As filed with the Securities and Exchange Commission on June 30, 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended December 31, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-29992
OPTIBASE LTD.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s
name into English)
Israel
(Jurisdiction of incorporation
or organization)
2 Gav Yam Center
7 Shenkar Street
Herzliya 46120, Israel
+972-9-970-9288
(Address of principal executive offices)
Mr. Amir Philips, Chief Financial Officer
Telephone Number: 972-9-9709200, Fax Number: 972-9-9586099, Email: amirp@optibase.com
2 Gav Yam Center
7 Shenkar Street
Herzliya, 46120 Israel
(Name, Telephone, E-Mail and/or Facsimile and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Ordinary Shares,
par-value NIS 0.13 each
Name of Each Exchange on Which Registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Not Applicable
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 16,914,281
Ordinary Shares, par value NIS 0.13 per share, including 347,573 Ordinary Shares held by the Registrant and 30,000 Ordinary Shares held by a trustee for the benefit of the
Registrant’s employees under the Registrant's incentive plan, both awarding their holders no voting or equity rights.
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 ý
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes o No ý
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated
filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer o
Accelerated filer o
Non-accelerated filer ý
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
Yes o No o
U.S. GAAP ý
International Financing Reporting Standards as issued by the International Accounting Standards Board oooo
Other o
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Item 17 o Item 18 o
Yes o No ý
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CERTAIN DEFINED TERMS
FORWARD-LOOKING STATEMENTS
PART I
TABLE OF CONTENTS
ITEM 1. IDENTITY OF DIRECTORS; SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
ITEM 4. INFORMATION ON THE COMPANY
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
ITEM 8. FINANCIAL INFORMATION
ITEM 9. THE OFFER AND THE LISTING
ITEM 10. ADDITIONAL INFORMATION
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15T. CONTROLS AND PROCEDURES
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
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iv
iv
1
1
1
1
20
35
35
54
65
68
70
71
88
89
90
90
90
90
91
91
91
91
92
92
92
92
93
93
93
93
CERTAIN DEFINED TERMS
In this annual report, unless otherwise provided, references to the "Company," "Optibase", "we", "us" or "our" are to Optibase Ltd., a company organized under the laws of
Israel, and its wholly owned subsidiary, Optibase, Inc., a Californian corporation. In addition, references to our financial statements are to our consolidated financial statements, except
as the context otherwise requires. References to "U.S." or "United States" are to the United States of America, its territories and its possessions.
We have registered "Optibase" and "VideoPlex", as registered trademarks. In addition, the names "Creator", "MGWFlashStreamer", "MGW Decoder", "MGW Micro", EZTV,
"MPEG MovieMaker 200", "MPEG MovieMaker 230", "Media Gateway", "MGW5100", "MGW1100", "MGW2000", "MGW2000e", "MGW1000", "MGW HD", "Creator", "MGW
Flash", "VideoPlex Xpress", "VideoPlex Pro", "MPEG MovieMaker", "Videoplex", "MPEG ComMotion", "MPEG Composer", "VideoPump", "MGW200", "MGW230", "MGW 400",
"MovieMaker HD", "MovieMaker HD264", "Ocaster" and "MediaPump", are our trademarks.
In this annual report, references to "$" or "dollars" or "U.S. dollars" or "USD" are to the legal currency of the United States, references to "CHF" are to Swiss Francs and
references to "NIS" are to New Israeli Shekels, the legal currency of Israel. The Company’s financial statements are presented in accordance with United States generally accepted
accounting principles, or U.S. GAAP. Except as otherwise specified, financial information is presented in U.S. dollars. References to a particular "fiscal" year are to the Company’s fiscal
year ended December 31 of such year.
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE REFLECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTIONS ENTITLED "RISK FACTORS", "INFORMATION ON THE COMPANY" AND "OPERATING AND FINANCIAL REVIEW AND PROSPECTS" AND
ELSEWHERE IN THIS REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD -LOOKING STATEMENTS, WHICH REFLECT
MANAGEMENT’S BELIEFS, ASSUMPTIONS AND EXPECTATIONS OF OUR FUTURE OPERATIONS AND ECONOMIC PERFORMANCE, TAKING INTO ACCOUNT CURRENTLY
AVAILABLE INFORMATION. IN ADDITION, READERS SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN THE COMPANY’S
PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME. WE DO NOT UNDERTAKE ANY
OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE, EXCEPT AS
MAY BE REQUIRED UNDER APPLICABLE SECURITIES LAWS AND REGULATIONS.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
PART I
Not applicable.
ITEM 3. KEY INFORMATION
Introduction
During 2009, we resolved, to expand and diversify our field of operations and enter into the fixed-income real estate sector. For further details, see Item 4.A 'History and
Development of The Company'.
On March 16, 2010, we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd., a wholly owned subsidiary of S.A. Vitec
(also known as Vitec Multimedia) (S.A. Vitec and Optibase Technologies Ltd., collectively "Vitec"), according to which Optibase Technologies Ltd. will purchase all of the assets and
liabilities related to our Video Solutions Business (the "APA" and the "Vitec Transaction"). Closing of the transaction is expected to occur on June 30, 2010, after the release of this
annual report. For Further details see Item 4.B "Business Overview".
The Company, directly and indirectly, engages mainly in the following areas:
· Digital Video and Streaming Based Products and Services or Video Technologies Business (collectively, "Video Solutions Business") – development, marketing and sale
of high quality equipment for a wide range of professional video applications in the broadband IPTV, broadcast, government, enterprise and post-production markets.
·
Fixed Income Real-Estate – investments in fixed-income real estate assets.
3.A. SELECTED CONSOLIDATED FINANCIAL DATA
We derived the consolidated statement of operations data for the years ended December 31, 2007, 2008 and 2009, and consolidated balance sheet data as of December 31, 2008
and 2009 from the audited consolidated financial statements appearing elsewhere in this annual report. These financial statements have been prepared in accordance with U.S generally
accepted accounting principles ("U.S. GAAP"). We derived the consolidated statement of operations data for the years ended December 31, 2005 and 2006 and the consolidated balance
sheet data as of December 31, 2005, 2006 and 2007 from audited consolidated financial statements that are not included in this annual report, which statements have also been prepared
in accordance with U.S. GAAP. The selected financial data set forth below should be read in conjunction with "Item 5 Operating and Financial Review and Prospects" below and the
financial statements, including the notes thereto, included elsewhere in this annual report.
- 1 -
Net (loss) income after income tax
(2,195)
(3,135)
Consolidated Statement of Operations Data:
2005
Year Ended December 31,
2006
2008
2007
(U.S. dollars in thousands, except per share data)
2009
$
$
19,343
-
19,343
$
$
17,977
-
17,977
$
$
22,977
-
22,977
$
$
19,901
-
19,901
$
$
Revenues:
Video solutions
Fixed income real estate
Total revenues
Costs and expenses:
Cost of video solutions operations
Research and development, net
Selling and marketing, net
General and administrative
Cost of real estate operation
Total costs and expenses
Operating loss
Other income (expenses), net
Financial income (loss), net
Net (loss) income before tax
Provision for income tax
Equity in losses of affiliated companies and gain from sale of investment
in affiliated company
Net income (loss) from continuing operations
Income (loss) related to discontinued operations (1)
Net income (loss)
Net (loss) income per share from continuing operations:
Basic
Diluted
Basic and diluted earnings per share from discontinued operations
Net income (loss) per share
Basic and diluted
Weighted average shares used in computing net income (loss) per share
(in thousands):
Basic
Diluted
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term investment in marketable
securities net
Working capital
Long term investment in marketable securities
Total assets
Long term loans and capital lease obligations, including current
maturities
Capital Stock
Total shareholders’ equity
$
$
$
$
$
$
$
$
13,149
272
13,421
6,537
3,725
5,763
2,601
125
18,751
(5,330)
-
617
(4,713)
-
(4,713)
4,773
60
-
60
0.00
0.00
0.00
0.00
16,534
16,540
7,808
4,001
8,798
1,892
22,499
(3,156)
(622)
1,583
(2,195)
7,716
4,208
8,288
2,134
22,346
(4,369)
(171)
1,405
(3,135)
-
(2,195)
(1,250)
(3,445)
(0.17)
(0.17)
(0.09)
$
$
$
$
-
(3,135)
15
(3,120)
(0.23)
(0.23)
0.00
$
$
$
$
11,387
5,362
7,895
2,276
26,920
(3,943)
(327)
(31)
(4,301)
(73)
(4,374)
(2,769)
(7,143)
(30)
(7,173)
9,754
6,375
8,964
2,931
28,024
(8,123)
218
270
(7,635)
(7,635)
(1,930)
(9,565)
20
(9,545)
$
$
(0.53)
(0.53)
0.00
$
$
(0.63)
(0.63)
0.00
(0.26)
$
(0.23)
$
(0.53)
$
(0.63)
$
13,188
13,188
13,431
13,431
13,602
13,602
15,159
15,159
2005
2006
December 31,
2007
(U.S. dollars in thousands)
2008
2009
40,695
40,342
2,207
60,974
-
119,720
44,494
$
$
18,387
20,098
-
51,932
-
120,706
39,164
$
$
11,386
9,610
-
47,306
-
126,142
35,011
$
$
28,651
29,254
-
63,350
18,262
126,299
35,238
18,199
16,383
26,742
58,346
-
118,508
44,836
$
$
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3.B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
3.C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
3.D. RISK FACTORS
Our business operations are subject to various risks resulting from changing economic, political, industry, business and financial conditions. In addition, this annual
report contains various forward-looking statements that reflect our current views with respect to future events and financial results. Below we attempt to identify and describe the
principal uncertainties and risk factors that in our view at the present time may affect our financial condition, cash flows and results of operations and our forward-looking
statements. Readers are reminded that the uncertainties and risks identified below in this annual report do not purport to constitute a comprehensive list of all the uncertainties and
risks, which may affect our business and the forward-looking statements in this annual report. In addition, we do not undertake any obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Risks Relating to the Economy, Our Financial Condition and Shareholdings
We have a history of losses and we might not be able to reach profitability.
Since 2000 and until the quarter ended March 31, 2003, we operated at a loss. We returned to profitability in the quarter ended June 30, 2003 and remained profitable until the
quarter ended March 31, 2004. Since the quarter ended June 30, 2004 and until the quarter ended December 31, 2008 we returned to operating at a loss. We returned to profitability in the
quarter ended March 31, 2009. Since the quarter ended June 30, 2009 and until the quarter ended December 31, 2009 we returned to operate at a loss. As of December 31, 2009, we have
accumulated losses of $89.8 million. Given the current market conditions and recent economic downturn, the uncertainty in the technology sector, the uncertainty regarding the demand
for our products and our research and development and other expenses as well as the uncertainty regarding the fixed income real-estate sector, we may continue to operate at a loss and
may not be able to reach profitability in the future, and our operating results for future periods will continue to be subject to numerous uncertainties and risks. In order to maintain
profitability, we will need, among other matters, to aggressively expand markets for our new products while continuing to expand market share for our existing products and to engage in
new profitable fixed-income real-estate ventures. We cannot assure you that we will be able to increase the sales of our products and revenues and achieve profitability.
The economic outlook may adversely affect the demand for our products and the results of our operations.
Weak economic conditions have caused, and may continue to cause, reductions in spending in technology markets in general, including spending in the Video Solutions
Business. Consequently, there has been, and may continue to be, an adverse impact on the demand for our products and services, which has adversely affected, and may continue to
adversely affect our sales and results of operations. In addition, predictions regarding economic conditions have a low degree of certainty, and further predicting the effect of the
changing economy is even more difficult. We may not be able to accurately gauge the effect of the general economy on our business. As a result, we may not react to such changing
conditions in a timely manner, which may result in an adverse impact on our results of operations. Any such adverse impact on the results of our operations from a changing economy
may cause the price of our ordinary shares to decline.
Our future fixed-income real estate revenues are highly dependent on the over all economic outlook. Our ability to renew tenancy agreements with current tenants as well as
seek new tenants in desirable conditions could be impacted by a number of factors, including, but not limited to, the global economic and financial market crisis. A decrease in demand
for our real-estate properties may materially adversely affect our financial results.
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We manage our available cash through investments in interest bearing bank deposits and money market funds with leading banks. We are exposed to the credit risk of such banks.
During 2009, our available cash was invested in interest bearing bank deposits and money market funds with various banks. Our available cash is subject to the credit risk of
the banks with which the funds are deposited and as such we may suffer losses if those banks fail to repay those deposits.
Our officers, directors and affiliated entities own a large percentage of our ordinary shares and could significantly influence the outcome of actions.
Our executive officers, directors and the entities affiliated with them, beneficially own, in the aggregate, as of June 21, 2010, approximately 43.71% of our outstanding ordinary
shares, of which Shlomo (Tom) Wyler, our President and Chief Executive Officer holds approximately 42.62% (calculated taking into consideration shares underlying options that are
currently exercisable or exercisable within 60 days of June 21, 2010 which are deemed to be outstanding), see "Item 7.A. Major Shareholders" below. These shareholders, if acting
together, would be able to significantly influence all matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business
combination transactions.
We have experienced significant fluctuations in our results of operations at times in the past and expect these fluctuations to continue. These fluctuations may result in volatility
in our share price.
We have experienced at times in the past, and may in the future experience, significant fluctuations in our quarterly and annual results. Factors that may contribute to the
fluctuations in our quarterly results of operations include:
v The timing of purchases of our products by system integrators and other large customers;
v The rate of acceptance of new products we introduce;
v The loss of major customers;
v Product introductions and other actions taken by our competitors;
v Market acceptance of IPTV video services;
v Changing networking standards in the video solutions industry and our ability to anticipate and react to such changes in a timely manner;
v Changes in sales and distribution environments and costs;
v Fluctuations in manufacturing yields and delays in product shipments;
v The purchase or failure to purchase fixed-income real-estate assets;
v Changes in the availability, cost and terms of financing;
v The ongoing need for capital improvements;
v Personnel changes;
v Changes in foreign exchange rates;
v General economic conditions, particularly in those countries or regions where we sell our products; and
v Fluctuations in foreign exchange rates between the USD and other currencies relevant to the location of our real estate properties
Historically, the prices of video encoders and decoders and content authoring tools have decreased over the life of individual products, while the complexity of new product
introductions has increased. As a result, we have reduced prices for our products and we may have to reduce prices in the future. In addition, we may have to increase our research,
development and marketing expenditures in response to competitive conditions in order to develop new technologies and products. Accordingly, investors should not rely on the
results of any past periods as an indication of our future performance. It is likely that in some future periods, our operating results may be below expectations of public market analysts
or investors. If this occurs, the market price of our ordinary shares may drop.
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The trading price of our ordinary shares has been highly volatile, and may continue to fluctuate significantly due to factors beyond our control.
The trading price of our ordinary shares is and will continue to be subject to significant fluctuations in response to numerous factors, including:
v The entering into new businesses;
v The announcement of new products, services or service enhancements by us or our competitors;
v Quarterly variations in our results of operations or in our competitors’ results of operations;
v Changes in earnings estimates or recommendations by securities analysts;
v Perceptions of the video solutions and networking industry’s relative strength or weakness;
v Developments in our industry and change in demand for our products;
v General market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors;
v Seizure of a substantial business opportunity by our competitors or us;
v Availability of funding resources for the acquisition of new real estate assets;
v Fluctuations in foreign exchange rates between the USD and other currencies relevant to the location of our real estate properties; and
v Changes in interest rates.
We expect this volatility to continue in the future. In addition, any shortfall or changes in our revenues, operating income, earnings or other financial results could cause the
market price of our ordinary shares to fluctuate significantly. In recent years, the stock market has experienced significant price and trading volume fluctuations, which have particularly
affected the market price of many technology companies and which may not be related to the operating performance of those companies. Volatility in the price of stock of companies in
the video solutions industry has been particularly high. These broad market fluctuations have affected and may continue to affect adversely the market price of our ordinary shares. In
recent years, the trading price of our ordinary shares has been highly volatile. From January 2009 through June 2010, the closing price of our ordinary shares fluctuated reaching a high
of $1.55 and decreasing to a low of $0.93. The fluctuations and factors listed above, as well as general economic, political and market conditions may further materially adversely affect
the market price of our ordinary shares.
Holders of our ordinary shares who are United States residents face income tax risks.
There is a substantial risk that we are a passive foreign investment company, commonly referred to as PFIC. Our treatment as a PFIC could result in a reduction in the after-tax
return to the holders of our ordinary shares and would likely cause a reduction in the value of such ordinary shares. For U.S. federal income tax purposes, we will be classified as a PFIC
for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are
held for the production of passive income. For this purpose, cash is considered to be an asset, which produces passive income. As a result of our substantial cash position and the
decline in the value of our stock, we believe that there is a substantial risk that we became a PFIC during the taxable year ended December 31, 2009, under a literal application of the asset
test described above, which looks solely to the market value. If we are classified as a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning
ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. In addition, there can be no assurance that we will not be classified as
a PFIC in the future, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, and such determination cannot be
made with certainty until the end of a calendar year. United States residents should carefully read "Item 10.E. Taxation" under the heading "United States Federal Income Tax
Consequences" below for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares.
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We may not be able to raise additional financing for our future capital needs on favorable terms, or at all, which could limit our growth and increase our costs and could
adversely affect the price of our ordinary shares.
We received net proceeds in the amount of approximately $67 million from our secondary public offering in March 2000, and we spent approximately $37 million in cash as a
component of the consideration paid to acquire Viewgraphics Inc. and certain other assets, see also "Item 4.A. History and Development of the Company" below. In June 2008, we also
issued 2,816,901 ordinary shares in a private placement to our Chief Executive Officer and President and then Executive Chairman of our board of directors in consideration for $5 million.
It is probable that we will need to raise additional capital in the future to continue our longer-term strategic plans. We cannot be certain that we will be able to obtain additional financing
on commercially reasonable terms or at all. This could inhibit our growth and increase our operating costs.
We may in the future be the target of securities class action or other litigation, which could be costly and time consuming to defend.
In the past, following a period of volatility in the market price of a company’s securities, securities class action lawsuits have often been instituted against such companies. We
may in the future be the target of similar litigation. If such a lawsuit were brought against us, regardless of its outcome, we would incur substantial costs and our management resources
would be diverted to defending such litigation.
We do not intend to pay dividends.
We have never declared or paid any cash dividends on our ordinary shares. We currently intend to retain any future earnings to finance operations and expand our business
and, therefore, do not expect to pay any dividends in the foreseeable future.
We may continue to seek to expand our business through acquisitions that could result in a diversion of resources and our incurring additional expenses, which could disrupt our
business and harm our financial condition.
As we have done in the past, we may in the future continue to pursue acquisitions of businesses, products and technologies, or the establishment of joint ventures, that could
expand our business. The negotiation of potential acquisitions or joint ventures as well as the integration of an acquired or jointly developed business, technology, service or product
could cause diversion of management’s time as well as our resources. Future acquisitions could result in:
v Additional operating expenses without additional revenues;
v Potential dilutive issuances of equity securities;
v The incurrence of debt and contingent liabilities;
v Amortization of goodwill and other intangibles;
v Research and development write-offs;
v
v Other acquisition-related expenses.
Impairment charges; and
Acquired businesses or joint ventures may not be successfully integrated with our operations. If any acquisition or joint venture were to occur, we may not receive the
intended benefits of the acquisition or joint venture. If future acquisitions disrupt our operations, our business may suffer.
We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404, which started in
connection with our annual report on Form 20-F for the fiscal year ended December 31, 2007, have resulted in increased general and administrative expense and a diversion of
management time and attention, and we expect these efforts to require the continued commitment of resources. Section 404 of the Sarbanes-Oxley Act of 2002 requires (i) management’s
annual review and evaluation of our internal control over financial reporting and (ii) an attestation report issued by an independent registered public accounting firm on our internal
control over financial reporting, in connection with the filing of our annual report on Form 20-F for each fiscal year (such requirement is currently expected to be applicable to us starting
with our annual report on Form 20-F for the fiscal year ending December 31, 2010, if not further deferred or abolished). We have documented and tested our internal control systems and
procedures in order for us to comply with the requirements of Section 404. While our assessment of our internal control over financial reporting resulted in our conclusion that as of
December 31, 2009, our internal control over financial reporting was effective, we cannot predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our
internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. Failure to maintain effective
internal control over financial reporting could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor
confidence in our reported financial information, and the market price of our ordinary shares.
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Risks Relating to Our Video Solutions Business
On March 16, 2010, we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd., a wholly owned subsidiary of S.A. Vitec
(also known as Vitec Multimedia), according to which Optibase Technologies Ltd. will purchase all of the assets and liabilities related to our Video Solutions Business. Closing of the
transaction is expected to occur on June 30, 2010, after the release of this annual report. For further details see Item 4.B "Business Overview".
The video solutions market is highly competitive, and we may lose sales to our competitors and be forced to continue to lower the prices for our products, which may result in
reduced revenues.
We currently develop and market two product lines: the IPTV product line and the Video Technologies product line. The IPTV product line enables telephone operators and
service providers to offer TV services to their subscribers by leveraging their existing digital subscriber lines, or DSL, and fiber communications infrastructure. The Video Technologies
product line enables a variety of content creation and streaming applications. Both the IPTV and the Video Technologies operate and market their products in the enterprise,
government and broadcast markets.
Competition in each of these markets is intense and we expect competition to increase. The Video Technologies markets have grown in recent years and have attracted many
competitors. Advances in video encoding technologies and in desk-top processing capabilities have also enabled sophisticated new applications within these markets which require an
in-depth understanding of customer needs and significant development efforts. Moreover, the availability of video encoding technologies has also driven prices for products down
within these markets. In contrast, the IPTV market though young, is currently dominated by large companies that can afford to aggressively promote their products by reducing prices
in order to gain market share. To be competitive in each product line, we must continue to respond promptly and effectively to changing customer preferences, feature and pricing
requirements, technological change and competitors’ innovations.
We expect price competition to escalate in the video solutions industry. We have consistently attempted to minimize the effect of price reductions in the market by introducing
more sophisticated products at the top of our product line, and thereby attempt to maintain higher selling prices. However, competition in the future may force us to further lower
product prices and we may be unable to introduce new products at higher prices. We cannot assure you that we will be able to compete successfully in this kind of price competitive
environment. Lower prices and reduced demand for our products would reduce our ability to generate revenue. Failure by us to mitigate the effect of these pressures through cost
reduction of our products or changes in our product mix could have a material adverse effect on our business, financial condition and results of operations.
Some of our actual and potential competitors may have longer operating histories, greater name recognition, access to larger customer bases and significantly greater financial,
marketing, technical and other resources than we do. Our competitors also sell products that provide some of the benefits of the products that we sell, and we could lose sales to our
competitors. Moreover, some companies in the video solutions industry, including some of our competitors, participate in business combinations. These combinations may result in the
emergence of competitors who have greater market share, customer base, sales force, product offering, technology expertise and/or marketing expertise than we do. As a result, our
competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the promotion and sale of their
products than we can. Thus, we cannot assure you that we will be able to compete successfully against current and future competitors, or that we will be able to make the technological
advances necessary to improve or even maintain our competitive position or that our products will achieve market acceptance.
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If the video solutions market does not grow as we expect, the demand for some of our products and technology may decline and our revenues will be materially adversely affected.
Our growth depends on our ability to predict which segments of the video solutions markets will grow and on our ability to penetrate those segments. We have devoted
substantial effort and expense to the development of new products based on our prediction of market trends, however, if market growth rates do not meet our expectations, or if we are
unsuccessful in identifying and penetrating those segments, our business will suffer. In addition, general weak economic conditions have had an adverse impact on the digital video
industry and on the demand for our products. If the economic conditions persist and demand does not increase, our revenues will decline, and our business will be materially adversely
affected.
The video solutions market is characterized by rapid technological changes and multiple evolving standards. If we fail to enhance our existing products, develop new and more
technologically advanced products and successfully market these products, the results of our operations will suffer.
The markets for our products are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. For example, recent
advances in silicon technology have enabled the development of cheaper video compression components with higher performance and greater ease of integration than ever before.
Such developments enable competitors to offer similar or superior products to our own. Our future success will depend on our ability to maintain expertise in the digital video
technologies, enhance our existing products and introduce new products and features to meet the evolution of customer requirements and industry standards.
In addition, we, or our competitors, may announce the introduction of products that have the potential to shorten the life cycle of, or replace, our products. We have made
such announcements in the past and may do so in the future. Such announcements could cause customers not to buy our products or to defer decisions to buy our products. In
addition, we cannot assure you that products or technologies developed by others will not render our products or technologies non-competitive or obsolete.
Our future success also depends upon our ability to enhance our existing products and develop, launch and market new technologies and products in a cost-effective and
timely fashion. We have devoted, and will continue to devote, a substantial effort and expenses for the development of new technologies and products. However, we cannot assure you
that we will be able to complete testing and successfully launch our new products.
We have increased the allocation of research and development resources for the enterprise government and military markets. Should our expectations for such target markets fail
to materialize, our ability to respond to the needs of other customers may be adversely affected.
We have changed the internal allocation of resources within our research and development departments, or R&D department so as to align our products’ road map with and
focus primarily in products, such as the EZ TV, which are more targeted towards the enterprise, government and military markets. As our R&D resources are limited, such allocation of
resources may affect our ability to respond to the needs of other target markets, hurt our relationships with existing and potential customers and have an adverse affect on our
revenues.
We derive a significant portion of our revenues from one type of product, and the failure of this type of product to meet market demands could have an adverse impact on our
financial performance, revenues, and income.
Our MGW X100 product family accounted for 61% of our revenues in 2007, 68% of our revenues in 2008 and 72% of our Video Solutions revenues in 2009. While our revenues
from the MGW X100 product family increased as a percentage of total revenues, it decreased in absolute dollars over this period, we expect that this product family will continue to
account for a significant portion of our revenues in the next year. If this product fails to match the price, availability, quality or other features of competing products or to otherwise meet
our expectations with respect to market demand, it would have a material adverse affect on our results of operations.
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Failure to enter into cooperation agreements with system integrators or unfruitful cooperation agreements with system integrators may have a material adverse effect on our
results of operations.
As IPTV operators currently struggle with the complexity of integrating new technologies from many vendors, it is increasingly clear that it is not enough to provide top-class
encoders and transcoders for the IPTV operators. Most IPTV operators do not have sufficient expertise and, therefore, rely on a system integrator.
In the IPTV market, we manufacture encoders and transcoders, and mainly rely on system integrators to market and sell our products by integrating our encoders and
transcoders with complementary products offered by such system integrators.
We cannot assure you that we will be able to create the business relationships with the appropriate system integrators on favorable commercial terms or at all. In addition, the
integration process is quite complex and requires special resources and expertise and there is no assurance that any relationships we form with system integrators will be fruitful. Failure
to enter into cooperation agreements with system integrators or unfruitful cooperation agreements with system integrators may have a material adverse effect on our results of
operations.
A decrease in the sales of our Video Technologies product line which we expect to continue over the coming years, has had an adverse effect on our financial results and will
continue to have an adverse effect on our financial results in the future.
Our sales from the Video Technologies product line were $8.6 million in 2007, $6.2 million in 2008 and $3.6 million in 2009. The decrease in the sales of our Video Technologies
products are mainly attributed to significant advances in PC technology supporting software products for standard definition encoding and the emergence of new compression formats.
We expect that our sales from the Video Technologies products will continue to decrease over the years which would adversely affect our financial results.
We have a limited backlog of orders and have to plan production and inventory levels on unpredictable ordering patterns. Maintaining sufficient inventory levels to meet
anticipated demand increases the risk of inventory obsolescence and associated write-offs, which could adversely affect our financial performance.
The timing and volume of orders are difficult to forecast for each quarter, as a substantial portion of our sales are booked and shipped in the same quarter pursuant to purchase
orders. We have a limited backlog of orders for our products and must maintain or have available sufficient inventory levels to satisfy anticipated demand on a timely basis. Maintaining
sufficient inventory levels to assure prompt delivery of our products increases the risk of inventory obsolescence and associated write-offs. A shift in demand could also result in
inventory write-offs, which could harm our financial performance.
In addition, the ordering patterns of some of our large customers have been unpredictable in the past and we expect that ordering patterns by customers will continue to be
unpredictable. In view of this inherent unpredictability, we must plan our production and inventory levels based on internal forecasts of customer demand, which may fluctuate
substantially and sometimes vary substantially from early estimates provided by customers to us for planning purposes.
We depend on third parties to distribute and market our products. If we cannot retain effective distributors or fail to develop new distributor relationships, we may be unable to
effectively market and distribute our products.
A significant portion of our sales efforts worldwide, in particular in the Video Technologies product line, is conducted through a network of independent distributors. We are
unable to predict whether and the extent to which some of these distributors will be successful in marketing and selling our products in the future. While we have a policy of using only
distributors who do not distribute competing products, we have experienced, and may experience in the future, sales by our distributors of products that compete with our products. In
such cases, we may have to seek new distributor relationships, and we may not be able to establish relationships on the same terms as the prior relationships. Furthermore, distributors
may terminate their relationships with us upon short notice with little or no penalty.
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Our future performance also depends on our ability to attract additional distributors who will be able to market and support our products effectively, especially in markets in
which we have not previously been active. Effective distributors must possess sufficient technical, marketing and sales resources and must devote these resources to a lengthy sales
cycle and subsequent first-line customer support. We may not be able to retain our current distributors and may not be able to recruit additional or replacement distributors with
sufficient technical expertise in the networking and video content fields. The loss of one or more of our major distributors, especially in a key market, or the failure by one or more major
distributors to adequately provide customer support could adversely affect our business.
We believe it is becoming increasingly important for our success to develop relationships with several large original equipment manufacturers, or OEMs, of video server and
network equipment with technical and support expertise. We presently have a limited number of OEM relationships and we may not be able to maintain these relationships. Moreover,
we may not be able to develop new OEM relationships on favorable terms or at all. Our failure to retain existing or to develop new OEM relationships will have a material adverse effect
on our ability to sell our products and our operation results.
Some of our sales to the telecommunication, or Telco, market segment are conducted directly. However, sales to major Telcos largely depend on our ability to develop
relationships and form business combinations with well-recognized Telco vendors, such as: Alcatel, Siemens and Nortel. Failure to develop such relationships will have a material
adverse affect on our revenues and results of operations.
Some of our sales to the enterprise market and federal agencies in the United States in particular are conducted directly. However, sales to major federal agencies largely
depend on our ability to develop relationships and form business combinations with large purchasing agencies. Failure to develop such relationships will have a material adverse affect
on our revenues and results of operations.
As we market our products internationally our business is affected by the WEEE and RoHS directives.
As manufacturers and sellers of electronic equipment, certain aspects of the Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive
(2002/95/EC) which bans the use on the European Union ("EU") market of certain hazardous materials including lead, mercury, cadmium, chromium, and halogenated flame-retardants
and the Waste Electrical and Electronic Equipment (WEEE) Directive (2002/96/EC) which regulates the collection, recovery and recycling of waste from electrical and electronic products
apply to our operation. In addition, the Peoples’ Republic of China has enacted a law on Management Methods for Controlling Pollution by Electronic Information Products, referred to
as the China RoHS, that is equivalent of the bans implemented in the EU, but the marking and product certification requirements exceed the requirement of the EU RoHS directive.
Furthermore, the scope of this legislation is broader than the EU RoHS directive, covering also medical devices and measurement instruments. Although we make efforts to comply with
the directives, if we fail to do so, we may not be able to market our products effectively in some countries (mainly in Europe) and as a result, our operations will be adversely affected. In
order to comply with these directives we have invested and may need to further invest development resources to replace non-compliant components with compliant components with
the same function. Our costs of goods sold may also increase due to the use of certain new components and manufacturing processes. We cannot assure you that lack of compliance
with the WEEE and RoHS directives will not have a material adverse effect on our financial condition or results of operations. In some cases compliance with these directives may
require changing a hardware product in a way that requires some of our customers to make changes to their own systems. The need by a customer to change an existing system requires
an investment of resources and presents the opportunity for a customer to reconsider the advantages of our products in comparison with those of competitors, and may result in the
loss of some of our customers.
Our products could contain defects, which would reduce sales of those products or result in claims against us.
We develop complex and evolving products. Despite testing, errors may be found in existing or new products. Reliability, quality or compatibility problems with our products
could significantly delay or reduce market acceptance of our products, could require the devotion of significant time and resources to address errors, could divert our engineering and
other resources from other tasks and development efforts, and could damage our reputation and adversely affect our ability to retain our existing customers and to attract new
customers. We could also be subject to material product liability claims by customers.
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We depend on a number of third parties to manufacture, distribute and supply critical components of our products and we may be unable to operate our business if these parties
fail to perform their obligations.
We depend upon sole source suppliers for key components used in our products. These key components include, for example:
v H.264 SD, H.264 HD, MPEG I/II, MXF, AAC, Flash, streaming servers and HD video encoding tools provided by technological partners;
v Encoding and Decoding S/W’s provided by Main concept;
v Various modules, which are integrated in our systems, both for the MGW2000, MGW200/400, MGW Flash, MGW5100, MGW 1100, MGW HD and the MGW1000 including:
Encoding module by Ateme S.A., Switches supplied by PTI (Performance Technologies Inc.), Interface by Intel Corporation, Hosts supplied by Kontron AG, backplane boards by
Kaparel Corporation Pentium, CPU modules supplied by Kontron and Compact Pci platforms supplied by EPS (Israel) TECH 1992 Ltd., Elma Electronic Israel Ltd and Dan-el
Technologies Ltd.;
v Digital Signal Processing, or DSP, compression techniques, manufactured by Equator Inc. and TI, which are used in our MGW X100 product line and Movie Maker 400 products;
v Video compression chips manufactured by Fujitsu, Magnum and NEL;
v Audio Analog to Digital Converters (A/D), Digital to Analog Converters (D/A) and decompression chips manufactured by Crystal Semiconductor Corporation, or Crystal, a
subsidiary of Cirrus Logic, which are included in our encoders and decoders;
v Freescale, Inc.’s DSPs, which are included in our decoders and encoders;
v A video decoding chip manufactured by IBM Corp;
v SDI interface chips manufactured by Gennum Corporation;
v Microprocessor and PCI bridge devices from Intel that are used in our MediaPump and MovieMaker boards;
v A video processing chipset from Gennum, which is used in our MM2X0s;
v Programmable devices by Altera Corporation and Xilinx Inc., which are used in all our product lines; and
v Servers provided by EIM Systems & Components (1999) Ltd, Intel and IBM.
We may have sole source suppliers for additional products in the future. We purchase these sole source components pursuant to purchase orders placed from time to time. We
do not carry significant inventories of these sole source components and we have no guaranteed supply arrangements or other long-term agreements. The lack of guaranteed supply
arrangements can result in delays in obtaining components from time to time. The time and resources that these third parties devote to our business is not within our control. We cannot
be sure that these parties will perform their obligations as expected or that any revenues, cost savings or other benefits will be derived from the efforts of these parties. If any of these
parties breaches or terminates its agreement with us or otherwise fails to perform its obligations in a timely manner, the manufacture of our products may be delayed or cancelled. If any
of these events occur, we may be required to look for alternative sources of supply for our sole source components, which may be time consuming and we may incur additional
expenses, which in turn may affect our sales and operation results.
Some of our products were designed a number of years ago and we may face difficulties acquiring components for these products which will result in an adverse effect on our
reputation and sales.
Though we monitor the availability of components and make reasonable effort to procure sufficient quantities to meet demand, the availability of components is largely beyond
our control, in particular for older components. If a manufacturer declares one or more of these components obsolete, we may not be able to meet the demand for our products which
may adversely affect our reputation and our sales.
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We depend on a limited number of key personnel who would be difficult to replace, and if we lose the services of these individuals or cannot hire additional qualified personnel,
our business will be adversely affected.
Our continued growth and success largely depend on the managerial and technical skills of key technical, sales and management personnel. If any of the current members of
the senior management team are unable or unwilling to continue in our employ, our results of operations could be materially and adversely affected. Our success also depends to a
substantial degree upon our ability to attract, motivate, and retain other highly qualified personnel. The technology associated with video solutions is at a relatively advanced stage,
and there are many competitors in this area. Consequently, there is considerable competition for the services of technical, sales, management and engineering personnel.
The length of our sales cycle of streaming products depends on factors beyond our control and may cause revenues to vary significantly.
Sales of our streaming products, and in particular, the IPTV products, which are generally integrated within a larger system, require an extended sales effort. The period from an
initial sales call to the receipt of a purchase order for such products typically ranges from six to twelve months and can be longer. Also, because our products are often used as part of a
larger project, the timing of an order for our products is often dependent upon the timing of the projects, which is beyond our control. In addition, due to the operating procedures in
many large organizations considering the purchase of our products, an extended period of time may be required for technical evaluation to be completed and capital expenditure
authorization to be obtained within the customer. Accordingly, if a forecast of revenues from a specific customer for a particular period is not realized in that period, our operating
results for such period will be adversely affected.
Cost-reduction efforts may adversely impact our productivity and service levels.
Since 2001 and until the first quarter of 2010, we have continuously implemented various cost-control measures affecting various aspects of our business operations, including
several reductions in our workforce in particular in our U.S. and Israeli offices among various departments. We may in the future be required to take additional cost-saving actions to
reduce our operating losses and to conserve cash. The failure to achieve such future cost savings could have a material adverse affect on our financial conditions. On the other hand,
even if we are successful with these efforts and can generate the anticipated cost savings, these actions may adversely impact our employees’ morale and productivity, the
competitiveness of our products and business, our strength and stability as perceived by our customers and the results of our operations.
Reductions in work force may limit our ability to maintain products and develop new ones.
In our efforts to reduce operational expenses over the last few years, we have reduced the number of employees in our R&D department. Though we believe we have applied
adequate configuration management procedures to support the development of new products and all of our commitments for maintenance and customer support, our ability to respond
to certain customer requests may be limited and as such may harm our business relationship with such customers. In addition such reduction in work force may also limit our ability to
develop new products. The potential loss and damage could have an adverse affect on our business.
Our proprietary technology is difficult to protect and unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively.
Our success and ability to compete depend in large part upon protecting our proprietary technology including both hardware and software components of our products. We
cannot assure you that our efforts to protect our proprietary rights will be adequate. Our inability to protect our proprietary rights effectively could have a material adverse effect on our
business, financial condition and results of operations. We currently rely on a combination of patent, trade secret, trademark and copyright laws, nondisclosure and other contractual
agreements and technical measures to protect our proprietary rights. We cannot assure you that any patents will be issued to us as a result of current or future patent applications or
that patents issued to us will not be invalidated, circumvented or challenged. In addition, we cannot assure you that the rights granted under any such patents will provide us with
competitive advantages. We cannot assure you that any patents issued to us will be adequate to stop unauthorized third parties from copying our technology, designing around the
patents we own or otherwise obtaining and using our products, designs or other information. Litigation may be necessary to enforce our intellectual property rights and to protect our
trade secrets, and we cannot assure you that such efforts will be successful. Moreover, we cannot assure you that others will not develop technologies that are similar or superior to
our technology. Additionally, our products may be sold in foreign countries that provide less protection to intellectual property than that provided under United States or Israeli laws.
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Because our products may be subject to claims of infringement on the intellectual property rights of third parties, our business will suffer if we are sued for infringement or cannot
obtain licenses to these rights on commercially acceptable terms.
All of our products rely on technology that could be the subject of existing patents or patent applications of third parties. Many participants in the video solutions market have
a significant number of patents and have frequently demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement. We
expect that companies will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. Such claims may require us to enter into license arrangements, or may result in protracted and costly litigation that would require us and our
management to make significant expenditures of time, capital and other resources, regardless of the merits of these claims. Any necessary licenses may not be available or if available,
may not be obtainable on commercially reasonable terms. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be forced to stop selling all or some of
our products, and our business would be harmed.
From time to time, we receive notices relating to alleged infringement. In some cases, we have not received subsequent communications after responding to the initial claim or
we believe that the correspondence requires no further action on our behalf. In some other cases, we have resolved the matters on commercially reasonable terms or requested
additional information in order to determine the merits of the notice. However, we cannot assure you that future claims will be resolved on such terms, and failure to resolve such claims
on commercially acceptable terms could result in a material adverse affect on our business, financial condition and results of operations.
The prices of our products may become less competitive due to foreign exchange fluctuations.
Foreign currency fluctuations may affect the prices of our products. Our prices in all countries are incurred or determined in U.S. dollars. If there is a significant devaluation of
the local currency in relation to the U.S. dollar in a specific country, the prices of our products will increase relative to the local currency and may be less competitive.
The government programs and tax benefits that we currently participate in or receive require us to meet several conditions and may be terminated or reduced in the future, which
would increase our costs.
We receive grants from the Office of the Chief Scientist, or the OCS, in the Israeli Ministry of Industry, Trade and Labor for research and development programs that meet
specified criteria. Through 2009, we received an aggregate of $8.4 million in grants from the OCS and our accrued and paid royalties to the OCS totaled $4.2 million. We also receive tax
benefits under Israeli law for capital investments that are designated as "Approved Enterprises". These grants and tax benefits might be reduced in the future. To maintain our eligibility
for these programs and tax benefits, we must continue to meet conditions, including payment of royalties with respect to grants received and making specified investments in fixed
assets. Under the Encouragement of Industrial Research and Development Law, of 1984, or the "R&D Law", and the terms of the OCS grants, we are subject to three main obligations: (i)
the obligation to locally manufacture the OCS supported products; manufacturing the OCS supported products outside of Israel that results in a reduction of more than 10% of the local
manufacturing rate, is subject to the OCS's prior written approval and the payment of increased royalties, which may be up to 300% of the grant amount plus interest, depending on the
manufacturing volume that is performed outside of Israel, at an increased annual return rate; (ii) the obligation not to transfer know-how, that was developed as a result of grants
received from the OCS (in the course of an ‘approved plan’), outside the State of Israel; the Research Committee is authorized to approve the transfer of know-how, that results from
research and development made in the course of an ‘approved plan’, outside of Israel pursuant to certain terms, including payment of a redemption fee; and (iii) the obligation to pay
royalties to the OCS whenever the company successfully commercializes OCS funded products. Failure to comply with the R&D Law may result in cancellation of the grants received
from the OSC. We may be required to refund the portion of the grant already received plus interest and we may also be subject to penalties and criminal charges. The difficulties in
obtaining the approval of the OCS for the transfer of know-how and manufacturing rights out of Israel could have a material adverse effect on strategic alliances or other transactions
that we may enter into in the future that provide for such a transfer.
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Entitlement to the tax benefits under the Law for Encouragement of Capital Investments for enterprises to which the Investment Center granted an Approved Enterprise status
prior to December 31, 2004, is subject to the final ratification of the Investment Center, and is conditioned upon fulfillment of all terms of the approved program. In the event of our
failure to comply with these conditions, the tax and other benefits granted under the Law for Encouragement of Capital Investments could be canceled, in whole or in part, and we might
be required to refund the amount of the canceled benefits, together with the addition of Consumer Price Index linkage difference and interest. We believe that our Approved Enterprise
substantially complies with all such conditions at present, but there can be no assurance that it will continue to do so. There can be no assurance that we, who
enjoy Approved Enterprise benefits under the Law for Encouragement of Capital Investments will, meet the conditions stipulated under the Law for Encouragement of
Capital Investments in order to obtain a future status of Privileged Enterprise, or that the provisions of the Law for Encouragement of Capital Investments will not change in respect of
such status. The termination or reduction of the benefits under the Law for Encouragement of Capital Investments would increase our tax liability in the future, which would reduce our
profits or increase our losses. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities might not be eligible for inclusion in
Israeli tax benefit programs. See "Item 10.E. Taxation" under the heading "Israeli Taxation – Tax benefits under the Law for the Encouragement of Capital Investments, 1959." below.
In recent years, the Government of Israel has reduced the benefits available under these programs. There is no assurance as to the level of these benefits that will be available
in the future, if any, and whether we will be eligible for such benefits.
Business interruptions could adversely affect our business.
Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control, especially because our facilities
are located in Israel and the State of California. We do not have a detailed disaster recovery plan. In the event these blackouts, earthquake or other interruptions occur, they could
disrupt the operations of our affected facilities. In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur and any losses, and
any potential damages resulting from such interruptions could have a material adverse affect on our business.
The sale of our assets and liabilities related to our Video Solutions Business under the Vitec Transaction is subject to the receipt of consents and approvals from various entities,
which may impose conditions on, or jeopardize the completion of, the sale or reduce the anticipated benefits of the sale. Failure to complete the sale of our assets and liabilities
related to our Video Solutions Business under the Vitec Transaction could negatively impact the market price of our ordinary shares and our future business and financial results.
On March 16, 2010, we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Vitec, according to which Vitec will purchase all of the assets and
liabilities related to our Video Solutions Business (the "APA" and the "Vitec Transaction" respectively). Closing of the transaction is expected to occur on June 30, 2010, after the
release of this annual report. For further details see Item 4.B "Business Overview" and Item 10.C "Material Contracts".
Completion of the sale of our assets and liabilities related to our Video Solutions Business under the Vitec Transaction is conditioned upon the satisfaction of closing
conditions, including the receipt of certain required approvals from third parties and receipt of all necessary regulatory approvals and, if applicable, approval of the transaction by the
Israeli Antitrust Authority, all as set forth in the APA with Vitec. The required conditions to closing may not be satisfied in a timely manner, if at all, or, if permissible, waived, and the
sale may not be consummated.
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If the sale of our Video Solutions Business to Vitec is not completed for any reason, our on-going business may be materially adversely affected and will be subject to a
number of risks, each of which, among others, may have a negative impact on the market price of our ordinary shares. The risks associated with a failure to complete the acquisition
include, but are not limited to:
·
·
failure to pursue other beneficial opportunities as a result of the focus of management of each of the companies on the sale, without realizing any of the anticipated benefits of
the sale;
the market price of our ordinary shares may decline to the extent that the current market price reflects a market assumption that the sale will be completed;
· we may experience negative reactions to the termination of the sale from licensors, collaborators, suppliers, customers or other strategic partners; and
·
our costs incurred related to the sale, such as legal and accounting fees, must be paid even if the sale is not completed.
There is no assurance that we will receive the full benefits from the Vitec Transaction.
The Vitec Transaction includes an "earn-out" mechanism pursuant to which 45% of Vitec’s revenues deriving from the Video Solutions Business and exceeding $14 million in
the year following the closing of the transaction, will be paid to us. For additional information on the Vitec Transaction, see Item 10.C "Material Contracts". The receipt of the proceeds
from the "earn-out" mechanism depends, among other things, on market conditions and the successful integration and sale of our products by Vitec. There is no assurance that we will
receive any proceeds from the "earn-out" mechanism.
In addition, under the asset purchase agreement with Vitec, $1 million out of the aggregate consideration of $8 million (plus adjustments relating to receivables and payables as
of the closing of the transaction) will be deposited in an escrow for a period of two years as a security for damages arising to Vitec, subject to certain conditions, see also Item 10.C
"Material Contracts". Although we believe that we have provided Vitec with accurate and complete representations and warranties, there is no assurance that such amount will
eventually be paid to us from reasons beyond our control.
Risks Relating to our Fixed-Income Real Estate Business
We have recently decided to enter into the fixed income real-estate sector which presents risks which are, in their essence, materially different from our current business.
On May 11, 2009, our board of directors resolved to expand and diverse our operations and enter into the fixed-income real estate sector. At a special shareholders meeting
held on June 25, 2009, our shareholders approved the diversification of the Company’s operations by entering into the fixed income real-estate sector. Such approval was sought solely
for cautionary purposes and without any obligation of the part of the Company to do so. Since then, we have entered into two transactions, the first - the acquisition of a stake in an
office building located at 485 Lexington Avenue in Manhattan, New York for which we received a letter terminating the agreement from the seller and we have filed a lawsuit against the
seller and the second – the acquisition of a commercial building located in Rümlang, Switzerland. For additional information on such transactions, see Item 4.B. "Fixed-Income Real
Estate Business", Item 8. "Financial Information - Legal Proceedings" and Item 10.C "Material Contracts".
The fixed-income real estate sector presents risks which are, in their essence, materially different from our current business.
Our fixed income real-estate operations may involve the following risks:
·
We may experience difficulties in finding suitable real-estate properties for investment, either at all or at viable prices;
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·
·
·
·
·
We may be unable to proceed with the acquisition of fixed income properties because we cannot obtain financing on favourable terms. We may require substantial up-front
expenditures for property acquisition. Accordingly, we may require substantial amounts of cash and financing from banks and other capital resources (such as institutional
investors and/or the public) for our fixed income real estate operations. We cannot be certain that such external financing would be available on favourable terms or on a timely
basis or at all;
We may have difficulties leasing real-estate properties. The fixed income real-estate sector relies on the presence of tenants in the real-estate assets. The failure of a tenant to
renew its lease, the termination of a tenant’s lease, or the bankruptcy or economic decline of a tenant can have a material adverse effect on the economic performance of the
real-estate asset. There can be no assurance that if a tenant were to fail to renew its lease, we would be able to replace such tenant in a timely manner or that we could do so
without incurring material additional costs;
The ability to collect rents depends on the solvency of the tenants. Tenants may be in default or not pay on time, or we may need to reduce the amount of rents invoiced by
lease incentives, to align lease payments with the financial situation of some tenants. In all these cases, tenant insolvency may hurt our operational results;
Real estate properties in general are relatively illiquid. Such illiquidity may affect the ability to dispose of or liquidate part of real-estate assets in a timely fashion and at
satisfactory prices in response to changes in the economic environment, the real estate market or other conditions; and
Properties could suffer physical damage caused by fire or other causes, resulting in losses which may not be fully compensated by insurance. In addition, there are certain
types of losses, generally of a catastrophic nature, such as earthquakes, floods, terrorism or acts of war that may be uninsurable or are not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might result in insurance proceeds being
insufficient to repair or replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds may be inadequate to restore the economic position
with respect to the affected properties. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in the affected property as well as
anticipated profits from that property. No assurance can be given that material losses in excess of insurance proceeds will not occur in the future.
The occurrence of one or more of these factors could affect our fixed income real-estate business, financial condition and results of operations.
With respect to our commercial building in Rümlang, Switzerland, we are dependent on the continued attraction of third parties to enter into lease agreements, and in particular
anchor tenants. If we fail to enter into lease agreements, it would adversely affect our financial condition and results of operations.
We own, through our subsidiaries, a real-estate asset in Rümlang, Switzerland, which is currently leased to third parties. One of the lessees in Rümlang, that leases
approximately 33% of the property, may terminate the lease agreement at a 6-month prior notice. If such lease agreement is terminated, there is no assurance that we will be able to attract
new lessees in favorable terms or at all.
In addition, we may find it more difficult to engage tenants to enter into leases during periods when market rents are increasing. Economic recession, pressures that affect
consumer confidence, job growth, energy costs and income gains can affect the financial condition of prospective tenants, and a continuing soft economic cycle may impact our ability
to find tenants for our properties. Failure to attract tenants, the termination of a tenant’s lease, or the bankruptcy or economic decline of a tenant may adversely affect the rent fees for
our properties and adversely affect our financial condition and results of operations.
We may depend on partners in our joint ventures and collaborative arrangements.
We are currently and we may, in the future, own interests in real-estate assets in partnership with other entities. Our investments in these joint ventures may, under certain
circumstances, be subject to (i) the risk that one of our partners may become bankrupt or insolvent, which may cause us to be unable to fulfill our financial obligations, may trigger a
default under our bank financing agreements or, in the event of a liquidation, may prevent us from managing or administering our business or entail a compulsory sale of the asset at
less favorable terms; (ii) the risk that one of our partners may have economic or other interests or goals that are inconsistent with our interests and goals, and that such partner may be
in a position to veto actions which may be in our best interests; and (iii) the possibility that disputes may arise regarding the continued operational requirements of our assets that are
jointly owned.
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We may not be able to obtain additional financing for our future capital needs on favorable terms, or at all, which could limit its growth and increase its costs and could adversely
affect the price of its ordinary shares.
Real estate activities are largely financed from external sources. We cannot be certain that we will be able to obtain financing on favorable terms for our future real estate
activities, or at all. In addition, an adverse change can occur in the terms of the financing that we receive. Any such occurrence could increase our financing costs and/or result in a
material adverse effect on the results of the Company and its ability to develop its real estate business. The amount of long term loans currently outstanding may inhibit our ability to
obtain additional financing for our future capital needs, inhibit our long-term expansion plans, increase our costs and adversely affect the price of our ordinary shares.
We are a party to a legal proceeding in connection with the termination of an agreement for the purchase of a stake in a company holding a real estate asset in New-York, NY, USA.
On February 3, 2010, Mazal 485 LLC, a company whose beneficial interest is jointly owned by us and by Gilmore USA LLC, filed a lawsuit against SL Green Realty Corp. and
certain of its subsidiaries ("SL Green") regarding the purchase agreement for interests in 485 Lexington Avenue (the "Purchase Agreement"). On January 7, 2010, we received a notice
from the seller of 485 Lexington Avenue stating that the Purchase Agreement is terminated. The lawsuit alleges that SL Green breached material terms of the Purchase Agreement,
including a covenant of good faith and fair dealing towards Mazal 485 LLC ("Mazal"). The lawsuit seeks specific performance to enforce SL Green’s obligations under the Purchase
Agreement and an abatement of the purchase price to compensate Mazal 485 LLC for damages incurred as a result of SL Green’s breaches. On March 16, 2010, SL Green filed a motion
for an order dismissing Mazal's claims, which was heard on June 2, 2010. On June 23, 2010, SL Green's motion to dismiss Mazal's request for performance of the sale-purchase agreement,
was granted. Mazal's remaining claims, seeking damages for failure to perform, which are limited in scope, are currently being held before the court. There is no assurance that the
abovementioned legal proceedings will succeed and that we will be granted the sought performance of the transaction and/or damages. In the opinion of the Company and its advisors,
the provisions included in the Company’s financial statements are sufficient to cover the potential liabilities of such lawsuit. For further information see Item 8. "Financial Information -
Legal Proceedings".
Risks Relating to Operations in Israel
Deterioration in the economy in Israel may adversely affect our results of operations.
We are incorporated under the laws of and our main offices are located in the State of Israel. The economic conditions in Israel directly influence us. The Israeli economy,
which is also influenced by the political and military instability in Israel, has suffered in the past and may suffer in the future from instability, which may adversely affect our financial
condition and results of operations. Following the recession and the instability that characterized the Israeli economy during the years 2001 through 2003, the Israeli economy showed
signs of improvement between 2004 and 2008 and was relatively lesser impacted by the global financial crisis that broke in the last quarter of 2008. However, the continued global
economic instability and uncertainty and in particular the financial crisis which is currently experienced in Europe may adversely affect the economic conditions in Israel. If the Israeli
economy deteriorates, it may affect our financial conditions and the results of operations. In addition, acts of terrorism, armed conflicts or political instability in the region could
negatively affect local business conditions and harm our results of operations. We cannot predict the effect on the region of any diplomatic initiatives or political developments
involving Israel or the Palestinians or other countries in the Middle East. Furthermore, several countries restrict doing business with Israel and Israeli companies, and additional
companies may restrict doing business with Israel and Israeli companies as a result of an increase in hostilities. Our products are heavily dependent upon components imported from,
and most of our sales are made to, countries outside of Israel. Accordingly, our operations could be adversely affected if trade between Israel and its present trading partners were
interrupted or curtailed.
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Potential political and military instability in Israel may adversely affect our results of operations.
The political and military conditions in Israel directly influence us. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors, and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Although Israel has
entered into various agreements with Egypt, Jordan and the Palestinian Authority, since September 2000, there has been a high level of violence between Israel and the Palestinians.
Recently, there has been a further escalation in violence among Israel, Hamas, a militant group responsible for many attacks into Israel, the Palestinian Authority and other groups. In
addition, in July 2006, the Israeli army was engaged in extensive hostilities along Israel’s northern border with Lebanon and to a lesser extent in the Gaza Strip. Since June 2007, the
Hamas militant group has taken over the Gaza Strip from the Palestinian Authority, and the hostilities along Israel’s border with the Gaza Strip have increased, escalating to a wide scale
attack by Israel in December 2008, in retaliation to rocket attacks into southern Israel. These developments have further strained relations between Israel and the Palestinian Authority.
Any armed conflict, political instability or violence in the region may have a negative effect on our business condition, harm our results of operations and adversely affect our share
price. No predictions can be made as to whether or when a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact
Israel’s economic development or our operations.
Most of our officers and employees are currently obligated to perform military reserve duty, which may amount to lengthily periods of time, and some were called to duty
during the summer of 2006 and in December 2008. Additionally, all reservists are subject to being called to active duty at any time under emergency circumstances. Our operations could
be disrupted by the absence for a significant period of one or more of our directors, executive officers or key employees due to military service. We cannot assess the full impact of
these requirements on our workforce and business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.
Because most of our revenues are generated in U.S. dollars but a portion of our expenses in Israel are incurred in New Israeli Shekels, our results of operations may be seriously
harmed by inflation in Israel and currency fluctuations.
We generate most of our revenues in U.S. dollars but incur a portion of our expenses in NIS. As a result, we are exposed to risk to the extent that the rate of inflation in Israel
exceeds the rate of devaluation of the NIS in relation to the dollar or if the timing of devaluation lags behind inflation in Israel. In either event, the dollar cost of our operations in Israel
will increase and our dollar-measured results of operations will be adversely affected. Specifically, the inflation rate in Israel was approximately 3.4% in 2007, approximately 3.8% in 2008
and approximately 3.9% in 2009. At the same time the appreciation of the NIS against the dollar was approximately 9% in 2007, 1.1% in 2008 and 0.7% in 2009. As a result of this
differentiation, we experienced an increase in the dollar costs of operation in Israel in each of the years 2007, 2008 and 2009, all of which affected our results in such periods. The
fluctuations in the dollar costs of our operations in Israel related primarily to the costs of salaries in Israel, which are paid in NIS and constitute a portion of our expenses. We cannot
assure you that we will not be materially adversely affected in the future if inflation in Israel exceeds the devaluation of NIS against the dollar or if the timing of such devaluation lags
behind increases in inflation in Israel. Since October 2009 following the acquisition of a real estate property in Switzerland we have obtained a loan to finance that purchase. We are also
exposed to currency fluctuations of the CHF (Swiss Frank) and its corresponding interest rate as we derive our rental income in CHF and the loan is denominated in CHF. Our operations
could also be adversely affected if we are unable to guard against currency fluctuations in the future. Accordingly, we may enter into currency hedging transactions to decrease the risk
of financial exposure from fluctuations in the exchange rate of the dollar against the NIS. These measures, however, may not adequately protect us from material adverse effects due to
the impact of inflation in Israel.
Anti-takeover provisions could negatively impact our shareholders.
The Israeli Companies Law, 1999, or the Companies Law, provides that certain purchases of securities of a public company are subject to tender offer rules. As a general rule,
the Companies Law prohibits any acquisition of shares in a public company that would result in the purchaser holding 25% or more, or more than 45% of the voting power in the
company, if there is no other person holding 25% or more, or more than 45% of the voting power in a company, respectively, without conducting a special tender offer.
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The Companies Law further provides that a purchase of shares of a public company or a class of shares of a public company, which will result in the purchaser's holding 90%
or more of the company’s shares or class of shares, is prohibited unless the purchaser conducts a full tender offer for all of the company’s shares or class of shares. The purchaser will
be allowed to purchase all of the company's shares or class of shares (including those shares held by shareholders who did not respond to the offer), if the shareholders who did not
respond to the offer constitute less than 5% of the company’s issued share capital, or of the issued class of shares. At the request of an offeree of a full tender offer which was
accepted, the court may determine that the consideration for the shares purchased under the tender offer, was lower than their fair value and compel the offeror to pay to the offerees
the fair value of the shares. Such application to the court may be filed as a class action.
In addition, the Companies Law provides for certain limitations on a shareholder that holds more than 90% of the company’s shares, or class of shares.
Israeli courts might not enforce judgments rendered outside of Israel, which may make it difficult to collect on judgments rendered against us.
We are incorporated in Israel. Some of our directors and officers are not residents of the United States and some of their assets and our assets are located outside the United
States. Service of process upon our non-U.S. resident directors and officers and enforcement of judgments obtained in the United States against us, and our directors and executive
officers may be difficult to obtain within the United States.
We have been informed by our Israeli legal counsel, that there is doubt as to the enforceability of civil liabilities under U.S. securities laws in original actions instituted in Israel.
However, subject to certain time limitations, an Israeli court may declare a foreign civil judgment enforceable if it finds that all of the following terms are met:
v The judgment was rendered by a court which was, according to the laws of the state of the court, competent to render the judgment;
v The judgment can no longer be appealed;
v The obligation imposed by the judgment is enforceable according to the rules relating to the enforceability of judgments in Israel and the substance of the judgment is not contrary
to public policy; and
v The judgment is executory in the state in which it was given.
Even if the above conditions are satisfied, an Israeli court will not enforce a foreign judgment if it was given in a state whose laws do not provide for the enforcement of
judgments of Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice the sovereignty or security of the State of Israel. An Israeli court will also not declare
a foreign judgment enforceable in the occurrence of any of the following:
v The judgment was obtained by fraud;
v There was no due process;
v The judgment was rendered by a court not competent to render it according to the laws of private international law in Israel;
v The judgment is at variance with another judgment that was given in the same matter between the same parties and which is still valid; or
v At the time the action was brought in the foreign court a suit in the same matter and between the same parties was pending before a court or tribunal in Israel.
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ITEM 4. INFORMATION ON THE COMPANY
4.A. HISTORY AND DEVELOPMENT OF THE COMPANY
History
During 2009, we resolved to expand and diversify our field of operations and to enter into the fixed-income real estate sector.
On March 16, 2010 we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with a subsidiary of S.A. Vitec for the sale of all of the assets and liabilities
related to our Video Solutions Business. Closing of the transaction is expected to occur on June 30, 2010, after the release of this annual report. For further details regarding the
diversification of our business and the sale of our Video Solutions business, see below.
Optibase was founded and incorporated in the State of Israel in 1990 under the name of Optibase Advanced Systems (1990) Ltd. In November 1993 we changed our name to
Optibase Ltd. Our principal executive offices are located at 2 Gav Yam Center, 7 Shenkar Street, Herzliya 46120, Israel, and our telephone number at that location is +972-9-970-9288. Our
website is located at www.optibase.com. Optibase is subject to the provisions of the Companies Law. Our subsidiary, Optibase, Inc., was incorporated in 1991 in California, and is
located at 625 Ellis Street, Mountain View, California 94043. Our European subsidiary, Optibase Real Estate Europe SARL, was incorporated in October 2009 as part of our decision to
enter the fixed-income real estate sector and is located at 6 Rue Jean Bertholet L-1233 Luxembourg.
Commencing in February 2001, Festin Management Corp., a British Virgin Island corporation jointly owned by Shlomo (Tom) Wyler and Arthur Mayer-Sommer started to
acquire our ordinary shares on the open market. On September 10, 2004, Festin Management Corp. transferred all of its holdings in us to its shareholders. As of the date of this annual
report, Mr. Wyler serves as our President, Chief Executive Officer and a member of the board of directors and is considered the Company’s controlling shareholder. For additional
information on Mr. Wyler’s holdings in the Company, see "Item 7.A. Major Shareholders".
In December 2000, we acquired Viewgraphics Inc, a privately held company based in Mountain View, California, and a provider of hardware and software products for video
solutions infrastructure application which was merged with and into our subsidiary Optibase, Inc. in June 2001. In connection with the acquisition, we paid an aggregate consideration
of approximately $43.6 million, of which $11.8 million (net of issuance expenses) was paid in 1.37 million newly issued ordinary shares.
In June 2004, we acquired certain assets and liabilities of Media 100 Inc. as part of a pre-packaged bankruptcy filing of Media 100, in consideration for $2.5 million in cash and
costs incurred by us totaling $401,000. In September 2005, we entered into an agreement for the sale of our Digital Non-Linear Editing product line activity. For further information
regarding this agreement, see "Item 10.C. Material Contracts".
We listed our ordinary shares for trade on the Tel Aviv Stock Exchange, or the TASE, on August 6, 2007. On September 23, 2008, we decided to delist our ordinary shares from
trade on the TASE. The delisting of the Company’s ordinary shares from trade on the TASE was effective on September 28, 2008. The last day for trading of the Company’s ordinary
shares on the TASE was September 24, 2008.
In a series of transactions conducted during 2007 and the first quarter of 2008, we purchased an aggregate of 5,105,223 ordinary shares of Scopus Video Networks Ltd., or
Scopus, representing approximately 37% of Scopus’ issued and outstanding share capital, for an aggregate consideration of $28.6 million. For further information on these agreements,
see "Item 10.C. Material Contracts".
During 2008, we held negotiations with Scopus for the sale of our Video Solutions Business pursuant to which a non-binding term sheet for such sale was executed on August
4, 2008. Under the term sheet, we undertook to sell our Video Solutions Business in consideration for 2.6 million of Scopus shares, and up to additional 900,000 of Scopus shares based
on the post-closing performance of our business. Such negotiations did not materialize into a binding agreement with Scopus. On December 23, 2008, Scopus entered into a definitive
agreement with Harmonic Inc., or Harmonic, pursuant to which Harmonic undertook to acquire Scopus by way of merger pursuant to which, each shareholder of Scopus shall receive
$5.62 in cash per each outstanding share of Scopus. At the time of such agreement, we held approximately 36% of Scopus’ outstanding share capital. On March 12, 2009, following the
closing of the merger agreement between Scopus and Harmonic, we disposed of our entire holding in Scopus shares consisting of 5,105,223 shares representing 36.34% of Scopus then
issued share capital for a total consideration of $28.7 million. As a result, during the first quarter ended March 31, 2009, we recorded other income of $4.8 million, net of equity in losses.
For further information on this transaction, see "Item 10.C. Material Contracts".
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On May 11, 2009, our board of directors resolved, to expand and diverse our operations and enter into the fixed-income real estate sector. The board of directors believed that
due to the global financial crisis, the fixed-income real estate sector has become attractive and presents new business opportunities. The board of directors determined that there are
opportunities, especially in Central and Western Europe and North America that are potentially beneficial for the Company and its shareholders that should be pursued. The fixed-
income real estate sector presents opportunities and risks which are, in their essence, materially different from the Company's current business. At a special shareholders meeting held
on June 25, 2009 our shareholders approved the diversification of the Company’s operations by entering into the fixed income real-estate sector. Such approval was sought solely for
cautionary purposes and without any obligation of the Company to do so. As of the date hereof, we have entered into one agreement for the acquisition of a fixed-income real estate
asset in Switzerland. For further information see Item 4.B "Business Overview".
On March 16, 2010, we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd., a wholly owned subsidiary of S.A. Vitec
(also known as Vitec Multimedia) (S.A. Vitec and Optibase Technologies Ltd., collectively "Vitec"), according to which Optibase Technologies Ltd. will purchase all of the assets and
liabilities related to our Video Solutions Business. Closing of the transaction is expected to occur on June 30, 2010, after the release of this annual report. For additional information on
the transaction see Item 4.B "Business Overview" and Item 10.C "Material Contracts".
In addition, we hold interests in two companies, as follows:
1. V.Box Communication Ltd. - In July 2001, we invested $250,000 in a privately held company, V.Box Communication Ltd. ("V.Box"). The investment was made by way of a loan
against a note that can be converted into Ordinary shares of V. Box, at any time, by a five-day prior written notice. The amount of the loan should be payable upon the earlier of: (i) July
1, 2010; (ii) actual liquidation of V. Box; or (iii) mutual consent by us and the other investor of V. Box. The loan does not bear interest. Through December 31, 2007, we invested an
additional $2.3 million in V. Box in respect of additional convertible notes. During 2007, we invested additional $325,000 by the way of a promissory note bearing no interest and no
linkage differentials. Such additional amounts will be repaid only out of proceeds received by V.Box on account of sale of all or substantially all of the assets of V.Box or a specific line
of products and/or upon the occurrence of an event of default, including among others, insolvency or bankruptcy of V.Box, appointment of a receiver or a liquidator to V.Box and
exercise of any liens on all or substantially all of V.Box’ assets, as described above. In case of conversion, we will hold approximately 32% of V. Box ordinary shares. We recorded
impairment losses in the amount of $173,000 and $325,000 in the years ended December 31, 2006 and 2007, respectively, which are included in the statement of operations under other
expenses (income), net. Through December 31, 2007, we have impaired our investment in V.Box and the balance of the investment was $0. We did not invest additional amounts in 2008
and 2009. In addition, we provide V.Box with distribution services in the North American market.
2. Mobixell Networks Inc.- In November 2000, we entered into an agreement with a privately held company called Mobixell Networks Inc., or Mobixell, pursuant to which we
granted Mobixell a license to use certain of our MPEG-4 technologies valued at $300,000, and committed to invest through one of our subsidiaries at least $1 million. In December 2000,
we invested $1.064 million in Mobixell’s Series A Preferred Stock. Mobixell Networks designs, develops and markets solutions for mobile rich media adaptation, optimization and
delivery. During the quarter ended March 31, 2003, based on updated information, we decided to adjust downward the value of the investment in Mobixell by its full amount, totaling
$1.36 million. However, during the quarter ended September 30, 2003, Mobixell entered into an additional financing round that included new strategic investors. As part of the financing
round, we reassessed the investment and decided to participate in the financing round in the amount of $300,000 in Mobixell’s Series B Preferred Stock. In May 2004, we decided to
participate in another financing round in the amount of $400,000 in Mobixell’s Series C Preferred Stock. In March 2010, Mobixell networks acquired a company and paid part of the
acquisition costs with newly issued shares of stock. As a result, our holdings in Mobixell, on a fully diluted basis, have decreased from 4.34% to 3.71% of its equity. We may participate
in future financing rounds in Mobixell and our holdings may be further diluted.
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4.B. BUSINESS OVERVIEW
The following is a summary of the principal fields of our businesses:
· Digital Video and Streaming Based Products and Services or Video Technologies Business (collectively, "Video Solutions Business") – development, marketing and sale
of high quality equipment for a wide range of professional video applications in the broadband IPTV, broadcast, government, enterprise and post-production markets.
·
Fixed Income Real-Estate – investments in fixed-income real estate assets.
Below is a description of our principal fields of activity:
Video Solutions Business
We provide high quality equipment for a wide range of professional video applications in the broadband IPTV, broadcast, government, enterprise and post-production
markets. During 2009, we developed and marketed two product lines: Video Technologies and IPTV. Our products are generally manufactured by the same subcontractors by the use of
similar raw materials purchased from the same suppliers. We market our products through a combined sales and marketing team and sell them by way of direct sales and through
independent distributors, system integrators and resellers.
Sale of our Video Solutions Business
On March 16, 2010 we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd., a subsidiary of S.A. Vitec ("Vitec"),
according to which Vitec will purchase all of the assets and liabilities related to our Video Solutions Business in consideration for $8 million (plus adjustments relating to receivables and
payables as of the closing of the Transaction). The consideration will be further adjusted according to an earn-out mechanism pursuant to which 45% of Vitec’s revenues deriving from
the Video Solutions Business and exceeding $14 million in the year following the closing of the Transaction, will be paid to us. For further information regarding the terms of the asset
purchase agreement, see Item 10.C "Material Contracts".
Products
Video Technologies
The Video Technologies product line includes Peripheral Component Interconnect Encoders ("PCI encoders"), decoders and Digital Video Broadcasting ("DVB") network
interfaces, Media Gateways for streaming video over computer networks and video ingest solutions.
The PCI products are PC extension boards that are inserted into the Peripheral Component Interconnect bus of a host computer. We provide software applications that operate
these boards for encoding, decoding and DVB processing respectively. We also offer software development kits with which system integrators can build their own professional video
applications based on our boards.
The Media Gateways are stand-alone, integrated devices for encoding and streaming video over computer networks. They do not use the PCI platforms for encoding or
decoding though they are based on similar technology. These products are remotely managed by either a web interface or an SNMP management application.
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In the quarter ending March 31, 2008, we released a new product, called the Creator, which uses the PCI encoders to provide a versatile, integrated solution for Ingest. Ingest is
the process of acquiring video content for a variety of video applications.
In the quarter ending March 31, 2009, we added to the Creator the ability to encode HD in the H.264 format and an SD only version that provides a cost-effective solution for
customers who only need the SD features of the Creator.
The Video Technologies products are sold to the broadcast, government, enterprise and post-production markets.
In enterprise markets, the encoding and streaming products enable corporate training, videoconferencing and TV to the desktop. In the broadcast markets the ingest solutions
enable the preparation of video content for Video On Demand (VOD) and non-linear-editing.
We sell the Video Technologies products directly to end users, through OEMs and to system integrators and also through a worldwide network of distributors, resellers and
value added resellers.
IPTV
IPTV (Internet Protocol Television) is a system where a digital television service is delivered using the IP protocol including delivery by a broadband connection. For
residential users, IPTV is often provided in conjunction with VOD access and VoIP (Voice Over IP). IPTV is typically supplied by a broadband operator using a closed network
infrastructure.
The primary market of the IPTV product line consists of telephone operators and internet service providers worldwide who are offering broadband and telephone services.
These companies are exploring ways to leverage their existing networks to add new services, and in particular, personalized multi-channel television. These networks (sometimes called
"access networks") are typically IP enabled over digital subscriber line, or DSL, a family of digital telecommunication protocols designated to allow high speed data communication over
existing telephone lines or fiber networks or combinations of these. The new services are offered to home subscribers, to organizations, gated communities or within hotels for
entertainment.
In these applications, our IPTV products are integrated in a video head-end. They receive content from various analog or digital video sources, like Betacam tape machines or
satellite-receivers and distribute the content over an access network. The three key features of the IPTV products are encoding, transcoding and transrating uncompressed and/or
compressed video feeds. "Encoding" means to compress an uncompressed video source (analog or digital); "Transcoding" means the conversion of a video bitstream from one
compression format to another and "Transrating" is the reduction of the bitrate of the video content without changing the compression format.
The MGW5100 is a video streaming device that can encode, transcode, transrate and recast up to 26 streams in the MPEG-1, MPEG-2, H.264 (i.e. MPEG-4 Part 10 or AVC)
formats over IP and ATM networks such as DSL (Digital Subscriber Line) and optical fiber.
The MGW1100 has a smaller form factor than the MGW5100 and supports up to 12 channels. It targets regional headends and other smaller installations where fewer channels
are required.
Our management applications for the IPTV products allow an operator to configure each device, to monitor its status and receive notifications upon malfunction. They also
enable the configuration of devices for channel redundancy whereby a malfunctioning channel is substituted by a redundant channel in the event of failure. The application uses the
Simple Network Management Protocol (or SNMP), commonly used by network equipment vendors, thus enabling smooth integration of our products into other management
applications.
During 2007, we added the capability to deliver closed captions, teletext and subtitles to the MPEG-2 streams generated by these products. Closed captions are the textual
representation of audio tracks of the video for the purpose of translation or as a viewing aid for the hearing impaired. Government regulations in some countries, for instance in the US,
require that public TV services include closed captions. The IPTV products support the insertion of closed captions into MPEG-2 streams according to the SCTE-20 and SCTE-21
specifications.
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In the quarter ended September 30, 2008, we released a new version of the MGW 5100 and MGW 1100 that supports the insertion of closed captions into H.264 streams
according to Appendix D of the ATSC 53 document published by the Advanced Television Systems Committee (ATSC) which has been adopted by the industry as the preferred
method for delivering DTVCC in H.264 streams.
This version of the MGW 5100 and MGW 1100 products also implements the SAP (Session Announcement Protocol) which is a protocol defined by the IETF (Internet
Engineers Task Force) that enables video transmitters to announce and video receivers to detect the media services that are available on an IP (Internet Protocol) network.
Enhancements were also made to the H.264 encoder to improve the quality of streams produced at low bit-rates, including the ability to control the number of frames being encoded per
second.
In the quarter ending December 31, 2007, we released the MGW HD which is a high quality encoder for High Definition TV (HDTV) in the H.264 format for IPTV delivery and
other applications. In the quarter ending June 30, 2008 we released an improved version of the product with improvements to the chassis and user interface. In the quarter ending
September 30, 2008, we also enhanced the management application for our IPTV products to include user management, advanced fail-over features and more detailed feature control for
the MGW HD.
For the IPTV product line we are working on video quality improvements and cost reduction. We are also developing new features such as the ability to accept input streams
over IP for transcoding in addition to the DVB inputs that are supported today. We are also developing the capability to generate two streams for each video channel, one with a high
bitrate, the other with a low bitrate so that receivers can combine such streams to create a "Picture in a Picture" (PIP) effect on the display. We are also adding the capability to send
output streams over Internet Protocol version 6 (IPv6) networks in addition to the IPv4 support that we have today. IPv4 is the dominant version of the Internet Protocol for packet-
switched internetworks and the Internet. IPv6 is the next-generation version of this protocol.
Enterprise, Government and Military Markets
With the IPTV products we also address certain high-end requirements of the enterprise, government and military markets for video streaming. The IPTV products are
especially effective where there is a requirement to handle many channels at one location, where high availability is crucial or when transcoding or transrating are needed. These
requirements are common in certain enterprise, governmental and military applications.
In an effort to complete our streaming solutions for the enterprise and government markets, we introduced the EZ TV and the MGW FlashStreamer.
We first released the EZ TV in the quarter ending March 31, 2008. EZ TV is an application that manages the distribution and playback of video over Enterprise IP networks and
networks used by military and government facilities. The EZ TV works with all Optibase MediaGateways and, in particular, with the IPTV encoder products. A key feature of the EZ TV
system is a web-based desk top player which allows users to view 1, 4, 9 or 16 simultaneous video channels and is very simple to deploy in large numbers throughout an organization.
The EZ TV also supports IP settop boxes to allow viewing on TV monitors in addition to computer monitors.
In the quarter ending June 30, 2008, we released version 2.0 of the EZ TV that includes a Video-On-Demand (VOD) server. This version allows users to record content, to
upload it to the VOD server and to view it on demand with the EZ TV desktop player. In the quarter ending March 30, 2009, we released version 2.5 of the EZ TV which includes
integration with Active Directory. Active Directory is a Microsoft technology that allows network administrators to assign policies, deploy software, and apply updates within an
organization. This integration allows IT (Information Technology) managers in organizations in which the EZ TV is deployed to control access to content through the existing IT
infrastructure.
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In the quarter ending December 31, 2008, we released a new product called the MGW FlashStreamer. This product offers real time video encoding in the Adobe Flash format.
The product’s built-in Adobe Flash Media Streaming Server supports streaming to hundreds of concurrent internet users who can view the streams on the latest Adobe Flash Player,
the prominent Internet browser-based media player. This product is intended for use in e-learning and corporate applications requiring delivery of media at low bitrates over private IP
networks. It is also well suited for Web TV services delivered over the public internet. In the quarter ending March 31, 2009, we released version 2.0 of the MGW Flash Streamer which
includes the ability to save streams on an internal storage device and support for on-demand delivery of prerecorded content from storage. This version also allows simultaneous
encoding of higher and lower bitrate versions of the same video signal and encoding to the H.264 format, which is now supported by Flash Player 9.
In the quarter ending September 30, 2009, we added a VGA (Video Graphics Array) input to the MGW FlashStreamer. This new feature allows encoding from the VGA input, as
well as from regular composite input and composes a custom video layout comprised of these two inputs.
During the quarters ended December 31, 2008 and March 31, 2009 we have changed the internal allocation of resources within our R&D department so as to align our products’
road map with and focus primarily in products, such as the EZ TV, which are more targeted towards the enterprise, government and military markets
Sales and Marketing
We sell our products through the combined efforts of our direct internal sales force and through indirect channels, including independent distributors, system integrators and
resellers. A key element of our sales and distribution strategy is to cultivate strategic relationships with companies that can promote reference sales with the potential for significant
revenue impact. Our marketing strategy for IPTV products includes partnering with other vendors and system integrators to create an IPTV eco-system thus making our offering more
complete and reducing integration complexities for the customer or system integrator.
The particular mix of sales and distribution methods we use varies according to geographic region.
Our sales efforts in North America, Central America and South America are managed by Optibase, Inc., our wholly owned subsidiary, which is headquartered in Mountain
View, California. Our North American sales activities are conducted primarily through our direct sales organization, which focuses on key accounts, which include telecommunication
operators, system integrators and OEM accounts that offer strategic opportunities or large volume potential. North American sales efforts are supplemented by our value added
resellers, or VAR, channel, through which our products are sold directly to end-users. North America accounted for approximately 47% of our total sales in 2007, approximately 54% of
our total sales in 2008 and approximately 56% of our Video Solutions sales in 2009.
Outside of North America, the majority of sales are handled via a network of distributors and resellers that manage both small and large accounts. As a rule, this channel is
responsible for stocking an inventory of our products to meet immediate local demand, providing first-line sales and technical support for their customers, and, with the use of co-op
funds from us for these purposes, conducting local marketing efforts, including trade shows, seminars, advertisements and mailings.
Distributors also generate and follow up on sales leads, act as the sole interface with customers, translate our promotional and technical written materials and endeavor to meet
agreed sales targets. Depending on market size and potential, the number of distributors and other partners in a given geographic region varies. Each is carefully selected based on its
background in video and networking technology, its knowledge of the local market, its customer base and its reputation. In addition, we strive to work with partners who will devote
significant time and effort promoting our products and who do not have product line conflicts. Our distributors do not usually have exclusive rights with respect to any of our products
or market segments, and none of our distribution agreements limits our ability to independently develop products or to enter markets. While most of our relationships can be terminated
by either party upon short notice and without significant penalty, we have maintained long-standing relationships with many of our distributors. Many of our largest distributors have
carried our products for over three years.
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Distributor and direct account relationships outside of North America are managed directly or indirectly from our headquarters in Israel. In Europe these distributors and
customers are supported by our sales managers in Israel. This local presence approach brings with it many advantages related to culture and language. Our office in Beijing, China
directs our sales efforts in China and Hong Kong. In India, we sell our products through our new local sales office. Sales to Asia Pacific or APAC are managed directly from our
headquarters in Israel. European Video Solutions sales constituted approximately 32% of our total Video Solutions revenues in 2007, approximately 21% of our total Video Solutions
revenues in 2008, and approximately 14% of our total Video Solutions revenues in 2009, while Video Solutions sales in Eastern Asia, including Japan, constituted approximately 15% of
our total Video Solutions revenues in 2007, approximately 21% of our total Video Solutions revenues in 2008, and approximately 25% of our total Video Solutions revenues in 2009.
Video Solutions sales in Israel and other areas outside of North America, Europe and the Far East was approximately 6% of our total Video Solutions revenues in 2007, approximately 4%
of our total Video Solutions revenues in 2008 and approximately 5% of our total Video Solutions revenues in 2009. Please also see "Item 5.A. Operating Results" below.
Technology
During the early 90's, we introduced content creating tools for the PC based on the MPEG-1 and MPEG-2 specifications. The products are comprised of software that runs on
the PC and controls a PCI (Peripheral Component Interconnect) hardware encoder that is inserted in an expansion slot on the PC. The main application for these products is to create
compressed audiovisual files that could be stored on CD and on DVD. These MPEG specifications standardize advanced methods for the compression, delivery and storage of digital
audio and video information.
From 1995 and onwards we also developed and marketed products that deliver video over IP networks (a process known as streaming). The first products in this family, known
as Commotion, were implemented on a PC with encoder boards, similar to those used for the content creation products. From 2001 and onwards we also developed and marketed
streaming products as dedicated custom servers with no keyboard, monitor or mouse that can be controlled remotely using a Web application.
With our acquisition of Viewgraphics Inc. in December 2000, we acquired expertise in DVB technology, primarily through the MediaPump product. The MediaPump is a PC PCI
board whose functions are to send files over a DVB network from the PC, receive data over a DVB network to store as a file on the PC, and to provide certain processing operations for
outgoing and ingoing data.
Encoder related technology
Our video encoding technology is largely based on the MPEG-1, MPEG-2, MPEG-4 international standards and Part 10 of the MPEG-4 specification, also known as H.264 and
as AVC (Advanced Video Coding). We have developed and released IPTV products for the delivery of standard definition and high definition video signals using H.264.
Our audio encoding technologies include MPEG-1 Layer II encoding, Dolby AC-3 encoding licensed from Dolby and AAC (Advanced Audio Encoding).
We have implemented some of these audio and video technologies on multimedia DSPs and others by integrating dedicated silicon components. In most cases we license the
core encoder from a third party and integrate it in the hardware and software layers of our products.
Our MPEG-2 encoder products use video encoding technology from LSI Logic. We have developed an MPEG-4 part 2 encoder on a powerful multimedia DSP from Equator
Technologies for some of our products. Our H.264 technology was developed in cooperation with a two technology partners, one for the standard definition encoder and the other for
the high definition encoder. We have also developed an MPEG-2 PCI encoder of high definition video using a dedicated component from NEL. This encoder is used mostly in our
content creation tools, the latest of which is the Creator, an ingest server for the broadcast and professional video market.
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We have developed an MPEG-1 Layer II encoder on a dedicated digital signal processor, or DSP, and have integrated an implementation of a Dolby AC3 audio encoder,
licensed from Dolby, on the same DSP. Our AAC encoders were also developed in cooperation with technology partners including Fraunhofer.
We have also implemented a multiplexer component for each of these products according to the MPEG standards. Multiplexing is the process of combining the compressed
video and audio information to ensure synchronization of the decoded audio and video signals and to ensure smooth decoder buffer management.
Within some of our products we have developed a patented technology that we call EverSync to assure the synchronization of both audio and video, even when our products
receive unstable video sources or are subject to random noise and disconnections. This technique eliminates the need for an external time base corrector ("TBC"). In addition, despite
the fact that the MPEG and MPEG 2 standards do not support certain lower frame rates, our patented technology (that we call SmartMux) embodied in the multiplexer enables the
generation of streams with low frame rates, that are compatible with standard MPEG players, trading smoothness of motion for higher image quality at a given bit rate.
FPGA and Embedded technology
For some of our products we have developed proprietary technology running on field-programmable gate arrays (FPGA) for processing video before encoding. Some aspects
of the technology are designed to stabilize the video input before it is sent for encoding, others are designed to filter the video and derive a signal that is easier for the encoder to
encode efficiently. Recent developments in this field enable the scale down of a high definition feed down to standard resolution for standard definition encoding and the extraction of
closed captions information that are embedded in the video signal.
DVB (Digital Video Broadcast) technology
With the MediaPump we provide proprietary technology to record, play and process MPEG transport streams that containing multiple programs (i.e. services) of audio and
video (Multiple Program Transport Stream, or MPTS). The MediaPump is capable of multiplexing several programs to create an MPTS. It can also extract selected programs from an
MPTS for storing or further processing.
We have developed transport and control protocols for the streaming of multimedia over IP networks, such as the real time transport protocol, or RTP, and the real time control
protocol, or RTCP, that are becoming widely adopted and standard in the industry. We have also developed smoothing algorithms in our streaming products that are used to reduce
congestion of the network and prevent the dropping of packets in routers and by other networking interfaces.
SDK (Software Development Kit) technology
Our PCI encoders, decoders and DVB boards are exposed by our software development kits, or SDKs. The SDKs allow system integrators to easily incorporate our MPEG
encoders, decoders and DVB boards into their own digital video applications. The SDKs have been designed to be forward compatible allowing easy upgrades of hardware with little
changes to the customer’s application.
Management Software Technology
As part of the development of our media gateways products we have developed management software. For some of our products we have implemented Web applications
using the hyper text markup language, or HTML, which can be accessed by web browsers. For our IPTV products we have developed a comprehensive management application using
SNMP. The application enables the provisioning of each device and provides monitoring and alarm generation. An important capability of this management application is the
management of automatic, flexible and configurable fail-over between devices to reduce possible down-time to a minimum.
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Transcoding Technology
An important feature developed for the IPTV products is the ability to transcode one media format to another. We have developed the ability to transcode compression formats
from MPEG-2 to MPEG-4 and to transrate from MPEG-2 at a high bit rate to MPEG-2 at a lower bit rate. The source can be either a variable bit rate, or VBR, or constant bit rate, or CBR
feed. Some of the technology is licensed from a technology vendor and integrated into our products. We have also developed the ability to pass-through specified elements of the
audiovisual information without transcoding, such as closed captions and audio streams. In addition to transcoding at the compression layer, we have further enhanced our networking
capabilities to perform translation of the network layer between DVB, IP/Ethernet and ATM according to the needs of the service provider. With regard to ATM we have developed the
capability of transmitting audiovisual content over native ATM and over IP over ATM.
Carrier Class systems related technology
As part of the development of the IPTV products, the MGW 5100 and the MGW 1100, we have implemented such features as redundancy and scalability, no single point of
failure, and the design to meet carrier grade requirements. These features are required by Telcos (i.e. carriers) and service providers in order to ensure a reliable service to their
customers. An important capability of our management application is that of flexible and configurable fail-over management between redundant devices to reduce possible down-time to
a minimum.
Enterprise Software Technology
The EZ TV family of products is designed for users in an Enterprise environment. For these products we have developed technologies relating to simple and secure
deployment of software within an organization. In particular we have developed plug-ins for our browser based media player and we have integrated the management server with Active
Directory.
Adobe Flash Technology
For the MGW FlashStreamer we have developed components that implement the Adobe Flash proprietary technology on the server and on the client. On the server side, we
have developed the know how to build encoders that are Adobe Flash compliant and the ability to deliver hundreds of encoded streams concurrently to individual users. On the client
side, we have integrated the Flash Player into the EZ TV player.
Research and Development
We believe that our innovative and versatile technology is at the core of our strength, and that our ability to enhance our current products, to develop and to introduce new
products, to maintain technological competitiveness and to meet customer requirements is essential to our future success. Accordingly, we devote and intend to continue to devote
significant human and financial resources to research and development.
As part of the process of product development, we work closely with current and potential customers, dealers, distributors and leading companies in relevant industries to
identify market needs and define appropriate product specifications. As of June 21, 2010, our research and development department was comprised of 27 employees all of whom are
located in our headquarters in Israel. Our research and development net expenses were $5.4 million in 2007, $6.4 million in 2008, and $3.7 million in 2009.
Our research and development efforts have been financed through internal resources as well as through programs sponsored by the Israeli OCS, in the Israeli Ministry of
Industry and Trade, and the European Union Research and Development Program. The total funding from these sources was $1.8 million in 2007, $1.1 million in 2008, and $1.3 million in
2009.
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Under the Encouragement of Industrial Research and Development Law, of 1984, or the R&D Law, and the terms of the OCS grants we are subject to three main obligations: (i)
the obligation to locally manufacture the OCS supported products; manufacturing the OCS supported products outside of Israel, that resulted in a reduction if more than 10% of the
local manufacturing rate, is subject to the OCS's prior written approval and the payment of an increased total amount of royalties, which may be up to 300% of the grant amount plus
interest, depending on the manufacturing volume that is performed outside of Israel, at an increased annual return rate; (ii) the obligation not to transfer know how, that was developed
as a result of grants received from the OCS (in the course of an ‘approved plan’), outside the State of Israel; Under section 19B of the R&D Law, the Research Committee is authorized to
approve the transfer of know-how, that results from research and development made in the course of an ‘approved plan’, outside of Israel pursuant to certain terms, including payment
of a redemption fee; and (iii) the obligation to pay royalties to the OCS whenever we sell OCS funded products. Such sale of OCS funded products includes: (i) any contractual
engagement for the purchase, transfer, lease, rent and grant of a right to manufacture, market or use the OCS funded product itself, in its development, including when such product is
part of other goods; and (ii) the formation of a commitment for the provision of maintenance, installation, instruction, consulting, performance of applications services and any other
OCS funded product related services. Thus, as described above, the terms of the OCS grants limit us from manufacturing products or transferring technologies developed using these
grants outside of Israel without special approvals, which may or may not be granted. Even if we receive approval to manufacture the OCS supported products outside of Israel, we
would be required to pay an increased total amount of royalties, which may be up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed
outside of Israel at an increased annual return rate. The R&D Law permits the transfer of OCS financed technology outside of Israel, under certain conditions and subject to receipt of
approval from the OCS for such transfer. Failure to comply with the R&D Law may result in cancellation of the grants received from the OCS. We may be required to refund the portion
of the grant already received plus interest and we may also be subject to penalties and criminal charges. The difficulties in obtaining the approval of the OCS for the transfer of know-
how and manufacturing rights out of Israel could have a material adverse effect on strategic alliances or other transactions that we may seek to enter into in the future that provide for
such a transfer. Through December 31, 2009, we received grants from the OCS aggregating $8.4 million for certain of our research and development projects. As of December 31, 2009,
accrued and paid royalties to the OCS totaled $4.2 million. As of December 31, 2009, the Company had an outstanding contingent obligation to pay royalties in the amount of
approximately $4.2 million plus interest.
To maintain our eligibility for these programs and tax benefits, we must continue to meet conditions, including payment of royalties, amounting to 3%-3.5% of the sales of the
products and other related revenues generated from such projects, up to 100% of the grants received, linked to the U.S. dollar and for grants received after January 1, 1999 also bearing
interest at the rate of LIBOR. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required.
In addition to the programs mentioned above the OCS provides royalty-free grants through the MAGNET program which provides funding for research and development
collaborations between industrial companies and academic research groups, under the auspices of the Office of the Chief Scientist of the Ministry of Industry, Trade & Labor, which are
subject to the R&D Law. Under the conditions of the MAGNET program, each of the members of the consortium is to provide the other members with a license to use any know how
developed by the consortium, and the recipients of grants under the MAGNET program shall not be under any obligated to pay royalties to the OCS. We have already participated in
two consortia under the MAGNET program, MOST and STRIMM and are currently participating in the NEGEV and Net-HD consortiums. The goal of the NEGEV consortium is to
develop the infrastructure and techniques for the processing, management and delivery of content to facilitate personalized, on-demand services over broadband and mobile networks.
This consortium began operations in May 2006. The goal of Net-HD is to research and develop technologies that will effectively increase the network capacity for network providers
without physically changing the underlying infrastructure, in order to provide for expected high demand for High Definition video streaming over the Internet. This consortium began
operation in April 2009.
Through December 31, 2009, we recorded grants from the MAGNET framework for participation and research in the MOST, STRIMM, NEGEV and Net-HD consortiums,
aggregating $6.6 million.
We are also involved in joint research projects with large European companies under the auspices of, and with financial assistance from, the European Union Research and
Development Framework Programs. We have been active contributors in many such projects and have been the coordinator of three: VideoGateway, MUFFINS and TIRAMISU.
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Under the European Union Research and Development Framework Programs and the agreements signed under such programs, we are obligated to grant licenses to other
participants in the project with respect to our information and/or any existing know-how held by us before entering into the project and to the results, the knowledge and any related
intellectual property rights which are generated under the project. Such licenses for use purposes may be requested by the other participants in writing during the 24 months after the
end of each project, after which, if not exercised, their right to request such licenses expires.
The VideoGateway project developed a gateway between the narrow band internet and the next generation broadband internet for the purpose of offering live and on-demand
video content. MUFFINS was established to investigate the problem of description, delivery and protection of rich-media content, and to propose different scenarios for using that
content. The scenarios include the definition and search for the content, as well as the delivery and the related handling of rights management. TIRAMISU proposed a protected
framework for the creation, delivery and consumption of audio-visual media across a wide range of hybrid networks and platforms.
We believe that participation in such projects increases our exposure to new technologies, products and potential customers. Within the EU framework we have cooperated
closely with large European organizations such as France Telecom, Alcatel, T-Systems, Siemens AG, Fraunhofer, Telefónica I+D and THALES. These programs provide royalty-free
funding to consortia of industrial companies and academic institutions aimed at improving the competitiveness of European industry through technological research and development,
partnerships and strategic alliances.
Through December 31, 2009 we have obtained approvals for grants for sixteen European research and development projects for a total amount of approximately $8.4 million (of
which approximately $7.4 million has already been offset against research and development expenses).
Service and Support
We believe that providing a high level of customer service and support is essential to our success. Since 2005, we have been offering our IPTV customers two types of Service
Level Agreements (SLA) - Silver service and Gold service. The main differences between the two types of services is that Silver SLA service is offered during standard working hours
and Gold SLA service is available for 24 hours a day, on all days of the year. The gold service level also offers an advance replacement service. Our technical support personnel provide
worldwide services through each of our main offices in Israel, United States, China and India. In the United States, we provide the first-line of support through our wholly owned
subsidiary, Optibase Inc., from the Mountain View office. Outside of the United States and Israel, our independent distributors provide the first-line of support in their respective
territories, while in Israel, we provide a second-line of support to those customers. We also support customer inquiries via a web based Help Desk system to which all our customers are
linked, on-premises support, telephone and e-mail support, and provide additional technical information on our Internet home page. We also provide a one-year warranty on our
hardware products. In addition, we organize technical seminars from time to time to further enhance the technical knowledge of distributors and resellers in the use of our products.
Manufacturing and Sources of Supply
Our manufacturing facilities, located in Herzliya, Israel, perform procurement of components, final assembly, testing and quality control of our products. We out-source
assembly of hardware modules to multiple manufacturers in Israel who work in accordance with our designs and specifications. This outsourcing strategy has improved product quality
and our gross margins. Quality control of our products is conducted at various production stages, both at facilities belonging to the subcontractors and at our facilities. We have
implemented a supplier qualification program to ensure subcontractor quality standards. We monitor printed circuit performance by way of statistical survey and a reporting system that
tracks boards from initial inspection to shipment. To decrease cost and improve our production process, we have initiated a program of subcontracting the manufacturing of products to
manufacturers who also procure the required components. Under this system, we purchase fully assembled and tested products at predetermined prices. We intend to continue to
outsource additional products as production levels increase and we are satisfied as to the quality control of our subcontractors. These types of arrangements will allow us to focus on
the manufacture of low-volume products, which are generally more complex in nature and require more rigorous assembly, testing and quality control procedures.
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Key components used in our products are presently available from, or supplied by, only one source and other components are available from limited sources.
v H.264 SD, , H.264 HD, MPEG I/II, MXF, AAC, Flash, streaming servers and HD video encoding tools provided by technological partners;
v Encoding and Decoding S/W’s provided by Main concept;
v Various modules, which are integrated in our systems, both for the MGW2000, MGW200/400, MGW Flash, MGW5100, MGW 1100, MGW HD and the MGW1000 including:
Encoding module by Ateme, Switches supplied by PTI (Performance Technologies Inc.), Interface by Intel, Hosts supplied by Kontron, backplane boards by Kaparel Corporation
Pentium, CPU modules supplied by Kontron and Compact Pci platforms supplied by EPS (Israel) TECH 1992 Ltd., Elma Electronic Israel Ltd and Dan-el Technologies Ltd;
v Digital Signal Processing, or DSP, compression techniques, manufactured by Equator Inc. and TI, which are used in our MGW X100 product line and Movie Maker 400 products;
v Video compression chips manufactured by Fujitsu, Magnum and NEL;
v Audio Analog to Digital Converters (A/D), Digital to Analog Converters (D/A) and decompression chips manufactured by Crystal Semiconductor Corporation, or Crystal, a
subsidiary of Cirrus Logic, which are included in our encoders and decoders;
v Freescale, Inc.’s DSPs, which are included in our decoders and encoders;
v A video decoding chip manufactured by IBM;
v SDI interface chips manufactured by Gennum;
v Microprocessor and PCI bridge devices from Intel that are used in our MediaPump and MovieMaker boards;
v A video processing chipset from Gennum, which is used in our MM2X0s;
v Programmable devices by Altera and Xilinx, which are used in all our product lines; and
v Servers provided by EIM Systems & Components (1999) Ltd, Intel and IBM.
Although we generally do not have long term supply contracts with our suppliers, we have, in the past, been able to obtain supplies of components and raw materials in a
timely manner and upon acceptable terms. We cannot assure you that in the future we will not face interruptions or delays in the supply of key components. The design of components
to replace any of these limited source components could require six months or more, and our results of operations could be adversely affected in the event of an extended interruption or
delay.
Competition
Competition in the markets of both Video Technologies and IPTV product lines is intense and we expect competition to increase.
The Video Technologies markets have grown in recent years and have attracted many competitors. Advances in video encoding technologies and in desk-top processing
capabilities have also enabled sophisticated new applications within these markets which require an in-depth understanding of customer needs and significant development efforts.
Moreover, the availability of video encoding technologies has also driven prices for products down within these markets. In contrast, the IPTV market is still young, but is currently
dominated by large companies that can afford to aggressively promote their products by reducing prices. To be competitive in each product line, we must continue to respond promptly
and effectively to changing customer preferences, feature and pricing requirements, technological change and competitors’ innovations.
The principal competitors of our Video Technologies products in the enterprise and government markets are VBrick Systems Inc., and HaiVision. In the broadcast markets our
competitors for these products include Digital Rapids Corporation, Vela Research Inc., Dektec Digital Video B.V., VideoPropulsion, Inc. and CMI and Stradis, Inc. In the post-production
market we compete with Canopus and Matrox Electronic Systems Ltd. The post-production market is also characterized by increasing indirect competition from vendors of software
encoders and decoders like Digital Rapids, MainConcept GmbH and Intervideo combined with capture cards from Winnov, Inc. and Viewcast, Inc.
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The principal competitors in the IPTV market include Envivio, Inc., Thomson, Tandberg Television ASA, and Harmonic Inc. Many of these competitors have substantially
greater financial, technical, and marketing resources than Optibase. Some of our actual and potential competitors may have longer operating histories, greater name recognition, access
to larger customer bases and significantly greater financial, marketing, technical and other resources than we do. Our competitors also sell products that provide some of the benefits of
the products that we sell, and we could lose sales to our competitors. Moreover, some companies in the video solutions market, including some of our competitors, are participating in
business combinations. These combinations may result in the emergence of competitors who have greater market share, customer base, sales force, product offering, technology
expertise and/or marketing expertise than we do. As a result, our competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements
or to devote greater resources to the promotion and sale of their products than we can. Thus, we cannot assure you that we will be able to compete successfully against current and
future competitors, or that we will be able to make the technological advances necessary to improve or even maintain our competitive position or that our products will achieve market
acceptance.
In addition, we expect price competition to escalate in the Video Solutions market. We have consistently attempted to minimize the effect of price reductions in the market by
introducing more sophisticated products at the top of our product line, and thereby attempt to maintain higher selling prices. However, competition in the future may force us to further
lower product prices and we may be unable to introduce new products at higher prices. We cannot assure you that we will be able to compete successfully in this kind of price
competitive environment. Lower prices and reduced demand for our products would reduce our ability to generate revenue. Failure by us to mitigate the effect of these pressures
through cost reduction of our products or changes in our product mix could have a material adverse effect on our business, financial condition and results of operations.
Intellectual Property
Our future success and ability to compete are dependent, in part, upon our proprietary technology. We rely on patent, trade secret, trademark, copyright law, and confidential
agreements to protect our intellectual property. Relating to technologies developed in Optibase Ltd., we hold thirteen issued patents, five granted in Israel, seven granted in the United
States, and one in Europe (validated in France and the United Kingdom). We also have three pending application in the United States. In September 2005, certain patents acquired by us
in the Media 100 transaction were sold to Acoustics Technology LLC. In April 2008 two patents acquired by us in the Viewgraphics transaction were sold to O.B. Digital Limited
Liability Company.
Effect of Government Regulation on our Business
Regulation of our business by the Israeli government affects our business in several ways. We benefit from certain tax incentives promulgated by the government of Israel,
including programs sponsored by the OCS, in the Israeli Ministry of Industry, Trade and Labor for the support of research and development activities. We also obtained funding from
the MOST, STRIMM, NEGEV and Net-HD consortia, which are part of the OCS MAGNET program. The terms of the OCS grants limit us from manufacturing products or transferring
technologies developed using these grants outside of Israel without special approvals, which may or may not be granted. For further information see "Research and Development"
above.
We are subject to the Companies Law and regulations promulgated under that law, which regulate the activities of companies incorporated in Israel. Please see the "Item 3.D.
Risk Factors" under the heading "Risks Related to Operating in Israel" above, as well as "Item 10. Additional Information" below, for more information on the effects of governmental
regulation of our business.
Sale of our Video Solutions Business
On March 16, 2010, we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd., a wholly owned subsidiary of S.A. Vitec
(also known as Vitec Multimedia) (S.A. Vitec and Optibase Technologies Ltd., collectively "Vitec") pursuant to which Optibase Technologies Ltd. will purchase all of the assets and
liabilities related to our Video Solutions Business against an aggregate consideration of $8 million in cash. In addition, Optibase and Vitec agreed on an earn-out mechanism pursuant to
which 45% of Vitec's revenues deriving from the Business exceeding $14 million in the year following the closing of the transaction will be paid to Optibase. Closing of the transaction is
expected to occur on June 30, 2010, after the release of this annual report. For additional information regarding the asset purchase agreement see Item 10.C "Material Contracts".
- 32 -
Fixed-Income Real Estate Business
General
On May 11, 2009, our board of directors resolved to expand and diverse our operations and enter into the fixed-income real estate sector. At a special shareholders meeting
held on June 25, 2009 our shareholders approved the diversification of the company’s operations by entering into the fixed income real-estate sector. Such approval was sought solely
for cautionary purposes and without any obligation of the Company to do so.
The fixed-income real estate market includes the purchasing and operating of real estate properties intended for leasing primarily for the purpose of commercial, industrial,
office space, parking garage and warehouse use. The fixed-income real estate market is affected by growth or slowdown in the economy, and by changes in the demand and the
available supply of commercial areas, as well as the construction of additional commercial areas. The real estate market is also affected by governmental, municipal and tax authority
policies regarding planning, building, marketing and taxation of land.
Commencing in the fourth quarter of 2008 and as a result of the global economic and financial market crisis, there has been a slowdown in the fixed-income real estate market
which is evidenced by a decline in the number of real estate transactions, a reduction in the availability of credit sources, an increase in financing costs and stricter requirements by
banks for providing such financing. However, as our fixed-income real estate is leased under long term agreements, we believe that we have limited exposure to the effects of the
slowdown in the fixed-income real estate market.
Our strategy in our real estate activities is to become a substantial owner of fixed-income properties. To achieve this goal, we intend to pursue a number of operating and growth
strategies, which include:
·
·
·
·
·
purchase of real estate mainly in Central and Western Europe, North America and Israel.
developing and improving existing real estate;
maximize the leasing of existing properties to commercial users;
increase and develop unused building rights in our existing properties; and
acquire additional commercial real estate and fixed-income assets in light of market conditions, while diversifying our real estate property base.
As of the date of this annual report, we own one real-estate asset in Rümlang Switzerland with approximately 12,500 total square meters of developed property. In addition, a
previous agreement for the purchase of an additional real estate asset in New-York, NY, USA was terminated before closing. For further information see Item 8. "Financial Information -
Legal Proceedings".
Set forth below is additional information with respect to our projects:
Rümlang, Switzerland
On October 29, 2009, we acquired a commercial building located at Riedmattstrasse 9, Rümlang from the Swiss property company Zublin Immobilien AG. Rümlang is situated 15
km from Zurich and as many commercial buildings due to its strategic location in proximity to Zurich international airport.
- 33 -
The five-storey building includes 12,500 square meters (approximately 134,500 square feet) of rentable space with office, laboratory and retail uses. The property is currently
97% occupied and approximately 58% of the leasable area in the property is occupied by Polymed Medical Center and DHL Logistics.
The closing of the transaction occurred on October 29, 2009 and title to the property was acquired by an Optibase subsidiary. The purchase price for the transaction was
approximately CHF 23,500,000 of which CHF 18,800,000 (approximately $22.8 million and $18.1 million respectively) was financed by a local Swiss bank pursuant to a mortgage
agreement. The expected gross proceeds per annum is approximately CHF 1.7 million (approximately $1.52 million), excluding a sellers’ two years rent guaranty for CHF 60,000
(approximately $ 55,000) for the two years period, and the expected net operating income per annum is approximately CHF 1.7 million (approximately $1.48 million
For further information regarding the acquisition agreement and the mortgage agreement, see Item 10.C. "Material Contracts".
Chessell Holdings, a Cypriot company, through its beneficial owner, introduced Optibase to the Rümlang property and facilitated Optibase’s acquisition and financing of the
property. In connection with such services, the Company’s subsidiary in Luxembourg, entered into an option agreement dated March 1, 2010 with Chessell Holdings Limited" pursuant
to which Chessell Holdings was granted an option to purchase twenty percent (20%) interest in the owner of the property. For further information, see Item 10.C. "Material Contracts".
485 Lexington Avenue, New-York, NY
On August 7, 2009, we entered into a joint venture to acquire 49.5% of the beneficial interest in an office building located at 485 Lexington Avenue in Manhattan, New York,
from a subsidiary of SL Green Realty Corp. Optibase and Gilmor USA LLC, an unrelated party, are each equal partners in the joint venture through Mazal 485 LLC ("Mazal"). On August
7, 2009, Mazal executed a sale-purchase agreement to acquire certain interests in the building. For further information see Item 10.C "Material Contracts".
On January 7, 2010, Green 485 JV LLC, the seller of 485 Lexington Avenue in Manhattan, delivered a letter stating that the purchase agreement for 485 Lexington Avenue is
terminated and requesting that the escrow agent return the deposit for the transaction to Optibase and its joint venture partner with interest. On February 3, 2010, Mazal filed a lawsuit
against SL Green Realty Corp. and certain of its subsidiaries regarding the purchase agreement for interests in 485 Lexington Avenue. On March 16, 2010, SL Green filed a motion for an
order dismissing Mazal's claims. On June 23, 2010, SL Green's motion to dismiss Mazal's request for performance of the sale-purchase agreement, was granted. Mazal's remaining claims,
seeking damages for failure to perform, which are limited in scope, are currently being held before the court. For further information see Item 8.A "Financial Information – Legal
Proceedings".
Competition
The fixed-income real estate market is highly competitive and is characterized by a large number of competitors. The main factor affecting competition in this market is
geographic location of property. There are properties in close proximity to some of our properties that are similar in purpose and use, which has the effect of increasing competition for
the leasing of those properties as well as reducing the rental rates for those properties. Other factors affecting competition are the leasing price, the physical condition of the properties,
the finishing of the properties and the level of the management services provided to tenants. Furthermore, the economic and financial market crisis may further increase competition,
leading to a reduction of rental fees and a decline in demand for properties. However, as our fixed-income real estate is leased under long term agreements, we believe that we have
limited exposure to the effects of the slowdown in the fixed-income real estate market.
4.C. ORGANIZATIONAL STRUCTURE
Optibase operates directly and through several subsidiaries. Optibase Inc., incorporated in 1991 in California and is currently located in Mountain View, California which
manages our North American sales, marketing and customer support activities. Our real estate activity is managed through several subsidiaries held directly and indirectly by Optibase
Ltd.
- 34 -
Our sales activities of the Video Solutions Business in Europe (including Israel) are conducted through sales managers. In 1999 and 2000 we established offices in Japan and in
China, respectively, to cultivate closer relationships with local sales forces and potential system integrators and expand our business development activities in those local markets.
During 2007 and 2008 we closed our offices in Singapore and Japan, respectively, and focused our attention on the increasing potential we see in the Chinese and Indian markets. Sales,
marketing, and support of our products in Asia Pacific are managed from our headquarters in Israel. We are currently in the process of establishing a new office in India, which will
focus on marketing and supporting our products in this growing market.
In addition, we hold convertible bonds, which, if converted, will constitute approximately 32% of the issued and outstanding share capital of V.Box, a provider of Digital TV
and Data Broadcast receiver equipment for Video and Data applications. We also hold, on a fully diluted basis, approximately 3.71% of Mobixell’s issued and outstanding share capital,
which designs, develop and markets solutions for mobile rich media adaptation, optimization and delivery. For additional information, see "Item 4.A. History and Development of the
Company" above.
4.D. PROPERTY, PLANTS AND EQUIPMENT
Our headquarters are located in offices occupying approximately 15,532 square feet in Herzliya Pituach, Israel. Our lease for this space expires on December 31, 2011 and we do
not expect to extend the lease beyond that date.
Optibase, Inc.’s headquarters occupy approximately 3,517 square feet in Mountain View, California. The current lease expires on August 31, 2011. We do not expect the current
lease to be extended.
We rent an office of approximately 1,735 square feet in Beijing, China. The current lease expires in December 2010.
We rent approximately 289 square feet in India. The current lease expires on March 2011.
Our European subsidiaries occupy offices totaling approximately 646 square feet in Luxembourg. The current leases do not have an expiration date and can be terminated at
any time with a three months prior notice.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis about our financial condition and results of operations contain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not
limited to, those set forth under "Item 3.D. Risk Factors" above and "Item 5.D. Trend Information" below, as well as those discussed elsewhere in this annual report. You should read
the following discussion and analysis in conjunction with the "Selected Consolidated Financial Data" and the Consolidated Financial Statements included elsewhere in this
annual report.
Overview
We currently have two principal fields of activity. The following is a summary of these fields of our businesses:
· Digital Video and Streaming Based Products and Services or Video Technologies Business (collectively, "Video Solutions Business") – development, marketing and sale
of high quality equipment for a wide range of professional video applications in the broadband IPTV, broadcast, government, enterprise and post-production markets.
- 35 -
·
Fixed Income Real-Estate – investments in fixed-income real estate assets.
Below is a description of our principal fields of activity
Video Solutions Business
On March 16, 2010, we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd., a wholly owned subsidiary of S.A. Vitec
(also known as Vitec Multimedia) (S.A. Vitec and Optibase Technologies Ltd., collectively "Vitec"), according to which Optibase Technologies Ltd. will purchase all of the assets and
liabilities related to our Video Solutions Business. Closing of the transaction is expected to occur on June 30, 2010, after the release of this annual report. For further details see Item 4.B
"Business Overview".
We provide high quality products that enable the preparation and delivery of digital video based on MPEG over ATM, DVB, and internet protocol (IP) and other packet-based
networks through two product lines: Video Technologies and IPTV.
The Video Technologies product line includes PCI platform for encoding, decoding and interfacing with DVB networks and Media Gateways that enables a variety of content
creation and streaming application. The Video Technologies products target the broadcast, government, enterprise and post-production markets.
IPTV products design, develop and deliver digital SD and HD (High Definition) TV solutions, from concept to completion for the IPTV market. The IPTV products are offered
by themselves or as part of an end-to-end solution together with third-party products.
As new IPTV operators struggle with the complexity of integrating new technologies from many vendors, it is increasingly clear that it is not enough to provide top-class
encoders and transcoders for this market. Most operators do not have sufficient expertise and must rely on a system integrator to do this for them. This increases the cost of the
solution significantly to the IPTV operators. Over the last three years, we have developed our own integration expertise and have developed business relationships with partners to
enable us to provide a turn-key integrated IPTV headend at a lower cost than the larger Telco integrators.
Our solutions include Optibase encoders and transcoders for live TV delivery and partner products for VOD, for middleware and for conditional access. As the set-top box
swiftly becomes the most expensive component of the deployment it is important that we give our customers the flexibility to choose. Indeed Optibase solutions are interoperable with a
wide range of set-top boxes.
The original market of the IPTV product line is the IPTV market which mainly consists of telephone operators and internet service providers worldwide that are offering
broadband and telephone services. These companies are exploring ways to leverage their existing networks to add new services, and in particular, personalized multi-channel television.
In addition, the IPTV product line offers full solution for enterprise video communication in various markets including military, government, educational and medical, as well as any other
large corporate.
During the last years we are facing a decrease in our Video Technologies product line sales mainly due to advances in PC technology supporting software products for
standard definition encoding. At the same time, we are also experiencing a decrease in our IPTV and IPTV related products sales during the last years mainly as a result of increased
competition and competitors focus towards the IPTV target market.
Our products from both the Video Technologies and IPTV product lines are sold both directly and through various indirect channels, such as independent distributors, system
integrators, OEM’s and resellers.
During 2009 we have continued the development of the H.264 (i.e. MPEG-4 Part 10 or AVC) encoders and transcoders by releasing quality improvements. During 2009, we have
also added the capability to deliver low bitrates and low resolutions support, closed captions, teletext, subtitles and Picture In Picture support to these products. We believe that these
new features will enable our customers to add new services and will increase our advantage over competitors.
- 36 -
During 2007 we released the MGW HD which is a high quality encoder for High Definition TV (HDTV) in the H.264 format for IPTV delivery and other applications. H.264 offers
a reduction of between 50% and 60% in bitrate compared with MPEG-2 when configured to produce comparable quality.
In the quarter ending March 31, 2008 we added two new products to our portfolio EZ TV and Creator. EZ TV is an application that enables the distribution of IPTV over
Enterprise networks and networks used by Military and Government facilities. The creator is used for building on the Video Technology PCI platforms to provide a versatile, integrated
solution for Ingest. Ingest is a broad term used in the professional video industry to describe the process of acquiring video content for a variety of processing applications.
During the quarter ended December 31, 2008, and during the quarter ended March 31, 2009, we took several steps in order to streamline our business and costs, including
decreasing our headcount by 22% accompanied by a decrease of approximately 18% in direct personnel costs and overhead. All cost reduction measures have been implemented while
minimizing any potential damage to our future business.
We generate most of our Video Solutions revenues from three territories: North America, Europe, including Israel, and Asia Pacific. During 2009, these three regions accounted
for 56%, 14% and 30% of our Video Solutions revenues, respectively.
Fixed-Income Real Estate
On May 11, 2009, our board of directors resolved to expand and diverse our operations and enter into the fixed-income real estate sector. At a special shareholders meeting
held on June 25, 2009, our shareholders approved the diversification of the Company’s operations by entering into the fixed income real-estate sector. Such approval was sought solely
for cautionary purposes and without any obligation of the Company to do so.
On August 7, 2009, we entered into a joint venture to acquire a stake in an office building located at 485 Lexington Avenue in Manhattan from a subsidiary of SL Green Realty
Corp. On January 7, 2010, we received a notice from the seller of 485 Lexington Avenue stating that the purchase agreement is terminated. On February 3, 2010, we filed a lawsuit against
SL Green Realty Corp. and certain of its subsidiaries ("SL Green") regarding the purchase agreement for interests in 485 Lexington Avenue. On March 16, 2010, SL Green filed a motion
for an order dismissing Mazal's claims. On June 23, 2010, SL Green's motion to dismiss Mazal's request for performance of the sale-purchase agreement, was granted. Mazal's remaining
claims, seeking damages for failure to perform, which are limited in scope, are currently being held before the court. For further information see Item 4.B. "Business Overview – Fixed
Income Real Estate Business" and Item 8. "Financial Information - Legal Proceedings".
On October 29, 2009 we acquired a commercial building located at Riedmattstrasse 9, Rümlang from the Swiss property company Zublin Immobilien AG. For further information
see Item 4.B. "Business Overview – Fixed Income Real Estate Business".
As of December 31, 2009, we had available cash, cash equivalents, long term investments and other financial investments net of approximately $28.7 million. As of June 21,
2010, we have available cash, cash equivalents, long term investments and other financial investments net of approximately $32.5 million. For information regarding the investment of our
available cash, see "Item 5.B. Liquidity and Capital Resources" below.
- 37 -
In January 2008, we purchased from certain shareholders of Scopus an aggregate of 1,380,000 ordinary shares of Scopus, representing, at that time, approximately 10% of
Scopus’ outstanding shares, for an aggregate consideration of approximately $8.6 million. For further information on these agreements, see "Item 10.C. Material Contracts". Following
such transaction, we beneficially owned approximately 37% of Scopus’ issued and outstanding shares. We accounted for the investment in Scopus in accordance with the provision of
APB 18, and the equity method of accounting was applied. As such, the purchase price has been allocated to the assets acquired and the liability assumed based on their fair value at
the dates of acquisition. The fair values of the identified tangible and intangible assets were established based on an independent valuation study performed by a third-party specialist.
The excess of the purchase price over the fair value of the net tangible and intangible assets acquired has been recorded as goodwill totaling approximately $2.7 million. During 2008, we
held negotiations with Scopus for the sale of our Video Solutions Business pursuant to which a non-binding term sheet for such sale was executed on August 4, 2008. Under the term
sheet, we undertook to sell our Video Solutions Business in consideration for 2.6 million of Scopus shares and up to additional 900,000 of Scopus shares based on the post-closing
performance of our business. Such negotiations did not materialize into a binding agreement with Scopus. On December 23, 2008, Scopus entered into a definitive agreement with
Harmonic pursuant to which Harmonic undertook to acquire Scopus by way of merger pursuant to which, each shareholder of Scopus shall receive $5.62 in cash per each outstanding
share of Scopus. At the time of such agreement, we held approximately 36% of Scopus’ outstanding share capital. In connection with the said transaction, we entered into a voting
agreement with Harmonic pursuant to which we undertook to vote in favor of the merger and the transactions contemplated by the merger agreement. We have also agreed to grant to
Harmonic a proxy and appointed certain Harmonic officers as its proxy to vote in favor of the merger. On March 12, 2009, following the closing of the merger agreement between Scopus
and Harmonic, we disposed of our entire holding in Scopus shares consisting of 5,105,223 shares representing 36.34% of Scopus then issued share capital for a total consideration of
$28.7 million. As a result, during the first quarter ended March 31, 2009, we recorded other income of $4.8 million, net of equity in losses. We have also entered into an additional
agreement with Scopus pursuant to which we and Scopus agree to waive any claim against one another (and against Harmonic, in the case of claims by the Company) arising from or in
connection with the term sheet, previously signed by the Company and Scopus, the negotiations between the parties and the termination of such negotiations. Scopus undertook in
addition to reimburse the Company for certain of its expenses associated with such negotiations in the aggregate amount of $300,000.
In addition, we hold interests in V.Box and Mobixell, see "Item 4.A. History and Development of the Company" above. These investments are recorded at $0.0 million in our
financial statements.
We use the U.S. dollar as our functional currency. Our consolidated financial statements are presented in U.S. dollars and prepared in accordance with generally accepted
accounting principles in the U.S., or U.S. GAAP. In 2009, most of our revenues were denominated in U.S. dollars. Our functional currency may change in the future as a result of the
recent diversification of the Company's operation. Our expenses to date have been incurred, in almost equal parts, in U.S. dollars or currencies linked to the U.S. dollar, and in New
Israeli Shekels. Our transactions denominated in currencies other than the U.S. dollar are converted into U.S. dollars and recorded based on the exchange rate at the time we issue the
invoice for the transaction. Our headquarters are located in Herzliya Pituach, Israel; our subsidiary facilities in the United States are located in Mountain View, California and our
European subsidiary is located in Luxembourg. We maintain offices in China and India in order to establish and expand our local presence at the markets and use the advantages, related
to culture and language, of that approach.
Revenues and Sales
The following table sets forth, for the periods indicated, the total consolidated sales (in thousands) derived from each of our product lines.
Product Line
Video Technology
IPTV
Fixed Income Real Estate
Total
Year Ended December 31,
2007
8,923
14,054
$
-
22,977 $
2008
6,420
13,481
$
-
19,901 $
2009
3,672
9,477
272
13,421
$
$
Our level of revenues from video solutions fluctuated in recent years from $23 million in 2007 to $19.9 million in 2008 and to $13.1 million in 2009. The decrease in our total sales
in 2008 compared to 2007 and in 2009 compared to 2008, can be mainly attributed to the overall downturn in the global economy as well as the continued decrease in our Video
Technology product line sales. The IPTV and IPTV related products sales generated revenues of approximately $9.5 million in the 2009 compared to approximately $13.5 million in 2008
and approximately $14.1 million in 2007. The Video Technology product line sales generated revenues of approximately $3.7 million in the 2009 compared to approximately $6.4 million in
the 2008 and approximately $7.9 million in 2007.
- 38 -
Our level of net income fluctuated in recent years from a net loss of $7.2 million in 2007, to a net loss of $9.5 million in 2008 and to a net income of $60,000 in 2009. Our move into
net income in 2009 compared with our net loss in 2008 is mainly attributed to equity in loss and gain from sale of investment in affiliated company in the amount of $4.8 million recorded
in 2009 as a result of the sale of our holdings in Scopus. The increase in our net loss in 2008 compared with 2007 can be mainly attributed to the significant increase in our operating
expenses partially offset by the increase in other and financial income and the decrease in other expenses, which reflect equity in loss of Scopus. As of December 31, 2009, we had
accumulated losses of $89.8 million.
The following table sets forth, for the periods indicated, the percentage of total consolidated sales of video solutions derived from sales of video solutions into each of the
regions identified in the table, regardless of the operating unit, which generated the sale.
Region
North America
Europe
Eastern Asia
Other countries, including Israel
Year Ended December 31,
2007
2008
2009
47%
31%
15%
7%
54%
21%
21%
4%
56%
14%
25%
5%
The portion of our revenues, as a percentage of total sales, derived from sales into North America and Eastern Asia have increased while the dollar amounts have decreased in
2009 compared to 2008 while the portion of revenues, as a percentage of total sales as well as the dollar amounts into Europe have decreased and the portion of revenues as a
percentage of total sales into other countries, including Israel have increased while the dollar amounts have decreased. The decrease in sales into North America, Eastern Asia, Europe
and Other countries, including Israel can be mainly attributed to the overall economic downturn as well as increased competition. We sell directly to system integrators, OEMs and
value-added resellers, or VARs. Outside of North America, we also sell to distributors. Sales of our products to system integrators can involve a lengthy process and the timing of
volume orders from system integrators can be difficult to forecast. As a result, revenues may fluctuate from quarter to quarter depending on the timing and volume of orders. Since these
types of customers typically request initial delivery within four to eight weeks of their placement of orders, we have historically had a minimal backlog of orders.
The majority of our revenues are derived from sales of our standard products. Additionally, from time to time, we have the opportunity to develop customized products, which
require varying amounts of modifications to our standard products and existing technology. Dollar amount and the percentage of revenues represented by standard products and
customized products, respectively, fluctuate from period to period depending on a variety of factors, including the number, size and timing of customized product activities.
Cost of video solutions operations
Cost of video solutions operations consists primarily of raw material costs, costs of subcontracting manufacturing and assembly, labor expense, write-off of obsolescence
inventory, royalty payments made to the Israeli OCS and other vendors, amortization of capitalized software development costs, other acquisition related costs and allocated overhead
attributable to our production operations.
Research and development expenses
Research and development expenses, net, consist primarily of labor expenses, development-related raw materials and sub contractors services, acquisition related costs and
stock option compensation charges and related overheard, offset by grants from the OCS, including the OCS MAGNET program, and from the EU.
Sales and marketing expenses
Selling and marketing expenses, net, consist primarily of compensation expenses, promotional expenses, travel costs and related overhead and expenses.
- 39 -
General and administrative expenses
General and administrative expenses consist primarily of fees to outside consultants, legal and accounting fees, stock option compensation charges and certain office
maintenance costs.
Cost of real estate operations
Cost of real estate operations consist primarily of direct costs associated with operating the real estate properties such as building insurance and management company fees.
Real estate depreciation and amortization
Real estate depreciation and amortization consist primarily of depreciation expenses related to the value of properties net of amounts accounted for land, as well as amortization
expenses associated with intangible assets derived from the purchase of real estate properties.
Other income (expenses), Net
Other income (expenses), net, consists primarily of impairment expenses, capital gains or losses and other expenses or income.
Financial income (expenses), Net
Financial expenses consist primarily of interest we paid in connection with bank loans and credit lines, and losses from realization of securities and financial instruments.
Financial income consists mainly of interest received on deposits and other financial assets held in our bank accounts and gains from realization of securities and financial instruments.
Our exchange differences occur primarily as a result of the change of the NIS value relative to the U.S. dollar.
Taxes
As of 2009, Israeli companies are generally subject to a corporate income tax rate of 26%. The income tax rate for Israeli companies was reduced to 25% in 2010. We were
granted Approved Enterprise status under the Law for the Encouragement of Capital Investment, 1959 which allow us to enjoy two alternative tax benefits. Under one of the
alternatives, a company’s undistributed income derived from an Approved Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year of
taxable income, depending on the geographic location of the Approved Enterprise within Israel, and the company will be eligible for a reduced tax rate of 10%-25% for the remainder of
the benefits period depending on the level of foreign investment. See also "Item 10.E. Taxation" under the heading "Israeli Taxation- Tax benefits under the Law for the Encouragement
of Capital Investment, 1959" below. The period during which we are entitled to receive these benefits is limited to seven or ten years from the first year that taxable income is generated,
12 years from commencement of production or within 14 years from the date of approval of the Approved Enterprise status. A recent amendment to the Law, which has been officially
published effective as of April 1, 2005 has changed certain provisions of the Law. An eligible investment program under the amendment will qualify for benefits as a Privileged
Enterprise (rather than the previous terminology of Approved Enterprise). See also "Item 10.E. Taxation" under the heading "Israeli Taxation- Tax benefits under the Law for the
Encouragement of Capital Investment, 1959" below.
We have final tax assessments through the tax year 2005. On December 27, 2007 and on May 28, 2008, we received from the Israeli Tax Authorities a Tax Assessment (the
"Assessment") based upon "best judgment" for the years 2002-2003 and 2004-2005 respectively. On January 13, 2009 we signed a settlement agreement with the ITA according to which
a final tax obligation of $73,000 was paid for the final tax assessments for the years 2002-2005.
As of December 31, 2009, we had approximately $53.2 million of net operating loss carry-forwards for Israeli tax purposes which we will have to utilize before we can make use of
the tax benefits arising from our "Approved Enterprise" status. These net operating loss carry-forwards have no expiration date.
- 40 -
Equity in losses and gain from sale of affiliated company
Equity in losses and gain from sale of affiliated company consist primarily of equity gains or losses, net of capital gain derived from the disposal of our entire holding in an
affiliated company.
5.A. OPERATING RESULTS
The following table sets forth, for the years ended December 31, 2007, 2008 and 2009 statements of operations data as percentages of our total revenues:
Revenues
Video solutions
Fixed income real estate
Total revenues
Costs and expenses:
Cost of video solutions operations
Research and development, net
Selling and marketing, net
General and administrative
Cost of real estate operations
Real estate depreciation and amortization
Total costs and expenses
Operating income (loss)
Other income expenses, net
Financial income (expenses), net
(Loss) before provision for tax
Provision for tax
Net (loss) after income tax
Equity in losses of affiliates and gain from sale
of investment in affiliated company
Net income (loss) from continuing operations
(Loss) Income from Discontinued Operations
Net income (loss)
Results of Operations for the Years Ended 2009 and 2008
Year Ended December 31
2007
2008
100
-
100.0%
100
-
100.0%
49.6
23.3
34.4
9.9
-
-
117.2
(17.2)
(1.4)
(0.1)
(18.7)
(0.3)
(19)
49
32
45
14.8
-
-
140.8
(40.8)
1.1
1.3
(38.4)
-
(38.4)
(12.1)
(31.1)
(0.1)
(31.2)%
(9.7)
(48.1)
0.1
(48)%
2009
98
2
100.0%
48.7
27.8
42.9
19.4
0
0.1
139.7
(39.7)
-
4.6
(35.1)
-
(35.1)
35.6
0
0
0%
Total revenues. Our video solutions revenues decreased by 33.9% to $13.1 million in 2009 from $19.9 million in 2008. The decrease is attributed to the decrease in our Video
Technologies products sales by approximately 43% as well as a decrease of approximately 30% in our IPTV products and the over all downturn in the global economy. 2009 is the first
year we record revenues from our real estate activity.
Cost of video solutions operations. Cost of video solutions operations as a percentage of revenues remained stable at approximately 49% in 2009 compared 2008, and
amounted to $6.5 million in 2009 compared to $9.8 million in 2008. The decrease is attributed to the overall lower sales volume of our products, including third parties products. Our cost
of video solutions operations may fluctuate as a percentage of revenues depending on our product mix, changes in raw materials cost and other factors.
Research and Development Expenses, Net. Our net research and development expenses decreased by approximately 41.6% to $3.7 million in 2009 from $6.4 million in 2008. As a
percentage of total revenues, net research and development expenses were approximately 27.8% in 2009 and approximately 32% in 2008. The dollar decrease in research and
development expenses can primarily be attributed to the decrease in salaries and related costs as a result of a decrease in headcount. The dollar decrease can also be attributed to the
decrease in other expenses and the increase of research and development grants received from the OCS, including the OCS MAGNET program, and from the EU which increased to
approximately $1.3 million in 2009 from approximately $1.1 million in 2008.
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Selling and Marketing Expenses, Net. Our net selling and marketing expenses decreased by approximately 35.7% to $5.8 million in 2009 from $9 million in 2008. As a percentage
of revenues, net selling and marketing expenses decreased to approximately 42.9% in 2009 from approximately 45% in 2008. The decrease in selling and marketing expenses can be
primarily attributed to the decrease in our sales and technical support personnel. Selling and marketing expenses may continue to fluctuate as a percentage of total revenues, depending,
in part, on fluctuations in the level of total revenues.
General and Administrative Expenses. General and administrative expenses decreased approximately by 11.3% to $2.6 million in 2009 from $2.9 million in 2008. As a percentage
of revenues, general and administrative expenses increased to approximately 19.4% in 2009 from approximately 14.8% in 2008. The decrease in dollar amount can be mainly attributed to a
decrease in salaries and related expenses.
Cost of real estate operations. 2009 is the first year in which we incur costs for real estate operations which consist primarily of direct costs associated with operating the real
estate properties such as building insurance and management company fees.
Real estate depreciation and amortization. 2009 is the first year we incur costs for real estate depreciation and amortization, which consist primarily of depreciation expenses
related to the value of properties net of amounts accounted for land, as well as amortization expenses associated with intangible assets derived from the purchase of real estate
properties.
Operating loss. As a result of the foregoing, we recorded operating loss of $5.3 million in 2009 compared with an operating loss of $8.1 million in 2008. The decrease in the
operational loss can be primarily attributed to the overall decrease in our operating expenses.
Other Income (Expenses), Net. We recorded no other income, net, in 2009, compared to other income, net of $218,000 in 2008. The amounts recorded in 2008 related to other
income from the sale of certain patents.
Financial Income (Expenses), Net. We recorded financial income, net of $617,000 in 2009, compared with financial income, net of $270,000 in 2008. The change can be mainly
attributed to an increase in interest received as well as foreign currency translation differences and a decrease in interest expenses.
Taxes Income (Expenses), Net. Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48 ("FIN 48"). Under the requirements of FIN 48, we reviewed
all of our tax positions and determined whether the position is more-likely-than-not to be sustained upon examination by regulatory authorities. Accordingly, no provision for taxes was
recorded during 2009 and 2008.
Equity in losses and Gain from Sale of Investment in Affiliated Company. We recorded Equity in losses and gain from sale of investment in affiliated company, of $4.8 million
in 2009, compared to a loss of approximately $1.9 million in 2008. The amounts recorded in 2009 are related to the disposal of our entire holding in Scopus shares, net of equity in losses,
while in 2008 we recorded equity in loss, as a result of our conclusion that our investment in Scopus qualifies for use of the equity method.
Net Income (Loss) from Continuing Operations. We recorded net income of $60,000 in 2009, compared with a net loss of $9.6 million in 2008. The decrease in our net loss from
continuing operations can be mainly attributed to the decrease in total costs and expenses, the increase in other income, net, from $218,000 in 2008 to $4.8 million in 2009 and the
increase in our financial income, net, from $270,000 in 2008 to $617,000 in 2009.
Discontinued Operation. In the fourth quarter of 2006 based on recent assessments and in accordance with the guidance of ASC 360 (Formerly SFAS 144) and EITF 03-13, we
have decided to present the Digital Non Linear product line operation, which was sold in the third quarter ending September 30, 2005, as discontinued operations. Net income related to
discontinued operation in 2008 totaled to $20,000.
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Net Income (Loss). We recorded net income of $60,000 in 2009, compared with a net loss of $9.5 million in 2008. The decrease in our net loss can be mainly attributed to the
decrease in total costs and expenses, the increase in equity in losses and gain from sale of investment in affiliated company, from a net loss of $1.9 million in 2008 to a net gain of $4.8
million in 2009 and the increase in our financial income, net, from $270,000 in 2008 to $617,000 in 2009.
Results of Operations for the Years Ended 2008 and 2007
In June 2004, we acquired certain assets and liabilities of Media 100 Inc. as part of a pre-packaged bankruptcy filing of Media 100. In September 2005, we entered into an
agreement for the sale of our Digital Non-Linear Editing operation to Artel Software Corp. for details regarding the sale agreement, see "Item 10.C. Material Contracts" below. In
December 2006, based on recent assessments in accordance with the guidance ASC 360 and EITF 03-13, we have decided to present the Digital Non-Linear Editing product line
operation as discontinued operations and as such all amounts related to the operational results of the Digital Non Linear Editing product line presented accordingly. For further
information on the digital non linear transactions see "Item 5. Operating and Financial Review and Prospects" under the heading "Overview" above. During 2007 and beginning of 2008
we purchased in a series of transactions, approximately 37% of Scopus’ share capital, for an aggregate consideration of $ 28.6 million. For addition information, see "Item 4.A. History
and Development of the Company" above.
Total Revenues. Our video solutions revenues decreased by 13.4% to $19.9 million in 2008 from $23 million in 2007. The decrease can mainly be attributed to the decrease in our
Video Technologies products sales by approximately 28% as well as the over all downturn in the global economy.
Cost of Video Solutions Operations. Cost of video solutions operations as a percentage of revenues decreased to approximately 49% in 2008 compared to approximately 49.6%
in 2007, and amounted to $9.8 million in 2008 compared to $11.4 million in 2007. The decrease can be mainly attributed to the overall lower sales volume of our products, including third
parties products. Our cost of revenues may fluctuate as a percentage of revenues depending on our product mix, changes in raw materials cost and other factors.
Research and Development Expenses, Net. Our net research and development expenses increased by approximately 18.9% to $6.4 million in 2008 from $5.4 million in 2007, net
research and development expenses were approximately 32% in 2008 and approximately 23.3% in 2007. The dollar increase in research and development expenses can primarily be
attributed to the increase in salaries and related costs as a result of the devaluation of the USD against the NIS related to expenses paid in our headquarters in Israel. The dollar increase
can also be attributed to the increase in other expenses and the decrease of research and development grants received from the OCS, including the OCS MAGNET program, and from
the European Union which decreased to approximately $1.1 million in 2008 from approximately $1.8 million in 2007.
Selling and Marketing Expenses, Net. Our net selling and marketing expenses increased by approximately 13.5% to $9 million in 2008 from $7.9 million in 2007. As a percentage
of revenues, net selling and marketing expenses increased to approximately 45% in 2008 from approximately 34.4% in 2007. The increase in selling and marketing expenses can be
primarily attributed to the increase in our sales and technical support personnel, mainly in our North America office, as well as the devaluation of the USD against the NIS related to
expenses paid in our headquarters in Israel. Selling and marketing expenses may continue to fluctuate as a percentage of revenues, depending, in part, on fluctuations in the level of
revenues.
General and Administrative Expenses. General and administrative expenses increased approximately by 28.8% to $2.9 million in 2008 from $2.3 million in 2007. As a percentage
of revenues, general and administrative expenses increased to approximately 14.7% in 2008 from approximately 9.9% in 2007. The increase in dollar amount can be mainly attributed to an
increase in our expenses for legal expenses, professional services and consulting.
Operating loss. As a result of the foregoing, we recorded operating loss of $8.1 million in 2008 compared with an operating loss of $4 million in 2007. The increase in the
operational loss can be primarily attributed to the decrease in our revenues and the overall increase of our operating expenses.
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Other Income (Expenses), Net. We recorded other income, net, of $218,000 in 2008, compared to other expenses, net of $327,000 in 2007. In 2008 we recorded other income from
the sale of certain patents while in 2007 we recorded expenses totaling approximately $325,000 of impairment losses in respect of our investment in V.Box.
Financial Income (Expenses), Net. We recorded financial income, net of $270,000 in 2008, compared with financial loss of $31,000 in 2007. The change can be attributed to lack
of impairment charges we recorded in connection with some of our structured notes and corporate bonds in 2007. The change can be also attributed to the decrease in our utilized
portion of credit lines during the year compared to 2007.
Taxes Income (Expenses), Net. Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48 ("FIN 48"). Under the requirements of FIN 48, we reviewed
all of our tax positions and determined whether the position is more-likely-than-not to be sustained upon examination by regulatory authorities. Accordingly, no provision for taxes was
recorded during 2008. During 2007 we have recorded a provision for taxes of approximately $73,000.
Equity in loss. In connection with our investment in Scopus we recorded equity in loss of approximately $1.9 and $2.8 million in 2008 and 2007 respectively, as a result of our
conclusion that our investment in Scopus qualifies for use of the equity method.
Net Income (Loss) from Continuing Operations. We recorded net loss of $9.6 million in 2008, compared with a net loss of $7.1 million in 2007. The increase in our net loss from
continuing operations can be mainly attributed to the decrease in revenues and the overall increase in our operating expenses partially offset by the decrease in equity in loss from $2.8
million in 2007 to $1.9 million in 2008,.
Discontinued Operation. In the fourth quarter of 2006 based on recent assessments and in accordance with the guidance of ASC 360 and EITF 03-13, we have decided to
present the Digital Non Linear product line operation, which was sold in the third quarter ending September 30, 2005, as discontinued operations. Net income related to discontinued
operation in 2008 totaled to $20,000, compared to net loss of $30,000 in 2007.
Net Income (Loss). We recorded net loss of $9.5 million in 2008, compared with a net loss of $7.2 million in 2007. The increase in our net loss can be mainly attributed to the
decrease in revenues and the overall increase in our operating expenses partially offset by the decrease in equity in loss from $2.8 million in 2007 to $1.9 million in 2008.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make certain estimates, judgments and
assumptions based upon information available at the time that they are made, historical experience and various other factors that are believed to be reasonable under the circumstances.
These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of
revenues and expenses during the periods presented.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are
also areas in which management’s judgment in selecting among available alternatives would not produce a materially different result. Our management reviewed these critical accounting
policies and related disclosures with our Audit Committee. See Note 2 to our Consolidated Financial Statements, which contain additional information regarding our accounting policies
and other disclosures required by U.S. GAAP.
Our management believes the significant accounting policies which affect management’s more significant judgments and estimates used in the preparation of our consolidated
financial statements and which are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
v Revenue recognition;
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v Allowance for doubtful debts;
v
Inventories valuation;
v
Impairment long- lived assets;
v Accounting for stock-based compensation; and
v Contingencies.
v Taxes
Revenue recognition
The Company and its subsidiaries generate revenues mainly from the followings:
Sale of hardware products ("products") and to a lesser extent from sales of software products – The Video Solutions Business revenues.
Fixed income real-estate.
·
·
The Video Solutions Business revenues
Revenues from product sales in which the software is incidental to the hardware are recognized in accordance with ASC 605, "Revenue Recognition" and Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements" (SAB 104), when delivery has occurred, persuasive evidence of an agreement exists, the vendor's fee is fixed or
determinable, no further obligation exist and collectability is probable. Estimated warranty costs, which are insignificant, are based on the Company and its subsidiaries past experience
and are accrued in the financial statements. The Company and its subsidiaries do not grant a right of return.
Revenues from sale of products that include post customer support are recognized in accordance with ASC 605-25 Multiple Element Arrangements" (formerly: Emerging Issues
Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"). Multiple-element arrangement (an arrangement that involves the delivery or performance of
multiple products, services and/or rights to use assets) is separated into more than one unit of accounting, and revenue from such deliverables is recognized under SAB 104.
The Company accounts for product sales in which the software is more-than incidental to the functionality of the hardware in accordance with ASC 985-605 "Revenue
Recognition - Software" (Formerly - Statement of Position No. 97-2, "Software Revenue Recognition"). ASC 985-605 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the relative fair value of the elements. ASC 985-605 also requires that revenue be recognized under the "residual
method" when vendor-specific objective evidence ("VSOE") of fair value exists for all undelivered elements and VSOE does not exist for one or more of the delivered elements. Under
the residual method, any discount in the arrangement is allocated to the delivered elements.
Maintenance and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the maintenance and support
agreement. The VSOE of fair value of the undelivered elements (maintenance and support), is determined based on the renewal rate charged when these elements are sold separately.
Amounts received from customers for whom revenue has not yet been recognized, are presented as deferred revenues.
We assess collection based on a number of factors, including past transaction history, credit worthiness of the customer and in some instances a review of the customer’s
financial statements. We insure a substantial part of our customers with credit insurance in cases of bankruptcy.
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Our arrangements do not generally include an acceptance requirement. However if such an acceptance provision exists, then revenue recognition is deferred until written
acceptance of the product has been received from the customer. All of our agreements in which revenues are recognized are non-refundable and non-cancelable.
Rental income includes minimum rents and expenses recoveries. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis.
Leasehold improvements are capitalized and recorded as tenant improvements and depreciated over the shorter of the useful life of the improvement or the lease term. Lease revenue
recognition commences when the lessee is given possession of the leased space and there are no contingencies offsetting the lessee's obligation to pay rent.
None of the lease agreements contain provisions that require the payment of additional rents based on the respective tenant's sales volume (contingent or percentage rent) and
substantially all contain provisions that require reimbursement of the tenant's share of real estate taxes, insurance and common area maintenance costs, or common area maintenance
fees ("CAM"). Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period that the applicable costs are incurred in accordance with the lease
agreements.
Fixed income real-estate
Rental income includes minimum rents and expenses recoveries. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis.
Lease revenue recognition commences when the lessee is given possession of the leased space and there are no contingencies offsetting the lessee's obligation to pay rent.
Substantially all of the lease agreements contain provisions that require reimbursement of the tenant's share of real estate taxes, insurance and common area maintenance costs,
or common area maintenance fees ("CAM"). Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period that the applicable costs are incurred in
accordance with the lease agreements.
Allowance for doubtful debts
We review on a continuing basis the ability to collect on the trade accounts receivable and the adequacy of the allowance for doubtful debts against the trade receivables. We
specifically analyze customer accounts, account receivable aging reports, history of bad debts and the business or industry sector to which they belong, customer concentrations,
customer credit-worthiness, current economic trends and any other pertinent factors that come to light and to our attention. Generally a provision will be made when a trade receivable
becomes 90 days past due. In exceptional cases, a provision after 90 days past due will be waived when, after due diligence with the customer, we are confident that the receivable is still
collectible and the customer has demonstrated that payment is forthcoming. In addition, we provide approximately 2% of the trade receivable amount as a general provision for doubtful
debts. As of December 31, 2009, our provision for doubtful debt was approximately $414,000.
Inventories valuation
Significant judgment is required to determine the reserve for obsolete or excess inventory. Inventory on hand may exceed future demand either because the product is outdated
or obsolete, or because the amount on hand is more than can be used to meet future need, or excess. We provide for the total value of inventories that we determine to be obsolete
based on criteria such as customer demand and changing technologies. We value our inventories at the lower of cost or market price.
Impairment of Long- Lived Assets
We periodically evaluate our goodwill and long-lived assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on
legal factors, market conditions and operational performance of our acquired businesses.
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Accounting for stock-based compensation
The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation – Stock Compensation" (formally: SFAS 123(R), "Share-Based
Payment"). ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of income. In 2009, we recognized equity-based
compensation expense under ASC 718 in the amount of approximately $222,000.
As of December 31, 2009, we had $170,000 of unrecognized compensation expense related to non-vested shares options and non-vested restricted shares awards. For options
granted before January 1, 2006, and which had graded vesting, we recognized compensation expenses, based on the accelerated attribution method over the requisite service period of
each of the awards. Forfeitures were accounted for as they occurred, but have been estimated with the adoption of ASC 718 for those awards not yet vested. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual
historical pre-vesting forfeitures.
Contingencies
We periodically estimate the impact of various conditions, situations and/or circumstances involving uncertain outcomes to our financial condition and operating results.
These events are called "contingencies", and the accounting treatment for such events is prescribed by the ASC 450 "Contingencies" (formerly: SFAS 5, "Accounting for
Contingencies") ASC 450 defines a contingency as "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will
ultimately be resolved when one or more future events occur or fail to occur". Legal proceedings are a form of such contingencies.
In accordance with ASC 450, accruals for exposures or contingencies are being provided when the expected outcome is probable. It is possible, however, that future results of
operations for any particular quarter or annual period could be materially affected by changes in our assumptions, the actual outcome of such proceedings or as a result of the
effectiveness of our strategies related to these proceedings.
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Income Taxes
The Company and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes" (Formerly: SFAS 109, "Accounting for Income Taxes"). This
Statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries
provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
Effective January 1, 2007, the Company adopted the provisions of ASC 740 (Formerly: FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109"). ASC 740 clarifies the accounting for uncertainties in income taxes by establishing minimum standards for the recognition and measurement
of tax positions taken or expected to be taken in a tax return. Under the requirements of ASC 740, the Company must review all of its tax positions and make a determination as to
whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely–than-not standard, then the related tax
benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue.
Business Combinations
In December 2007, the FASB issued ACS No. 805 (Formerly SFAS 141(R) ), "Business Combinations". This Statement replaces SFAS No. 141, ‘‘Business Combinations’’, and
requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration and any non-
controlling interest in the acquire at the acquisition date, measured at their fair values as of that date. In addition, the statement requirement to measure the non-controlling interest
acquired at fair value will result in recognizing the goodwill attributable to the non-controlling interest in addition to that attributable to the acquirer.
ACS 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008.
Recent Accounting Pronouncements
In June 2009, the FASB issued what has been codified in ASC 105, "Generally Accepted Accounting Principles" (Formerly: SFAS No. 168, "the FASB Accounting Standards
Codifications and Hierarchy of GAAP - a Replacement of SFAS 162"). The Financial Accounting Standards Board (FASB) Accounting Standards Codification™ ("Codification")
became the single source of authoritative U.S. GAAP. The Codification did not create any new GAAP standards but incorporated existing accounting and reporting standards into a
new topical structure with a new referencing system to identify authoritative accounting standards, replacing the prior references to Statement of Financial Accounting Standards
(SFAS), Emerging Issues Task Force (EITF), FASB Staff Position (FSP), etc. Authoritative standards included in the Codification are designated by their Accounting Standards
Codification (ASC) topical reference, and new standards will be designated as Accounting Standards Updates (ASU), with a year and assigned sequence number. Beginning with this
report for the year ended December 31, 2009, references to prior standards have been updated to reflect the new referencing system.
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, "Multiple-Deliverable Revenue Arrangements" (ASU 2009-13). This update amends ASC
Topic 605-25, "Revenue Recognition—Multiple-Deliverable Revenue Arrangements" to remove the criterion that entities must use objective and reliable evidence of fair value in
separately accounting for deliverables and provides entities with a hierarchy of evidence that must be considered when allocating arrangement consideration. The update also requires
entities to allocate arrangement consideration to the separate units of accounting based on the deliverables’ relative selling price. ASU 2009-13 is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, unless the election is made to adopt ASU 2009-13 retrospectively. The adoption of
this guidance is not expected to have a material impact on the Company’s financial condition, results of operations and cash flows.
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In October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements that Include Software Elements" (ASU 2009-14). This update modifies the scope of the
software revenue recognition guidance to exclude (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased
with tangible products when the software components and non-software components of the tangible product function together to delivery the product’s functionality. ASU 2009-14 is
effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, unless the election is made to adopt ASU 2009-14
retrospectively. The adoption of this guidance is not expected to have a material impact on the Company’s financial condition, results of operations and cash flows.
In January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements" (ASU
2010-06). ASU 2010-06 includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1 and 2 and additional information about Level 3
activity. The new disclosures are required in interim and annual reporting periods beginning after December 15, 2009, except for the disclosures relating to Level 3 activity, which are
effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption did not have a material impact on the Company’s financial
condition, results of operations or cash.
Conditions in Israel
We are incorporated under the laws of the State of Israel, and our principal offices and substantially all research and development and manufacturing facilities are located in
Israel. Accordingly, we are directly affected by political, economic and military conditions in Israel.
Political Conditions
Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from
time to time in intensity and degree, has led to security and economic problems for Israel. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian
Authority, since September 2000, there has been a high level of violence between Israel and the Palestinians. Recently, there has been a further escalation in violence among Israel,
Hamas, a militant group responsible for many attacks into Israel, the Palestinian Authority and other groups. In addition, in July 2006, the Israeli army was engaged in extensive
hostilities along Israel’s northern border with Lebanon and to a lesser extent in the Gaza Strip. Since June 2007, the Hamas militant group has taken over the Gaza Strip from the
Palestinian Authority, and the hostilities along Israel’s border with the Gaza Strip have increased, escalating to a wide scale attack by Israel in December 2008, in retaliation to rocket
attacks into southern Israel. These developments have further strained relations between Israel and the Palestinian Authority. Any armed conflict, political instability or violence in the
region may have a negative effect on our business condition, harm our results of operations and could adversely affect our share price. No predictions can be made as to whether or
when a final resolution of the area’s problems will be achieved or the nature thereof and to what extent the situation will impact Israel’s economic development or our operations. Certain
countries, companies and organizations continue to participate in a boycott of Israeli firms. We do not believe that the boycott has had a material adverse effect on us, but restrictive
laws, policies or practices directed towards Israel or Israeli businesses may have an adverse impact on the expansion of our business.
Generally, all male adult citizens and permanent residents of Israel under a certain age are obligated to perform military reserve duty which may amount to lengthily periods of
time. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Currently, a majority of our officers and employees are
obligated to perform annual reserve duty. While we have operated effectively under these requirements since our inception, we cannot assess the full impact of such requirements on
our workforce or business if conditions should change, and we cannot predict the effect of any expansion or reduction of such obligations on us.
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Economic Conditions
Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980’s, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and civil unrest. The Israeli government has, for these and other reasons, intervened in various sectors of the economy,
employing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and controls of wages, prices and foreign currency exchange rates. In 1998, the
Israeli currency control regulations were liberalized significantly, as a result of which Israeli residents generally may freely deal in foreign currency and non-residents of Israel generally
may freely purchase and sell Israeli currency and assets. There are currently no Israeli currency control restrictions on remittances of dividends on the ordinary shares or the proceeds
from the sale of the shares; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time. Currently, the global
economy shows signs of growth slowdown which might also have an effect on the Israeli economy. The Israeli economy has also been subject to significant changes, as a result of
implementation of new economic policies and privatization.
Currency and Inflation
A substantial majority of our sales and expenses are incurred or determined in U.S. dollars or are dollar-linked. The currency of the primary economic environment in which we
operate is, therefore, the dollar, which is our functional reporting currency. Nevertheless, because certain of our expenses are incurred in NIS and are affected by changes in the Israeli
consumer price index, the dollar cost of our operations is influenced by the extent to which any increase in the rate of inflation in Israel is not offset, or is offset on a lagging basis, by
the devaluation of the NIS in relation to the dollar.
As of June 21, 2010, the inflation rate in Israel has increased at a rate of 0.4% and the NIS had devaluated against the dollar by approximately 1.0%. The inflation rate in Israel
was approximately 3.4% in 2007, approximately 3.8% in 2008 and approximately 3.9% in 2009. At the same time the appreciation of the NIS against the dollar was approximately 9% in
2007, approximately 1.1% in 2008, and approximately 0.7% in 2009. As a result of this differential, we experienced an increase in the dollar costs of operations in Israel in each of the years
2007, 2008 and 2009, all of which did not materially affect our results in such periods. The fluctuations in the dollar costs of our operations in Israel related primarily to the costs of
salaries in Israel, which are paid in NIS and constitute a significant portion of our expenses. We cannot assure you that we will not be materially adversely affected in the future if
inflation in Israel exceeds the devaluation of NIS against the dollar or if the timing of such devaluation lags behind increases in inflation in Israel.
Trade Agreements
Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance
Corporation. Israel is also a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. Israel has also been
granted preferences under the Generalized System of Preferences from Japan. These preferences allow Israel to export the products covered by these programs either duty-free or at
reduced tariffs.
Israel and the U.S. entered into a Free Trade Agreement (FTA) in 1985. Under the FTA, most products receive immediate duty-free status. The FTA eliminated all tariff and
some non-tariff barriers on most trade between the two countries in 1995. Israel became associated with the European Economic Community, now known as the European Union, under a
1975 FTA, which confers some advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from those countries
over a number of years. Israel is a member of the European Union’s Sixth Research and Development Program, giving Israelis access to research and development tenders in the
European Union countries. Since 1993, a FTA has been in effect between Israel and the European Free Trade Association, or EFTA, whose members include Switzerland, Norway,
Iceland and Liechtenstein. The agreement grants the exporting countries of EFTA trading with Israel conditions similar to those Israel enjoys with the U.S.
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In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India and other nations in Asia and Eastern
Europe, with which Israel previously had not had these relations.
5.B. LIQUIDITY AND CAPITAL RESOURCES.
We have funded our operations primarily through private and public sales of our equity securities, banks credit, research and development grants from, among others, the
Commission of the European Union and the OCS. As of December 31, 2009, we had cash and cash equivalents of $28.7 million. Our operating activities used cash of $6.6 million, $3.3 and
$3.9 million in 2009, 2008 and 2007 respectively. Cash used by operating activities in 2007 was primarily the result of our net loss for the period, as adjusted for compensation related to
the grant of option and restricted shares, depreciation and amortization, impairment of long term investments and other assets acquired partially offset by the net changes of our
working capital mainly decrease in deferred revenues, accrued expenses and other accounts payables and an increase in inventory partially offset by the increase in trade payables.
Cash used by operating activities in 2008 was primarily the result of our net loss for the period, as adjusted for compensation related to the grant of option and restricted shares,
depreciation and amortization, equity in loss of Scopus and the net change in our working capital partially offset by the realized gain on the sale of our available-for-sales marketable
securities and the decrease in our accrued severance pay, net. Cash used by operating activities in 2009 was primarily the result of our net income for the period, as adjusted for gain
from sale of investment in affiliated company, increase in other accounts receivables and prepaid expenses, decrease in trade payables and a decrease in accrued expenses and other
liabilities, partially offset by a decrease in inventories, depreciation and amortization and a decrease in trade receivables, net.
Net cash provided from investing activities in 2009 reflects primarily the proceeds from sale of a company totaling $28.6 million primarily offset by investment in real estate
totaling $22.3 million, investment in other assets and the purchase of property and equipment totaling $659,000 and $276,000 respectively. In 2008 our investing activity used $240,000
which reflects primarily investment in companies totaling $8.6 million and the purchase of property and equipment totaling $393,000 partially offset by proceeds from redemption of
available-for-sale marketable securities totaling $8.5 million and proceeds from sale of intangible assets totaling $218,000. Net cash provided from investing activities in 2007 reflects
primarily the result of the redemption of available for sale marketable securities totaling $36.2 million partially offset by investing in companies totaling $20.4 million and purchase of
property and equipment totaling $945,000.
Net cash provided from financial activities in 2009 was primarily the result of a long term loan totaling $18.3 million, received for the financing of our investment in real estate.
Net cash provided from financial activities in 2008 was primarily the result of a private placement of 2,816,901 of our ordinary shares to Mr. Shlomo (Tom) Wyler, our President, Chief
Executive Officer and then Executive Chairman of the board of directors, who is also considered as our controlling shareholder, in consideration for $5 million in cash., slightly offset by
a decrease of $634,000 in bank credit. Net cash used in financial activities in 2007 reflects primarily the decrease of approximately $3 million in bank credit, partially offset by proceeds
from exercise of stock options in the amount of approximately $225,000. Net cash provided by financing activities in 2006 reflects primarily the net proceeds from the exercise of stock
options approximately in the amount of $498,000 and the increase in bank credit by approximately $2.4 million. As of December 31, 2009, we have an authorized credit line in the amount
of $395,000 (none of which was utilized). As collateral for our lines of credit, a fixed charge has been placed on our property and equipment and shareholders' equity, and a floating
charge (security interest in assets of the Company as they exist from time to time) has been placed on all of our other assets. We have an agreement with Clal Credit Insurance Ltd. for
the provision of insurance against default on outstanding receivable balances.
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As of December 31, 2009, our available cash including cash and cash equivalent was $28.7 million. As of June 21, 2010, we have available cash, and cash equivalents of
approximately $32.5 million. The increase is mainly attributed to the release of a certain deposit totaling $3.75 million that was placed in escrow with respect to the 485 Lexington Avenue
transaction. We manage our available cash on a discretionary basis, within the framework of an investment policy based upon an established set of guidelines approved by our board of
directors. The main terms of the investment guidelines permit us to invest in the following securities: (i) U.S. treasury and government agency obligations (Government Securities); (ii)
money market instruments of domestic and foreign issues denominated in U.S. dollars of commercial paper, bankers’ acceptances, certificates of deposit, euro-dollar time deposits and
variable rate issues (Money Market Instruments); (iii) up to 40% of the Company's assets, excluding Government Securities, cash and Money Market Instruments, or any combination
of the following: (a) corporate notes and bonds rated investment grade (BAA/BBB- and above) on the date of their purchase, provided that investments in any one corporation or entity
will not exceed $3 million; (b) investments in bonds and notes with lower rating then BBB- and higher rating of B, on their purchase date, provided that investments in any one
corporation or entity will not exceed $1 million; (c) various financial instruments including structure range note products issued by a rated institution (A and above) in which the interest
income may be subjected to changes in interests rate; (d) hedge funds up to $5 million of total portfolio pursuant to the following guidelines: (1) volatility below 10%; (2) minimum 5
years of positive performance; (3) low beta; (4) positive sharp ratio; (5) size of fund of at least $1 billion; (e) hedging transactions in order to protect us against currency fluctuations
between the US dollar and the NIS as relates to up to $3 million operating expenses of the Company; and (f) purchasing of leading foreign currencies. The investment policy prohibits us
from engaging in any non-business related investment activity that would be considered speculative according to the principles of conservative investment management and limits the
borrowing for investment to no more than 25% of the investment principal. According to the investment policy, the maximum maturity of individual securities in the portfolio has no
limitation and the weighted-average days to maturity of the portfolio may not exceed 10 years. For securities that have put, reset or expected average maturity dates, the put, reset or
expected average maturity will be used, instead of the final maturity dates, for maturity limit purposes. The investment guidelines are to be reviewed periodically by our board of
directors with the President and the Chief Financial Officer. In addition, our President and Chief Financial Officer and his authorized employees are responsible for the managing
investments subject to strict adherence to these guidelines. As of the date hereof, we do not have any material contractual commitments related to capital expenditure. During 2009, we
invested solely in interest bearing bank deposits and money market funds with various banks.
We believe that, considering the use of cash in our ongoing operations, together with the existing sources of liquidity described above, our current cash, cash equivalents and
marketable securities will be sufficient to meet our needs for cash for at least the next 12 months. However, our liquidity and capital requirements are affected by many factors, some of
which are based on the normal ongoing operations of our businesses and some of which arise from uncertainties related to global economies and the markets that we target for our
services. In addition, we routinely review potential acquisitions. If we grow more rapidly than currently anticipated, it is possible that we would require more funds than anticipated. In
that event, we would likely seek additional equity or debt financing, although we cannot assure you that we would be successful in obtaining such financing on favorable terms or at all.
5.C. RESEARCH AND DEVELOPMENT
Research and development expenses, net, consist primarily of labor expenses, development-related raw materials and subcontractors’ services and related overhead, offset by
grants. Our net research and development expenses have increased from $5.4 millions in 2007 to $6.4 million in 2008 and decreased to $3.7 million in 2009. As a percentage of revenues,
our net research and development expenses changed to approximately 27.8% in 2009 from approximately 32% in 2008 and approximately 23.3% in 2007. Our level of research and
development expenses had fluctuated over the years. The decrease in research and development expenses between 2009 and 2008 can primarily be attributed to the decrease in
compensation expenses due to a decrease in headcount and a reduction in salaries and related costs and an increase in our research and development grants received from the OCS and
the European Union. The increase in research and development expenses between 2008 and 2007 can primarily be attributed to the decrease in our research and development grants
received from the OCS and the European Union and the increase in compensation expenses due to the devaluation of the USD against the NIS. Research and development grants
totaled $1.3 million in 2009, $1.1 million in 2008 and $1.8 million in 2007.
For grants received from certain entities, see "Item 4.B. Business Overview - Research and Development" above.
5.D. TREND INFORMATION
The video solutions industry continues to be intensely competitive. We continue to focusing on developing technologies and new products, and research and development
expenses might grow in the near future. We continue to market our new products, while expanding markets for our existing products. However, as discussed throughout this annual
report, our operations have been subject, and will continue to be subject, to pressure from weakness in the overall technology sector as well as the video solutions industry.
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Starting in 2008 the global economic downturn caused a slowdown in the fixed-income real estate market. In the later part of 2008 and through 2009, banks have lowered interest
rates but at the same time were reluctant to provide financing or perform refinancing of existing debt. We will continue looking for opportunities in North America, Western Europe and
Israel.
Our financial income affected by changes in the 6-month Libor rate, see "Item 3.D. Risk Factors" under the heading "Risks Relating to the Economy, Our Financial Condition
and Shareholdings" above. During 2008 we have disposed of all of our investments in structure notes and corporate bonds.
We have been operating at a loss since the quarter ended December 31, 2000. We were able to return to profitability in the quarter ended June 30, 2003, and remain profitable
until the quarter ended March 31, 2004. Since the quarter ended June 30, 2004 and until the quarter ended December 31, 2008 we returned to operate in loss. We returned to profitability
in the quarter ended March 31, 2009. Since the quarter ended June 30, 2009 and until the quarter ended December 31, 2009 we returned to operate at a loss. If global economic conditions
worsen resulting in weakening the demand for our products and increased vacancy in our real estate property, we may not be able to return to profitability in 2010.
5.E. OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
5.F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Set forth below are our contractual obligations and other commercial commitments as of December 31, 2009:
Contractual Obligations
Long-Term Debt
Capital Lease Obligations
Operating Leases
Purchase Obligations
Severance pay
Other Long-Term Obligations
Total Contractual Cash Obligations
Other Commercial Commitments
Lines of Credit
Standby Letters of Credit
Guarantees
Standby Repurchase Obligations
Other Commercial Commitments
Total Commercial Commitments
Total
18,262
--
1,416
--
1,731
--
21, 409
Total
395
--
143
--
--
538
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Less than 1 year
365
--
841
--
--
--
1,206
Less than 1 year
--
--
--
--
--
--
Payments Due by Period
(USD in thousands)
1- 3 years
730
--
575
--
--
--
1,305
4-5 years
After 5 years
730
--
--
--
--
--
730
16,437
--
--
--
1,731
--
18,168
After 5 years
395
--
143
--
--
538
--
--
--
--
--
--
--
--
--
--
--
--
Amount of Commitment Expiration Per Period
(USD in thousands)
1- 3 years
4-5 years
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6,A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information with respect to the individuals who are currently our directors and executive officers. All of these individuals are presently serving in
the respective capacities described below:
Name
Alex Hilman
Shlomo (Tom) Wyler(1)
Amir Philips
Yaron Comarov(5)
Michael Chorpash(5)
Ehud Ardel(5)
Nir Shalev(5)
Yaron Yunger
Dana Tamir-Tavor(2)
Orli Garti Seroussi (1)(2)(3) (4)
Itzhak Wulkan(3) (2) (4)
Danny Lustiger
Age
57
58
41
44
45
41
41
39
60
49
58
42
Position
Executive Chairman of the Board of Directors
President and Chief Executive Officer
Chief Financial Officer
Vice President of Operations
President and Vice President of Sales, Optibase Inc
Vice President of Research and Development
Vice President of Marketing
Vice President of International Sales and Technical Support
Director
Director
Director
Director
· On February 12, 2009, Mr. Eli Sharon resigned from his position as our Vice President Research and Development.
· On October 1, 2009, Mr. Udi Shani resigned from his position as our Executive Vice President of International Sales and Technical Support.
· On October 1, 2009, Mr. Yossi Aloni resigned from his position as President of Optibase Inc and Vice President of Marketing.
· On September 1, 2009, Shlomo (Tom) Wyler resigned from his position as Executive Chairman of the Board of Directors.
· On September 1, 2009, Alex Hilman was appointed as the Executive Chairman of the Board of Directors.
· On October 28, 2009, Danny Lustiger was appointed as a director of the Company by our Board of Directors.
(1) Member of the investment committee
(2) Member of the audit committee
(3) Member of the compensation committee
(4) External Director
(5) Following the signing of the asset purchase agreement between the Company, Optibase Inc. and Optibase Technologies Ltd. on March 16, 2010, the Company terminated the
employment of such officers, subject to the remainder of their early notice period. For further information, see Item 10.C "Material Contracts".
Shlomo (Tom) Wyler serves as a President, Chief Executive Officer and a member our Board of Directors. Since his investment in us in September 2001 (then through Festin
Management Corp.), Mr. Wyler has served in various senior executive positions. Through the Festin Group, of which he is a co-owner, Mr. Wyler has had substantial stakes in several
public companies in Switzerland. His other areas of involvement include investment banking, foreign exchange, financial futures and real-estate. In the early 1990s, Mr. Wyler turned his
efforts to real estate interests in the U.S. More recently, his attention has been directed toward the high-tech industry in Israel. Mr. Wyler holds a Masters degree in Business
Economics from the University of Zurich.
Amir Philips serves as our Chief Financial Officer. Mr. Philips has been serving in this position since May 2007. Prior to this position, Mr. Philips served as Vice President
Finance of Optibase Inc. from July 2004. From 2000 until 2004, Mr. Philips held the position of Group Controller and Financial Manager at Optibase Ltd. Before joining Optibase, Mr.
Philips was an accountant and auditor at Lotker Stein Toledano and Co., currently a member of BDO Ziv Haft. Mr. Philips is a Certified Public Accountant in Israel. He holds a B.B.
degree in Accounting and Business Management from the Israeli College of Management.
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Yaron Comarov served as our Vice President of Operations. Mr. Comarov has been serving in this position since 2000 and until his dismissal in May, 2010 (subject to the
remainder of his early notice period). Prior to his present position, Mr. Comarov served as our Director of Operations, a position he has held since joining the Company in 1994. Before
joining us, Mr. Comarov worked as an Operations and Project Manager at Israel Aircraft Industries. Mr. Comarov holds a B.Sc. degree in information systems and industrial engineering
from the Technion Israel Institute of Technology and an MBA degree from Boston University.
Michael Chorpash served as President and Vice President of Sales at Optibase Inc. Since October 2009 and until his dismissal in May 2010 (subject to the remainder of his early
notice period) Mr. Chorpash manages the North American operation for Optibase. Mr. Chorpash has vast experiences in the distribution of digital media throughout Enterprise,
Broadcast, Telco and Government market segments. Mr. Chorpash had joined Optibase in 1991 and served as a regional sales manager and as Vice President of Sales since October
2007. Before joining Optibase Mr. Chorpash held management positions with Avnet, Inc. a Fortune 500 company that distributes electronic components, enterprise computer products
and embedded subsystems.
Ehud Ardel served as our vice president Research and Development until his dismissal in May 2010 (subject to the remainder of his early notice period). Mr. Ardel has been
with Optibase since 2000. Previously, Mr. Ardel served as a System Engineering Manager and Professional Services Manager. Before joining Optibase, Mr. Ardel held the position of
System Engineer in a large military project on behalf of IAF (Israeli Air Force) and an IAF System Engineer in the military classified network system. Mr. Ardel holds BScEE (Control and
Communications) from Tel-Aviv University.
Nir Shalev served as our vice president Marketing until his dismissal in May 2010 (subject to the remainder of his early notice period). Mr. Shalev joined Optibase in 2006 as
Director of Product Marketing. Prior to Optibase, Mr. Shalev served as Director of Engineering at Hot Telecom Ltd. (Hot) the leading cable provider in Israel. Mr. Shalev is responsible
for product definition, product marketing management and marketing communications activities. Mr. Shalev holds a practical engineer diploma in Electronic and Computer Science from
Tel Aviv University.
Yaron Yunger served as our Vice President International Sales and Technical Support since October 2009 and until his dismissal in May 2010 (subject to the remainder of his
early notice period). Mr. Yunger joined Optibase in 2000 as Regional Sales Manager for Asia. In 2002 was appointed as AVP of Asia Sales, in 2004 was appointed as AVP for EMAE
sales and in 2006 was appointed as Vice President of Asia sales, managing the company's sales and support offices in China and India. Prior to Optibase, Mr. Yunger served as Director
of Sales at CMR Communication and at the RAD Bynet Group as a Sales Manager. Mr. Yunger holds a BA in Business Administration from Newcastle University in the UK.
Yossi Aloni served as President of Optibase Inc. and as our Vice President of Marketing until his resignation in October 2009. Mr. Aloni joined Optibase in May 2005 as
Director of Broadcast Solutions. In January 2006 he was appointed as Director of Projects, in May 2006 he was appointed as Vice President of Marketing, and in January 2008 he was
appointed as President of Optibase Inc. Previously, from 1998 to 2005, Mr. Aloni served as Director of Engineering/Chief Engineer at Telad, an Israeli channel originator. Prior to his
appointment, he was Head of Post-Production at Telad. During his career in the video arena over almost two decades, Mr. Aloni also served as Technical Manager at Feltronics, and
Golden Channels and Co., as well as Head of the Video Section in the Israel Defense Forces. Mr. Aloni earned his B.Sc. in Computer Science from the Weizmann Institute of Science.
Udi Shani served as our Executive Vice President International Sales and Technical Support until his resignation in October, 2009. Mr. Shani joined Optibase in 1999 as regional
sales manager. In 2001, he was appointed as AVP of European Sales, in 2002 he relocated to North America where he founded and managed the Americas IPTV sales force, and in 2005
Mr. Shani returned to Israel and was appointed Executive Vice President International Sales. Prior to joining Optibase, Mr. Shani served as sales and marketing manager at Eden Telecom
Ltd. and as sales manager at Muller Co. Mr. Shani holds a B.A. in Business Administration from the Israeli College of Management and an MBA from Manchester University.
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Eli Sharon served as vice president Research and Development until his resignation in February, 2009. Mr. Sharon joined Optibase in 2007. Prior to joining Optibase, Mr.
Sharon served as Director of System Engineering and Program Manager at DBS Satellite Services (1998) Ltd. (YES), the leading satellite television provider in Israel. Mr. Sharon holds a
Bachelor of Technology in Electronic Engineering and Communication from Ariel University, Israel.
Dana Tamir-Tavor joined our board of directors in September 2000. Presently, Ms. Tamir serves as the Chief of Staff of the VAS Group in Comverse after having served as the
co-manager of the Indian offshore operation for Comverse. From January 1997 to May 2000, Ms. Tamir served as the Chief Executive Officer of Qronus, Inc., a company that was spun
off by Mercury Interactive Corp. Prior to that Ms. Tamir managed and executed large-scale Command Control & Communication real-time systems for the Israeli Defense Forces and
European armies.
Alex Hilman serves as Executive Chairman of the Board of Directors since September 2009. He has joined the board of directors in February 2002. Mr. Hilman is a partner in
Hilman & Co., which provides auditing, tax and business consulting services to corporations. Mr. Hilman was the President of the Israeli Institute of Certified Public Accountants in
Israel, served on the board of IFAC, and is a member of the Small & Medium Practices committee in IFAC. Mr. Hilman has published professional works on tax and accounting, among
them, The Israel Tax Guide, and in the past was an editor at Globes, a leading Israeli financial daily paper. Mr. Hilman has also held professional and management positions at the
Ministry of Finance. Mr. Hilman holds a B.A. in Accountancy and Economics from Tel-Aviv University.
Orli Garti Seroussi joined our board of directors on January 31, 2008 as an external director. Ms. Garti-Seroussi has served as the General Manager of the Bureau of Municipal
Corporation in the municipality of Tel-Aviv Jaffa since August 2001. From June 1999 until July 2001 Ms. Garti-Seroussi served as manager of consulting department in Shif-Hazenfrats &
Associations, CPA firm. Prior to that, Ms. Garti-Seroussi served as Deputy Director of the Department of Market Regulation in the Israel Securities Authority and as an Auditor in the
Tel Aviv Stock Exchange. Ms. Garti-Seroussi holds an M.P.A from Harvard University and M.B.A degree and a B.A degree in economics and accounting from Tel Aviv University.
Itzhak Wulkan joined our board of directors in December 17, 2007, as an external director. Mr. Wulkan is an independent entrepreneur and has over 30 years of experience in
various aspects of Hi-Tech industry at senior positions in leading Israeli corporations (among others Vice-President of Business Development Wireless at Audiocodes Ltd.; Vice-
President of Business Development MMA group at Comverse; founder and head of R&D and project department at Tadiran Switching). Mr. Wulkan holds an MBA degree from Tel
Aviv University and a B.Sc degree in electrical engineering from the Technion – Israeli Technological Institute.
Danny Lustiger joined our board of directors in October 2009. Mr. Lustiger is Mr. Lustiger is the president and Chief Executive Officer of Cupron Inc. and has over 18 years of
experience in various aspects of Hi-Tech industry at senior positions together with Real estate and infrastructure industries, experience at senior position in public companies. From
2007 until 2009, Mr. Lustiger served as the Chief Financial officer of Shikun & Binui Holdings Ltd. From 1996 and until 2005, Mr. Lustiger served at different managerial positions at
Optibase including Chief Financial Officer. From 1993 to 1996 Mr. Lustiger held the position of an accountant and auditor at Igal Brightman & Co. (currently Brightman Almagor & Co., a
member of Deloitte & Touche Tomatsu International). Mr. Lustiger is a Certified Public Accountant in Israel. Mr. Lustiger holds a B.A. degree in Accounting and Economics and an
MBA in Finance and International management from the Tel-Aviv University.
6.B. COMPENSATION.
The aggregate remuneration we paid to all persons as a group (15 persons) who served in the capacity of director or executive officer in the year ended December 31, 2009,
including compensation to directors and officers whose employment was terminated during 2009, was $1.38 million, including amounts paid to provide pension, retirement or similar
benefits pursuant to standard Israeli plans but excluding amounts expended by us for vehicles made available to all of our officers, expenses reimbursed to officers and other fringe
benefits commonly reimbursed or paid by companies in Israel. As of December 31, 2009, 12 persons served in the capacity as directors or executive officers in our Company and
beneficially owned as of such date, options to purchase an aggregate of 257,500 ordinary shares which have not vested on December 31, 2009 or within 60 days thereafter. The exercise
price of the options was between $1.192 and $3.16, the vesting period is spread out over a 4-year period and the expiration date of such options is generally 7 years as of their date of
grant. In addition, as of June 21, 2010, our directors and executive officers beneficially owned 7,363,708 shares (of which 311,000 shares are issuable upon exercise of options that are
currently vested or will vest within 60 days as of June 21, 2010).
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Indemnification, exemption and insurance of Directors and Officers
The Companies Law permits a company to insure its directors and officers provide them with indemnification, either in advance or retroactively, and exempt its directors and
officers from liability resulting from their breach of their duty of care towards the company, all in accordance with the terms and conditions specified under Israeli law. Our articles of
association include clauses allowing us to provide our directors and officers with insurance, indemnification and to exempt them from liability subject to the terms and conditions set
forth by the Companies Law, as described below.
Subject to statutory limitations, our articles of association provide that we may insure the liability of our directors and offices to the fullest extent permitted by the Companies
Law. Without derogating from the aforesaid we may enter into a contract to insure the liability of our directors and officer for an obligation imposed on such director or officer in
consequence of an act done in his capacity as a director or officer of Optibase, in any of the following cases:
v A breach of the duty of care vis-a-vis us or vis-a-vis another person;
v A breach of the fiduciary duty vis-a-vis us, provided that the director or officer acted in good faith and had a reasonable basis to believe that the act would not harm us;
v A monetary obligation imposed on him or her in favor of another person; or
v Any other matter in respect of which it is permitted or will be permitted under applicable law to insure the liability of our director or officer.
Our articles of association further provide that we may indemnify our directors and officers, to the fullest extent permitted by the Companies Law. Without derogating from the
aforesaid, we may indemnify our directors and officers for liability or expense imposed on them in consequence of an action made by them in the capacity of their position as directors or
officers of Optibase, as follows:
v Any financial liability he or she incurs or imposed on him or her in favor of another person in accordance with a judgment, including a judgment given in a settlement or a judgment
of an arbitrator, approved by a court.
v Reasonable litigation expenses, including legal fees, incurred by the director or officer or which he or she was ordered to pay by a court, within the framework of proceedings filed
against him or her by or on behalf of Optibase, or by a third party, or in a criminal proceeding in which he or she was acquitted, or in a criminal proceeding in which he or she was
convicted of a felony which does not require a finding of criminal intent.
v Reasonable litigation expenses, including legal fees he or she incurs due to an investigation or proceeding conducted against him or her by an authority authorized to conduct such
an investigation or proceeding, and which was ended without filing an indictment against him or her and without being subject to a financial obligation as a substitute for a criminal
proceeding, or that was ended without filing an indictment against him, but with the imposition of a financial obligation, as a substitute for a criminal proceeding relating to an
offence which does not require criminal intent, within the meaning of the relevant terms in the Companies Law.
v Any other obligation or expense in respect of which it is permitted or will be permitted under law to indemnify a director or officer of Optibase.
In addition, our articles of association provide that we may give an advance undertaking to indemnify a director and/or an officer in respect of all of the matters above,
provided that with respect to the first matter above, the undertaking is restricted to events, which in the opinion of our board of directors, are anticipated in light of our actual activity at
the time of granting the obligation to indemnify and is limited to a sum or measurement determined by our board of directors as reasonable under the circumstances. We may further
indemnify an officer therein, save for the events subject to any applicable law.
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Our articles of association further provide that we may exempt a director in advance and retroactively for all or any of his or her liability for damage in consequence of a breach
of the duty of care vis-a-vis Optibase, to the fullest extent permitted by the Companies Law. Notwithstanding the foregoing, the Companies Law prohibits a company to exempt any of
its directors and officers in advance from their liability towards such company for the breach of its duty of care in distribution, as defined in the Companies Law, for such company’s
shareholders (including distribution of dividend and purchase of such company’s shares by the company or an entity held by it).
The above provisions with regard to insurance, exemption and indemnity are not and shall not limit the Company in any way with regard to its entering into an insurance
contract and/or with regard to the grant of indemnity and/or exemption in connection with a person who is not an officer of the Company, including employees, contractors or
consultants of the Company, all subject to any applicable law.
All of the above shall apply mutatis mutandis in respect of the grant of insurance, exemption and/or indemnification for persons serving on behalf of the Company as officers
in companies controlled by the Company, or in which the Company has an interest.
The Companies Law provides that companies may not give insurance, indemnification (including advance indemnification), or exempt their directors and/or officers from their
liability in the following events:
v a breach of the fiduciary duty, except for a breach of the fiduciary duty vis-à-vis the company with respect to indemnification and insurance if the director or officer acted in good
faith and had a reasonable basis to believe that the act would not harm the company;
v an intentional or reckless breach of the duty of care, except for if such breach was made in negligence;
v an act done with the intention of unduly deriving a personal profit; or
v a fine imposed on the directors or officers.
We have a directors and officers liability insurance policy. Our shareholders approved indemnification of our directors and officers in connection with our public offerings. We
have undertaken to indemnify our directors and officers to the fullest extent permitted by the Companies Law and our articles of association and entered into an indemnity letter with
each of our directors and executive officers. The aggregate indemnification amount shall not exceed the higher of: (i) 25% of our shareholders’ equity, as set forth in our financial
statements prior to such payment; or (ii) $7.5 million.
Optibase, Inc. has also undertaken to indemnify its directors and officers to the maximum extent and in a manner permitted by the California Corporation Code and entered into
an indemnity letter with each of its directors and officers, subject to similar limitations. The aggregate indemnification amount shall not exceed the higher of: (i) 25% of the shareholders’
equity of Optibase, Inc., as set forth in Optibase, Inc.’s financial statements prior to such payment; or (ii) $7.5 million.
6.C. BOARD PRACTICES
Pursuant to our articles of association, our board of directors is required to consist of three to nine members. Directors are elected at the annual general meeting of our
shareholders by a vote of the holders of a majority of the voting power represented at such meeting. Each director holds office until the annual general meeting of shareholders
following the annual general meeting at which the director was elected or until his or her earlier resignation or removal. A director may be re-elected for subsequent terms. At present,
our board of directors consists of six members, including two external directors appointed in accordance with the Israeli law requirements, as detailed herein. Our articles of association
provide that our directors may at any time and from time to time, appoint any other person as a director, either to fill in a vacancy or to increase the number of members of our board of
directors.
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Under the Companies Law, each Israeli public company is required to determine the minimum number of directors with "accounting and financial expertise" that such company
believes is appropriate in light of the particulars of such company and its activities. A director with "accounting and financial expertise" is a person that, due to education, experience
and qualifications, is highly skilled and has an understanding of business-accounting issues and financial statements in a manner that enables him/her to understand in depth the
company’s financial statements and stimulate discussion regarding the manner of presentation of the financial data. Our board of directors resolved on March 30, 2006 and on June 27,
2010 that the minimum number of directors with accounting and financial expertise appropriate for us in light of the size of the board of directors and nature and volume of the
Company’s operations is one director (such director may serve as an external director, see below).
External Directors
Under the Companies Law, Israeli public companies are required to appoint at least two external directors to serve on their board of directors. Our shareholders approved in
December 2007 the appointment of Mr. Itzhak Wulkan and Ms. Orly Garti-Seroussi as our external directors as of December 17, 2007 and as of January 31, 2008, respectively, for a three-
year term. In addition, each committee of the board of directors entitled to exercise any powers of the board is required to include at least one external director. The audit committee must
include all the external directors, See "Committees of the Board of Directors" below.
Pursuant to the Israeli Companies Law at least one external director is required to have "accounting and financial expertise" and the other is required to have "professional
qualification" or "accounting and financial expertise". A director has "professional qualification" if he or she satisfies one of the following:
(i)
(ii)
(iii)
the director holds an academic degree in one of these areas: economics, business administration, accounting, law or public administration;
the director holds an academic degree or has other higher education, all in the main business sector of the company or in a relevant area for the board position; or
the director has at least five years’ experience in one or more of the following or an aggregate five years’ experience in at least two or more of these: (a) senior
management position in a corporation of significant business scope; (b) senior public office or senior position in the public sector; or (c) senior position in the main
business sector of the company.
A director with "accounting and financial expertise" is a person that in light of his or her education, experience and skills has high skills and understanding of business-
accounting issues and financial reports which allow him or her to deeply understand the financial reports of the company and hold a discussion relating to the presentation of financial
information. The company’s board of directors will take into consideration in determining whether a director has "accounting and financial expertise", among other things, his or her
education, experience and knowledge in any of the following:
(i)
accounting issues and accounting control issues characteristic to the segment in which the company operates and to companies of the size and complexity of the
company;
(ii)
the functions of the external auditor and the obligations imposed on such auditor;
(iii)
preparation of financial reports and their approval in accordance with the companies law and the securities law.
An external director may not be appointed to an additional term unless: (i) such director has "accounting and financial expertise"; or (ii) he or she has "professional expertise",
and on the date of appointment for another term there is another external director who has "accounting and financial expertise" and the number of "accounting and financial experts" on
the board of directors is at least equal to the minimum number determined appropriate by the board of directors.
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A company whose shares are traded in certain exchanges outside of Israel, including The NASDAQ Global Market, such as our company, is not required to nominate at least
one external director who has accounting and financial expertise so long as another independent director for audit committee purposes who has such expertise serves on board of
directors pursuant to the applicable foreign securities laws. In such case, all external directors will have professional qualification.
Under Israeli law, a person may not serve as an external director if at the date of the person’s appointment or within the prior two years the person, or his or her relatives,
partners, employers or entities under the person’s control, have or had any affiliation with us or any entity controlling, controlled by or under common control with us. Under the
Companies Law, "affiliation" includes an employment relationship, a business or professional relationship maintained on a regular basis or control or service as an office holder,
excluding service as a director in anticipation of serving as an external director in a company that is about to offer its shares to the public for the first time.
A person may not serve as an external director if that person’s position or other business activities create, or may create, a conflict of interest with the person’s service as an
external director or may otherwise interfere with the person’s ability to serve as an external director. If at the time any external director is appointed, all members of the board are the same
gender, then the external director to be appointed must be of the other gender.
External directors are elected by a majority vote at a shareholders’ meeting, so long as either:
(i)
(ii)
the majority of shares voted for the election includes at least one-third of the shares of non-controlling shareholders voted at the meeting; or
the total number of shares of non-controlling shareholders voted against the election of the external director does not exceed one percent of the aggregate voting
rights of the company.
The Companies Law provides for an initial three-year term for an external director which may be extended, for an additional three-year term. In the case of a company whose
shares are traded in certain exchanges outside of Israel, including The Nasdaq Global Market, such as our company, regulations promulgated under the Companies Law provide that the
service of an external director can be extended to additional three-year terms, if both the audit committee and the board of directors confirm that in light of the expertise and contribution
of the external director, the extension of such external director's term would be in the interest of the company. Election of external directors requires a special majority, as described
above. External directors may be removed only by the same special majority required for their election or by a court, and then only if the external directors cease to meet the statutory
qualifications for their appointment or if they violate their duty of loyalty to the company. In the event the number of external directors is less than two external directors, our board of
directors is required under the Companies Law to call a shareholders meeting to appoint a new external director.
Our external directors are Mr. Itzhak Wulkan and Ms. Orly Garti Seroussi.
External directors may be compensated only in accordance with regulations adopted under the Companies Law.
Following the appointment of Danny Lustiger, on October 28, 2009, a former officer of the Company, as an additional director of the Company, our board of directors does not
have a majority of independent directors and therefore we are not in compliance with the NASDAQ Global Market rules requiring that the board of directors of a listed company contain
a majority of independent directors and we have notified NASDAQ that we will be following home practice rules in this respect. Danny Lustiger has ceased to be an officer of the
Company in November 2007, and therefore, during November 2010 (following the laps of 3 years from the termination of Danny Lustiger's employment) our board of directors is expected
to have the majority of independent directors required pursuant to the NASDAQ Global Market rules.
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Committees of the Board of Directors
Our board of directors has established an audit committee, a compensation committee and an investment committee, as described below.
Audit Committee
The Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of
the company’s business and approval of related party transactions as required by law. An audit committee must consist of at least three members, and include all of the company’s
external directors. However, the chairman of the board of directors, any director employed by the company or providing services to the company on a regular basis, any controlling
shareholder and any relative of a controlling shareholder may not be a member of the audit committee. An audit committee recommends approval of transactions that are deemed
interested party transactions, including directors’ compensation and transactions between a company and its controlling shareholder or transactions between a company and another
person in which its controlling shareholder has a personal interest. An audit committee may not approve an action or a transaction with an officer or director, a transaction in which an
officer or director has a personal interest, a transaction with a controlling shareholder and certain other transactions specified in the Companies Law, unless at the time of approval two
external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted.
In accordance with the Sarbanes-Oxley Act of 2002 and NASDAQ requirements, our audit committee reviews our internal accounting procedures and consults with and
reviews the services provided by our independent auditors.
The rules of NASDAQ currently applicable to foreign private issuers, such as us, require us to establish an audit committee of at least three members, comprised solely of
independent directors. All of the members of the audit committee must be able to read and understand basic financial statements, and at least one member must have experience in
finance or accounting, requisite professional certification in accounting or comparable experience or background. The board has determined that Ms. Orly Garti-Seroussi is an audit
committee financial expert as defined by applicable Securities and Exchange Commission, or the "SEC" or "Commission" regulation. The responsibilities of the audit committee under the
NASDAQ rules include the selection and evaluation of the outside auditors and evaluation of their independence.
The members of the audit committee are Mr. Itzhak Wulkan, Ms. Dana Tamir –Tavor and Ms. Orly Garti-Seroussi. These include our two external directors as required under the
Companies Law, and we believe that all of the members of the audit committee are independent of management, and satisfies the requirements of Companies Law, the SEC’s rules and
NASDAQ rules.
Compensation Committee
The compensation committee, which is comprised of Ms. Orli Garti Seroussi and Mr. Itzik Wulkan, reviews and recommends to the board of directors and in certain cases,
determines, the compensation and benefits of our employees and reviews general policy relating to our compensation and benefits. The compensation committee also administers our
share option plans. Both of the members of the compensation committee have been determined to be independent as defined by the applicable NASDAQ rules.
Investment Committee
Our investment committee, which is comprised of Ms. Orli Garti Seroussi and Mr. Shlomo (Tom) Wyler manages our investments in accordance with guidelines set by our
board of directors.
The Israeli Companies Law requires the board of directors of a public company to appoint an internal auditor pursuant to the audit committee’s proposal. The internal auditor
must satisfy certain independence requirements as required by the law. The role of the internal auditor is to examine, among other things, the compliance of the company's conduct with
applicable law and orderly business procedures. Our internal auditor is Doron Cohen, CPA (Isr.), CIA (USA).
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We currently do not have a nomination committee, and the actions ordinarily taken by such committee are resolved by the majority of our independent directors, in accordance
with the NASDAQ Global Market listing requirements.
Employment Agreements
Each of our executive officers entered into a written employment agreement with us that provides, among other things, that such officers be paid a monthly salary and bonuses.
Each such agreement can be terminated either by us, or by the employee, upon prior notice, which ranges between 30 to 120 days for most of the management team. In the event of a
change of control, termination of employment may result for some of the management members in acceleration of the vesting of options by an additional 12 to 24 months. The
employment agreements also provide that each executive officer will maintain confidentiality of matters relating to us and will not compete with us during the period of the officer’s
employment and for a certain period thereafter.
6.D. EMPLOYEES
As of June 21, 2010, we had 79 employees, including employees in our subsidiaries and regional offices, of whom approximately 17 are part-time employees. The following is a
comparison of the breakdown of our employees by division and location, for the years ended December 31, 2009, 2008 and 2007.
Division
2007
December 31,
2008
2009
US
Israel
US
Israel
US
Israel
Research & Development
Sales and Technical Marketing
Marketing
Operations
General and Administrative, Finance and Human
Resources
Total
(1) This number includes 8 employees in Asia.
(2) This number includes 8 employees in Asia.
(3) This number includes 8 employees in Asia.
-
8
2
3
3
16
132
48
23(1)
7
24
14
116
-
12
3
-
3
18
114
39
19(2)
7
19
12
96
-
10
1
-
2
13
94
29
16(3)
6
17
13
81
The number of employees as of December 31, 2009 had continuously decreased from December 31, 2008 and December 31, 2007. The decrease is mainly the result of the
reduction in work-force implemented across all departments in the Company during the quarters ended March 31, 2009 and December 31, 2008.
In connection with the sale of the assets and liabilities related to our Video Solutions Business to Vitec, we have provided a dismissal notice to approximately 72 employees
(out of the 79 employees employed by the Company as of the date of this annual report) whose employment shall terminate upon completion of their respective prior notice period.
Some of our employees were offered employment by Vitec.
Certain provisions of Israeli law and of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (the Israeli federation of employers’ organizations) apply to our Israeli employees directly or by an extension order of the Israeli Ministry of Industry, Trade and
Labor. These provisions principally concern the maximum length of the workday and the workweek, minimum wages, recuperation payments, travel expenses, determination of
severance payment and other conditions of employment. Furthermore, under these provisions, the wages of most of our employees are automatically adjusted in accordance with the
cost of living adjustments, as determined on a nationwide basis and pursuant to agreements with the Histadrut based on changes in the Israeli consumer price index, which was
extended by an extension order. The amounts and frequency of such adjustments are modified from time to time.
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Israeli law generally requires the payment by Israeli employers of severance payment upon the retirement or death of an employee or upon termination of employment by the
employer or, in certain circumstances, by the employee. We currently fund our ongoing severance obligations by making monthly payments for insurance policies. In addition,
according to the Israeli National Insurance Law, Israeli employees and employers are required to pay specified amounts to the National Insurance Institute, which is similar to the United
States Social Security Administration. These contributions entitle the employees to benefits in periods of unemployment, work injury, maternity leave, disability, reserve military service
and bankruptcy or winding-up of the employer. Since January 1, 1995, such amounts also include payments for national health insurance payable by employees. A majority of our full-
time employees are covered by general and/or individual life and pension insurance policies providing customary benefits to employees, including retirement and severance benefits.
The Israeli employment courts have restricted substantially non-competition provisions in employment agreements.
6.E. SHARE OWNERSHIP
As of June 21, 2010, our current directors and executive officers (12 persons) beneficially owned an aggregate of 7,363,708 ordinary shares of our Company of which
311,000 shares are issuable upon exercise of options that may be exercisable within 60 days of June 21, 2010. Such number excludes 14,000 ordinary shares held by a trustee for the
benefit of directors and executive officers under the Company’s incentive plan which have not vested as of June 21, 2010 or 60 days thereafter and award their holder no voting and
equity rights. Other than Shlomo (Tom) Wyler, all of our directors or executive officers hold less than 1% of our shares. See "Item 7.A. Major Shareholders" for more information
regarding Mr. Wyler's holdings.
Incentive Plans
Since 1990, we have granted options to employees and directors to purchase ordinary shares at exercise prices ranging from $0.17 to $32.00. As of June 21, 2010, options and
warrants to purchase 991,600 of our ordinary shares were outstanding, with exercise prices ranging from $1.192 to $6.625 per share. As of June 21, 2010, 731,592 of the options described
above have vested or are exercisable within 60 days of such date. The expiration date of the aforementioned options is generally 7 years from the date of their grant. As of December 31,
2008 and 2009, the number of options outstanding and reserved for issuance under our plans was 3,440,486 and 3,157,588, respectively. The following table shows the number of
options outstanding and reserved for issuance under each of our incentive plans, as of June 21, 2010 or within 60 days thereafter.
Plan
1999 Plans
2001 Non-statutory share option plan
Total options
2006 Israeli Incentive Compensation Plan
Total shares
Plan
Number of options
outstanding
Number of options
reserved for
issuance
939,600
52,000
991,600
2,039,115
391,060
2,229,821
Number of shares
outstanding
Number of shares
reserved for
issuance
14,000
14,000
112,450
112,450
In connection with the sale of our Video Solutions Business to Vitec, we have provided a dismissal notice to most of our employees which are to terminate their employment
with us upon completion of their respective notice period. Following such termination and in light of our share price levels, we expect that upon consummation of the APA with Vitec,
approximately 497,100 options shall return to our pool of options reserved for issuance.
The following is a description of our incentive plans currently in effect.
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1999 Plans
In January 1999, our shareholders approved the adoption of an Israeli option plan, or the 1999 Israeli Plan, and a U.S. option plan, or the 1999 U.S. Plan, collectively the "1999
Plans" both plans have a joint pool of underlying shares to be granted thereunder. The 1999 Plans were amended from time to time to include different tax tracks. The purpose of the
1999 Plans is to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of our business. In
December 1999, our board of directors adopted a resolution to amend the 1999 Plans in a manner that as of April 1, 2000, the number of shares made available for grant under the 1999
Plans will be automatically increased annually, to equal 5% of our outstanding share capital at the relevant time. As of June 21, 2010, or within 60 days thereafter, an aggregate of
2,039,115ordinary shares has been reserved for issuance under this plan, and 939,600 were granted and are outstanding. Unless specifically changed for a certain grantee, options vest
monthly over a period of four years, starting one year after the date of grant, subject to the continued employment of the grantee. The exercise price of the options is determined by our
board of directors, subject to limitations. Generally, options granted under each of the 1999 Plans will have a term of no more than seven years from the date of grant. All options are
subject to earlier termination upon termination of the grantee’s employment or other relationship with us, generally no less than three months from termination. We may make certain
exceptions, from time to time, in the vesting and expiration terms of options granted to certain grantees.
2001 Non-statutory Share Option Plan
In April 2001, our board of directors approved the adoption of the 2001 Non-statutory Share Option Plan, the purpose of which is to attract and retain the best available
personnel, to provide additional incentive to employees and consultants and to promote the success of our business. The options to be granted under the plan are limited to non-
statutory options, thus no incentive stock options are granted under the plan. In addition, we grant options only to employees pursuant this plan, thus excluding officers and directors
from the plan. As such, we do not need shareholder approval of this plan under U.S. laws or applicable NASDAQ rules. As of June 21, 2010, or within 60 days thereafter, an aggregate of
391,060ordinary shares has been reserved for issuance under this plan, and 52,000 were granted and are outstanding. The plan otherwise has terms similar to those contained under the
1999 U.S. Plan
2006 Israeli Incentive Compensation Plan
In May 2006, our board of directors approved the adoption of the 2006 Israeli Incentive Compensation Plan, or the 2006 Plan, the purpose of which is to secure the benefits
arising from ownership of share capital by our employees, officers and directors who are expected to contribute to the Company’s future growth and success. The 2006 Plan provides
for the grant of options, restricted shares and restricted share units in accordance with various Israeli tax tracks. We currently use the 2006 Plan for the grant of restricted shares only.
The restricted shares are granted for no consideration and with a vesting schedule of two years (50% each year). The restricted shares are granted in accordance with the Israeli capital
gains tax track. Termination of employment of a grantee for any reason will result in the forfeiture of such grantee’s unvested restricted shares. All restricted shares are subject to earlier
termination upon termination of the grantee’s employment or other relationship with us, generally no less than 90 days from termination. We may make certain exceptions, from time to
time, in the vesting and expiration terms of the securities granted to certain grantees. As of June 21, 2010 or within 60 days thereafter, an aggregate of 112,450 ordinary shares has been
reserved for issuance under the 2006 Plan, and 14,000 were granted and are outstanding.
NASDAQ Listing Rules permit foreign private issuers to follow home country practices in regard to certain requirements, including the requirement to obtain shareholder
approval in connection with the establishment of certain incentive plans. In June and September 2006, we notified NASDAQ that we elected to follow home practices with regard to the
adoption of, and the amendment to, the 2006 Plan. Accordingly, the adoption of, and the amendment to, the 2006 Plan were not approved by our shareholders.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. MAJOR SHAREHOLDERS
The following table sets forth certain information known to the Company regarding the beneficial ownership of our outstanding ordinary shares as of June 21, 2010 of (i) each
person or group known by us to beneficially own 5% or more of the outstanding ordinary shares and (ii) the beneficial ownership of all officers and directors as a group, in each case as
reported by such persons:
Name of Beneficial Owner
Shlomo (Tom) Wyler(2)
Arthur Mayer – Sommer(3)
Prescott Group Capital Management, L.L.C. (4)
Shareholding of all directors and officers as a group (12 persons)(5)
No. Of Ordinary
Shares
Beneficially Owned(1)
7,089,934
1,200,000
2,006,698
7,363,708
Percentage of
Ordinary Shares
Beneficially Owned
42.62
7.26
12.13
43.71
(1) Number of shares and percentage ownership is based on 16,536,708 ordinary shares outstanding as of June 21, 2010. Such number excludes: (i) 347,573 ordinary shares held by us
or for our benefit, and (ii) 14,000 ordinary shares granted under our 2006 Plan held by a trustee for the benefit of the grantees thereunder, both have no voting or equity rights as of
the date hereof or within 60 days thereafter. Beneficial ownership is determined in accordance with rules of the SEC and includes voting and investment power with respect to such
shares. Shares subject to options that are currently exercisable or exercisable within 60 days of June 21, 2010 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage ownership of such person, but are not deemed to be outstanding and to be beneficially owned for the
purpose of computing the percentage ownership of any other person. All information with respect to the beneficial ownership of any principal shareholder has been furnished by
such shareholder and, unless otherwise indicated below, we believe that persons named in the table have sole voting and sole investment power with respect to all the shares
shown as beneficially owned, subject to community property laws, where applicable. The shares beneficially owned by the directors include the ordinary shares owned by their
family members to which such directors disclaim beneficial ownership.
(2) Mr. Shlomo (Tom) Wyler currently serves as a President, Chief Executive Officer and a member in our Board of Directors. The information is based on Amendment No. 10 to
Schedule 13D filed by Mr. Wyler on September 10, 2009. Includes 6,983,934 ordinary shares and 100,000 ordinary shares issuable upon exercise of option exercisable within 60 days
of June 21, 2010 with an exercise price of $6 per option and expiration date of December 2011 and 6,000 ordinary shares held by a trustee for the benefit of Mr. Shlomo (Tom) Wyler
under our 2006 Plan.
(3) To our knowledge, the information is accurate as of June 21, 2010 and is based on the website of NASDAQ online whose address is www.nasdaq.net.
(4) The information is accurate as of December 31, 2009 and based on Amendment No. 2 to Schedule 13G filed with the SEC by, among others, Prescott Group Capital Management,
L.L.C. ("Prescott Capital") on February 12, 2010. The number of shares consists of 2,006,098 ordinary shares of the Company purchased by Prescott Group Aggressive Small Cap,
L.P., an Oklahoma limited partnership ("Prescott Small Cap"), Prescott Group Aggressive Small Cap II, L.P., an Oklahoma limited partnership ("Prescott Small Cap II" and together
with Prescott Small Cap, the "Small Cap Funds") through the account of Prescott Group Aggressive Small Cap Master Fund, G.P., an Oklahoma general partnership ("Prescott
Master Fund"), of which the Small Cap Funds are general partners. Prescott Capital serves as the general partner of the Small Cap Funds and may direct the Small Cap Funds, the
general partners of Prescott Master Fund, to direct the vote and disposition of the 2,006,098 ordinary shares of the Company held by the Prescott Master Fund. As the principal of
Prescott Capital, Mr. Frohlich may direct the vote and disposition of the 2,006,098 ordinary shares of the Company held by Prescott Master Fund.
(5) Includes 7,052,708 ordinary shares and 311,000 ordinary shares issuable upon exercise of options exercisable within 60 days of June 21, 2010. Excludes 14,000 ordinary shares held
by a trustee for the benefit of our directors and executive officers under our 2006 Plan, which have not vested on June 21, 2010 or within 60 days thereafter and do not acquire any
voting or equity rights.
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Significant changes in the ownership of our shares.
The following table specifies significant changes in the ownership of our shares held by Shlomo (Tom) Wyler. This information is based on Schedules 13D filed by Shlomo
(Tom) Wyler during the period beginning on January 1, 2007, regarding ownership of our shares, and to date:
Beneficial Owner –
Shlomo (Tom) Wyler
Shlomo (Tom) Wyler
Shlomo (Tom) Wyler
Date of filing
June 25, 2008
August 14, 2008
August 13, 2009
No. Of Shares
Beneficially Held
5,218,739
6,761,448
7,285,934*
* Including 200,000 ordinary shares issuable upon exercise of option which have expired on December 5, 2009.
The following table specifies significant changes in the ownership of our shares by MKM Longboat Capital Advisors LLP. This information is based on Schedule 13G filed by
MKM Longboat Capital Advisors LLP during the period beginning on January 1, 2007, regarding ownership of our shares, and to date:
Beneficial Owner –
MKM Longboat Capital Advisors LLP
Date of filing
June 27, 2007
February 11, 2008
February 2, 2009
No. Of Shares
Beneficially Held
715,300
1,346,418
-
The following table specifies significant changes in the ownership of our shares by Prescott Group Capital Management, L.L.C. This information is based on Schedule 13G filed
by Prescott Group Capital Management, L.L.C. during the period beginning on January 1, 2007, regarding ownership of our shares, and to date:
Beneficial Owner –
Prescott Group Capital Management, L.L.C.
Date of filing
February 14, 2008
January 6, 2009
February 12, 2010
All of our shares have the same voting rights.
No. Of Shares
Beneficially Held
1,362,192
2,004,698
2,006,098
On June 21, 2010, there were approximately 63 registered shareholders of our ordinary shares. As of such date, 43 registered holders in the United States hold approximately
81.15% of our ordinary shares. To the best of our knowledge, except as described above, we are not owned or controlled directly or indirectly by any government or by any other
corporation. We are not aware of any arrangement, the operation of which may at a subsequent date result in a change in control of the company.
7.B. RELATED PARTY TRANSACTIONS
For a description of the insurance, indemnification and exemption granted to our directors and officers, see "Item 6.B. Compensation" above.
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For a description of the grant of options to our directors and officers, see "Item 6.E. Share Ownership", above. In addition, each member of our board of directors is paid an
annual fee of $18,000 for his/her service as a director.
On November 8, 2006 our shareholders approved the reimbursement of expenses to Shlomo (Tom) Wyler, our President, Chief Executive Officer and then Executive Chairman of
our board of directors, who is also considered our controlling shareholder in an amount not to exceed $50,000 for each year beginning in 2006, all on account of performing his duties
towards us.
On December 20, 2007, our shareholders approved an employment agreement between Optibase and Mr. Shlomo (Tom) Wyler with respect to Mr. Wyler’s service as Chief
Executive Officer of the Company. Under the agreement, Mr. Wyler will continue to serve as Chief Executive Officer of the Company in consideration for a gross monthly payment of
NIS 40,000. In addition, Mr. Wyler will be entitled to managers' insurance, educational fund (keren hishtalmut), 24 days annual vacation, sick leave and 10 days replenishment fees (dmey
havraa). The Company has also undertaken to provide Mr. Wyler with a telephone, facsimile, mobile phone, internet connection, laptop and printer and bear all installation costs and all
expenses related thereto. The agreement further provides that Mr. Wyler shall be entitled to a one-time bonus in the amount of $10,000 upon the execution of the employment
agreement. In addition, our board of directors, at its sole discretion, may grant Mr. Wyler an annual bonus for each year commencing in 2008 (for the year 2007) which shall not exceed
twice Mr. Wyler’s monthly salary. The agreement is for a three-year term commencing retroactively on October 1, 2007. Any party to the agreement may terminate it by providing the
other party with a 4-month advance written notice. At the Company's discretion, Mr. Wyler shall be obligated to continue working during the first two months of such 4-month advance
notice period. During the next two months Mr. Wyler shall be free to practice any other business without the receipt of the Company's approval. The Company may elect to pay Mr.
Wyler a one time payment for such advance notice period. Notwithstanding the above, the Company may terminate the agreement and Mr. Wyler's employment immediately for Cause,
as such term is defined in the agreement. See also the discussion regarding our relationships with Mobixell and V.Box under "Item 4.A. History and Development of the Company"
above.
In June 2008, we issued, in a private placement, 2,816,901 of our ordinary shares to Mr. Shlomo (Tom) Wyler, the President, Chief Executive Officer and then Executive Chairman
of the board of directors, who is also considered as our controlling shareholder, in consideration for $5 million in cash. We undertook to make our best efforts to register for resale the
shares under the Securities Act within six months of the issuance date. On August 25, 2008, Mr. Shlomo (Tom) Wyler agreed to extend such period by an additional twenty four months
as of such date. On October 19, 2009 and following such approval by our audit committee and board of directors, our shareholders approved the registration for resale under the
Securities Act of 4,069,447 ordinary shares NIS 0.13 par value each, which constitute all the ordinary shares of the Company held, as of the date of this proxy statement, by Mr. Wyler. It
has also been approved that we will bear the expenses relating to the preparation and filing of such registration statement. To date, such shares have not been registered for resale
under the Securities Act.
In connection with our entering into a joint venture to acquire 49.5% of the beneficial interest in the office building located at 485 Lexington Avenue in Manhattan, New York,
see Item 10.C "Material Contracts", our shareholders approved the provision of certain undertakings by Mr. Shlomo (Tom) Wyler, our Chief Executive Officer and President of the
Company, who is deemed also the Company's controlling shareholder. The undertakings include a limited guarantee and indemnity for exceptional events by Mr. Wyler in favor of the
bank servicing the loan for the property. Such events include, but are not limited to, fraud, bankruptcy, dissolution, reorganization and liquidation proceedings, prohibition on transfer,
and certain acts of misapplication and misappropriation. Mr. Wyler and the Company entered into a reimbursement and indemnification agreement with Gilmor and its principles, in order
to allocate their maximum obligations for responsibility under these guarantees and indemnities. Such undertakings have not yet been provided by Mr. Wyler. For information on the
legal proceedings in connection with the property, see Item 8. "Financial Information - Legal Proceedings".
On October 19, 2009, our shareholders approved the compensation of Mr. Alex Hilman, a director of the Company, who was appointed on September 1, 2009 as Executive
Chairman of the Board of Directors. The principal terms of such compensation are as follows: a monthly payment of NIS 20,000 plus applicable value added tax, against the receipt of a
tax invoice. The Company will also reimburse Mr. Hilman of his reasonable expenses directly incurred by him in the performance of his duties against the production of appropriate
receipts. In addition, Mr. Hilman was granted on October 19, 2009, 100,000 options exercisable into 100,000 ordinary shares NIS 0.13 nominal value each of the Company under the
Section 102 of the Israeli Tax Ordinance, through the capital gains tax track. The options shall vest over a period of four years in equal parts, and will be exercisable until their 10th
anniversary, subject to an exercise price of $1.192. All other terms of the options are as stated in the Company's 1999 Israeli Share Option Plan.
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On May 6, 2010 our shareholders approved the compensation of Mr. Danny Lustiger as a director of the Company. Mr. Lustiger is entitled to an annual amount of US $18,000,
plus reimbursement of expenses, with a retroactive effect as of the date Mr. Lustiger was appointed as a director of the Company (i.e. October 28, 2009), 50,000 options exercisable into
50,000 ordinary shares NIS 0.13 nominal value each of the Company under Section 102 of the Israeli Tax Ordinance, through the capital gains tax track. The options shall vest over a
period of four years in four equal parts, and will be exercisable until their 10th anniversary subject to an exercise price of $2. All other terms of the options are as stated in the Company's
1999 Israeli Share Option Plan). Mr. Lustiger is also entitled to 4,000 restricted shares, which shall vest over two years in two equal parts, and which shall be granted pursuant to the
Company's 2006 Israeli Incentive Compensation Plan.
We lend unsubstantial amounts, from time to time, to our employees, who are not officers, which payments are not deemed benefits by Israeli tax authorities.
7.C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
8.a. Consolidated statements and other financial information
See Item 18 for a list of financial statements filed as part of this annual report.
Legal proceedings
In September 2005, we were served with a lawsuit filed by Vsoft Ltd., or Vsoft, a company that is undergoing liquidation proceedings and which has claimed that during 2002
we negotiated with Vsoft in bad faith regarding a potential purchase of its share capital, which led to Vsoft’s entering into bankruptcy proceedings. Vsoft demanded damages in the
amount of $2,129,000 as well as the payment of reimbursement of expenses, legal fees and applicable VAT. On January 1, 2006, we filed a motion to dismiss the lawsuit based on our
claim that Vsoft’s receiver did not approve the lawsuit as determined by the liquidation court. As of June 23, 2010, our motion to dismiss was denied. We believe, based on the facts
known to us and based on the advice of our external legal advisors as of this annual report, that though the claim for damages is without merit, the court may rule otherwise, and as such
we have provided an amount which we believe would cover the risk associated with that lawsuit.
On February 2, 2010, Mazal 485 LLC, a company whose beneficial interest is jointly owned by us and by Gilmore USA LLC ("Mazal"), filed a lawsuit against SL Green Realty
Corp. and several of its subsidiaries ("SL Green") regarding the Purchase Agreement for interests in 485 Lexington Avenue. On January 7, 2010, we received a notice from the seller of
485 Lexington Avenue stating that the Purchase Agreement is terminated. The lawsuit alleges that SL Green breached material terms of the Purchase Agreement and breached its
covenant of good faith and fair dealing toward Mazal 485 LLC. The lawsuit seeks specific performance to enforce SL Green's obligations under the Purchase Agreement and an
abatement of the purchase price to compensate Mazal 485 LLC for damages incurred as a result of SL Green’s breaches. On March 16, 2010, SL Green filed a motion for an order
dismissing Mazal's claims, which was heard on June 2, 2010. On June 23, 2010, SL Green's motion to dismiss Mazal's request for performance of the sale-purchase agreement, was
granted. The court directed SL Green to answer to Mazal's remaining damage claims, while a conference was set for September 8, 2010. The case now proceeds with discovery on
Mazal's remaining claims, seeking damages for failure to perform, which are limited by the Purchase Agreement to Mazal's reasonable out-of-pocket costs and expenses (including
reasonable attorney's fees) incurred in connection with the agreement.
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There is no assurance that the abovementioned legal proceedings will succeed and that we will be granted the sought performance of the transaction and/or damages. For
further information see Item 10.C "Material Contracts".
There are several legal proceedings initiated against us in the ordinary course of business, and we do not believe that the outcome of these proceedings, if adverse to us,
individually or in the aggregate, will have a significant effect on our financial position or profitability.
Dividend Policy
We have not declared or paid any cash dividends on our ordinary shares in the past. We do not expect to pay cash dividends on our ordinary shares in the foreseeable future
and intend to retain our future earnings, if any, to finance the development of our business.
A dividend policy, if adopted, will be determined by our board of directors and will depend, among other factors, upon our earnings, financial condition, capital requirements,
the impact of the distribution of dividends on our financial condition and tax liabilities, and such other conditions as our board of directors may deem relevant. Under Israeli law, an
Israeli company may pay dividends only out of its retained earnings as determined for statutory purposes. Under our articles of association the distribution of dividends will be made by
a resolution of the Company’s board of directors. See "Description of Share Capital" and "Israeli Taxation and Investment Programs".
Cash dividends paid by an Israeli company are normally subject to a withholding tax, except for dividends paid to an Israeli company in which case no tax is withheld unless
the dividend is in respect of earnings from an Approved Enterprise. In addition, because we have received certain benefits under Israeli laws relating to Approved Enterprises, the
payment of dividends by us may be subject to certain Israeli taxes to which we would not otherwise be subject. The tax-exempt income attributable to the Approved Enterprise can be
distributed to shareholders without subjecting us to taxes only upon our complete liquidation. If we decide to distribute cash dividends out of income that has been exempted from tax,
the income out of which the dividend is distributed will be subject to corporate tax at a rate between 10% and 25%. See "Israeli Taxation and Investment Programs". In the event that
cash dividends are declared in the future, such dividends will be paid in NIS or in foreign currency subject to any statutory limitations. Under current Israeli regulations, any dividends
or other distributions paid in respect of ordinary shares will be freely repatriable in such non-Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that
Israeli income tax has been paid on, or withheld from, such payments. Because exchange rates between the NIS and the dollar fluctuate continuously, a U.S. shareholder will bear the
risks of currency fluctuations during the period between the date such dividend is declared and paid by us in NIS and the date conversion is made by such shareholder into U.S. dollars.
ITEM 8.B. SIGNIFICANT CHANGES
On March 1, 2010 the company’s Luxembourgish subsidiary (the Company) entered into an Option Agreement with a Cypriot company, Chessell Holdings Limited With
respect to the commercial building acquired by the Company in October, 2009, in Rümlang, Switzerland. Through its beneficial owner, Chessell Holdings introduced Optibase to the
Rümlang property and facilitated Optibase’s acquisition and financing of the property. Under the Option Agreement, the Company granted Chessell Holdings an option to purchase
twenty percent (20%) of the share capital of the Company. Chessell Holdings undertook to pay a purchase price for the option of CHF 315,000 for the option. The exercise price under
the Option Agreement is calculated based on Optibase’s acquisition costs for the Rümlang Property plus interest and an adjustment for proceeds that are distributed to the Company’s
shareholders. The shares that would be issued to Chessell Holdings upon exercise of the option will not have voting rights and would be subject to transfer restrictions in favor of
Optibase.
In March 2010, Mobixell networks had acquired a company and paid part of the acquisition costs with newly issued shares. As a result, the Company’s holding in Mobixell on
a fully diluted basis had decreased from 4.34% to 3.71%.
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On March 16, 2010, the Company signed an APA (Assets Purchase Agreement) Optibase Technologies Ltd., a wholly owned subsidiary of VITEC Multimedia ("Vitec")
pursuant to which Optibase Ltd. and its subsidiary Optibase Inc. (collectively, "Optibase") will sell their entire video business to Vitec (the "Business" and the "Transaction",
respectively). Under the terms of the transaction, which was approved by the Board of Directors of both companies, in consideration for the sale of the Business, Vitec will pay the
Company an aggregate amount of US $8 million in cash of which US $1 million will be deposited in escrow for a 2-year period as a security, inter alia, for breach or material inaccuracy
relating to Optibase's representations and warranties. In addition, Optibase and Vitec agreed on an earn-out mechanism pursuant to which 45% of Vitec's revenues deriving from the
Business exceeding $14 million in the year following the closing of the Transaction will be paid to Optibase. Consummation of the Transaction is subject to the fulfillment of certain
conditions precedent standard for transactions of this nature. Closing of the Transaction is expected to occur on June 30, 2010, after the release of this annual report. Upon signing of
the Transaction, Vitec deposited US $500,000 in escrow to be paid to Optibase if closing does not take place within a specific period of time from signing, subject to certain limited
circumstances, principally relating to non fulfillment of certain closing conditions by Optibase, in which case, such funds will be returned to Vitec.
ITEM 9. THE OFFER AND LISTING
9.A. OFFER AND LISTING DETAILS
Our ordinary shares are traded on The NASDAQ Global Market under the symbol OBAS since our initial public offering on April 7, 1999. The following table sets forth, for the
periods indicated, the high and low closing sale prices per share of our ordinary shares as reported by The NASDAQ Global Market.
Year
2005
2006
2007
2008
2009
2008
2009
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter (until June 21, 2010)
Most Recent Six Months
December 2009
January 2010
February 2010
March 2010
April 2010
May 2010
June 2010 (until June 21, 2010)
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Nasdaq
High
Low
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
High
High
High
6.69
5.01
4.52
2.73
1.50
2.73
2.2
1.83
1.34
1.29
1.50
1.35
1.45
1.43
1.55
1.45
1.38
1.25
1.43
1.55
1.49
1.43
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Low
Low
Low
4.49
2.62
2.52
0.74
0.93
1.61
1.59
1.14
0.74
0.93
1.02
1.05
1.13
1.20
1.35
1.27
1.22
1.2
1.22
1.37
1.35
1.39
We listed our ordinary shares for trade on the TASE, on August 6, 2007. On September 23, 2008, we decided to delist our ordinary shares from trade on the TASE. The delisting
of the Company's ordinary shares from trade on the TASE became effective on September 28, 2008 and the last day for trading of the Company's ordinary shares on the TASE was
September 24, 2008.
On June 21, 2010, the reported closing sale price of our ordinary shares on The NASDAQ Global Market, was $1.42 per share.
9.B PLAN OF DISTRIBUTION
Not applicable.
9.C MARKETS
Our ordinary shares have been listed on The NASDAQ Global Market since April 7, 1999, under the symbol "OBAS".
9.D SELLING SHAREHOLDERS
Not applicable.
9.E DILUTION
Not applicable.
9.F EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. SHARE CAPITAL
Not applicable.
10.B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Purposes and Objects of the Company
We are a public company registered under the Companies Law as Optibase Ltd., registration number 52-0037078.
Pursuant to our articles of association, our objectives are to engage in any lawful business and our purpose is to act pursuant to business considerations to make profits.
Our articles of association also state that we may contribute a reasonable amount for an appropriate cause, even if the contribution is not within the framework of our business
considerations.
The Powers of the Directors
The power of our directors to vote on a proposal, arrangement or contract in which the director is interested is limited by the relevant provisions of the Companies Law. In
addition, the power of our directors to vote on compensation to themselves or any members of their body is limited in that such decision requires the approval of the audit committee,
the board of directors and the shareholders at a general meeting, see "Approval of Certain Transaction" below.
The powers of our directors to borrow are not limited, except in the same manner as any other transaction by the company.
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Rights Attached to Shares
Our registered share capital is NIS 3,900,000 divided into a single class of 30,000,000 ordinary shares, par value NIS 0.13 per share, of which 16,914,281 ordinary shares were
outstanding as of June 21, 2010. All outstanding ordinary shares are validly issued, fully paid and non-assessable. The rights attached to the Ordinary Shares are as follows:
Dividend rights
Holders of Ordinary Shares are entitled to the full amount of any cash or share dividend subsequently declared. The Board of Directors may propose a dividend only out of
profits, in accordance with the provisions of the Companies Law. Declaration of a dividend requires the approval of our board of directors. Please see "Item 10.E. Taxation" below.
One year after a dividend has been declared and is still unclaimed, the board of directors is entitled to invest or utilize the unclaimed amount of dividend in any manner to our
benefit until it is claimed. We are not obligated to pay interest or linkage differentials on an unclaimed dividend.
Voting rights
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights may be affected by the grant of
any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. Currently there are no shares of capital stock outstanding with
special voting rights. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent, in the
aggregate, at least thirty three and one third percent (33.3%) of our voting rights. In the event that a quorum is not present within half an hour of the scheduled time, the shareholders'
meeting will be adjourned to the same day of the following week, at the same time and place, or such time and place as the board of directors may determine by a notice to the
shareholders. If at such adjourned meeting a quorum is not present at the time of opening of such meeting, two shareholders, at least, present in person or by proxy, shall constitute a
quorum.
An ordinary resolution, such as a resolution for the election of directors, or the appointment of auditors, requires the approval by the holders of a majority of the voting rights
represented at the meeting, in person, by proxy or through a voting instrument and voting thereon. Under our articles of association, if a resolution to amend the articles of association
is recommended by our board of directors, such recommended resolution’s adoption in a general meeting of the shareholders requires an ordinary majority. In any other case, such a
resolution requires approval of a special majority of more than three quarters of the votes of the shareholders entitled to vote themselves, by proxy or through a voting instrument.
The directors are appointed by decision of an ordinary majority at a general meeting. The directors have the right at any time, in a resolution approved by at least a majority of
our directors, to appoint any person as a director, subject to the maximum number of directors specified in our articles of association, to fill in a place which has randomly been vacated,
or as an addition to the board of directors. Any such director so appointed shall hold office until the next annual general meeting and may be reelected.
Under our articles of association our directors are elected by an ordinary majority of the shareholders at each duly convened annual meeting, and they serve until the next
annual meeting, provided that external directors shall be elected in accordance with the Israeli Companies Law. In each annual meeting the directors that were elected at the previous
annual meeting are deemed to have resigned from their office. A resigning director may be reelected.
Under the NASDAQ corporate governance rules, foreign private issuers are exempt from many of the requirements if they instead elect to be exempted from such requirements,
provided they are not prohibited by home country practices and disclose where they have elected to do so.
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Rights in the Company’s profits
All of our ordinary shares have the rights to share in our profits distributed as a dividend and any other permitted distribution.
Rights in the event of liquidation
All of our ordinary shares confer equal rights among them with respect to amounts distributed to shareholders in the event of liquidation.
Changing Rights Attached to Shares
According to our articles of association, our share capital may be divided into different classes of shares or the rights of such shares may be altered by an ordinary majority
resolution passed by the general meetings of the holders of each class of shares separately, or after obtaining the written consent of the holders of all of the classes of shares. As of the
date hereof, we only have one class of shares.
Annual and Extraordinary Meetings
Our board of directors must convene an annual meeting of shareholders every year by no later than the end of fifteen months from the last annual meeting. Notice of at least
twenty-one days prior to the date of the meeting is required. An extraordinary meeting may be convened by the board of directors, as it decides or upon a demand of any two directors
or 25% of the directors, whichever is lower, or by one or more shareholders holding in the aggregate at least 5% of the voting rights in the Company. Where the board of directors is
requisitioned to call a special meeting, it shall do so within twenty-one days, for a date that shall not be later than thirty-five days from the date on which the notice of the special
meeting is published. Notice of a general meeting shall be given to all shareholders entitled to attend and vote at such meeting. No separate notice is to be given to registered
shareholders of the Company. Notices may be provided by the Company in person, in mail, transmission by fax or in electronic form. A notice to a shareholder may alternatively be
served, as general notice to all shareholders, in accordance with the rules and regulations of any applicable securities authority with jurisdiction over the Company or in accordance
with the rules of any stock market upon which the Company's shares are traded.
Limitations on the Rights to Own Securities in the U.S.
Our memorandum and articles of association do not restrict in any way the ownership of our shares by non-residents of Israel, and neither the memorandum and articles of
association nor Israeli law restricts the voting rights of non-residents of Israel, except that under Israeli law, any transfer or issue of shares of a company to a resident of an enemy state
of Israel is prohibited and shall have no effect, unless authorized by the Israeli Minister of Finance.
Limitations on Change in Control and Disclosure Duties
Our memorandum and articles of association do not restrict the change of control nor do they impose any disclosure duties beyond the requirements set out in Israeli law. For
restriction of change of control provision under Israeli law, see "Item 3.D. Risk Factors", under the heading "Risks Relating to Operations in Israel – Anti-takeover Provisions" above.
Changes in Our Capital
Changes in our capital are subject to the approval of the shareholders at a general meeting by an ordinary majority of shareholders participating and voting in the general
meeting.
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Fiduciary Duty and Duty of Care of Directors and Officers
The Companies Law codifies the duties directors and officers owe to a company. An "Officer" includes a company’s directors, general manager, general business manager,
executive vice president, vice president, any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title and other managers
directly subordinate to the general manager. The directors’ and officers’ principal duties to the company are a duty of care and a fiduciary duty to act in good faith for the company’s
benefit which include:
v
the avoidance of any conflict of interest between the director’s or officer’s position with the company and any other position he or she fulfills or with his or her personal affairs;
v
the avoidance of any act in competition with the company’s business;
v
the avoidance of exploiting any of the company’s business opportunities in order to gain a personal advantage for himself or for others; and
v
the disclosure to the company of any information and documentation relating to the company’s affairs obtained by the director or officer due to his or her position with the
company.
The Companies Law requires that directors, officers or a controlling shareholder of a public company disclose to the company any personal interest that he or she may have,
including all related material facts or documents in connection with any existing or proposed transaction by the company. The disclosure must be made without delay and no later than
the first board of directors meeting at which the transaction is first discussed.
Approval of Certain Transactions
Generally, under the Companies Law, engagement terms of directors, including the grant of an exemption from liability, purchase of directors’ and officers’ insurance, or grant
of indemnification (whether prospective or retroactive) and engagement terms of such director with a company in other positions require the approval of the audit committee, the board
of directors and the shareholders of the company. In addition, transactions between a public company and its director or officer, or a transaction between such company and other
person in which such director or officer has a personal interest must be approved by such company’s board of directors, and if such transaction is considered an extraordinary
transaction (as defined below) it must receive the approval of such company’s audit committee as well.
The Companies Law also requires that any extraordinary transaction between a public company and its controlling shareholder or an extraordinary transaction between such
company and other person in which such company’s controlling shareholder has a personal interest must be approved by the audit committee, the board of directors and the
shareholders of the company by an ordinary majority, provided that (i) such majority vote at the shareholders meeting shall include at least one third (1/3) of the total votes of
shareholders having no personal interest in the transaction, participating at the voting (excluding abstaining votes); or (ii) the total number of votes of shareholders mentioned in clause
(i) above who voted against such transaction does not exceed one percent (1%) of the total voting rights in the company. An "extraordinary transaction" is defined in the Companies
Law as any of the following: (i) a transaction not in the ordinary course of business; (ii) a transaction that is not on market terms; or (iii) a transaction that is likely to have a material
impact on the company’s profitability, assets or liability.
The Companies Law further provides that the engagement terms of a controlling shareholder with the company, either as an officer or an employee, must also be approved by
such company’s audit committee, board of directors and general meeting by the special majority described above.
The Companies Law prohibits any director who has a personal interest in a matter to participate in the discussion and voting pertaining to such matter in the company’s board
of directors or audit committee except for in circumstances when the majority of the board of directors’ have a personal interest in the matter and then such matter must also be
approved by the company’s shareholders.
10.C. MATERIAL CONTRACTS
Voting Agreement with Harmonic
On December 23, 2008, Scopus entered into a definitive agreement with Harmonic, pursuant to which Harmonic undertook to acquire Scopus by way of merger pursuant to
which each shareholder of Scopus is entitled to receive $5.62 in cash per each outstanding share of Scopus. At the time of such agreement, we held approximately 36% of Scopus’
outstanding share capital. In connection with the said transaction, we entered into a voting agreement with Harmonic pursuant to which we undertook to vote in favor of the merger and
the transactions contemplated by the merger agreement. We have also agreed to grant to Harmonic a proxy and appointed certain Harmonic officers as its proxy to vote in favor of the
merger. On March 12, 2009, following the closing of the merger agreement between Scopus and Harmonic, we disposed of our entire holding in Scopus shares consisting of 5.1 million
shares representing 36.34% of Scopus then issued share capital for a total consideration of $28.7 million. As a result, during the first quarter ended March 31, 2009, we recorded other
income of $4.8 million, net of equity in losses.
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Private Placement to Shlomo (Tom) Wyler
In June 2008, we issued in a private placement 2,816,901 ordinary shares of the Company to Mr. Shlomo (Tom) Wyler, the President, Chief Executive Officer and then Executive
Chairman of our board of directors, who is also considered as our controlling shareholder, in consideration for $5 million in cash, in the aggregate. For further information, see "Item 7.B
Related Party Agreements".
Purchase of Interest in a Property in 485 Lexington Avenue, New-York, NY
On August 7, 2009, Mazal 485 LLC, a joint venture owned in equal parts by Optibase and Gilmor USA LLC, an unrelated party ("Mazal"), entered into a Sale-Purchase
Agreement with a subsidiary of SL Green Realty Corp. ("SL Green"), pursuant to which Mazal would acquire from SL Green 49.5% of the ownership of Green 485 JV LLC, a Delaware
limited liability company which, prior to the closing, would own the entire beneficial interest in the office building located at 485 Lexington Avenue in Manhattan, New York. In
consideration for the purchased interest in Green 485 JV LLC, Mazal would pay a purchase price of approximately $20,790,000 (which shall be contributed in equal shares by Optibase
and Gilmor).
If closing were to occur, Green 485 JV LLC would have had existing debt to an affiliate of the SL Green in the amount of $12,200,000 which shall become due in 2013.
Mazal 485 LLC paid an initial deposit of $7,500,000 into escrow in order to secure the payment of the purchase price under the Sale-Purchase Agreement. Such sums were later
returned to Mazal 485 LLC following the termination of the Sale-Purchase Agreement.
Under the agreement, upon completion of the transaction, Mazal would make an approximately $20,000,000 nonrecourse loan to SL Green which would mature on December 31
2020 and which would be secured by a pledge by the SL Green of an additional 49.5% interest in Green 485 JV LLC, with the SL Green retaining an unencumbered 1% interest in Green
485 JV LLC. Mazal would also acquire an option to purchase such additional ownership interests which is exercisable until December 31, 2022, subject to certain limitations.
The transactions above are subject to certain conditions including the lender’s approval of the transfer of ownership in Green 485 JV LLC and the lender’s approval of
substitute guarantors under the existing nonrecourse mortgage financing in the principal amount of $450,000,000 serviced by Wachovia Bank.
For information on a termination letter we received in connection with this property and a lawsuit filed in connection with such letter of termination, see Item 8. "Financial
Information - Legal Proceedings" above.
Purchase of a Property in Rümlang, Switzerland
On October 29, 2009, the company's subsidiary Optibase RE 1 SARL ("Optibase RE 1"), which is wholly owned by the company's subsidiary Optibase Real Estate SARL,
entered into a Purchase Agreement with the Swiss property company Zublin Immobilien AG to acquire a 12,500 square meter (approximately 134,500 square feet) commercial building
located at Riedmattstrasse 9, Rümlang, Switzerland. Under the Purchase Agreement, Optibase RE 1 undertook to pay a purchase price of CHF 23,500,000 (approximately $22.8 million) to
acquire ownership of the property. The Purchase Agreement included representations and warranties from the seller regarding its ownership of the property, the absence of liens, the
status of tenant leases and regarding other matters. In the Purchase Agreement, the seller guaranteed the gross annual rental income from two significant tenants up to a maximum
amount of CHF 60,000 (approximately $58,000). To secure the Seller's guarantee, an amount of CHF 60,000 was deposited in escrow for two years with Optibase RE 1's counsel. The
closing of the Purchase Agreement occurred on October 29, 2009. Upon closing Optibase RE 1 was registered as the owner of the property, and the purchase price was transferred. For
further details, see Item 4.B "Business Overview" above.
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Mortgage Agreement - Rümlang, Switzerland
In connection with the purchase of the commercial building in Rümlang, on October 28, 2009, the Company, through its subsidiary Optibase RE 1 SARL ("Optibase RE 1"),
wholly owned by Optibase Real Estate SARL, entered into a mortgage agreement with Swiss bank Basler Kantonalbank (the "Bank"), according to which the Bank loaned to Optibase
RE 1 a principal amount of CHF 18,800,000 (approximately $18.1 million) (the "Loan"). Interest on the principal amount, is payable in four quarterly payments annually, at the rate of the
Libor for a period determined by Optibase RE 1 on the date of each payment for the following period, plus a fixed margin of 0.8% (as of the date hereof, the interest is set to be the rate of
Libor for a period of 3 months). The Bank may adjust the margin at its sole discretion on account of deterioration in Optibase RE 1's credit standing or the value of the property. The
principal amount is payable in four quarterly amortization payments annually, each in the amount of CHF 94,000 (approximately $86,000). The principal payments may be adjusted on
sole discretion of the Bank if the lease of major tenants is terminated and no replacement tenant is found within 6 months. According to the agreement, Optibase RE 1 may repay the
mortgage at any time, subject to a prior notice of three months to the Bank, with no subject penalty. The Bank holds the right to accelerate future loan payments, upon occurrence of
certain default conditions listed in the agreement.
As security for repayment of the loan, Optibase RE 1 mortgaged the rights to the Rümlang property in favor of the Bank, and registered such mortgage with the local land
registrar. Additionally, Optibase RE 1 committed not to grant any encumbrance or mortgage on the Rumland property without the Bank's approval. Optibase RE 1 has also pledged to
the Bank all if its rights in a designated bank account, to which rent payments and guarantees relating to the Rümlang property are deposited. As additional security, Optibase Real
Estate SARL was to pledge all of its shares in Optibase RE 1 to the Bank. The latter pledge, however, has not yet been provided.
Chessell Holdings Limited
On March 1, 2010, the Company’s subsidiary in Luxembourg Optibase RE 1 SARL ("Optibase RE 1") entered into an Option Agreement (the "Option Agreement") with a
Cypriot company, Chessell Holdings Limited, with respect to a commercial building acquired by the Company in October, 2009 in Rümlang, Switzerland. Through its beneficial owner,
Chessell Holdings introduced Optibase to the Rümlang property and facilitated Optibase’s acquisition and financing of the property. Under the Option Agreement, Optibase RE 1
granted Chessell Holdings an option to purchase twenty percent (20%) of the share capital of Optibase RE 1. Chessell Holdings undertook to pay a purchase price for the option of CHF
315,000 for the option. The exercise price under the Option Agreement is calculated based on Optibase’s acquisition costs for the Rümlang Property plus interest and an adjustment for
proceeds that are distributed to the shareholders of Optibase RE 1. The shares that would be issued to Chessell Holdings upon exercise of the option will not have voting rights and
would be subject to transfer restrictions in favor of Optibase.
Sale of our Video Solutions Business
On March 16, 2010 we and our subsidiary, Optibase Inc., entered into an asset purchase agreement with Optibase Technologies Ltd., a wholly owned subsidiary of S.A. Vitec
(also known as Vitec Multimedia) (S.A. Vitec and Optibase Technologies Ltd., collectively "Vitec"), according to which Optibase Technologies Ltd. will purchase all of the assets and
liabilities related to our Video Solutions Business (the "APA" and the "Transaction", respectively). Closing of the transaction is expected to occur on June 30, 2010, after the release of
this annual report. The following is a short summary of the principal provisions of the APA:
Acquired Assets and Liabilities
Pursuant to the APA, Vitec will acquire all rights, title and interest in and to all of our assets and assume certain liabilities, related to our Video Solutions Business only (the
"Acquired Assets"). Our Video Solutions Business includes the design, development, manufacture, production, supply, sale, marketing and distribution of video devices and related
services (the "Video Solutions Business").
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The Acquired Assets include all inventories, tangible assets, intellectual property rights and right under certain assumed agreements, all in relation to the Video Solutions
Business only. In addition, Vitec will also acquire all rights to the name "Optibase" and derivatives thereof provided, however, we will be entitled to use the Optibase name in
connection with our business so long as such use is not related to the field of video solutions.
The following will not be purchased by Vitec pursuant to the APA: the legal entities of Optibase Ltd. and Optibase Inc.; any securities of Optibase Inc. and any of our other
subsidiaries or affiliates; our rights to any grants from the Israeli Office of the Chief Scientist or from other EU/EC sponsored programs or other grants, received or receivable as to the
period ending upon closing of the Transaction; cash, cash equivalents and other investments; leases on our offices, and other properties; rights and claims under current insurance
policies and all other assets not related to the and our Video Solutions Business ("Excluded Assets"). In addition, the Excluded Assets include, inter alia, our real estate assets as well
as other investments, held directly or indirectly by us.
Consideration
As consideration for the Acquired Assets and the assumption of our liabilities, Vitec will pay us a sum of $8 million (plus adjustments relating to receivables and payables as of
the closing of the Transaction), of which a sum of $7 million (plus adjustments relating to receivables and payables as of the closing of the Transaction) will be paid in cash upon
closing and $1 million will be deposited in an escrow for a period of two years as a security for damages arising or resulting from, inter alia, breach or material inaccuracy relating to our
representations and warranties and covenants and liabilities that Vitec may incur which are part of the Excluded Liabilities.
In addition, under to the APA, the consideration will be further adjusted according to an earn-out mechanism pursuant to which 45% of Vitec’s revenues deriving from the
Video Solutions Business and exceeding $14 million in the year following the closing of the Transaction, will be paid to us.
Signing Deposit
Upon signing of the APA, Vitec deposited US $500,000 in escrow to be paid to us if closing does not take place within a specific period of time from signing, subject to certain
limited circumstances, principally relating to the non-fulfillment of certain closing conditions by Optibase, including, inter alia, the receipt of necessary governmental and third party
approvals and the transfer of a certain number of employees to Vitec, in which case, such funds will be returned to Vitec.
Representations and Warranties
The APA includes certain representations and warranties which are customary for transactions of this type. Such representations and warranties include, among others,
representations and warranties by the Company that relate to the Acquired Assets and Liabilities, to our financial results, intellectual property, employment matters, legal proceedings
etc. and representations and warranties of Vitec relating to, among others, its ability to continue and operate the Video Solutions Business and the financial condition of Vitec. Such
representations and Warranties will survive closing for a period of twenty four months, except for certain exceptions relating to, inter alia, provisions providing for non-competition and
confidentiality undertakings and fraud or willful misconduct.
Closing Conditions
Consummation of the Transaction is subject to the fulfillment of certain conditions precedent standard for transactions of this nature, including, inter alia, receipt of all
necessary approvals and permits, the approval of our shareholders and the transfer of a certain number of employees to Vitec.
With respect to the consortium agreements to which we are a party, if necessary approvals for the assumption of such agreements are not obtained until closing, we may
choose to either terminate the APA or pay to Vitec a certain amount unsubstantial to the Company for each consortium agreement which can not assigned to Vitec.
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Additional Undertakings
Both parties have undertaken several covenants for the period beginning on the signing of the APA and for the period beginning on date of the closing of the Transaction. In
this respect, during the period beginning on the signing of the APA and ending on closing of the Transaction, we have undertaken, inter alia, to continue and operate the business in
the ordinary course of business and not to make any action relating to the acquisition, sale, or transfer of any of the Acquired Assets or change of control over Seller other than in the
ordinary course of business and Vitec has undertaken, among others, to offer employment to a certain number of our employees on terms no less favorable then their current terms of
employment or service with the Seller. In addition, for the period following the closing of the Transaction, we have undertaken to comply with non-competition and confidentiality
provisions and Vitec has undertaken to provide us with access to information and records, and to endeavor to continue operating the Video Solutions Business for a period of at least
twelve months from the closing of the Transaction.
Indemnification
The APA includes mutual indemnification for a period of two years for damages arising or resulting from, inter alia, breach or material inaccuracy relating to the representations,
warranties and covenants and the liabilities that Vitec may incur which are part of the Excluded Liabilities arising or resulting therefrom such as the breach or material inaccuracy of any
representation or warranty. In addition, indemnification provisions will apply for longer periods in the case of damages resulting from fraud or willful misconduct, a period of three years
from closing for non-competition provisions and an indefinite confidentiality undertaking). The mutual indemnification will be limited to a maximum amount of $6 million.
From and after the closing, the rights of the parties to indemnification shall be the exclusive remedy of the Parties with respect to claims resulting from this Agreement.
The amount of $1 million which will be deposited in the indemnity escrow account as aforementioned, will be used for such indemnification, and any outstanding sums will be
paid by the indemnifying party.
Termination
Both parties shall have the right to terminate the APA, if the other side has breached any material representation, warranty, or covenant contained in the APA, or if closing did
not take place within 120 days from the signing of the APA. Vitec may also terminate the APA if any material portion of the Acquired Assets is no longer in our possession immediately
prior to closing or is damaged and we have not cured such situation within a period of 30 days. In addition, as aforesaid, we may terminate the agreement if the necessary approvals for
the assumption of the consortium agreements are not obtained until closing.
Guaranty of S.A. Vitec
S.A. Vitec has undertaken to fully guarantee all undertakings, representations, warranties and obligations of Optibase Technologies Ltd. under the APA.
10.D. EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new "general permit" was
issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that previously existed under the law and enabled Israeli citizens to freely invest outside of
Israel and freely convert Israeli currency into non-Israeli currencies.
Dividends, if any, paid to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel
of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange
prevailing at the time of conversion.
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Under Israeli law (and our memorandum and articles of association), persons who are neither residents nor nationals of Israel may freely hold, vote and transfer ordinary shares
in the same manner as Israeli residents or nationals.
10.E. TAXATION
The following is a discussion of Israeli and United States tax consequences material to us and our Israeli and U.S. shareholders. To the extent the discussion is based on new
tax legislation, which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question. The
discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations. Holders of our ordinary shares should
consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect
of any non-U.S., state or local taxes.
Israeli taxation
General Corporate Tax Structure in Israel
Generally, Israeli companies are subject to "Corporate Tax" on their taxable income. On July 25, 2005, the Knesset (Israeli Parliament) approved an amendment to the Income
Tax Ordinance, which prescribes, among others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26%
and in 2010 and thereafter - 25%. In July 2009, the Israeli Parliament (the Knesset) passed the Economic Efficiency Law (Amended Legislation for Implementing the Economic Plan for
2009 and 2010), 2009, which prescribes, among other things, an additional gradual reduction in Israeli corporate tax rate starting from 2011 to the following tax rates: 2011 - 24%, 2012 -
23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.
However, the effective tax rate payable by a company which derives income from an Approved Enterprise (as further discussed below) may be considerably less.
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
The Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for industrial companies. An
industrial company is defined as a company resident in Israel, at least 90% of the income of which in a given tax year exclusive of income from specified government loans, capital gains,
interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial
production activity.
Under the Industry Encouragement Law, industrial companies are entitled to a number of corporate tax benefits, including:
v deduction of purchase of know-how and patents and/or right to use a patent over an eight-year period ;
v
the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies and an industrial holding company;
v Accelerated depreciation rates on equipment and buildings; and
v Expenses related to a public offering on recognized stock markets, are deductible in equal amounts over three years
Under some tax laws and regulations, an industrial enterprise may be eligible for special depreciation rates for machinery, equipment and buildings. These rates differ based on
various factors, including the date the operations begin and the number of work shifts. An industrial company owning an Approved Enterprise may choose between these special
depreciation rates and the depreciation rates available to the Approved Enterprise.
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Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We believe that we currently qualify
as an industrial company. But no assurance can be given that the Israeli tax authorities will agree that we qualify, or, if we qualify, that we will continue to qualify as an industrial
company or that the benefits described above will be available to us in the future.
Tax Benefits under the Law for the Encouragement of Capital Investments, 1959
Tax benefits prior the 2005 amendment
The Law for the Encouragement of Capital Investments, 1959, as amended (effective as of April 1, 2005) (the "Investments Law"), provides that a proposed capital investment
in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Commerce of the State of Israel, be designated as an Approved Enterprise. The
Investment Center bases its decision as to whether or not to approve an application, among other things, on the criteria set forth in the Investments Law and regulations, the then
prevailing policy of the Investment Center, and the specific objectives and financial criteria of the applicant. Each certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, e.g., the equipment to be purchased and utilized pursuant to
the program.
The Investments Law provides that an Approved Enterprise is eligible for tax benefits on taxable income derived from its Approved Enterprise programs. The tax benefits under
the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the Approved Enterprise, income generated
from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the Approved Enterprise’s ordinary
course of business. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the
applicable rates. The tax benefits under the Investments Law are not, generally, available with respect to income derived from products manufactured outside of Israel. In addition, the
tax benefits available to an Approved Enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that a company does not meet these conditions, it would be required to refund the amount of tax benefits, plus a
consumer price index linkage adjustment and interest.
The Investments Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an Approved
Enterprise program in the first five years of using the equipment.
Taxable income of a company derived from an Approved Enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate tax rate, for the
benefit period. This period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income after the commencement of production,
and is limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier (the "Years limitation"). Please note that the year’s limitation does
not apply to the exemption period. As discussed below.
A company may elect to receive an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from the Approved
Enterprise will be exempt from corporate tax for a period of between two and ten years from the first year the company derives taxable income under the program but after the
commencement of production, depending on the geographic location of the Approved Enterprise within Israel, and such company will be eligible for a reduced tax rate for the remainder
of the benefits period. A company that has elected the alternative package of benefits, such as us, that subsequently pays a dividend out of income derived from the Approved
Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount distributed, including any taxes thereon, at the rate which would have been
applicable had it not elected the alternative package of benefits, generally 10%-25%, depending on the percentage of the company’s ordinary shares held by foreign shareholders. The
dividend recipient is subject to withholding tax at the rate of 15% with respect to the gross amount distributed, applicable to dividends from Approved Enterprises, if the dividend is
distributed during the tax exemption period or within twelve years thereafter. The company must withhold this tax at source.
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Foreign investor’s Company ("FIC")
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a foreign investors’ company. A foreign investors’ company is a
company which more than 25% of its share capital and combined share and loan capital is owned by non-Israeli residents. A company that qualifies as a foreign investors’ company and
has an Approved Enterprise program is eligible for tax benefits for a ten-year benefit period. As specified above, depending on the geographic location of the Approved Enterprise
within Israel, income derived from the Approved Enterprise program may be entitled to the following:
v Extension of the benefit period up to ten years.
v An additional period of reduced corporate tax liability at rates ranging between 10% and 25%, depending on the level of foreign (i.e., non-Israeli) ownership of our shares. Those tax
rates and the related levels of foreign investment are as set forth in the following table:
Region B
Region A
Other Region
Rate of
Reduced Tax
25
25
20
15
10
Rate of
Reduced Tax
25
25
20
15
10
Rate of
Reduced Tax
25
25
20
15
10
Reduced Tax
Period
1 years
4 years
4 years
4 years
4 years
Reduced Tax
Period
0 years
0 years
0 years
0 years
0 years
Reduced Tax
Period
5 years
8 years
8 years
8 years
8 years
Tax Exemption
Period
6 years
6 years
6 years
6 years
6 years
Tax Exemption
Period
10 years
10 years
10 years
10 years
10 years
Tax Exemption
Period
2 years
2 years
2 years
2 years
2 years
Percent of
Foreign Ownership
0-25%
25-48.99%
49-73.99%
74-89.99%
90-100%
Percent of
Foreign Ownership
0-25%
25-48.99%
49-73.99%
74-89.99%
90-100%
Percent of
Foreign Ownership
0-25%
25-48.99%
49-73.99%
74-89.99%
90-100%
v The twelve years limitation period for reduced tax rate of 15% on dividend from the Approved Enterprise will not apply.
Subject to applicable provisions concerning income under the alternative package of benefits, dividends paid by a company are considered to be attributable to income
received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the
Investments Law, a company that has elected the alternative package of benefits is not obliged to distribute retained profits, and may generally decide from which year’s profits to
declare dividends.
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Currently we have five Approved Enterprises programs under the Capital Investment Law, which entitle us to some tax benefits. Income derived from these alternative benefit
programs is exempt from tax for a period of two years, starting in the first year in which we generate taxable income from the Approved Enterprise, subject to certain conditions. As
mentioned above the year’s limitation does not apply to the exemption period.
Tax benefits under the 2005 Amendment
The amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise. The amendment applies to new investment
programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to December 31, 2004.
A company wishing to receive the tax benefits afforded to a Benefited Enterprise, as defined below, is required to select the tax year from which the period of benefits under
the Investment Law are to commence by notifying the Israeli Tax Authority within 12 months of the end of that year. Companies are also granted the right to approach the Israeli Tax
Authority for a pre-ruling regarding their eligibility for benefits under the Amendment
Our company will continue to enjoy its current tax benefits in accordance with the provisions of the Investment Law prior to its revision, but if our company is granted any new
benefits in the future they will be subject to the provisions of the amended Investment Law.
The amendment simplifies the approval process: according to the amendment, only Approved Enterprises receiving cash grants require the approval of the Investment Center.
The Amendment does not apply to benefits included in any certificate of approval that was granted before the Amendment came into effect, which will remain subject to the
provisions of the Investment Law as they were on the date of such approval.
Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business
income from export (referred to as a "Benefited Enterprise"). In order to receive the tax benefits, the Amendment states that the company must make an investment in the Benefited
Enterprise exceeding a certain percentage or a minimum amount specified in the Law. Such investment may be made over a period of no more than three years ending at the end of the
year in which the company requested to have the tax benefits apply to the Benefited Enterprise (the "Year of Election"). Where the company requests to have the tax benefits apply to
an expansion of existing facilities, then only the expansion will be considered a Benefited Enterprise and the company’s effective tax rate will be the result of a weighted combination of
the applicable rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage or a minimum amount of the
company’s production assets before the expansion.
The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, as described in the Investment Law, or 12 years from the first
day of the Year of Election. The tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following
new tax routes, which may be applicable to us:
v Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of
the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each
year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived
from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the
dividend that we may distribute. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited
Enterprise; and
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v A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4%
for foreign residents.
Generally, a company that is Abundant in Foreign Investment (as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years,
depending on the rate of its income that is derived in foreign currency.
The Amendment changes the definition of "foreign investment" in the Investments Law so that the definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder, provided that the company’s outstanding and paid-up share
capital exceeds NIS 5 million. Such changes to the aforementioned definition will take effect retroactively from 2003.
The Amendment will apply to Approved Enterprise programs in which the year of election under the Investments Law is 2004 or later, unless such programs received approval
from the Investment Center on or prior to December 31, 2004, in which case the Amendment provides that terms and benefits included in any certificate of approval already granted will
remain subject to the provisions of the law as they were on the date of such approval.
As a result of the amendment, tax-exempt income generated under the provisions of the Investments Law, as amended, will subject us to taxes upon distribution or liquidation
and we may be required to record deferred tax liability with respect to such tax-exempt income. As of December 2009 we did not generated any tax exempt income under the Investment
Law.
Special Provisions Relating to Measurement of Taxable Income
According to the law, until 2007, the results for tax purposes were measured based on the changes in the Israeli CPI. In February 2008, the "Knesset" (Israeli parliament) passed
an amendment to the Income Tax (Inflationary Adjustments) Law, 1985, which limits the scope of the law starting 2008 and thereafter. Starting 2008, the results for tax purposes are
measured in nominal values, excluding certain adjustments for changes in the Israeli CPI carried out in the period up to December 31, 2007. The amendment to the law includes, inter alia,
the elimination of the inflationary additions and deductions and the additional deduction for depreciation starting 2008.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into effect (the "TP Regs").
Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions carried out between related parties be conducted on an arm’s length principle
basis and will be taxed accordingly. The TP Regs are not expected to have a material affect on us.
Tax Benefits of Research and Development
Israeli tax law permits, under some conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, in scientific research and development
projects, if the expenditures are approved by the relevant government ministry and if the research and development is for the promotion of the enterprise and is carried out by, or on
behalf of, a company seeking the deduction. However, the amount of such expenses shall be reduced by the sum of any funds received through government grants for the finance of
such scientific research and development projects. Expenditures not so approved are deductible over a three-year period.
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Capital Gains Tax on Sales of Our Ordinary Shares
Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in
Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the
shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain
which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign
currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.
Generally, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder
claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered
a "material shareholder" at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means
of control in the company, the tax rate shall be 25%. Israeli companies are subject to the Corporate Tax rate on capital gains derived from the sale of shares, unless such companies were
not subject to the Adjustments Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance that came into effect on January 1, 2006, in
which case the applicable tax rate is 25%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial
public offering (that may be subject to a different tax arrangement).
The tax basis of shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in the three trading days preceding January 1,
2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange
or regulated market outside of Israel, provided however that such capital gains are not derived from a permanent establishment in Israel, such shareholders are not subject to the
Adjustments Law, and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-
Israeli corporation, whether directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.
Pursuant to the Convention Between the government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended (the "U.S.-
Israel Tax Treaty"), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States
within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli
capital gains tax. Such exemption will not apply if (i) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the
12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a
permanent establishment in Israel. In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-
Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.
Taxation of Non-Resident Holders of Shares
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends,
royalties and interest, as well as non-passive income from services rendered in Israel. As of 2006, distributions of dividends other than bonus shares, or stock dividends, income tax is
withheld at the source at the rate of 20%, 15% for dividends generated by an Approved Enterprise (if the dividend is distributed during the tax exemption period or within 12 years
thereafter. In the event, however, that the company is qualified as a Foreign Investors’ Company, there is no such time limitation), unless a different rate is provided in a treaty between
Israel and the shareholder’s country of residence.
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Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty U.S. Resident is 25%. However, under the Investments Law,
dividends generated by an Approved Enterprise (or Benefited Enterprise) are taxed at the rate of 15%. Furthermore, dividends not generated by an Approved Enterprise (or Benefited
Enterprise) paid to a U.S. corporation holding at least 10% of our issued voting power during the part of the tax year which precedes the date of payment of the dividend and during the
whole of its prior tax year, are generally taxed at a rate of 12.5%.
United States Federal Income Tax Consequences
The following is a summary of certain material U.S. federal income tax consequences that apply to U.S. Holders who hold ordinary shares as capital assets. This summary is
based on the United States Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof,
and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. This summary does not address all tax
considerations that may be relevant with respect to an investment in ordinary shares. This summary does not account for the specific circumstances of any particular investor, such as:
v broker-dealers,
v
financial institutions,
v certain insurance companies,
v
investors liable for alternative minimum tax,
v
tax-exempt organizations,
v non-resident aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar,
v persons who hold the ordinary shares through partnerships or other pass-through entities,
v
investors that actually or constructively own 10 percent or more of our voting shares, and
v
investors holding ordinary shares as part of a straddle or a hedging or conversion transaction.
This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of
state, local or foreign taxation. You are urged to consult your tax advisors regarding the non-U. S. and United States federal, state and local tax considerations of an investment in
ordinary shares.
For purposes of this summary, a U.S. Holder is:
v an individual who is a citizen or, a resident of the United States for U.S. federal income tax purposes;
v a partnership, corporation or other entity created or organized in or under the laws of the United States or any political subdivision thereof;
v an estate whose income is subject to U.S. federal income tax regardless of its source;
v a trust if: (a) a court within the United States is able to exercise primary supervision over administration of the trust, and (b) one or more United States persons have the authority to
control all substantial decisions of the trust; or
v a trust, if the trust were in existence and qualified as a "United States person," within the meaning of the Code, on August 20, 1996 under the law as then in effect and elected to
continue to be so treated.
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Taxation of Dividends
The gross amount of any distributions received with respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S.
Federal income tax purposes, to the extent of our current and accumulated earnings and profits as determined for U.S. federal income tax principles. You will be required to include this
amount of dividends in gross income as ordinary income. Distributions in excess of our earnings and profits will be treated as a non-taxable return of capital to the extent of your tax
basis in the ordinary shares and any amount in excess of your tax basis, will be treated as gain from the sale of ordinary shares. See "Item 10.D. Exchange Controls" under the
heading "Disposition of Ordinary Shares" below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends-received deduction generally available
to U.S. corporations under Section 243 of the Code.
Recently enacted amendments to the Code, as amended, provide that certain dividend income received by individual U.S. Holders, with respect to taxable years beginning on
or before December 31, 2010 may be eligible for a reduced rate of taxation. Such dividend income will be taxed at the applicable long-term capital gains rate (currently, a maximum rate of
15%) if the dividend is received from a "qualified foreign corporation," and the shareholder of such foreign corporation holds such stock for at least 61 days during the 121-day period
that begins on the date that is 60 days before the ex-dividend date for the stock. The holding period is tolled for any days on which the shareholder has reduced his risk of loss. A
"qualified foreign corporation" is one that is eligible for the benefits of a comprehensive income tax treaty with the United States. A foreign corporation will be treated as qualified with
respect to any dividend paid, if its stock is readily tradable on an established securities market in the United States. Dividend income will not qualify for the reduced rate of taxation if
the corporation is a passive foreign investment company, or PFIC (see below), for the year in which the dividend is distributed or for the previous year.
Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to
the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate
in effect on such day may have a foreign currency exchange gain or loss that would be treated as U.S. source ordinary income or loss. U.S. Holders should consult their own tax
advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder’s U.S. federal income tax liability, subject to certain
limitations set out in the Code (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under
which non-U.S. tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income.
Dividends generally will be treated as foreign-source passive income for United States foreign tax credit purposes. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual may be carried back for the first preceding taxable years and forward for the first ten taxable years in order to reduce U.S. federal income taxes, subject to the credit
limitation applicable in each of such years. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to
the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent
such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute. The rules relating to the determination of the foreign
tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.
Dispositions of Ordinary Shares
If you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S. Federal income tax purposes in an amount equal to the difference between the
amount realized on the sale or other disposition and the adjusted tax basis in ordinary shares. Subject to the discussion below under the heading "Passive Foreign Investment
Companies," such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the time of
the sale or other disposition. In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit
limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.
- 86 -
In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value
of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into
United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as U.S. source
ordinary income or loss.
Passive Foreign Investment Companies ("PFIC")
There is a substantial risk that we are a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Our treatment as a PFIC could result in a reduction
in the after-tax return to the U.S. Holders of our ordinary shares and may cause a reduction in the value of such shares.
For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) the
average percentage of the value of all of our assets for the taxable year which produce or are held for the production of passive income is at least 50%. For this purpose, cash is
considered to be an asset which produces passive income. Passive income includes, among others, dividends, interest, certain types of royalties and rents, annuities, net foreign
exchange gains and losses and the excess of gains over losses from the disposition of assets which produce passive income. As a result of our substantial cash position and the
decline in the value of our stock, we may be a PFIC under a literal application of the asset test that looks solely to market value. If we are a PFIC for U.S. federal income tax purposes,
U.S. Holders of our ordinary shares would be required, in certain circumstances, to pay an interest charge together with tax calculated at maximum rates on certain "excess
distributions," including any gain on the sale of ordinary shares.
The consequences described above can be mitigated if the U.S. Holder makes an election to treat us as a qualified electing fund, or QEF. A shareholder making the QEF
election is required for each taxable year to include in income a pro rata share of the ordinary earnings and net capital gain of the QEF, subject to a separate election to defer payment of
taxes, which deferral is subject to an interest charge. We have agreed to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election. The QEF
election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the Internal Revenue Service, or IRS.
As an alternative to making the QEF election, the U.S. Holder of PFIC stock which is publicly traded could mitigate the consequences of the PFIC rules by electing to mark the
stock to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the PFIC
stock and the U.S. Holder's adjusted tax basis in the PFIC stock. Losses would be allowed only to the extent of net mark-to-market gain previously included by the U.S. Holder under the
election for prior taxable years. All U.S. Holders are advised to consult their own tax advisers about the PFIC rules generally and about the advisability, procedures and timing of their
making any of the available tax elections, including the QEF or mark-to-market elections.
Backup Withholding and Information Reporting
Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to a 28 percent U.S. backup withholding tax. Backup
withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer
identification number and make any other required certification. Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited
against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the IRS. Any U.S. holder who holds 10% or more in vote or value of our ordinary shares may be subject to certain additional United States information reporting
requirements.
- 87 -
U.S. Gift and Estate Tax
An individual U.S. Holder of ordinary shares will be subject to U.S. gift and estate taxes with respect to ordinary shares in the same manner and to the same extent as with
respect to other types of personal property.
10.F. DIVIDEND AND PAYING AGENTS
Not applicable.
10.G. STATEMENT BY EXPERTS
Not applicable.
10.H. DOCUMENTS ON DISPLAY
Reports and other information of Optibase filed electronically with the SEC may be found at www.sec.gov. They can also be inspected without charge and copied at prescribed
rates at the public reference facilities maintained by the SEC Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Copies of this material are also available by mail from
the Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, at prescribed rates.
10.I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Most of our revenues are generated in U.S. dollars but a portion of our expenses is incurred in NIS. Therefore, our results of operations may be seriously harmed by inflation in
Israel and currency fluctuations. In 2007, 2008 and 2009, the NIS appreciated by approximately 9%, 1.1% and 0.7%, respectively, against the U.S. dollar. In 2007, 2008 and 2009 the
inflation rate in Israel was approximately 3.4%, 3.8% and 3.9%, respectively. Our operations could be adversely affected if we are unable to guard against currency fluctuations in the
future. Accordingly, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the dollar against the NIS.
These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel.
In our balance sheet, we remeasure into U.S. dollars all monetary accounts (principally cash and cash equivalents and liabilities) that are maintained in other currencies. For this
remeasurement we use the foreign exchange rate at the balance sheet date. Any gain or loss that results from this remeasurement is reflected in the statement of income as financial
income or financial expense, as appropriate.
We measure and record non-monetary accounts in our balance sheet (principally fixed assets, prepaid expenses, and share capital) in U.S. dollars. For this measurement we use
the U.S. dollar value in effect at the date that the asset or liability was initially recorded in our balance sheet (the date of the transaction).
The financial statements of Optibase Real Estate SARL whose functional currency has been determined to be CHF have been translated into U.S. dollars. Assets and liabilities
of this subsidiary are translated at year-end exchange rates and their statement of operations items are translated using the actual exchange rates at the dates on which those items are
recognized. Such translation adjustments are recorded as a separate component of accumulated other comprehensive income in shareholders' equity.
Interest Rate and Rating Risks
Our exposure to market risk for changes in interest rates in Switzerland relates primarily to our long term loan taken for the purchase of our real-estate property in Switzerland
and denominated in Swiss Franks (CHF). Changes in Swiss interest rates, could affect our financial results.
- 88 -
Investments Risks
In the second quarter of 2003, we transferred approximately $39.3 million of our monies and investments to Optibase, Inc. to achieve better net profit from the investment. As of
December 31, 2009, our available net cash was $28.7 million. We manage our available cash on a discretionary basis, within the framework of an investment policy based upon an
established set of guidelines approved by our board of directors. For information concerning our investment policy, see "Item 5.B. Liquidity and Capital Resources" above. The
investment guidelines are to be reviewed periodically by our board of directors and Investment Committee with the President and Chief Financial Officer. As of December 31, 2009, our
available cash was invested in short term interest bearing bank deposits and money market funds with several banks. Our available cash (including the money market funds) is generally
classified as Cash and cash equivalents and, consequently, is recorded on the consolidated balance sheets as such.
Furthermore, our equity and other investments in private companies are subject to risk of loss of investment capital. These investments are inherently risky as the market for
the technologies or products they have under development are typically in the early stages and may never materialize. We could lose our entire investment in these companies. At any
time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investments as well as on our results of operations. We do not currently hedge these
interest rate exposures.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
- 89 -
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15T. CONTROLS AND PROCEDURES
(a) Our management, including our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of
December 31, 2009. Based on such review, our chief executive officer and chief financial officer have concluded that we have in place effective controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to
our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required
disclosure, and is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
(b) Our management, under the supervision of our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control
over our financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is
defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that:
—
—
—
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions;
provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our financial statements in accordance with
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a
material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of
our internal control over financial reporting as of December 31, 2009 based on the framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, our management concluded that the Company’s internal controls over financial reporting were effective as of
December 31, 2009.
- 90 -
This management report on internal control over financial reporting shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended or otherwise subject to the liabilities of that Section.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was
not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Commission that permit us to provide only management’s report in this annual
report.
(c) There were no changes in our internal controls over financial reporting identified with the evaluation thereof that occurred during the period covered by this annual report
that have materially affected, or are reasonable likely to materially affect our internal control over financial reporting
ITEM 16. [RESERVED]
ITEM 16.A. AUDIT COMMITTEE FINANCIAL EXPERT
The board of directors has determined that Ms. Orly Garti-Serroussi is an "audit committee financial expert" and that she is independent under the applicable Securities and
Exchange Commission and NASDAQ listing rules.
ITEM 16.B. CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics for our employees, including our chief executive officer and senior financial officers. The Code of Business Conduct
and Ethics was attached as Exhibit 11 to the Company’s annual report on Form 20-F for the fiscal year ended December 31, 2003, filed with the Commission on May 17, 2004.
ITEM 16.C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Kost, Forer Gabbay & Kasierer, a member of Ernst & Young Global, or Ernst & Young has served as our independent public accountants for each of the fiscal years in the
three-year period ended December 31, 2009, for which audited financial statements appear in this annual report on Form 20-F.
The following table presents the aggregate fees for professional services and other services rendered by Kost, Forer Gabbay & Kasierer to Optibase in 2009 and 2008 (in
thousands):
Audit fees (1)
Audit-related fees (2)
Tax fees (3)
All other fees (4)
Total
2008
2009
95
100
49
--
244
95
--
--
--
95
(1) Audit fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor can reasonably provide,
and include the group audit; statutory audits; comfort letters and consents; attest services; and assistance with and review of documents filed with the SEC.
(2) Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that
are traditionally performed by the external auditor, and include consultations concerning financial accounting and reporting standards; internal control reviews of new systems,
programs and projects; review of security controls and operational effectiveness of systems; review of plans and control for shared service centers, due diligence related to
acquisitions; accounting assistance and audits in connection with proposed or completed acquisitions; and employee benefit plan audits.
(3) Tax fees include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for refund; tax consultations, such as assistance
and representation in connection with tax audits and appeals, tax advice related to mergers and acquisitions, transfer pricing, and requests for rulings or technical advice from taxing
authority; tax planning services; and expatriate tax planning and services.
(4) All other fees include fees billed for training; forensic accounting; data security reviews; treasury control reviews and process improvement and advice; and environmental,
sustainability and corporate social responsibility advisory services.
- 91 -
Audit Committee Pre-approval Policies and Procedures
Optibase’s audit committee's main role is to assist the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and
reporting practices of the Company. The audit committee oversees the appointment, compensation, and oversight of the public accounting firm engaged to prepare or issue an audit
report on the financial statements of the Company. The audit committee's specific responsibilities in carrying out its oversight role include the approval of all audit and non-audit
services to be provided by the external auditor and quarterly review the firm's non-audit services and related fees. These services may include audit services, audit-related services, tax
services and other services, as described above. It is the policy of our audit committee to approve in advance the particular services or categories of services to be provided to the
Company periodically. Additional services may be pre-approved by the audit committee on an individual basis during the year.
During 2008 and 2009, none of audit-related fees, tax fees or other fees provided to us by Kost, Forer Gabbay & Kasierer in Israel or by Ernst & Young in the United States were
approved by the audit committee pursuant to the de minimis exception to the pre-approval requirement provided by paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
ITEM 16.D. EXEMPTION FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
We have not and do not expect to apply for any exemptions from the NASDAQ listing standards for audit committees.
ITEM 16.E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATE PURCHASERS
Not applicable.
ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT
None.
ITEM 16G. CORPORATE GOVERNANCE
Following the appointment of Danny Lustiger, on October 28, 2009, a former officer of the Company, as an additional director of the Company, our board of directors does not
have a majority of independent directors and therefore we are not in compliance with the NASDAQ Global Market rules requiring that the board of directors of a listed company contain
a majority of independent directors and have notified The NASDAQ that we will be following home practice rules in this respect. Danny Lustiger has ceased to be an officer of the
Company on November 2007 and therefore, on November 2010 (following the laps of 3 years from the termination of Danny Lustiger's employment) our board of directors will have the
majority of independent directors required pursuant to The NASDAQ Global Market rules.
There are no other significant ways in which the Company’s corporate governance practices differ from those followed by domestic companies listed on the Nasdaq Global
Market.
- 92 -
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
PART III
The following are our financial statements audited by Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, together with the reports of Kost Forer Gabbay &
Kasierer, a member of Ernst & Young Global, for the fiscal year ended December 31 2009, are filed as part of this annual report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 19. EXHIBITS
See Exhibit Index.
- 93 -
Page
F-2
F-3 - F-4
F-5
F-6
F-7 - F-8
F-9 - F-34
OPTIBASE LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2009
U.S. DOLLARS IN THOUSANDS
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
F-2
F-3 - F-4
F-5
F-6
F-7 - F-8
F-9 - F-36
Kost Forer Gabbay & Kasierer
3 Aminadav St.
Tel-Aviv 67067, Israel
Tel: 972 (3)6232525
Fax: 972 (3)5622555
www.ey.com/il
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
OPTIBASE LTD.
We have audited the accompanying consolidated balance sheets of Optibase Ltd. ("the Company") and its subsidiaries as of December 31, 2008 and 2009, and the related
consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are
the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial
statements of Scopus Video Networks Ltd., an affiliate presented at equity method, in which the Company's investments totaled to $ 23,914 thousand as of December 31, 2008, and the
Company's share in their losses amounted to $ 2,769 thousand and $ 1,930 thousand, for the years ended December 31, 2007 and 2008, respectively. The financial statements of Scopus
Video Networks Ltd. for the years ended December 31, 2007 and 2008 were audited by other auditors, whose report have been furnished to us, and our opinion, insofar as it relates to
amounts included for Scopus Video Networks Ltd. for the years ended December 31, 2007 and 2008, is based solely on the reports of the other auditors.
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 audits 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 and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above, present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31, 2008 and 2009, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009, in conformity with U.S. generally accounting principles.
Tel-Aviv, Israel
June 30, 2010
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
F - 2
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
ASSETS
CURRENT ASSETS:
OPTIBASE LTD. AND ITS SUBSIDIARIES
December 31,
2008
2009
Cash and cash equivalents
Trade receivables (net of allowance for doubtful accounts of $ 355 and $ 414 at December 31, 2008 and 2009, respectively) (Note 16b)
Other accounts receivable and prepaid expenses (Note 4)
Inventories (Note 5)
$
Total current assets
INVESTMENTS IN COMPANIES (Note 6)
LONG-TERM INVESTMENTS:
Long-term lease deposits (Note 10a)
Severance pay fund
Total long-term investments
PROPERTY, EQUIPMENT AND OTHER ASSETS, NET (Note 7)
Property and equipment, net
Real Estate Property, net
Other assets, net
Total property, equipment and other assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
F - 3
$
11,386
3,241
690
4,373
19,690
24,614
309
1,465
1,774
1,228
-
-
1,228
28,651
2,338
4,492
2,356
37,837
700
233
1,230
1,463
636
22,080
634
23,350
63,350
$
47,306
$
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands (except share and per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long term loan (Note 9)
Trade payables
Deferred revenues
Other accounts payable and accrued expenses (Note 8)
Total current liabilities
ACCRUED SEVERANCE PAY
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)
LONG TERM LOAN, NET OF CURRENT MATURITIES (Note 9)
SHAREHOLDERS' EQUITY (Note 13):
Share capital -
Ordinary Shares of NIS 0.13 par value -
Authorized: 30,000,000 shares at December 31, 2008 and 2009; Issued: 16,914,281 shares at December 31, 2008 and 2009;
Outstanding: 16,522,058 and 16,536,708 shares at December 31, 2008 and 2009, respectively
Additional paid-in capital
Treasury shares (392,223 and 377,573 shares at December 31, 2008 and 2009, respectively)
Accumulated other comprehensive loss
Accumulated deficit
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of the consolidated financial statements.
OPTIBASE LTD. AND ITS SUBSIDIARIES
December 31,
2008
2009
$
$
-
2,276
884
6,920
10,080
2,215
365
1,095
709
6,315
8,484
1,731
-
17,897
650
125,492
(1,306)
-
(89,825)
35,011
$
47,306
$
650
125,649
(1,208)
(54)
(89,799)
35,238
63,350
June 30, 2010
Date of approval of the
financial statements
Tom Wyler
President and Chief Executive Officer.
Amir Philips
Chief Financial Officer
F - 4
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands (except share and per share data)
Revenues:
Video solutions
Fixed income real estate
Total revenues
Costs and expenses:
Cost of video solutions operations
Research and development, net (Note 16a)
Selling and marketing
General and administrative
Cost of real estate operations
Total costs and expenses
Operating loss
Other income (expenses), net (Note 11)
Financial income (expenses), net (Note 16c)
Loss before taxes on income
Taxes on income
Loss after taxes on income
Gain from sale of investment in affiliated company and equity in losses of affiliated companies, net
Net income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Basic and diluted income (loss) per share from continuing operations
Basic and diluted income (loss) per share from discontinued operations
Basic and diluted income (loss) per share
Weighted average number of shares used in computing basic and diluted net income (loss) per share (in
thousands):
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
F - 5
OPTIBASE LTD. AND ITS SUBSIDIARIES
2007
Year ended December 31,
2008
2009
$
$
22,977
-
22,977
$
19,901
-
19,901
11,387
5,362
7,895
2,276
-
26,920
(3,943)
(327)
(31)
(4,301)
73
(4,374)
(2,769)
(7,143)
(30)
9,754
6,375
8,964
2,931
-
28,024
(8,123)
218
270
(7,635)
-
(7,635)
(1,930)
(9,565)
20
$
$
$
$
(7,173) $
(9,545) $
(0.53) $
(0.63) $
(0.00) $
0.00
$
(0.53) $
(0.63) $
13,602
13,602
15,159
15,159
13,149
272
13,421
6,537
3,725
5,763
2,601
125
18,751
(5,330)
-
617
(4,713)
-
(4,713)
4,773
60
-
60
0.00
0.00
0.00
16,534
16,540
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
U.S. dollars in thousands
OPTIBASE LTD. AND ITS SUBSIDIARIES
Ordinary
shares
Additional
paid-in
capital
Treasury
shares
Accumulated
other
comprehensive
income (loss)
Accumulated
deficit
Total
comprehensive
loss
Total
shareholders'
equity
Balance as of January 1, 2007
$
539
$
119,181
$
(2,278) $
(339) $
(72,609)
$
44,494
Exercise of employees stock options
Stock-based compensation related to options and
unvested shares granted to employees
Issuance of treasury shares upon vesting of
unvested shares
Other comprehensive loss:
Unrealized gain on available-for-sale marketable
securities, net
Net loss
Total comprehensive loss
Balance as of December 31, 2007
Issuance of ordinary shares in a private placement
(see Note 13a)
Stock-based compensation related to options and
unvested shares granted to employees
Issuance of treasury shares upon vesting of
unvested shares
Other comprehensive loss:
Unrealized gain on available-for-sale marketable
securities, net
Net loss
Total comprehensive loss
2
-
-
-
-
541
109
-
-
-
-
223
1,013
-
(252)
500
-
-
-
-
-
-
-
605
-
-
-
(248)
-
$
(7,173)
$
605
(7,173)
(6,568)
120,165
(1,778)
266
(80,030)
4,891
658
-
-
(222)
472
-
-
-
-
-
-
-
(266)
-
Balance as of December 31, 2008
650
125,492
(1,306)
Stock-based compensation related to options and
unvested shares granted to employees
Issuance of treasury shares upon vesting of
unvested shares
Other comprehensive loss:
Foreign currency translation adjustment
Net income
Total comprehensive income
-
-
-
-
221
(64)
-
-
-
98
-
-
-
-
-
(54)
-
-
-
(250)
-
$
(9,545)
$
(89,825)
-
(34)
-
60
$
$
(266)
(9,545)
(9,811)
(54)
60
6
225
1,013
-
605
(7,173)
39,164
5,000
658
-
(266)
(9,545)
35,011
221
-
(54)
60
Balance as of December 31, 2009
$
650
$
125,649
$
(1,208) $
(54) $
(89,799)
$
35,238
The accompanying notes are an integral part of the consolidated financial statements.
F - 6
OPTIBASE LTD. AND ITS SUBSIDIARIES
2007
Year ended December 31,
2008
2009
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Cash flows from operating activities:
Net income (loss)
Adjustments required to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization
Impairment of an affiliated company
Gain from sale of investment in affiliated company and equity in losses of an affiliated companies, net
Accrued interest and amortization of premium and discount on available-for-sale marketable securities, net
Realized gain on sale of available-for-sale marketable securities
Impairment of available-for-sale marketable securities
Loss on sale of property and equipment
Accrued severance pay, net
Compensation related to options and restricted shares granted to employees and directors
Decrease in trade receivables, net
Decrease (increase) in other accounts receivable and prepaid expenses
Decrease (increase) in inventories
Increase (decrease) in trade payables
Decrease in deferred costs
Increase (decrease) in deferred revenues
Increase (decrease) in accrued expenses and other accounts payable
Gain on sale of intangible assets
Net cash provided by discontinued operations
Net cash used in operating activities
Cash flows from investing activities:
Proceeds from sale of property and equipment
Purchase of property and equipment
Proceeds from redemption of available-for-sale marketable securities
Proceeds from sale of intangible assets
Investment in long-term lease deposits
Investment in affiliated companies
Investment in other assets
Investment in real estate property
Proceeds from sale of an affiliated company
$
(7,173) $
(9,545) $
1,244
325
2,769
(192)
(210)
582
2
163
1,013
491
(715)
(1,507)
990
500
(1,313)
(964)
-
121
(3,874)
41
(945)
36,173
-
(5)
(20,382)
-
-
-
1,090
-
1,930
-
(274)
-
-
(180)
658
812
797
713
(477)
-
494
870
(218)
43
(3,287)
-
(393)
8,482
218
9
(8,556)
-
-
-
Net cash provided by (used in) investing activities
14,882
(240)
Cash flows from financing activities:
Short-term bank credit
Proceeds from exercise of stock options
Issuance of ordinary shares in a private placement
Proceeds from bank loan
Net cash provided by (used in) financing activities
Exchange differences on balances of cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
(3,002)
225
-
-
(2,777)
-
8,231
2,316
(634)
-
5,000
-
4,366
-
839
10,547
Cash and cash equivalents at the end of the year
$
10,547
$
11,386
$
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
60
1,047
-
(4,773 )
-
-
-
8
(249)
221
903
(3,801)
1,939
(1,182)
-
(175)
(605)
-
-
(6,607)
1
(276)
-
-
76
-
(659)
(22,282)
28,691
5,551
-
-
-
18,353
18,353
(32)
17,265
11,386
28,651
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
Supplemental disclosure of cash flow activities:
(a)
Non-cash transactions:
Reclassification of inventories into property and equipment
(b)
Cash paid during the year for:
Interest
The accompanying notes are an integral part of the consolidated financial statements.
F - 8
OPTIBASE LTD. AND ITS SUBSIDIARIES
2007
Year ended December 31,
2008
2009
$
$
333
$
235
$
386
$
49
$
77
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 1:-
GENERAL
a.
Optibase Ltd. ("the Company") was incorporated and commenced operations in 1990.
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company has two wholly-owned subsidiaries: Optibase Inc. in the United States which was incorporated in 1991 ("the U.S subsidiary") and Optibase Real
Estate Europe SARL ("Optibase SARL") in Luxembourg which was incorporated in October 2009 (collectively: "the Group").
In October 2009, the Company acquired through a new subsidiary in Luxembourg, a commercial real estate property in Rumlang, Switzerland in consideration of
approximately $ 22,800 and engaged in fixed income real estate activity (see also Note 3).
The Company and its U.S subsidiary provide high quality equipment for a wide range of professional video applications in the Broadband IPTV, Broadcast,
Government, Enterprise and Post-production markets, which performed through the operation of two product lines: Video technologies and IPTV.
The Company and its U.S subsidiary sell their products worldwide, directly and through distributors, Value Added Resellers ("VARs"), system integrators and
Original Equipment Manufacturers ("OEMs"), all of which are considered end-customers from the perspective of the Company and its subsidiary.
The majority of the Company and its U.S subsidiary sales are made in North America, Europe and the Far East. For the years ended December 31, 2007, 2008 and
2009, the Company had one major customer whose revenues were approximately 14%, 17% and 12%, respectively, from the total revenues.
On March 16, 2010, the Company entered into an Asset Purchase Agreement (“the Agreement”) with Vitec Multimedia ("Vitec"), a French company, for the sale
of its video technology and IPTV business for consideration of $ 8,000 in cash. In addition, Optibase and Vitec agreed on an earn-out mechanism pursuant to
which 45% of Vitec's revenues deriving from the video business exceeding $14,000 in the year following the closing of the transaction will be paid to Optibase as
additional consideration. The Agreement contemplated the sale of substantially all of the assets and liabilities relating to the business with the exception of
specific assets and liabilities as defined in the Agreement. As of the signing date of the financial statements, the closing of this transaction is still subject to the
receipt of the consideration and is expected to occur shortly after the release of these financial statements. See further details in Note 17c. Following the closing
of the transaction the Company's business will focus on the real estate segment. In addition, the Company's entire revenues and expenses for the years ended
2008 and 2009 from the video technology and IPTV business will be classified after the closing of the Agreement as discontinued operations in the Company's
financial statements.
b.
Discontinued operations:
In 2006, the Company determined that the level of activity and cash flow generated from the disposed digital non-linear product line are no longer significant and
as such reassessed the classification of the Digital non-linear product line, and decided that it meets the definition of discontinued operation, in accordance with
ASC 205-20 "Discontinued Operation".
Accordingly, the results of operations including revenues, operating expenses and other income and expenses of the digital non-linear product line for the years
2007 and 2008 have been classified in the accompanying statements of operations as discontinued operations. No income or expenses were recognized for the
year ended December 31, 2009.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").
F - 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
OPTIBASE LTD. AND ITS SUBSIDIARIES
the FASB
issued what has been codified
In June 2009,
(Formerly: SFAS No. 168,
"the FASB Accounting Standards Codifications and Hierarchy of GAAP - a Replacement of SFAS 162"). The Financial Accounting Standards Board (FASB) Accounting
Standards Codification™ ("Codification") became the single source of authoritative U.S. GAAP. The Codification did not create any new GAAP standards but
incorporated existing accounting and reporting standards into a new topical structure with a new referencing system to identify authoritative accounting standards,
replacing the prior references to Statement of Financial Accounting Standards (SFAS), Emerging Issues Task Force (EITF), FASB Staff Position (FSP), etc. Authoritative
standards included in the Codification are designated by their Accounting Standards Codification (ASC) topical reference, and new standards will be designated as
Accounting Standards Updates (ASU), with a year and assigned sequence number. Beginning with this report for the year ended December 31, 2009, references to prior
standards have been updated to reflect the new referencing system.
in ASC 105, "Generally Accepted Accounting Principles"
a.
Use of estimates:
The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. The Company's management believes that the estimates, judgments and
assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ from those estimates.
b.
Financial statements in U.S. dollars:
A majority of the revenues of the Company and its subsidiaries is generated in United States dollars ("dollars"). In addition, a substantial portion of their costs is
incurred or determined in dollars. The Company's management believes that the dollar is the currency of the primary economic environment in which the Company
and its subsidiaries operate. Thus the dollar is their functional and reporting currency. Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into U.S. dollars, in accordance with ASC 830, "Foreign Currency Matters" (Formerly: SFAS No. 52, "Foreign Currency Translation"). All
transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as
appropriate.
The financial statements of Optibase SARL (subsidiary in Luxembourg) whose functional currency has been determined to be CHF (Swiss Francs) have been
translated into U.S. dollars. Assets and liabilities of this subsidiary are translated at year-end exchange rates and their statement of operations items are translated
using the actual exchange rates at the dates on which those items are recognized. Such translation adjustments are recorded as a separate component of
accumulated other comprehensive income in shareholders' equity.
c.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances, including profits from
intercompany sales not yet realized outside of the Group, have been eliminated upon consolidation.
F - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
d.
Cash equivalents:
OPTIBASE LTD. AND ITS SUBSIDIARIES
Cash equivalents include short-term, highly liquid investments that are readily convertible to cash, with original maturities of three months or less.
e.
Inventories:
Inventories are stated at the lower of cost or market value. Inventory reserves are provided to cover risks arising from slow-moving items or technological
obsolescence. In 2007, 2008 and 2009, the Company and its subsidiaries recorded write-off charges in a total amount of $ 0, $ 79 and $ 171, respectively, related to
obsolete inventory and slow-moving items, which are included in the statement of operations under cost of revenues.
Cost is determined as follows:
Raw materials and components - by the "moving average cost" method.
Work in progress and finished goods - cost of manufacturing with the addition of allocable indirect manufacturing costs by the "average cost" method.
f.
Property and equipment:
Property and equipment are stated at cost net of accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful lives of the assets, at the following annual rates:
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Building
Leasehold improvements
g.
Long-lived assets including intangible assets:
%
20 – 33
6 – 20
15
35
The shorter of the useful life or term of the lease
The Company and its subsidiaries long-lived assets are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment" (Formerly: SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"), whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.
F - 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company reviewed assets on a component-level basis, which is the lowest level of assets for which there are identifiable cash flows that can be
distinguished operationally and for financial reporting purposes. The carrying amount of the asset group was compared with the related expected undiscounted
future cash flows to be generated by those assets over the estimated remaining useful life of the primary asset. In cases where the expected future cash flows
were less than the carrying amounts of the assets, those assets were considered impaired and written down to their fair values. Fair value was established based
on discounted cash flows. As of December 31, 2007, 2008 and 2009, no impairment losses have been identified.
h.
Investments in affiliated companies:
Investments in companies that are not controlled but over which the Company can exercise significant influence are presented using the equity method of
accounting. The Company discontinues applying the equity method when its investment is reduced to zero and the Company has not guaranteed obligations of
the affiliate or otherwise committed to provide further financial support to the affiliate.
Investments in non-marketable equity securities of entities in which the Company does not have control or the ability to exercise significant influence over their
operation and financial policies are recorded at cost.
Management evaluates investments in affiliates and other companies for evidence of other-than temporary declines in value. When relevant factors indicate a
decline in value that is other-than temporary the Company recognizes an impairment loss for the decline in value. As for impairment charges recorded in 2007,
2008 and 2009 see Note 6.
i.
Revenue recognition:
The Company and its subsidiaries generate revenues mainly from the followings:
Sale of hardware products ("products") and to a lesser extent from sales of software products - The Video solutions revenues. Fixed income-real-estate.
The Video solutions revenues
The Company and its U.S. subsidiary sell their products worldwide directly and through system integrators, VARs, distributors and OEMs who are considered
end-customers.
Revenues from product sales in which the software is incidental to the hardware are recognized in accordance with ASC 605, "Revenue Recognition" and Staff
Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" (SAB 104), when delivery has occurred, persuasive evidence of an agreement
exists, the vendor's fee is fixed or determinable, no further obligation exist and collectability is probable. Estimated warranty costs, which are insignificant, are
based on the Company and its U.S. subsidiary's past experience and are accrued in the financial statements. The Company and its U.S. subsidiary do not grant a
right of return.
Revenues from sale of products that include post customer support are recognized in accordance with ASC 605-25 Multiple Element Arrangements" (formerly:
Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"). Multiple-element arrangement (an arrangement that
involves the delivery or performance of multiple products, services and/or rights to use assets) is separated into more than one unit of accounting, and revenue
from such deliverables is recognized under SAB 104.
F - 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company accounts for product sales in which the software is more-than incidental to the functionality of the hardware in accordance with ASC 985-605
"Revenue Recognition - Software" (Formerly - Statement of Position No. 97-2, "Software Revenue Recognition"). ASC 985-605 generally requires revenue earned
on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. ASC 985-605 also requires
that revenue be recognized under the "residual method" when vendor-specific objective evidence ("VSOE") of fair value exists for all undelivered elements and
VSOE does not exist for one or more of the delivered elements. Under the residual method, any discount in the arrangement is allocated to the delivered elements.
Maintenance and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the maintenance
and support agreement. The VSOE of fair value of the undelivered elements (maintenance and support), is determined based on the renewal rate charged when
these elements are sold separately.
Amounts received from customers for whom revenue has not yet been recognized, are presented as deferred revenues.
Fixed income-real-estate
Rental income includes minimum rents and expenses recoveries. Minimum rents are recognized on an accrual basis over the terms of the related leases on a
straight-line basis. Lease revenue recognition commences when the lessee is given possession of the leased space and there are no contingencies offsetting the
lessee's obligation to pay rent.
Substantially all of the lease agreements contain provisions that require reimbursement of the tenant's share of real estate taxes, insurance and common area
maintenance costs, or common area maintenance fees ("CAM"). Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period
that the applicable costs are incurred in accordance with the lease agreements.
j.
Research and development costs:
ASC 985-20 "Costs of Software to Be Sold, Leased, or Marketed" (Formerly known as SFAS 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed") requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.
Based on the Company product development process, technological feasibility is established upon completion of a working model.
Research and development costs incurred in the process of developing product improvements or new products, are generally charged to expenses as incurred,
net of participation of the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor, and the European Union Research and Development
Program.
In the years ended December 31, 2007, 2008 and 2009, all research and development costs were charged to the statements of operations as incurred.
F - 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k.
Income taxes:
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes" (Formerly: SFAS 109, "Accounting for Income Taxes").
This Statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable
value.
Effective January 1, 2007, the Company adopted the provisions of ASC 740 (Formerly: FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes,
an Interpretation of FASB Statement No. 109"). ASC 740 clarifies the accounting for uncertainties in income taxes by establishing minimum standards for the
recognition and measurement of tax positions taken or expected to be taken in a tax return. Under the requirements of ASC 740, the Company must review all of its
tax positions and make a determination as to whether its position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax
position meets the more-likely–than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-
likely-than-not to be realized upon ultimate settlement or disposition of the underlying issue.
l.
Royalty-bearing grants:
Royalty-bearing grants from the Government of Israel for research and development are recognized at the time the Company is entitled to such grants on the basis
of the related costs incurred, and are recorded as a reduction of research and development costs (see also Note 10b).
m.
Non-royalty-bearing grants:
The Company receives non-royalty-bearing grants from the European Union Research and Development Program, and from the STRIMM and NEGEV
consortiums, which are part of the Office of the Chief Scientist Magnet program. These grants are recognized at the time the Company is entitled to such grants
on the basis of the costs incurred, and are recorded as a reduction in research and development costs.
n.
Concentrations of credit risk:
Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents,
trade receivables and long-term lease deposits.
Cash and cash equivalents are invested in U.S. dollar deposits with major banks in Israel and the United States. Such deposits in the United States may be in
excess of insured limits and are not insured in other jurisdictions. The Company maintains cash and cash equivalents with diverse financial institutions and
monitors the amount of credit exposure to each financial institution. The trade receivables of the Company and its subsidiaries are geographically diversified and
derived from sales to customers mainly in North America, Europe and the Far East. The Company and its U.S. subsidiary generally do not require collateral;
however, in certain circumstances, the Company and its U.S. subsidiary may require letters of credit, advance payments, insurance, and other collateral or
additional guarantees. An allowance for doubtful accounts is determined with respect to those amounts that the Company and its U.S. subsidiary have
determined to be doubtful of collection in addition to a general allowance for the remaining accounts. The Company and its subsidiary perform ongoing credit
evaluations of their customers.
F - 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
o.
Basic and diluted net earnings (losses) per share:
OPTIBASE LTD. AND ITS SUBSIDIARIES
Basic net earnings (losses) per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings
(losses) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares
considered outstanding during the year, in accordance with ASC 260, "Earning Per Share" (Formerly: SFAS 128, "Earnings Per Share"). All outstanding stock
options and unvested shares have been excluded from the calculation of the diluted net earnings (losses) per Ordinary share because the securities are anti-
dilutive for all periods presented.
p.
Accounting for stock-based compensation:
The Company accounts for stock-based compensation in accordance with ASC 718 "Compensation – Stock Compensation" (formally: SFAS 123(R), ''Share-
Based Payment'').
ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model.
The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s
consolidated statements of income.
The Company recognizes compensation expenses net of estimated forfeitures and recognizes the compensation costs for only those shares expected to vest on a
straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years. ASC 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option pricing model. The option-pricing model requires a
number of assumptions, of which the most significant are the expected stock price volatility and the expected option term. Expected volatility is calculated based
upon actual historical stock price movements. The expected term of options granted is based upon historical experience and represents the period of time that
options granted are expected to be outstanding. The risk free interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company
has historically not paid dividends and has no foreseeable plans to pay dividends. During the years ended December 31, 2007, 2008 and 2009, the fair value was
estimated at the date of grant using the following assumptions:
Dividend yield
Volatility
Risk free interest
Expected term (years)
F - 15
2007
0%
58%
4.6%
4.6
December 31,
2008
0%
58%
3% - 4.6%
4.6
2009
0%
60%
2.36% - 3.69%
4.75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
q.
Severance pay:
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company's liability for severance pay is calculated pursuant to Israel's Severance Pay Law, based on the most recent salary of the employees, multiplied by
the number of years of employment as of the balance sheet date. Israeli employees are entitled to severance equal to one month's salary for each year of
employment, or a portion thereof. The Company's liability for all of its employees is fully provided by monthly deposits with insurance policies and by an accrual.
The value of these policies is recorded as an asset in the Company's balance sheet.
The deposited funds include profits or losses accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation, pursuant to the Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies,
and includes immaterial profits.
Commencing July, 2007, the Company's employees elected to be included under section 14 of the Severance Compensation Act, 1963 ("section 14"). According to
section 14, these employees are entitled only to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies.
Payments in accordance with section 14 release the Company from any future severance payments (under the above Israeli Severance Pay Law) in respect of
those employees. The aforementioned deposits are not recorded as an asset in the Company's balance sheet.
Severance pay expense amounted to $ 446, $ 599 and $ 380 for the years ended December 31, 2007, 2008 and 2009, respectively.
r.
Employee benefit plan:
The Company has a 401(K) defined contribution plan covering certain employees in the U.S. All eligible employees may elect to contribute up to 100%, but no
more than $ 16.5 per year (and $ 22 for employees of 50 years of age and above), of their annual compensation to the plan through salary deferrals, subject to IRS
limits. The Company makes a matching contribution up to 25% over a vesting period of 5 years.
s.
Fair value measurements:
The carrying amounts of our financial instruments, including cash and cash equivalents, short-term bank deposits, trade receivables, accounts receivable, trade
payables, other accounts payable and accrued liabilities, approximate fair value because of their generally short maturities.
As of December 31, 2009 and 2008, the Company had no assets and liabilities measured at fair value under ASC 820 "Fair Value Measurement and Disclosures"
t.
Treasury Shares:
During past years, the Company repurchased certain of its Ordinary shares on the open market and holds such shares as treasury shares. The Company presents
the cost to repurchase treasury shares as a reduction from shareholders' equity.
F - 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
u.
Fair value of financial instruments:
OPTIBASE LTD. AND ITS SUBSIDIARIES
The carrying amounts of our financial instruments, including cash and cash equivalents, trade receivables, accounts receivable, trade payables, other accounts
payable, and accrued liabilities, approximate fair value because of their generally short-term maturities.
Effective January 1, 2008, the Company adopted ASC 820 (Formerly SFAS 157), "Fair Value Measurements and Disclosures". ASC 820 clarifies that fair value is an
exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a
liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation
methodologies in measuring fair value:
Level 1-
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2-
Include other inputs that are directly or indirectly observable in the marketplace.
Level 3-
Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Cash measured at fair value under ASC 820 on a recurring basis as of December 31, 2009.
v.
Business Combinations:
In December 2007, the FASB issued ACS No. 805 (Formerly SFAS 141(R) ), ‘‘Business Combinations’’. This Statement replaces SFAS No. 141, ‘‘Business
Combinations’’, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any
contingent consideration and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. In addition, the
statement requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling
interest in addition to that attributable to the acquirer.
ACS 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008.
w.
Impact of recently issued accounting standards:
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (ASU 2009-13). This update
amends ASC Topic 605-25, “Revenue Recognition—Multiple-Deliverable Revenue Arrangements” to remove the criterion that entities must use objective and
reliable evidence of fair value in separately accounting for deliverables and provides entities with a hierarchy of evidence that must be considered when allocating
arrangement consideration. The update also requires entities to allocate arrangement consideration to the separate units of accounting based on the deliverables’
relative selling price. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after
June 15, 2010, unless the election is made to adopt ASU 2009-13 retrospectively. The adoption of this guidance is not expected to have a material impact on the
Company’s financial condition, results of operations and cash flows.
F - 17
OPTIBASE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
In October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements that Include Software Elements” (ASU 2009-14). This update modifies the
scope of the software revenue recognition guidance to exclude (a) non-software components of tangible products and (b) software components of tangible
products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function
together to delivery the product’s functionality. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010, unless the election is made to adopt ASU 2009-14 retrospectively. The adoption of this guidance is not expected to
have a material impact on the Company’s financial condition, results of operations and cash flows.
In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements” (ASU 2010-06). ASU 2010-06 includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1
and 2 and additional information about Level 3 activity. The new disclosures are required in interim and annual reporting periods beginning after December 15,
2009, except for the disclosures relating to Level 3 activity, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within
those fiscal years. The adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.
NOTE 3:-
BUSINESS COMBINATION
On October 29, 2009, the Company through its subsidiary in Luxemburg acquired a commercial building located in Switzerland. The five-storey building includes 12,500
square meters (approximately 134,500 square feet) of rentable space with offices, laboratory and retail uses. The purchase price for the transaction was approximately CHF
23,500 (approximately $ 22,800 as of the purchase date) of which CHF 18,800 (approximately $ 18,100 as of the purchase date) was financed through a long-term loan from a
Swiss bank (see details in Note 9). The Company recognized in 2009 approximately $ 201 of acquisition-related costs.
The acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated to land, building and intangible assets. The
aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting
existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases
exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a
lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. Other than as discussed above, the Company
has determined that the real estate properties do not have any other significant identifiable intangibles. Following the acquisition, the Company reports on operating
segments as described in Note 14.
The results of operations of the acquired property are included in the Company's financial statements from the date the acquisition has been completed. The intangible
assets associated with the property acquisition are included in the consolidated balance sheets.
F - 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 3:-
BUSINESS COMBINATION (Cont.)
The total purchase price was allocated as follows:
Cash paid
Land
Building
Intangible assets
Total purchase price
Unaudited pro forma results:
OPTIBASE LTD. AND ITS SUBSIDIARIES
$
22,828
2,818
19,354
656
$
22,828
The following unaudited condensed combined pro forma financial information presents the Company's adjusted results of operations as if the acquisition had occurred as
of the beginning of the fiscal years 2008 and 2009, assuming that net income for the periods incorporates the amortization of intangible assets and financing costs from the
loan that was used for the acquisition:
Technology net revenues (audited)
Real estate net revenues (unaudited)
Technology net income (loss) (audited)
Real estate net income (unaudited)
Technology Basic and diluted net earnings (loss) per share
Real estate Basic and diluted net earnings per share
Year ended
December 31,
2008
Year ended
December 31,
2009
$
19,901
1,608
13,149
1,530
21,509
$
14,679
(9,545) $
505
(9,040) $
(0.63) $
0.03
(0.60) $
212
426
638
0.01
0.03
0.04
$
$
$
$
$
$
The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at the beginning of
2008 and 2009, nor is it necessarily indicative of future results.
F - 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
Government authorities
Prepaid expenses
Short-term deposit (1)
Interest receivable
Others
OPTIBASE LTD. AND ITS SUBSIDIARIES
December 31,
2008
2009
$
$
$
455
85
-
5
145
690
$
228
151
3,750
131
232
4,492
(1)
Short-term deposit was paid by the Company to a third-party in connection with potential transaction to acquire interest in an office building in the U.S.A.
Subsequent to December 31, 2009, this transaction was terminated and the Company received the deposit from the third party.
NOTE 5:-
INVENTORIES
Raw materials and components
Work in progress
Finished goods
NOTE 6:-
INVESTMENTS IN COMPANIES
December 31,
2008
2009
$
$
$
1,707
324
2,342
4,373
$
1,035
149
1,172
2,356
a.
b.
c.
The Company holds on a fully diluted basis approximately 4.34% of Mobixell Network, Inc. equity. The investment is treated on the basis of the cost method. As
of December 31, 2008 and 2009, the investment's balance amounts to $ 700.
The Company holds approximately 32% on a fully diluted basis, of V.Box Communication Ltd. ("V. Box"), a privately held Company. The Company recorded
impairment losses in the amount of $ 325 in the year ended December 31, 2007, which are included in the statement of operations under other expenses (income),
net. Through December 31, 2007, the Company has impaired the investment and the balance of the investment was $ 0. Optibase did not invest additional
amounts in 2008 and 2009.
In January 2007, the Company purchased 3,035,223 Ordinary shares of Scopus, representing approximately 23% of Scopus then issued share capital, from Koor
Corporate Venture Capital and Koor Industries Ltd. at an aggregate purchase price of approximately $ 15,935. In August 2007, the Company has completed a
tender offer process and purchased on the market additional 690,000 Ordinary shares of Scopus, representing approximately 5% of Scopus then issued share
capital, at an aggregate purchase price of $ 3,968.
In January 2008, the Company purchased additional 1,380,000 Ordinary shares of Scopus, bringing its aggregated investment to approximately 37% of Scopus
then issued share capital. The consideration of the purchase amounted to approximately $ 8,556.
F - 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 6:-
INVESTMENTS IN COMPANIES (Cont.)
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company accounted for the investment in accordance with the provision of ASC 323 "Investment - Equity Method and Joint Ventures" (formerly: APB 18),
and as the Company has the ability to exercise significant influence over Scopus, the equity method of accounting was applied. As such, the purchase price has
been allocated to the assets acquired and the liability assumed based on their fair value at the dates of acquisition. The fair values of the identified assets were
established based on an independent valuation study performed by a third-party specialist. The excess of the purchase price over the fair value of the net
tangible and intangible assets acquired has been recorded as goodwill totaling approximately $ 1,627 in the 2008 acquisition. For the year ended December 31,
2008, the Company recorded its share of Scopus loss as well as amortization of tangible and intangible assets acquired, amounting to $ 1,930.
The following summarizes information of Scopus:
Current assets
Non current assets
Current liabilities
Non current liabilities
Revenues
Gross profit
Net Income
December 31,
2008
2009
62,275 $
4,620 $
(20,117) $
(1,921) $
Year ended December 31,
2009
2008
75,654 $
37,113 $
346 $
-
-
-
-
-
-
-
$
$
$
$
$
$
$
On December 23, 2008, the Company entered into an Agreement with Harmonic Inc. ("Harmonic") and Scopus, pursuant to which Scopus will become a wholly
owned subsidiary of Harmonic. In connection with the Agreement, the Company and Harmonic entered into a voting agreement pursuant to which the Company
has undertaken to vote in favor of the transactions. The Company has agreed also to grant Harmonic a proxy and appointed certain Harmonic officers as its proxy
to vote in favor of the transactions.
As of December 31, 2008, the proposed acquisition was subject to customary conditions, regulatory approvals and the approval of Scopus' shareholders. In
connection with the acquisition, Optibase entered into a voting agreement with Harmonic pursuant to which Optibase has undertaken to vote in favor of the
acquisition at Scopus' shareholder meeting. The closing took place in March 2009.
On March 12, 2009 following the closing of the merger agreement between Scopus and Harmonic, the Company had disposed of its entire holding in Scopus for a
total consideration of approximately $ 28,700 and recorded other income, which include equity in losses of $ 4,773. The Company does not expect any tax
payments as a result of the sale.
The Company and Scopus have agreed to waive any claim against each other (and against Harmonic, in the case of claims by the Company) arising from or in
connection with the term sheet, previously signed by the Company and Scopus with respect to negotiations took place between the parties during 2008 and the
termination of such negotiations. Scopus undertook in addition to reimburse the Company for certain of its expenses associated with such negotiations in the
aggregate amount of $ 300.
F - 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 7:-
PROPERTY, EQUIPMENT AND OTHER ASSETS, NET
Cost:
Computers and peripheral equipment
Office furniture and equipment
Motor vehicles
Leasehold improvements
Accumulated depreciation
Depreciated cost *)
Cost (See Note 3 for more details):
Land
Real estate property
Accumulated depreciation
Depreciated cost
Acquired intangible assets, net **
OPTIBASE LTD. AND ITS SUBSIDIARIES
December 31,
2008
2009
$
11,783
357
5
852
12,997
11,769
1,228
$
$
-
-
-
-
-
$
-
$
11,985
363
-
796
13,144
12,508
636
2,818
19,354
22,172
92
22,080
634
$
$
$
$
$
*)
Depreciation expenses amounted to $ 1,244, $ 1,090 and $ 933 for the years ended December 31, 2007, 2008 and 2009, respectively.
**)
Amortization expenses amounted to $ 22 for the year ended December 31, 2009. See further details with regards to the other assets in Note 3.
Estimated amortization expenses for each of the five succeeding fiscal years are as follows:
Year
2010
2011
2012
2013
2014
F - 22
Estimated
amortization
expenses
$
130
130
130
130
104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Employees and payroll accruals
Royalties (see Note 10b)
Accrued expenses
Government authorities
OPTIBASE LTD. AND ITS SUBSIDIARIES
December 31,
2008
2009
$
$
1,998
1,906
2,204
812
$
6,920
$
1,119
2,046
2,035
1,115
6,315
NOTE 9:-
SHORT-TERM BANK CREDIT LINE AND LONG TERM LOAN
As of December 31, 2008 and 2009, the Company and its subsidiaries had authorized lines of credit in the amount of $ 921 and $ 395, respectively, out of which $ 921 and $
395, respectively, are linked to the NIS and bear an annual bank interest rate of Prime plus 1%-1.25%.
The Company and its subsidiaries did not utilize its line of credit as of December 31, 2008 and 2009.
On October 29, 2009, the Company’s subsidiary in Luxemburg was granted a mortgage loan ("the loan") from a financial institution in Switzerland, in the amount of CHF
18,800 for the purpose of purchasing its real estate property located in Switzerland ("the property"). The loan bears an adjustable interest rate based on current money and
capital markets in Switzerland plus the bank’s customary margins. The financial institution may increase margin at any time if creditworthiness of the borrower or quality of
the property is impaired. Principal and interest of the loan are payable quarterly. The mortgage loan may be repaid at any time with a three months prior written notice by
the Company. The mortgage loan is governed by the laws of Switzerland and bears other terms and conditions customary for that type of mortgage loans. The Company
pledged to the bank the property and all accounts and assets of the Company’s subsidiary which are deposited with the bank against the loan received.
Maturities of long term loan by years are as follows:
Year ended December 31,
2011
2012
2013
2014
2015
2016 and thereafter
$
365
365
365
365
365
16,072
$
17,897
F - 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a.
Lease commitments:
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company and its subsidiaries facilities and motor vehicles are leased under several operating lease agreements for periods ending in 2011.
Future minimum lease commitments under non-cancelable operating leases are as follows:
Year ended December 31,
2010
2011
$
$
841
575
1,416
As of December 31, 2009, the Company and its subsidiaries provided long-term deposits amounting to $ 233 as collateral, in accordance with the lease
agreements.
Rent expenses amounted to $ 693, $ 759 and $ 725 for the years ended December 31, 2007, 2008 and 2009, respectively. Motor vehicle leasing expenses for the
years ended December 31, 2007, 2008 and 2009, were $ 549, $ 482 and $ 334, respectively.
b.
Royalty commitments:
The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. The Company is obligated to
pay royalties to the Office of the Chief Scientist ("OCS"), amounting to 3%-3.5% of the sales of the products and other related revenues generated from such
projects, up to 100% of the grants received, linked to the U.S. dollar and for grants received after January 1, 1999 also bearing interest at the rate of LIBOR. The
obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required.
Through December 31, 2009, the Company has paid or accrued royalties to the OCS in the amount of $ 4,248, which was recorded under cost of revenues. As of
December 31, 2009, the Company had an outstanding contingent obligation to pay royalties in the amount of approximately $ 4,162 plus interest.
c.
Guarantees:
As of December 31, 2009, the Company has obtained bank guarantees in favor of a lessor and the Israeli Chambers of Commerce totaling $ 143.
d.
Assets pledged as collateral:
As collateral for the Company's lines of credit, a fixed charge has been placed on the Company's property and equipment, shareholders' equity and a floating
charge (security interest in assets of the Company as they exist from time to time) has been placed on all the other assets of the Company.
F - 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
e.
Legal claim and contingent liabilities:
OPTIBASE LTD. AND ITS SUBSIDIARIES
In September 2005, the Company was served with a lawsuit filed by Vsoft Ltd., or Vsoft, a company that is undergoing liquidation proceedings and which claimed
that during 2002 the Company negotiated with Vsoft in bad faith regarding a potential purchase of its share capital, which led to Vsoft's entering into bankruptcy
proceedings. Vsoft demanded damages in the amount of $2,129 as well as the payment of reimbursement of expenses, legal fees and applicable VAT. On January
1, 2006, the Company filed a motion to dismiss the lawsuit based on our claim that Vsoft's receiver did not approve the lawsuit as determined by the liquidation
court. The Company's motion to dismiss was denied. The Company believes, based on the facts known to the Company and based on the advice of the
Company's external legal advisors as of this annual report, that though the claim for damages is without merit, the court may rule otherwise, and as such the
Company have provided an amount which it believes would cover the risk associated with that lawsuit.
There are several legal proceedings initiated against the Company in the ordinary course of business. In the opinion of management, it is not anticipated that the
settlement or resolution of any such matters, if any, will have a material adverse impact on the Company's financial condition, results of operations or cash flows.
NOTE 11:-
OTHER INCOME (EXPENSES), NET
Impairment losses of V.Box
Sale of Intangible Assets
Other expenses
Year ended December 31,
2008
2007
2009
$
(325) $
-
$
-
(2)
218
-
$
(327) $
218
$
-
-
-
-
NOTE 12:- TAXES ON INCOME
a.
Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:
According to the law, until 2007, the Company's results for tax purposes were measured based on the changes in the Israeli Consumer Price Index ("CPI"). As
explained in Note 2b, the financial statements are measured in U.S. dollars. The difference between the annual change in the Israeli CPI and in the NIS/dollar
exchange rate causes a further difference between taxable income and the income before taxes shown in the financial statements. In accordance with ASC 740
"Income taxes" (formerly: SFAS No. 109), the Company has not provided deferred income taxes on the difference between the functional currency and the tax
bases of assets and liabilities.
F - 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
b.
Corporate tax rates:
OPTIBASE LTD. AND ITS SUBSIDIARIES
Taxable income of Israeli companies is subject to tax at the rate of 29% in 2007, 27% in 2008, 26% in 2009, 25% in 2010, 24% in 2011, 23% in 2012, 22% in 2013, 21%
in 2014, 20% in 2015, 18% in 2016 and thereafter.
c.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the law"):
The Company's production facilities have been granted the status of an "Approved Enterprise" under the law, for five separate investment programs.
According to the provisions of the law, the Company has elected the "Alternative Package of Benefits" - waiver of grants in return for tax benefits.
According to the provisions of the law, income derived from the "Approved Enterprise" programs, under the " Alternative Package of Benefits", will be tax-
exempt for a period of two years, commencing with the year in which the Company first earns taxable income and subject to corporate taxes at the reduced tax rate
of 10%-25%, for an additional period of five to eight years (depending on the percentage of foreign investor ownership in the Company).
The law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved
enterprise program in the first five years of using the equipment.
The period of tax benefits detailed above is limited to the earlier of 12 years from the commencement of production, or 14 years from receiving the approval (this
limitation does not apply to the exemption period).
If the retained tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the reduced corporate
tax rate applicable to such profits (between 10%-25%) on the gross amount of dividend distributed. In addition, these dividends will be subject to a 15%
withholding tax.
The tax benefits available to an approved enterprise are contingent upon the Company's fulfillment of the conditions stipulated in the Law, regulations published
hereunder and the criteria set forth in the specific certificates of approval. In the event of failure to comply with these conditions, the benefits may be canceled
and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2009 management believes that
the Company is meeting all of the aforementioned conditions.
On April 1, 2005, an amendment to the Law came into effect ("the Amendment") and has significantly changed certain provisions of the Law. The Amendment
sets forth the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a "Beneficiary Enterprise",
such as provisions generally requiring that at least 25% of the "Beneficiary Enterprise" income will be derived from export. Additionally, the Amendment enacted
major changes in the manner in which tax benefits are awarded under the Law so that companies, that elect tax benefits under the "Alternative package of
benefits", no longer require Investment Center approval in order to qualify for tax. The company has elected one Beneficiary Enterprise status pursuant to the
Amendment benefits.
F - 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
OPTIBASE LTD. AND ITS SUBSIDIARIES
However, the Investment Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the
law as they were on the date of such approval. Therefore the Company's existing "Approved Enterprise" will generally not be subject to the provisions of the
Amendment.
Should the Company derive income from sources other than the "Approved Enterprise" during the relevant period of benefits; such income will be taxable at the
regular Israeli corporate tax rate.
Since the company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average
of the applicable rates. As of December 31, 2009, the Company did not generate any income under the provisions of the Law and the Amendment.
d.
Tax assessments:
The Company has final tax assessments through the tax year 2005.
On December 27, 2007 and on May 28, 2008, the Company received from the Israeli Tax Authorities a Tax Assessment (the "Assessment") for the years 2002-2003
and 2004-2005 respectively. On January 13, 2009 the Company signed a settlement agreement with the ITA, according to which, an amount of $ 73 was paid by the
Company for the final tax assessments for the years 2002-2005.
e.
Tax benefits under the Law for the Encouragement of Industry (Taxation), 1969:
The Company currently believes that it qualifies as an "industrial company" under the above law and, as such, is entitled to certain tax benefits, mainly
accelerated depreciation of machinery and equipment, and the right to claim public issuance expenses over three years, as a deduction for tax purposes.
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. No assurance can be
given that the Israeli tax authorities will agree that we qualify, or, if we qualify, that we will continue to qualify as an industrial company or that the benefits
described above will be available to us in the future.
f.
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred tax assets are as follows:
Operating loss carry forward
Reserves and allowances
Net deferred tax asset before valuation allowance
Valuation allowance
Net deferred tax asset
F - 27
December 31,
2008
2009
$
19,870 $
8,912
28,782
(28,637)
17,969
7,205
25,174
(25,029)
$
145 $
145
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
OPTIBASE LTD. AND ITS SUBSIDIARIES
The Company and its subsidiaries have provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforward and other temporary
differences. Management currently believes that, since the Company and its subsidiaries have a history of losses, it is more likely than not that the deferred tax
regarding the loss carryforward and other temporary differences will not be realized in the foreseeable future. During 2009, the valuation allowance was decreased
by approximately $ 3,608 primarily due to reduction in tax rate in Israel as described in paragraph b above.
g.
Net operating losses carryforward:
Through December 31, 2009, Optibase Ltd. had a net operating losses carryforward for tax purposes in Israel of approximately $ 53,297 which may be carried
forward and offset against taxable income in the future, for an indefinite period.
As of December 31, 2009, Optibase Inc. had U.S. federal net operating loss carryforward of approximately $ 21,861 that can be carried forward and offset against
taxable income for 20 years, no later than 2009 to 2029. Utilization of U.S. net operating losses may be subject to the substantial annual limitation due to the
"change in ownership" provisions of the Internal Revenue Code of 1986, and similar state provisions. The annual limitation may result in the expiration of net
operating losses before utilization.
h.
Reconciliation of the theoretical tax expenses to the actual tax expenses:
A reconciliation between the theoretical tax expense, assuming all income is taxed at the statutory tax rate applicable to the income of the Company and the actual
tax expense as reported in the statements of operations is as follows:
Loss before taxes as reported
Theoretical tax benefit computed at the statutory rate (29%, 27% and 26% for the years 2007, 2008
and 2009, respectively)
Tax adjustments in respect of currency translation
Income and other items for which a valuation allowance was provided
Current adjustment of ASC 740-10
Settlement of prior years tax assessments
Other non-deductible expenses
$
$
Year ended December 31,
2008
2007
2009
(4,301) $
(7,635) $
(4,713)
(1,247) $
(71)
895
73
-
423
(2,061) $
203
1,623
(73)
73
235
(1,225)
17
1,270
-
-
(62)
Income tax expense
$
73 $
- $
-
F - 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 12:- TAXES ON INCOME (Cont.)
i.
Loss before taxes on income consists of the following:
Domestic
Foreign
OPTIBASE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2008
2007
2009
$
$
(4,135) $
(166)
(8,655) $
1,020
(4,745)
32
(4,301) $
(7,635) $
(4,713)
j.
On January 1, 2007, the Company adopted the provisions of ASC Topic 740-10, "Income Taxes", previously referred to as FIN 48.. Prior to 2007, the Company
used the provisions of ASC 450 "Contingencies" (previously: FAS 5, "Accounting for Contingencies") to determine tax contingencies. As of January 1, 2007
there was no effect on the Company's shareholders equity upon the Company's adoption of ASC Topic 740-10.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at the beginning of the year
Reduction related to settlements of tax matters
Additions related to tax positions taken during the year
Balance at the end of the year
2008
2009
$
$
218 $
(73)
-
145 $
145
-
-
145
The Company conducts business globally and, as a result, the Company or its subsidiaries files income tax returns in the U.S. federal jurisdiction and various
states, as well as Switzerland and Luxembourg. In the normal course of business, the Company is subject to examination by taxing authorities such as Israel,
Switzerland, Luxembourg and the United States. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations for years before 2003 and is no longer subject to Israeli examinations for years before 2005.
NOTE 13:- SHAREHOLDERS' EQUITY
a.
General:
1.
The Ordinary shares of the Company are traded on the NASDAQ Global Market since April 1999.
Ordinary shares confer on their holders the right to receive notice to participate and vote in general meetings of the Company, the right to a share in
excess assets upon liquidation of the Company, and the right to receive dividends, if declared.
2.
On June 25, 2008, following the receipt of the approval of the Company's shareholders on June 18, 2008, the Company had completed a private issuance
of 2,816,901 ordinary shares of the Company to, the Company's President, Chief Executive Officer and then Executive Chairman of the Board of Directors,
in consideration for $5,000.
F - 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:- SHAREHOLDERS' EQUITY (Cont.)
b.
Stock options:
OPTIBASE LTD. AND ITS SUBSIDIARIES
Since 1990, the Company has granted options to employees and directors to purchase Ordinary shares.
In 1999, the Company adopted an Israeli Option Plan ("1999 Israeli option plan"), a U.S. Option Plan ("1999 U.S. option plan") (collectively "the 1999 plans").
Under the terms of the above option plans, options may be granted to employees, officers, directors and various service providers of the Company and its
subsidiaries. Also, the options generally become exercisable monthly over a four-year period, commencing one year after date of the grant, subject to the
continued employment of the employee. The options generally expire no later than seven years from the date of the grant.
In April 2001, the Board of Directors of the Company approved the adoption of the 2001 Non-Statutory Share Option Plan. Under the terms of this plan, options
may be granted to available personnel, employees, directors and consultants. The options to be granted under the plan are limited to non-statutory options. The
plan has terms similar to those contained under the 1999 U.S. Option Plan.
On May 1, 2003, the Board of Directors of the Company approved three years extension to the options granted under the 1994 share option agreement. At the
same date, the Company adopted the "Share Option Agreement 2003" in accordance with the amended Section 102 of Israel's Income Tax Ordinance.
The exercise price of the options granted under the plans may not be less than the nominal value of the shares into which such options are exercised. Any
options, which are forfeited or cancelled before expiration, become available for future grants.
The total number of options available for future grants as of December 31, 2009 was 2,303,302.
A summary of the Company's stock option activity, and related information, is as follows:
2007
Weighted
Average
Exercise
price
Amount
Year ended December 31
2008
Weighted
average
exercise
price
Amount
2009
Weighted
Average
Exercise
price
Amount
Outstanding at the beginning of the year
Granted
Exercised
Forfeited
2,209,922 $
210,000 $
(86,892) $
(377,904) $
5.66
3.72
2.55
13
1,955,126 $
32,500 $
- $
480,939 $
4.19
1.95
-
4.39
1,506,687 $
200,000 $
- $
(588,214) $
Outstanding at the end of the year
1,955,126 $
4.19
1,506,687 $
4.05
1,118,473 $
Exercisable options at the end of the year
1,725,942 $
4.08
1,432,447 $
4.08
907,895 $
4.05
1.26
-
3.23
3.99
4.60
Options vested and expected to vest at end
of year
Weighted average fair value of options
granted during the year
$
1,490,907
3.94
1,420,878 $
2.89
$
1.94
$
0.98
$
1.308
F - 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:- SHAREHOLDERS' EQUITY (Cont.)
OPTIBASE LTD. AND ITS SUBSIDIARIES
The aggregate intrinsic value represents the total intrinsic value (the difference between the Company's closing stock price on the last trading day of the fiscal
year 2009 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders
exercised their options on December 31, 2009. This amount changes based on the fair market value of the Company's stock. As of December 31, 2009, the total
intrinsic value of outstanding options was $ 14.
As of December 31, 2009, there was $ 170 of total unrecognized compensation cost related to options compensation arrangements granted under the Company's
stock option plans. That cost is expected to be recognized over a period of up to 3 years.
c.
Nonvested shares:
In May 2006, the Board of Directors approved the adoption of the 2006 Israeli Incentive Compensation Plan (the "2006 Plan"). The 2006 Plan provides for the
grant of options, restricted shares and restricted share units in accordance with various Israeli tax tracks. The Company currently uses the 2006 Plan for the grant
of restricted shares only. The restricted shares are granted at no consideration and with a vesting schedule of two years (50% each year). The restricted shares
are granted in accordance with the Israeli capital gains tax track. As of December 31, 2009 the pool consists of 300,000 Shares, where an aggregate of 116,450
ordinary shares has been reserved for issuance under the 2006 Plan.
A summary of the status of the entity's nonvested shares as of December 31, 2009, and changes during the year ended December 31, 2009, is presented below:
Nonvested shares
Non-vested at January 1, 2008
Granted
Vested
Forfeited
Non-vested at December 31, 2008
Granted
Vested
Forfeited
Non-vested at December 31, 2009
Weighted
average grant
date fair value
Shares
76,650 $
20,000 $
(61,900) $
(9,000) $
25,750 $
20,000 $
(14,750) $
(1,000) $
30,000 $
3.48
2.01
3.44
3.38
2.46
1.05
2.63
4.03
1.39
As of December 31, 2009, there was $ 8 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted to
employees under the Plan. That cost is expected to be recognized over a period of up to 2 years.
F - 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 13:- SHAREHOLDERS' EQUITY (Cont.)
d.
The total equity-based compensation expense related to all of the Company's equity-based awards, recognized for the years ended December 31, 2008 and 2009,
was comprised as follows:
OPTIBASE LTD. AND ITS SUBSIDIARIES
Cost of goods sold
Research and development
Selling and marketing
General and administrative
Total equity-based compensation expense before taxes
NOTE 14: - SEGMENT REPORTING
Year ended December 31,
2009
2008
$
$
80 $
60
272
246
658 $
16
18
108
79
221
a.
The Company's segment information has been prepared in accordance with ASC Topic 280, “Segment Reporting”. Operating segments are defined as
components of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by the Company's
chief operating decision-maker in deciding how to allocate resources and assess performance. The Company's chief operating decision-maker is the chief
executive officer, who evaluates our performance and allocates resources based on segment revenues and operating profit.
Commencing October 2009, following the acquisition of the real estate property as described in Note 3, the Company's operating segments are Video solution and
Fixed income real estate (See Note 1 for more details).
Segment operating profit is defined as income from operations, excluding unallocated headquarters costs. Expenses included in segment operating profit consist
principally of direct selling, general, administrative and delivery costs.
Year ended December 31, 2009
Fixed Income
Real Estate
Video
Solutions
Total
Revenues from external customers
Operating (loss)
Financial expenses, net
Equity in losses and gain from sale of investment in affiliated company
Income before taxes on income
Depreciation and amortization
Segment assets
F - 32
$
$
$
$
$
13,149 $
(5,216) $
4,773
933 $
40,226 $
272 $
(114) $
$
$
114 $
23,224 $
13,421
(5,330)
617
4,773
60
1,047
63,350
OPTIBASE LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 14: - SEGMENT REPORTING (Cont.)
Summary information about geographic areas:
The following presents total revenues for the years ended December 31, 2007, 2008 and 2009 and long-lived assets as of December 31, 2008 and 2009.
Israel
North America
Europe
Far East (excluding Japan)
Japan
Fixed income from real estate in Europe
Other
2007
Year ended December 31,
2008
2009
Total
revenues*)
Total
revenues*)
Long-
lived
assets
Total
revenues*)
Long-
Lived
Assets
$
1,186 $
10,813
7,228
3,309
167
-
274
444 $
10,756
4,246
3,848
275
-
332
1,433 $
104
-
-
-
-
-
474 $
7,399
1,883
3,153
119
272
121
848
21
-
-
22,714
-
$
22,977 $
19,901 $
1,537 $
13,421 $
23,583
*) Revenues are attributed to countries based on end-customer location.
b.
Total revenues from external customers per product line are divided as follows:
Video technologies
IPTV
Fixed Income Real Estate
NOTE 15:- RELATED PARTY TRANSACTIONS-
Year ended December 31,
2008
2007
2009
$
8,923 $
14,054
-
6,420 $
13,481
-
3,672
9,477
272
$
22,977 $
19,901 $
13,421
The Company has signed sublease and distribution agreements with V. Box through December 31, 2005. From January 2006 through December 2008, the sublease
agreement with V. Box was renewed on a month by month basis. The sublease agreement was not renewed starting January 2009.
The balances with and the revenues derived from related party were as follows:
a.
Balances with related party:
Trade receivables:
V. Box
F - 33
December 31,
2008
2009
$
65
$
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 15:- RELATED PARTY TRANSACTIONS (Cont.)
b.
Revenues from related party:
V. Box
Scopus
c.
Sublease and IT services payment received from related party:
V. Box
d.
Purchases from related party:
Scopus
V. Box
e.
General and administrative from related party:
Scopus
NOTE 16:- SELECTED STATEMENT OF OPERATIONS DATA
a.
Research and development, net:
Total research and development costs
Less - grants and participation
b.
Allowance for doubtful accounts:
Balance at beginning of year
Increase during the year
Write-off of bad debts
Balance at the end of year
F - 34
OPTIBASE LTD. AND ITS SUBSIDIARIES
2007
Year ended December 31,
2008
2009
$
$
$
$
$
$
9
-
$
$
11
23
$
$
92
$
125
$
99
213
$
$
102
107
$
$
-
$
300
$
8
-
22
-
31
-
Year ended December 31,
2008
2007
2009
7,143 $
(1,781)
7,498 $
(1,123)
5,020
(1,295)
5,362 $
6,375 $
3,725
313 $
56
(2)
367 $
367 $
159
(171)
355 $
355
172
(113)
414
$
$
$
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 16:- SELECTED STATEMENT OF OPERATIONS DATA (Cont.)
c.
Financial income (expenses):
Financial income:
Interest
Foreign currency translation adjustments
Realized gains on sale of available-for-sale marketable securities
Financial expenses:
Interest
Foreign currency translation adjustments
Realized losses on sale of available-for-sale marketable securities
Impairment of marketable securities
OPTIBASE LTD. AND ITS SUBSIDIARIES
Year ended December 31,
2008
2007
2009
$
$
804
-
733
1,537
(359)
(104)
(523)
(582)
(1,568)
$
214
-
349
563
(79)
(139)
(75)
-
(293)
$
(31)
$
270
$
423
257
-
680
(63)
-
-
-
(63)
617
NOTE 17:- SUBSEQUENT EVENTS (UNAUDITED)
a.
On March 1, 2010 the Company’s subsidiary in Luxembourg entered into an Option Agreement with a Cypriot company, Chessell Holdings Limited, with respect
to the commercial building acquired by the Company in October 2009, in Rümlang, Switzerland. Through its beneficial owner, Chessell Holdings, introduced
Optibase to the Rumlang property and facilitated Optibase’s acquisition and financing of the property. Under the Option Agreement, the Company granted
Chessell Holdings an option to purchase twenty percent (20%) of the share capital of the Company. Chessell Holdings undertook to pay a purchase price for the
option of CHF 315. The exercise price under the Option Agreement is calculated based on Optibase’s acquisition costs for the Rumlang Property plus interest
and an adjustment for proceeds that are distributed to the Company’s shareholders. The shares that would be issued to Chessell Holdings upon exercise of the
option will not have voting rights and would be subject to transfer restrictions in favor of Optibase.
b.
In January 2010, Mobixell networks had acquired a company and paid part of the acquisition costs with newly issued shares. As a result, the Company’s holding
in Mobixell on a fully diluted basis had decreased from 4.34% to 3.71%.
F - 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands (except share and per share data)
NOTE 17:- SUBSEQUENT EVENTS (UNAUDITED) (Cont.)
OPTIBASE LTD. AND ITS SUBSIDIARIES
c.
d.
On March 16, 2010, the Company signed an Assets Purchase Agreement (APA) with a wholly owned subsidiary of VITEC Multimedia ("Vitec") pursuant to
which Optibase Ltd. and its subsidiary Optibase Inc. (collectively, "Optibase") will sell their entire video business to Vitec (the "Business" and the
"Transaction", respectively). Under the terms of the transaction, which was approved by the Board of Directors of both companies, in consideration for the sale
of the Business, Vitec will pay the Company an aggregate amount of $ 8,000 in cash of which $ 1,000 will be deposited in escrow for a 2-year period as a security,
inter alia, for breach or material inaccuracy relating to Optibase's representations and warranties. In addition, Optibase and Vitec agreed on an earn-out
mechanism pursuant to which 45% of Vitec's revenues deriving from the Business exceeding $ 14,000 in the year following the closing of the Transaction will be
paid to Optibase. Consummation of the Transaction is subject to the fulfillment of certain conditions precedent standard for transactions of this nature. Closing
of the Transaction is expected to occur on June 30, 2010, after the release of this annual report. Upon signing of the Transaction, Vitec deposited US $500 in
escrow to be paid to Optibase if closing does not take place within a specific period of time from signing, subject to certain limited circumstances, principally
relating to non fulfillment of certain closing conditions by Optibase, in which case, such funds will be returned to Vitec. After closing of the transaction, the
company will reclassify its entire revenues and expenses for the years 2008 and 2009 as discontinues operation.
On February 2, 2010, Mazal 485 LLC, a company whose beneficial interest is jointly owned by the Company and by Gilmore USA LLC ("Mazal"), filed a lawsuit
against SL Green Realty Corp. and several of its subsidiaries ("SL Green") regarding the Purchase Agreement for interests in 485 Lexington Avenue. On January
7, 2010, the Company received a notice from the seller of 485 Lexington Avenue stating that the Purchase Agreement is terminated. The lawsuit alleges that SL
Green breached material terms of the Purchase Agreement and breached its covenant of good faith and fair dealing toward Mazal 485 LLC. The lawsuit seeks
specific performance to enforce SL Green's obligations under the Purchase Agreement and an abatement of the purchase price to compensate Mazal 485 LLC for
damages incurred as a result of SL Green’s breaches. On March 16, 2010, SL Green filed a motion for an order dismissing Mazal's claims, which was heard on June
2, 2010. On June 23, 2010, SL Green's motion to dismiss Mazal's request for performance of the sale-purchase agreement, was granted. The court directed SL
Green to answer to Mazal's remaining damage claims, while a conference was set for September 8, 2010. The case now proceeds with discovery on Mazal's
remaining claims, seeking damages for failure to perform, which are limited by the Purchase Agreement to Mazal's reasonable out-of-pocket costs and expenses
(including reasonable attorney's fees) incurred in connection with the agreement. There is no assurance that the abovementioned legal proceedings will succeed
and that the Company will be granted the sought performance of the transaction and/or damages.
F - 36
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and has duly caused and authorized this annual report to be signed on its behalf by the
SIGNATURES
undersigned.
Date: June 30, 2010
OPTIBASE LTD.
By:
/s/ Shlomo (Tom) Wyler
Name: Shlomo (Tom) Wyler
Title: President and Chief Executive Officer
- 94 -
Exhibit Number
1.1
1.2
4.1
4.2
4.3*
4.4*
4.5*
4.6*
4.7*
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
8.1*
EXHIBIT INDEX
Description of Document
Amended and Restated Memorandum of Association of Optibase Ltd. (incorporated by reference to Exhibit 3.1 to the Registrant's Report on Form 6-K dated
February 15, 2002).
Amended and Restated Articles of Association of Optibase Ltd. (incorporated by reference to Exhibit 1.2 to the Registrant’s Annual Report on Form 20-F for the
fiscal year ended December 31, 2008).
Agreement between Optibase Ltd. and Mr. Shlomo (Tom) Wyler dated May 6, 2008 (incorporated by reference to Exhibit 99.4 to Schedule 13D/A, filed with the
Commission by Shlomo (Tom) Wyler on June 25, 2008).
Agreement between Optibase Ltd. and Harmonic Inc. dated December 22, 2008 (incorporated by reference to Exhibit 99.13 to Schedule 13D/A, filed with the
Commission by Shlomo (Tom) Wyler on December 23, 2008).
Agreement between Mazal 485 LLC and Green 485 Holdings LLC, a subsidiary of SL Green Realty Corp. dated August 7, 2009.
Agreement between Optibase RE 1 SARL and Zublin Immobilien AG dated October 29, 2009.
Agreement between Optibase RE 1 SARL and Basler Kantonalbank dated October 28, 2009.
Agreement between Optibase RE 1 SARL and Chessell Holdings Limited dated March 1, 2010.
Agreement between Optibase Inc. and Optibase Technologies Ltd., a wholly owned subsidiary of S.A. Vitec dated March 16, 2010.
Form of Letter of Indemnification between Optibase Ltd. and its directors and officers (incorporated by reference to Exhibit 99.3 to Registrant's Report on Form 6-
K, filed with the Commission on October 5, 2005).
Form of Letter of Indemnification between Optibase, Inc. and its directors and officers (incorporated by reference to Exhibit 4.9 to the Registrant’s Annual Report
on Form 20-F for the fiscal year ended December 31, 2002).
1999 Israel Share Option Plan, as amended (incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 20-F for the fiscal year ended
December 31, 1999).
1999 U.S. Share Option Plan, as amended (incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 20-F for the fiscal year ended
December 31, 1999).
102 Plan (incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 20-F for the fiscal year ended December 31, 1999).
Employee Stock Purchase Plan (incorporated by reference to exhibits filed with the Registrant’s Annual Report on Form 20-F for the fiscal year ended December
31, 1999).
2001 Non-statutory Share Option Plan as amended and Form Option Agreement (incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on
Form 20-F for the fiscal year ended December 31, 2000, and with respect to an amendment, by reference to Exhibit 99.7 to the Registrant's Report on Form 6-K,
filed with the Commission on February 15, 2002).
2003 Amendment to the 1999 Israel Share Option Plan (incorporated by reference to Exhibit 4.(c).9 to the Registrant’s Annual Report on Form 20-F for the fiscal
year ended December 31, 2003).
2006 Israeli Incentive Compensation Plan (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on From S-8 (File no. 333-137644)).
List of the subsidiaries of the Company.
- 95 -
Exhibit Number
Description of Document
11.1
12.1*
12.2*
13.1*
13.2*
15.1*
15.2*
* Filed herewith
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 11 to the Registrant’s Annual Report on Form 20-F for the fiscal year ended December
31, 2003).
Certification by Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification by Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Certification by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification by Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Consent of Kost, Forer Gabbay & Kasierer, a member of Ernst & Young Global.
Consent of Brightman Almagor Zohar & Co., Certified Public Accountants, a member Firm of Deloitte Touche Tohmatsu.
- 96 -
Exhibit 4.3
EXECUTION VERSION
SALE-PURCHASE AGREEMENT
by and among
GREEN 485 HOLDINGS LLC,
as Transferor,
and
MAZAL 485 LLC,
as Transferee
August 7, 2009
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Certain Definitions
Sale-Purchase
Purchase Price; Loan Assumption
Condition of Title
Closing
Violations
Apportionments
Closing Deliveries
Conditions Precedent
Estoppel Certificates
No Successor
Right of Inspection
Title Insurance
Reserved
Indemnities
TABLE OF CONTENTS
i
Page
1
7
7
11
13
13
13
21
25
27
28
28
30
32
32
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
Representations and Warranties
Broker
Condemnation and Destruction
Escrow
Covenants
Transfer Taxes
Non-Liability
Inability to Perform; Default
Condition of Premises
Environmental Matters
Tax Certiorari Proceedings; ICIP
Reserved
Notices
Entire Agreement
Amendments
No Waiver
Successors and Assigns
ii
Page
34
43
44
45
47
51
52
52
53
54
54
55
56
57
58
58
58
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
Partial Invalidity
Section Headings; Incorporation of Exhibits
Governing Law
Confidentiality
No Recording or Notice of Pendency
Assignment
Adjournments
Counterparts
No Third Party Beneficiary
1031 Exchange
iii
Page
58
58
58
58
59
59
59
60
60
60
EXHIBITS
1(A)
1(B)
1(C)
1(D)
1(E)
1(F)
2(A)
2(B)
2(C)
2(D)
2(E)
2(F)
2(G)
2(H)
3(A)
4(A)(i)
8(A)(xxii)
8(A)(xxiii)
8(A)(xxiv)
8(A)(xxv)
8(A)(xxvi)
8(A)(xxix)
10
16(A)(i)
16(A)(ii)
16(A)(vii)
16(A)(xvi)
16(A)(xvii)
16(A)(xviii)
16(A)(xix)
16(A)(xxi)
16(A)(xxii)
Description of Land
Leases
Existing Contracts
Telecommunications Contracts
Brokerage Agreements
Union Agreements
Company LLC Agreement
Contribution Agreement
JV Loan Promissory Note
Member Loan Promissory Note
Option Agreement
Transferor Pledge and Security Agreement
Assignment of Limited Liability Company Interest
Title Affidavit
Transferor’s Wire Instructions
Title Exceptions
Form of 750 Space Lease
Form of 750 REA
Form of REA Estoppels
Form of Notice to 750 Third Owner LLC
Recognition Agreement
Indemnity Agreement
Form of Tenant Estoppel Certificate
Rent Arrearages
Union Employees
Litigation
Liabilities
Open Tax Certiorari Proceedings
Security Deposits
Tenant Billing
Environmental Violations
Existing Loan Documents
iv
16(A)(xxv)
16(A)(xxvi)
16(A)(xxvii)
16(A)(xxix)(a)
16(A)(xxix)(b)
Servicer Statement
ICIP Litigation
Leasing Costs
Current Structure Chart
Closing Structure Chart
v
SALE-PURCHASE AGREEMENT (this “Agreement”), made as of the ___ day of August, 2009 (the “Effective Date”), by and between GREEN 485 HOLDINGS LLC, a Delaware
limited liability company having an address c/o SL Green Realty Corp., 420 Lexington Avenue, New York, New York 10170, (the “Transferor”) and MAZAL 485 LLC, a Delaware limited
liability company having an address at 241 West 47th Street, Suite 11B, New York, New York 10036 (“Transferee”).
R E C I T A L S :
A. Green 485 Owner LLC (“Subsidiary”), 485 EAT Owner LLC (“EAT”) and Green 485 TIC LLC (“TIC”) are the owners as tenants-in-common of 100% of the fee interest in
the Premises (as hereinafter defined) commonly known as 485 Lexington Avenue, New York, New York.
B. As of the date hereof (i) Transferor is the owner of (a) 85.6% of the membership interests in Green 485 JV LLC, a Delaware limited liability company (the “Company”)
and (b) 100% of the membership interests in TIC; (ii) the Company is the owner of 100% of the membership interests in Green 485 Mezz LLC, a Delaware limited liability company (“Mezz
LLC”); (iii) Mezz LLC is the owner of 100% of the membership interests in Subsidiary; (iv) SL Green Operating Partnership, LP, a Delaware limited partnership (“SLGOP”) is the owner of
100% of the membership interests in (a) 485 EAT LLC, a Delaware limited liability company (“EAT Parent”) and (b) Transferor; and (v) EAT Parent is the owner of 100% of the
membership interests in EAT.
C. Prior to Closing, as set forth in Section 20C, Transferor shall (w) acquire the remaining 14.4% of the membership interests in the Company from CIF (as hereinafter
defined), (x) transfer a 1% membership interest in the Company to a wholly-owned subsidiary of SLGOP (the “1% Owner”), (y) contribute all of the membership interests in TIC to Mezz
LLC and (z) cause SLGOP to cause EAT Parent to contribute all of the membership interests in EAT to Mezz LLC.
D. In connection with the Closing, the parties intend to cause each of TIC and EAT to be merged with and into Subsidiary with Subsidiary as the surviving entity.
E. Pursuant to the terms and subject to the conditions set forth in this Agreement, Transferor desires to sell, assign, transfer and convey to Transferee forty-nine and
one-half percent (49.5%) of the legal and beneficial ownership interests in the Company (the “Purchased Interest”).
NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Transferor and Transferee hereby agree as follows:
1. Certain Definitions.
Certain capitalized terms used in this Agreement shall, for the purposes of this Agreement, have the meanings ascribed to such terms in this Article 1. Other capitalized terms
used in this Agreement and not defined in this Article 1 shall have the meanings ascribed to such terms elsewhere in this Agreement.
“affiliate” shall mean, as to any designated person or entity, any other person or entity which controls, is controlled by, or is under common control with, such designated
person or entity.
“Building” shall mean the building commonly identified as 485 Lexington Avenue, New York, New York.
“Brokerage Agreements” shall mean the agreements between a Transferor Party and any leasing brokers which are set forth on Exhibit “1(E)”.
“CIF” shall mean CIF 485 Member LLC, a Delaware limited liability company.
“Company” shall have the meaning set forth in the Recitals.
“Company LLC Agreement” shall mean that certain Amended and Restated Limited Liability Company Agreement of the Company, dated as of the Closing Date in the form
attached hereto as Exhibit “2(A)”, as the same may be amended or amended and restated from time to time.
“Contribution Agreement” shall mean that certain Contribution Agreement in the form of Exhibit “2(B)” to this Agreement, by and among SLGOP, Transferor, the Company
and Mezz LLC.
“control” (and with correlative meaning, “controlled by” and “under common control with”) shall mean the possession, directly or indirectly, of the power to direct or cause
the direction of management or policies of the Person in question (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise.
“Covered Affiliates” shall mean all affiliates of Transferor, Mezz LLC, the Fee Owner or the Company, as applicable.
“EAT Parent” shall have the meaning set forth in the Recitals.
“Escrow Agent” shall mean Greenberg Traurig, LLP.
“Existing Contracts” shall mean the management, service, telecommunications, information service and maintenance contracts and collective bargaining and other union
agreements affecting the Premises or the operation thereof which are listed on Exhibits “1(C)”, “1(D)” and “1(F)”.
“Existing Guaranty” shall mean that certain Guaranty dated as of January 22, 2007 by and between SL Green and Lender.
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“Existing Hazardous Substances Indemnity Agreement” shall mean that certain Hazardous Substances Indemnity Agreement dated as of January 22, 2007 by and between SL
Green, Subsidiary, TIC, EAT and Lender.
“Existing Loan” shall mean that certain loan in the original principal amount of Four Hundred Fifty Million Dollars ($450,000,000.00), made on or about January 22, 2007, by
Lender to the Fee Owner.
“Existing Loan Documents” shall mean the documents, agreements, and instruments evidencing and/or securing the Existing Loan, identified on Exhibit “16(A) (xxii)” attached
hereto.
“Existing Mortgage” shall mean the Amended, Restated and Consolidated Mortgage, Security Agreement, Assignment of Rents and Fixture Filing dated as of January 22, 2007
by and between Lender and the Fee Owner.
“Fee Owner” (each individually a “Fee Owner”) shall mean, collectively, Subsidiary (as successor by merger to EAT and TIC or otherwise), EAT and TIC.
“Fixtures” shall mean all equipment, fixtures and appliances of whatever nature which are (i) affixed to the Land or Improvements and (ii) owned by any Transferor Party and
used exclusively at the Real Property.
“Global Contracts” shall mean those Existing Contracts identified as a global contract on Exhibit “1(C)”,which relate to the Premises along with other properties owned by any
Covered Affiliate.
“Hazardous Materials” shall mean any solid wastes, toxic or hazardous substances, wastes or contaminants, polychlorinated biphenyls, paint or other materials containing
lead, urea formaldehyde foam insulation, radon, asbestos, and asbestos containing material, petroleum product and any fraction thereof as any of these terms is defined in or for the
purposes of any Relevant Environmental Laws (as hereinafter defined), and any Pathogen (as hereinafter defined).
“Improvements” shall mean the improvements on the Land, including without limitation, the Building.
“JV Loan” means that certain loan in the original principal amount of Twelve Million Two Hundred Thousand Dollars ($12,200,000.00) to be made by SLGOP or its wholly-
owned subsidiary (the “JV Lender”) to the Company prior to the Closing pursuant to the terms of this Agreement.
“JV Loan Promissory Note” shall mean the Promissory Note, in the form of Exhibit “2(C)” to this Agreement, made by the Company to the order of the JV Lender evidencing
the JV Loan.
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“Land” shall mean the land described on Exhibit “1(A)” and situated in the Borough of Manhattan, City of New York, County of New York and State of New York.
“Landlord” shall mean the landlord under a Lease.
“Leases” (each individually, a “Lease”) shall mean the leases, tenancies, concessions, licenses and occupancies affecting the Premises as listed on Exhibit “1(B)” (specifically
excluding any subleases listed on said Exhibit), as (a) the same heretofore have been amended, modified or extended (to the extent noted on Exhibit “1(B)”); and (b) hereafter may be
amended, modified or extended from time to time in accordance with the terms of this Agreement, or entered into between the date hereof and the Closing Date (as hereinafter defined) in
accordance with Article 20 hereof.
“Lender” shall mean Wachovia Bank, National Association as servicer of the Existing Loan held by Wells Fargo Bank, N.A. as trustee for the registered holders of Wachovia
Bank Commercial Mortgage Trust, Commercial Mortgage Pass-Through Certificates Series 2007-C30.
“Major Lease” means the Lease of each of Citibank, N.A. and Travelers Indemnity, each of which is identified on Exhibit “1(B)”.
“Major Tenant” means the tenant under any Major Lease.
“Manager Bad Boy Acts” means (a) the intentional misappropriation by Newmark or a Qualified Manager of any tenant security deposits or the intentional misapplication of
rent after an Event of Default (as defined in the Existing Mortgage), (b) the misapppropriation of Loss Proceeds (as defined in the Existing Mortgage) and (c) any act of damage, arson or
physical waste of the Premises resulting from the intentional acts or intentional omissions of Newmark or a Qualified Manager provided that such acts or omissions are willful or
constitute gross negligence.
“Member Loan” means that certain loan in the original principal amount of Twenty Million Dollars ($20,000,000.00) (which amount shall be increased or decreased by 49.5% of
any Net Adjustment provided for in Article VII), to be made on the Closing Date, by Transferee to Transferor, which loan is being made pursuant to the Member Loan Promissory Note
for a term of five (5) years and which shall be secured by Transferor’s retained 49.5% membership interest in the Company pursuant to the Transferor Pledge and Security Agreement.
“Member Loan Promissory Note” shall mean the Promissory Note, in the form of Exhibit “2(D)” to this Agreement, made by Transferor to the order of Transferee, evidencing
the Member Loan.
“Mezz LLC” shall have the meaning set forth in the Recitals.
“New Contracts” shall mean all management, service, telecommunications, information service and maintenance contracts, equipment leases and collective bargaining and
other union agreements affecting the Premises or the operation thereof and which are entered into by a Transferor Party or any Covered Affiliate after the date hereof subject to the
applicable provisions of this Agreement.
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“Nortel Lease” shall mean that certain Lease dated December 15, 2006 with Nortel Networks, Inc.
“Occupied Space” shall mean the aggregate square footage of rentable area at the Premises occupied, as of the date hereof, by Tenants other than the tenant under the Nortel
Lease, which the parties agree is 863,303 rentable square feet.
“Option Agreement” shall mean the Membership Interest Option Agreement by and between Transferee and Transferor in the form of Exhibit “2E” to this Agreement.
“Pathogen” shall mean any pathogen, toxin or other biological agent or condition, including but not limited to, any fungus, mold, mycotoxin or microbial volatile organic
compound.
“Personal Property” shall mean the aggregate of the following:
(i) All site plans, architectural renderings, plans and specifications, engineering plans, as-built drawings, floor plans and other similar plans or diagrams, if any, which (a)
relate to the Real Property and (b) are in a Transferor Party’s possession or control (the “Building Plans”);
(ii) Any Transferor Party’s right, title and interest, if any, in all licenses, permits and warranties, guaranties, indemnities, and bonds, which (a) relate to the Real Property or
any other Personal Property at the Real Property and (b) are assignable to Transferee (the “Permits”); and
(iii) All equipment, appliances, tools, machinery, supplies, building materials and other similar personal property which are (a) owned by any Transferor Party as of the date
of this Agreement or purchased after the date hereof and (b) attached to, appurtenant to or located in the Improvements and used in the day-to-day operation or maintenance of the
Improvements, but expressly excluding the Fixtures and any and all personal property owned by any property manager which is not a Covered Affiliate, tenants in possession, public or
private utilities licensees or contractors. Notwithstanding the foregoing, “Personal Property” expressly excludes, and Transferor shall not be required to convey, and Transferee shall
not be entitled to receive, any items containing the logo of Transferor or any Covered Affiliate, or any computer programs, software and documentation thereof (except to the extent that
same is required to operate and/or is embedded within any building systems within the Improvements and is not subject to an unassignable license or similar restriction in favor of a
third party that is not an affiliate of Transferor), electronic data processing systems, program specifications, source codes, logs, input data and report layouts and forms, record file
layouts, diagrams, functional specifications and variable descriptions, flow charts and other related materials (collectively, “Operational Systems”).
“Premises” shall mean the aggregate of the Real Property and the Personal Property.
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“Real Property” shall mean the fee estate in and to the aggregate of the Land, the Improvements, the Fixtures, the Fee Owner’ right, title and interest, if any, in the streets,
roads, lands and alleys in front of and adjacent to the Land, and the hereditaments and appurtenances to the Improvements and the Land, including without limitation all easements,
rights-of-way and other similar interests appertaining to the Land or the Improvements, and any award or payment made or to be made in lieu of any of the foregoing and any unpaid
award for damage to the Land or any of the Improvements by reason of change of grade or the closing of any street, road or avenue.
“Relevant Environmental Laws” shall mean any and all laws, rules, regulations, orders and directives, whether federal, state or local, applicable to the Premises or any part
thereof with respect to the environmental condition of the Premises and any adjacent property, and any activities conducted on or at the Premises, including by way of example and not
limitation: (i) Hazardous Materials; (ii) air emissions, water discharges, noise emissions and any other environmental, health or safety matter; (iii) the existence of any underground
storage tanks that contained or contain Hazardous Materials; and (vi) the existence of pcb contained electrical equipment.
“Security Deposits” (each individually, a “Security Deposit”) shall mean all refundable deposits (together with interest thereon) as listed on Exhibit “16(A)(xviii)” as same may
be drawn down, applied and/or retained after the date hereof in accordance with the applicable Lease and the terms of this Agreement.
“SLGOP” shall have the meaning set forth in the Recitals.
“SL Green” shall mean SL Green Realty Corp., a Maryland corporation.
“Surviving Contracts” shall mean Existing Contracts and New Contracts other than (i) Global Contracts which are in effect as of the Closing and (ii) any other Existing Contract
or New Contract which Transferee requests to be terminated at the Closing in accordance with Section 8(A)(xix).
“Telecommunications Contracts” shall mean the telecommunications and information service contracts and licenses affecting the Premises or the operation thereof which are
listed on Exhibit “1(D)”.
“Tenants” (each individually, a “Tenant”) shall mean the current tenants under the Leases.
“Title Insurer” shall mean, collectively, LandAmerica Financial Group, Inc. as to a not less than one-quarter (1/4) share as co-insurer, and First American Title Insurance
Company as to the balance, subject to Section 13E.
“Transferor Pledge and Security Agreement” shall mean the Pledge and Security Agreement, in the form of Exhibit “2(F)” to this Agreement, entered into by Transferor and
Transferee.
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“Transferor Party” shall mean, individually and collectively, Transferor, Mezz LLC, the Company and the Fee Owner.
“Union Agreements” shall mean the collective bargaining agreements with respect to the Union Employees (hereinafter defined) more particularly described on Exhibit “1(F)”.
2. Sale-Purchase.
In consideration of, and upon and subject to, the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the mutual
receipt and legal sufficiency of which is hereby acknowledged, Transferor agrees to sell, assign, transfer and convey to Transferee, and Transferee agrees to purchase, accept, assume
and acquire, the Purchased Interest. Transferor and Transferee agree that no portion of the Purchase Price (as hereinafter defined) is attributable to the Personal Property included in
this sale.
3. Purchase Price; Loan Assumption.
A. The purchase price for the Purchased Interest (the “Purchase Price”) is TWENTY MILLION SEVEN HUNDRED AND NINETY THOUSAND AND xx/00 DOLLARS
($20,790,000.00), plus or minus any Net Adjustment provided for in Article VII, payable as follows: (i) SEVEN MILLION FIVE HUNDRED THOUSAND AND xx/00 DOLLARS
($7,500,000.00) (the “Deposit”) payable on the date hereof (the “Deposit Date”), by wire transfer of immediately available federal funds to an account designated by Greenberg Traurig,
LLP, as escrow agent (“Escrow Agent”), to be held by Escrow Agent pursuant to and in accordance with the provisions of Article 19 of this Agreement; and (ii) THIRTEEN MILLION
TWO HUNDRED NINETY THOUSAND and xx/00 DOLLARS ($13,290,000.00), subject to the Net Adjustment, shall be paid to Transferor by wire transfer to an account or accounts
designated by Transferor on the Closing Date. Payment of the Option Payment (as such term is defined in the Option Agreement) shall be paid to Transferor by wire transfer to an
account or accounts designated by Transferor on the Closing Date simultaneous with the execution and delivery of the Option Agreement by Transferee. Transferor and Transferee
agree that any interest earned on the Deposit shall not be credited to the Purchase Price at Closing, and shall, upon the Closing, be and remain the property of Transferor; provided,
however, that any interest earned on the Deposit during any Transferor Adjournment Period (as hereinafter defined) shall be for the account of and credited to Transferee at Closing.
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B. It shall be a condition to Transferor’s obligation (as to items (i), (ii), (v) and (vi) below) and Transferee’s obligation (as to items (i), (ii), (iii), (iv) and (vi) below) to close
under this Agreement that, on or before the Closing Date, Lender shall consent in writing (the “Lender Consent”) pursuant to the Existing Loan Documents to (i) the sale of the
Purchased Interest to Transferee, (ii) the change of control of Fee Owner as the borrowers under the Existing Loan, pursuant to the agreements to be delivered at Closing, (iii) the
Transferor Pledge and the exercise of remedies thereunder or the exercise of Transferee’s call option pursuant to the Option Agreement, (iv) (x) the amendment of Article 9 and the
definition of “Transfer” in the Mortgage to substantially provide that transfers of direct and indirect interests in Fee Owner shall be permitted without Lender’s consent (but subject to
customary conditions), provided that such transfers do not result in a change of control of Fee Owner or, together with all prior such transfers in the aggregate (but excluding any
transfers of direct or indirect interests in SLGOP and/or SL Green), do not total more than 49% of the direct or indirect interests in Fee Owner, (y) (i) the approval of Newmark Knight
Frank as a “Qualified Manager” (as defined in the Mortgage) and (ii) the amendment of subsection (i) of the penultimate paragraph of Section 1.2 of the Existing Guaranty to provide
that none of the events in such subsection (i) shall be applicable to any Affiliate of Newmark or any other Qualified Manager which signs the Existing Guaranty and no recourse or
liability under the Existing Guaranty shall be triggered if any event described in subsection (i) shall occur with respect to any Affiliate of Newmark or any other Qualified Manager which
signs the Existing Guaranty, and (z) the termination of that certain Tenancy in Common Agreement, dated as of January 22, 2007, by and among Subsidiary, EAT and TIC, (v) the
exercise of Transferor’s or JV Lender’s remedies under or in respect of the JV Loan Promissory Note and the Company LLC Agreement upon Transferee’s default under the JV Loan
Promissory Note, and (vi) the execution and delivery of the Approved 750 REA (as described in Section 3C(iii) below), (all of the foregoing, the “Loan Assumption”). Transferee
acknowledges and agrees that (a) Transferee has received copies of the Existing Loan Documents, (b) the Existing Loan Documents set forth certain requirements that restrict the
assumption of the Existing Loan and (c) the Existing Loan has been securitized. By its execution and delivery of this Agreement, Transferee assumes all risk as to the Loan Assumption
and Transferee’s qualifications to purchase the Purchased Interest and satisfaction of the requirements imposed by Lender or the Existing Loan Documents in connection with the Loan
Assumption, and otherwise subject to the terms and conditions of this Agreement.
C. (1) No later than ten (10) business days after the date hereof, Transferee shall provide all information required of Transferee and its Affiliates, and Transferor shall
submit, together with the application fee (which application fee shall be split equally between Transferor and Transferee, and Transferee shall pay its share to Transferor within two (2)
business days after request therefor), a formal and complete application (the “Assumption Application”) to Lender pursuant to the assumption provisions of the Existing Loan, and
Transferee shall cooperate with Transferor to provide Lender with all applications, financial statements, reports and other materials required by the provisions under the Existing Loan
Documents in connection with the assumption of the Existing Loan, including, without limitation, such certifications as may be required under the Existing Loan Documents in respect
thereof and such other certifications and documents as may be required by Lender as and when requested, provided the same are customarily required in connection with the
assumption of loans similar to the Existing Loan. Transferee and Transferor shall cooperate with one another and with Lender and work diligently to obtain the Lender Consent.
Transferee shall deliver to Lender all applications, financial statements, organizational documents, statements, reports and other documents required to be delivered in connection with
the Loan Assumption and such other documents and information as are reasonably requested by Lender. Notwithstanding anything to the contrary in this Agreement, (a) Transferee
shall, using commercially reasonable efforts in a continuous and diligent manner, seek to satisfy all reasonable requirements and conditions precedent to the Loan Assumption required
by the Existing Loan Documents or customarily required by lenders in connection with the assumption of loans similar to the Existing Loan and (b) other than requirements and
conditions specific to Transferor (to the extent consistent with Transferor’s obligations under this Agreement), Transferee shall use commercially reasonable efforts to satisfy all such
reasonable requirements and conditions precedent, including, without limitation, all reasonable requirements and conditions imposed by Lender or rating agencies pursuant to the
Existing Loan Documents or otherwise customarily required by lenders in connection with the Loan Assumption. In furtherance of, and not in limitation of, Transferee's obligations
under the immediately preceding sentence, Transferee shall promptly and diligently: (a) comply with all reasonable requests or requirements of Lender and shall provide truthful,
accurate and complete information in response to all such requests and requirements; (b) execute such documents as shall reasonably be requested or required by Lender to facilitate
the Loan Assumption; and (c) comply with all other reasonable requests or requirements of Lender in accordance with customary prevailing practices of institutional lenders in
connection with mortgage loans secured by office properties of a size and type similar to the Premises.
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(ii) Transferee shall pay all third party attorneys’ fees and costs in connection with the Loan Assumption as and when the same are due. Transferor
and Transferee shall each pay its one-half share of all payments and other costs and fees as and when due in connection with the Loan Assumption pursuant to the
Existing Loan Documents, including but not limited to all assumption fees, transfer fees, application fees and payments due to Lender, all servicers, special servicers
and rating agencies (collectively, the “Loan Assumption Costs”); provided, however, that Transferor’s share of costs and expenses in connection with the Loan
Assumption Costs (exclusive of any assumption fees due to Lender) shall be limited to $10,000.00 and Transferee shall be responsible for any balance. Transferee
acknowledges and agrees that, except as provided in Section 23(A) of this Agreement, if Transferee fails, for any reason or for no reason, to purchase the Purchased
Interest, Transferee shall not be entitled to any refund or reimbursement for all or any portion of the payments by Transferee under this Section 3(c)(ii), including,
without limitation, any Loan Assumption Costs.
(iii) Concurrently with the Assumption Application, Transferor shall submit for Lender’s approval an Amended and Restated Reciprocal Operating and
Easement Agreement in the form attached hereto as Exhibit “8(A)(xxiii)” (the “Form 750 REA”). Transferor and Transferee shall reasonably cooperate to obtain
Lender’s approval of the Form 750 REA, including making such reasonable and customary changes to the Form 750 REA as may be requested by Lender (such
changes, the “Lender REA Changes”; the Form 750 REA, as modified by the Lender REA Changes and approved by Lender, is referred to as the “Approved 750
REA”). At Closing, Transferor shall cause 750 Owner to direct and Transferee shall direct that the Approved 750 REA be recorded in the New York County Office of
the Register of the City of New York.
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D. If Lender issues the Lender Consent and the Closing occurs, Transferee shall accept the Purchased Interest and the corresponding indirect ownership interest in the
Premises, subject to the Existing Loan and the Existing Loan Documents and the JV Loan, all of which shall constitute Permitted Exceptions for purposes of this Agreement. At the
Closing, Transferee and Transferor shall execute and deliver, and Transferee shall cause the Fee Owner to execute and deliver, such loan assumption agreements and other
documentation as Lender shall reasonably require to effectuate the Loan Assumption in each case in form and content reasonably acceptable to Lender (collectively, the “Loan
Assumption Documents”); provided, however, the Loan Assumption Documents shall expressly provide that Transferor and SL Green Realty Corp. (and all guarantors and indemnitors
of any and all obligations in connection with the Existing Loan) shall be released from any and all liability under the applicable Existing Loan Documents (including but not limited to the
Existing Guaranty and the Existing Hazardous Substances Indemnity Agreement) arising or accruing from and after the Loan Assumption on the Closing Date. Transferee shall execute
and deliver and shall cause the Fee Owner to execute and deliver all Loan Assumption Documents that do not materially increase the liabilities or obligations imposed by the Existing
Loan Documents upon the Fee Owner, as the borrower thereunder, including, without limitation, such Loan Assumption Documents in form and substance as may be customary with
respect to the assumption of securitized loans. Transferee shall offer Gilmor International Inc., a British Virgin Islands company and Optibase Ltd., an Israeli company, jointly and
severally, and Newmark Knight Frank (“Newmark”) (or any other “Qualified Manager” (as defined in the Mortgage)), as to the Manager Bad Boy Acts only under the Existing Guaranty
(as modified or replaced in connection with the Closing) (collectively, including such other persons or entities that Transferee may in its discretion agree to offer as a replacement
guarantor, the “Replacement Guarantor”) as replacement guarantor under the Existing Guaranty and (other than Newmark or such other Qualified Manager) the Existing Hazardous
Substances Indemnity Agreement. If Lender at any time and from time to time indicates, as a condition to further processing the Loan Assumption Application, that any Replacement
Guarantor offered by Transferee is insufficient and needs to be supplemented, and Transferee fails to offer another Replacement Guarantor acceptable to Lender within ten (10)
Business Days after receiving written notice of same from Transferor, then Transferor shall have the right to terminate this Agreement by written notice to Transferee, whereupon
(provided that Transferor shall not be in default of its obligations to offer the Replacement Guarantor required under this Agreement or any other agreement between the parties), the
parties shall have no further rights or obligations hereunder and Escrow Agent shall return the Deposit to Transferee.
E. Each of Transferee and Transferor shall reasonably endeavor to include the other party in any meetings and discussions with Lender in connection with the Loan
Assumption. Neither Transferee nor Transferor may deliver any written communication to Lender without delivering a copy thereof to the other party. Each of Transferee and
Transferor shall deliver to the other, promptly upon receipt or sending, as applicable, copies of all correspondence among or between Lender, Transferee or Transferor, as the case may
be, or its applicable Covered Affiliates and their respective representatives. Each of Transferee and Transferor shall endeavor to keep the other party reasonably apprised on a current
basis of all communications with Lender.
F. Transferee agrees that until Closing, Transferor shall have the right to draw on any and all escrows, reserves or deposits held by or on behalf of Lender in connection
with the Existing Loan for the purposes permitted by the Existing Loan Documents, and Transferor shall endeavor to give Transferee notice thereof prior to or simultaneously with such
draw. The fact that Transferor shall have drawn escrow funds to pay for any costs or expenses that are subject to adjustment or apportionment under this Agreement shall not affect
the treatment of such costs and expenses under the adjustment and apportionment provisions of this Agreement.
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4. Condition of Title.
A. As of Closing, the Fee Owner shall have fee title to the Premises, subject only to (collectively, the “Permitted Exceptions”):
(i) the matters set forth in Schedule B of that certain Certificate and Report of Title issued by First American Title Insurance Company on July 13, 2009,
under Title No. LT 080327 (the “Commitment”) and attached hereto as Exhibit “4(A)(i)”;
(ii) the Leases;
(iii) all Violations (as hereinafter defined), subject to Section 6 hereof;
(iv) all present and future zoning, building, environmental and other laws, ordinances, codes, restrictions and regulations of all governmental authorities
having jurisdiction with respect to the Premises, including, without limitation, landmark designations and all zoning variances and special exceptions, if any;
(v) liens, encumbrances, violations and defects (including, without limitation, any mechanics and/or materialmen’s lien or any judgment arising as a
result thereof), removal of which is an obligation of a Tenant in possession, and the aggregate amount of which does not exceed (i) $5,000,000 with respect to the
Major Tenants and (ii) $1,000,000 with respect to all other Tenants, provided that none of the Fee Owner, no Covered Affiliate nor any other party shall have waived
or released, in writing, its rights to cause such Tenant to cure, correct, bond over, or remove the same, or to reimburse the landlord thereunder for its expenses
incurred in doing so;
(vi) All presently existing and future liens for unpaid real estate taxes and water and sewer charges not due and payable as of the date of the Closing,
subject to adjustment as hereinbelow provided;
(vii) All covenants, restrictions and rights and all easements and agreements for the erection and/or maintenance of water, gas, steam, electric,
telephone, sewer or other utility pipelines, poles, wires, conduits or other like facilities, and appurtenances thereto, over, across and under the Premises which are
either (a) presently existing or (b) granted to a public utility in the ordinary course, provided that the same shall not have a material adverse effect on the use of the
Premises for its current use, or on the access to the Premises;
(viii) State of facts shown on or by survey prepared by Earl B. Lovell - S.P. Belcher, Inc., dated May 1, 1958, last updated by visual examination December
16, 2005, and any additional facts which would be shown on or by an accurate current survey of the Premises (collectively, “Facts”), provided that, solely with respect
to such additional Facts, the same shall not have a material adverse effect on the use of the Premises for its current use, or on the access to the Premises;
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(ix) The Surviving Contracts;
(x) Consents by any Transferor Party or any former owner of the Land for the erection of any structure or structures on, under or above any street or
streets on which the Land may abut, that do not materially impair the current operation of the Premises;
(xi) Possible encroachments and/or projections of stoop areas, roof cornices, window trims, vent pipes, cellar doors, steps, columns and column bases,
flue pipes, signs, piers, lintels, window sills, fire escapes, satellite dishes, protective netting, sidewalk sheds, ledges, fences, coping walls (including retaining walls
and yard walls), air conditioners and the like, if any, on, under or above any street or highway, the Building, or any adjoining property, provided that the same shall
not have a material adverse effect on the use of the Premises for its current use or access to the Premises;
(xii) Variations between tax lot lines and lines of record title;
(xiii) Standard exclusions from coverage contained in the form of title policy or “marked-up” title commitment employed by the Title Insurer;
(xiv) Any financing statements, chattel mortgages, encumbrances or mechanics’ or other liens entered into by, or arising from, any financing statements
filed on a day more than five (5) years prior to the Closing and any financing statements, chattel mortgages, encumbrances or mechanics’ or other liens filed against
property no longer contained in the Premises, provided that the Title Insurer shall remove them as exceptions from the title insurance policy to be issued to Transferee
at Closing or shall affirmatively insure over them at no additional cost or expense to Transferee;
(xv) Any lien or encumbrance arising out of the acts or omissions of Transferee;
(xvi) Any other matter which the Title Insurer may raise as an exception to title, provided the Title Insurer will either omit or affirmatively insure against
collection or enforcement of same out of the Premises at no additional cost or expense to Transferee and that no prohibition of present use or maintenance of the
Premises will result therefrom, as may be applicable;
(xvii) any other matter which, pursuant to the last sentence of Section 13(A) or any other express provision of this Agreement, is a permitted exception.
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5. Closing.
The “Closing” shall mean the consummation of each of the actions set forth in Article 8 of this Agreement, or the waiver of such action by the party in whose favor such
action is intended, and the satisfaction of each condition precedent to the Closing set forth in Article 9 and elsewhere in this Agreement, or the waiver of such condition precedent by
the party intended to be benefited thereby. The Closing shall take place commencing at 10:00 a.m., with the portion of the Purchase Price due at Closing received by 5:00 p.m. to be
deemed paid as of such date (New York time), at the offices of Greenberg Traurig, LLP, 200 Park Avenue, New York, New York or such other place which the parties shall mutually agree,
on the date which is ten business (10) days after the date Lender delivers the Lender Consent to Transferee or Transferor, but in no event earlier than October 5, 2009, TIME BEING OF
THE ESSENCE with respect to Transferee’s obligation to close on or before such date, subject to Transferor’s and Transferee’s right to adjourn the Closing as permitted under this
Agreement (such date, as same may be extended or adjourned in accordance with this Agreement, is hereinafter referred to as the “Closing Date”). If Lender does not deliver the
Lender Consent to Transferee or Transferor on or before the date that is ninety (90) days after submission of the Assumption Application (the “Assumption Outside Date”), either
Transferor or Transferee may terminate this Agreement by written notice to the other party, whereupon the parties shall have no further rights or obligations hereunder, and Escrow
Agent shall return the Deposit to Transferee. Notwithstanding anything to the contrary contained herein, (i) Transferor may, upon written notice to Transferee, extend the Closing Date
one or more times for an aggregate of up to forty five (45) days in order to satisfy a condition to closing under this Agreement (such extended period, the “Transferor Adjournment
Period”) and (ii) Transferee may, upon written notice to Transferor, extend the Closing Date one or more times for an aggregate of up to fifteen (15) days for any reason.
6. Violations.
Transferor shall have no obligation to cure or remove any violations of law, rules, regulations, ordinances, orders or requirements noted in or issued by any Federal, state,
county, municipal or other department or governmental agency having jurisdiction against or affecting the Premises whenever noted or issued (collectively, “Violations”) nor any
conditions which could give rise to any Violations, except that Transferor shall be responsible for any penalties or fines in connection with any Violations issued prior to the date of this
Agreement, imposed on or before the Closing Date and (except to the extent such fine is imposed after the Closing Date because of the continuance of any such Violation after the
Closing Date) for thirty (30) days following the Closing Date.
7. Apportionments.
A. The following shall be apportioned between Transferor and the Fee Owner at the Closing with respect to the Premises as of 11:59 p.m. of the day immediately preceding
the Closing Date. At Closing, the Purchase Price will be increase or decreased, as the case may be, by an amount (the “Net Adjustment”) equal to 49.5% multiplied by the sum of (i) the
net amount of all prorations calculated pursuant to this Article 7 (excluding Leasing Costs provided for in clause (ix) below) and (ii) the difference (positive or negative) between the
total of all reserves held by the Lender under the Existing Loan and Four Million Two Hundred Thousand Dollars ($4,200,000).
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(i) Real property taxes and assessments (or installments thereof), payments required to be made to any business improvement district (“BID taxes”)
and vault charges, except those required by Leases to be paid by a Tenant directly to the entity imposing same;
(ii) Water rates and charges, except those required by Leases to be paid by a Tenant directly to the entity imposing same;
(iii) Sewer taxes and rents, except those required by Leases to be paid by a Tenant directly to the entity imposing same;
(iv) Salaries, vacation pay, sick pay and pension and other benefits of the Union Employees (as hereinafter defined);
(v) Permit, license and inspection fees, if any, on the basis of the fiscal year for which levied;
(vi) Fuel, if any, at the cost per gallon most recently charged to the Fee Owner, based on the supplier’s measurements thereof, plus sales taxes thereon,
which measurements taken by the supplier or any other professionally qualified third party shall be given by Transferor to Transferee as close to the Closing Date as
is reasonably practicable, and which, absent manifest error, shall be conclusive and binding on the Transferor and Transferee;
(vii) Transferor shall receive a credit in the full amount of (including accrued interest thereon, if any) deposits on account with any utility company
servicing the Premises;
(viii) Rents (as hereinafter defined), if, as and when collected, in accordance with Section 7(F) hereof;
(ix) Leasing Costs shall be apportioned as follows:
(a) Leasing Costs held in reserve under the Existing Loan Documents shall not be apportioned,
(b) Transferor shall pay the Leasing Cost Credit (as defined in Section 20(B)) to the Fee Owner at Closing,
(c) Any remaining Leasing Costs shall be paid by Transferor or credited to Transferor at Closing or after Closing in accordance with Section
20(B) hereof;
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(x) Payments due under any Surviving Contracts (it being agreed that (i) Transferee shall assume no obligations or liabilities under any Global Contract,
(ii) Transferor shall remain liable for any obligations or liabilities under any Global Contract and (iii) Transferor shall cause the Premises to be removed from the Global
Contracts from and after Closing);
(xi) Interest payable under the Existing Loan Documents accruing during the calendar month in which the Closing occurs; and
(xii) All other items customarily apportioned in connection with the sale of similar properties similarly located.
B. Apportionment of real property taxes, BID taxes, water rates and charges, sewer taxes and rents and vault charges shall be made on the basis of the fiscal year for
which assessed. If the Closing Date shall occur before the real property tax rate, BID taxes, water rates or charges, sewer taxes or rents or vault charges are fixed, apportionment for any
item not yet fixed shall be made on the basis of the real property tax rate, BID taxes, water rates and charges, sewer taxes and rents or vault charges, as applicable, for the preceding year
applied to the latest assessed valuation. After the real property taxes, BID taxes, water rates and charges, sewer taxes and rents and vault charges are finally fixed, Transferor and the
Fee Owner shall make a recalculation of the apportionment of same after the Closing, and Transferor or the Fee Owner, as the case may be, shall make an appropriate payment to the
other based upon such recalculation.
C. The amount of any of the unpaid taxes, assessments, water rates or charges, sewer rents and vault charges which Fee Owner is obligated to pay and discharge, with
interest and penalties thereon (if any) to the Closing Date may, at Transferor’s option, be allowed to be paid by Transferee out of the balance of the Purchase Price, provided that official
bills therefor with interest and penalties thereon (if any) are furnished by Transferor at the Closing.
D. If any refund of real property taxes, BID taxes, water rates or charges, sewer taxes or rents or vault charges is made after the Closing Date covering a period prior to
and/or after the Closing Date, the same shall be applied first to the reasonable out-of-pocket costs incurred in obtaining same and the balance, if any, of such refund shall, to the extent
received by Transferee, the Company or a Fee Owner, be paid to Transferor (for the period prior to the Closing Date) and to the extent received by Transferor, be paid to the Fee Owner
(for the period commencing with the Closing Date). Any payment to Transferor pursuant to the immediately preceding sentence shall be net of any amount payable to a Tenant in
accordance with its Lease (and any payment to the Fee Owner by Transferor pursuant to the immediately preceding sentence shall include any amount payable to a Tenant in
accordance with its Lease, which payment to such Tenant shall be made promptly by Transferee or the Fee Owner after such refund is made). Transferee shall and shall cause the Fee
Owner to indemnify and hold harmless Transferor as to any refund payment paid by Transferor to Fee Owner for a Tenant.
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E. If there are meters measuring water consumption or sewer usage at the Premises (other than meters measuring water consumption or sewer usage for which a Tenant is
obligated to pay under its Lease directly to the taxing authority or utility), Transferor shall, and shall cause the Fee Owner to attempt to obtain readings to a date not more than thirty
(30) days prior to the Closing Date. If such readings are not obtained (and if such readings are obtained, then with respect to any period between such reading and the Closing Date),
water rates and charges and sewer taxes and rents, if any, shall be apportioned based upon the last meter readings, subject to reapportionment when readings for the relevant period are
obtained after the Closing Date. If any of the Tenants pay electric based on a submeter for their electric consumption, then the Transferor shall, and shall cause the Fee Owner to cause
any such submeter to be read as close as possible to the Closing Date and upon completion of such reading, the Transferor shall, and shall cause the Fee Owner to cause bills to be
sent to each such Tenant for electric charges, based on such reading. At the Closing, the Transferor shall provide the Transferee with documentation as to any such readings and
billings for submetered electric charges.
F. To the extent that Transferor, the Fee Owner, Mezz LLC, the Company or Transferee receives Rents after the Closing Date, the same shall be held in trust by such
recipient, as the case may be, and shall be applied in the order of priority set forth in this Section 7(F).
(i) The following terms shall be as defined herein: “Base Rents”: fixed rent, and other amounts of a fixed nature (which may include, without limitation,
electric inclusion and supplemental water, HVAC and condenser water charges paid or payable by Tenants); “Overage Rents”: a percentage of the Tenant’s
business during a specified annual or other period (sometimes referred to as “percentage rent”), if any, so-called “escalation rent”, and additional rent based upon
increases in or otherwise attributable to real estate and BID taxes, operating expenses, utility costs, a cost of living index or porter’s wages or otherwise, but which
shall in no event include Reimbursable Payments (as hereinafter defined); “Reimbursable Payments”: overtime heat, air conditioning or other utilities or services;
freight elevator; electric inclusion and adjustments related to electric usage (such as rate and/or fuel adjustments and survey); submetered electric; supplemental
water, HVAC, and condenser water charges; services or repairs, and labor costs associated therewith, to which a Tenant is obligated to reimburse the landlord under
its Lease or for which a Tenant has separately contracted with Transferor or its agent; true-ups on account of escalation and/or additional rent for years prior to the
year in which the Closing occurs; above standard cleaning; and all other items which are payable to the Fee Owner, the Company or Transferor as reimbursement or
payment for above standard or overtime services (but which amounts shall not be treated as Reimbursable Payments if already included in a Tenant’s Base Rents);
and “Rents”: all amounts due and owing from Tenants, however characterized, including, without limitation, Base Rents, Overage Rents and Reimbursable Payments.
(ii) Base Rents and Overage Rents shall be adjusted and prorated on an as, if and when collected basis. Base Rents and Overage Rents collected by
the Fee Owner, the Company, Transferee or Transferor after the Closing from any Tenant who owes any such amounts for periods prior to the Closing shall be applied
in the following order, but shall be treated separately for such allocation purposes: (a) first, in payment of such amounts owed by such Tenant for the month in which
the Closing occurs, (b) second, in payment of such amounts owed by such Tenant for periods after the month in which the Closing occurs, (c) third, in payment of
such amounts owed by such Tenant (if any) for any periods prior to the month in which the Closing occurs, and (d) fourth, the balance to Transferee, if any. Each
such amount, less any third party costs of collection (including reasonable attorneys’ fees and expenses) reasonably allocable thereto, shall be paid over as provided
above, and the party who receives any such amount shall promptly pay over to the other party any portion thereof to which it is so entitled.
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(iii) Reimbursable Payments shall not be apportioned or adjusted to the extent they relate to a period of time prior to the Closing Date. Reimbursable
Payments incurred and which relate to a period of time prior to the Closing Date shall belong in their entirety to Transferor, and shall be retained by Transferor, and/or
paid over to Transferor by Transferee, as applicable, on an as, if and when collected basis, less a proportionate share of any reasonable attorneys’ fees and expenses
of collection thereof. To the extent a payment is made by a Tenant after the Closing Date which is specifically designated as being on account of one or more
Reimbursable Payments due to Transferor, by reference to a charge, invoice number or otherwise, or is of an amount which is equal to one or more Reimbursable
Payments and no other charge for the same amount exists, provided that at the time of such payment the applicable Tenant is current for the period following Closing
in the payment of Base Rent, then same shall be treated as a Reimbursable Payment which relates to a period of time prior to the Closing Date, and shall be paid over
to Transferor promptly upon receipt thereof. Reimbursable Payments incurred and which relate to a period of time on or after the Closing Date shall belong in their
entirety to the Fee Owner, and shall be retained by the Fee Owner, and/or paid over to the Fee Owner by Transferor, on an as, if and when collected basis, less a
proportionate share of any reasonable attorneys’ fees and expenses of collection thereof. To the extent a payment is made by a Tenant to Transferor, the Company or
the Fee Owner after the Closing Date which is specifically designated as being on account of one or more Reimbursable Payments and no other charge for the same
amount exists and is not specifically due to the Fee Owner by reference to a charge, invoice number, identity to the charged amount or otherwise, then same shall be
treated as a Reimbursable Payment which relates to a period on or after the Closing Date, and shall be paid over to the Fee Owner promptly upon receipt thereof until
all sums due the Fee Owner are paid and then to Transferor until all accounts for Reimbursable Payments due Transferor (i.e., those which relate to a period of time
prior to the Closing Date) are paid, with the balance, if any, being paid to the Fee Owner. To the extent any payment made by a Tenant is not specifically designated
as being on account of a Reimbursable Payment, or otherwise not identifiable as a Reimbursable Payment (for example, by reference to a charge, invoice number or
similar reference or if a payment is in an amount equal to one or more charges for Reimbursable Payments), same shall be treated hereunder as either Base Rent or
Overage Rent attributable to the calendar year in which the Closing occurs.
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(iv) Transferee shall cause the Fee Owner to bill Tenants in possession as of the Closing Date who owe Rents for periods prior to the Closing on a
monthly basis for a period of six (6) consecutive months following the Closing and shall use commercially reasonable efforts to collect such past due Rents (which
efforts shall include, but not be limited to, including such amounts in invoices and notices for rents due for the period after Closing). Neither Transferee nor the Fee
Owner shall have any obligation to commence any action or proceeding to collect any such past due Rents, provided, however, if Transferee or the Fee Owner in fact
commences any such action or proceeding, the amount sought shall include all Rents unpaid for the period prior to the Closing and Transferor shall reimburse the Fee
Owner for a portion of the reasonable legal fees and disbursements actually incurred in pursuing said claim, equal to the total amount of such fees and disbursements
multiplied by a fraction, the numerator of which is the total amount realized by the Transferor and the denominator is the total amount realized by the Transferor and
the Fee Owner in such action or proceeding. Notwithstanding the foregoing, if Transferee or the Fee Owner shall fail to collect such past due Rents after such six (6)
month period, then after prior written notice to Transferee, Transferor shall have the right (in the name of the Fee Owner, if required) to pursue such Tenants to collect
such delinquencies (including, without limitation, the prosecution of one or more lawsuits); provided that, without the consent of Transferee (which consent may be
withheld in Transferee’s sole and absolute discretion), in no event shall any such action result in the termination of a Tenant’s Lease or the eviction of a Tenant from
its demised premises or, application against any Security Deposits.
(v) Transferee shall cause the Fee Owner to (a) promptly render bills to the applicable Tenants in possession as of the Closing Date for any Overage
Rent in respect of a period that shall have expired prior to the Closing but which is payable after the Closing, (b) bill Tenants in possession as of the Closing Date for
any such Overage Rent on a monthly basis for a period of six (6) consecutive months thereafter and (c) use commercially reasonable efforts to collect such Overage
Rent (which efforts shall include, but not be limited to, including such amounts in invoices and notices for rents due for the period after the
Closing). Notwithstanding the foregoing, if Transferee shall be unable to collect such Overage Rent after such six (6) month period, then after prior written notice to
Transferee, Transferor shall have the right (in the name of the Fee Owner, if required) to pursue Tenants to collect such delinquencies (including, without limitation,
the prosecution of one or more lawsuits); provided that, without the consent of Transferee (which consent may be withheld in Transferee’s sole and absolute
discretion), in no event shall any such action result in the termination of a Tenant’s Lease or the eviction of a Tenant from its demised premises or application against
any Security Deposits. From and after the Closing, Transferor may furnish to Transferee calculations of the amounts due from Tenants in possession as of the
Closing Date on account of Overage Rent for periods prior to the Closing, and such other information relating to the period prior to the Closing as is reasonably
necessary for the billing of any such Overage Rent. Transferee shall cause the Fee Owner to bill such Tenants for Overage Rent for periods prior to the Closing in
accordance with and on the basis of such information furnished by Transferor. Transferee shall cause the Fee Owner to deliver to Transferor, concurrently with the
delivery to such Tenants, copies of all statements delivered to Tenants relating to Overage Rent for periods prior to the Closing.
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(vi) Overage Rent for the calendar year in which the Closing occurs shall be apportioned between Transferor and the Fee Owner using a percentage
derived by dividing the total operating expenses incurred for those operating expenses (or real estate or BID taxes, as the case may be) which are used by Transferor
in determining the operating expense pool for the calendar year in question consistent with the terms of the applicable Leases over each parties’ actual expenses
incurred for such operating expenses (or real estate or BID taxes, as the case may be). To the extent actually collected, Transferor shall be entitled to receive the
proportion of such Overage Rent (less a like portion of any out-of-pocket costs and expenses (including reasonable attorneys’ fees and expenses) incurred in the
collection of such Overage Rent) that the portion of the actual expenses incurred for operating expenses (or real estate or BID taxes, as the case may be) for the
calendar year in question by Transferor or the Fee Owner prior to Closing bears to the entire operating expenses (or real estate or BID taxes, as the case may be) pool
for the calendar year in question, and Transferee shall be entitled to receive the proportion of such Overage Rent (less a like portion of any out-of-pocket costs and
expenses (including reasonable attorneys’ fees and expenses) incurred in the collection of such Overage Rent) that the portion of the actual expenses incurred for
operating expenses (or real estate or BID taxes, as the case may be) for the calendar year in question by Fee Owner from and after the Closing bears to the entire
operating expenses (or real estate or BID taxes, as the case may be) pool for the calendar year in question. If, prior to the Closing, Transferor or the Fee Owner shall
receive any installment of Overage Rent attributable to Overage Rent for periods from and after the Closing, such sum shall be apportioned at the Closing. If, after the
Closing, Transferee or the Fee Owner shall receive any installment of Overage Rent attributable to Overage Rent for periods prior to the Closing, such sum (less any
out-of-pocket costs and expenses (including reasonable counsel fees) incurred by Transferee or the Fee Owner in the collection of such Overage Rent) shall be paid
by Transferee or the Fee Owner to Transferor promptly after Transferee (or the Fee Owner) receives payment thereof.
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(vii) To the extent that any payment on account of Overage Rent for a period prior to the Closing is required to be paid periodically by Tenants for any
calendar year (or, if applicable, any lease year or any other applicable accounting period), and at the end of such calendar year (or lease year or other applicable
accounting period, as the case may be) such estimated amounts are required to be recalculated based upon the actual expenses, taxes or other relevant factors for that
calendar year (or lease year or other applicable accounting period, as the case may be), then Transferee agrees to so recalculate same for Tenants in possession as of
the Closing Date, subject to Transferor’s reasonable review and approval (not to be unreasonably withheld) of such recalculation and to bill such Tenants for all
amounts due from such Tenants on account therefor, within six (6) months after the end of such calendar year (or lease year or other applicable accounting period, as
the case may be). At the time(s) of final calculation and collection from (or refund to) each Tenant of the amounts in reconciliation of actual Overage Rent, there shall
be a re-proration between Transferor and the Fee Owner in accordance with this Agreement and Transferor, on the one hand, and Transferee and the Fee Owner, on
the other hand, shall each be entitled to (or responsible for, as the case may be) the amounts attributable to such party’s period of ownership of the Purchased
Interest, provided that Transferor shall have no liability for amounts due to Tenants if Transferee shall have failed to obtain Transferor’s prior approval of any such
recalculation, if required. Any amounts owed to a Tenant in possession as of the Closing Date for which Transferor is responsible pursuant to the immediately
preceding sentence shall be delivered by Transferor to the Fee Owner within ten (10) days following demand, which payment to such Tenant shall be forwarded
promptly by Transferee or the Fee Owner to such Tenant. Transferee shall indemnify and cause the Fee Owner to indemnify and hold Transferor harmless from any
and all losses, costs, damages, liens, claims, counterclaims, liabilities and expenses (including, but not limited to, reasonable attorneys’ fees, court costs and
disbursements) incurred by Transferor as the result of Transferee failing to pay over to any Tenant in possession as of the Closing Date any amount paid by
Transferor to Transferee for the benefit of any Tenant on account of Overage Rent. Transferor, on or prior to the Closing, shall send (or cause to be sent) statements
of the reconciliations with the Tenants for Overage Rent for calendar year 2008 and all prior years and to the extent any such Tenant overpaid such Overage Rent, the
Transferor shall, on or prior to the Closing, refund any such overpayment of Overage Rent to each such applicable Tenant. Transferor hereby agrees to indemnify
and hold Transferee and the Fee Owner harmless from any and all losses, costs, damages, liens, claims, counterclaims, liabilities and expenses (including, but not
limited to, reasonable attorneys’ fees, court costs and disbursements) incurred by Transferee or the Fee Owner as a result of the Transferor’s failure to refund (or
cause to be refunded) any overpayment of Overage Rent due by Transferor or the Fee Owner to any Tenant for any time period prior to the Closing.
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(viii) For a period of the lesser of (i) one (1) year following Closing, and (ii) until such time as all amounts required to be paid to Transferor by Transferee
or the Fee Owner pursuant to this Section 7(F) shall have been paid in full, to the extent Transferee or the Fee Owner collects any arrears in Base Rents and/or
Overage Rent owed to the Transferor, Transferee shall furnish or cause the Fee Owner to furnish to Transferor a reasonably detailed monthly accounting of cash
receipts from Tenants (accompanied by aged receivable reports) with a detailed accounting of amounts allocable to Transferor pursuant to this Agreement, which
accounting shall be delivered to Transferor for each such applicable month, within twenty (20) days after the end thereof. Transferor and Transferee and their
representatives shall each have the right from time to time, for a period of one (1) year following the Closing, on prior notice to the other party, during ordinary
business hours on business days, to review each other’s rental records and operating expense costs with respect to the Premises to ascertain the accuracy of any
such accountings during Transferor’s and Transferee’s respective periods of ownership of the Purchased Interest.
G. As of the one-year anniversary of the Closing Date, Transferee shall cause the Fee Owner to determine any Nortel Losses (hereinafter defined) calculated as provided
in this Section 8(G). Upon such determination, Transferee shall send notice to Transferor setting forth the calculation of Nortel Losses together with backup for such calculation in
reasonable detail, which shall be subject to the verification of Transferor. Transferee may, from and after the third anniversary of the Closing Date, as its sole remedy on account of any
Nortel Losses, cause the Company to offset any Nortel Losses actually incurred by the Fee Owner accruing during the one-year period after the Closing against its payment obligations
under the JV Loan, as more particularly provided in the JV Loan Promissory Note. "Nortel Losses" shall mean, in the event of the rejection of the Nortel Lease in the pending bankruptcy
proceeding, losses of net rental income actually incurred by Fee Owner, measured against any net rental income that would have been received absent rejection of the Nortel Lease, in
respect of the space demised under the Nortel Lease, taking into account (i) any amounts recoverable from the security deposit under the Nortel Lease (i.e., there is no legal impediment
to Fee Owner’s recovery of same) and (ii) any net effective rent accruing under any lease for any portion of the space demised under the Nortel Lease during the one-year period after
the Closing (on a ratable basis over the term of such lease including for these purposes any free rent period under such lease and taking into account any leasing and tenant
improvement costs).
H. If any adjustment or apportionment is miscalculated at the Closing, or the complete and final information necessary for any adjustment is unavailable at the Closing,
the affected adjustment shall be calculated after the Closing, and 100% of the net amount thereof either shall be paid by Transferee (on behalf of the Fee Owner) to Transferor or paid by
Transferor to the Fee Owner (after giving effect to the consummation of the Closing), as the case may be, within five (5) Business Days after determination thereof. The provisions of
this Article 7 shall survive the Closing Date for a period of one (1) year.
8. Closing Deliveries.
A. At the Closing, Transferor shall, and shall cause the Fee Owner, as applicable, to deliver to Transferee, executed and acknowledged, as applicable:
(i) an Assignment of Limited Liability Company Interest Agreement in the form attached hereto as Exhibit 2(G) (the “Assignment”) pursuant to which
Transferor sells, assigns, transfers, conveys and delivers the Purchased Interest in the Company to Transferee, together with a certification from Transferor that
Transferor has caused all applicable transactions provided for in the Recitals (including without limitation, the purchase of the CIF Interest) to be consummated and
that Transferor and the 1% Owner are the sole members of the Company;
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(ii) the Contribution Agreement in the form attached hereto as Exhibit 2(B) and the closing items to be executed and delivered by Transferor set forth
therein, including, without limitation, certificates of merger;
(iii) a certified copy of the JV Loan Promissory Note, which shall remain outstanding;
(iv) the Member Loan Promissory Note in the form attached hereto as Exhibit 2(D);
(v) the Transferor Pledge and Security Agreement in the form attached hereto as Exhibit 2(F).
(vi) the Option Agreement in the form attached hereto as Exhibit 2(E).
(vii) Executed original counterparts of all Leases, Brokerage Agreements and Surviving Contracts, or certified copies thereof to the extent executed
original counterparts are not in a Transferor Party’s or property manager’s possession;
(viii) A certification of nonforeign status, in form required by Internal Revenue Code Section 1445 and the regulations issued thereunder;
(ix) The Tenant Estoppels (as hereinafter defined) required to be delivered under Article 10 hereof;
(x) Evidence of authority, good standing (if applicable) and due authorization of each Transferor Party to enter into the within transaction and to
perform all of its obligations hereunder, including, without limitation, the execution and delivery of all of the closing documents required by this Agreement, and
setting forth such additional facts, if any, as may be needed to show that the transaction is duly authorized and is in conformity with each Transferor Party’s
organizational documents and applicable laws and to enable the Title Insurer to omit all exceptions regarding each Transferor Party’s standing, authority and
authorization;
(xi) The Company LLC Agreement in the form attached hereto as Exhibit 2(A);
(xii) To the extent in the Fee Owner’s, its property manager’s or any affiliate’s possession or control (a) those transferable licenses and permits,
authorizations and approvals pertaining to the Premises which are not posted at the Premises, (b) all transferable guarantees and warranties which Fee Owner has
received in connection with any work or services performed or equipment installed in and improvements erected on the Premises and (c) copies of all Building Plans;
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(xiii) A title affidavit in the form annexed here to as Exhibit 2(H);
(xiv) To the extent required by applicable law, a Real Property Transfer Tax Return with respect to the New York City Real Property Transfer Tax (the
“RPT Form”) and a New York State Real Estate Transfer Tax Return and Credit Line Mortgage Certificate with respect to the New York State Real Estate Transfer Tax
(the “Form TP-584”);
(xv) To the extent available at Closing, documentation as reasonably required by the Transferee to calculate the Overage Rent due and owing after the
Closing or if not available then Transferor will deliver same within a reasonable time following the Closing;
(xvi) A closing statement (the “Closing Statement”);
(xvii) A certified updated schedule of Rent arrearages (i.e., “Exhibit 16(A)(i)”) and a certified schedule of unreturned escrow and reserves held by the
Lender under the Existing Loan (to the extent not confirmed by the Lender in connection with the Loan Assumption);
(xviii) Keys to locks at the Premises in the possession or control of the Fee Owner, its property manager or any Covered Affiliate;
(xix) Evidence that Fee Owner has sent notices of termination, at its sole cost, of the existing property management agreement and those other Existing
Contracts and New Contracts designated in writing by Transferee no less than ten (10) days prior to the Closing Date (it being understood that the provisions of
certain such contracts will necessitate more than ten (10) days advance notice for termination, and that such contracts will extend through the end of the termination
period therein and therefore the termination of such contracts will not be effected until after the Closing Date and it being further understood that Transferee shall be
liable under such contracts for the period from and after Closing but not for any termination fees which shall be payable by Transferor or the Fee Owner). Such
Existing Contracts and New Contracts shall be excluded from the definition of Surviving Contracts;
(xx) The Lender’s Consent and certified copies of the material Existing Loan Documents (to the extent not certified by the Lender in connection with the
Loan Assumption);
(xxi) A certification updating Transferor’s representations and warranties contained in Section 16(A) as of the Closing Date;
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(xxii) A lease for a portion of the property located at 750 Third Avenue, New York, New York in the form attached hereto as Exhibit “8(A)(xxii)” (the “750
Space Lease”), executed by 750 Third Owner LLC (“750 Owner”);
(xxiii) The Approved 750 REA, executed by 750 Owner, in substantially the form attached hereto as Exhibit “8(A)(xxiii)”, subject to any Lender REA
Changes;
(xxiv) Estoppels with respect to (A) that certain Joint Use Agreement, dated as of November 23, 1956 between 750 Third Avenue Corporation and Uris
Lexington, Inc., (B) that certain Declaration, dated as of October 10, 1962 between 750 Third Avenue Corporation and Uris Lexington, Inc., (C) that certain Covenant
and Declaration, dated as of November 23, 1956 between 750 Third Avenue Corporation and Uris Lexington, Inc., (D) that certain Loading Dock Services Agreement,
dated as of July 28, 2004, between 485 Lexington Owner LLC and 750 Owner ((A), (B), (C), and (D) being the “Joint 750 Documents”), and (E) the Approved REA,
each in the form attached hereto as Exhibit “8(A)(xxiv)” (collectively, the “REA Estoppels”) executed by 750 Owner;
(xxv) A notice letter to 750 Owner pursuant to the Joint 750 Documents substantially in the form attached hereto as Exhibit “8(A)(xxv)”;
(xxvi) If required by the tenant under the Lease with Citibank, N.A., a Subordination, Recognition and Attornment Agreement in substantially the form
attached hereto as Exhibit “8(A)(xxvi)”, subject to reasonable changes requested by such tenant, described on Exhibit “1(B)”, executed by 750 Owner;
(xxvii) An agreement reasonably satisfactory to Transferor and Transferee terminating that certain Tenancy-In-Common Agreement dated as of January
22, 2007 by and between Subsidiary, EAT and TIC;
(xxviii) A certified updated schedule of all base rents, real estate taxes and operating expense escalations billed to Tenants during the month prior to the
month in which the Closing Date occurs and all Security Deposits held by the Fee Owner as of the Closing Date, together with copies of bills sent to Tenants after the
date hereof and prior to the Closing (provided that a failure to deliver all such copies shall not be deemed to be a default under this Agreement);
(xxix) The Indemnity Agreement in the form attached hereto as Exhibit 8(A)(xxix); and
(xxx) Such other instruments or documents which by the terms of this Agreement are to be delivered by Transferor at the Closing.
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B. At the Closing, Transferee shall (or shall cause the Fee Owner to) deliver to Transferor, executed and acknowledged, as applicable:
(i) The balance of the Purchase Price due at Closing, the Option Payment (as such term is defined in the Option Agreement) and the full proceeds of
the Member Loan, and all other amounts payable by Transferee to Transferor at the Closing pursuant to this Agreement;
(ii) The Assignment;
(iii) The Transferor Pledge and Security Agreement;
(iv) The Option Agreement;
(v) The Company LLC Agreement;
(vi) Evidence of authority, good standing (if applicable) and due authorization of Transferee to enter into the within transaction and to perform all of its
obligations hereunder, including, without limitation, the execution and delivery of all of the closing documents required by this Agreement, and setting forth such
additional facts, if any, as may be needed to show that the transaction is duly authorized and is in conformity with Transferee’s organizational documents and
applicable laws;
(vii) The Closing Statement;
(viii) The 750 Space Lease;
(ix) the Approved 750 REA;
(x) if required by applicable law, the RPT Form and the TP-584; and
(xi) Such other instruments or documents which by the terms of this Agreement are to be delivered by Transferee at Closing.
9. Conditions Precedent.
A. Transferor’s obligations under this Agreement are subject to satisfaction of the following conditions precedent which may be waived in whole or in part by Transferor,
provided such waiver is in writing and signed by Transferor on or before the Closing Date:
(i) Transferee shall have paid or tendered payment of (i) the portion of the Purchase Price due at Closing, (ii) the Option Payment and (iii) the proceeds
of the Member Loan, pursuant to the terms hereof;
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(ii) Transferee shall have delivered to or for the benefit of Transferor, on or before the Closing Date, all of the documents and items required to be
delivered by Transferee pursuant to Article 8 hereof which have been tendered thereto by Transferor and Transferee shall have performed in all material respects all of
its obligations hereunder to be performed on or before the Closing Date; and
(iii) All of Transferee’s representations and warranties made in this Agreement shall be true and correct in all material respects as of the date made and
true and correct in all material respects as of the Closing Date as if then made; and
(iv) Lender Consent (or the portions thereof provided to be Transferor conditions to Closing under this Agreement) shall have been received and the
Loan Assumption Documents shall expressly provide that SL Green (and any affiliate thereof) shall be released from any and all liability under the applicable Existing
Loan Documents, including the Existing Guaranty, the Existing Hazardous Substances Indemnity Agreement and all other applicable guaranties and indemnities in
connection with the Existing Loan, arising or accruing from and after the Loan Assumption.
B. Transferee’s obligations under this Agreement are subject to the satisfaction of the following conditions precedent which may be waived in whole or in part by
Transferee, provided such waiver is in writing and signed by Transferee on or before the Closing Date:
(i) Transferor shall have delivered to or for the benefit of Transferee, on or before the Closing Date, all of the documents and items required to be
delivered by Transferor pursuant to Article 8 hereof and Transferor shall have performed in all material respects all of its obligations hereunder to be performed on or
before the Closing Date; and
(ii) Subject to the other provisions of this Agreement, all of Transferor’s representations and warranties made in this Agreement shall be true and
correct as of the date made and true and correct in all material respects as of the Closing Date as if then made, as the same may have been updated pursuant to Section
8(A)(xxi), other than those representations or warranties made as of a specific date, or with reference to previously dated materials, in which event such
representations and warranties shall be true and correct as of the date thereof or as of the date of such materials, as applicable. For purposes hereof, but subject to
the provisions of Section 9(C)(ii) below, (a) any representation or warranty set forth in Section 16(A)(i), the first sentence of Section 16(A)(ii), Section 16(A)(vi)
or Section 16(A)(xxi) (solely to the extent of Environmental Notices relating to conditions existing as of the date of this Agreement) shall not be deemed to have been
breached if the representation or warranty is not true and correct in all material respects as of the Closing Date by reason of changed facts or circumstances arising
after the date hereof which pursuant to this Agreement are not prohibited to have occurred and did not arise by reason of a breach of any covenant made by
Transferor under this Agreement or Agreement and (b) no representation or warranty shall be deemed to have been breached if the same is not true and correct in all
material respects as of the Closing Date by reason of any act or omission of Transferor (x) permitted under this Agreement or (y) taken with the consent of Transferee;
and
(iii) Lender Consent (or the portions thereof provided to be Transferee conditions to Closing under this Agreement) shall have been received.
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C. (i) Notwithstanding anything to the contrary contained in this Agreement, but subject to the provisions of Section 9(C)(ii) below, (a) Transferor does not
represent or warrant that any Lease will be in force or effect at Closing, that any Tenant will have performed its obligations under its Lease or that any Tenant will not be the subject of
bankruptcy proceedings and (b) the existence of any default by a Tenant, the failure by a Tenant to perform its obligations under its Lease, the termination of any Lease prior to Closing
by reason of the Tenant’s default (if in accordance with the other provisions of this Agreement) or the existence of bankruptcy proceedings pertaining to any Tenant shall not affect
Transferee’s obligations hereunder in any manner or entitle Transferee to an abatement of or credit against the Purchase Price or give rise to any other claim on the part of Transferee.
(ii) Notwithstanding the provisions of Section 9(C)(i) above, in the event that one or more Tenants occupying, in the aggregate, five percent (5%) or
more of the Occupied Space (for the avoidance of doubt, excluding the Nortel Lease), becomes a debtor in a bankruptcy proceeding and rejects its Lease in such
proceeding (such Lease, a “Rejected Lease”) prior to the Closing, Transferee may, upon twenty (20) days prior written notice to Transferor after such rejection,
terminate this Agreement; provided, however, that Transferee’s termination notice shall become null and void in the event Transferor, within such twenty (20) day
period, commits to cause SLGOP to enter into a lease at Closing for the space covered by such Rejected Lease for the remaining term and otherwise on substantially
the same terms and conditions as the Rejected Lease.
10. Estoppel Certificates.
A. Transferor shall use and shall cause the Fee Owner to use commercially reasonable efforts to obtain and to deliver to Transferee, no later than five (5) days prior to the
Closing, estoppel certificates (individually, an “Estoppel” and, collectively, the “Estoppels”) from Tenants who, in the aggregate, lease at least 75% of the Occupied Space and including,
in any event, the Major Tenants. Each Estoppel shall (x) either (i) be substantially in the form attached hereto as Exhibit 10 and made a part hereof, it being agreed that the inclusion of
qualifications as to knowledge shall not cause the Estoppel to be non-compliant (except with respect to estoppel statements not already qualified by knowledge in said form contained
in the Estoppels from the Major Tenants and Advanced Magazine Publishers, Inc.), (ii) be on such other form as may be provided by any Tenant, provided that it certifies the matters
contained in Exhibit 10; or (iii) in the event that any Lease provides for the form or content of an Estoppel that such Tenant shall be required to deliver, then such Tenant’s Estoppel
may (and in the case of the tenant under the Lease with Citibank, N.A., shall) be in such form or contain only those matters as an Estoppel is required to address pursuant to the related
Lease, without giving effect to any requirement regarding “additional information reasonably requested by the lessor” or words of similar import and (y) be dated no earlier than
September 1, 2009; provided that if the Closing Date does not occur on or before November 30, 2009, the Estoppels from the Major Tenants and Advance Magazine Publishers, Inc.
shall be dated no earlier than November 15, 2009. Each Estoppel executed and delivered by a Tenant satisfying the above requirements that confirms such matters that an Estoppel is
required to address pursuant to the related Lease is referred to herein as a “Conforming Estoppel”. Transferor shall deliver to Transferee a copy of all Estoppels it receives from
Tenants, regardless of the content of such Estoppels. In the event that Transferor is unable to obtain Conforming Estoppels from Tenants who, in the aggregate, lease at least 75% of
the Occupied Space (such percentage, the “Required Percentage”), including, without limitation, the Major Tenants, then the same shall constitute a failure of a condition to
Transferee’s obligations hereunder and not a default by Transferor, Transferee shall not be entitled to specific performance of such obligation of Transferor to deliver such Conforming
Estoppels and Transferee’s sole remedy shall be to waive such failure or terminate this Agreement and receive a refund of the Deposit, together with any interest earned
thereon. Claims of any Tenant set forth in any Estoppel shall not be deemed (alone or in combination with other matters), to cause such Estoppel not to be a Conforming Estoppel
unless the facts underlying such claims in the aggregate with any claims set forth in any other Tenant Estoppels and any breaches of Transferor’s representations and warranties, equal
or exceed the Floor (as hereinafter defined). Without limiting the generality of the foregoing sentence, an Estoppel shall be a Conforming Estoppel notwithstanding that such Estoppel
may contain claims that are based on the (i) facts disclosed on Schedules or Exhibits to this Agreement, (ii) an assertion by any Tenant that there are amounts due from the Fee Owner
to such Tenant allocable to periods prior to the Closing and which, under the terms of this Agreement, Transferor has agreed to pay or (iii) failure of the landlord to keep the Premises,
the building systems or other improvements or equipment in good order and repair or to make required repairs or improvements thereto, unless such failure would constitute a default
under such Tenant’s Lease (it being agreed that Transferor shall not be obligated to make any such repairs or improvements unless otherwise obligated to do so pursuant to Section 20
(A)(vi), and Transferee hereby expressly agrees that for all purposes of this Agreement the obligation to make any such repairs or improvements shall be conclusively deemed to have
arisen or accrued after the Closing). Notwithstanding the above, to the extent any delivered Estoppels contain claims or state facts which would cause any representation or warranty
contained herein to be untrue, the aggregate adverse economic impact of the facts underlying such claims shall be counted in determining, pursuant to Section 16(C), whether or not
there are breaches of Transferor representations or warranties in excess of the Floor, provided Transferor has not cured the circumstances giving rise to such claims (collectively,
“Estoppel Claims”).
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B. Subject to Article 39, upon not less than three (3) days’ advance written notice (unless the reason necessitating the extension only arises within the three (3) days
immediately prior to the Closing Date, in which event as much in advance of the Closing as is practicable but in no event less than one (1) business day prior to the Closing Date),
Transferor shall be entitled to one or more adjournments, not to exceed forty-five (45) days in the aggregate, of the Closing Date to obtain Tenant Estoppels.
11. No Successor.Transferee is not and is not to be deemed to be a successor of any of the Transferor Parties, it being understood that Transferee is acquiring only the Purchased
Interest; and it is expressly understood and agreed that Transferee has not and does not hereby assume or agree to assume nor shall transferee be deemed to have assumed any liability
whatsoever of any of the Transferor Parties, nor does Transferee assume or agree to assume nor shall Transferee be deemed to have assumed any obligation of any of the Transferor
Parties under any guaranty, contract, agreement, indenture or any other document to which any such Transferor Party is or may be bound or which in any manner affects the Premises
or the Purchased Interest or any part thereof, except for those contracts and agreements specifically assumed pursuant to the terms hereof (including but not limited to the Existing Loan
Documents).
12. Right of Inspection.
A. Transferee and its agents, employees and consultants, from time to time prior to the Closing and during regular business hours, upon at least two (2) business days’
prior notice (written or via electronic mail) to Transferor, may inspect the Premises, provided that (i) Transferee shall not communicate with any employees of the Fee Owner or the Fee
Owner’s managers or contractors or with Tenants or occupants of the Premises without, in each instance, the prior consent (written or via electronic mail) of Transferor, which consent
may be withheld in Transferor’s reasonable discretion, (ii) Transferee shall not perform any tests with respect to the Premises without the prior written consent of Transferor in each
instance, which consent may be withheld in Transferor’s reasonable discretion, provided however, if such tests are invasive Transferor shall have the right to withhold its consent to
such tests in its sole discretion (it being agreed that the public record inquiries required to prepare a Phase I Environmental Report shall not be deemed “invasive”), and (iii) Transferee
shall have no additional rights or remedies under this Agreement as a result of such inspection(s) or any findings in connection therewith. Any entry upon the Premises shall be
performed in a manner which is not way disruptive to Tenants or the normal operation of the Premises (other than to a de minimis extent) and shall be subject to the rights of any
Tenants or occupants of the Premises. Transferee shall (i) exercise reasonable care at all times that Transferee shall be present upon the Premises, (ii) at Transferee’s expense, observe
and comply with all applicable laws and any conditions imposed by any insurance policy then in effect with respect to the Premises and (iii) not engage in any activities which would
violate the provisions of any permit or license pertaining to the Premises. Transferor shall have the right to have a representative of Transferor accompany Transferee during any such
communication or entry upon the Premises.
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B. Transferee hereby agrees to indemnify, defend and hold the Transferor Parties and their respective officers, shareholders, partners, members, directors, employees,
attorneys and agents harmless from and against any and all liability, loss, cost, judgment, claim, damage or expense (including, without limitation, reasonable attorneys’ fees and
expenses), resulting from or arising out of the entry upon the Premises prior to the Closing by Transferee and its employees, agents, consultants, contractors and advisors. The
foregoing indemnification shall survive the Closing or the termination of this Agreement.
C. As a condition precedent to (x) any third party entering the Premises on behalf of Transferee in connection with any inspection and (y) any physically invasive testing
of the Premises by Transferee or any third party on behalf of Transferee (each, an “Insurable Inspection”), Transferee shall maintain or cause to be maintained, at Transferee’s sole cost
and expense, a policy of comprehensive general public liability and property damage insurance by an insurer or syndicate of insurers reasonably acceptable to Transferor: (a) with a
combined single limit of not less than Three Million Dollars ($3,000,000.00) general liability and Five Million Dollars ($5,000,000.00) excess umbrella liability, (b) insuring Transferee, the
Transferor Parties, the Fee Owner’s property manager, their respective affiliates, lenders and any other person or entity related to the Transferor Parties or involved with the transaction
contemplated by this Agreement (such additional persons or entities to be designated in writing by Transferor), as additional insureds, against any injuries or damages to persons or
property that may result from or are related to (x) Transferee’s entry upon the Premises and (y) any inspection or other activity conducted thereon by representatives or agents of
Transferee and (c) containing a provision to the effect that insurance provided by Transferee hereunder shall be primary and noncontributing with any other insurance available to the
Transferor Parties. Transferee shall deliver evidence of such insurance coverage to Transferor prior to the commencement of the Insurable Inspection and proof of continued coverage
prior to any subsequent Insurable Inspection.
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D. Notwithstanding any provision in this Agreement to the contrary, neither Transferee nor any representative or agent of Transferee shall contact any Federal, state,
county, municipal or other department or governmental agency regarding the Premises without Transferor’s prior written consent thereto; provided, however, that the foregoing shall
not prohibit Transferee from accessing publicly accessible governmental records and databases from time to time. In addition, if Transferor’s consent is obtained by Transferee,
Transferor shall be entitled to receive at least five (5) business days prior written notice of the intended contact and shall be entitled to have a representative present when Transferee
has any such contact with any governmental official or representative.
E. During the term of this Agreement, Transferor shall endeavor to, at Transferee’s cost, make available to Transferee for inspection and copying, or at Transferor’s
option deliver to Transferee, such documents, materials and information concerning the Premises as Fee Owner may have in its or its property manager’s possession or control,
excluding (i) internal analyses of the value of the Premises, (ii) materials that are subject to attorney-client privilege or work-product doctrine and (iii) materials of a proprietary nature.
13. Title Insurance.
A. (i) Transferee acknowledges receipt of the existing owner’s title insurance policy for the Premises. At Closing, Transferee shall have the right at Transferee’s
sole cost and expense to obtain a new title policy. Transferor shall use commercially reasonable efforts to cooperate with Transferee in connection with obtaining such policy and a
nonimputation endorsement; provided, however, that neither Transferor or any affiliate thereof shall be required to expend any monies (except pursuant to the following sentence) or
assume any additional liability (other than the title affidavits, certifications and indemnities set forth in Section 8A(xiii)) in connection therewith. Provided that Transferee obtains a new
owner’s title insurance policy with a policy limit not to exceed $500,000,000, Transferor agrees at Closing to reimburse Transferee for one-half of any additional premium payable on
account of the non-imputation endorsement (provided, however, in the event Transferee obtains a new owner’s title insurance policy with a policy limit that exceeds $500,000,000,
Transferee will pay for the excess cost for such non-imputation endorsement resulting from such excess title insurance, it being understood and agreed that the parties shall split the
cost for such endorsement up to a policy limit of $500,000,000).
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(ii) Except as otherwise expressly provided in this Section 13(A)(ii) or elsewhere in this Agreement, Transferor shall have no obligation to remove any
exception to title. Transferee acknowledges that the Premises shall be subject to the Permitted Exceptions. If exceptions to title appear on any update or continuation
of a title commitment issued by the Title Insurer (each a “Continuation”) which are not Permitted Exceptions, Transferee shall notify Transferor thereof (any such
specified item being herein called an “Objection”) within the earlier of ten (10) business days after Transferee receives such Continuation and the last business day
prior to the Closing Date, TIME BEING OF THE ESSENCE. Transferee shall be deemed to have waived any such item or items if it does not specify the same as an
Objection within the aforementioned period. Transferor shall be obligated to discharge the following title exceptions (each of which shall automatically be deemed to
be an Objection (the “Required Objections”): (a) any title exception that constitutes a mortgage encumbering the Premises granted by any Transferor Party (except
for the Existing Mortgage), (b) any title exception that constitutes a consensual lien that Transferor voluntarily causes to be recorded against the Premises after the
date of execution of this Agreement and (c) any title exception that constitutes a mechanic’s lien of record resulting from work that the Fee Owner (and not any
Tenant) has performed or caused to be performed at the Premises, provided that Transferor shall have the right to bond and remove any such mechanic’s
lien. Transferor shall use commercially reasonable efforts to eliminate any Objections that are not Required Objections, provided that no Transferor Party shall be
required to expend any sum of money to eliminate any such Objection.
(iii) Subject to clause (ii), if Transferor is unable, or elects not to attempt, to eliminate such Objections, or if Transferor elects to attempt to eliminate any
such Objection but is unable to do so or thereafter decides not to eliminate the same, and accordingly, is unable to convey title to the Premises in accordance with the
provisions of this Agreement, Transferor shall so notify Transferee and, within ten (10) business days after receipt of such notice from Transferor, Transferee shall
elect either (i) to terminate this Agreement by notice given to Transferor (time being of the essence with respect to Transferee’s notice), in which event the provisions
of Article 14 of this Agreement shall apply, or (ii) to accept title to the Premises subject to such exceptions, without any abatement of the Purchase Price. If Transferee
shall not notify Transferor of such election within such ten (10) business day period, time being of the essence, Transferee shall be deemed to have elected clause (ii)
above with the same force and effect as if Transferee had elected clause (ii) within such ten (10) business day period.
B. Notwithstanding the foregoing provisions of this Article 13, in the event that Title Insurer or any title company retained by Transferee shall raise an exception to title
which is not a Permitted Exception, Transferor shall have no obligation to eliminate such exception and Transferee shall have no right to terminate the Agreement by reason of such
exception (and such exception shall be deemed a Permitted Exception) if Title Insurer or another national title company, as applicable, shall, at no additional cost or premium (unless
Transferor agrees to pay such additional cost or premium) insure title to the Premises without such exception.
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C. Except as expressly provided in Section 13A, Transferee shall pay the costs of examination of title and any owner’s or mortgagee’s policy of title insurance to be
issued insuring Transferee’s title to the Purchased Interest, as well as all other title charges, survey fees, recording charges and any and all other title and survey costs or expenses
incident to the Closing or in connection therewith.
D. Notwithstanding anything in Article 13 hereof to the contrary, Transferee may at any time accept such title as Transferor can convey, without reduction of the
Purchase Price or any credit or allowance on account thereof or any claim against Transferor. Subject to Section 16(C), the acceptance of the Purchased Interest by Transferee shall be
deemed to be full performance of, and discharge of, every agreement and obligation on Transferor’s part to be performed under this Agreement, except for the documents delivered at
Closing and such matters which are expressly stated in this Agreement to survive the Closing, to the limit of such survival.
E. In the event the Title Company is unwilling to issue a title insurance policy as required under this Agreement, Transferor may, at Transferee’s cost, replace the Title
Company with any combination of Fidelity National Title Insurance Company, LandAmerica and Chicago Title Insurance Company that commits to issue such policy under the same
conditions and circumstances as required under this Agreement; provided, that in no event shall the replacement of the Title Company cause the Closing Date to occur beyond any
adjournments permitted under this Agreement.
14. Reserved.
15. Indemnities.
A. It is the intention of Transferor and Transferee that, notwithstanding the fact that Transferee is purchasing the Purchased Interest, Transferee shall not be obligated to
pay or discharge any liabilities or other obligations which Transferee would not assume or be liable for if Transferee were purchasing the Premises instead of the Purchased Interest.
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(i) In order to implement the foregoing, Transferor and SLGOP hereby jointly and severally indemnify and agree to hold harmless Transferee, the
Company, Mezz LLC and the Fee Owner from and against all liabilities, obligations, debts, claims, causes of action, judgments and damages which may be asserted
against, imposed on or incurred by Transferee, the Company, Mezz LLC or the Fee Owner after the Closing by reason of any of the following: (i) any obligations of
the Transferor Parties for borrowed money which were incurred prior to the Closing, other than the Existing Loan and the JV Loan; (ii) any claims made by any party
(other than the Fee Owner) to any Existing Contracts or New Contracts with respect to any period prior to the Closing; (iii) all obligations and payments due from
Transferor or the Fee Owner to trade creditors with respect to any period prior to the Closing; (iv) any amounts due and payable by Transferor or the Fee Owner to the
Fee Owner’s property manager arising prior to the Closing; (v) all obligations relating to the period prior to Closing with respect to existing litigation against the
Transferor Parties, or any litigation instituted against the Transferor Parties on or after the Closing Date to the extent based on any matter occurring prior to the
Closing Date; (vi) any income, excise or franchise taxes payable by the Transferor Parties in respect of any period prior to the Closing Date; (vii) any liability to Lender
or any other indemnified party under the Existing Loan Documents relating to matters arising prior to the Closing Date; and (vii) any other liabilities, obligations,
debts, claims, causes of action, judgments or damages which may be imposed upon, incurred by or asserted against the Transferor Parties and which are based on any
matter occurring prior to the Closing.
(ii) Notwithstanding anything to the contrary set forth in this Section 15 (but subject to the provisions of Section 15(B)), the indemnity of SLGOP and
Transferor set forth herein shall not apply to any of the following or to any liability, obligation, debt, claim, cause of action, judgment or damage based on any of the
following: (a) any matter occurring, arising or accruing after the Closing Date except (with respect solely to Transferor and not SLGOP) to the extent Transferor is
expressly obligated in respect thereof under other provisions of this Agreement; (b) any matter expressly assumed by Transferee, the Company, Mezz LLC or the Fee
Owner or as to which Transferor is expressly relieved of any obligations or responsibilities under the terms of this Agreement or any agreement entered into in
connection with the Closing; (c) any matter which is the subject of a representation and warranty of Transferor set forth in this Agreement or any instrument or
document executed pursuant hereto, it being understood and agreed that the indemnity set forth in this Section 15 is not intended either to expand upon or increase
Transferor’s liability under such warranties and representations or to affect or impair Transferee’s rights under other applicable provisions of this Agreement or any
such document in the event of the breach of any such representation or warranty; (d) any matter or item in respect of which an apportionment has been made or
provided for in this Agreement; (e) any matter relating to title to the Premises; and (f) any matter relating to the physical condition of the Premises or any personal
property included therein, including, without limitation, the need for any required repairs or replacements or any condition at the Premises which violates applicable
building, zoning, use, occupancy, fire, safety, health, environmental, disability or other laws, ordinances or codes. Without limiting the generality of clause (f) above,
but in amplification thereof (but without limiting any remedies that may be provided to Transferee under this Agreement in respect thereof) , if any Tenant or other
party claims that the Fee Owner is in default because they failed to make any required repairs, replacements or improvements, or if any governmental authority or other
party asserts that the Premises is in violation of any applicable laws, ordinances or codes, unless otherwise expressly provided elsewhere in this Agreement, SLGOP
and Transferor shall have no liability, responsibility or obligation to make any such repairs, replacements or improvements, or to comply with any such laws,
ordinances or codes or to remedy any violation thereof, or to pay the cost thereof, even if the condition which gives rise to the need therefor occurred prior to the
Closing, it being understood and agreed that except as otherwise expressly provided elsewhere in this Agreement Transferee has agreed to acquire the Purchased
Interest on the basis that the Premises will be in “as is” condition and that Transferor shall not be obligated to make any repairs, replacements or improvements
thereto or remedy any conditions therein which are in violation of any applicable laws, ordinances or codes.
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B. Supplementing the liabilities and indemnities set forth in Sections 15(A) above and elsewhere under this Agreement:
(i) Notwithstanding any other provision of this Agreement (including, without limitation, any provision purporting to create a sole and exclusive
remedy for the benefit of Transferor): Transferee shall indemnify, defend and hold Transferor, its direct and indirect shareholders, officers, directors, partners,
principals, members, employees, agents, contractors and all successors or assigns of the foregoing (collectively, the “Covered Transferor Parties”) harmless from
and against any and all losses, costs, damages, liens, claims, liabilities or expenses (including, but not limited to, reasonable attorneys’ fees, court costs and
disbursements) incurred by any of the Covered Transferor Parties as the result of or in connection with any obligation under the Existing Loan (including, without
limitation, the Existing Guaranty or any replacement or modification thereof) arising from and after the Closing Date, except as expressly provided in any agreements
entered into at the Closing or arising on account of the wrongful acts of any Covered Transferor Party.
(ii) Notwithstanding any other provision of this Agreement (including, without limitation, any provision purporting to create a sole and exclusive
remedy for the benefit of Transferee): Transferor and SLGOP shall indemnify, defend and hold Transferee, its direct and indirect shareholders, officers, directors,
partners, principals, members, employees, agents, contractors and all successors or assigns of the foregoing (collectively, the “Covered Transferee Parties”)
harmless from and against any and all losses, costs, damages, liens, claims, liabilities or expenses (including, but not limited to, reasonable attorneys’ fees, court costs
and disbursements) incurred by any of the Covered Transferee Parties as the result of or in connection with any liability to Lender or any other indemnified party
under the Existing Loan (subject to the limitations set forth in Section 15(A)(ii) above) relating to matters arising prior to the Closing Date.
(iii) This Section 15(B) shall survive the Closing or termination of this Agreement.
16. Representations and Warranties.
A. Transferor hereby represents and warrants to Transferee as follows as of the date hereof:
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(i) The Leases together with all amendments thereto and guarantees listed on Exhibit ”1(B)” are the only leases, licenses, tenancies, possession
agreements and occupancy agreements affecting the Premises on the date of this Agreement in which any Fee Owner holds the lessor’s, licensor’s or grantor’s
interest and there are no other leases, licenses, tenancies, possession agreements or occupancy agreements affecting the Premises (other than subleases, licenses,
tenancies or other possession or occupancy agreements which may have been entered into by the Tenants, or their predecessors in interest, under such Leases);
Exhibit “1(B)” also sets forth a list of all subleases, licenses, tenancies or other possession or occupancy agreements which may have been entered into by the
Tenants, or their predecessors in interest, under such Leases as to which the Fee Owner has executed a consent or recognition agreement; Transferor has delivered
copies of all such Leases to Transferee, which copies are true, complete and correct in all material respects; as of the date hereof, no Fee Owner has received any
written notice of any default of any of its material obligations under such Leases which has not been cured; Fee Owner has not sent written notice to any Tenant
claiming that such Tenant is in default, which default remains uncured, nor does Transferor or Fee Owner have knowledge of any monetary or material non-monetary
default under any Lease by any Tenant or the landlord thereunder or the existence of any condition, which, following the mere passage of time or the giving of notice
or both, could become a default by a Tenant under a Lease; no Tenant is in arrears in the payment of Base Rent for any period in excess of thirty (30) days, except as
set forth on Exhibit “16(A)(i)”;
(ii) The Union Employees listed on Exhibit “16(A)(ii)” are all of the Union Employees of the Fee Owner and to Transferor’s best knowledge, the
employees of the Fee Owner’s property manager and any affiliates who work at the Premises as of the date hereof and the Fee Owner has no other employees, and
Exhibit “16(A)(ii)” correctly identifies the union with which each Union Employee is affiliated and the position of each Union Employee. Transferor and its affiliates
have made all payments relating to the Union Employees required prior to the Closing under the collective bargaining agreements, union agreements and other
material agreements related to the Union Employees (it being acknowledged that the Multiemployer Pension Plan (hereinafter defined) is underfunded);
(iii) The Existing Contracts listed on Exhibit “1(C)” are the only Existing Contracts; Transferor has delivered copies of all such Existing Contracts (other
than Global Contracts) to Transferee, which copies are true, complete and correct in all material respects; as of the date hereof, to Transferor’s actual knowledge,
Transferor has received no written notice of material default under an Existing Contract;
(iv) The Telecommunications Contracts listed on Exhibit “1(D)” are the only Telecommunications Contracts; Transferor has delivered copies of all such
Telecommunications Contracts (other than Global Contracts) to Transferee, which copies are true, complete and correct in all material respects; as of the date hereof,
to Transferor’s actual knowledge, Transferor has received no written notice of material default under a Telecommunications Contract;
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(v) Transferor is not a “foreign person” within the meaning of Section 1445(f)(3) of the Internal Revenue Code;
(vi) Neither Transferor nor any Fee Owner nor the Fee Owner’s property manager has received written notice of any pending or threatened
condemnation with respect to the Premises or any part thereof;
(vii) Other than as set forth in Exhibit “16(A)(vii)” attached hereto, and except for claims covered by insurance, there are no material actions, suits,
proceedings or government investigations pending against any Transferor Party or the Premises, or to Transferor’s knowledge threatened in writing against any
Transferor Party or the Premises, in any court of law or in equity or in any arbitration or other forum or before any governmental instrumentality;
(viii) The Brokerage Agreements listed on Exhibit “1(E)” are the only brokerage agreements entered into by the Fee Owner with respect to the leasing of
portions of the Premises which provide for the possibility of additional commissions subsequent to the date hereof. Transferor has delivered copies of all such
Brokerage Agreements to Transferee, which copies are true, complete and correct in all material respects;
(ix) Each Transferor Party is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware,
and has the requisite power and authority to enter into and perform its obligations under this Agreement; Each Transferor Party has taken all action required to
execute, deliver and, subject to any consents or waivers required to be obtained prior to the Closing, perform this Agreement and to make all of the provisions of this
Agreement the valid and enforceable obligations they purport to be and has caused this Agreement to be executed by a duly authorized person. Transferor has
delivered to Transferee true, correct and complete copies of the limited liability company operating agreements currently in effect of the Company, Mezz LLC and each
Fee Owner;
(x) This Agreement is, and all documents which are to be delivered to Transferee by Transferor, SLGOP and/or the Fee Owner at the Closing are or at
the time of Closing will be, duly authorized, executed and delivered by Transferor, SLGOP and the Fee Owner, as applicable; is (and with respect to any of the
documents to be delivered at Closing, at the time of Closing will be), the legal, valid and binding obligations of Transferor, SLGOP and the Fee Owner, as applicable,
enforceable in accordance with their terms, subject to general principles of equity and to bankruptcy, insolvency, reorganization, moratorium or other similar laws
presently or hereafter in effect affecting the rights of creditors or debtors generally; and do not conflict with any provision of any law or regulation to which
Transferor, SLGOP or the Fee Owner is subject or agreement to which Transferor, SLGOP or the Fee Owner is a party or the Premises is subject, violate any provision
of any judicial order to which Transferor, SLGOP or the Fee Owner is a party or to which Transferor, SLGOP, the Fee Owner, or the Premises is subject; or require
Transferor, SLGOP or the Fee Owner to obtain any consent, authorization, approval or registration under any law, regulation or judicial order which is binding upon
Transferor, SLGOP, the Fee Owner or the Premises;
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(xi) As of the Closing, Transferor and the 1% Owner will be the legal and beneficial owners of all of the issued and outstanding legal and beneficial
ownership interests in the Company, free and clear of any and all liens and such interests have been duly authorized, validly issued and are fully paid and
nonassessable. Transferor has not transferred, assigned, sold, hypothecated, pledged or encumbered all or any portion of its interest in the Company;
(xii) There are no subscriptions, warrants, options, conversion rights, or other agreements of any kind to purchase or otherwise acquire or sell
Transferor’s interest in the Company and there are no subscriptions, warrants, options, conversion rights, or other agreements of any kind to purchase or otherwise
acquire or sell any other interests in Mezz LLC or the Fee Owner. None of Transferor, the Company, Mezz LLC or any Fee Owner has granted any currently
outstanding purchase option or rights of first refusal with respect to the sale of the Purchased Interest or any interest in Mezz LLC, the Fee Owner or the Premises, as
applicable. Upon the consummation of the transactions contemplated by this Agreement, Transferee shall be the holder of the Purchased Interest free and clear of
any restrictions on transfer and liens and encumbrances, except as provided in any of the agreements to be executed or delivered at Closing (including the JV Loan).
No person or entity has any voting or management rights with respect to the Company except as set forth in and subject to the Company LLC Agreement;
(xiii) Neither the Company nor Mezz LLC has any subsidiaries or holds any direct or indirect beneficial ownership interest in any corporation,
partnership, joint venture, limited liability company or other entity or enterprise, other than as set forth on Exhibit “16(A)(xxix)(a)”;
(xiv) The Fee Owner does not, either directly or indirectly, own of record or beneficially any shares or other equity interests in any corporation,
partnership, limited partnership, limited liability company, limited liability partnership, joint venture, trust or other business entity. The Fee Owner have not, either
directly or indirectly, owned of record any other real or personal property other than the Premises;
(xv) None of Transferor, the Company, Mezz LLC or any Fee Owner has (i) made a general assignment for the benefit of its creditors, (ii) admitted in
writing its inability to pay its debts as they mature, (iii) had an attachment, execution or other judicial seizure of any property interest which remains in effect, (iv)
taken, failed to take or submitted to any action indicating a general inability to meet its financial obligations as they accrue or (v) made a filing of a partition of the
Premises. There is not now or pending any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or
recomposition of Transferor, the Company or any Fee Owner or any of their respective debts under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, seeking appointment of a receiver, trustee, custodian or other similar official for any of them or for all or any substantial part of its property;
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(xvi) Other than as set forth on Exhibit “16(A)(xvi)”, no Transferor Party has any material liabilities other than liabilities relating to the Premises;
(xvii) Other than as set forth on Exhibit “16(A)(xvii)”, the Fee Owner has not commenced any tax assessment reduction proceedings with respect to the
Premises;
(xviii) Exhibit “16(A)(xviii)” sets forth all Security Deposits (including those in the form of Letters of Credit) presently held by or on behalf of the Fee
Owner with respect to the Leases as of the date hereof;
(xix) Exhibit “16(A)(xix)” sets forth all base rents, real estate taxes and operating expense escalations billed to Tenants during July 2009;
(xx) None of Transferor, the Company, Mezz LLC or any Fee Owner is a person in violation of, and is not a person and/or entity with whom Transferee
is restricted from doing business under, the International Emergency Economic Powers Act, 50 U.S.C. § 1701 et seq.; the Trading With the Enemy Act, 50 U.S.C. App.
§ 5; the USA Patriot Act of 2001; any executive orders promulgated thereunder, any implementing regulations promulgated thereunder by the U.S. Department of
Treasury Office of Foreign Assets Control (“OFAC”) (including those persons and/or entities named on OFAC’s List of Specially Designated Nationals and Blocked
Persons); or any other applicable law of the United States;
(xxi) Other than as set forth on Exhibit “16(A)(xxi)” neither Transferor nor any Fee Owner nor to Transferor’s knowledge, the Fee Owner’s property
manager, has received written notice (each, an “Environmental Notice”) from any governmental entity of violation of any environmental law or regulation with respect
to the Premises or any part thereof;
(xxii) Exhibit “16(A)(xxii)” attached hereto contains a true, correct and complete list of all of the material Existing Loan Documents. Transferor has
delivered to Transferee true, correct and complete copies of the material Existing Loan Documents;
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(xxiii) All required payments of principal and interest due and payable as of the date hereof under the Existing Loan Documents have been paid and there
exists no Event of Default (as such term is defined in the Existing Loan Documents) under the Existing Loan Documents;
(xxiv) None of Transferor, the Company, Mezz LLC or the Fee Owner has made any transfer that would constitute a Sale (as such term is defined in the
Existing Mortgage) pursuant to Section 9.04 of the Existing Mortgage;
(xxv) Attached hereto as Exhibit “16(A)(xxv)” is a true, correct and complete copy of the Servicer Statement for the Existing Loan as of the date set forth
thereon;
(xxvi) Other than as set forth on Exhibit “16(A)(xxvi)” there exists no litigation related to exemption from real estate tax payments under the Industrial
Commercial Incentive Program of the City of New York (which, as same may from time to time be amended, is herein referred to as the “ICIP”) for the Property;
(xxvii) Other than as set forth on Exhibit “16(A)(xxvii)” there are no outstanding Leasing Costs;
(xxviii) The Fee Owner has in full force and effect all material licenses and permits necessary for the operation of the Premises in the manner the same is
currently operated;
(xxix) Attached hereto as Exhibit “16(A)(xxix)(a)” is a true, correct and complete copy of the current organizational ownership structure of the Premises
and of all of the direct and indirect ownership interests therein (other than ownership interests in SL Green or SLGOP, and no representation is made regarding the
interest in the Company owned by CIF). Upon the consummation of the Closing in accordance with the terms of this Agreement, the ownership structure of the
Premises and of all of the direct and indirect ownership interests therein shall be as set forth on Exhibit “16(A)(xxix)(b)” attached hereto;
(xxx) Each of the Company, Mezz LLC and each Fee Owner (and Transferor with respect to Company income) has paid or caused to be paid or will pay all
federal, state, local, foreign, and other taxes relating to the period prior to the Closing, including, without limitation, income taxes, excise taxes, sales taxes, use taxes,
value added taxes, gross receipts taxes, franchise taxes, capital stock taxes, employment and payroll related taxes, withholding taxes, transfer taxes, whether or not
measured in whole or in part by net income, and all deficiencies, or other additions to tax, interest, fines and penalties owed by it and required to be paid by it through
the date hereof. Each of the Company, Mezz LLC and each Fee Owner has, in accordance with applicable law, filed when due all federal, state, local and foreign
returns, declarations, reports, claims for refund, or information returns or statements relating to such taxes, including any schedule or attachment thereto, and
including any amendment thereto (“Tax Returns”) required to be filed by it through the Closing Date (except for extensions duly filed as to such obligations), and to
Transferor's knowledge all such Tax Returns were correct and complete in all material respects;
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(xxxi) To Transferor's knowledge, as of the date hereof, neither the Internal Revenue Service nor any other governmental authority is now asserting or has
threatened in writing to assert against the Company, Mezz LLC or any Fee Owner any deficiency or claim for additional Taxes; and
(xxxii) As of the date hereof, (i) there is no pending audit of any Tax Return filed by the Company, Mezz LLC or any Fee Owner and no such party has
been notified by any tax authority that any such audit is contemplated or pending, and (ii) no waiver or agreement by the Company, Mezz LLC or any Fee Owner is in
force for the extension of time for the assessment or payment of any Taxes. None of the Company, Mezz LLC or any Fee Owner has waived any statute of limitations
in respect of Taxes.
B. Transferee represents and warrants to Transferor that, as of the date hereof:
(i) Transferee is a limited liability company, duly organized, validly existing and in good standing under the laws of the State of Delaware, and on the
Closing Date, will be in good standing and qualified to do business under the laws of the State of New York; Transferee has taken all action required to execute,
deliver and perform this Agreement and to make all of the provisions of this Agreement the valid and enforceable obligations they purport to be and has caused this
Agreement to be executed by a duly authorized person;
(ii) This Agreement is, and all documents which are to be delivered to Transferor by Transferee at the Closing are or at the time of Closing will be, duly
authorized, executed and delivered by Transferee; are, or (with respect to any of the documents to be delivered at Closing) at the time of Closing will be, legal, valid
and binding obligations of Transferee enforceable in accordance with their terms, subject to general principles of equity and to bankruptcy, insolvency,
reorganization, moratorium or other similar laws presently or hereafter in effect affecting the rights of creditors or debtors generally; and do not conflict with any
provision of any law or regulation to which Transferee is subject or agreement to which Transferee is a party, violate any provision of any judicial order to which
Transferee is a party or to which Transferee is subject, or require Transferee to obtain any consent, authorization, approval or registration under any law, regulation or
judicial order which is binding upon Transferee;
(iii) There are no judgments, orders or decrees of any kind against Transferee unpaid or unsatisfied of record and no legal action, suit or other legal or
administrative proceeding pending or threatened before any court or administrative agency which has, or is likely to have, any material adverse effect on (a) the
business or assets or the condition, financial or otherwise, of Transferee or (b) the ability of Transferee to perform its obligations under this Agreement;
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(iv) Transferee has not filed any petition seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any law relating to bankruptcy or insolvency, nor has any such petition been filed against Transferee; No general assignment of Transferee’s
property has been made for the benefit of creditors, and no receiver, master, liquidator or trustee has been appointed for Transferee or any of its property; Transferee
is not insolvent and the consummation of the transactions contemplated by this Agreement shall not render Transferee insolvent; Transferee has now and will have
as of the Closing Date sufficient capital or net worth to meet its obligations under this Agreement; and Transferee certifies that any financial statements and any
financial statements of Transferee and/or any affiliate of Transferee submitted to Transferor are true, correct and complete in all material respects; and
(v) Transferee is not a person and/or entity with whom Transferor is restricted from doing business under OFAC (including those persons and/or
entities named on OFAC’s List of Specially Designated Nationals and Blocked Persons); or any other applicable law of the United States.
C. The representations of Transferor set forth in this Agreement as updated and made as of the date of Closing (collectively, the “Surviving Transferor Representation
(s)”) shall survive the Closing under this Agreement for a period of two hundred seventy (270) days after the Closing Date (the “Survival Period”); provided, however, that the
representations of Transferor set forth in this Agreement with respect to Leases shall not survive the Closing to the extent a Conforming Estoppel covering substantially the same
matter is delivered. Each Surviving Transferor Representation shall automatically be null and void and of no further force and effect after the Survival Period unless, prior to the end of
the Survival Period, Transferee shall have asserted in writing a specific claim with respect to the particular Surviving Transferor Representation and commenced a legal proceeding
within of one hundred eighty (180) days after the expiration of the Survival Period against Transferor alleging that Transferor is in breach of such Surviving Transferor Representation
and that Transferee has suffered actual damages as a result thereof (a “Proceeding”). In no event shall Transferee be entitled to assert any consequential, special or punitive damages,
nor shall it be entitled to any award or payment based on such damages. If Transferee timely commences a Proceeding, and a court of competent jurisdiction, pursuant to a final, non-
appealable order in connection with such Proceeding, determines that (1) the applicable Surviving Transferor Representation was breached as of the date of this Agreement and/or the
Closing Date and (2) Transferee suffered actual damages (the “Damages”) by reason of such breach and (3) Transferee did not have knowledge of such breach prior to the Closing,
then Transferee shall be entitled to receive an amount equal to the Damages, but in no event in an amount greater than the Ceiling (as hereinafter defined); provided, however,
Transferee shall not be entitled to pursue any claim against Transferor for damage to Transferee that is, together with all other claims against Transferor regarding breaches of
representations and/or Estoppel Claims, less than the Floor (as hereinafter defined). If Transferee has claim(s) against a Transferor Party, individually or in the aggregate, in excess of
the Floor, then Transferee shall be entitled to pursue the full amount of the actual loss suffered by Transferee in connection with such claim(s) against Transferor, but in no event shall
Transferor’s liability for any and all claims exceed the Ceiling. For purposes of this Section 16, Transferee shall be deemed to have actual knowledge if Transferee and/or its affiliates
and their respective officers, employees, agents, representatives or consultants had knowledge of the fact in issue prior to Closing or if such information is identified in the Schedules
and Exhibits hereto. As used herein, “Floor” shall mean with respect to any claim or claims against Transferor for breach of any Surviving Transferor Representation, ONE HUNDRED
FIFTY THOUSAND AND 00/100 Dollars ($150,000.00), provided that in determining whether such amount has been reached, Transferor and Transferee shall take into account, pursuant
to Sections 10(A) and 16(D), the amount (but in no event in excess of $150,000.00), if any, attributable to any breaches of Transferor’s representations and warranties and/or Estoppel
Claims, regardless of whether Transferee had knowledge prior to the Closing, but subject to indemnification of such breach pursuant to Section 15 hereof, and “Ceiling” shall mean
SEVEN MILLION FIVE HUNDRED THOUSAND AND 00/100 Dollars ($7,500,000.00). The provisions of this Section 16(C) shall constitute the sole and exclusive remedy after closing
for breaches of Transferor’s representations. Notwithstanding the above, the representations of Transferor set forth in Sections 16(A)(v), (vi), (ix), (x), (xii), (xiii), (xiv), (xv), (xvi), (xx),
(xxix), (xxx), (xxxi) and (xxxii) shall survive indefinitely and shall not be subject to the Ceiling.
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D. (i) Until Closing, Transferor shall, and shall cause Fee Owner to endeavor to update any representation or warranty in this Agreement to correct any
mistake and/or to reflect any matter which arises subsequent to the date of this Agreement. If Transferee has actual knowledge of any matter which would constitute a material breach
of Transferor’s representations and warranties, Transferee shall notify Transferor of such material breach within the earlier of ten (10) business days of learning of same and the Closing
Date, failing which Transferee shall be deemed to waive any such material breach of Transferor’s representations and warranties. Transferor shall have the right to contest Transferee’s
determination as to a material breach of Transferor’s representations and warranties (including an alleged breach based on information contained in an Estoppel), and shall, upon one (1)
day written notice to Transferee, have the right to attempt to cure such material breach without being obligated to complete such cure. In addition, subject to the provisions of Article
39, Transferor shall have until the date that is the later of the then scheduled Closing Date and forty-five (45) days from the date of Transferee’s notice to cure any such material breach
of Transferor’s representations and warranties and, at Transferor’s sole option, upon not less that three (3) days’ advance written notice (unless the reason necessitating the extension
only arises within the three (3) days immediately prior to the Closing Date, in which event as much in advance of the Closing as is practicable but in no event less than one (1) business
day prior to the Closing Date), the Closing Date shall be extended to such forty-fifth (45th) day (or any earlier business day) after Transferee’s notice to permit such cure by
Transferor. Transferee shall not be obligated to close the transactions contemplated hereunder prior to the cure or waiver by Transferee of any such material breach. If the Transferor
fails to cure any such material breach of Transferor’s representations and warranties within the time period set forth herein, then Transferee, as its sole and exclusive remedies shall have
the option to (i) terminate this Agreement by written notice to Transferor, in which case Escrow Agent shall return the Deposit (together with all interest thereon, if any) to Transferee
and neither party to this Agreement shall thereafter have any further right or obligation hereunder, other than the Surviving Obligations or (ii) waive such material breach and
consummate the transactions contemplated by this Agreement without any credit against or reduction of the Purchase Price, in which case, subject to Section 16(C), Transferee shall be
deemed to have forever and for all purposes waived such material breach and shall not be entitled to pursue any action for or collect any damages hereunder therefor.
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(ii) For the purposes of Section 16(C) and this Section 16(D), “material” shall mean any state of facts, taken alone or together with all other material
untruths or inaccuracies and all such covenants with which the Transferor Parties have not materially complied, the restoration of which to the condition represented or warranted by
Transferor under this Agreement, or the cost of compliance with which, would cost Transferee in excess of ONE HUNDRED FIFTY THOUSAND AND 00/100 Dollars ($150,000.00);
provided, that any one or more breaches of any of the representations and warranties set forth in Sections 16(A)(ix), (x) (which shall be subject to clause (A) below only), (xi), (xii), (xiii),
(xiv), (xv), (xvi), (xxx), (xxxi) or (xxxii) shall not, individually or in the aggregate, be deemed to be material if either (A) Transferor causes the same to be cured at or prior to Closing, or (B)
the aggregate cost of such cure or damages arising from any such uncured breach is less than TWELVE MILLION and 00/100 Dollars ($12,000,000.00) and SLGOP agrees to indemnify
Transferee from and against any losses incurred on account of such breaches.
E. The terms “to Transferor’s actual knowledge,” “to the best of Transferor’s actual knowledge” and phrases of similar import shall mean the actual present knowledge
(and not constructive knowledge) of Andrew S. Levine, Andrew Mathias and Isaac Zion, without independent inquiry or investigation (except for such investigation and inquiry as
such parties reasonably deemed appropriate), and shall not mean that Transferor or such individual is charged with knowledge of the acts, omissions and/or knowledge of Transferor’s
property manager (or any employee thereof) or of Transferor’s other agents or employees or of Transferor’s predecessors in title to the Premises.
17. Broker.
A. Transferor represents to Transferee that it has not dealt with any broker, finder or like agent in connection with this transaction other than (i) Cushman & Wakefield
(“Transferor Broker”) and (ii) Howard Michaels and the Carlton Group (collectively, “Transferee Broker”). Transferor shall pay the amounts due Transferor Broker as set forth in a
separate agreement by and between Transferor and Transferor Broker. Transferor hereby indemnifies and holds Transferee harmless from and against any and all claims for any
commission, fee or other compensation by any person or entity, including Transferor Broker (but excluding Transferee Broker), who shall claim to have dealt with Transferor in
connection with the sale of the Purchased Interest and for any and all costs incurred by Transferee in connection with any such claims including, without limitation, reasonable
attorneys’ fees and disbursements.
B. Transferee represents to Transferor that it has not dealt with any broker, finder or like agent in connection with this transaction other Transferor Broker and Transferee
Broker. Transferee shall pay the amounts due Transferee Broker as set forth in a separate agreement by and between Transferee and Transferee Broker. Transferee hereby indemnifies
and holds Transferor harmless from and against any and all claims for any commission, fee or other compensation by any person or entity, including Transferee Broker (but excluding
Transferor Broker), who shall claim to have dealt with Transferee in connection with the sale of the Purchased Interest and for any and all costs incurred by Transferor in connection
with any such claims including, without limitation, reasonable attorneys’ fees and disbursements.
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C. The provisions of this Article 17 shall survive the Closing or any early termination of this Agreement.
18. Condemnation and Destruction.
A. If, prior to the Closing Date, all or any “Significant Portion” (as hereinafter defined) of the Premises is taken, or rendered unusable for its current purpose or reasonably
inaccessible by eminent domain (or is the subject of a pending or contemplated taking which has not been consummated), Transferor shall notify Transferee of such fact and Transferee
shall have the option to terminate this Agreement upon notice to Transferor given not later than fifteen (15) business days after receipt of Transferor’s notice. For purposes of this
Section 18(A) and Section 18(B) hereof, a “Significant Portion” shall mean a portion of the Premises (i) the reasonably estimated cost to restore (as determined by an engineer selected
by Transferor which is reasonably satisfactory to Transferee), in the case of a casualty, or the value of the award, in the case of a condemnation, equals to or is greater than Twenty-
Five Million Dollars ($25,000,000) or (ii) which would permit one or more tenants leasing in the aggregate not less than five percent (5%) of the Occupied Space to terminate its Lease. If
this Agreement is terminated as aforesaid, neither party shall have any further right or obligation hereunder except that Escrow Agent shall refund to Transferee the Deposit (together
with interest thereon, if any). If Transferee does not elect to terminate this Agreement (provided that Transferee’s failure to elect to terminate shall be deemed an election to close) or if
the portion of the Premises which is taken or rendered unusable or reasonably inaccessible by eminent domain (or is the subject of a pending or contemplated taking which has not been
consummated) is not a Significant Portion of the Premises, Transferee shall accept the Purchased Interest with no abatement of the Purchase Price, and at the Closing, Transferor shall
assign and, if applicable, turn over to the Fee Owner, and the Fee Owner shall be entitled to receive and keep, all of Transferor’s interest in and to all awards for such taking by eminent
domain, if any.
B. If, prior to the Closing Date, a Significant Portion of the Building is destroyed by fire or other casualty, Transferor shall notify Transferee in writing of such fact and
Transferee shall have the option to terminate this Agreement upon ten (10) days notice to Transferor given not later than fifteen (15) business days after receipt of Transferor’s notice,
which notice from Transferor shall include a reasonable estimate from the engineer selected under Section 18(A) as to the estimated cost to restore the portion of the Building affected.
If Transferee shall elect to terminate this Agreement as aforesaid (provided that Transferee’s failure to elect to terminate shall be deemed an election to close), this Agreement shall
terminate and neither party shall have any further rights or obligations hereunder, other than the Surviving Obligations, except that Escrow Agent shall refund to Transferee the Deposit
(together with all interest thereon, if any). If Transferee does not elect to terminate this Agreement as provided above, or if the portion of the Premises so damaged or destroyed is not a
Significant Portion of the Premises, Transferee shall accept the Purchased Interest, and the appurtenant indirect ownership interest in the Premises in its then “as is” condition with no
abatement of the Purchase Price, and at the Closing Transferor shall assign and, if applicable, turn over to the Fee Owner, and the Fee Owner shall be entitled to receive and keep, all of
Transferor’s interest in and to all casualty insurance proceeds payable in connection with such casualty (except that the proceeds of any business interruption or rental value insurance
payable to Transferor shall be apportioned as of the Closing Date; and to the extent necessary to maintain the benefits of any coverage provided by any business interruption or rental
value insurance from and after the Closing, Transferor shall, and shall cause Fee Owner to also assign to Transferee Transferor’s right and interest in and to such policies), if any, and
Transferor shall pay to the Fee Owner at the Closing the amount of any deductible payable by Transferor, the Company or the Fee Owner in connection with casualty coverage. This
Article is an express agreement to the contrary of Section 5-1311 of the New York General Obligations Law.
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19. Escrow.
A. The Deposit shall be held in escrow by Escrow Agent, upon the following terms and conditions:
(i) Escrow Agent shall deposit the Deposit in an interest-bearing account or invest the Deposit in a money market or monetary fund;
(ii) Escrow Agent shall deliver to Transferor the Deposit (together with all interest thereon, if any) at and upon the Closing; and
(iii) If this Agreement is terminated in accordance with the terms hereof, or if the Closing does not take place under this Agreement by reason of the
failure of either party to comply with such party’s obligations hereunder, Escrow Agent shall pay the Deposit (together with all interest thereon, if any) to Transferor
and/or Transferee, as the case may be, in accordance with the provisions of this Agreement.
B. It is agreed that:
(i) The duties of Escrow Agent are only as herein specifically provided, and, except for the provisions of Section 19(C) hereof, are purely ministerial in
nature, and Escrow Agent shall incur no liability whatever except for its own willful misconduct or gross negligence;
(ii) Escrow Agent shall not be liable or responsible for the collection of the proceeds of any checks used to pay the Deposit;
(iii) In the performance of its duties hereunder, Escrow Agent shall be entitled to rely upon any document, instrument or signature believed by it in
good faith to be genuine and signed by either of the other parties hereto or their successors;
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(iv) Escrow Agent may assume, so long as it is acting in good faith, that any person purporting to give any notice of instructions in accordance with the
provisions hereof has been duly authorized to do so;
(v) Escrow Agent shall not be bound by any modification, cancellation or rescission of this Agreement unless in writing and signed by Escrow Agent,
Transferor and Transferee;
(vi) Except as otherwise provided in Section 19(C) hereof, Transferor and Transferee shall jointly and severally reimburse and indemnify Escrow Agent
for, and hold it harmless against, any and all loss, liability, costs or expenses in connection herewith, including attorneys’ fees and disbursements, incurred without
willful misconduct or gross negligence on the part of Escrow Agent arising out of or in connection with its acceptance of, or the performance of its duties and
obligations under, this Agreement, as well as the costs and expenses of defending against any claim or liability arising out of or relating to this Agreement;
(vii) Each of Transferor and Transferee hereby releases Escrow Agent from any act done or omitted to be done by Escrow Agent in good faith in the
performance of its duties hereunder; and
(viii) Escrow Agent may resign upon ten (10) days written notice to Transferor and Transferee. If a successor Escrow Agent is not appointed by
Transferor and Transferee within such ten (10) day period, Escrow Agent may petition a court of competent jurisdiction to name a successor.
C. Escrow Agent is acting as a stakeholder only with respect to the Deposit. Escrow Agent, except in the event of the Closing, shall not deliver the Deposit except on
seven (7) days’ prior written notice to the parties and only if neither party shall object within such seven (7) day period. If there is any dispute as to whether Escrow Agent is obligated
to deliver all or any portion of the Deposit or as to whom the Deposit is to be delivered, Escrow Agent shall not be required to make any delivery, but in such event Escrow Agent may
hold the same until receipt by Escrow Agent of an authorization in writing, signed by all of the parties having any interest in such dispute, directing the disposition of the Deposit
(together with all interest thereon, if any), or in the absence of such authorization Escrow Agent may hold the Deposit (together with all interest thereon, if any), until the final
determination of the rights of the parties in an appropriate proceeding. If such written authorization is not given or proceedings for such determination are not begun within thirty (30)
days after the date Escrow Agent shall have received written notice of such dispute, and thereafter diligently continued, Escrow Agent may, but is not required to, bring an appropriate
action or proceeding for leave to deposit the Deposit (together with all interest thereon, if any), in court pending such determination. Escrow Agent shall be reimbursed for all costs and
expenses of such action or proceeding including, without limitation, reasonable attorneys’ fees and disbursements, by the party determined not to be entitled to the Deposit, or if the
Deposit is split between the parties hereto, such costs of Escrow Agent shall be split, pro rata, between Transferor and Transferee, in inverse proportion to the amount of the Deposit
received by each. Upon making delivery of the Deposit (together with interest thereon, if any), in the manner provided in this Agreement, Escrow Agent shall have no further obligation
or liability hereunder.
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D. Escrow Agent has executed this Agreement solely to confirm that Escrow Agent has received the Deposit (if the Deposit is made by check, subject to collection) and
will hold the Deposit, in escrow, pursuant to the provisions of this Agreement.
E. Transferor understands and acknowledges that Escrow Agent also serves as Transferee’s counsel and that Escrow Agent shall have the right to represent Transferee
in any dispute between Transferor and Transferee with respect to the Deposit, this Agreement or otherwise.
20. Covenants.
A. Transferor agrees that, prior to the Closing, it shall, and shall cause the Company, Mezz LLC and the Fee Owner, as applicable, to:
(i) Not enter into any new lease of space or other occupancy arrangement or any New Contract or brokerage agreement, or amend or modify the same or
any Lease, Surviving Contracts or Brokerage Agreements or approve any assignment or sublease (to the extent the Fee Owner’s approval is required under a Lease),
in each case, other than (a) with the prior written consent of Transferee, which consent Transferee shall not unreasonably withhold, condition or delay; or (b) New
Contracts which expire or are cancelable prior to the Closing Date or are cancelable at any time without cause on not more than thirty (30) days’ notice without
payment of any termination fees, or (c) renewals, extensions, expansions or consents under Leases which are expressly provided in any such Lease and which, under
the terms of the applicable Lease, do not require the consent of the lessor thereunder or to which the consent or approval of the lessor shall not be unreasonably
withheld and as to which the lessor has no reasonable basis for objecting (and Transferor shall consult with Transferee regarding such renewals, extensions,
expansions or consents). Transferee acknowledges receipt of the Fee Owner’s standard form lease and Transferee hereby approves same. Notwithstanding the
foregoing provisions of this clause (i), Transferor may enter into Leases, renewals, extensions and modifications based on a term sheet or letter of intent approved in
writing by Transferee (which approval shall not be unreasonably withheld, delayed or conditioned), provided that the same is on the approved standard form lease
subject only to commercially reasonable changes to such form agreed between the Fee Owner and the applicable tenant in order to conform with the approved term
sheet or letter of intent. If Transferee fails to respond to a request from Transferor for consent to any action for which Transferee’s consent is required under this
Section 20(A)(i) within five (5) business days after Transferee’s receipt of Transferor’s written request, which request shall include a summary of terms relating to
such request, Transferor shall send a second notice to Transferee and if Transferee fails to respond to such request within three (3) business days, Transferee’s
consent to such action shall be deemed granted. Transferor shall provide to Transferee a copy of any Lease, Brokerage Agreements and New Contract executed by
Transferor, the Company or the Fee Owner after the date hereof;
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(ii) Subject to subsection (vi) of this Section 20(A), keep and perform in all material respects all of the obligations to be performed by it under the Leases
(“Landlord’s Lease Obligations”); provided that none of the Transferor Parties may cause the termination of any Lease or the bringing of any proceeding by reason
of a default without Transferee’s consent, which consent may be withheld in its sole discretion except that such consent shall not be unreasonably withheld solely in
the event of a proposed termination by reason of a material monetary default under the Lease; and provided, further, that nothing herein shall prohibit Transferor from
applying, or causing the Company or the Fee Owner to apply a Security Deposit under a Lease in accordance with the terms of such Lease if the Tenant has vacated
the leased space (and Transferor shall give Transferee notice of such application prior thereto or simultaneously therewith); if Transferee shall fail to respond to a
written request for consent under this Section 20(A)(ii) within five (5) business days after receipt thereof Transferor shall send a second notice to Transferee and if
Transferee fails to respond to such request within three (3) business days, Transferee shall be deemed to have consented;
(iii) Not create, incur or suffer to exist any mortgage, deed of trust, lien, pledge or other encumbrance in any way affecting any portion of the Premises
other than a Permitted Encumbrance or the liens encumbering the Premises on the date of this Agreement, and not amend any of the Existing Loan Documents;
(iv) Maintain the current insurance coverages on the Premises and otherwise comply with the insurance requirements under the Existing Mortgage
subject to any waiver by Lender;
(v) In a manner consistent with the Union Agreements, cause the replacement of any of the current Union Employees with other Union Employees so
long as the wages and benefits (including, without limitation, any termination liability) for any replacement Union Employees are not greater in the aggregate than the
wages and benefits for the replaced Union Employees;
(vi) Operate the Premises substantially in accordance with past practice; provided, however, that notwithstanding the foregoing, except for Landlord’s
Lease Obligations, the Fee Owner or Transferor may, but shall not be obligated to, make or cause to be made any capital or other repairs, replacements or
improvements to the Improvements, provided that Transferee’s consent shall be required for repairs, replacements or improvements to the Improvements in excess of
$250,000 in the aggregate (except in the case of emergency repairs, repairs required under the terms of the Leases or repairs required by applicable laws, for which no
consent shall be required, but Transferor shall endeavor, but shall not be obligated, to give notice to Transferee of any such repairs that are material). To the extent (x)
Transferor or the Fee Owner is required to make any repairs, replacements or improvements to the Improvements (other than Landlord’s Lease Obligations) by a
change in the law or (y) the Fee Owner or Transferor elects to make any repairs, replacements or improvements to the Improvements (other than Landlord’s Lease
Obligations) and the Transferee approves such election (which approval shall not be unreasonably withheld or delayed), then Transferee shall, at the Closing,
reimburse or cause the Fee Owner to reimburse Transferor for all sums actually expended by the Fee Owner or Transferor between the date of this Agreement and the
Closing Date on account of such repairs, replacements or improvements made to the Improvements; and to the extent the Fee Owner or Transferor elects to make any
repairs, replacements or improvements to the Improvements which are not approved by Transferee, required by law as described above or are Leasing Costs for which
the Fee Owner or Transferor is responsible pursuant to Section 20(B), Transferee shall not be required to reimburse Transferor for any such sums expended by the
Fee Owner or Transferor on account of such election; if Transferee shall fail to respond to a written request for consent under this Section 20(A)(vi) within ten (10)
business days after receipt thereof, Transferor shall send a second notice to Transferee and if Transferee fails to respond to such request within three (3) business
days, Transferee shall be deemed to have consented;
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(vii) Not consent to any work or alterations by Tenants without Transferee’s consent (which consent or denial shall be provided within ten (10)
business days after receipt by Transferee of written request therefor), provided Transferee shall be reasonable in granting such consent to the extent the landlord is
required to be reasonable pursuant to the Lease;
(viii) Endeavor to deliver to Transferee, promptly upon receipt thereof by any of the Transferor Parties, copies of any notices received or given by any
of the Transferor Parties, from or to any person alleging or relating to any violation of applicable law or any default under any agreement to which any Transferor
Party is a party (including, without limitation, any Lease or the Existing Loan Documents). Transferor shall promptly advise Transferee in writing of the receipt by any
Transferor Party of notice of the institution of any litigation or judicial, quasi-judicial or administrative inquiry or proceeding with respect to the Premises, the
Company, Mezz LLC or the Fee Owner, including any legal proceedings or condemnation proceedings, any notice of a violation issued by any governmental authority
with respect to the Premises;
(ix) Comply in all material respects with all of its obligations and covenants under each of the Existing Loan Documents. No Transferor Party shall
waive any material right it has or may have under any agreement, including, without limitation, any Lease or any Existing Loan Documents, to the extent such waiver
would be binding on Mezz LLC, the Company or the Fee Owner from and after Closing Date;
(x) Not transfer or otherwise encumber or cause to be encumbered the Purchased Interest, any membership interest in Mezz LLC, or any membership
interest in any Fee Owner, except as contemplated in the Recitals;
(xi) Not take any actions or make any decisions relating to the Premises in connection with the pending bankruptcy proceedings of the tenant under the
Nortel Lease or any other tenant under a Lease that becomes a debtor in a bankruptcy proceeding after the date of this Agreement without Transferee’s prior written
consent (which consent shall not be unreasonably withheld and which consent shall be deemed given if Transferee shall fail to respond within five (5) business days
after request therefor). Transferor shall, after consultation with Transferee, submit or file any claims in such bankruptcy proceeding relating to the Nortel Lease (or
any other applicable Lease), to the extent any filing deadline shall occur prior to the Closing Date.
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B. As used in this Agreement, “Leasing Costs” shall mean brokerage commissions in connection with any Lease (including commissions and overrides payable to
affiliates of Transferor of one-full commission, computed at Transferor’s affiliates standard rates, if Transferor’s affiliate is the sole broker, and one-half of such a full commission if
Transferor’s affiliate is a co-broker), out-of-pocket reasonable legal fees and expenses incurred in connection with any Lease and all costs and expenses required under a Lease to be
paid by the landlord thereunder, to or for the benefit of the tenant thereunder, including, but not limited to, the costs and expenses, or reimbursements, to prepare the space thereunder
for the initial occupancy of the tenant. Transferor shall, subject to the further provisions of this Section 20(B), be responsible for all Leasing Costs payable in connection with (x) the
initial term of the Leases entered into prior to the date hereof and (y) any renewals, amendments, modifications, terminations, extensions and expansions which have an effective date
prior to the date hereof (“Transferor Leasing Costs”). With respect to Leasing Costs which are payable after the Closing for which Transferor is responsible pursuant to this Section 20
(B), to the extent not covered by any reserves held by the Lender at Closing for such purpose), fifty percent (50%) of the aggregate amount thereof in excess of such reserves shall be
paid to the Fee Owner out of the Purchase Price at the Closing (such amount, the “Leasing Cost Credit”) in accordance with the provisions of Section 6(A)(ix), and the balance shall be
deposited at closing into an escrow account with Escrow Agent pursuant to an escrow agreement reasonably acceptable to Transferor and Transferee. Transferee shall assume
Transferor’s obligations in respect of Transferor Leasing Costs payable from such reserves, and such additional Transferor Leasing Costs first becoming due and payable in an
aggregate amount equal to the Leasing Cost Credit, and shall be responsible for payment of all Transferor Leasing Costs payable from such reserves and the Transferor Leasing Costs
next due and payable until the Leasing Cost Credit has been exhausted. Any balance of the Transferor Leasing Costs shall be payable from the proceeds in the escrow account as
provided in such escrow agreement, if and when due and payable pursuant to the applicable Lease or Brokerage Agreement. Any excess balance on deposit from time to time in such
escrow account after the applicable Transferor Leasing Costs have been satisfied or waived (and Transferee agrees to cause the Fee Owner to request an estoppel from any applicable
Tenant as requested by Transferor to confirm same) shall be remitted to Transferor. Transferor hereby agrees to indemnify and hold the Transferee and the Fee Owner harmless from
and against any and all liability, court costs, judgment, claim, damage or expense (including, without limitation, reasonable attorneys’ fees and expenses) in connection with any unpaid
Transferor Leasing Costs, except to the extent assumed by Transferee pursuant to this Section 20(B) or delivered into escrow pursuant to this Section 20(B). Transferee shall pay or
cause the Fee Owner to pay all Leasing Costs (“Transferee Leasing Costs”) payable in connection with: (i) the Leases entered into on or after the date hereof and prior to the Closing
which are approved in writing by Transferee in accordance with this Agreement (or deemed approved by Transferee under this Agreement) and leases which are pending as of the
Closing (and executed by Transferee after the Closing) and Leases entered into after Closing, (ii) all renewals, terminations, extensions and expansions entered into after the date hereof
with the approval of Transferee (or deemed approval of Transferee under this Agreement) or, without Transferee’s approval, if the lessor’s consent to such action is not required or is
not to be unreasonably withheld under the terms of the applicable Lease (collectively “New Leases”) and the applicable Leasing Costs are payable in accordance with the express terms
of such existing Lease as to any renewals, exercised by a Tenant for a renewal period commencing after the date hereof and (iii) all renewals, amendments, modifications, extensions and
expansions which have an effective date on or after the date hereof. If on or prior to the Closing Date, a Transferor Party shall have paid any Transferee Leasing Costs, Transferee shall
(or shall cause the Fee Owner to) reimburse Transferor therefor at the Closing or credit the same ratably against the Leasing Cost Credit and the escrow of Leasing Costs provided for
above. Transferee hereby agrees to indemnify, defend and hold the Transferor Parties harmless from and against any and all liability, loss, cost, judgment, claim, damage or expense
(including, without limitation, reasonable attorneys’ fees and expenses), arising from nonpayment of Transferor Leasing Costs assumed by Transferee pursuant to this Section 20(B) or
any Transferee Leasing Costs. The provisions of this Section 20(B) shall survive the Closing.
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C. Transferor Structure.
Interest”), to assign the CIF Interest to Transferor so that Transferor shall, prior to Closing, own 100% of the membership interests in Company.
(i) Prior to Closing, Transferor shall cause CIF, which entity currently owns a 14.4% membership interest in Company (such interest, the “CIF
(ii) Prior to Closing, Transferor shall (a) transfer a 1% membership interest in the Company to the 1% Owner, (b) contribute all of the
membership interests in TIC to Mezz LLC and (c) cause SLGOP to cause EAT Parent to contribute all of the membership interests in EAT to Mezz LLC, so that that the
Company shall, at Closing, own directly or indirectly 100% of the Premises.
21. Transfer Taxes.
A. Transferor and Transferee shall join on the Closing Date in completing, executing, delivering and verifying the returns, affidavits and other documents required in
connection with the taxes imposed under Article 31 of the Tax Law of the State of New York and Title II of Chapter 46 of the Administrative Code of the City of New York and any other
tax payable by reason of delivery and/or recording of the documents to be delivered at the Closing (collectively, “Conveyance Taxes”). The Conveyance Taxes, if any, and any and all
interest and penalties thereon shall be paid by Transferor.
B. The provisions of this Article 21 shall survive the Closing.
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22. Non-Liability.Transferee agrees that it shall look solely to the Premises and proceeds thereof and to any assets of Transferor or to the members, managers, directors, officers,
employees, shareholders, partners or agents of Transferor or any other person, partnership, corporation or trust, as principal of Transferor or otherwise, and whether disclosed or
undisclosed, to enforce its rights hereunder, and that none of the members, managers, directors, officers, employees, shareholders, partners or agents of Transferor or any other person,
partnership, corporation or trust, as principal of Transferor or otherwise, and whether disclosed or undisclosed, shall have any personal obligation or liability hereunder, and Transferee
shall not seek to assert any claim or enforce any of its rights hereunder against such party. Transferor agrees that none of the members, managers, directors, officers, employees,
shareholders, partners or agents of Transferee or any other person, partnership, corporation or trust, as principal of Transferee or otherwise, and whether disclosed or undisclosed, shall
have any personal obligation or liability hereunder, and Transferor shall not seek to assert any claim or enforce any of its rights hereunder against such party. The provisions of this
Article 22 shall survive the Closing.
23. Inability to Perform; Default.
A. Transferor’s Inability to Perform; Transferor’s Default. If Transferor shall be unable to perform its obligation to convey the Purchased Interest to Transferee in
accordance with the terms of this Agreement (other than by reason of Transferor’s Controllable Default (as hereinafter defined)), then Transferee, at its sole option and as its sole and
exclusive remedy, may terminate this Agreement, in which event Escrow Agent shall refund to Transferee the Deposit (and all interest earned thereon, if any), and neither party shall
thereafter have any further right or obligation hereunder, other than with respect to any Surviving Obligations (as hereinafter defined). “Transferor’s Controllable Default” shall mean
Transferor’s failure to perform its obligation to convey the Purchased Interest to Transferee in accordance with the terms of this Agreement, provided: (1) the reasons for such failure do
not include conditions beyond Transferor’s reasonable control, the action or inaction of any third party (including, without limitation, the failure of any Tenant to deliver an Estoppel,
but excluding the failure of CIF to convey its interest in the Company to Transferor, which shall be deemed to constitute a Transferor’s Controllable Default) or the unmarketability of
title (unless the same was willfully or intentionally caused by Transferor); and (2) Transferee is ready, willing and able to consummate the Closing under this Agreement and to deliver
the Purchase Price due Transferor under this Agreement. In the event of Transferor’s Controllable Default, then Transferee, at its sole option and as its sole and exclusive remedy may
either (a) terminate this Agreement, in which event (x) Escrow Agent shall refund to Transferee the Deposit (and all interest thereon, if any), (y) make a claim against Transferor for
Transferee’s reasonable out-of-pocket costs and expenses (including reasonable attorneys’ fees) incurred in connection with the transactions contemplated by this Agreement, not to
exceed $300,000.00 in the aggregate, and (z) neither party shall thereafter have any further right or obligation hereunder, other than the Surviving Obligations or (b) within ninety (90)
days after any rights of Transferee arise due to a Transferor’s Controllable Default, bring an action in equity against Transferor for specific performance. In no event may Transferee
bring an action against Transferor for damages or seek any remedy (whether or not in an action at law or in equity) against Transferor that could require Transferor to pay any monies to
Transferee whether characterized as damages or otherwise (except for an action to compel Escrow Agent to return the Deposit to Transferee if Transferee is, in fact, entitled to the return
thereof in accordance with this Agreement or to compel Transferor to pay the costs set forth in clause (a)(y) of the previous sentence if Transferee is, in fact, entitled to reimbursement
thereof). The untruth or inaccuracy of any representation or warranty of Transferor shall not be deemed Transferor’s Controllable Default, provided Transferor has complied with its
obligations under Section 16(D) with respect thereto.
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B. Transferee’s Inability to Perform; Transferee’s Default. If Transferee shall default of its obligation to consummate the Closing under this Agreement, the parties hereto
agree that Transferor’s sole remedy shall be to terminate this Agreement and retain the Deposit (together with all interest thereon, if any) as liquidated damages, it being expressly
understood and agreed that in the event of Transferee’s default, Transferor’s damages would be impossible to ascertain and that the Deposit (together with all interest thereon, if any)
constitutes a fair and reasonable amount of compensation in such event. Upon such termination, neither party to this Agreement shall have any further rights or obligations hereunder
except that: (a) Transferee shall return to Transferor all written material relating to the Premises or the transaction contemplated herein delivered by or on behalf of Transferor; (b)
Escrow Agent shall deliver to Transferor and Transferor shall retain the Deposit (together with all interest thereon, if any) as liquidated damages, except with respect to any breaches of
Surviving Obligations (as hereinafter defined); and (c) any provisions of this Agreement which expressly survive the termination of this Agreement (collectively, the “Surviving
Obligations”) shall survive and continue to bind Transferee and Transferor and the Fee Owner.
24. Condition of Premises.Transferee shall accept indirect ownership of the Premises at the Closing in its “as is” condition as of the date hereof, reasonable wear and tear excepted,
and subject to the provisions of Article 18 hereof in the event of a casualty or condemnation and subject to Transferor’s compliance with the covenants contained in Article 20
hereof. Transferor shall not be liable for any latent or patent defects in the Premises or bound in any manner whatsoever by any guarantees, promises, projections, operating expenses,
set-ups or other information pertaining to the Premises made, furnished or claimed to have been made or furnished, whether orally or in writing, by Transferor or any other person or
entity, or any partner, employee, agent, attorney or other person representing or purporting to represent Transferor, except to the extent expressly set forth herein or in any document or
instrument expressly required in this Agreement to be delivered at Closing (collectively, the “Closing Documents”). Transferee acknowledges that neither Transferor nor any of the
employees, agents or attorneys of Transferor have made and do not make any oral or written representations or warranties whatsoever to Transferee, whether express or implied, except
as expressly set forth in this Agreement or in any Closing Document, and, in particular, that no such representations and warranties have been made with respect to the physical,
environmental condition or operation of the Premises, the presence, introduction or effect of Hazardous Materials at or affecting the Premises, the actual or projected revenue and
expenses of the Premises, the zoning and other laws, regulations and rules or Relevant Environmental Laws applicable to the Premises or the compliance of the Premises therewith, the
current or future real estate tax liability, assessment or valuation of the Premises, the availability of any financing for the alteration, rehabilitation or operation of the Premises from any
source, including, without limitation, any state, city or Federal government or any institutional lender, the current or future use of the Premises, including, without limitation, the
Premises use for residential (including hotel, cooperative or condominium use) or commercial purposes, the present and future condition and operating state of any and all machinery or
equipment on the Premises and the present or future structural and physical condition of any building or its suitability for rehabilitation or renovation, the ownership or state of title of
any Personal Property comprising a portion of the Premises, the quantity, quality or condition of the Personal Property or Fixtures, the use or occupancy of the Premises or any part
thereof, or any other matter or thing affecting or relating to the Premises or the transactions contemplated hereby, except in each such case as specifically set forth in this Agreement or
in any Closing Document. Transferee has not relied and is not relying upon any representations or warranties or upon any statements made in any informational materials with respect
to the Premises provided by Transferor or any other person or entity, or any shareholder, employee, agent, attorney or other person representing or purporting to represent Transferor,
other than the representations and warranties expressly set forth in this Agreement or in any Closing Document. The parties hereto agree that the Personal Property included in this
sale, which is or may be attached to or used in connection with the Premises, has no significant separate value except in conjunction with the Real Property. No part of the Purchase
Price is attributable to the Personal Property. The provisions of this Article 24 shall survive the Closing.
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25. Environmental Matters.Without limiting the generality of Article 24, Transferee acknowledges that it has had an opportunity to conduct its own investigation of the Premises
with regard to Hazardous Materials and compliance of the Premises with Relevant Environmental Laws. Transferee is aware (or has had sufficient opportunity to become aware) of the
environmental, biological and pathogenic conditions of, affecting or related to the Premises and Transferee agrees to take the Premises subject to such conditions. Transferee agrees to
assume all costs and liabilities arising out of or in any way connected to the Premises, including, but not limited to those arising out of Hazardous Materials and Relevant Environmental
Laws. Transferee hereby releases Transferor, its principals and affiliates, and their respective officers, directors, members, managers, partners, agents, employees, successors and
assigns, from and against any and all claims, counterclaims and causes of action which Transferee may now or in the future have against any of the foregoing parties arising out of the
existence of Hazardous Materials affecting the Premises; provided nothing in this Article 25 shall be deemed to be an indemnification of Transferor by Transferee. Nothing in this
Article 25 shall be deemed to limit the remedies of Transferee on account of any breach of the representation contained in Section 16(A)(xxi) of this Agreement. The provisions of this
Article 25 shall survive the Closing.
26. Tax Certiorari Proceedings; ICIP.
A. If any tax reduction proceedings in respect of the Real Property relating to any fiscal year ending prior to the fiscal year in which the Closing occurs are pending at the
time of the Closing, Transferor reserves and shall have the right to continue to prosecute and/or settle the same on behalf of the Transferor Parties. If any tax reduction proceedings in
respect of the Real Property relating to the fiscal year in which the Closing occurs are pending at the time of the Closing, then Transferor reserves and shall have the right to continue to
prosecute and/or settle the same on behalf of the Company or the Fee Owner, provided, however, that Transferor shall not settle any such proceeding without Transferee’s prior written
consent, which consent shall not be unreasonably withheld or delayed, and Transferee shall be entitled to that portion of any refund relating to the period from and after the Closing in
accordance with Section 7(D). Transferee shall reasonably cooperate with Transferor in connection with the prosecution of any such tax reduction proceedings. Transferee shall have
the sole right to prosecute any tax proceedings in respect of the Real Property on behalf of the Company, Mezz LLC or the Fee Owner relating to any fiscal year ending after the fiscal
year in which the Closing occurs. Transferor shall reasonably cooperate with Transferee in connection with the prosecution of any such tax proceedings.
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B. Transferor shall have the right to continue to prosecute on behalf of the Transferor Parties and, without Transferee’s consent, settle the ICIP Litigation listed on
Exhibit “16(A)(xxvi)” prior to Closing; provided, however, that if the ICIP Litigation shall be severed such that it relates solely to the Premises, (i) Transferor shall not settle such ICIP
Litigation which relates solely to the Premises with respect to the fiscal year in which Closing occurs or any subsequent fiscal year without Transferee’s prior written consent, which
consent shall not be unreasonably withheld or delayed and (ii) Transferee may assume control of such ICIP Litigation and, if Transferee does so assume control, Transferee shall not
settle such ICIP Litigation which relates solely to the Premises with respect to any fiscal year prior to the year in which the Closing occurs without Transferee’s prior written consent,
which consent shall not be unreasonably withheld or delayed. Each of Transferee and Transferor shall reasonably cooperate with the other in connection with the prosecution of the
ICIP Litigation and shall reasonably consult with the other with respect to the ICIP Litigation to the extent it relates to the Premises.
C. Any refunds or savings in the payment of taxes resulting from such tax reduction proceedings or the ICIP Litigation applicable to the period prior to the Closing shall
belong to and be the property of Transferor, and any refunds or savings in the payment of taxes applicable to the period from and after the Closing shall belong to and be the property
of Transferee; provided, however, that if any such refund creates an obligation to reimburse any Tenants for any Overage Rent paid or to be paid, that portion of such refund equal to
the amount of such required reimbursement (after deduction of allocable expenses as may be provided in the Lease to such Tenant) shall be paid to Transferee and Transferee shall
disburse the same to such Tenants. All reasonable attorneys’ fees and other expenses incurred in obtaining such refunds or savings shall be apportioned between Transferor and
Transferee in proportion to the gross amount of such refunds or savings payable to Transferor and Transferee, respectively (without regard to any amounts reimbursable to Tenants).
D. The provisions of this Article 26 shall survive the Closing.
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27. Reserved.
28. Notices. All notices, demands or requests made pursuant to, under or by virtue of this Agreement (in each case, a “Notice”) must be in writing and sent to the party to which
the Notice is being made by nationally recognized overnight courier or delivered by hand with receipt acknowledged in writing as follows:
To Transferor:
and:
and:
c/o SL Green Realty Corp.
420 Lexington Avenue
New York, New York 10170-1881
Attention: Andrew S. Levine, Esq.
485 EAT Owner LLC
c/o SL Green Realty Corp.
420 Lexington Avenue
New York, New York 10170-1881
Attention: Marc Holliday
Green 485 TIC LLC
c/o SL Green Realty Corp.
420 Lexington Avenue
New York, New York 10170-1881
Attention: Andrew S. Levine, Esq.
with a copy to:
To Transferee:
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019
Attention: Peter E. Fisch, Esq.
Mazal 485 LLC
423 West 55th Street, 12th Floor
New York, NY 10019
Attention: Arie Kotler and Julius Schwarz
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with a copy to:
Greenberg Traurig, LLP
200 Park Avenue
New York, New York 10166
Attention: Robert J. Ivanhoe, Esq.
Optibase Inc.
c/o Deco Towers
330 West 42nd Street, Suite 1700
New York, New York 10036
Attention: Philip B. Trost, Esq.
and:
and:
Optibase Inc.
880 Maude Avenue
Mountain View, CA 94043
Attention: Amir Philips and Joan Yeh
To Escrow Agent:
Greenberg Traurig, LLP
200 Park Avenue
New York, New York 10166
Attention: Robert J. Ivanhoe, Esq.
c/o SL Green Realty Corp.
420 Lexington Avenue
New York, New York 10170-1881
Attention: Andrew S. Levine, Esq.
To SLGOP:
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, New York 10019
Attention: Peter E. Fisch, Esq.
All Notices (i) shall be deemed given upon the date of delivery if delivery is made before 5:00 PM (New York time) and, if delivered later, on the next business day after delivery of such
Notice or the date of refusal to accept delivery of such Notice and (ii) may be given either by a party hereto or by such party’s attorney set forth above. The address for Notices to any
party may be changed by such party by a written Notice served in accordance with this Section.
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29. Entire Agreement. This Agreement contains all of the terms agreed upon between the parties with respect to the subject matter hereof, and all agreements heretofore had or
made between the parties hereto are merged in this Agreement which alone fully and completely expresses the agreement of said parties.
30. Amendments. This Agreement may not be changed, modified or terminated, nor may any provision hereunder be waived, except by an instrument executed by the parties
hereto.
31. No Waiver No waiver by either party of any failure or refusal to comply with its obligations under this Agreement shall be deemed a waiver of any other or subsequent failure
or refusal to so comply.
32. Successors and Assigns This Agreement shall inure to the benefit of, and shall bind the parties hereto and the heirs, executors, administrators, successors and permitted
assigns of the respective parties.
33. Partial Invalidity If any term or provision of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the
remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law.
34. Section Headings; Incorporation of Exhibits The headings of the various Articles and Sections of this Agreement have been inserted only for convenience, and are not part of
this Agreement and shall not be deemed in any manner to modify, explain or restrict any of the provisions of this Agreement. Unless otherwise provided in this Agreement, any
reference in this Agreement to an Exhibit is understood to be a reference to the Exhibits annexed to this Agreement. All Exhibits annexed to this Agreement shall be incorporated into
this Agreement as if fully set forth herein.
35. Governing Law This Agreement shall be governed by, interpreted under and construed and enforced in accordance with, the laws of the State of New York, without reference
to conflicts of laws principles. Each of the parties hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim arising out of relating to this
Agreement. Any action brought hereunder shall be brought in a court of law located in the City, County and State of New York. The prevailing party in any such litigation shall be
entitled to recovery of all of its fees and expenses (including reasonable legal fees) incurred in such action.
36. Confidentiality.
A. Except as may be required by law (including, without limitation, any public statement with respect to the transaction contemplated hereunder by Optibase Ltd. which is
required under applicable law) or in connection with any court or administrative proceeding and as expressly provided in Section 36(B) below, prior to the Closing hereunder, neither
party hereto nor their respective agents or designees shall issue or cause the publication of any press release or other public announcement, or cause, permit or suffer any other
disclosure which sets forth the terms of the transactions contemplated hereby (other than to such party’s employees, officers, directors, shareholders, owners, affiliates, agents,
attorneys, advisors, accountants, engineers, architects, lenders and other representatives of any advisors to Transferee who need to know the information for the purposes of assisting
such party in making determinations with respect to the Transaction, who, in turn, shall be bound by this Article 36), without first obtaining the written consent of the other party
hereto, such consent not to be unreasonably withheld, delayed or conditioned. Any release to the public of information with respect to this Sale-Purchase Agreement will be in the form
approved by both Transferor and Transferee, and their respective counsel.
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B. Transferee recognizes that SL Green Realty Corp., who indirectly owns interests in Transferor, is a public company. Accordingly, Transferee acknowledges and agrees
that Transferor or SL Green Realty Corp. may disclose in press releases, filings with governmental authorities, financial statements and/or other communications such information
regarding the transactions contemplated hereby as may be necessary or advisable under securities laws, rules or regulations, GAAP or other accounting rules or procedures or SL Green
Realty Corp.’s prior custom, practice or procedure. Transferor acknowledges that any direct or indirect owner of interests in Transferee that is a public company shall be entitled to the
same rights of disclosure.
37. No Recording or Notice of Pendency. The parties hereto agree that neither this Agreement nor any memorandum hereof shall be recorded. Supplementing the other liabilities
and indemnities of Transferee to Transferor under this Agreement, and notwithstanding any other provision of this Agreement (including, without limitation, any provision purporting
to create a sole and exclusive remedy for the benefit of Transferor), Transferee agrees to indemnify and hold Transferor harmless from and against any and all losses, costs, damages,
liens, claims, counterclaims, liabilities or expenses (including, but not limited to, reasonable attorneys’ fees, court costs and disbursements) incurred by Transferor arising from or by
reason of the recording of this Agreement, any memorandum hereof, or any notice of pendency (unless Transferee prevails in a final unappealable order against Transferor in the action
underlying such notice of pendency) or any other instrument against the Premises in any case, by Transferee. The provisions of this Article 37 shall survive the Closing or any early
termination of this Agreement.
38. Assignment. Transferee may not assign its rights or obligations under this Agreement or transfer any direct or indirect ownership or other interest in Transferee so as to cause
a change in control of Transferee without the prior written consent of Transferor in its sole discretion, and any such assignment made without Transferor’s consent shall be void ab
initio. Notwithstanding the immediately preceding sentence, Transferee may, prior to submission of the Assumption Application (and after such submission with the consent of the
Lender (to the extent required by Lender), provided such assignment will not cause a material delay in receipt of the Lender Consent), without Transferor’s consent but upon notice to
Transferor, assign this Agreement and its rights and obligations hereunder to any entity that controls, is controlled by, or is under common control with Gilmor International Inc., and/or
Optibase Ltd., provided that Transferee and Transferee’s assignee are jointly and severally liable for the rights and obligations hereunder.
39. Adjournments. Anything in this Agreement to the contrary notwithstanding, all rights of Transferor and Transferee under this Agreement to adjourn or extend the Closing
Date may not cause the Closing to be extended in the aggregate, for more than forty-five (45) days.
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40. Counterparts. This Agreement may be executed in any number of counterparts each of which when so executed and delivered shall be deemed to be an original, but all such
counterparts shall constitute one and the same agreement.
41. No Third Party Beneficiary. The provisions of this Agreement are not intended to benefit any third parties.
42. 1031 Exchange. Transferee understands that Transferor may seek to structure the disposition of the Purchased Interest in such a way that will afford Transferor an opportunity
to take advantage of the provisions of Internal Revenue Code (the “Code”) Section 1031 governing tax free exchanges and reorganizations. Transferee shall reasonably cooperate with
Transferor (at Transferor’s sole cost and expense) in such efforts. Without limiting the generality of the foregoing, Transferee, as directed by Transferor, shall make all payments on
account of the Purchase Price, including the Deposit, to a Qualified Intermediary (as defined in the Code) and not to Transferor, directly or indirectly. Transferor reserves the right, in
effectuating such like-kind exchange, to assign Transferor’s rights, but not its obligations, under this Agreement to the Qualified Intermediary and Transferee hereby consents to such
assignment. Transferee agrees to execute such reasonable documents and otherwise to cooperate in such respects as may reasonably be requested by Transferor in order to enable
Transferor to carry out a like-kind exchange as aforesaid. A like kind exchange shall not diminish Transferee’s rights (or Transferor’s liabilities or obligations), nor increase its liabilities
or obligations, in any manner. Transferor agrees to indemnify, defend and hold harmless Transferee from and against all loss, liability, damages and disbursements, costs and expenses
(including reasonable counsel fees and disbursements) resulting from Transferor’s election to structure the disposition of its interests as a like-kind exchange.
[The remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written.
TRANSFEROR:
GREEN 485 HOLDINGS LLC,
a Delaware limited liability company
By: SL Green Operating Partnership, LP,
a Delaware limited partnership,
its sole member
By: SL Green Realty Corp.,
a Maryland corporation,
its general partner
By: /s/ Andrew S. Levine
Name: Andrew S. Levine
Title: Chief Legal Officer
TRANSFEREE:
MAZAL 485 LLC,
a Delaware limited liability company
By:
By:
_______________________
Name:
Title:
_______________________
Name:
Title:
[Signatures continue on following page]
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written.
TRANSFEROR:
GREEN 485 HOLDINGS LLC,
a Delaware limited liability company
By: SL Green Operating Partnership, LP,
a Delaware limited partnership,
its sole member
By: SL Green Realty Corp.,
a Maryland corporation,
its general partner
By: _______________________
Name: Andrew S. Levine
Title: Chief Legal Officer
TRANSFEREE:
MAZAL 485 LLC,
a Delaware limited liability company
By:
By:
/s/ Tom Wyler /s/ Amir Philips
Name: Tom Wyler Amir Philips
Title: Authorized Signer Authorized Signer
_______________________
Name:
Title:
[Signatures continue on following page]
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written.
TRANSFEROR:
GREEN 485 HOLDINGS LLC,
a Delaware limited liability company
By: SL Green Operating Partnership, LP,
a Delaware limited partnership,
its sole member
By: SL Green Realty Corp.,
a Maryland corporation,
its general partner
By: _______________________
Name: Andrew S. Levine
Title: Chief Legal Officer
TRANSFEREE:
MAZAL 485 LLC,
a Delaware limited liability company
By:
By:
/s/ Abekasis Abraham
Name: Abekasis Abraham
Title: Director
/s/ Arie Kotler
Name: Arie Kotler
Title: Authorized Signer
[Signatures continue on following page]
The undersigned has executed this Agreement
solely to confirm its acceptance of the duties of
Escrow Agent as set forth in Article 19 hereof:
Greenberg Traurig, LLP
By: /s/ Joseph Farrell
Name:
Title:
The undersigned has executed this Agreement
solely to confirm its acceptance of the
obligations set forth in Article 15 hereof:
SL GREEN OPERATING PARTNERSHIP, L.P.,
a Delaware limited partnership
By: SL Green Realty Corp.,
a Maryland corporation,
its general partner
By: _______________________
Name: Andrew S. Levine
Title: Chief Legal Officer
The undersigned has executed this Agreement
solely to confirm its acceptance of the duties of
Escrow Agent as set forth in Article 19 hereof:
Greenberg Traurig, LLP
By: _______________________
Name:
Title:
The undersigned has executed this Agreement
solely to confirm its acceptance of the
obligations set forth in Article 15 hereof:
SL GREEN OPERATING PARTNERSHIP, L.P.,
a Delaware limited partnership
By: SL Green Realty Corp.,
a Maryland corporation,
its general partner
By: /s/ Andrew S. Levine
Name: Andrew S. Levine
Title: Chief Legal Officer
EXHIBIT “2(C)”
JV Loan Promissory Note
$ 12,200,000.00
PROMISSORY NOTE
New York, New York
___________, 2009
FOR VALUE RECEIVED, GREEN 485 JV LLC, a Delaware limited liability company, having an office at c/o SL Green Realty Corp., 420 Lexington Avenue, New York,
New York 10170 (“Maker”), promises to pay to SLG 485 FUNDING LLC, a Delaware limited liability company, its successors and/or assigns, having an office at c/o SL Green Realty
Corp., 420 Lexington Avenue, New York, New York 10170 (“Payee”), or order, at said office, or at such other place as may be designated, from time to time, in writing by Payee, the
principal sum of TWELVE MILLION TWO HUNDRED THOUSAND AND 00/100 DOLLARS ($12,200,000.00) in lawful money of the United States of America, with interest thereon from
and including the date of this Note to, but not including, the date this Note is paid in full at the Applicable Rate (hereinafter defined) calculated in the manner hereinafter set forth, and
payable as follows:
monthly payments, in arrears, of interest only on the Principal Balance (as hereinafter defined) outstanding from time to time, calculated at a per
annum interest rate of four and 50/100 percent (4.5%) shall be due and payable on ________, 2009 and on the fifteenth (15th) day of every calendar month thereafter (each such date, an
“Interest Payment Date”), provided, that any payment due on a day that is not a business day in the City of New York shall be paid on the immediately following business day; and
(i)
sums due under this Note, shall be due and payable on the Maturity Date (taking into account, for purposes of clarity, all amounts paid under clause (i)).
(ii)
the entire Principal Balance, together with accrued and unpaid interest on the Principal Balance calculated at the Applicable Rate, and all other
1. The following terms as used in this Note shall have the following meanings:
(a) The term “Applicable Rate” shall mean an interest rate per annum equal to nine percent (9%), compounded annually. Interest at the Applicable Rate (i)
shall be calculated for complete calendar months on the basis of a three hundred sixty (360) day calendar year containing twelve (12) months of thirty (30) days each, and (ii) shall be
calculated for partial calendar months on the basis of the actual number of days elapsed over a three hundred sixty five (365) day calendar year.
to direct or cause the direction of the day to day management and policies of Maker, through the ownership of voting securities, by contract or otherwise.
(b) The term “Change of Control” shall mean that the neither Gilmore International Inc. nor Optibase Ltd. is in possession, directly or indirectly, of the power
(c) The term “Closing Date” shall have the meaning assigned to it in the Purchase Agreement (as hereinafter defined).
accordance with the provisions of this Note or the other Loan Documents.
(d) The term “Debt” shall mean all principal, interest, additional interest and other sums of any nature whatsoever which may or shall become due to Payee in
(e) The term “Default Rate” shall mean an interest rate per annum equal to eighteen percent (18%), compounded annually. Interest at the Default Rate (i) shall
be calculated for complete calendar months on the basis of a three hundred sixty (360) day calendar year containing twelve (12) months of thirty (30) days each, and (ii) shall be
calculated for partial calendar months on the basis of the actual number of days elapsed over a three hundred sixty five (365) day calendar year.
(f) The term “Loan” shall mean the loan in the principal sum of $12,200,000.00, by Payee to Maker which is evidenced by this Note.
connection therewith, as the same may be modified or amended from time to time.
(g) The term “Loan Documents” shall mean collectively this Note and all other documents and instruments now or hereafter executed and delivered in
provisions of this Note.
(h) The term “Maturity Date” shall mean the date that is four (4) years after the Closing Date, as the same may be accelerated pursuant to the express
(i) The term “Nortel Losses” shall have the meaning assigned to it in the Purchase Agreement.
the Purchase Agreement.
(j) The term “Property” shall mean that certain real property commonly known as 485 Lexington Avenue, New York, New York, as described in more detail in
(k) The term “Principal Balance” shall mean the outstanding principal balance of this Note from time to time.
and Mazal 485 LLC, each a Delaware limited liability company, as amended, restated, modified and supplemented from time to time.
(1) The term “Purchase Agreement” shall mean that certain Sale-Purchase Agreement dated as of August ___, 2009, by and between Green 485 Holdings LLC
without limitation, Green 485 Mezz LLC, Green 485 Owner LLC, 485 EAT Owner LLC and Green 485 TIC LLC, each a Delaware limited liability company.
(m) The term “Subsidiaries” shall mean, collectively (and each individually, a “Subsidiary”), each and every direct or indirect subsidiary of Maker, including,
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2. All capital proceeds received by Maker, including, without limitation, the net proceeds of the sale or refinancing of any assets of Maker or distributions received
from any direct or indirect Subsidiary of Maker of capital proceeds (including, without limitation, net proceeds of the sale or refinancing of any assets of any Subsidiary, property
insurance proceeds or condemnation awards) (collectively, “Capital Proceeds”), in an amount not to exceed the total amount of the Debt, shall be paid directly to Payee or remitted by
Maker to Payee within two (2) business days after receipt by Maker for application against Maker’s obligations under this Note and the other Loan Documents. All Capital Proceeds
shall be applied in the following order: first, to the payment of any monies owed to Payee under this Note or the other Loan Documents, other than interest or principal; second, to the
payment of all accrued and unpaid interest under this Note; third, to the repayment of the Principal Balance; and fourth, any excess shall be paid to Maker. Notwithstanding anything to
the contrary which may be set forth in this Paragraph 2, the full amount of the Debt shall be due and payable in full on the Maturity Date (as the same may be accelerated pursuant to
the further provisions of this Note).
3. This Note may be prepaid in whole or in part, without penalty or premium, at any time.
4. Notwithstanding anything to the contrary contained in this Note, in the event of any transfer (which shall not be deemed to include leasing, licenses and
easements in the ordinary course of business) occurring after the Closing Date of (i) all or any portion of Maker’s or the Subsidiaries’ direct or indirect ownership interest in the
Property (whether through a conveyance of any interest in the Property or the transfer of any interest in any direct or indirect Subsidiary of Maker, but excluding direct and indirect
ownership interests in Maker), unless Maker directly or indirectly continues to own one hundred percent (100%) of the interests in the Property after giving effect to such transfer or (ii)
any direct or indirect interest in Maker that results in a Change of Control, then the Maturity Date shall, without any further action by Payee, be accelerated and this Note shall
immediately be due and payable in full.
5. Maker agrees to observe and perform the following covenants set forth in this Paragraph 5 (“Covenants”). By acceptance of this Note, Payee agrees that the sole
and exclusive remedy of Payee for a breach of any of the Covenants shall be to bring an action for injunctive relief; provided, that if injunctive relief shall not be available, Payee may
maintain an action for actual damages (but not consequential or punitive damages) suffered on account of Maker’s breach of the Covenants. Maker agrees, for so long as this Note
remains outstanding from and after the Closing Date, it shall, and shall cause the Subsidiaries, as applicable, to:
(a) Not be subject to commencement of an involuntary case or other proceeding against Maker or any Subsidiary that seeks liquidation, reorganization or
other relief with respect to it or its debts or other liabilities under any bankruptcy, insolvency or other similar legal requirements now or hereafter in effect or seeks the appointment of a
trustee, receiver, liquidator, custodian or other similar official of Maker, any Subsidiary or any of Maker or Subsidiaries’ property, and such involuntary case or other proceeding shall
remain undismissed or unstayed for a period of ninety (90) days; or an order for relief against Maker or any Subsidiary shall be entered in any such case under the Federal Bankruptcy
Code;
3
(b) Not commence a voluntary case or other proceeding seeking liquidation, reorganization (other than the contemplated merger of Green 485 Owner LLC, 485
EAT Owner LLC and Green 485 TIC LLC, resulting in Green 485 Owner LLC as the surviving entity) or other relief with respect to Maker, any Subsidiary or the debts or other liabilities of
Maker or any Subsidiary under any bankruptcy, insolvency or other similar legal requirements or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar
official for it or any of its property, or consent by Maker or any Subsidiary to any such relief or to the appointment of or taking possession by any such official in an involuntary case or
other proceeding commenced against Maker or any Subsidiary, or the making by Maker or any Subsidiary of a general assignment for the benefit of creditors, or the failure by Maker or
any Subsidiary, or the admission by Maker or any Subsidiary in writing of its inability to pay its debts generally as they become due, or any action by Maker or any Subsidiary to
authorize or effect any of the foregoing;
Subsidiary, and not transfer (nor permit any member of Maker to transfer) an interest in Maker that would result in a Change of Control;
(c) Except entering into leases and easements in the ordinary course of business, not transfer all or any portion of the Property or any interest in any
(d) Not (nor permit any member of Maker to) wind up, liquidate, dissolve, reorganize, merge, or consolidate with or into, or convey, sell, assign, transfer,
lease, or otherwise dispose of all or substantially all of Maker’s or any Subsidiary’s assets (other than the contemplated merger of Green 485 Owner LLC, 485 EAT Owner LLC and Green
485 TIC LLC, resulting in Green 485 Owner LLC as the surviving entity);
(e) Operate and lease the Property in accordance with reasonably prudent management standards and at market rates; and
(f) Not solicit tenants of the Property to relocate to other properties owned by any affiliate of the managing member of Maker.
6. In the event any required interest payment under this Note is not paid when due and such nonpayment continues for ten (10) days following written notice
(“Default Notice”) by Payee to Maker (provided that Payee shall not be required to give notice of any such nonpayment more than once in any given calendar year) (any such
continuing nonpayment, a “Payment Default”), interest shall accrue on the entire Principal Balance from and after the due date of such payment at the Default Rate until the date the
unpaid interest and any default interest on account of such nonpayment is paid in full. Upon the occurrence of a Payment Default and until such Payment Default is cured and all
default interest on account thereof has been paid in full, Maker shall cause all direct or indirect Subsidiaries of Maker to distribute all available cash flow directly to or as directed by
Payee to be applied to satisfy the Debt. If such Payment Default continues for ninety (90) days following delivery of the Default Notice, if such notice is required, or if no such notice is
required, for ninety (90) days after said Payment Default, the Maturity Date shall be accelerated and the Debt shall be declared immediately due and payable in full without further act
and without the necessity of any further or prior notice by Payee to Maker.
4
7. If the Debt is not paid in full on the Maturity Date or upon such earlier acceleration as provided for in Paragraphs 4 and 6 (a “Maturity Default”), then Maker shall
cause all direct or indirect Subsidiaries of Maker to distribute all available cash flow directly to or as directed by Payee to be applied to the Debt until the same is paid in full.
8. Effective upon any Payment Default or Maturity Default, Maker hereby authorizes Payee to deliver notice to any Subsidiary and/or any Subsidiary’s lender
instructing such party to remit any amounts payable to any Subsidiary or to Maker directly to or as directed by Payee, and each such party is hereby authorized by Maker to rely on any
such notice, provided, that upon the cure of any such Payment Default or Maturity Default, Payee shall notify such parties instructing them to remit payments as they were prior to
such instruction.
9. If any Maturity Default shall continue for a period of ninety (90) days, then (i) interest shall accrue and be payable thereafter on all unpaid interest and Principal
Balance under this Note at the rate of twenty-five percent (25%) per annum and (ii) Maker shall pay to Payee an additional fee in an amount equal to Two Million Dollars ($2,000,000),
which shall constitute additional interest under this Note.
10. Notwithstanding the second sentence of Paragraph 16 of this Note, if a New York State and/or New York City taxing authority (each, a “Taxing Authority”) shall
have commenced a transfer tax audit of the transaction contemplated by the Purchase Agreement (an “Audit”) and such Audit shall remain pending as of the Maturity Date, then Maker
may, on written notice to Payee, elect to satisfy its obligation to pay the Debt in full by paying the Debt into an escrow account (the “Escrow Account”) with an escrow agent
reasonably acceptable to both Maker and Payee (“Escrow Agent”), and Escrow Agent shall be directed to release the proceeds of the Escrow Account, together with any interest
earned thereon (the “Escrow Proceeds”) to Payee upon the completion or settlement of the Audit and presentation of reasonable evidence of dismissal of such Audit (or determination
that no amounts are due and owing in respect thereof) and/or payment by Payee or its affiliate of any amounts assessed in connection therewith (provided, that the foregoing shall not
be deemed to limit the rights of Payee or its affiliate to contest such Audit or to appeal the results thereof). In the event that Maker or any member of Maker (other than an affiliate of
Payee) is subject to any liability on account of such Audit that is not otherwise reimbursed by Payee or its affiliate, then Escrow Agent shall be directed to reimburse Maker or such
member, to the extent of its unreimbursed liabilities, from the Escrow Proceeds, and the balance of the Escrow Proceeds shall be paid to Payee in accordance with the previous sentence.
11. Notwithstanding the second sentence of Paragraph 16 of this Note, from and after the third anniversary of the Closing Date, Maker may offset any unreimbursed
Nortel Losses against its payment obligations under this Note as and when the same thereafter become due, including the payment of any interest and the payment of the Debt at
Maturity.
5
12. Maker hereby waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note. If any payment under this Note is not
made when due, Maker agrees to pay all costs of collection when incurred, including reasonable attorneys’ fees (which costs shall be added to the amount due under this Note and
shall be receivable therewith). Maker agrees to perform and comply with each of the terms, covenants and provisions contained in this Note and the other Loan Documents on the part
of Maker to be observed or performed. No extension of time for payment of this Note, or any installment hereof, and no alteration, amendment or waiver of any provision of this Note or
the other Loan Documents made by agreement between Payee and any other person or party shall release, discharge, modify, change or affect the liability of Maker under this Note or
the other Loan Documents.
13. This Note is subject to the express condition that at no time shall Maker be obligated or required to pay interest on the Principal Balance at a rate which could
subject Payee to either civil or criminal liability as a result of being in excess of the maximum rate which Maker is permitted by law to contract or agree to pay. If by the terms of this Note,
Maker is at any time required or obligated to pay interest on the Principal Balance at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be
immediately reduced to such maximum rate and interest payable hereunder shall be computed at such maximum rate and the portion of all prior interest payments in excess of such
maximum rate shall be applied and shall be deemed to have been payments in reduction of the Principal Balance.
14. The terms of this Note shall be governed by and construed under the laws of the State of New York.
15. This Note may only be modified, amended, changed or terminated by an agreement in writing signed by Payee and Maker. No waiver of any term, covenant or
provision of this Note shall be effective unless given in writing by Payee and if so given by Payee shall only be effective in the specific instance in which given.
16. Maker acknowledges that this Note and Maker’s obligations under this Note are and shall at all times continue to be absolute and unconditional in all respects and
shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to this Note and
the obligations of Maker under this Note or the obligations of any other person or party relating to this Note or the obligations of Maker hereunder or otherwise with respect to the
Loan. Subject to the provisions of Paragraphs 10 and 11 of this Note, Maker absolutely, unconditionally and irrevocably waives any and all right to assert any defense, setoff,
counterclaim or crossclaim of any nature whatsoever with respect to this Note or the obligations of Maker under this Note or the obligations of any other person or party relating to this
Note or the obligations of Maker hereunder or otherwise with respect to the Loan in any action, case or proceeding brought by Payee to collect the Debt, or any portion thereof
(provided, however, that the foregoing provisions of this sentence shall not be deemed a waiver of the right of Maker to assert any compulsory counterclaim in any such action, case or
proceeding brought by Payee in any state court if such counterclaim is compelled under local law or rule of procedure, or in any such action, case or proceeding brought by Payee in a
court of the United States, nor shall the foregoing provisions of this sentence be deemed a waiver of the right of Maker to assert any claim which would otherwise constitute a defense,
setoff, counterclaim or crossclaim of any nature whatsoever against Payee in any separate action, case or proceeding brought by Maker against Payee).
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17. No delay on the part of Payee in exercising any right or remedy under this Note or the other Loan Documents or failure to exercise the same shall operate as a
waiver in whole or in part of any such right or remedy. No notice to or demand on Maker shall be deemed to be a waiver of the obligation of Maker or of the right of Payee to take further
action without further notice or demand as provided in this Note and the other Loan Documents.
18. Maker agrees to submit to personal jurisdiction in the State of New York in any action, case or proceeding arising out of this Note and, in furtherance of such
agreement, Maker hereby agrees and consents that without limiting other methods of obtaining jurisdiction, personal jurisdiction over Maker in any such action, case or proceeding
may be obtained within or without the jurisdiction of any court located in New York and that any process or notice of motion or other application to any such court in connection with
any such action, case or proceeding may be served upon Maker by registered or certified mail to or by personal service at the last known address of Maker, whether such address be
within or without the jurisdiction of any such court. Maker also agrees that the venue of any litigation arising in connection with the Debt or in respect of any of the obligations of
Maker under this Note shall, to the extent permitted by law, be in New York County.
19. Maker shall and shall cause any Subsidiaries and affiliates to execute such further instruments and take such further actions as Payee shall reasonably require to
carry out the intent and purposes of the remedies set forth in this Note.
20. Maker represents that Maker has full power, authority and legal right to execute and deliver this Note and that the Debt constitutes a valid and binding obligation
of Maker.
21. MAKER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, AND PAYEE BY ITS ACCEPTANCE OF THIS NOTE IRREVOCABLY AND
UNCONDITIONALLY WAIVES, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, CASE, PROCEEDING, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH,
OUT OF OR OTHERWISE RELATING TO THE LOAN, THIS NOTE, OR THE OTHER LOAN DOCUMENTS.
22. Whenever used, the singular number shall include the plural, the plural the singular, and the words “Payee” and “Maker” shall include their respective successors
and assigns; provided, however, that Maker shall in no event or under any circumstance have the right without obtaining the prior written consent of Payee to assign or transfer its
obligations under this Note or the other Loan Documents, in whole or in part, to any other person, party or entity.
7
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
8
IN WITNESS WHEREOF, Maker has duly executed this Note the day and year first above written.
GREEN 485 JV LLC,
a Delaware limited liability company
By:
Name:
Title:
STATE OF NEW YORK )
: ss:
COUNTY OF NEW YORK )
On the ___________ day of _________________ in the year 2009 before me, the undersigned, a notary public in and for said state, personally appeared _____________________
personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to
me that he/she/they executed the same in his/her/their capacity(ies) and that by his/her/their signature(s) on the instrument, the individual(s) or the person upon behalf of which the
individual(s) acted, executed the instrument.
Notary Public
EXHIBIT “2(D)”
Member Loan Promissory Note
SECURED NOTE
$ _________________1
New York, New York
__________________, 2009
FOR VALUE RECEIVED, GREEN 485 HOLDINGS LLC, a Delaware limited liability company (“Maker”), having an office at c/o SL Green Realty Corp., 420 Lexington
Avenue, New York, New York 10170, promises to pay to MAZAL 485 LLC, a Delaware limited liability company (together with its successors and/or assigns, “Payee”), having an office
at c/o Green Investments Group, LLC, 241 West 47th Street, Suite 11B, New York, New York 10036, or order, at said office, or at such other place as may be
designated, from time to time, in writing by Payee, the principal sum of _______________________________ AND 00/100 DOLLARS ($ __________), in lawful money of the United
States of America, with interest thereon from and including the date of this Note to, but not including, the date this Note is paid in full calculated in the manner hereinafter set forth, as
follows:
(i) interest only on the Principal Balance (as hereinafter defined) calculated at the Applicable Rate (as hereinafter defined) shall, subject to
Paragraph 2 below, be due and payable on ___________ 1, 2009 and on the first day of every calendar month thereafter (each such date, an “Interest Payment Date”); and
(ii) the entire Principal Balance, together with all interest accrued and unpaid thereon calculated in the manner hereinafter set forth and all other
sums due under this Note, shall be due and payable on the Maturity Date (as hereinafter defined).
1. The following terms as used in this Note shall have the following meanings:
(a) The term “Applicable Rate” shall mean an interest rate per annum equal to (x) ten and 75/100 percent (10.75%) during the period from and after the date
hereof through and including December 31, 2013, and (y) five percent (5%) during the period from and after January 1, 2014. Notwithstanding the foregoing, during the continuance of
any “Payment Default” or “Maturity Default” under the JV Note, the Applicable Rate under this Note shall be five percent (5%) per annum. Interest at the Applicable Rate (i) shall be
calculated for complete calendar months on the basis of a three hundred sixty (360) day calendar year containing twelve (12) months of thirty (30) days each, and (ii) shall be calculated
for partial calendar months on the basis of the actual number of days elapsed over a three hundred sixty five (365) day calendar year.
(b) The term “Company” shall mean Green 485 JV LLC, a Delaware limited liability company.
1 $20,000,000.00, adjusted by 49.5% of the Adjustment Amount (net prorations, including lender reserves, in excess of (or less than, as the case may be) $4,200,000, under the
Agreement).
(c) The term “Debt” shall mean all principal, interest, additional interest and other sums of any nature whatsoever which may or shall become due to Payee in
accordance with the provisions of this Note, the Security Agreement or the other Loan Documents.
(d) The term “Default Rate” shall mean an interest rate per annum equal to the aggregate of (i) three percent (3%) plus (ii) the Applicable Rate. Interest at the
Default Rate (i) shall be calculated for complete calendar months on the basis of a three hundred sixty (360) day calendar year containing twelve (12) months of thirty (30) days each, and
(ii) shall be calculated for partial calendar months on the basis of the actual number of days elapsed over a three hundred sixty five (365) day calendar year.
(e) The term “JV Note” shall mean that certain Promissory Note, dated as of __________, 2009, made by Green 485 JV LLC in favor of SLG 485 Funding LLC,
as the same may be amended, restated, modified and supplemented from time to time.
(f) The term “LLC Agreement” shall mean that certain Amended and Restated Limited Liability Company Agreement of Green 485 JV LLC dated as of the date
hereof as the same may be amended, restated, modified and supplemented from time to time.
(g) The term “Loan” shall mean the loan in the principal sum of $ _______________, by Payee to Maker which is evidenced by this Note and secured by,
among other things, the Security Agreement.
(h) The term “Loan Documents” shall mean collectively this Note, the Security Agreement, and all other documents and instruments now or hereafter
executed and delivered in connection therewith, as the same may be amended, restated, modified and supplemented from time to time.
(i) The term “Maturity Date” shall mean December 31, 2021.
(j) The term “Principal Balance” shall mean the outstanding principal balance of this Note from time to time.
(k) The term “Security Agreement” shall mean that certain Pledge and Security Agreement dated the date hereof given by Maker to Payee with respect to the
Loan, as the same may be amended, restated, modified and supplemented from time to time.
2. All monies distributed by the Company to Maker pursuant to the terms of the LLC Agreement (“Distributions”), up to the amount of the Debt hereunder, shall be
paid directly to Payee for application against Maker’s obligations under this Note and the other Loan Documents. If, on any Interest Payment Date, the amount of the Distributions then
held by Payee under the Security Agreement is less than the interest which has accrued on the Principal Balance under this Note for the calendar month just ended (any such deficiency
with respect to a calendar month, a “Deficiency”), the interest payable under this Note with respect to such calendar month shall be deferred in an amount equal to the Deficiency.
Interest on this Note which is deferred in accordance with the provisions of this paragraph (“Deferred Interest”) shall accrue interest at the per annum interest rate in effect under this
Note from time to time, and such accrued interest shall compound annually (it being agreed that any interest which accrues on the Deferred Interest will for the purposes of this Note
also constitute Deferred Interest, to the extent not paid currently). All Distributions held by Payee under the Security Agreement shall be applied in the following order, first, to the
payment of any monies owed to Payee under this Note or the other Loan Documents, other than interest (including Deferred Interest) or principal, second, to the payment of interest
then due and payable under this Note (other than Deferred Interest), third to Deferred Interest, and fourth, to the repayment of the Principal Balance. Notwithstanding anything to the
contrary which may be set forth in this paragraph, the full amount of the Debt shall be due and payable in full on the Maturity Date.
2
3. The Principal Balance may not be prepaid, in whole or in part (except as otherwise specifically provided in Paragraph 2 or this paragraph). Notwithstanding
anything set forth in this Note to the contrary, this Note shall be prepayable in whole or in part, without penalty or premium, in the event all or any portion of Maker’s interest in the
Company is transferred in accordance with any written agreement by and between Maker and Payee, or any affiliate of Payee.
4. It is hereby expressly agreed that the entire Debt shall become immediately due and payable at the option of Payee on the happening of any Event of Default
under the Security Agreement, and that all of the terms, covenants and provisions contained in the Security Agreement and the other Loan Documents which are to be kept and
performed by Maker are hereby made part of this Note to the same extent and with the same force and effect as if they were fully set forth herein.
5. If the Debt is declared immediately due and payable by Payee pursuant to the provisions of the Security Agreement, or if the Debt is not paid in full on the
Maturity Date, Maker shall thereafter pay interest on the then entire outstanding Debt from the date of such declaration or the Maturity Date, as the case may be, through and including
the date the Debt is paid in full at the Default Rate. In addition, if an Event of Default (as such term is defined in the Security Agreement) shall occur, the Principal Balance, the entire
amount of the Deferred Interest and the remainder of the Debt shall, from and including the date upon which the Event of Default has occurred and for so long as such Event of Default
continues and without further act or instrument and without the necessity of any further or prior notice by Payee to Maker, bear interest at the Default Rate irrespective of whether
Payer shall have declared the Debt to be immediately due and payable as the result of the occurrence of such Event of Default.
6. Maker hereby waives presentment and demand for payment, notice of dishonor, protest and notice of protest of this Note. If any payment under this Note is not
made when due, Maker agrees to pay all costs of collection when incurred, including reasonable attorneys’ fees (which costs shall be added to the amount due under this Note and
shall be receivable therewith). Maker agrees to perform and comply with each of the terms, covenants and provisions contained in this Note, the Security Agreement and the other Loan
Documents on the part of Maker to be observed or performed. No release of any security for the payment of this Note or extension of time for payment of this Note, or any installment
hereof, and no alteration, amendment or waiver of any provision of this Note, the Security Agreement or the other Loan Documents made by agreement between Payee and any other
person or party shall release, discharge, modify, change or affect the liability of Maker under this Note, the Security Agreement or the other Loan Documents.
3
7. This Note is subject to the express condition that at no time shall Maker be obligated or required to pay interest on the Principal Balance or the Deferred Interest at
a rate which could subject Payee to either civil or criminal liability as a result of being in excess of the maximum rate which Maker is permitted by law to contract or agree to pay. If by the
terms of this Note, Maker is at any time required or obligated to pay interest on the Principal Balance or the Deferred Interest at a rate in excess of such maximum rate, the rate of interest
under this Note shall be deemed to be immediately reduced to such maximum rate and interest payable hereunder shall be computed at such maximum rate and the portion of all prior
interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the Principal Balance or the Deferred Interest, as
applicable.
8. This Note is secured by the Security Agreement and the other Loan Documents.
9. The terms of this Note shall be governed by and construed under the laws of the State of New York.
10. This Note may only be modified, amended, changed or terminated by an agreement in writing signed by Payee and Maker. No waiver of any term, covenant or
provision of this Note shall be effective unless given in writing by Payee and if so given by Payee shall only be effective in the specific instance in which given.
11. Maker acknowledges that this Note and Maker’s obligations under this Note are and shall at all times continue to be absolute and unconditional in all respects,
subject, however, to the provisions of paragraph 17 hereof, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature
whatsoever which might otherwise constitute a defense to this Note and the obligations of Maker under this Note or the obligations of any other person or party relating to this Note or
the obligations of Maker hereunder or otherwise with respect to the Loan. Maker absolutely, unconditionally and irrevocably waives any and all right to assert any defense, setoff,
counterclaim or crossclaim of any nature whatsoever with respect to this Note or the obligations of Maker under this Note or the obligations of any other person or party relating to this
Note or the obligations of Maker hereunder or otherwise with respect to the Loan in any action, case or proceeding brought by Payee to collect the Debt, or any portion thereof, or to
enforce, foreclose and realize upon the liens and security interests created by the Security Agreement and the other Loan Documents, subject, however, to the provisions of paragraph
17 hereof (provided, however, that the foregoing provisions of this sentence shall not be deemed a waiver of the right of Maker to assert any compulsory counterclaim in any such
action, case or proceeding brought by Payee in any state court if such counterclaim is compelled under local law or rule of procedure, or in any such action, case or proceeding brought
by Payee in a court of the United States, nor shall the foregoing provisions of this sentence be deemed a waiver of the right of Maker to assert any claim which would otherwise
constitute a defense, setoff, counterclaim or crossclaim of any nature whatsoever against Payee in any separate action, case or proceeding brought by Maker against Payee). Maker
acknowledges that no oral or other agreements, understandings, representations or warranties exist with respect to this Note or with respect to the obligations of Maker under this Note,
except those specifically set forth in this Note, and that this Note and the other Loan Documents sets forth the entire agreement and understanding of Payee and Maker with respect to
the Loan.
4
12. No delay on the part of Payee in exercising any right or remedy under this Note, the Security Agreement or the other Loan Documents or failure to exercise the
same shall operate as a waiver in whole or in part of any such right or remedy. No notice to or demand on Maker shall be deemed to be a waiver of the obligation of Maker or of the right
of Payee to take further action without further notice or demand as provided in this Note, the Security Agreement and the other Loan Documents.
13. Maker agrees to submit to personal jurisdiction in the State of New York in any action, case or proceeding arising out of this Note and, in furtherance of such
agreement, Maker hereby agrees and consents that without limiting other methods of obtaining jurisdiction, personal jurisdiction over Maker in any such action, case or proceeding
may be obtained within or without the jurisdiction of any court located in New York and that any process or notice of motion or other application to any such court in connection with
any such action, case or proceeding may be served upon Maker by registered or certified mail to or by personal service at the last known address of Maker, whether such address be
within or without the jurisdiction of any such court. Maker also agrees that the venue of any litigation arising in connection with the Debt or in respect of any of the obligations of
Maker under this Note shall, to the extent permitted by law, be in New York County.
14. Maker represents that Maker has full power, authority and legal right to execute and deliver this Note and that the Debt constitutes a valid and binding obligation
of Maker.
15. MAKER HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, AND PAYEE BY ITS ACCEPTANCE OF THIS NOTE IRREVOCABLY AND
UNCONDITIONALLY WAIVES, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, CASE, PROCEEDING, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH,
OUT OF OR OTHERWISE RELATING TO THE LOAN, THIS NOTE, THE SECURITY AGREEMENT OR THE OTHER LOAN DOCUMENTS.
16. Whenever used, the singular number shall include the plural, the plural the singular, and the words “Payee” and “Maker” shall include their respective successors
and assigns; provided, however, that Maker shall in no event or under any circumstance have the right without obtaining the prior written consent of Payee to assign or transfer its
obligations under this Note, the Security Agreement or the other Loan Documents, in whole or in part, to any other person, party or entity.
5
17. By its acceptance of this Note and the Security Agreement, Payee agrees that it shall not enforce the liability and obligation of Maker to perform and observe the
obligations contained in this Note or the Security Agreement or any other Loan Document by any action or proceeding against Maker or any Exculpated Party (as hereinafter defined),
except that Payee may bring a foreclosure action, action for specific performance or other appropriate action or proceeding to enable Payee to enforce and realize upon the Security
Agreement and any collateral given to Payee created by the Security Agreement and the other Loan Documents; provided, however, that any judgment in any such action or
proceeding shall be enforceable against Maker only to the extent of Maker’s interest in the Company and in any other collateral given to Payee. Payee, by accepting this Note and the
Security Agreement, agrees that it shall not sue for, seek or demand any deficiency or other money judgment against Maker, any direct or indirect member, manager, shareholder,
partner, beneficiary or other owner of beneficial ownership interests in Maker, or any director, officer, agent, attorneys, employee or trustee of any of the foregoing (each, an
“Exculpated Party” and, collectively, the “Exculpated Parties”) in any such action or proceeding, under or by reason of or under or in connection with this Note, the Security Agreement
or the other Loan Documents. The provisions of this paragraph 17 shall not, however, (i) constitute a waiver, release or impairment of any obligation evidenced or secured by this Note,
the Security Agreement or the other Loan Documents; or (ii) impair the right of Payee to name Maker as a party defendant in any action or suit for judicial foreclosure and sale under the
Security Agreement (subject, however, to the aforesaid limitation on Payee’s right to sue, seek or demand a deficiency or other money judgment against Maker or any other Exculpated
Party).
18. This Note is registered as to both principal and interest with Maker and, notwithstanding any other provision hereof, transfer of this obligation may be effected
only by surrender of this instrument and either (a) the reissuance by Maker of this instrument to the new holder or (b) the issuance by Maker of a new instrument to the new holder.
Transfer of this instrument at any time by any means other than the method described in this paragraph shall be deemed void and ineffectual.
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
6
IN WITNESS WHEREOF, Maker has duly executed this Note the day and year first above written.
GREEN 485 HOLDINGS LLC,
a Delaware limited liability company
By:
Name:
Title:
STATE OF NEW YORK )
: ss:
COUNTY OF NEW YORK )
On the ____________ day of _____________________ in the year 2009 before me, the undersigned, a notary public in and for said state, personally
appeared ______________________________ personally known to me or proved to me on the basis of satisfactory evidence to be the individual(s) whose name(s) is (are)
subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies) and that by his/her/their signature(s) on the instrument,
the individual(s) or the person upon behalf of which the individual(s) acted, executed the instrument.
Notary Public
EXHIBIT “2(E)”
Option Agreement
DATE:
_______________, 2009
TO:
ADDRESS:
ATTN:
FAX:
FROM:
ATTN:
ADDRESS:
FAX:
Green 485 Holdings LLC
c/o SL Green Realty Corp.
420 Lexington Avenue
New York, New York 10170
Andrew S. Levine, Esq.
(212) 356-4135
Mazal 485 LLC
Julius Schwartz
241 West 47th Street
Suite 11B
New York, New York 10036
[_____________________]
The purpose of this letter agreement is to confirm the terms and conditions of the Transaction entered into on the Trade Date specified below (the “Transaction”) between Mazal 485
LLC (“Party A”) and Green 485 Holdings LLC (“Party B”). This letter agreement constitutes the sole and complete “Confirmation” (as defined below), as referred to in the “Master
Agreement” (as defined below), with respect to the Transaction.
1.
This Confirmation evidences a complete and binding agreement between you and us as to the terms of the Transaction to which this Confirmation relates. In addition, in
lieu of negotiating an ISDA Master Agreement and Schedule, you and we agree that the 1992 ISDA Master Agreement (Multicurrency Cross-Border) (the “Master Agreement”) is
incorporated by reference herein with such modifications and elections as are set forth herein. This Confirmation (the “Confirmation”), confirming this transaction (a “Transaction”)
entered into between us shall supplement, form a part of, and be subject to the Master Agreement as if we had executed an agreement in such form effective as of the Trade Date of this
Transaction. In the event of any inconsistency between the Master Agreement and this Confirmation, this Confirmation will govern.
The definitions and provisions contained in the 2002 ISDA Equity Derivatives Definitions (the “Equity Definitions”), as published by the International Swaps and Derivatives
Association, Inc., are incorporated into this Confirmation except as modified herein. In the event of any inconsistency between the Equity Definitions and this Confirmation, this
Confirmation will govern.
Capitalized terms not otherwise defined herein, in the Master Agreement or in the Equity Definitions incorporated by reference into this Confirmation, shall have the ascribed
meanings set forth in the Amended and Restated Limited Liability Company Agreement of the Issuer, dated as of the date hereof, by and between Party A, Party B and [SLGOP
Subsidiary] (as amended, restated, modified or supplemented form time to time, the “LLC Agreement”).
2.
The terms of the particular Transaction to which this Confirmation relates are as follows:
I.
GENERAL TERMS:
Party A:
Party B:
Trade Date:
Effective Date:
Option Style:
Option Type:
Seller:
Buyer:
Shares:
Number of Options:
Option Entitlement:
Strike Price:
Mazal 485 LLC
Green 485 Holdings LLC
_____________, 2009
[Note: Insert date of initial closing of the acquisition of the initial 49.5%]
_____________, 2009
American
Call
Party B
Party A
49.5% membership interest in Green 485 JV LLC, a Delaware limited liability company, held by Party B as of the Trade Date.
One
All of the Shares per Option.
Subject to the Strike Price Cap, the fair market value (the “Fair Market Value”) of the Shares at the Settlement Date, minus the
Premium.
The Fair Market Value shall be determined by mutual agreement of Party A and Party B and shall be equal to the amount that
would be received by the holder of the Shares, based on the fair market value of that certain parcel of real property known as and
located at 485 Lexington Avenue, New York, New York (the “Property”), if the Property were sold to a third party in a bona fide
arms-length transaction on customary terms and conditions, and all liabilities of the Issuer and its subsidiaries were satisfied
from such sales proceeds and any balance were distributed to the members of the Issuer parties pursuant to the LLC Agreement.
2
If Party A and Party B (collectively, the “Parties”) are unable to agree upon the Fair Market Value within fifteen (15) days of the
Option Notice (as defined herein), then such Fair Market Value shall be determined as follows:
(a) The Parties shall, by mutual agreement, appoint a qualified appraiser (as defined below). If the Parties cannot agree on a single
qualified appraiser, then each of the Parties shall have the right to select a qualified appraiser and shall give written notice to the
other of the appraiser so selected. The first party to receive such a notice of selection shall have five (5) days after receipt thereof
to give the other party written notice of its selection. If one Party gives a notice of selection and the other fails to timely provide
its notice of selection within such five (5) day period (or if a single appraiser is selected), the one qualified appraiser so selected
shall be the sole appraiser in making the determination required hereunder, which written determination shall be final and binding
and shall be delivered to the Parties no more than thirty (30) days after the delivery of the first notice.
(b) If the second notice of selection is properly given within the requisite time, the qualified appraisers so selected shall promptly
make the determination required hereunder and deliver a written summary of such determination to the Parties within thirty (30)
days after the delivery of the first notice of selection. If such two appraisers reach the same determination, their determination
shall be final and binding. If the two appraisers reach determinations that are different but the lower determination is not less
than ninety percent (90%) of the higher determination, an average of the two shall be final and binding. In all other events, the
two appraisers shall promptly select a third qualified appraiser who shall promptly select the determination of one of the two
appraisers which it believes is more accurate and deliver a written summary of such determination to the Parties no more than
sixty (60) days after the delivery of the first notice of selection, and such determination shall be final and binding on both Parties.
3
Strike Price Cap:
The Strike Price shall not exceed:
As used herein, a “qualified appraiser” means a reputable, independent person who has no less than fifteen (15) years experience
in appraising or valuing limited liability company interests similar to the Shares, and who has not been employed by or consulted
to the Parties within the prior five (5) year period.
(i)
(ii)
$21,580,020.00 (the “Initial Cap”), which equals 103.8% of the Current FMV (as defined below), if the Settlement Date
occurs on or prior to July 31, 2013; or
if the Settlement Date occurs on or after August 1, 2013, 101% of the Initial Cap (which equals $21,795,820.20) plus an
additional 1% of the Initial Cap with respect to each one (1) year anniversary of August 1, 2013 occurring thereafter
that has occurred on or prior to the Settlement Date.
Notwithstanding the foregoing, if the Option is exercised on December 31, 2022, the Strike Price shall not exceed 115% of the
Initial Cap.
For the purposes of this Transaction, “Current FMV” means Fair Market Value of the Shares as of the Trade Date, based on the
initial valuation of 100% membership interest in the Issuer of USD $42,000,000.00.
Premium:
Premium Payment Date:
USD $275,000.00
Trade Date
Scheduled Trading Day:
Notwithstanding the Equity Definitions, a “Scheduled Trading Day” shall be any Local Business Day.
Exchange:
Related Exchange(s):
Clearance System(s):
II.
PROCEDURES FOR EXERCISE:
Commencement Date:
Not Applicable
Not Applicable
Not Applicable
March 1, 2013; provided, that in the event of a sale of the Property, Buyer may exercise the Option prior to March 1, 2013 if the
consummation of the Option occurs not less than two (2) Local Business Days after the sale and conveyance of the Property and
the payment in full of the JV Loan.
4
Latest Exercise Time:
6:00 pm (local time in New York, New York).
Expiration Time:
Expiration Date:
Multiple Exercise:
Automatic Exercise:
6:00 pm (local time in New York, New York).
December 31, 2020; provided that if the Option is not exercised by December 31, 2020, the Option may be exercised on December
31, 2022.
Not Applicable
Not Applicable
III.
SETTLEMENT TERMS:
Physical Settlement:
Applicable.
The Settlement Price shall be payable to Seller on the Settlement Date by wire transfer to the account of Seller set forth in clause
5 of Section VI below.
Settlement Currency:
USD
Settlement Method Election:
Not Applicable
Settlement Date:
The Settlement Date shall be the date set forth as the date for the closing of the purchase of the Shares in the notice from Buyer
of its exercise of the Option (the “Option Notice”).
Notwithstanding anything to the contrary in Section 3.2 of the Equity Definitions, the Option Notice shall be in writing, and shall
set forth the Settlement Date for the closing of the purchase of the Shares, which Settlement Date shall occur no earlier than ten
(10) calendar days and no later than ninety (90) calendar days after the delivery of the Option Notice.
Seller shall not be required to consummate the closing of the purchase of the Shares hereunder unless the JV Loan (as defined in
the Purchase Agreement) is paid in full (taking into account the offset of any Nortel Losses (as defined in the Purchase
Agreement) and any applicable escrow of the payoff to the JV Loan as set forth in the JV Loan Documents) prior to or
simultaneously with the Settlement Date.
Buyer shall have the right to credit against the Strike Price payable hereunder all amounts (including principal and interest)
outstanding under the Green 485 Holdings Loan on the Settlement Date.
5
Settlement Disruption Event:
Method of Adjustment:
Extraordinary Dividends:
IV.
EXTRAORDINARY EVENTS:
Extraordinary Events:
Not Applicable
Not Applicable
Not Applicable
The following events shall constitute Extraordinary Events with the resulting consequences set forth next to each such
Extraordinary Event:
Merger Event:
Tender Offer:
Not Applicable
Not Applicable
Composition of Combined Consideration:
Not Applicable
Naturalization; Insolvency or Delisting:
Not Applicable
Additional Disruption Events:
The following events shall constitute Additional Disruption Events with the resulting consequences set forth next to each such
Additional Disruption Event:
Change in Law:
Failure to Deliver:
Insolvency Filing:
Hedging Disruption:
Increased Cost of Hedging:
Loss of Stock Borrow:
Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Increased Cost of Stock Borrow:
Not Applicable
Determining Party:
Party A
6
V.
REPRESENTATIONS AND WARRANTIES:
Non-Reliance:
Agreements and Acknowledgments Regarding
Hedging Activities:
Applicable
Not Applicable
Additional Acknowledgements:
Applicable
Additional Representations:
In addition to the representations set forth in the Master Agreement, each party hereto represents and warrants to the other
party hereto the following:
(i) It understands that this Transaction has not been registered under the U.S. Securities Act of 1933 as amended (the
“Securities Act”) or the securities law of any other jurisdiction, and that neither party is obliged to register the Transaction or to
assist the other party in complying with any exemption from registration under the Securities Act or state securities laws;
provided, however, notwithstanding the foregoing, if this Transaction is not otherwise exempt from the registration requirements
of the Securities Act, each party represents with respect to this Transaction:
(a)
(b)
it is entering into the Transaction for its own account as principal, and not with a view to, or for, resale, distribution or
fractionalization thereof, in whole or in part;
it acknowledges its understanding that the offer and sale of this Transaction is intended to be exempt from
registration under the Securities Act, by virtue of Section 4(2) of the Securities Act. In furtherance thereof, each party
represents and warrants to the other party that (i) it has the financial ability to bear the economic risk of its
investment, including a loss of its entire investment, (ii) it is either (x) an accredited investor as defined in Rule 501
under the Securities Act, or (y) a “qualified institutional buyer” as defined in Rule 144A under the Securities Act, (iii)
it has the knowledge and experience of investing in instruments similar to the Transaction and is capable of
evaluating the risks and merits of the Transaction and has, or has had an opportunity to request, such information as
it deemed necessary to make such evaluation; and
7
(c)
it understands that the Transaction has not been registered under the Securities Act or under the securities laws of
certain states and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless an exemption for
such resale, pledge, assignment or disposition is available and that neither party is obliged to register the Transaction
or to assist the other party in complying with any exemption from registration under the Securities Act or state
securities laws;
(ii) Any information that it desires concerning this Transaction or any other matter relevant to its decision to enter into this
Transaction is, or has been made, available to it;
(iii) It is not an investment company required to be registered under the U.S. Investment Company Act of 1940, as amended (the
“Investment Company Act”) pursuant to the exemption available under Section 3(c)(7) of the Investment Company Act or a
business development company as defined in Section 202(a)(22) of the U.S. Investment Advisers Act of 1940, as amended.
(iv) It is an “eligible contract participant” as defined in section 1a(12) of the Commodity Exchange Act as amended;
8
(v) It represents that (i) is not an employee benefit plan (an “ERISA Plan”) as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), subject to Title 1 of ERISA or Section 4975 of the Internal Revenue Code of
1986, as amended, (ii) it is not a person or entity acting on behalf of an ERISA Plan because less than 25% of all of its equity
interests are held by “benefit plan investors” within the meaning of 29 CFR Section 2510.3-101(f)(2), (iii) none of its assets are or
will be deemed to be “plan assets” within the meaning of U.S. Department of Labor Regulation 29 C.F.R. Section 2510.3-101 or
otherwise; (iv) it is not a defined contribution plan; (v) it is not a “governmental plan” within the meaning of ERISA Section 3
(32); and (vi) transactions by or with it are not subject to state statutes regulating investments of and fiduciary obligations with
respect to governmental plans.
9
VI.
MISCELLANEOUS:
1.
Incorporation of Terms of Master Agreement. (a) For the avoidance of doubt, the parties agree that the Master Agreement is incorporated herein by reference, and the parties
expressly specify that (i) Second Method and Loss shall apply unless otherwise specified herein; (ii) the Threshold Amount with respect to Party B shall be zero; and with
respect to Party A shall not be applicable; (iii) paragraph 2(c) will not apply to Transactions; (iv) the replacement of the word “third” in the last line of Section 5(a)(i) with the
word “second”; (v) Specified Entity shall mean none with respect to Party A, and shall mean all Affiliates with respect to Party B.
(b)
(c)
“Termination Currency” means USD.
“Credit Support Document”: With respect to Party A, none. With respect to Party B, means the following: the Credit Support Annex, dated as of the date hereof,
between Party A and Party B.
(d)
Rights of Set-Off. The parties agree to amend Section 6 of the Master Agreement by adding a new Section 6(f), as follows:
“(f) Upon the occurrence of an Event of Default or Termination Event occurs hereunder with respect to a party (“X”), the other party (“Y”) will have the right (but not
be obliged) without prior notice to X or any other person to set off or apply any obligation of X owed to Y (or any Affiliate of Y) (whether or not matured or
contingent and whether or not arising under this Agreement, and regardless of the currency, place of payment or booking office of the obligation) against any
obligation of Y (or any Affiliate of Y) owed to X (or any Affiliate of X) (whether or not matured or contingent and whether or not arising under this Agreement, and
regardless of the currency, place of payment or booking office of the obligation). Y will give prompt notice to the other party of any set-off effected under this Section
6(f).
Amounts (or the relevant portion of such amounts) subject to set-off may be converted by Y into the Termination Currency at the rate of exchange at which Y would
be able, acting in a commercially reasonable manner and in good faith, to purchase the relevant amount of such currency.
If any obligation is unascertained, Y may in good faith estimate that obligation and set off in respect of the estimate, subject to Y accounting to X when the obligation
is ascertained.
Nothing in this Section 6(f) shall be effective to create a charge or other security interest. This Section 6(f) shall be without prejudice and in addition to any right of
set-off, combination of accounts, lien or other right to which any party is at any time otherwise entitled (whether by operation of law, contract or otherwise).”
10
2.
Agreement to Deliver Documents. On the Trade Date, each party agrees to deliver the following documents, as applicable, unless already delivered to the other party pursuant
to the terms of any other agreement between the parties:
(i) with respect to Seller, a duly executed and acknowledged Assignment of Membership Interest Agreement, between Buyer (or its designee) and Seller,
substantially in the form of Annex I hereto, relating to the transfer of the Shares hereunder;
(ii) with respect to Seller, the Shares, in certificated form, duly issued and executed by the Issuer pursuant to the LLC Agreement, together with undated and
blank endorsements;
(iii) with respect to Seller, certified copies of board resolutions or other similar documents approving the Transaction contemplated by this Confirmation, and
evidence of the signing authority and specimen signature of each person executing this Confirmation and any Credit Support Document;
(iv) with respect to Seller, such other documents and instruments as may be reasonably necessary or desirable to further carry out the purposes of this
Transaction as determined by Buyer;
(v) with respect to Buyer, a duly executed Secured Note in the original principal amount of USD $20,000,000.00, dated on or about the date hereof, by Party A
(or its Affiliate) in favor of Party B;
(vi) the LLC Agreement, duly executed by each such party;
(vii) any other documentation reasonably requested by Party A; and
(viii) Tax forms, documents or certificates to be delivered are:
Party required to deliver document
Party A
Form/Document/Certificate
An executed U.S. Internal Revenue Service Form W-9 for each of the
Date by which to be delivered
Upon or prior to the execution and delivery of the
members or partners of Party A.
Confirmation.
Party B
An executed U.S. Internal Revenue Service Form W-9 for each of the
Upon or prior to the execution and delivery of the
members or partners of Party B.
Confirmation.
11
3.
4.
5.
6.
7.
Fully-Paid Transaction. Notwithstanding the terms of Sections 5 and 6 of the Master Agreement, if at any time and so long as one of the parties to this Confirmation (“X”)
shall have satisfied in full all its payment obligations under Section 2(a) of the Master Agreement and shall at the time have no future payment obligations, whether absolute or
contingent, under such Section, then unless the other party (“Y”) is required pursuant to appropriate proceedings to return to X or otherwise returns to X upon demand of X
any portion of any such payment, (a) the occurrence of an event described in Section 5(a) of the Master Agreement with respect to X or any Specified Entity of X shall not
constitute an Event of Default or a Potential Event of Default with respect to X as the Defaulting Party and (b) Y shall be entitled to designate an Early Termination Date
pursuant to Section 6 of the Master Agreement only as a result of the occurrence of a Termination Event set forth in (i) either Section 5(b)(i) or 5(b)(ii) of the Master Agreement
with respect to Y as the Affected Party or (ii) Section 5(b)(iii) of the Master Agreement with respect to Y as the Burdened Party.
Consent to Recording. Each party (i) consents to the recording of the telephone conversations of trading and marketing personnel of the parties in connection with the
Agreement, this Transaction or any potential Transaction, (ii) agrees to obtain any necessary consent of, and give notice of such recording to, such personnel and (iii) agrees
that such recordings may be submitted in evidence in any proceedings.
Accounts for Payments:
Account for Payment
to Party A:
Account for Payment
to Party B:
To be advised
To be advised
Expenses. All expenses related to the transfer of Shares to be delivered under this Transaction (such as any transfer taxes, recording fees, filing fees or stamp duty) shall be
payable by Seller.
Confidentiality. Both parties agree that Section 36 of the Purchase Agreement shall apply to this Confirmation mutatis mutandis. The provisions of this paragraph on
“Confidentiality” shall survive the termination of the Master Agreement, this Confirmation, or this Transaction.
12
8.
Agreements Regarding Bankruptcy Treatment. The parties agree that this Transaction is intended to provide Buyer with the rights set forth in Sections 555 and 560 of title 11
of the United States Code (the “Bankruptcy Code”). The parties also intend for this Agreement to be, and agree that this Agreement is: (i) a “swap agreement” within the
meaning of Section 101(53B) of the Bankruptcy Code, and specifically including, but not limited to, an “equity swap” and an “option” within the meaning of Section 101(53B)
(A)(IV) of the Bankruptcy Code, and (ii) a “securities contract” within the meaning of Section 741 of the Bankruptcy Code. In addition, the parties agree that Buyer is a
“financial participant” within the meaning of Section 101(22A) of the Bankruptcy Code as at the time Buyer enters into this Transaction. The parties also agree that the exercise
of rights arising under or related to this Agreement are contractual rights arising under common law or by reason of normal business practice for purposes of Section 555 of the
Bankruptcy Code.
9.
Governing Law; Waiver of Jury Trial:
(a)
(b)
This Confirmation shall be governed by, and construed in accordance with, the laws of the State of New York (without reference to choice of law doctrine).
EACH PARTY HEREBY WAIVES, TO THE FULL EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY ACTION, SUIT OR PROCEEDING RELATING TO OR ARISING OUT OF THIS CONFIRMATION OR THIS TRANSACTION. Each party hereby
confirms and acknowledges that (i) no representative, agent or attorney of the other party has represented, expressly or otherwise, that such other party would not
seek to enforce the foregoing waiver and (ii) it has been induced to enter into this Confirmation by, among other things, the mutual waivers, confirmations and
acknowledgments in this paragraph.
10.
Notices. All notices and other communications pursuant or related to this Confirmation shall be in writing (which shall include, for the avoidance of doubt, any notices or other
communications sent by facsimile transmission, by electronic mail, or in any other form from time to time approved by the parties) All notices to Party A shall be delivered to
Mazal 485 LLC, 241 West 47th Street, Suite 11B, New York, NY 10036, Attn: _________________________, Facsimile No.: ________________; with a copy to: Greenberg
Traurig, LLP, 200 Park Avenue, New York, NY 10166, Attn: Joseph D. Farrell, Esq., Facsimile No.: (212) 805-9304. All notices to Party B shall be delivered to c/o SL Green Realty
Corp., 420 Lexington Avenue, New York, NY 10170, Attn: Andrew S. Levine, Esq., Facsimile No.: (212) 356-4135; with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison, LLP,
1285 Avenue of the Americas, New York, NY 10019, Attn: Peter E. Fisch, Esq., Facsimile No.: (212) 492-0424. Notices may be delivered by Party A or Party B by email to the
email address, if any, specified above. Any such notice shall be deemed to be delivered upon transmission so long as verbal notice is also delivered telephonically.
This Confirmation may be executed in several counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
13
Party B hereby agrees to check this Confirmation and to confirm that the foregoing correctly sets forth the terms of the Transaction by signing in the space provided below and
returning to Party B a facsimile of the fully-executed Confirmation to [____________]. For inquiries regarding this Transaction, please contact [_______________] by telephone at
[______________], and email the following email address(es): [________________]. Originals will be provided for your execution upon your request.
Please check this Confirmation carefully and immediately upon receipt, so that errors or discrepancies can be promptly identified and rectified.
We are very pleased to have concluded this Transaction with you.
14
Sincerely,
MAZAL 485 LLC (Party A)
By:
Name:
Title:
Confirmed as of the date first above written:
GREEN 485 HOLDINGS LLC (Party B)
By:
Name:
Title:
15
ANNEX 1
FORM OF ASSIGNMENT OF INTEREST
This ASSIGNMENT OF MEMBERSHIP INTEREST, dated as of __________, 2009 (this “Assignment”), is entered into by and among GREEN 485 HOLDINGS LLC, a
Delaware limited liability company (“Assignor”) and MAZAL 485 LLC, a Delaware limited liability company (“Assignee”).
WITNESSETH:
WHEREAS, Green 485 JV LLC, (the “Company”) is a limited liability company duly formed under the laws of the State of Delaware, pursuant to the (i) Certificate of Formation of
the Company filed with the Secretary of State of the State of Delaware on December 8, 2006 and (ii) the Amended and Restated Limited Liability Company Agreement, dated as
of __________, 2009 (“Operating Agreement”);
WHEREAS, Assignor is the owner and holder of a forty-nine and one half percent (49.5%) membership interest in the Company (the “Interest”); and
WHEREAS, Assignor has agreed to assign its Interest to Assignee.
NOW, THEREFORE, for value received, the receipt and sufficiency of which are hereby acknowledged, the undersigned, in consideration of the premises, covenants and
agreement contained herein, do hereby agree as follows:
1.
Assignment. Assignor hereby unconditionally and irrevocably assigns, transfers and conveys to Assignee, effective as of the date hereof, all of the right, title and
interest of Assignor in and to the Interest, including, without limitation, all right, title and interest of Assignor, if any, in and to the properties (real and personal) and capital of the
Company and all distributions and allocations made or to be made in respect of the Interest.
2.
Assumption. Assignee hereby accepts the assignment of the Interest and expressly assumes the obligations of Assignor with respect to the Interest accruing from and
after the date hereof.
3.
Books and Records. The members of the Company shall take all actions necessary to evidence the admission of Assignee as a member of the Company.
4.
Future Cooperation. Each of the parties hereto agrees to cooperate at all times from and after the date hereof with respect to all of the matters described herein, and to
execute such further assignments, releases, assumptions, amendments of the Operating Agreement, notifications and other documents as may be reasonably requested for the purpose
of giving effect to, or evidencing or giving notice of, the transaction contemplated by this Assignment.
5.
Binding Effect. This Assignment shall be binding upon, and shall inure to the benefit of the parties hereto and their respective successors and assigns.
16
6.
Execution in Counterparts. This Assignment may be (a) executed in counterparts, each of which shall be deemed an original, but all which shall constitute one and the
same instrument and (b) by telecopy or other electronic signature (which shall be deemed an original for all purposes).
7.
Governing Law. This Assignment shall be governed by, and construed under, the laws of the State of New York, all rights and remedies being governed by said laws,
without regard to principles of conflict of law.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
17
IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be duly executed as of the day and year first-above written.
ASSIGNOR:
GREEN 485 HOLDINGS LLC,
a Delaware limited liability company
By:
Name: Andrew S. Levine
Title: Executive Vice President
ASSIGNEE:
MAZAL 485 LLC,
a Delaware limited liability company
By:
Name:
Title:
ISDA®
International Swaps and Derivatives Association, Inc.
CREDIT SUPPORT ANNEX
to the Schedule to the
ISDA MASTER AGREEMENT
dated as of ___________, 2009
Between
and
Mazal 485 LLC
(“Party A”)
Green 485 Holdings LLC
(“Party B”)
This Annex supplements, forms part of, and is subject to, the above-referenced Agreement, is part of its Schedule and is a Credit Support Document under this Agreement with respect
to each party.
Accordingly, the parties agree as follows:–
Paragraph 1. Interpretation
Definitions and Inconsistency. Capitalized terms not otherwise defined herein or elsewhere in this Agreement have the meanings specified pursuant to Paragraph 12, and all
(a)
references in this Annex to Paragraphs are to Paragraphs of this Annex. In the event of any inconsistency between this Annex and the other provisions of this Schedule, this Annex will
prevail, and in the event of any inconsistency between Paragraph 13 and the other provisions of this Annex, Paragraph 13 will prevail.
Secured Party and Pledgor. All references in this Annex to the “Secured Party” will be to either party when acting in that capacity and all corresponding references to the
(b)
“Pledgor” will be to the other party when acting in that capacity; provided, however, that if Other Posted Support is held by a party to this Annex, all references herein to that party as
the Secured Party with respect to that Other Posted Support will be to that party as the beneficiary thereof and will not subject that support or that party as the beneficiary thereof to
provisions of law generally relating to security interests and secured parties.
Paragraph 2. Security Interest.
Each party, as the Pledgor, hereby pledges to the other party, as the Secured Party, as security for its Obligations, and grants to the Secured Party a first priority continuing security
interest in, lien on and right of Set-off against all Posted Collateral Transferred to or received by the Secured Party hereunder. Upon the Transfer by the Secured Party to the Pledgor of
Posted Collateral, the security interest and lien granted hereunder on that Posted Collateral will be released immediately and, to the extent possible, without any further action by either
party.
Copyright © 1994 by International Swaps and Derivatives Association, Inc.
Paragraph 13. Elections and Variables
Security Interest for “Obligations”. The term “Obligations” as used in this Annex includes the following additional obligations: Not Applicable.
Credit Support Obligations.
(i)
Delivery Amount, Return Amount and Credit Support Amount.
(A)
“Delivery Amount” shall not be applicable.
(B)
(C)
“Return Amount” shall not be applicable.
“Credit Support Amount” shall mean, for any Valuation Date, the Fair Market Value (as defined below) of the Shares on the Trade Date.
(ii)
Eligible Collateral. The following items will qualify as “Eligible Collateral” for the Party specified:
(a)
(b)
Cash
Party A
Not Applicable
Not Applicable
Party B
Not Applicable
[X]
Valuation
Percentage
0%
100%
49.5% membership interest in Green 485 JV LLC, a Delaware limited liability
company, held by Party B as of the Trade Date (the “Shares”).
(iii)
Other Eligible Support. None.
(iv)
Thresholds.
(1)
(2)
(3)
(4)
“Independent Amount” means with respect to Party B: as of any date of determination, the Fair Market Value of the Shares (as defined in the Confirmation to
the 1992 ISDA Master Agreement (Multicurrency Cross-Border), dated as of the date hereof (the “Confirmation”)).
“Threshold” means with respect to Party A and Party B: Not Applicable.
“Minimum Transfer Amount” means with respect to Party A and Party B: Not Applicable.
“Rounding” means with respect to Party A and Party B: Not Applicable.
11
(c)
Valuation and Timing.
(i)
(ii)
(iii)
“Valuation Agent” means Party A.
“Valuation Date” means the Trade Date and the Exercise Date.
“Valuation Time” means the close of business in the city of the Valuation Agent on the Local Business Day prior to the Valuation Date or date of calculation, as
applicable; provided that the calculations of Value and Exposure will be made as of approximately the same time on the same date.
(iv)
“Notification Time” means 11:00 a.m., New York time, on a Local Business Day following the Valuation Date.
(d)
Conditions Precedent and Secured Party’s Rights and Remedies.
The following Termination Event(s) will be a “Specified Condition” for the party specified (that party being the Affected Party if the Termination Event occurs with respect to
that party):
Party A
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Not Applicable
Party B
Yes
Yes
Yes
Yes
Yes
Illegality
Tax Event
Tax Event Upon Merger
Credit Event Upon Merger
Extraordinary Event(s) (as specified in the Confirmation)
(e)
Substitution.
Substitution shall only be permitted with the express written consent of Party A.
(f)
Dispute Resolution.
The dispute resolution provision of Paragraph 5 shall not be applicable.
(g)
Holding and Using Posted Collateral.
(i)
Eligibility to Hold Posted Collateral; Custodians.
Party A will be entitled to hold Posted Collateral pursuant to Paragraph 6(b).
(ii)
Use of Posted Collateral. The provisions of Paragraph 6(c)(i) will not apply; the provisions of Paragraph 6(c)(ii) will apply.
(h)
Distributions and Interest Amount.
(i)
Interest Rate. Not Applicable.
12
(ii)
Transfer of Interest Amount. Not Applicable.
(iii)
Alternative to Interest Amount. The provisions of Paragraph 6(d)(ii) will not apply.
(i)
(j)
Additional Representation(s). Not Applicable.
Other Eligible Support and Other Posted Support.
(i)
(ii)
“Value” with respect to Other Eligible Support and Other Posted Support means: Not Applicable.
“Transfer” with respect to Other Eligible Support and Other Posted Support means: Not Applicable.
(k)
Demands and Notices.
All demands, specifications and notices under this Annex will be made to the following addresses:
Party A:
Address:
Attention:
Fax:
Mazal 485 LLC
241 West 47th Street, Suite 11B
New York, NY 10036
______________________
______________________
With a copy to:
Party B:
Address:
Attention:
Fax:
Address:
Attention:
Fax:
Greenberg Traurig, LLP
200 Park Avenue
New York, NY 10166
Joseph D. Farrell, Esq.
(212) 805-9304
c/o SL Green Realty Corp.
420 Lexington Avenue
New York, NY 10170
Andrew S. Levine, Esq.
(212) 356-4135
13
With a copy to:
Address:
Attention:
Fax:
Paul, Weiss, Rifkind, Wharton & Garrison, LLP
1285 Avenue of the Americas
New York, NY 10019
Peter E. Fisch, Esq.
(212) 492-0424
(1)
Addresses for Transfers.
Party A:
To Be Advised.
Party B:
To Be Advised.
(m)
Other Provisions.
(i)
(ii)
Party A and Party B agree that, notwithstanding anything to the contrary in the recital to this Annex, Paragraph 1(b) or Paragraph 2 or the definitions in Paragraph 12,
(a) the term “Secured Party” as used in this Annex means only Party A, (b) the term “Pledgor” as used in this Annex means only Party B, (c) only Party B makes the
pledge and grant in Paragraph 2, the acknowledgment in Paragraph 8 as amended by this Paragraph 13 and the representations in Paragraph 9 as amended by this
Paragraph 13 and (d) only Party B will be required to make Transfers of Eligible Collateral hereunder. Party A and Party B further agree that, notwithstanding anything
to the contrary in the recital to this Annex or Paragraph 7, this Annex will constitute a Credit Support Document only with respect to Party B, and the Events of
Default in Paragraph 7 and Specified Conditions in Paragraph 13(d) will only apply to Party B.
The definition of Shares, as this term is used in this Paragraph 13, shall mean the Shares (as defined in the Confirmation), including, without limitation, all dividends,
distributions, instruments or other property or proceeds relating thereto. Additionally, Posted Collateral shall include (a) all rights of the Pledgor under the LLC
Agreement (as defined in the Confirmation), together with all right, title and interest to all distributions and other proceeds to which Party A is entitled as holder of the
Shares; and (b) to the extent not covered by the definition of Posted Collateral under this Annex as amended by this Paragraph 13(m)(iii), all proceeds of the
foregoing.
(iii)
Conditions Precedent. No later than the Trade Date in respect of the Transaction, Party B shall have delivered to Party A all documentation necessary to validly
Transfer the Shares in forms reasonably acceptable to Party A, which documentation shall include:
(1)
a duly executed and acknowledged Assignment Agreement (as defined in the Confirmation);
14
(2)
(3)
(4)
the Shares, in certificated form, duly issued and executed by the Issuer (as defined in the Confirmation) pursuant to the LLC Agreement, together with
undated and blank endorsements;
a copy of the register of the Issuer, duly updated to record the Transfer of the Shares to Party A and the pledge of the Shares by Party B to Party A; and
such other documents and instruments as may be reasonably necessary or desirable to further carry out the purposes of the Transaction as determined by
Party A.
(iv)
The definition of (i) “Exposure” hereunder is amended to delete the definition thereof and replace it with the following: “Exposure shall be equal to the Independent
Amount”; and (ii) the definition of “Value” is hereby amended by deleting clause (i)(B) and replacing it with the following: “Shares, the Fair Market Value of such
Shares as defined in the Confirmation.”
(v)
Paragraph 8 of this Annex is hereby amended by adding the following provisions directly below clause (a)(iv) thereof:
(v)
The Secured Party may, in its discretion, but shall not be obligated to, sell the Posted Collateral or any part thereof by private sale in such manner and under
such circumstances as the Secured Party may deem necessary or advisable. Seller may purchase the Posted Collateral in lieu of effecting any private sale of
the Posted Collateral. Without limiting the generality of the foregoing, in any such event, the Secured Party in its discretion (x) may, in accordance with
applicable securities laws, proceed to make such private sale, (y) may approach and negotiate with a single possible purchaser to effect such sale, including,
without limitation, the Issuer and (z) may restrict such sale to a purchaser who is an accredited investor under the Securities Act of 1933, as amended, and, if
required by the Issuer, a qualified purchaser under the Investment Company Act of 1940, as amended, and who will represent and agree that such purchaser
is purchasing for its own account, for investment and not with a view to the distribution or sale of such Posted Collateral or any part thereof. In addition, the
Secured Party in its reasonable discretion (subject only to applicable requirements of law), may require that any sale hereunder (including a sale at auction)
be conducted subject to restrictions:
(1)
(2)
(3)
as to the financial sophistication and ability of any Person permitted to bid or purchase at any such sale;
as to the content of legends on the Shares sold in such sale, including restrictions on future transfer thereof;
as to the representations required to be made by each Person bidding or purchasing at such sale relating to that Person’s access to financial
information about the Pledgor and such Person’s intentions as to the holding of the Posted Collateral so sold for investment for its own account
and not with a view to the distribution thereof; and
15
(4)
as to such other matters as the Secured Party may, in its discretion, deem necessary or appropriate in order that such sale (notwithstanding any
failure so to register) may be effected in compliance with relevant insolvency or bankruptcy laws and other laws affecting the enforcement of
creditors’ rights and the Securities Act of 1933, as amended and all applicable state securities laws.
(vi)
The Pledgor agrees to the maximum extent permitted by applicable law that following the occurrence and during the continuance of an Event of Default or
Termination Event with respect to the Pledgor, it will not at any time plead, claim or take the benefit of any appraisal, valuation, stay, extension, moratorium
or redemption law now or hereafter in force in order to prevent or delay the enforcement of this Agreement, or the absolute sale of the whole or any part of
the Posted Collateral or the possession thereof by any purchaser at any sale hereunder, and the Pledgor waives the benefit of all such laws to the extent it
lawfully may do so. The Pledgor agrees that it will not interfere with any right, power and remedy of the Secured Party provided for in this Agreement or in
the other Credit Support Documents to which the Pledgor is a party or now or hereafter existing at law or in equity or by statute or otherwise, or the exercise
or beginning of the exercise by the Secured Party of any one or more of such rights, powers or remedies;
(vii)
The Pledgor further agrees that a breach of any of the covenants contained herein will cause irreparable injury to the Secured Party, that the Secured Party
shall have no adequate remedy at law in respect of such breach and, as a consequence, agrees that each and every covenant contained herein shall be
specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance
of such covenants;
16
(viii)
(ix)
TO THE MAXIMUM EXTENT PERMITTED BY LAW, FOLLOWING THE DELIVERY BY PARTY A OF A NOTICE OF AN EVENT OF DEFAULT OR A
TERMINATION EVENT WITH RESPECT TO THE PLEDGOR, THE PLEDGOR HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS THE
SECURED PARTY AS THE PROXY AND ATTORNEY-IN-FACT OF THE PLEDGOR WITH RESPECT TO THE POSTED COLLATERAL, INCLUDING
THE RIGHT TO VOTE SUCH POSTED COLLATERAL, WITH FULL POWER OF SUBSTITUTION TO DO SO. IN ADDITION TO THE RIGHT TO
VOTE ANY SUCH POSTED COLLATERAL, SUBJECT TO THE LLC AGREEMENT OF THE ISSUER, THE APPOINTMENT OF THE SECURED PARTY
AS PROXY AND ATTORNEY-IN-FACT SHALL INCLUDE THE RIGHT TO EXERCISE ALL OTHER RIGHTS, POWERS, PRIVILEGES AND REMEDIES
TO WHICH A HOLDER OF SUCH POSTED COLLATERAL WOULD BE ENTITLED (INCLUDING GIVING OR WITHHOLDING WRITTEN
CONSENTS OF MEMBERS, CALLING SPECIAL MEETINGS OF MEMBERS AND VOTING AT SUCH MEETINGS), IN EACH CASE SUBJECT TO THE
LLC AGREEMENT OF THE ISSUER. SUCH PROXY SHALL BE EFFECTIVE, AUTOMATICALLY AND WITHOUT THE NECESSITY OF ANY ACTION
(INCLUDING ANY TRANSFER OF ANY SUCH POSTED COLLATERAL ON THE RECORD BOOKS OF THE ISSUER THEREOF) BY ANY PERSON
(INCLUDING THE ISSUER OF SUCH POSTED COLLATERAL OR ANY OFFICER OR AGENT THEREOF), UPON THE OCCURRENCE OF AN EVENT
OF DEFAULT OR A TERMINATION EVENT WITH RESPECT TO THE PLEDGOR; AND
THE APPOINTMENT OF THE SECURED PARTY AS PROXY AND ATTORNEY-IN-FACT IN THIS CLAUSE 8(A) IS COUPLED WITH AN INTEREST AND
SHALL BE IRREVOCABLE UNTIL THE DATE ON WHICH THIS TRANSACTION IS TERMINATED IN ACCORDANCE WITH ITS TERMS. THE
APPOINTMENT OF SECURED PARTY AS PROXY AND ATTORNEY-IN-FACT SHALL INCLUDE THE RIGHT, WITHOUT LIMITATION, TAKE ANY
ACTION AND TO EXECUTE ANY INSTRUMENT THAT THE SECURED PARTY MAY DEEM NECESSARY OR ADVISABLE TO ACCOMPLISH THE
PURPOSES OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION TO PAY OR DISCHARGE TAXES OR LIENS LEVIED OR PLACED UPON OR
THREATENED AGAINST THE POSTED COLLATERAL, THE LEGALITY OR VALIDITY THEREOF AND THE AMOUNTS NECESSARY TO DISCHARGE
THE SAME TO BE DETERMINED BY THE SECURED PARTY IN ITS SOLE DISCRETION, ANY SUCH PAYMENTS MADE BY THE SECURED PARTY TO
BECOME OBLIGATIONS OF THE PLEDGOR TO THE SECURED PARTY, DUE AND PAYABLE IMMEDIATELY WITHOUT DEMAND.
NOTWITHSTANDING ANYTHING CONTAINED HEREIN, NEITHER THE SECURED PARTY NOR ANY OF ITS RESPECTIVE AFFILIATES, OFFICERS,
DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL HAVE ANY DUTY TO EXERCISE ANY RIGHT OR POWER GRANTED
HEREUNDER OR OTHERWISE OR TO PRESERVE THE SAME AND SHALL NOT BE LIABLE FOR ANY FAILURE TO DO SO OR FOR ANY DELAY IN
DOING SO, EXCEPT IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS
FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION; PROVIDED THAT, IN NO EVENT SHALL THEY BE LIABLE FOR ANY
PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.
17
(vi)
Paragraph 9 of this Annex is hereby amended by adding the following representations to the end of clause (iv) thereof:
(v)
(vi)
(vii)
The Pledgor has not performed and will not perform any acts that might prevent the Secured Party from enforcing any of the terms of this Agreement or that
might limit the Secured Party in any such enforcement;
all Posted Collateral constituting the Shares has been duly authorized, validly issued, are fully paid and non-assessable; with respect to any Shares that are
represented by certificates delivered to the Secured Party or attributed to a securities account, such Shares are Securities as defined in Article 8 of the UCC;
none of the Posted Collateral has been issued or transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction
to which such issuance or transfer may be subject, and there are existing no options, warrants, calls or commitments or liens of any character whatsoever
relating to the Posted Collateral which are the Shares (except for any options, warrants, calls or commitments or liens created by or contemplated in this
Agreement) or which obligate the Issuer of the Shares included in the Posted Collateral to issue additional membership interests to the Pledgor;
(viii)
The representations and warranties set forth in this Paragraph 9 shall survive the execution and delivery of this Agreement, and shall be deemed repeated on
each Business Day on which Posted Collateral is removed, added or substituted pursuant to the terms hereof; and
(vii)
Paragraph 10 of this Annex is hereby amended by adding the following clause (d) at the end of clause (c) thereof: “The obligation of the Pledgor to pay expenses as
set forth in this Paragraph 10 shall survive the termination of the Agreement and the discharge of the Pledgor’s obligations thereunder.”
(viii)
Paragraph 11 of this Annex is hereby amended by adding the following clauses at the end of such Paragraph:
(g)
The Pledgor will maintain, and will cause the Issuer to maintain, complete and accurate books and records with respect to the Posted Collateral. The Pledgor
will not intervene with any rights that the Secured Party may have to inspect the books and records of the Issuer.
18
(h)
(i)
(j)
(k)
The Pledgor hereby authorizes the Secured Party to file, and if requested will deliver to the Secured Party, all financing statements (including, without
limitation, a UCC financing statement in the name of the Pledgor in the UCC jurisdiction) and other documents and other instruments and take such other
actions as may from time to time be requested by the Secured Party in order to maintain a first-priority perfected security interest in and control of, the
Posted Collateral in any relevant jurisdiction. Any financing statement filed by the Secured Party may be filed in any filing office in any UCC jurisdiction and
may (i) describe the Collateral by any description which reasonably approximates the description contained in this Annex and the Confirmation, and (ii)
contain any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement or
amendment, including whether the Pledgor is an organization, the type of organization and any organization identification number issued to the Pledgor. The
Pledgor also agrees to furnish any such information to the Secured Party promptly upon request. The Pledgor also ratifies its authorization for the Secured
Party to have filed in any UCC jurisdiction any initial financing statements or amendments thereto if filed prior to the date hereof. The Pledgor shall pay all
actual and reasonable out-of-pocket third party expenses incurred in connection with such liens and security interest within five (5) Business Days.
Except as specifically provided in the Agreement, the Pledgor will not sell, assign, transfer, pledge, dispose or otherwise encumber any of its rights in or to
the Posted Collateral, or any unpaid dividends, interest or other distributions or payments with respect to the Posted Collateral or grant a security interest or
lien in the Posted Collateral without the prior consent of the Secured Party.
The Pledgor will not create, incur, or suffer to exist any lien on the Posted Collateral except the security interest created by this Agreement and any lien
created in favor of Party A in the usual course of business. The Pledgor will not authorize the filing of any financing statement or any other document or
instrument naming the Pledgor as debtor covering all or any portion of the Posted Collateral other than in favor of the Secured Party. The Pledgor
acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement without
the prior written consent of the Secured Party. The Pledgor shall ensure that the Issuer remains duly incorporated and in good standing in the jurisdiction in
which it is organized and each jurisdiction in which it conducts its business.
The Pledgor shall (a) deliver to the Secured Party the originals of the Assignment Agreement relating to the Shares that constitute Posted Collateral, and (b)
hold in trust for the Secured Party upon receipt and immediately thereafter deliver to the Secured Party any other securities and/or instruments constituting
Posted Collateral.
19
(1)
(m)
(n)
(o)
(p)
The Pledgor shall, and will permit the Secured Party to, from time to time cause the Issuer of any uncertificated securities or other types of Eligible Collateral
that constitute Posted Collateral not represented by certificates to mark its books and records with the numbers and face amounts of all such uncertificated
securities and all rollovers and replacements therefor to reflect the lien of the Secured Party granted pursuant to this Annex. The Pledgor will take any
actions necessary to cause the Issuer of any such uncertificated securities to cause the Secured Party to have and retain control over such uncertificated
securities.
The Pledgor shall not (i) permit or suffer the Issuer to dissolve, merge, liquidate, retire any of the Shares or other instruments or securities evidencing
ownership, reduce its capital, sell or encumber all or substantially all of its assets or merge or consolidate with any other entity, or (ii) vote any of the Shares
in favor of any of the foregoing.
The Pledgor shall, until the Secured Party delivers a notice of an Event of Default or a Termination Event with respect to the Pledgor, be entitled to exercise
all voting rights and any other rights relating to any Shares constituting Posted Collateral with the prior written consent of the Secured Party. Upon delivery
by the Secured Party of a notice of an Event of Default or a Termination Event with respect to the Pledgor, the Secured Party shall, at all times prior to the
termination of this Annex but subject to all of the restrictions and limitations with respect to the Shares under the LLC Agreement of the Issuer, be entitled to
exercise (or, if applicable, to direct the Pledgor with respect to its exercise of) all voting rights or other rights relating to Posted Collateral, including, without
limitation, exchange, subscription or any other rights, privileges, or options pertaining to any Shares constituting Posted Collateral as if it were the absolute
owner thereof.
The Pledgor will not interfere with any right, power and remedy of the Secured Party provided for in this Annex or now or hereafter existing at law or in
equity or by statute or otherwise, or the exercise or beginning of the exercise by the Secured Party of any one or more of such rights, powers or remedies.
The Pledgor shall not (a) change its name as it appears in official filings in the jurisdiction of its incorporation or organization, (b) change the type of entity
that it is, (c) change its organization or registration identification number, if any, issued by its jurisdiction of incorporation or other organization, or (d)
change its jurisdiction of incorporation or organization, in each case, unless the Secured Party shall have received at least ten (10) days prior written notice
of such change and the Secured Party shall have acknowledged in writing that either (1) such change will not adversely affect the validity, perfection or
priority of the Secured Party’s security interest in the Posted Collateral, or (2) any action requested by the Secured Party in connection therewith has been
completed or taken (including any action to continue the perfection of any liens in favor of the Secured Party in any Posted Collateral).
20
(q)
(r)
(s)
This Agreement and Annex shall remain in full force and effect and continue to be effective should any petition be filed by or against the Pledgor for
liquidation or reorganization, should the Pledgor become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or
trustee be appointed for all or any significant part of the Pledgor’s assets, and shall continue to be effective or be reinstated, as the case may be, if at any
time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be
restored or returned by any obligee of the Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though such
payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations
shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.
The Pledgor acknowledges that the agreements made by it and the authorizations granted by it hereunder are irrevocable and that the authorizations granted
in this Paragraph 13 hereof are powers coupled with an interest until payment in full of all amounts due under this Agreement and Annex.
The Secured Party may execute any of its duties hereunder by or through agents or employees and shall be entitled to advice of counsel concerning all
matters pertaining to its duties hereunder. Neither the Secured Party, nor any of its respective officers, directors, employees, agents or counsel shall be liable
for any action lawfully taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful
misconduct as finally determined by a court of competent jurisdiction.
MAZAL 485 LLC
Name:
Title:
Date:
GREEN 485 HOLDINGS LLC
Name:
Title:
Date:
21
EXHIBIT “2(F)”
Transferor Pledge and Security Agreement
This PLEDGE AND SECURITY AGREEMENT (this “Agreement”), dated as of the _______ day of ___________, 2009, between MAZAL 485 LLC, a Delaware limited
liability company, its successors and/or assigns, having an office at 241 West 47th Street, Suite 11B, New York, New York 10036 (“Secured Party”) and GREEN 485 HOLDINGS LLC, a
Delaware limited liability company having an office at c/o SL Green Realty Corp., 420 Lexington Avenue, New York, New York 10170 (“Pledgor”).
PLEDGE AND SECURITY AGREEMENT
WHEREAS, Secured Party has agreed to make a loan in the principal sum of $______________ (the “Loan”) to Pledgor;
Preliminary Statement
WHEREAS, Pledgor is a member of Green 485 JV LLC, a Delaware limited liability company (the “Company”), under and pursuant to the LLC Agreement (as defined in
Exhibit A attached hereto);
WHEREAS, Secured Party was willing to make the Loan to Pledgor only if Pledgor executes and delivers this Agreement and grants and assigns to Secured Party a
security interest in the Collateral (as hereinafter defined) in the manner hereinafter set forth;
NOW, THEREFORE, in consideration of the making of the Loan and other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Pledgor hereby represents and warrants to and covenants and agrees with Secured Party as follows:
SECTION 1. Security Interest. As security for (i) the due and punctual payment of the Debt (as defined in Exhibit A attached hereto) and (ii) the due and punctual
observance and performance by Pledgor of all of the terms, covenants and provisions of the Loan Documents (as defined in Exhibit A attached hereto) (collectively the “Obligations”),
Pledgor hereby pledges, hypothecates, assigns, and delivers to Secured Party and grants to Secured Party a security interest in all of Pledgor’s right, title and interest now owned or
hereafter acquired in and to the following described property (the “Collateral”):
(a)
(b)
100% of Pledgor’s membership interest in the Company (the “Interest”) and certificates, if any, representing the Interest;
all cash, securities, dividends, distributions, proceeds, and other property at any time from and after the date hereof and from time to time thereafter received,
receivable or otherwise distributed to Pledgor in respect of or in exchange for any or all of the Interest, and any fees, commissions or other compensation payable from and after the date
hereof to Pledgor as a member of the Company (all of the foregoing, collectively, “Distributions”);
(c)
all contract rights, general intangibles, rights, claims, powers, privileges, benefits and remedies arising from or in any way related to ownership of the Interest,
certificates, if any, representing the Interest and the other Collateral described above in paragraphs 1(a) and (b), including, without limitation, all rights to vote or consent, or to receive
any notice, or to inspect or review any books, records or other information;
(d)
(e)
all additions to the Collateral described in the foregoing clauses (a) through (c), all substitutions therefor and all replacements thereof; and
all proceeds of any of the foregoing.
SECTION 2. Representations and Warranties of Pledgor. Pledgor hereby represents and warrants to Secured Party as follows:
(a)
Pledgor is duly organized and validly existing in accordance with the laws of the jurisdiction of its formation and is in good standing under the laws of the State
of New York and has all requisite power and authority under the laws of such state and under its organizational and charter documents to enter into and perform its obligations under
this Agreement.
(b)
Pledgor has taken all necessary legal and other action to authorize the execution, delivery and performance of this Agreement, and this Agreement constitutes
the valid and binding obligation and agreement of Pledgor, enforceable against Pledgor in accordance with its terms.
(c)
Pledgor has not received any written notice of default under any agreement or instrument to which it is a party or by which it or its assets may be bound which
default would have a Material Adverse Effect (as defined on Exhibit A attached hereto), and to the extent Pledgor is in default under any order, judgment, award or decree of any court,
arbitrator or other governmental authority binding upon it or by which any of its assets may be bound or affected, such default would not have a Material Adverse Effect.
(d)
Neither the execution and delivery of this Agreement nor the compliance by Pledgor with the terms and provisions hereof are events which of themselves, or
with the giving of notice or the passage of time, or both, would constitute, on the part of Pledgor, a violation of or conflict with, or result in any breach of, or default under, the terms,
conditions or provisions of, or require any consent, permit, approval, authorization, declaration or filing which has not been made or obtained under or pursuant to, any statute, law,
judgment, decree, order, rule or regulation applicable to Pledgor, the organizational and charter documents of Pledgor, or any other material agreement or instrument to which Pledgor is
a party or by which Pledgor, or its assets, are bound, or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever (other than the security interest
granted hereby) on any of the assets of Pledgor that would have a Material Adverse Effect, and no such condition or event of itself, or with the giving of notice or the passage of time,
or both, will result in the acceleration of the due date of any obligation of Pledgor or by which any of its assets are bound which would have a Material Adverse Effect.
(e)
To Pledgor’s actual knowledge, there are no judgments presently outstanding and unsatisfied against Pledgor or any of its assets that would have a Material
Adverse Effect, and neither Pledgor nor any of its assets are a party to or the subject of any actions or suits or proceedings in equity or by any governmental authorities that would
have a Material Adverse Effect, and no such litigation or proceeding has been threatened against Pledgor or against any of its assets that would have a Material Adverse Effect, and no
investigation in contemplation of such litigation or proceeding has begun or is pending that would have a Material Adverse Effect.
2
(f)
Pledgor is the sole legal and equitable owner of the Interest, free and clear of all liens, security interests, charges and encumbrances of every kind and nature
(other than as created hereunder); the Interest is duly authorized, validly issued, fully paid and non-assessable; Pledgor has legal title to the Interest and good right and lawful authority
to grant a security interest in the same in the manner hereby done or contemplated; except as otherwise provided in the LLC Agreement, the Interest is not subject to any option or
similar arrangement; and no consent or approval of any governmental body or regulatory authority, or of any securities exchange, is necessary to the validity of the rights created
hereunder; and all action has been taken by Pledgor to create in favor of Secured Party, a valid security interest in the Interest.
(g)
Pledgor is the legal and equitable owner of the Collateral free and clear of all liens, security interests, charges, and encumbrances of every kind and nature
(other than those created hereunder); the membership interest comprising the Collateral has been duly authorized, validly issued and is fully paid and non-assessable; Pledgor has legal
title to such Collateral and good and lawful authority to pledge, assign and deliver such Collateral in the manner hereby contemplated; and no consent or approval of any governmental
body or regulatory authority, or of any securities exchange, is necessary to the validity of the rights created hereunder.
(h)
Pledgor shall not take any action, or fail to take any action, in contravention of the terms, conditions and provisions of the Loan Documents.
SECTION 3. Delivery of Collateral; Voting Rights; Distributions; Substitution of Collateral.
(a)
Any and all certificates, if any, representing the Collateral (including without limitation additional or substitute certificates or instruments representing
Distributions or other Collateral that hereafter may be issued) shall be delivered to the Secured Party in suitable form for transfer by delivery, or shall be accompanied by duly executed
instruments of transfer or assignment in blank, with signatures appropriately guaranteed, and accompanied by any required transfer tax stamps, all in form satisfactory to Secured Party.
Upon the pledge of any Collateral hereunder, Pledgor shall forthwith take any action necessary to cause such Collateral to be registered in the name of Secured Party or its designee,
and shall provide evidence of same to Secured Party within five (5) business days of written request.
(b)
So long as there shall not have occurred and be continuing an Event of Default, Pledgor shall be entitled to exercise any and all voting rights and powers
relating or pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms and provisions of the Loan Documents or otherwise in contravention of any of
the terms, covenants or provisions of the Loan Documents.
3
(c)
Until the Obligations are paid and performed in full, Pledgor shall not receive or be entitled to retain any Distributions, if any, paid on the Collateral. Pledgor
hereby irrevocably directs the Company to deliver directly to the Secured Party any Distribution that is payable to Pledgor prior to the Obligations having been paid and performed in
full. All Distributions received by Secured Party shall be held by Secured Party in an account under the sole dominion and control of Secured Party. Pledgor hereby pledges to Secured
Party, as collateral for the obligations, all right, title and interest of Pledgor to any monies placed in such account, including any interest earned on such monies. The monies placed into
such account, together with interest earned thereon, if any, shall be applied by Secured Party in accordance with the provisions of the Note. To the extent Pledgor receives any
Distributions prior to the Obligations having been paid and performed in full, Pledgor shall receive same in trust for the benefit of Secured Party and shall immediately deliver same to
Secured Party or its designated agent (accompanied by proper instruments of assignment or stock powers executed by Pledgor in accordance with Secured Party’s instructions) to be
held subject to the terms, provisions and conditions of this Agreement.
(d)
Upon the occurrence and during the continuation of an Event of Default, at the option of Secured Party, (i) all rights of Pledgor to exercise the voting and
consensual rights and powers which Pledgor is entitled to exercise pursuant to the foregoing subparagraph (b) shall cease, and all such rights shall thereupon and without any further
action or notice become vested in Secured Party who shall have the sole and exclusive right and authority to exercise (or refrain from exercising) such voting and consensual rights and
powers in its sole discretion, and (ii) without limiting the rights of Secured Party under Section 3(d), Secured Party shall continue to be entitled to receive and retain any and all
Distributions until the Obligations are paid and performed in full. THIS ASSIGNMENT OF VOTING RIGHTS IS COUPLED WITH AN INTEREST AND IS IRREVOCABLE BY
DISSOLUTION OR OTHERWISE. The exercise of any of the rights and remedies of Secured Party under this paragraph shall not be or be deemed to be a disposition of Collateral under
Article 9 of the Uniform Commercial Code as in effect in any applicable jurisdiction (the “UCC”) or an acceptance or a retention or a proposal to accept or retain all or any part of the
Collateral in satisfaction of all or any of the Obligations. Any and all Distributions received by Secured Party pursuant to the provisions of this paragraph shall be retained by Secured
Party as part of the Collateral and applied in accordance with the provisions of Section 6 of this Agreement.
(e)
No substitution of Collateral shall be permitted without the prior written consent of Secured Party.
SECTION 4. Defaults. The Debt shall become immediately due and payable at the option of the Secured Party upon the occurrence of any of the following events (an
“Event of Default”):
(a)
if (i) any portion of the Debt is not paid within five (5) business days after the same is due (taking into account any right of Pledgor under the Note to defer
payment of Deferred Interest, as defined in the Note) or (ii) the Debt is not paid in full on the Maturity Date.
(b)
if any Federal tax lien is filed against Pledgor or the Collateral that would have a Material Adverse Effect, Pledgor is aware of such lien and the same is not
discharged of record within thirty (30) days of Pledgor receiving notice of such lien from the lienor, Secured Party or any third party;
4
(c)
if without the written consent of Secured Party, to be granted or withheld in Secured Party’s sole discretion, any part of the Collateral or any interest therein is
in any manner further encumbered, sold, transferred or conveyed;
(d)
if any representation or warranty of Pledgor made in the Loan Documents or in any certificate, report, financial statement or other instrument furnished in
connection with the making of the Loan or the execution of the Loan Documents shall prove to have been false or misleading in any material respect when made and would have a
Material Adverse Effect;
(e)
(f)
if Pledgor shall make a general assignment for the benefit of creditors;
if a court of competent jurisdiction enters a decree or order for relief with respect to Pledgor under Title 11 of the United States Code as now constituted or
hereafter amended or under any other applicable Federal or state bankruptcy law or other similar law, or if such court enters a decree or order appointing a receiver, liquidator, assignee,
trustee, sequestrator (or similar official) of Pledgor or of any substantial part of its property, or if such court decrees or orders the winding up or liquidation of the affairs of Pledgor;
(g)
if Pledgor files a petition or answer or consent seeking relief under Title 11 of the United States Code as now constituted or hereafter amended, or under any
other applicable Federal or state bankruptcy law or other similar law, or if Pledgor consents to the institution of proceedings thereunder or to the filing of any such petition or to the
appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of Pledgor, or of any substantial part of its property, or
if Pledgor fails generally to pay its debts as such debts become due, or if Pledgor takes any action in furtherance of any action described in this subparagraph;
(h)
except with respect to defaults arising under Section 4(a), if Pledgor shall be in default (i) under this Agreement with respect to any monetary obligation which
continues for five (5) business days after notice from Secured Party or with respect to any non-monetary default which continues for thirty (30) days after notice from Secured Party or
(ii) under the terms of any other agreement between Pledgor and Secured Party or any affiliate of Secured Party.
SECTION 5. Remedies Upon Default. Upon the occurrence and during the continuation of an Event of Default, Secured Party may, in addition to any other rights or
remedies which Secured Party may have at law or in equity (including, without limitation, any rights or remedies provided under this Agreement or the other Loan Documents),
immediately and without demand exercise with respect to the Collateral any and all rights and remedies granted to a secured party under the UCC.
5
SECTION 6. Sale of Collateral.
(a)
Sale of the Collateral may be made at any public or private sale or at any broker’s board or on any securities exchange, for cash, upon credit or for future
delivery, as Secured Party shall deem appropriate. Secured Party shall be authorized at any such sale, in its sole discretion, to restrict the prospective bidders or purchasers to persons
who will represent and agree that they are purchasing the Collateral then being sold for their own account for investment and not with a view to the distribution or resale thereof, and
upon consummation of any such sale Secured Party shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof the Collateral so sold. Each such
purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives, to the extent permitted by law, all right
of redemption, stay or appraisal which Pledgor now have or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. To the extent that
notice of sale shall be required to be given by law, Secured Party shall give Pledgor ten (10) days’ notice in the manner herein specified of Secured Party’s intention to make any such
public or private sale or sale at any broker’s board or on any such securities exchange. Such notice, in case of public sale, shall state the time and place fixed for such sale, and, in the
case of sale at a broker’s board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or portion thereof,
will first be offered for sale at such board or exchange. In case of private sale, such notice shall state the time after which the Collateral will be sold. Any such public sale shall be held at
such time or times within ordinary business hours and at such place or places as Secured Party may fix in the notice of such sale. At any such sale, the Collateral, or any portion thereof,
may be sold in one lot as an entirety or in separate parcels, as Secured Party may in its sole discretion determine. To the extent permitted by law, Secured Party may bid, which bid may
be in whole or in part, in the form of cancellation of indebtedness, for and purchase for the account of Secured Party or its nominee the whole or any part of the Collateral. Secured Party
shall not be obligated to make any sale of the Collateral if Secured Party shall determine not to do so, regardless of the fact that notice of sale of the Collateral may have been given.
Secured Party may, without notice of publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for
sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case sale of all or any part of the Collateral is made on credit or for
future delivery, the Collateral so sold may be retained by Secured Party until the sales price is paid by the purchaser or purchasers thereof, but Secured Party shall not incur any liability
in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in the case of any such failure, such Collateral may be sold again upon like notice.
As an alternative to exercising the power of sale herein conferred upon it, Secured Party may proceed by a suit or suits at law or in equity to foreclose this Agreement and to sell the
Collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction. Pledgor agrees, to the extent permitted by law, that any sale or other
disposition of any of the Collateral in accordance with the foregoing procedures shall be deemed to be commercially reasonable under the UCC and otherwise proper.
(b)
In connection with any disposition of the Collateral, if Secured Party elects to obtain the advice of any one or more independent nationally known investment
banking firms which are member firms of the New York Stock Exchange (or other nationally recognized exchange), with respect to the method or manner of sale or disposition of any of
the Collateral, the best price reasonably obtainable therefor and any other details concerning such sale or disposition, Pledgor agrees, to the extent permitted by law, that any sale or
other disposition of any of the Collateral in reliance on such advice shall be deemed to be commercially reasonable under the UCC and otherwise proper.
6
(c)
Pledgor understands that compliance with federal or state securities laws may strictly limit the course of conduct of Secured Party if Secured Party were to
attempt to dispose of all or any part of the Collateral and may also limit the extent to which or the manner in which any subsequent transferee of the Collateral may dispose of the same.
Pledgor agrees that in any sale of any of the Collateral, Secured Party is hereby authorized to comply with any such limitation or restriction in connection with such sale as it may be
advised by counsel is necessary in order to avoid any violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of
prospective bidders and purchasers or further restrict such prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account
for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental
regulatory authority or official, and Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially
reasonable manner, nor shall Secured Party be liable or accountable to Pledgor for any discount allowed by reason of the fact that such Collateral is sold in compliance with any such
limitation or restriction.
SECTION 7. Application of Monies. All monies (including, without limitation, Distributions) received or collected by Secured Party pursuant to this Agreement shall be
held as Collateral by Secured Party and applied in accordance with the provisions of the Note and after the occurrence of an Event of Default shall be applied by Secured Party first, to
the payment of all costs incurred in the collection of such monies (including reasonable attorneys’ fees and legal expenses) and second, to the payment of the Obligations in such order
and priority as Secured Party may in its sole discretion determine. The balance, if any, of such monies remaining after payment in full of such costs and the Obligations shall be remitted
to Pledgor or as otherwise directed by a court of competent jurisdiction.
SECTION 8. Secured Party Appointed Attorney-in-Fact. Pledgor hereby appoints Secured Party the attorney-in-fact of Pledgor for the purpose of carrying out the
provisions of this Agreement and taking any action and executing any instrument which Secured Party may deem necessary or advisable to accomplish the purposes hereof, which
appointment is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Secured Party shall have the right and power to receive, endorse and collect all
checks and other orders for the payment of money made payable to Pledgor representing any Distribution or any part thereof and to give full discharge for the same.
SECTION 9. No Waiver. No failure or delay on the part of Secured Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power hereunder, nor shall Secured Party’s waiver of any
right or remedy against Pledgor release or relieve Pledgor from its obligations hereunder. No modification or waiver of any provision of this Agreement or consent to any departure by
Pledgor therefrom shall be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and
for the purpose for which given. No notice to or demand on Pledgor in any case shall, of itself, entitle Pledgor to any other or further notice or demand in similar or other circumstances.
If any notice is required by law to be given to Pledgor by Secured Party, ten (10) days’ notice given in the manner herein provided for and addressed to Pledgor at the address set forth
herein shall be deemed for all purposes to be reasonable notice.
7
SECTION 10. Duration of Secured Party’s Rights and Termination. Until the Obligations shall have been paid and performed in full, all rights, powers and remedies
granted to Secured Party under this Agreement shall continue to exist and may be exercised by Secured Party at any time and from time to time irrespective of the fact that the
Obligations or any part thereof may have become barred by any statute of limitations or that the liability of Pledgor or any other party therefor may have ceased. Upon payment and
performance in full of the Obligations, Secured Party shall reassign and redeliver, without recourse or warranty and at the expense of Pledgor, or cause to be so reassigned and
redelivered, to Pledgor or to such person or persons as Pledgor shall designate, against receipt, such of the Collateral, if any, as shall not have been sold or otherwise applied by
Secured Party pursuant to the terms hereof and still be held by Secured Party hereunder, together with appropriate instruments of reassignment and release.
SECTION 11. No Further Transfer or Encumbrance of Collateral. Until the Obligations are paid and performed in full, Pledgor covenants and agrees with Secured Party
that Pledgor shall not in any manner further encumber, sell, transfer or convey, or permit to be further encumbered, sold, transferred or conveyed in any manner, the Collateral and
security interests created hereby.
SECTION 12. Limitation on Duties and Liabilities of Secured Party; Indemnification.
(a)
Beyond the exercise of reasonable care in the custody of any Collateral in its possession, Secured Party (in its capacity as Secured Party) shall have no duty as
to any Collateral or as to the preservation of rights against prior parties or any other rights pertaining thereto. Secured Party (in its capacity as Secured Party) shall have no duty as to
any Collateral, to ascertain or take action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not Secured Party has or
is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral. Secured
Party shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to
that which it accords other collateral of the same type in its possession. Secured Party (in its capacity as Secured Party) shall not be liable or responsible for any loss or damage to any
of the Collateral, or for any diminution in the value thereof, by reason of the act or omission of Secured Party (in its capacity as Secured Party) or any agent, bailee or custodian selected
by Secured Party in good faith or for taking any necessary steps to preserve rights against any parties with respect to any Collateral or for the collection of any proceeds of any
Collateral or for any invalidity, lack of value or uncollectability of any of the Collateral.
(b)
The pledge and assignment of the Collateral and grant of a security interest is for collateral purposes only, and Secured Party shall neither by virtue of this
Security Agreement, by the receipt of Distributions, by exercise of voting rights or by the exercise of any of its rights or remedies hereunder be deemed to be a member of the Company
or to have any liability for the debts, obligations or liabilities of Pledgor, the Company or any other member of the Company. Without limiting the generality of the foregoing, by
accepting the pledge, assignment and security interests described herein, Secured Party does not thereby assume any debts, obligations, responsibilities, covenants, agreements or
liabilities of Pledgor in connection with the Collateral or of Pledgor to the Company or to any third parties dealing with the Company.
8
(c)
Pledgor upon demand shall pay to Secured Party the amount of any and all reasonable expenses, including the reasonable fees and disbursements of counsel
and of any experts and agents, which Secured Party may incur in connection with (i) the sale of, collection from, or other realization upon, any of the Collateral, (ii) the exercise or
enforcement of any of the rights of Secured Party hereunder, or (iii) the failure by Pledgor to perform or observe any of the provisions hereof.
(d)
All advances, charges, costs, taxes, liens, assessments, and expenses, including reasonable attorneys’ fees, incurred or paid by Secured Party in exercising any
right, power or remedy conferred in this Agreement, or in the enforcement thereof, shall become a part of the Obligation secured hereby and shall bear interest from the date incurred or
paid by Secured Party at a rate per annum equal to the lesser of (i) the Default Rate (as defined in the Note) and (ii), the maximum rate which Secured Party may lawfully be entitled to
receive.
SECTION 13. Security Interest Absolute. All rights of Secured Party and the security interests hereunder, and all obligations secured hereby, shall be absolute and
unconditional, irrespective of any lack of validity or enforceability of any of the Loan Documents; any change in the time, manner or place of payment of, or in any other term of, all or
any of the Obligations or any other amendment or waiver of or any consent to any departure from any of the Loan Documents; any exchange, release or non-perfection of any other
collateral for the Obligations, or any release or amendment or waiver of or consent to departure from any of the Loan Documents; or any other circumstance (other than payment and
performance of the Obligations in full) that might otherwise constitute a defense available to, or a discharge of Pledgor or any other obligor under any of the Loan Documents, or any
third party grantor of collateral for the Obligations or any part thereof.
SECTION 14. Notice. Any notice, request, demand, statement, authorization, approval or consent made All notices of default, demands, requests for or grants of
consents or approvals, which any of the parties to this Agreement may desire or be required to give hereunder shall be in writing and shall be given by (a) personal delivery, (b)
facsimile transmission or (c) a nationally recognized overnight courier service, fees prepaid, addressed as follows:
If to the Pledgor, to:
With a copy to:
c/o SL Green Realty Corp.
420 Lexington Avenue
New York, New York 10170
Attn: Andrew S. Levine, Esq.
Facsimile No.: (212) 356-4135
Paul, Weiss, Rifkind, Wharton & Garrison, LLP
1285 Avenue of the Americas
New York, New York 10019
Attn: Peter E. Fisch, Esq.
Facsimile No.: (212) 492-0424
9
If to the Secured Party, to:
With a copy to:
241 West 47th Street
Suite 11B
New York, New York 10036
Attn: ______________________________
Facsimile No.: ________________________________
Greenberg Traurig, LLP
200 Park Avenue
New York, New York 10166
Attention: Joseph D. Farrell, Esq.
Facsimile No.: ________________________________
Any Member may designate another addressee (and/or change its address) for notices hereunder by a notice given pursuant to this Section 14. A notice sent in compliance with the
provisions of this Section 14 shall be deemed given on the date of receipt.
SECTION 15. Further Assurances.
(a)
Pledgor will, at Pledgor’s expense and in such manner and form as Secured Party may require, execute, deliver, file and record any financing statement, specific
assignment or other customary paper and take any other action necessary or desirable, or that Secured Party may reasonably request, in order to create, preserve, perfect or validate any
security interest, or to enable Secured Party to exercise and enforce its rights hereunder with respect to any of the Collateral, or better to assure and confirm unto Secured Party its
rights, powers and remedies hereunder. To the extent permitted by applicable law, Pledgor hereby authorizes Secured Party to execute and file, in the name of Pledgor or otherwise, UCC
financing statements (which may be carbon, photographic, photostatic or other reproductions of this Agreement or of a financing statement relating to this Agreement) which Secured
Party in its sole discretion may deem necessary or appropriate to further perfect its rights under this Agreement. Pledgor hereby consents and agrees that the issuer of the Collateral or
any registrar or transfer agent for any of the Collateral shall be entitled to accept the provisions hereof as conclusive evidence of the right of Secured Party to effect any transfer
pursuant to the provisions hereof, notwithstanding any other notice or direction to the contrary heretofore or hereafter given by Pledgor or any other party to such issuer, registrar or
transfer agent.
(b)
Pledgor agrees that Pledgor will not change (i) Pledgor’s name or (ii) the location of Pledgor’s chief executive office unless Pledgor shall have given Secured
Party not less than thirty (30) days’ prior written notice thereof.
(c)
Pledgor agrees to do such further reasonable acts and things, and to execute and deliver such additional conveyances, assignments, agreements and
instruments, as Secured Party may at any time reasonably request in connection with the administration or enforcement of this Agreement (including, without limitation, to aid Secured
Party in the sale of all or any part of the Collateral) or related to the Collateral or any part thereof or in order better to assure and confirm unto Secured Party its rights, powers and
remedies hereunder.
10
SECTION 16. Cumulative Rights and Remedies. All remedies afforded to Secured Party by reason of this Agreement are separate and cumulative remedies and it is
agreed that no one of such remedies shall be deemed to be in exclusion of any other remedies available to Secured Party and shall not in any manner limit or prejudice any other legal or
equitable remedies which Secured Party may have. The rights, powers and remedies given to Secured Party by this Agreement shall be in addition to all rights, powers and remedies
given to Secured Party by virtue of any statue or rule of law and all such rights, powers and remedies are cumulative and not alternative, and may be exercised and enforced
successively or concurrently. Any forbearance or failure or delay by Secured Party in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right,
power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof, and every right, power and remedy of Secured
Party hereunder shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Secured Party.
SECTION 17. Parties Bound. This Agreement shall be binding upon and inure to the benefit of Pledgor and Secured Party and their respective successors and assigns.
SECTION 18. Severability. If any term, covenant or provision of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, this Agreement shall
be construed without such term, covenant or provision.
SECTION 19. No Oral Change. This Agreement may only be modified, amended, changed, discharged or terminated by an agreement in writing signed by the parties
hereto.
SECTION 20. Governing Law. This agreement shall be governed by and construed in accordance with the laws of the State of New York.
SECTION 21. Headings. Section headings used herein are for convenience only and shall not affect the construction of this Agreement.
SECTION 22. Counterparts. This Agreement may be executed in any number of counterparts, and each such counterpart shall for all purposes be deemed to be an
original, and all such counterparts together shall constitute but one and the same agreement.
SECTION 23. Exculpation. The provisions of paragraph 17 of the Note are hereby incorporated by reference to the fullest extent as if the text of such paragraph were set
forth in its entirety herein. In the event of any conflict or inconsistency between the provisions of paragraph 17 of the Note, as incorporated herein by this Section 23, on the one hand,
and any other Section or provision of this Agreement, on the other, the provisions of paragraph 17 of the Note shall govern and control.
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
11
IN WITNESS WHEREOF, Secured Party and Pledgor have duly executed this Agreement as of the date first above written.
SECURED PARTY:
MAZAL 485 LLC, a Delaware limited liability company
By:
Name:
Title:
PLEDGOR:
GREEN 485 HOLDINGS LLC, a Delaware limited liability company
By:
Name:
Title:
Green 485 JV LLC, the Company referred to in this Agreement, by its signature:
(i)
(ii)
(iii)
consents in all respect to the transactions effected by this Agreement,
agrees to make all Distributions payable to Pledgor directly to Secured Party, pursuant to instructions to be provided by Secured Party, until Secured Party provides
written notice to Green 485 JV LLC to the contrary,
agrees to be bound by all of the terms, covenants and provisions of this Agreement, including, without limitation, the right of Secured Party to declare the Debt
immediately due and payable in accordance with the provisions hereof.
GREEN 485 JV LLC,
a Delaware limited liability company
By: GREEN 485 HOLDINGS LLC, its managing member
By:
Name: Andrew S. Levine
Title: Executive Vice President
1.
2.
3.
4.
Debt:
Loan Documents:
The term “Debt” as used in this Agreement shall mean, collectively, all principal, interest and other sums of a nature whatsoever
which may or shall become due and payable under the Loan Documents.
The term “Loan Documents” as used in this Agreement shall mean, collectively, the following documents and instruments
executed and delivered in connection with the Loan:
EXHIBIT A
(A)
This Agreement.
(B)
(C)
The Note.
All other documents and instruments of any nature whatsoever executed and delivered in connection with the Loan or
otherwise relating thereto.
Material Adverse Effect:
LLC Agreement:
The term “Material Adverse Effect” as used in this Agreement shall mean a material adverse effect on Pledgor’s ability to perform
its obligations under this Agreement.
The term “LLC Agreement” as used in this Agreement shall mean that certain Amended and Restated Limited Liability Company
Agreement of Green 485 JV LLC, dated as of _____________, 2009, among Secured Party, Pledgor and [SLGOP Subsidiary], as
the same may hereafter be amended, modified, restated or supplemented in accordance with its terms.
5.
Note:
The term “Note” as used in this Agreement shall mean that certain Secured Note dated as of the date hereof in the principal sum
of $______________ given by the Pledgor to the Secured Party, as the same may be hereafter amended, modified, restated or
supplemented in accordance with its terms or by the mutual consent of Secured Party and Pledgor.
EXHIBIT “2(G)”
Assignment of Limited Liability Company Interest
This ASSIGNMENT OF MEMBERSHIP INTEREST,dated as of ______________, 2009 (this “Assignment”), is entered into by and among GREEN 485 HOLDINGS LLC, a
Delaware limited liability company (“Assignor”) and MAZAL 485 LLC, a Delaware limited liability company (“Assignee”).
ASSIGNMENT OF MEMBERSHIP INTEREST
WITNESSETH:
WHEREAS, Green 485 JV LLC, (the “Company”) is a limited liability company duly formed under the laws of the State of Delaware, pursuant to the (i) Certificate of Formation of
the Company filed with the Secretary of State of the State of Delaware on December 8, 2006 and (ii) the Limited Liability Company Agreement, dated as of December 15, 2006 (the
“Operating Agreement”);
WHEREAS, Assignor is the owner and holder of a ninety-nine percent (99%) membership interest in the Company; and
WHEREAS, Assignor and Assignee have entered into that certain Sale-Purchase Agreement, dated as of August _____, 2009, pursuant to which Assignor has agreed to assign
to Assignee a portion of its membership interest in the Company constituting a forty-nine percent (49.5%) membership interest therein (the “Interest”).
NOW, THEREFORE, for value received, the receipt and sufficiency of which are hereby acknowledged, the undersigned, in consideration of the premises, covenants and
agreement contained herein, do hereby agree as follows:
1.
Assignment. Assignor hereby unconditionally and irrevocably assigns, transfers and conveys to Assignee, effective as of the date hereof, all of the right, title and
interest of Assignor in and to the Interest, including, without limitation, all right, title and interest of Assignor, if any, in and to the properties (real and personal) and capital of the
Company and all distributions and allocations made or to be made in respect of the Interest.
2.
Assumption. Assignee hereby accepts the assignment of the Interest and expressly assumes the obligations of Assignor with respect to the Interest accruing from and
after the date hereof.
3.
Books and Records. The members of the Company shall take all actions necessary to evidence the admission of Assignee as a member of the Company.
4.
Future Cooperation. Each of the parties hereto agrees to cooperate at all times from and after the date hereof with respect to all of the matters described herein, and to
execute such further assignments, releases, assumptions, amendments of the Operating Agreement, notifications and other documents as may be reasonably requested for the purpose
of giving effect to, or evidencing or giving notice of, the transaction contemplated by this Assignment.
5.
Binding Effect. This Assignment shall be binding upon, and shall inure to the benefit of the parties hereto and their respective successors and assigns.
6.
Execution in Counterparts. This Assignment may be (a) executed in counterparts, each of which shall be deemed an original, but all which shall constitute one and the
same instrument and (b) by telecopy or other electronic signature (which shall be deemed an original for all purposes).
7.
Governing Law. This Assignment shall be governed by, and construed under, the laws of the State of New York, all rights and remedies being governed by said laws,
without regard to principles of conflict of law.
[REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
2
IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be duly executed as of the day and year first-above written.
ASSIGNOR:
GREEN 485 HOLDINGS LLC,
a Delaware limited liability company
By:
Name: Andrew S. Levine
Title: Executive Vice President
ASSIGNEE:
MAZAL 485 LLC,
a Delaware limited liability company
By:
Name:
Title:
[An unofficial English translation of the original document in German]
Public Notarisation
Purchase Agreement
Züblin Immobilien AG, with registered office in Zurich, Claridenstrasse 20, 8002 Zurich, as sole owner,
represented today by
- Bruno Schefer, born February 3, 1953, from Teufen AR, in Herrliberg, and
- Jonathan van Gelder, born January 7, 1974, from Winterthur ZH, in Zurich
hereby sells to
Optibase RE 1 s.a.r.l., limited liability company, with registered office in Luxembourg, 54, avenue de la Liberté, L-1930 Luxembourg,
represented today, pursuant to written power of attorney, by
- Thomas Ziegler, born October 26 1964, citizen of Solothurn, domiciled in Grellingen
the following:
Exhibit 4.4
- hereinafter referred to as the “Selling Party” -
- hereinafter referred to as the “Acquiring Party” -
- hereinafter referred to as the “subject property” -
Land Registry District: Niederglatt
Commune/city borough: Rümlang
Land register folio 1688, property, cadastre no. 4778,
Official surveying information<:>
<4778><, Riedmatt>, Plan no. <40>
<><5090> m2, divided as follows:
<>
Premises:
- Industrial building, no. 09700424, Riedmattstrasse 9
- Subsurface building, no. 09700424
- Adjoining building