the time consent is requested.
(g)
Notwithstanding the foregoing, allowing a de minimis portion of the Premises,
ie. 20 square feet or less, to be used by a third party vendor in connection
with the installation of a vending machine or payphone shall not constitute
a
subletting.
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12.2
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Terms
and Conditions Applicable to Assignment and
Subletting.
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(a)
Regardless of Lessor’s consent, no assignment or subletting shall: (i) be
effective without the express written assumption by such assignee or sublessee
of the obligations of Lessee under this Lease, (ii) release Lessee of any
obligations hereunder, or (iii) alter the primary liability of Lessee for the
payment of Rent or for the performance of any other obligations to be performed
by Lessee.
(b)
Lessor may accept Rent or performance of Lessee’s obligations from any person
other than Lessee pending approval or disapproval of an assignment. Neither
a
delay in the approval or disapproval of such assignment nor the acceptance
of
Rent or performance shall constitute a waiver or estoppel of Lessor’s right to
exercise its remedies for Lessee’s Default or Breach.
(c)
Lessor’s consent to any assignment or subletting shall not constitute a consent
to any subsequent assignment or subletting.
(d)
In the event of any Default or Breach by Lessee, Lessor may proceed directly
against Lessee, any Guarantors or anyone else responsible for the performance
of
Lessee’s obligations under this Lease, including any assignee or sublessee,
without first exhausting Lessor’s remedies against any other person or entity
responsible therefore to Lessor, or any security held by Lessor.
(e)
Each request for consent to an assignment or subletting shall be in writing,
accompanied by information relevant to Lessor’s determination as to the
financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a fee of $500
as
consideration for Lessor’s considering and processing said request. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested. (See also Paragraph
36)
(f)
Any assignee of, or sublessee
under, this Lease shall, by reason of accepting such assignment, entering into
such sublease, or entering into possession of the Premises or any portion
thereof, be deemed to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented to in
writing.
(g)
Lessor’s consent to any assignment or subletting shall not transfer to the
assignee or sublessee any Option granted to the original Lessee by this Lease
unless such transfer is specifically consented to by Lessor in writing. (See
Paragraph 39.2)
12.3 Additional
Terms and Conditions Applicable to Subletting. The following terms and
conditions shall apply to any subletting by Lessee of all or any part of the
Premises and shall be deemed included in all subleases under this Lease whether
or not expressly incorporated therein:
(a)
Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all
Rent payable on any sublease, and Lessor may collect such Rent and apply same
toward Lessee’s obligations under this Lease; provided, however, that until a
Breach shall occur in the performance of Lessee’s obligations, Lessee may
collect said Rent. In the event that the amount collected by Lessor exceeds
Lessee’s then outstanding obligations any such excess shall be refunded to
Lessee. Lessor shall not, by reason of the foregoing or any assignment of such
sublease, nor by reason of the collection of Rent, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee’s
obligations to such sublessee, Lessee hereby irrevocably authorizes and directs
any such sublessee, upon receipt of a written notice from Lessor stating that
a
Breach exists in the performance of Lessee’s obligations under this Lease, to
pay to Lessor all Rent due and to become due under the sublease, Sublessee
shall
rely upon any such notice from Lessor and shall pay all Rents to Lessor without
any obligation or right to inquire as to whether such Breach exists,
notwithstanding any claim from Lessee to the contrary.
(b)
In the event of a Breach by Lessee, Lessor may, at its option, require sublessee
to attorn to Lessor, in which event Lessor shall undertake the obligations
of
the sublessor under such sublease from the time of the exercise of said option
to the expiration of such sublease; provided, however, Lessor shall not be
liable for any prepaid rents or security deposit paid by such sublessee to
such
sublessor or for any prior Defaults or Breaches of such sublessor.
(c)
Any matter requiring the consent of the sublessor under a sublease shall also
require the consent of Lessor.
(d)
No sublessee shall further assign or sublet all or any part of the Premises
without Lessor’s prior written consent.
(e)
Lessor shall deliver a copy of any notice of Default or Breach by Lessee to
the
sublessee, who shall have the right to cure the Default of Lessee within the
grace period, if any, specified in such notice. The sublessee shall have a
right
of reimbursement and offset from and against Lessee for any such Defaults cured
by the sublessee.
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13.
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Default;
Breach; Remedies.
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13.1 Default;
Breach. A
“Default”
is defined as a failure by the Lessee to comply with
or perform any of the terms, covenants, conditions or Rules and Regulations
under this Lease. A “Breach” is defined as the occurrence of
one or more of the following Defaults, and the failure of Lessee to cure such
Default within any applicable grace period:
(a)
The abandonment of the Premises; or the vacating of the Premises without
providing a commercially reasonable level of
security, or where the coverage of the property insurance described in Paragraph
8.3 is jeopardized as a result thereof, or without providing reasonable
assurances to minimize potential vandalism.
(b)
The failure of Lessee to make any payment of Rent or any Security Deposit
required to be made by Lessee hereunder, whether to Lessor or to a third party,
when due, to provide reasonable evidence of insurance or surety bond, or to
fulfill any obligation under this Lease which endangers or threatens life or
property, where such failure continues for a period of 3 business days following
written notice to Lessee.
(c)
The commission of waste, act or acts constituting public or private nuisance,
and/or an illegal activity on the Premises by Lessee, where such actions
continue for a period of 3 business days following written notice to
Lessee,
(d)
The failure by Lessee to provide (i) reasonable written evidence of compliance
with Applicable Requirements, (ii) the service contracts, (iii) the rescission
of an unauthorized assignment or subletting, (iv) an Estoppel Certificate,
(v) a
requested subordination, (vi) evidence concerning any guaranty and/or Guarantor,
(vii) any document requested under Paragraph 42, (viii) material safety data
sheets (MSDS), or (ix) any other documentation or information which Lessor
may
reasonably require of Lessee under the terms of this Lease, where any such
failure continues for a period of 10 days following written notice to
Lessee.
(e)
A Default by Lessee as to the terms, covenants, conditions or provisions of
this
Lease, or of the rules adopted under Paragraph 40 hereof, other than those
described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default
continues for a period of 30 days after written notice; provided, however,
that
if the nature of Lessee’s Default is such that more than 30 days are reasonably
required for its cure, then it shall not be deemed to be a Breach if Lessee
commences such cure within said 30 day period and thereafter diligently
prosecutes such cure to completion.
(f)
The occurrence of any of the following events: (i) the making of any general
arrangement or assignment for the benefit of creditors; (ii) becoming a
“debtor” as defined in 11 U.S.C. §101 or any successor statute
thereto (unless, in the case of a petition filed against Lessee, the same is
dismissed within 60 days); (iii) the appointment of a trustee or receiver to
take possession of substantially all of Lessee’s assets located at the Premises
or of Lessee’s interest in this Lease, where possession is not restored to
Lessee within 30 days; or (iv) the attachment, execution or other judicial
seizure of substantially all of Lessee’s assets located at the Premises or of
Lessee’s interest in this Lease, where such seizure is not discharged within 30
days; provided, however, in the event that any provision of this subparagraph
is
contrary to any applicable law, such provision shall be of no force or effect,
and not affect the validity of the remaining provisions,
(g)
The discovery that any financial statement of Lessee or of any Guarantor given
to Lessor was materially false.
(h)
If the performance of Lessee’s obligations under this Lease is guaranteed: (i)
the death of a Guarantor, (ii) the termination
of a
Guarantor’s liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the
guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an
anticipatory basis, and Lessee’s failure, within 60 days following written
notice of any such event, to provide written alternative assurance or security,
which, when coupled with the then existing resources of Lessee, equals or
exceeds the combined financial resources of Lessee and the Guarantors that
existed at the time of execution of this Lease.
13.2 Remedies.
If Lessee fails to perform any of its affirmative duties or obligations, within
10 days after written notice (or in case of an emergency, without notice),
Lessor may, at its option, perform such duty or obligation on Lessee’s behalf,
including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. Lessee
shall
pay to Lessor an amount equal to 115% of the costs and expenses incurred by
Lessor in such performance upon receipt of an invoice therefore. In the event
of
a Breach, Lessor may, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have
by
reason of such Breach:
(a)
Terminate Lessee’s right to possession of the Premises by any lawful means, in
which case this Lease shall terminate and Lessee shall immediately surrender
possession to Lessor. In such event Lessor shall be entitled to recover from
Lessee: (i) the unpaid Rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent
which
would have been earned after termination until the time of award exceeds the
amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount
of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee’s failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom including but not limited to the cost of recovering possession of
the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys’ fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the immediately preceding sentence shall
be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of the District within which the Premises are located at the time of award
plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s
Breach of this Lease shall not waive Lessor’s right to recover damages under
Paragraph 12. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding any unpaid Rent and damages as are recoverable therein, or Lessor
may
reserve the right to recover all or any part thereof in a separate suit. If
a
notice and grace period required under Paragraph 13.1 was not previously given,
a notice to pay rent or quit, or to perform or quit given to Lessee under the
unlawful detainer statute shall also constitute the notice required by Paragraph
13.1. In such case, the applicable grace period required by Paragraph 13,1
and
the unlawful detainer statute shall run concurrently, and the failure of Lessee
to cure the Default within the greater of the two such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(b)
Continue the Lease and Lessee’s right to possession and recover the Rent as it
becomes due, in which event Lessee may sublet or assign, subject only to
reasonable limitations. Acts of maintenance, efforts to relet, and/or the
appointment of a receiver to protect the Lessor’s interests, shall not
constitute a termination of the Lessee’s right to possession,
(c)
Pursue any other remedy now or hereafter available under the laws or judicial
decisions of the state wherein the Premises are located. The expiration or
termination of this Lease and/or the termination of Lessee’s right to possession
shall not relieve Lessee from liability under any indemnity provisions of this
Lease as to matters occurring or accruing during the term hereof or by reason
of
Lessee’s occupancy of the Premises.
13.3 Intentionally
Omitted._______
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13.4 Late
Charges. Lessee hereby
acknowledges that late
payment by Lessee of Rent will cause Lessor to incur costs not contemplated
by
this Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting charges,
and late charges which may be imposed upon Lessor by any Lender. Accordingly,
if
any Rent shall not be received by Lessor within 5 days after such amount shall
be due, then, without any requirement for notice to Lessee, Lessee shall
immediately pay to Lessor a one-time late charge equal to 10% of each such
overdue amount or $100, whichever is greater. The Parties hereby agree that
such
late charge represents a fair and reasonable estimate of the costs Lessor will
incur by reason of such late payment. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee’s Default or Breach with respect
to such overdue amount, nor prevent the exercise of any of the other rights
and
remedies granted hereunder, In the event that a late charge is payable
hereunder, whether or not collected, for 3 consecutive installments of Base
Rent, then notwithstanding any provision of this Lease to the contrary, Base
Rent shall, at Lessor’s option, become due and payable quarterly in
advance.
13.5 Interest.
Any monetary payment due Lessor hereunder, other than late charges, not received
by Lessor, when due as to scheduled payments (such as Base Rent) or within
30
days following the date on which it was due for non-scheduled payment, shall
bear interest from the date when due, as to scheduled payments, or the 31st
day
after it was due as to non-scheduled payments. The interest
(“Interest”) charged shall be computed at the rate of 10% per
annum but shall not exceed the maximum rate allowed by law. Interest is payable
in addition to the potential late charge provided for in Paragraph
13.4.
13.6 Breach
by
Lessor.
Lessor
shall not be deemed in breach of this Lease unless Lessor fails within a
reasonable time to perform an obligation required to be performed by Lessor.
For
purposes of this Paragraph, a reasonable time shall in no event be less than
30
days after receipt by Lessor, and any Lender whose name and address shall have
been furnished Lessee in writing for such purpose, of written notice specifying
wherein such obligation of Lessor has not been performed; provided, however,
that if the nature of Lessor’s obligation is such that more than 30 days are
reasonably required for its performance, then Lessor shall not be in breach
if
performance is commenced within such 30 day period and thereafter diligently
pursued to completion.
14 Condemnation. If
the Premises or any portion
thereof are taken under the power of eminent domain or sold under the threat
of
the exercise of said power (collectively “Condemnation”), this Lease shall
terminate as to the part taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than 10% of the Building,
or more than 25% of that portion of the Premises not occupied by any building,
is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in
writing within 10 days after Lessor shall have given Lessee written notice
of
such taking (or in the absence of such notice, within 10 days after the
condemning authority shall have taken possession) terminate this Lease as of
the
date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall remain
in full force and effect as to the portion of the Premises remaining, except
that the Base Rent shall be reduced in proportion to the reduction in utility
of
the Premises caused by such Condemnation. Condemnation awards and/or payments
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold, the value of the part
taken, or for severance damages; provided, however, that Lessee shall be
entitled to any compensation paid by the condemnor for Lessee’s relocation
expenses, loss of business goodwill and/or Trade Fixtures, without regard to
whether or not this Lease is terminated pursuant to the provisions of this
Paragraph. All Alterations and Utility Installations made to the Premises by
Lessee, for purposes of Condemnation only, shall be considered the property
of
the Lessee and Lessee shall be entitled to any and all compensation which is
payable therefore. In the event that this Lease is not terminated by reason
of
the Condemnation, Lessor shall repair any damage to the Premises caused by
such
Condemnation.
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15.
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Brokerage
Fees.
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Lessee
and Lessor each represent and warrant to the other that it has had no dealings
with any person, firm, broker or finder (other than the Brokers, if any) in
connection with this Lease, and that no one other than said named Brokers is entitled
to any
commission or finder’s fee in connection herewith. Lessee and Lessor do each
hereby agree to indemnify, protect, defend and hold the other harmless from
and
against liability for compensation or charges which may be claimed by any such
unnamed broker, finder or other similar party by reason of any dealings or
actions of the indemnifying Party, including any costs, expenses, attorneys’
fees reasonably incurred with respect thereto.
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16.
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Estoppel
Certificates.
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(a)
Each Party (as “Responding Party”) shall within 10 days after
written notice from the other Party (the
“RequestingParty”) execute, acknowledge and
deliver to the Requesting Party a statement in writing in form similar to the
then most current “EstoppelCertificate” form
published by the AIR Commercial Real Estate Association or such other form
as
may be reasonably required by the Requesting Party, plus such additional
information, confirmation and/or statements as may be reasonably requested
by
the Requesting Party.
(b)
If the Responding Party shall fail to execute or deliver the Estoppel
Certificate within such 10 day period, the Requesting Party may execute an
Estoppel Certificate stating that: (I) the Lease is in full force and effect
without modification except as may be represented by the Requesting Party,
(ii)
there are no uncured defaults in the Requesting Party’s performance, and (iii)
if Lessor is the Requesting Party, not more than one month’s rent has been paid
in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party’s Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said
Certificate.
(c)
if Lessor desires to finance, refinance, or sell the Premises, or any part
thereof, Lessee and all Guarantors shall, subject to receipt of commercially
reasonable nondisclosure agreements, deliver to any potential lender or
purchaser designated by Lessor such financial statements as may be reasonably
required by such lender or purchaser, including but not limited to Lessee’s
financial statements for the past 3 years. All such financial statements shall
be received by Lessor and such lender or purchaser in confidence and shall
be
used only for the purposes herein set forth.
17. Definition
of Lessor. The term “Lessor” as used
herein shall mean the owner or owners at the time in question of the fee title
to the Premises, or, if this is a sublease, of the Lessee’s interest in the
prior tease. In the event of a transfer of Lessor’s title or interest in the
Premises or this Lease, Lessor shall deliver to the transferee or assignee
(in
cash or by credit) any unused Security Deposit held by Lessor. Upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid,
the
prior Lessor shall be relieved of alt liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to
be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined.
18. Severability.
The invalidity of any provision of this Lease, as determined by a court of
competent jurisdiction, shall in no way affect the validity of any other
provision hereof.
19. Days. Unless
otherwise specifically indicated to the contrary, the word “days” as used in
this Lease shall mean and refer to calendar days.
20. Limitation
on Liability. The obligations of Lessor under
this Lease shall not constitute personal obligations of Lessor or its partners,
members, directors, officers or shareholders, and Lessee shall look to the
Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against Lessor’s partners, members, directors, officers or shareholders, or any
of their personal assets for such satisfaction.
21. Time
of
Essence. Time is of the essence with respect to the performance of all
obligations to be performed or observed by the Parties under this
Lease.
22. No
Prior or
Other Agreements; This Lease contains all agreements between the
Parties with respect to any matter mentioned herein, and no other prior or
contemporaneous agreement or understanding shall be effective. Lessor and Lessee
each represents and warrants that it has made, and is relying solely
upon, its own investigation as to the nature, quality, character and financial
responsibility of the other Party to this Lease and as to the use, nature,
quality and character of the Premises.
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23.
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Notices.
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23.1 Notice
Requirements. All notices required or permitted by this
Lease or applicable law shall be in writing and may be delivered in person
(by
hand or by courier) or may be sent by regular, certified or registered mail
or
U.S. Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party’s
signature on this Lease shall be that Party’s address for delivery or mailing of
notices and, in the case of notice to Lessee, a copy to the
Premises. Either Party may by written notice to the other specify
a different address for notice, except that upon Lessee’s taking possession of
the Premises, the Premises shall constitute Lessee’s address for notice. A copy
of all notices to Lessor shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate
in
writing.
23.2 Date
of
Notice. Any notice sent by registered or
certified mail, return receipt requested, shall be deemed given on the date
of
delivery shown on the receipt card, or If no delivery date is shown, the
postmark thereon. If sent by regular mail the notice shall be deemed given
72
hours after the same is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantee next day delivery shall be deemed given 24 hours after delivery
of the same to the Postal Service or courier. Notices transmitted by facsimile
transmission or similar means shall be deemed delivered upon telephone
confirmation of receipt (confirmation report from fax machine is sufficient),
provided a copy is also delivered via delivery or mail. If notice is received
on
a Saturday, Sunday or legal holiday, it shall be deemed received on the next
business day.
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24.
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Waivers.
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(a)
No
waiver by Lessor of the Default or Breach of any term, covenant or condition
hereof by Lessee, shall be deemed a waiver of any other term, covenant or
condition hereof, or of any subsequent Default or Breach by Lessee of the same
or of any other term, covenant or condition hereof. Lessor’s consent to, or
approval of, any act shall not be deemed to render unnecessary the obtaining
of
Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or
be construed as the basis of an estoppel to enforce the provision or provisions
of this Lease requiring such consent.
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(b)
The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach
by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys
or damages due Lessor, notwithstanding any qualifying statements or conditions
made by Lessee in connection therewith, which such statements and/or conditions
shall be of no force or effect whatsoever unless specifically agreed to in
writing by Lessor at or before the time of deposit of such payment.
(c)
THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO
ALL
MATTERS RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE
STATUTE TO THE EXTENT THAT SUCH STATUTE IS INCONSISTENT WITH THIS
LEASE.
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25.
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lntentionally
Omitted.
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26. No
Right To Holdover.
Lessee has no right to retain possession of the Premises or any part
thereof beyond the expiration or termination of this Lease. In the event that
Lessee holds over, then the Base Rent shall be increased to 150% of the Base
Rent applicable immediately preceding the expiration or termination, Nothing
contained herein shall be construed as consent by Lessor to any holding over
by
Lessee.
27. Cumulative
Remedies. No remedy or election hereunder shall be deemed exclusive but
shall, wherever possible, be cumulative with all other remedies at law or in
equity.
28. Covenants
and Conditions;
Construction of Agreement. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions. In construing this
Lease, all headings and titles are for the convenience of the Parties only
and
shall not be considered a part of this Lease. Whenever required by the context,
the singular shall include the plural and vice versa. This Lease shall not
be
construed as if prepared by one of the Parties, but rather according to its
fair
meaning as a whole, as If both Parties had prepared it.
29. Binding
Effect; Choice of
Law. This Lease shall be binding upon the Parties, their personal
representatives, successors and assigns and be governed by the laws of the
State
in which the Premises are located. Any litigation between the Parties hereto
concerning this Lease shall be initiated in the county in which the Premises
are
located.
30. Subordination;
Attornment; Non-Disturbance.
30.1
Subordination. This
Lease and any
Option granted hereby shall be subject and subordinate to any ground lease,
mortgage, deed of trust, or other hypothecation or security device
(collectively, “Security Device”), now or hereafter placed upon
the Premises, to any and all advances made on the security thereof, and to
all
renewals, modifications, and extensions thereof. Lessee agrees that the holders
of any such Security Devices(in
this Lease together referred to as “Lender”)
shall have no liability or obligation
to perform any of the obligations of Lessor under this Lease. Any Lender may
elect to have this Lease and/or any Option granted hereby superior to the lien
of its Security Device by giving written notice thereof to Lessee, whereupon
this Lease and such Options shall be deemed prior to such Security Device,
notwithstanding the relative dates of the documentation or recordation
thereof.
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30.2 Attornment. ln
the event that Lessor transfers title to the Premises, or the Premises are
acquired by another upon the foreclosure or termination of a Security Device
to
which this Lease is subordinated (i) Lessee shall, subject to the
non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and
upon
request, enter into a new lease, containing all of the terms and provisions
of
this Lease, with such new owner for the remainder of the term hereof, or, at
the
election of the new owner, this Lease will automatically become a new lease
between Lessee and such new owner, for the remainder of the term hereof, and
(ii) Lessor shall thereafter be relieved of any further obligations hereunder
and such new owner shall assume all of Lessor’s obligations, except that such
new owner shall not: (a) be liable for any act or omission of any prior lessor
or with respect to events occurring prior to acquisition of ownership; (b)
be
subject to any offsets or defenses which Lessee might have against any prior
lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be
liable for the return of any security deposit paid to any prior
lessor.
30.3 Non-Disturbance.
With respect to Security Devices entered into by Lessor after the execution
of
this Lease, Lessee’s subordination of this Lease shall be subject to receiving a
commercially reasonable non-disturbance agreement (a “Non-Disturbance
Agreement”) from the Lender which Non-Disturbance Agreement provides that
Lessee’s possession of the Premises, and this Lease, including any options to
extend the term hereof, wilt not be disturbed so long as Lessee is not in Breach
hereof and attorns to the record owner of the Premises. Further, within 60
days
after the execution of this Lease, Lessor shall, if requested by Lessee, use
its
commercially reasonable efforts to obtain a Non-Disturbance Agreement from
the
holder of any pre-existing Security Device which is secured by the Premises.
In
the event that Lessor is unable to provide the Non-Disturbance Agreement within
said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and
attempt to negotiate for the execution and delivery of a Non-Disturbance
Agreement.
30.4 Self-Executing.
The agreements contained in this Paragraph 30 shall be effective without the
execution of any further documents; provided, however, that, upon written
request from Lessor or a Lender in connection with a sale, financing or
refinancing of the Premises, Lessee and Lessor shall execute such further
writings as may be reasonably required to separately document any subordination,
attornment and/or Non-Disturbance Agreement provided for herein.
31. Attorneys’
Fees. If any Party or Broker brings an action or proceeding involving
the Premises whether founded in tort, contractor equity, or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such
fees may be awarded in the same suit or recovered in a separate suit, whether
or
not such action or proceeding is pursued to decision or judgment. The term,
“Prevailing Party” shall include, without limitation, a Party-
who substantially obtains or defeats the relief sought, as the case may be,
whether by compromise, settlement, judgment, or the abandonment by the other
Party of its claim or defense. The attorneys’ fees award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor
shall be entitled to attorneys’ fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced In connection
with such Default or resulting Breach ($200 is a reasonable minimum per
occurrence for such services and consultation).
32. Lessor’s
Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times after reasonable prior notice (in no event
less than 24 hours’ notice (except In cases of emergency)) for the purpose of
showing the same to prospective purchasers, lenders, or tenants, and making
such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary or desirable and the erecting, using and maintaining of
utilities, services, pipes and conduits through the Premises and/or other
premises as long as there is no material adverse effect to Lessee’s use of the
Premises. All such activities shall be without abatement of rent or liability
to
Lessee.
33. Auctions.
Lessee shall not conduct, nor permit to be conducted, any auction
upon
the Premises without Lessor’s prior written consent. Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether
to
permit an auction.
34. Signs.
Lessor may place on the Premises ordinary “For Sale” signs at
any time and ordinary “For Lease” signs during the last 6
months of the term hereof. Except for ordinary “for sublease” signs, Lessee
shall not place any sign upon the Premises without Lessor’s prior written
consent. All signs must comply with all Applicable Requirements.
35. Termination;
Merger. Unless specifically stated otherwise in writing by Lessor, the
voluntary or other surrender of this Lease by Lessee, the mutual termination
or
cancellation hereof, or a termination hereof by Lessor for Breach by Lessee,
shall automatically terminate any sublease or lesser estate in the Premises;
provided, however, that Lessor may elect to continue any one or all existing
sub-tenancies, Lessor’s failure within 10 days following any such event to elect
to the contrary by written notice to the holder of any such lesser interest,
shall constitute Lessor’s election to have such event constitute the termination
of such interest.
36. Consents.
Except as otherwise provided herein, wherever in this Lease the consent of
a
Party is required to an act by or for the other Party, such consent shall not
be
unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses
(including but not limited to architects’, attorneys’, engineers’ and other
consultants’ fees) incurred in the consideration of, or response to, a request
by Lessee for any Lessor consent, including but not limited to consents to
an
assignment, a subletting or the presence or use of a Hazardous Substance, shall
be paid by Lessee upon receipt of an invoice and supporting documentation
therefore. Lessor’s consent to any act, assignment or subletting shall not
constitute an acknowledgment that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent. The failure to specify herein any particular
condition to Lessor’s consent shall not preclude the imposition by Lessor at the
time of consent of such further or other conditions as are then reasonable
with
reference to the particular matter for which consent is being given. In the
event that either Party disagrees with any
determination made by the other hereunder and reasonably
requests the reasons for such determination, the determining party shall furnish
its reasons in writing and in
reasonable detail within 10 business days following such
request.
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37. Intentionally
Omitted.
38. Quiet
Possession. Subject to payment by Lessee of the Rent and performance of
all of the covenants, conditions and provisions on Lessee’s part to be observed
and performed under this Lease, Lessee shall have quiet possession and quiet
enjoyment of the Premises during the term hereof.
39. Options.
If Lessee is granted an Option, as defined below, then the following provisions
shall apply:
39.1Definition.“Option”
shall mean: (a) the right to extend the term of or renew This Lease or to extend
or renew any lease that Lessee has on other property of Lessor; (b) the right
of
first refusal or first offer to lease either the Premises or other property
of
Lessor; (c) the right to purchase or the right of first refusal to purchase
the
Premises or other property of Lessor.
39.2
Options Personal To Original Lessee. Any Option granted to
Lessee in this Lease is personal to the original Lessee
(‘Original Lessee’), and cannot be assigned or exercised by anyone other than
said original Lessee and only while the original Lessee is in full possession
of
the Premises and, if requested by Lessor, with Lessee certifying that Lessee
has
no intention of thereafter assigning or subletting.
39.3
Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.
39.4
Effect of Default on Options.
(a) Lessee
shall
have no right to exercise an Option: (i) during the period commencing with
the
giving of any notice of Default and continuing until said Default is cured,
(ii)
during the period of time any Rent is unpaid (without regard to whether notice
thereof is given Lessee), (iii) during the time Lessee is in Breach of this
Lease, or (iv) in the event that Lessee has been given 3 or more notices of
separate Default, whether or not the Defaults are cured, during the 12 month
period immediately preceding the exercise of the Option.
(b) The
period of
time within which an Option may be exercised shall not be extended or enlarged
by reason of Lessee’s inability to exercise an Option because of the provisions
of Paragraph 39.4(a).
(c) An
Option
shall terminate and be of no further force or effect, notwithstanding Lessee’s
due and timely exercise of the Option, if, after such exercise and prior to
the
commencement of the extended term or completion of the purchase, (i) Lessee
fails to pay Rent for a period of 30 days after such Rent becomes due (without
any necessity of Lessor to give notice thereof), or (ii) if Lessee commits
a
Breach of this Lease.
40. lntentionally
Omitted.
41. Security
Measures. Lessee hereby acknowledges that the Rent payable to Lessor
hereunder does not include the cost of guard service or other security measures,
and that Lessor shall have no obligation whatsoever to provide same. Lessee
assumes all responsibility for the protection of the Premises, Lessee, its
agents and invitees and their property from the acts of third
parties.
42. Reservations.
Lessor reserves to itself the right, from time to time, to grant, without the
consent or joinder of Lessee, such easements, rights and dedications that Lessor
deems necessary, and to cause the recordation of parcel maps and restrictions,
so long as such easements, rights, dedications, maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee agrees
to
sign any documents reasonably requested by Lessor to effectuate any such
easement rights, dedication, map or restrictions,
43. Performance
Under Protest. if at any time a dispute shall
arise as to any amount or sum of money to be paid by one Party to the other
under the provisions hereof, the Party against whom the obligation to pay the
money is asserted shall have the right to make payment “under protest” and such
payment shall not be regarded as a voluntary payment and there shall survive
the
right on the part of said Party to institute suit for recovery of such sum.
If
it shall be adjudged that there was no legal obligation on the part of said
Party to pay such sum or any part thereof, said Party shall be entitled to
recover such sum or so much thereof as it was not legally required to pay.
A
Party who does not initiate suit for the recovery of sums paid “under protest”
with 6 months shall be deemed to have waived its right to protest such
payment.
44. Authority;
Multiple Parties; Execution.
(a) If
either Party
hereto is a corporation, trust, limited liability company, partnership, or
similar entity, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on its behalf.
(b) If
this Lease is
executed by more than one person or entity as “Lessee”, each such person or
entity shall be jointly and severally liable hereunder. It is
agreed that any one of the named Lessees shall be empowered to execute any
amendment to this Lease, or other document ancillary thereto and bind all of
the
named Lessees, and Lessor may rely on the same as if all of the named Lessees
had executed such document,
(c) This
Lease may be
executed by the Parties in counterparts, each of which shall be deemed an
original and all of which together shall constitute one and the same
instrument.
|
PAGE 16
OF 18
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|
INITIALS
|
INITIALS
|
|
|
©2001
- AIR COMMERCIAL REAL ESTATE
ASSOCIATION
|
FORM
STN-9-3/06E
|
|
45. Conflict. Any
conflict
between the printed provisions of this Lease and typewritten or handwritten
provisions shall be controlled by the typewritten or handwritten
provisions.
46. Offer. Preparation
of this
Lease by either Party or their agent and submission of same to the other Party
shall not be deemed an offer to lease to the other Party. This Lease is not
intended to be binding until executed and delivered by all Parties
hereto.
47. Amendments.
This Lease may be modified only in writing, signed by the Parties
in
interest at the time of the modification. As long as they do not materially
change Lessee’s obligations hereunder, Lessee agrees to make such reasonable
non-monetary modifications to this Lease as may be reasonably required by a
Lender in connection with the obtaining of normal financing or refinancing
of
the Premises.
48. Waiver
of
Jury Trial. TO THE EXTENT
ALLOWED UNDER THE APPLICABLE REQUIREMENTS, THE PARTIES HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE
PROPERTY OR ARISING OUT OF THIS AGREEMENT.
49. Mediation
and Arbitration of Disputes. An Addendum requiring the Mediation and/or
the Arbitration of all disputes between the Parties and/or Brokers arising
out
of this Lease ois
x
is not attached to this Lease.
50. Americans
with Disabilities Act. Subject to Lessor’s representations and
warranties contained herein, Lessor makes no warranty or representation as
to
whether or not the Premises comply with ADA or any similar legislation. In
the
event that Lessee’s use of the Premises requires modifications or additions to
the Premises in order to be in ADA compliance, Lessee agrees, subject to
Lessor’s express obligations set forth herein, to make any such necessary
modifications and/or additions at Lessee’s expense.
LESSOR
AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO
THE
PREMISES.
ATTENTION: NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AIR COMMERCIAL REAL ESTATE
ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR
TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES
ARE URGED TO:
1. SEEK
ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
2. RETAIN
APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES.
SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE
OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY,
THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE
PREMISES FOR LESSEE’S INTENDED USE.
WARNING:
IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS
OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN
WHICH THE PREMISES IS LOCATED.
The
parties hereto have executed this Lease at the place and on the dates specified
above their respective signatures.
|
Executed
at:
|
Executed
at: Monrovia
|
||||||
|
On:
|
On:2/13/07
|
||||||
|
By
|
LESSOR:
|
By
LESSEE:
|
|||||
|
OMP
INDUSTRIAL MORELAND, LLC
|
AEROVIRONMENT,
INC.,
|
||||||
|
a
Delaware limited liability company
|
a
Delaware corporation
|
||||||
|
BY:
|
OMP
Investor, LLC
|
||||||
|
A
Delaware limited liability company
|
By:
|
/s/
Stephen Wright
|
|||||
|
Its
manager
|
Name
Printed: Stephen Wright
|
||||||
|
By:
|
OVERTON,
MOORE PROPERTIES,
|
Title:
CFO
|
|||||
|
a
Delaware general partnership,
|
|||||||
|
its
sole member
|
|||||||
|
By:
|
MOORE
TECIMER LLC.
|
||||||
|
a
California limited liability company,
|
|||||||
|
Its
Administrative Partner
|
|||||||
|
By:
|
/s/
Timur Tecimer
|
||||||
|
Timur
Tecimer, a managing member
|
|||||||
|
PAGE
17 OF 18
|
||
|
INITIALS
|
INITIALS
|
|
|
©2001
- AIR COMMERCIAL REAL ESTATE ASSOCIATION
|
FORM
STN-9-3/06E
|
|
Address: OMP
Industrial Moreland, LLC
c/o
Overton Moore Properties 1125 West 190th
Street, Suite
200 Gardena, California 90248
|
Attn:
|
Property
Management
|
|
Telephone:
|
(310)
323-9100
|
|
Facsimile:
|
(310)
608-7997
|
Federal
ID No. ___________
|
BROKER:
|
BROKER:
|
|
|
Omitted
|
Omitted
|
NOTICE: These
forms are often modified to meet changing requirements of law and industry
needs. Always write or call to make sure you are utilizing the most current
form: AIR Commercial Real Estate Association, 800 W 6th Street, Suite 800,
Los
Angeles, CA 90017. Telephone No. (213) 687.8777. Fax No.: (213)
687-8616.
©
Copyright 2001 - By AIR Commercial Real Estate Association. All
rights reserved.
No
part of these works may be reproduced in any form without
permission in writing.
MLTOMP
Industrial-AV, Inc.
|
PAGE
18 OF 18
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|
INITIALS
|
INITIALS
|
|
|
©2001
- AIR COMMERCIAL REAL ESTATE
ASSOCIATION
|
FORM
STN-9-3/06E
|
|
ADDENDUM
TO SINGLE-TENANT LEASE
85
Moreland Road, Simi Valley, California
This
LEASE ADDENDUM (‘Addendum) is
attached to, incorporated into and amends and supplements that certain Standard
lndustrial/Commercial Single-Tenant Lease-Net (the lease”) entered into as of
the 12th day of February 2007 by and between OMP INDUSTRIAL MORELAND LLC, a
Delaware limited liability company ( “ Lessor ” ) and AEROVIRONMENT.
INC., a Delaware corporation
(’Lessee’).
Lessor and Lessee agree that notwithstanding anything contained in the Lease
to
the contrary the Lease as modified by the provisions set forth iii this Addendum
represents the full negotiated agreement of the parties, and the provisions
or
this Addendum will be deemed to be a part of the Lease and will supersede any
contrary or conflicting provision in the Lease arid prevail and control for
all
purposes. This Addendum, together with the Lease itself, and all other Exhibits
attached hereto represents the fully integrated and binding agreement of the
parties. All references in the Lease and in this Addendum to
“Lease” are to be construed to mean the Lease as amended and supplemented
by
this Addendum. All terms used in (his Addendum unless specifically defined
in
this Addendum, have the same meaning as such terms have in the
Lease.
1. Condition
of Premises. Lessee hereby acknowledges and agrees that Lessor shall not be
obligated to construct or complete any improvements in the Premises, the
Building or the Project, and Lessor shall not ( except as otherwise expressly
provided in the Lease (including Ibis Addendum )) be responsible,
in any manner whatsoever for the design and construction
of any improvements in the Premises, the Building or the Project. Except as
otherwise provided in the Lease (including Paragraphs 2.2and 2.3 of the Lease),
Lessee hereby accepts the Premises, the Building and the Project in their “as
is” condition as of the date hereof, subject to the warranty of Lessor in
Paragraph 2.3 of the Lease regarding compliance with “Applicable Requirements”
as of the date of the Lease. The taking of possession of the Premises by Lessee
shall conclusively establish that the Premises were, at such lime, in
satisfactory condition. In the event that as a result of Lessees use or intended
use of the Premises or any Alterations or Utility Installations to the Premises,
the Americans with Disabilities Act or similar law required modifications or
the
construction or installation of improvements in or to the Premises, Building
or
Project such modifications, construction or improvements shall, except for
Lessor’s obligations in Paragraphs 2.2 and 2.3 of the Lease, be made by Lessee
at Lessee’s expense. In the event that Lessor consents to Lessee’s construction
and completion of any improvements in the Premises (including, but not limited
to, any Alterations. improvements additions or Utility Installations, as set
forth in Paragraph 7.3 of the Lease), Such construction shall be subject to
the
terms of Paragraph 7.3 of the Lease and all other relevant provisions of the
Lease and Lessee hereby agrees to indemnity and defend Lessor and hold Lessor
harmless from and against any and all claims, costs, expenses or Liability.
arising from, Lessee’s design construction and operation of any improvements in,
on or about the Premises ( including without limitation Lessee’s failure to
obtain necessary permits, approvals or certificates from the applicable
governmental authorities and/or actual attomeys’ costs and fees, and court
costs).
2. Refurbishment
or Premises, Notwithstanding anything to the contrary contained herein,
Lessee shall be entitled to renovate the then-existing lessee improvements
in
the Premises in accordance with this Section 2 and otherwise in accordance
with
Paragraph 7 of the Lease. In connection therewith, Lessee shall be entitled
to a
one-time lessee refurbishment allowance (the “Refurbishment
Allowance”) in (the amount up to, but not exceeding Four Dollars (
$4.00) per square foot of the Premises (i.e., an amount up to, but not
exceeding, Four Hundred Twenty Thousand Three Hundred Thirty-Two Dollars (
$42O,332.00) based on 105,083 square feet in the Premises)
for the costs relating to the design and construction of certain
renovations to the Premises (the “Refurbished Improvements”) In
no event shall Lessor be obligated to make disbursements under this Section
2 in
a total amount which exceeds the Refurbishment Allowance.
(a) The
Refurbishment Allowance Items. The Refurbishment Allowance shall be
disbursed by Lessor following completion of the Refurbished Improvements for
the
following items and costs only (collectively the “Refurbishment
Allowance Items” ):
(i) Payment
of the fees of the
architect and engineer(s) retained by Lessee (if any), and payment of the fees
incurred by, and the cost or documents and materials supplied by, Lessor and
Lessor’s consultants in connection with the review of the plans and
specifications prepared for the Refurbished Improvements
(“RefurbishmentDrawings”)
(ii) The
Payment of plan check,
permit and license fees relating to construction, of the Refurbished
Improvements
(iii) The
cost of construction at the
Refurbished lmprovements,
including,
without limitation. testing and inspection costs, trash removal costs, and
contractors’ fees and general conditions;
(iv) The
cost of any changes to the
Refurbishment Drawings or Refurbished Improvements required by Applicable
Requirements; and
(v) Sales
and use taxes and Title
24 fees.
Notwithstanding
anything herein to the contrary, Lessee may, in the event there remains any
portion of the Refurbishment Allowance after Lessee’s
construction or the Refurbished Improvements, also use the Refurbishment
Allowance for (he costs of the purchase and installation of Lessee signage
for he Premises, built-ins and moveable furniture, trade fixtures and
equipment to be used in the Premises, relocation expenses (from Lessee’s
existing premises to the Premises) and as a credit towards tile rent due and
payable by Lessee to Lessor under the Lease (collectively, the ‘Other
Allowance Items’).
(b) Disbursement
of
Refurbishment Allowance. Provided that Lessee is not in default on any of
its obligations under the Lease, upon completion of the Refurbished Improvements
and/or upon incurring the costs for the Other Allowance Items. Lessor shall
make
a disbursement of the Refurbishment Allowance For Refurbishment Allowance Items
and/or Other Allowance Items for the benefit of Lessee and shall authorize
the
release of monies for the benefit of Lessee as follows:
(i) Disbursement.
Lessee shall deliver to Lessor: (I) a request for payment or Lessee’s general
contractor (“Contractor”), which Contractor shall be retained
by Lessee and shall be subject to Lessor’s reasonable prior written approval and
which request shall be approved by Lessee, in a form to be provided by Lessor;
(ii) paid invoices From all subcontractors, laborers, materialmen, vendors
and
suppliers used by Lessee in connection with the Refurbished Improvements (such
subcontractors, laborers, materialmen, vendors and suppliers, and the Contractor
may be known collectively as Lessees Agents’) and/or Other
Allowance Items, for labor rendered and materials delivered to the Premises
for
the Refurbished Improvements and/or Other Allowance Items; (iii) executed
unconditional mechanics’ lien releases from all of Lessee’s Agents in such form
and content as required by Lessor; and (iv) all other information reasonably
requested by Lessor. Lessee’s request for payment shall be deemed Lessee’s
acceptance and approval of the work furnished and/or the materials supplied
as
set forth in Lessee’s payment request. Promptly thereafter, assuming Lessor
receives all or (the applicable information described in items (i) through
(iv),
above, Lessor shall deliver a check made payable to Lessee in payment of the
amounts so requested by Lessee (but in no event to exceed the amount of the
Refurbishment Allowance), provided that Lessor does not dispute any request
for
payment based on non-compliance of any work with the Refurbishment Drawings,
or
due to any substandard work. Lessor’s payment of such amounts shall not be
deemed Lessor’s approval or acceptance of the work furnished or materials
supplied as set forth in Lessee’s payment request.
(ii) Other
Terms.
Lessor shall only be obligated to make disbursements from time Refurbishment
Allowance to the extent costs are incurred by Lessee for Refurbishment Allowance
Items and/or Other Allowance Items, All Refurbishment Allowance Items for which
the Refurbishment Allowance has been made available shall be deemed
Lessor’s property. Except as otherwise expressly provided above, in no event
shall Lessee be entitled to any credit (or any unused portion of the
Refurbishment Allowance. All drafts of the Refurbishment Drawings shall be
subject to Lessor’s prior written approval, which approval shall not be
unreasonably withheld or delayed. In addition, all of Lessee’s Agents shall be
subject to Lessor’s prior written approval (which approval shall not be
unreasonably withheld), except that subcontractors of Lessor’s selection shall
be retained by the Contractor to perform all life-safety, mechanical electrical,
plumbing, structural and heating. ventilation and air conditioning
work.
(c) No
Rent Abatement. Lessee acknowledges that the work to be performed by Lessee
pursuant to this Section 2 above shall be performed (if at all) during
the Early Possession period and/or during the Original Term, that Lessee shall
be entitled to (but shall not be obligated to) conduct business throughout
the
course of construction of such renovations and that Lessee shall not be entitled
to any abatement of rent, nor shall Lessee be deemed to be constructively
evicted from the Premises, as a result of the construction of such
renovations
3. Options
to Extend.
(a)
Option Right. Lessor hereby grants the Lessee named in
the Lease (the “Original Lessee”) two (2) options (each, an
“Option’) to extend the Lease Term for the entire Premises for a
period of five
(5) years each (each, an “Option Term”), which options shall be
exercisable only by written notice delivered by Lessee to Lessor as set forth
below. The rights contained in this Section 3 shall be personal to the Original
Lessee and may only be exercised by the Original Lessee (and not any assignee.
sublessee or other transferee of the Original Lessee’s interest in the Lease) if
the Original Lessee occupies the entire Premises as of the date of Lessee’s
Option Notice (as defined in Section 3(c) below).
(b) Option
Rent. The rent payable by Lessee during the applicable Option Term
(“Option Rent”) shall be equal to the Market Rent. Market Rent
shall be denned as prevailing fair market terms and conditions for comparable
space of comparable size, quality and location to Lessee’s Premises taking into
consideration the rental abatement, lessee improvement allowance and any other
lessee inducements then given to lessees in comparable class buildings in the
general vicinity of the Building.
(c) Exercise
of Options. The Options shall be exercised by Lessee only in the following
manner: (i) Lessee shall not be in default, and shall not have been in Default
under the Lease more than once on the delivery date of the Option Notice; (ii)
Lessee shall deliver written notice (“Option Notice”) to Lessor
not more than twelve (12) months nor less then nine (9) months prior to the
expiration of the Original Term (or prior Option Term as the case may be),
stating that Lessee is exercising the Option. and (iii) within forty-five (45)
business days of Lessor’s receipt of the Option Notice, Lessor shall deliver
notice ( “OptionRent Notice”) to Lessee
setting forth the applicable Option Rent. Lessee’s failure to deliver the Option
Notice to Lessor on or before the date specified above shall be deemed to
constitute Lessee’s election not to exercise the Option (and such Option (and
any succeeding Option, if any) shall be null and void). If Lessee timely and
properly exercises ifs Option, the then Lease Term shall be extended for the
applicable Option Term upon all of the terms and conditions set forth in the
Lease, except that the rent for the applicable Option Term shall be as indicated
in the Option Rent Notice unless Lessee, within, five (5) days after receipt
of
the Option Rent Notice containing Lessors Market Rent determination of the
Option Rent, objects to the Option Rent contained in such Option Rent Notice,
in
which case the parties shall follow the procedure amid the Option Rent shall
be
determined as set forth below.
(d) Determination
of
Market Rent. If Lessee timely and appropriately objects to the Market Rent
set forth in the Option Rent Notice, Lessor and Lessee shell attempt to agree
upon the Market Rent using their best good-faith efforts. If
Lessor and Lessee fail to reach agreement within five (5) days following
Lessee’s receipt of the Option Rent Notice, ( “Outside Agreement
Date”), then each party shall make separate determination of the Market
Rent which shall be submitted to each other and to arbitration in
accordance with the following items (i) through (vii):
(i) Lessor
and Lessee shall
each appoint, within five (5) business days or the Outside Agreement Date,
one
arbitrator who shall by profession be a current real estate broker of industrial
properties in Ventura County and Northern Los Angeles County, and who has been
active in such field over the last fifteen (15) years. The determination of
the
arbitrators shall be limited solely to the issue of whether Lessor’s or Lessee’s
submitted Market Rent is the closest to the actual Market Rent as determined
by
the arbitrators, taking into account the requirements of Section 3(b)
above.
(ii) The
two arbitrators so
appointed shall within live (5) business days of the date of the appointment
of
the last appointed arbitrator agree upon and appoint a third arbitrator who
shall be qualified under the same criteria set forth hereinabove for
qualification or the initial two arbitrators.
(iii) The
three
arbitrators shall within five (5) business days of the appointment of
the third arbitrator reach a decision as to whether the parties shall use
Iessor’s or Lessee’s submitted Market Rent, and shall notify Lessor and Lessee
thereof.
(iv) The
decision of the majority of the three arbitrators shall be binding upon Lessor
and Lessee.
(v) It
either Lessor or
Lessee fails to appoint an arbitrator within five (5) business days after the
applicable Outside Agreement Date the arbitrator appointed by one of them shall
reach a decision, notify Lessor and Lessee thereof, and such arbitrator’s
decision shall be binding upon Lessor and Lessee.
(vi) If
the two arbitrators
fail to agree upon and appoint a third arbitrator, or both parties fail to
appoint an arbitrator, then the appointment of the third arbitrator or any
arbitrator shall be dismissed and the matter to be decided shall be forthwith
submitted to arbitration under the provisions of the American Arbitration
Association, but subject to the instruction set forth in this Section
3(d).
(vii) The
cost of arbitration
shall be paid by Lessor and Lessee equally.
4. Base
Rent
Increases; Base Rent Abatement; Temporary Cap on Certain Costs’ and
Pre-Paid Rent Credit.
(a) Base
Rent Increases. The minimum monthly Base Rent payable by Lessee for the
Premises during the Original Term shall be as follows :
|
Monthly
Base Rent per
|
||||
|
Months
of Original Term
|
Monthly
Base Rent
|
SF
of Premises
|
||
|
1-12
|
$70,405.61
|
$0.67
|
||
|
13-24
|
$72,507.27
|
$0.69
|
||
|
25-36
|
$74,608.93
|
$0.71
|
||
|
37-48
|
$76,973.30
|
$0.7325
|
||
|
49-64
|
$79,337.66
|
$0.755
|
||
(b) Base
Rent
Abatement. Notwithstanding anything in the Lease to the contrary, Lessor
shall provide Lessee with monthly Base Rent abatement for the first (1st), second
(2nd) and third
(3rd) full months of the Original Term (i.e., the
months of March, April and May, 2007) and Base Rent abatement equal to one-half
(1/2) of the Base Rent due for the months of March and April 2008. During such
abatement periods Lessee Shall still be responsible for the payment of all
of
its other monetary obligations under the Lease. In the event of a default by
Lessee under the terms of the Lease within the first twelve (12) months of
the
initial term that results in early termination pursuant to the provisions of
Paragraph 13 of the Lease, then as a part of the recovery set forth in Paragraph
13 of the Lease, Lessor shall be entitled to the recovery of the monthly Base
Rent that was abated under the provisions of this Section 4.
(c) Temporary
Cap on
Certain Costs. Landlord acknowledges and agrees that the aggregate cost
payable by Lessee for the month of March, 2007 for Lessor’s standard landscape
maintenance, pest control. HVAC maintenance, security, elevator maintenance,
water and Real Property Taxes shell not exceed Fifteen Thousand Two Hundred
Fifteen Dollars ($15,215.00) for such month.
(d) Pre-Paid
Rent
Credit. Lessor acknowledges and agrees that Lessee previously paid Fifty
Thousand Dollars ($50,000) to Lessor as a credit toward the Base Rent due on
execution of this Lease and such credit is reflected in Paragraph 1.6(e) of
the
Basic Provisions.
5. Lessee’s
Right to
Audit. In the event Lessee disputes the amount of any expenses sat forth in
any final statement or any particular calendar year that may be delivered by
Lessor to Lessee. Lessee shall have the right at Lessee’s cost, after reasonable
notice to Lessor, to have Lessee’s authorized employees or agents inspect, at
Lessor’s office during normal business hours, Lessor’s books. records and
supporting documents concerning such expenses set forth in any such final
statement; provided however Lessee shall have no right to conduct
such inspection, have an audit performed by its agent, or object to or otherwise
dispute the amount of the any such expenses set forth in any such final
statement, unless Lessee notifies Lessor of such objection and dispute,
completes such inspection, and has its agent commence and complete such audit
within six (8) months immediately following Lessor’s delivery of the particular
final statement in question (the “Review Period”); provided,
further that notwithstanding any such timely objection. dispute, inspection,
and/or audit and as a condition precedent to Lessee’s exercise of its right of
objection, dispute, inspection and/or audit as set forth in this Section 5,
Lessee shall not be permitted to withhold payment of, and Lessee shall timely
pay to Lessor, the full amounts as required by the provisions of this Section
5
in accordance with such final statement. However, such payment may be made
under
protest pending the outcome of any audit which may be permitted by its
agent. In connection with any such inspection by Lessee, Lessor and
Lessee shall reasonably cooperate with each other so that such inspection can
be
performed pursuant to a mutually acceptable schedule, in an expeditious manner
and without interference with Lessor’s operation and management of the Project.
If after such inspection and/or request for documentation, Lessee still disputes
the amount of the expenses set forth in the final statement, Lessee shall have
the right, within the Review Period, to cause an independent certified public
accountant the “Accountant”) to complete an audit of Lessor’s
books and records pertaining to expenses to determine the proper amount of
the
expenses incurred and amounts payable by Lessee for the calendar year which
is
the subject of such final statement. Such audit by the Accountant shall be
final
and binding upon Lessor and Lessee. If such audit reveals that Lessor has
over-charged Lessee, then within thirty (30) days after the results of such
audit are made available to Lessor, Lessor shall reimburse to Lessee the amount
of such over-charge. If the audit reveals that the Lessee was under-charged,
then within thirty (30) days after the results of such audit are made available
to Lessor, Lessee shall reimburse to Lessor the amount of such under-charge.
Lessee agrees to pay the cost of such audit unless it is subsequently determined
that Lessor’s original final statement which was the subject of such audit was
in error to Lessee’s disadvantage by three percent (3%) or more of the total
expenses which was the subject of such audit. The payment by Lessee of
any amounts pursuant to this Section 5 shall not preclude Lessee
from questioning the correctness at any final statement provided by Lessor
at
any time during the Review Period, but the failure of Lessee to object thereto,
conduct and complete its inspection and have the Accountant conduct and complete
the audit as described above prior to the expiration of the Review Period shall
be conclusively deemed Lessee’s approval of the final statement in question and
the amount of expenses shown thereon. In connection with any inspection and/or
audit conducted by Lessee pursuant to this Section 5, Lessee agrees to keep,
and
to cause all of Lessee’s employees. agents, consultants and the Accountant to
keep, all of Lessor’s books and records and the audit, and all information
pertaining thereto and the results thereof, strictly confidential,
and in connection therewith, Lessee shall cause such employees, agents,
consultants and the Accountant to execute such commercially reasonable
confidentiality agreements as Lessor may require prior to conducting any such
inspections and/or audits.
6. Hazardous
Substances The following provisions are hereby added to Paragraph 6.2 of the
Lease:
“(d) Indemnification
Continued. The indemnification by Lessee of Lessor under Paragraph
6.2(d) includes, without limitation, any and all costs incurred in connection
with any investigation of site conditions or any clean up, remedial, removal
or
restoration work required by any federal, state or local governmental agency
or
political subdivision because of the presence of such Hazardous Substances
in,
on or about the Premises or the soil or groundwater on or under the Project
or
any portion thereof, which arise directly and/or proximately from the presence
of Hazardous Substances on, in or about the Premises or any other portion of
the
Project which is caused or permitted by Lessee, its agents, employees,
contractors or invitees. Lessee shall promptly notify Lessor of any release
of
Hazardous Substances in the Premises or any other portion of the Project which
Lessee becomes aware of during the Term or this Lease, whether caused by Lessee
or any other persons cm entities.
(f) Investigations
and Remediations
Continued. Lessor and Lessor’s
agents and employees shall have the right, but not the obligation, to inspect,
investigate sample and/or monitor the Premises, including any soil, water,
groundwater or other sampling, and any other testing,
digging, drilling or analyses at any reasonable time, upon prior
notice to Lessee, to determine whether Lessee is complying with the terms of
this Paragraph 6.2, and in connection therewith Lessee shall provide Lessor
with
full access to all relevant facilities, records and
personnel. If Lessee is not in compliance with any of the provisions
of this Paragraph 6.2, Lessor shall provide Lessee with written notice of such
non-compliance and a reasonable time period within which Lessee may retain
a
reputable contractor (selected or approved by Lessor) to prepare a work
plan to be approved by Lessor and, once such plan is approved, to cure such
non-compliance and to diligently prosecute to completion such cure, and if
Lessee does not so comply, Lessor and Lessor’s agents and employees
shall have the right, but not the obligation, without limitation upon any of
Lessor’s other rights and remedies under this Lease, to enter upon the Premises
and to discharge Lessee’s obligations under this Paragraph 6.2 at Lessee’s
expense, notwithstanding any other provision of this Lease. Notwithstanding
the
foregoing, Lessor’s prior written consent to the work plan shall not be
necessary in the event that the presence of Hazardous Substances in, on, under
or about the Premises or any other portion of the Project (i) poses an
immediate threat to the health, safety or welfare of any individual or (ii)
is of such a nature than an immediate remedial response is necessary and
is
not practicable to obtain Lessor’s consent before taking such action. All
reasonable sums disbursed, deposited or incurred by Lessor in connection
therewith including, but not limited to, all costs expenses and actual
attorneys’ fees, shall be due and payable by Lessee to Lessor, as an item of
additional rent, on demand by Lessor, together with interest thereon at interest
rate, from the date of such demand until paid by Lessee.
(h) Hazardous
Substance Questionnaire. Prior to the execution of this Lease, Lessee
shall complete, execute and deliver to Lessor a Hazardous Substances
Questionnaire (the “Hazardous Substances Questionnaire”) in the
form of Exhibit ‘B’, and Lessee shall certify to Lessor all information
contained in the Hazardous Substances Questionnaire as true and correct to
the
best of Lessee’s knowledge end belief The completed Hazardous Substances
Questionnaire shall be deemed incorporated into this Lease for all purposes
and
Lessor shall be entitled to rely fully on the information contained therein.
On
each anniversary of the Commencement Date (each such date is hereinafter
referred to as a ‘Disclosure Date’) until and including the
first Disclosure Date occurring after the expiration or sooner termination
of
this Lease, Lessee shall disclose to Lessor in
writing the names and amounts of all Hazardous Substances or any combination
thereof, which were stored, generated or used or disposed of on, in, under
or
about the Premises for the twelve-month period
prior to and after each Disclosure Date, or which Lessee intends to
store, generate, use or dispose of on, under or about the
Premises. At Lessor’s option, Lessee’s disclosure obligations under
this Paragraph 6.2 shall include a requirement that Lessee update, execute
and
deliver to Lessor the Hazardous Substances Questionnaire, as the same may be
modified by Lessor from time to time.
(i) Legal
Proceedings. Lessor, at Lessee’s sole cost and expense as part of
Lessee’s indemnity obligations set forth herein, shall have the right, but not
the obligation to join and participate in any legal proceedings or actions
initiated against Lessor the Project or the Premises in connection with any
claims or causes of action arising out of the storage, generation, use, release,
or disposal by Lessee, its agents, employees. contractors or invitees, of
Hazardous Substances in, on, under, from or about The Premises or any other
portion of the Project. If the presence of any Hazardous Substances in, on,
under or about the Premises or any other portion of the Project caused or
permitted by Lessee. its agents, employees. contractors, sublessees or invitees,
results in (i) injury to any person, (ii) injury to or any
contamination of the Premises or any other portion of the Project, or (iii)
injury to or contamination of any real or personal property wherever situated,
Lessee, at its sole cost and expense. shall promptly take all actions
necessary to return the Premises or such other portion of the Project,
to the condition existing prior to the introduction of such Hazardous Substances
to the Premises and to remedy or repair any such injury or contamination.
Notwithstanding the foregoing, Lessee shall not, without Lessor’s prior written
consent (except as provided in subsection (f) above), take any remedial action
in response to the presence of any Hazardous Substances in, on, under or about
the Premises or any other portion of the Project, or enter into any
settlement agreement consent decree or other compromise with any
governmental agency with respect to any Hazardous Substances claims related
to
the Premises or Project,
(j)
Closure Statement. Promptly upon the expiration or sooner termination
of this Lease,
Lessee shall represent to Lessor in writing that no Hazardous Substances exist
in, on, under or about the Premises or any other portion of the Project
other than as specifically identified to Lessor by Lessee in writing. Lessee
acknowledges receipt of that certain Phase I Environmental Site Assessment
report for the Building prepared by Ninyo & Moore and dated June 17,2005
(the “Existing Phase I”) within thirty (30) days prior to Lease
expiration Lessee shall at its sole cost and expense, also provide Lessor with
a
so-called Phase “I” for the Premises evidencing that the Premises are Free of
Hazardous Substances in violation of any Applicable Requirements. In no event
shall Lessee be responsible for the remediation of any Hazardous Substances
which were identified in the Existing Phase I.
(k) The
provisions of this
Paragraph 6.2 shall survive any termination of this Lease.
7. Compliance
with Laws. The following is hereby added to Paragraph 6.3 of the
Lease:
“Without
limiting the provisions oh Paragraph 6.3 of the Lease, Lessee agrees, during
the
Term of the Lease, to comply (at its sole cost and expense) with all provisions
applicable to occupants pursuant to any covenants, conditions and restrictions
of record now or hereafter affecting the Premises, as each of tile foregoing
may
be further amended or supplemented from time to time (collectively, the
‘Restrictions’). Without limiting the generality of the
foregoing, Lessee agrees (1) to fully cooperate with Lessor and the Declarant(s)
under the Restrictions in satisfying obligations imposed by the Restrictions
with respect to the Premises; and (2) that any fines or costs
which may be imposed on or incurred by Lessor as a result of Lessee’s failure to
comply with the previsions of the Restrictions shall constitute
additional rent under the Lease.”
“Furthermore,
as part of its obligations hereunder, Lessee shall, at its sole cost and
expense, observe and comply with the provisions of Title Ill of the Americans
with Disabilities Act of 1990, as amended and any regulations promulgated
pursuant thereto (collectively, the ‘ADA’), as it pertains to
Lessee’s use, occupancy, improvement and alteration of the Premises. Lessee
shall not use or allow the Premises to be used for any improper, immoral.
unlawful or reasonably objectionable purpose Lessee shall not do or permit
to be
done anything which will obstruct or interfere with the rights of other lessees
or occupants of the Protect, or injure or annoy them. Lessee shall lot cause,
maintain or permit any nuisance in, on or about the Premises or the Project,
nor
commit or suffer to he committed any waste in, on or about the
Premises.”
8. Alterations.
The
following is deemed added as new Paragraph 7.3(d) to the Lease:
Notwithstanding
anything in Paragraph 34 of the Lease, and subject to compliance with the
provisions of Paragraph 7.3, Lessee shall be entitled ho reasonable building
signage in locations reasonably acceptable to Lessor and Lessee. Lessee shall
pay for all costs relating ho the design, fabrication, installation, permitting,
maintaining and removal of the signage. All signage shall comply with the
Applicable Requirements. Lessee shall remove all signage and repair any damage
to the Premises caused by such removal upon the expiration or earlier
termination of this Lease”
9. Assignment and
Subletting. The following provision is hereby added to Paragraph
12.1(a):
“Lessor
and Lessee hereby acknowledge that Lessor’s disapproval of any proposed transfer
pursuant to this Paragraph 12 (‘Transfer’) shall be deemed
reasonably withheld if based upon any reasonable factor, including, without
limitation, any or all of the following factors: (a) the proposed Transfer
would
result in more than two (2) subleases of portions of the Premises being in
effect at any one time during the Term; (b) the proposed transferee
is a governmental entity; (c) the portion of the Premises ho be sublet or
assigned is irregular in shape with inadequate means of ingress and egress;
(d)
the use of the Premises by the transferee is not permitted by the use provisions
in Paragraph 1.7 hereof; (e) the transferee does not have the financial
capability to fulfill time obligations imposed by the Transfer; or (f) the
transferee is not in Lessor’s reasonable opinion of reputable or good
character.
Thu
following are hereby deemed added as new Paragraphs 12.4 and 12.5 of the
Lease:
“12.4
Transfer Premium. If Lessor consents to an assignment or
subletting, Lessee shall pay to Lessor within thirty (30) days of Lessee’s
receipt from the transferee, fifty percent (50%) of any “Transfer Premium” as
that term is defined in this Paragraph 12.4, received by Lessee
from such transferee. “Transfer Premium” shall mean all rent,
additional rent or other consideration payable by such transferee in excess
of
the Rent payable by Lessee under this Lease on a per rentable square foot basis
if less than all of the Premises is transferred, after deducting the reasonable
expenses incurred by Lessee for (i) any changes, alterations and
improvements to the Premises in connection with the assignment or subletting,
and (ii) any brokerage commissions in connection with the assignment or
subletting (collectively, the “Transfer Costs”) “Transfer
Premium” shall also include, but not be limited to, key money and bonus money
paid by the transferee to Lessee in connection with such assignment or
subletting, and any payment in excess of fair market value for services rendered
by Lessee to the transferee or for assets, fixtures, inventory, equipment,
or
furniture transferred by Lessee to the transferee in connection with such
assignment or subletting. Lessor or its authorized representatives shall have
the right at all reasonable times to audit the books, records and papers of
Lessee relating to any assignment or subletting, and shall have the right to
make copies thereof. If the Transfer Premium respecting any assignment or
subletting shall be found understated. Lessee shall, within thirty (30) days
after demand, pay the deficiency and Lessor’s costs of such audit,”
“12.5
Affiliate Transfers. Notwithstanding anything to the contrary
contained in Paragraph 12 of the Lease, an assignment or subletting of all
or a
portion of the Promises to an affiliate (“Affiliate”) of Lessee
(an entity which is controlled by, controls or is under common control with,
Lessee), shall not be deemed an Assignment or sublease under Paragraph 12 of
the
Lease (and shall not entitle Lessor to any Transfer Premium), provided that
(1)
Lessee gives Lessor not less than thirty (30) days prior notice of any such
assignment or sublease: (2) Lessee promptly supplies Lessor with any documents
or information requested by Lessor regarding such assignment or sublease or
such
affiliate; (3) such assignment or sublease is not a subterfuge by Lessee to
avoid its obligations under the Lease: (4) such affiliate has, as of the
effective date of any such assignment or sublease, a tangible net worth, in
the
aggregate, computed in accordance with generally accepted accounting principles
(but excluding goodwill as an asset), which equals or exceeds that of Lessee
as
of the date of the execution of the Lease: (5) such assignment or sublease
shall
be subject to all of the terms and provisions of the Lease and such assignee
or
sublessee shall assume, in a written document reasonably satisfactory to Lessor
and delivered to Lessor upon of prior to the effective date of such assignment
or sublease, all the obligations of Lessee under the Lease with respect to
the
space which is the subject of such transfer: (6) Lessee shall remain fully
liable for all obligations to be performed by lessee under the Lease; end (7)
the actual and/or intended use of the Premises by any such Affiliate complies
with the provisions of Paragraph 1.7 and the other terms and provisions of
the
Lease. An assignee of Lessee’s entire interest in the Lease pursuant
to the immediately preceding sentence may be referred to herein as an
“Affiliated Assignee.” “Control,” as used in
this Paragraph 12.5 shall mean the ownership, directly or indirectly, of greater
than fifty percent (50%) of the voting securities of, or possession of the
right
to vote, in the ordinary direction of its affairs, of greater than fifty percent
(50%) of the voting interest in. an entity.”
10. Default. A
new
Paragraph 13.1(h) to the Lease is hereby deemed added as follows:
“13.1(h) Any
notice sent by Lessor ho Lessee pursuant to this Paragraph 13 shall be in lieu
of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161.”
The
following shall be added as the third (3rd) sentence
to
Paragraph 13.2(a):
“The
‘worth at the time of the award’ of the amount referred to in
(ii) above shall be computed by allowing interest at the interest
rate set forth in Paragraph 13.5.”
The
following is deemed added as new Paragraph 13.6(b) to the Lease:
“Notwithstanding
anything to the contrary set forth in this Lease, if Lessee provides written
notice to Lessor of the need for repairs and/or maintenance which are Lessor’s
obligation to perform under the terms of this Lease, and Lessor fails to
undertake such repairs and/or maintenance within a reasonable period of time,
given the circumstances after receipt of such notice, but in any event not
later
than thirty (30) days after receipt of such notice (or such longer time as
is
reasonably necessary if more than thirty (30) days are reasonably required
to
complete such repairs and Lesser commences such repairs within such 30-day
period and thereafter diligently attempts to complete same, provided that in
cases of emergency involving imminent threat of serious injury or damage to
persons or property within the Premises, Lessor shall have only one (1) business
day after receipt of such notice or such later period of time as is reasonably
necessary to commence such corrective action), then Lessee may proceed to
undertake such repairs and/or maintenance upon delivery of an additional five
(5) business days’ notice to Lessor that Lessee is taking such required action
(but no such second notice shall be required in the cases of such emergency).
If
such repairs and/or maintenance were required under the terms of this Lease
to
be performed by Lessor and are not performed by Lessor prior to the expiration
of such 5-business day period or the one (1) business day period with respect
to
such emergency cases, as applicable (the “Outside Repair Period”), then Lessee
shall be entitled to reimbursement by Lessor of Lessee’s actual, reasonable, and
documented costs and expenses in performing such maintenance and/or repairs.
Such reimbursement shall be made within thirty (30) days after Lessor’s receipt
of invoice of such costs and expenses, and if Lessor fails to so reimburse
Lessee within such 30 day period, then Lessee shall be entitled to offset
against Rent payable by Lessee under this Lease the amount of such
invoice together with interest thereon, at the interest rate which shall have
accrued on the amount of such invoice during the period from and after Lessee’s
delivery of such invoice to Lessor through and including the earlier of the
date
Lessor delivers the payment to Lessee or the date Lessee offsets such amount
against the Rent; provided, however, that notwithstanding the foregoing to
the
contrary, if (i) Lessor delivers to Lessee prior to the expiration
of the Outside Repair Period described above, a written objection to Lessee’s
right to receive any such reimbursement based upon Lessor’s good faith claim
that such action did not have to be taken by Lessor pursuant to the terms of
this Lease, or (ii) Lessor delivers to Lessee, within thirty (30)
days after receipt of Lessee’s invoice, a written objection to the payment of
such invoice based upon Lessor’s good faith claim that such charges are
excessive (in which case, Lessor shall reimburse Lessee, within such 30-day
period, the amount Lessor contends would not be excessive), then Lessee shall
not be entitled to such reimbursement or offset against Rent, but Lessee, as
its
sole remedy, may proceed to institute a lawsuit against Lessor to determine
and
collect the amount, if any of such reimbursement. In the event Lessee
prevails in such lawsuit and receives a monetary judgment against Lessor, then
Lessor shall pay such monetary judgment (including any attorneys’ fees awarded
in connection therewith) to Lessee within thirty (30) days of date such monetary
judgment is issued if such monetary judgment is not so paid, then,
notwithstanding any contrary provision of this Lease, Lessee shall be entitled
to offset against the Rent payable under this Lease the amount of such monetary
judgment, including any attorneys’ fees awarded in connection therewith)
together with interest which shall have accrued on such monetary judgment during
the period from and after the day after the date such monetary judgment was
issued through and including the date that Lessee offsets against the Rent
the
amount of such monetary judgment, at the interest rate. In the event Lessee
undertakes such repairs and/or maintenance and such work will affect the base
building systems and equipment of the Building, any structural portions of
the
building, or other areas outside the Building and/or the exterior appearance
of
the Building or Project (or any portion thereof), Lessee shall use only those
unrelated third party contractors used by Lessor in the Building for such work
unless such contractors are unwilling or unable to perform such work at
competitive prices (including, without limitation, inability to perform due
to
Lessor’s failure to provide notice to Lessee of the identities and addresses of
such contractors), in which event Lessee may utilize the services of any other
qualified contractor which normally and regularly performs similar work in
comparable buildings in the general vicinity of the building. Lessee shall
comply with the other terms and conditions of this Lease if Lessee takes the
required action, except that Lessee is not required to obtain Lessor’s consent
for such repairs.”
The
Following is added as new Paragraph 13.6(c) to the Lease:
“The
obligations of Lessor under the Lease shall not constitute personal obligations
of Lessor, the individual partners or Lessor or their partners, directors,
officers or shareholders, and Lessee shall look to the Premises, and to no
other
assets of Lessor, for the satisfaction of any liability at Lessor with respect
to the Lease, and shall not seek recourse against the individual partners of
Lessor, or its or their individual partners, directors, officers or shareholders
or any of their personal assets for such satisfaction. It is expressly
understood and agreed that notwithstanding any contrary provision in the Lease
and notwithstanding any applicable law to the contrary, the liability of Lessor
hereunder and any recourse by Lessee against Lessor, shall be limited solely
and
exclusively to an amount which is equal to the interest of Lessor in the
Premises, and Lessor shall have no personal liability therefore, and Lessee
hereby expressly waives and releases such personal liability on behalf of itself
and all persons claiming by, through or under Lessee. Notwithstanding anything
to the contrary contained in the Lease, as hereby amended, Lessor shall not
be
liable under any circumstances for injury or damage to, or interference with,
Lessee’s business, including but net limited to, loss of profits, loss of rents
or other revenues, loss of business opportunity, loss of good will or loss
of
use, in each case, however occurring.
IN
WITNESS WHEREOF, the parties hereto have executed this Addendum as of the day
and year of execution of the Lease.
|
LESSOR:
|
LESSEE:
|
|||
|
OMP
INDUSTRIAL MORELAND, LLC,
|
AEROVIRONMENT,
INC., a Delaware corporation
|
|||
|
a
Delaware limited liability company
|
||||
|
By:
|
OMP
INVESTOR, LLC,
|
By:
/s/ Stephen Wright
|
||
|
a
Delaware limited liability company.
|
Name:
Stephen Wright
|
|||
|
its
manager
|
Title: CFO
|
|||
|
By:
|
OVERTON,
MOORE PROPERTIES,
|
|||
|
a
Delaware general partnership.
|
||||
|
its
sole member
|
||||
|
By:
|
MOORE
TECIMER, LLC
|
|||
|
A
California limited liability company,
|
||||
|
its
Administrative Partner
|
||||
|
/s/
Timur Tecimer
|
||||
|
Timur
Tecimer , a managing member
|
||||
Exhibit
“A”
Plot
Plan
SITE
DEVELOP
MENT
EXHIBIT
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
consent to the incorporation by reference in the Registration Statement on
Form
S-8 (Registration No. 333-140237) pertaining to the
AeroVironment, Inc. Nonqualified Option Plan, the AeroVironment, Inc. Director's
Nonqualified Stock Option Plan, the AeroVironment, Inc. 2002 Equity Incentive
Plan, and the AeroVironment, Inc. 2006 Equity Incentive Plan of our report
dated
June 27, 2007, with respect to the
consolidated financial statements and schedule of
AeroVironment, Inc. and subsidiaries, included in this Annual Report on
Form 10-K for the year ended April 30, 2007.
|
/s/
Ernst & Young LLP
|
Los
Angeles, California
June
27,
2007
EXHIBIT
31.1
Certification
of CEO Pursuant to
Securities
Exchange Act Rules 13a-14 and 15d-14
as
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I,
Timothy E. Conver, certify that:
1. I
have reviewed this annual report on Form 10-K of AeroVironment,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant
as
of, and for, the periods presented in this report;
4. The
registrant’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the
period in which this report is being prepared;
b) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
c) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter
(the
registrant's fourth fiscal quarter in the case of an annual report) that
has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent function):
a) All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
June 29, 2007
| /s/ Timothy E. Conver | |
|
Timothy
E. Conver
|
|
|
Chief
Executive Officer and President
|
|
| (Principal Executive Officer) |
EXHIBIT
31.2
Certification
of CFO Pursuant to
Securities
Exchange Act Rules 13a-14 and 15d-14
as
Adopted Pursuant to
Section 302
of the Sarbanes-Oxley Act of 2002
I,
Stephen C. Wright, certify that:
1. I
have reviewed this annual report on Form 10-K of AeroVironment,
Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant
as
of, and for, the periods presented in this report;
4. The
registrantr’s other certifying officer(s) and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed
such disclosure controls and procedures, or caused such disclosure controls
and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during
the
period in which this report is being prepared;
b) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this
report based on such evaluation; and
c) Disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter
(the
registrant's fourth fiscal quarter in the case of an annual report) that
has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The
registrant’s other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent function):
a) All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant’s internal control over financial
reporting.
Date:
June 29, 2007
| /s/ Stephen C. Wright | |
|
Stephen
C. Wright
|
|
|
Chief
Financial Officer
|
|
| (Principal Financial Officer) |
EXHIBIT
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C.
SECTION 1350
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant
to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley
Act
of 2002, the undersigned officers of AeroVironment, Inc. (the “Company”) hereby
certifies, to each such officer’s knowledge, that:
|
|
(i)
|
the
accompanying Annual Report on Form 10-K of the Company for the
year ended
April 30, 2007 (the “Report”) fully complies with the requirements of
Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange
Act of 1934, as amended; and
|
|
|
(ii)
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of
the
Company.
|
|
Date:
June 29, 2007
|
|
| /s/ Timothy E. Conver | |
|
Timothy
E. Conver
|
|
|
Chief
Executive Officer and President
|
|
|
Date:
June 29, 2007
|
|
| /s/ Stephen C. Wright | |
|
Stephen
C. Wright
|
|
|
Chief
Financial Officer
|
A
signed
original of this written statement required by Section 906 has been provided
to
the Company and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.