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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23585
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SM&A Corporation
(Exact name of registrant as specified in its charter)
California 33-0080929
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4695 MacArthur Court, 8th Floor, Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
(949) 975-1550
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
As of March 20, 2000, 16,257,307 shares of the Registrant's common stock,
no par value ("Common Stock"), were outstanding. The aggregate market value of
shares of Common Stock held by non-affiliates, based upon the closing sale
price of the stock on the Nasdaq National Market on March 20, 2000, was
approximately $36,339,791.(1)
Documents incorporated by reference. List hereunder the following documents
if incorporated by reference, and the part of the Form 10-K (e.g., Part I,
Part II, etc.) into which the document is incorporated: (1) any annual report
to security holders; (2) any proxy or information statement; and (3) any
prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933:
Portions of the Registrant's definitive proxy statement to be issued in
conjunction with the Registrant's Annual Meeting of Shareholders to be held on
June 6, 2000, which proxy statement will be filed within 120 days after the
end of the fiscal year covered by this Form 10-K.
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1. For purposes of this report, in addition to those shareholders which fall
within the definition of "affiliate" under Rule 405 of the Securities Act
of 1933, as amended, holders of ten percent of more of the Registrant's
Common Stock are deemed to be affiliates.
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PART I
ITEM 1--Business
Introduction
This Annual Report on Form 10-K contains certain statements which are not
historical in nature, and are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended by Public Law
104-6. Such forward-looking statements are principally contained in the
sections entitled "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" including, without limitation,
statements relating to (i) the anticipated growth in the proposal management
and contract support services markets; (ii) anticipated trends in the
financial condition and results of operations of SM&A Corporation ("SM&A" or
the "Company") (including expected changes in the Company's gross margin and
general, administrative and selling expenses); (iii) the ability of the
Company to finance its working capital requirements; (iv) the Company's
business strategy for expanding its presence in the information technology
solutions services markets; and (v) the Company's ability to distinguish
itself from its current and future competitors. These forward-looking
statements are based largely on the Company's current expectations and are
subject to a number of risks and uncertainties. Actual results could differ
materially from these forward-looking statements. In addition to the other
risks described in the "Risk Factors" discussion contained herein, important
factors to consider in evaluating such forward-looking statements include (i)
the shortage of reliable market data regarding the information technology
solutions, high-end systems engineering, and integrated proposal management
services markets; (ii) changes in external competitive market factors or in
the Company's internal budgeting process which might impact trends in the
Company's results of operations; (iii) unanticipated working capital or other
cash requirements; (iv) changes in the Company's business strategy or an
inability to execute its strategy due to unanticipated changes in the
information technology solutions, high-end systems engineering and integrated
proposal management and contract support services markets; and (v) various
other factors that may prevent the Company from competing successfully in the
marketplace. In light of these risks and uncertainties, many of which are
described in greater detail in the "Risk Factors" discussion contained herein,
there can be no assurance that the actual results will not differ materially
from such forward-looking statements contained herein. When used in this
report, the words "anticipate," "believe," "intends," "estimate," and "expect"
and similar expressions as they relate to the Company or its management are
intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's future business prospects, revenues, working
capital, liquidity, and income, are subject to certain risks and uncertainties
that could cause actual results to differ materially from those indicated in
the forward-looking statements, due to several important factors herein
identified, among others, and other risks and factors identified from time to
time in the Company's reports with the Securities and Exchange Commission.
Overview
SM&A, formerly Steven Myers & Associates, Inc. was founded in 1982. After
years of consistent revenue and profit growth, the Company completed an
initial public offering in January 1998 and embarked on a strategic
acquisition program to broaden its service and product offering capabilities.
SM&A is a comprehensive provider of competitive-edge information technology
services, software products and business solutions, high-end systems
engineering services, and integrated proposal management services. The Company
is organized into three distinct operating groups: the Information Technology
Solutions Group ("ITSG"), the Systems Solutions Group ("SSG"), and the
Proposal Management Group ("PMG"). The Company's services are provided in a
variety of computing environments and leading edge technologies such as
client/server architectures, object-oriented programming languages and tools,
groupware and the latest networking, communications and modeling technologies.
SM&A delivers its services and products to a diverse group of clients in the
telecommunications, medical information management, aerospace and defense
contractors as well as to federal and state government agencies.
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Information Technology Solutions Group ("ITSG")
The Information Technology Solutions Group provides high value information
technology solutions (services and proprietary software products) that solve
complex business problems and directly improve a client's competitive edge.
ITSG is recognized for innovative, rapid software development processes that
can dramatically reduce business cycle time while ensuring high quality
products. ITSG expertise extends across a broad spectrum of IT disciplines,
including full life cycle software engineering, telecommunications, PC
solutions and systems integration. ITSG focuses on seven areas of expertise
oriented primarily toward serving the commercial sector: (i) mission critical
solutions, (ii) enterprise security solutions, (iii) command & control
solutions, (iv) test solutions, (v) PC solutions, (vi) optimization solutions
and (vii) e-commerce enablement services and consulting. ITSG provides
services on a time and materials basis and develops, licenses and supports
complex proprietary software applications for various IT market segments, such
as network management.
ITSG's suite of proprietary software products consists of BillTamer(TM) and
NetTamer(TM), cost control and optimization tools for the telecommunications
industry; and ICCE(TM), an application which offers integrated command and
control display for data centers simultaneously operating multiple hardware,
software and display platforms.
Rapid technological change has forced companies to outsource an increasing
number of their IT functions. Corporate networks continue to grow and become
more complex. ITSG has the proven products and expertise designed to meet
these demands. In addition, ITSG has developed unique and cost saving client
solutions that it believes will drive substantial incremental growth. These
products offer innovative and mission critical solutions for managing the
complexities and costs of telecommunications and data networks.
Systems Solutions Group ("SSG")
The Systems Solutions Group provides (i) information technology, systems
engineering, and program integration services, (ii) modeling and simulation
support, (iii) advanced scientific research, and (iv) database creation,
management and technical analysis to federal and state government agencies,
major aerospace and defense contractors and commercial firms. SSG provides a
full spectrum of information technology services such as software applications
development and wargaming capabilities, significantly enhancing and expanding
a client's technical evaluation and decision making capabilities. SSG's
systems engineering services helps its clients to define the work that must be
done to meet the objectives of a program or contract. Systems engineers define
top level program objectives, perform cost studies and analyses, and then
manage the process to ensure that top level requirements are being met as the
program evolves from design through development, test and production phases.
Concurrent with systems engineering, SSG provides program integration
functions, which ensure that the program has been meticulously planned and
that the program team follows the plan.
SSG's IT and related services are largely provided on a time-and-materials
basis. Those services provided to federal and state agencies are done so
through a number of contract vehicles including, but not limited to, full and
open competitive contracts, the GSA schedules, blanket purchase agreements and
indefinite delivery and indefinite quantity agreements. Revenue growth rates
and margins in the government IT and related services sector, while not
providing the same economics as commercial activities, do provide a
predictability of revenue and profit due to the long-term structured
orientation of government IT and related services that is uncharacteristic of
the commercial market in general.
Proposal Management Group ("PMG")
The Proposal Management Group is the largest and most successful provider
of integrated proposal management services. PMG has developed and refined a
proprietary proposal management strategy and process that produces superior
results. In conjunction with this process, PMG typically assumes a leadership
role and places dedicated teams at client facilities to manage all aspects of
the competitive proposal development process. Since 1982, PMG has supported
450 proposals worth over $160 billion in value for clients with a
corresponding proposal win rate of 86.5% based on the dollar value of
contracts awarded. PMG had over $15 billion in new
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contract awards and 28 proposal wins by its clients during 1999. The
combination of its unprecedented win rate and superior reputation has
contributed to PMG's dominant 85% market share of proposal management services
actually outsourced by government contractors.
PMG leverages its success in winning business for its clients and its
involvement in the project life cycle to extend its services beyond proposal
development to SM&A's comprehensive capabilities in the areas of information
technology services, systems engineering program integration, and other
technical areas.
Acquisition/Strategy and Integration
During 1998, the Company acquired two high-end engineering and information
technology consulting firms (the "1998 Acquisitions"): Space Applications
Corporation ("SAC") and Decision-Science Applications, Inc. ("DSA"). SAC,
founded in 1969, provides systems engineering, scientific research, program
management support and technical support to military and civilian space
programs, the intelligence community and the armed services. DSA, founded in
1977, provides systems engineering, information systems development,
scientific research and program management support to the U.S. Government,
principally the Department of Defense. The 1998 Acquisitions have increased
the scope and depth of the Company's high-end profile services, adding more
than 400 systems engineering, information technology and program integration
experts and expanding SM&A's domestic presence with offices in strategic
locations near significant market centers. In November 1998, DSA changed its
name to SM&A Corporation (East), and in December 1998, SAC merged into SM&A
Corporation (East). The Company was subsequently reorganized into its three
existing operating groups: SSG, ITSG, and PMG.
In March 1999, the Company acquired Systems Integration Software, Inc.
("SIS"). SIS develops proprietary software products and provides services
focused on improving system performance and network reliability. This
transaction was accounted for as a purchase and, accordingly, the consolidated
financial statements include the financial results of SIS from the effective
date of the acquisition. The substantial portion of operations have been
combined with ITSG.
In September 1999, the Company acquired Kapos Associates Inc. ("KAI"). KAI
provides operations research, wargaming and systems analysis to the U.S.
Government. This transaction was accounted for as a purchase and, accordingly,
the consolidated financial statements include the financial results of KAI
from the effective date of the acquisition. Its operations have been combined
with SSG. The acquisitions of SIS and KAI are collectively referred to herein
as "the 1999 Acquisitions."
In February 2000, the Company acquired System Simulation Solutions, Inc.
("S3I"). S3I specializes in the design, development and application of
powerful simulation software products for the United States Air Force
assisting them on evaluating large-scale campaign level operations. The
substantial portion of operations will be combined with SSG. This transaction
was accounted for as a purchase and, accordingly, the consolidated financial
statements will include the financial results of S3I from the effective date
of the acquisition.
Markets
The Company is actively competing in three addressable markets: (i) the
commercial IT services and proprietary software products market, (ii) the
government IT services and systems engineering market and, (iii) the proposal
management services market.
Commercial IT Services and Proprietary Software Products
The commercial information technology services and software products market
is extremely competitive and characterized by continuous changes in customer
requirements and improvements in technologies.
The Company estimates the annual market for commercial IT services and
software products to be in excess of $300 billion.
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The Company believes that growth of the market for commercial IT services
and software products is dependent on a number of factors, including but not
limited to:
. Corporate Outsourcing. There has been a trend among large corporations
to increase efficiencies in the procurement and performance of
government and commercial projects of all sizes. As a result, major
companies are "outsourcing" more services instead of maintaining and
expanding internal groups. Through outsourcing, companies receive the
trained expertise needed without incurring the overhead expenses
associated with in-house resources.
. Increase in Commercial Projects. U.S. industry is making major
investments to explore new markets in commercial data and
telecommunications systems. Such investment is expected to result in an
increase in demand for the Company's services.
. Development of a New Economy. A strong demand for highly skilled IT
professionals and software products has developed in response to the
growth of the Internet economy. Talented professionals with skills in
leading edge technologies are in particularly high demand. To meet their
need for leading edge IT professionals, organizations are turning to
providers of technology talent such as the Company to support their
existing IT resources. To succeed in this market, providers of IT
professionals must deliver leading edge IT talent at a speed
commensurate with the demands of a rapidly changing technology
environment.
Government IT Services and Systems Engineering
Defense spending has decreased sharply since the end of the Reagan
administration. Defense spending has stabilized at around $270 billion
annually. This trend has caused a decline in the number of government workers,
which has resulted in a significant amount of work being performed by outside
service providers such as the Company.
The Company estimates the annual market for government IT services and
systems engineering to be in excess of $100 billion.
The Company believes that growth of the market for government IT services
and systems engineering is dependent on a number of factors, including but not
limited to:
. U.S. Government Outsourcing. In response to a reduced federal budget and
demands for efficiencies in government operation, many projects that
were once performed in-house by the U.S. Government are now being
outsourced to private industry.
. State and Local Governments. State and local government IT budgets are
expected to overtake federal spending during 2000.
Proposal Management Services
Companies competing for large government and commercial contracts often
seek the assistance of an outside firm of experts that can manage the proposal
process and maximize the company's prospects of winning the business.
The Company estimates the annual market including the in-house capabilities
of the Company's customers for proposal management is approximately $300
million.
The Company believes that growth of the market for proposal management is
dependent on a number of factors, including but not limited to:
. Increase in the Defense Procurement Spending Budget. The defense
procurement/spending budget is growing as a result of the need for
modernization. A good deal of that spending will be driven by
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increased investment in IT, command and control system communications,
computers and intelligence systems. Additional funding for new weapons
should originate from additional cost savings in existing programs. The
decrease in operational overhead of the Department of Defense will
create additional opportunity to provide proposal management in
connection with such projects.
. Increasing Importance of Proposal Management Services. The Company
believes that various factors in the aerospace and defense industries
are contributing to an increased need to win projects. Recent
consolidation activity in these industries has resulted in fewer, larger
firms as well as an increased disparity between the resources of such
larger firms and the remaining "smaller" firms. The large consolidated
firms are more motivated to win programs to support their operations and
the smaller firms have an even greater need to access the resources
necessary to compete with larger firms for programs. The U.S. Government
has also conducted a number of "winner-take-all" competitions in which
the government chose a single winner from two large aerospace suppliers
that had traditionally jointly supplied a product. The winner may
receive a multi-billion dollar contract while the loser may be allocated
a program sub-contract or be required to shut down an existing
production facility and re-assign or lay off several thousand workers.
Consequently, proposal management services and a winning outcome are
becoming increasingly crucial to all competitors.
. Internal Proposal Capabilities of Existing Clients is Decreasing. The
Company believes that the internal proposal capabilities of existing
clients may be decreasing due to fiscal pressures currently being
exerted on the organizations. This trend is expected to create
additional opportunities for regional management services.
Services
Information Technology. The Company's information technology business is
focused on consulting, complex proprietary software applications development
licensing and support, systems integration and other IT outsourcing services.
Specific areas of business focus include telecommunications, enterprise
security solutions, medical informatics, software engineering and testing,
network management solutions, systems integration, and PC product solutions.
Systems Engineering. The Company's systems engineering work assists its
clients to define the work that must be done to meet a given program's
objectives. The first step is to formally define the top level program
objectives including mission requirements, annual and total budget, and the
schedule for each major program milestone and then to communicate them to each
engineering, information technology and management department. The systems
engineers perform trade studies and analyses to objectively evaluate the cost,
schedule, risk and likely performance of alternative solutions. The systems
engineers then manage the top level program requirements data base. As the
program evolves from design through development, test and production phases,
they constantly evaluate the work of the program's design and test groups to
be certain that these top level requirements are being met.
Program Integration. Concurrent with systems engineering are the Company's
program integration functions. This work is done to ensure that a given
program has been meticulously planned and that the program team follows the
plan. The SM&A program integration effort is critical to the financial success
of the client. The work has an initial phase in which the program to be
accomplished is defined in detail. This includes the detailed description of
all tasks to be done by all of the participants over the lifetime of the
program, the scheduling of these tasks, the sizing of each task and the
definition of the inter-relationship among the tasks. This information is
maintained by the program integration team in an electronic and sometimes web-
enabled format easily accessible to the management team. After the definition
work is completed, the program integration staff focuses on the execution of
the program, in which the status of each task is constantly evaluated (and
reported to management, including the government project office), the likely
attainment of future milestones is predicted, and the program risks are
constantly re-evaluated to allow proactive management decisions to mitigate
risk.
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Proposal Management. Proposal management involves assisting clients with the
procurement of government and commercial programs. The process whereby SM&A
manages a proposal can be divided into three phases: organization and
strategy, proposal preparation, and post submittal.
Organization and Strategy. Once hired to manage a proposal, SM&A
assembles a team of proposal specialists at the client's site typically
deploying a proposal manager, volume leaders for each of the major
proposal volumes, specialists well versed in the new management
processes required by the government, and production specialists expert
in the new forms of electronic proposals often required by a government
acquisition agency. Each SM&A team manages a client team, typically 50
to 200 engineers, IT specialists and managers, providing full time,
hands-on execution of the SM&A process from strategy formulation,
through all phases of proposal preparation and review, to the post-
submittal responses to the government's questions. The proposal process
typically requires three to twelve months of intensive activity at the
client's site. The SM&A team assists the client in the creation of a
win strategy that leads to selection of sub-contractors, an investment
plan, a technical baseline, and a program implementation plan.
Proposal Preparation. The SM&A team manages a process that starts with
analysis of the government's request for proposal and results in the
creation of a series of proposal documents, each following a
proprietary SM&A template. These templates guide the team in developing
the key "facts" that will win, which typically consist of the most
cost-effective technical solution to meet the government's needs and a
low-risk program plan that will deliver the product on time and within
budget. Following SM&A's page-by-page quality review, the proposal is
submitted and, if required, an oral presentation is made. SM&A creates
the materials (technical charts, videos, models) for the oral
presentations, which are becoming more common. The IT contest of
proposals is becoming an increasingly larger component of the delivered
work product.
Post Submittal. After the proposal is submitted, the proposal team's
interaction with the U.S. Government is a critical part of the SM&A
winning process. Many teams submit their proposals and then key
personnel are reassigned on other projects. Conversely, in an SM&A-
managed proposal, the core competence is maintained to answer formal
questions from the government, and prepare the Best and Final Offer.
Another area of SM&A action during the government's proposal evaluation
period is working with the client's team in preparation for winning the
award. Many proposals include a very aggressive start-up phase that
requires the delivery of significant products within the first 30 to 60
days after the contract award. SM&A provides management support,
program planners and schedulers, systems engineers and IT specialists
to assist the client's team to meet early post-award commitments.
Clients
The Company provides its information technology services, high-end systems
engineering, and integrated proposal management services to numerous Fortune
100 clients and the U.S. Government. The Company provides contract support
services to various branches of the U.S. Government including the U.S. Air
Force, U.S. Navy, U.S. Army, NASA and government intelligence agencies
(collectively, "the U.S. Government").
Raytheon Company and Lockheed Martin Corporation accounted for
approximately 20.5% and 15.9%, respectively, of the Company's revenues for the
year ended December 31, 1999 and 15.8% and 16.6%, respectively, of the
Company's revenues in 1998. In addition, for the year ended December 31, 1999,
the U.S. Government accounted for 27.7% (24.8% in 1998) of the Company's
revenues. On a pro forma basis giving effect to the 1999 Acquisitions and 1998
Acquisitions, various branches and agencies of the U.S. Government together
would have accounted for an aggregate 39.8% of the Company's revenues for the
year ended December 31, 1999 and 37% in 1998. These revenues are a result of
various engagements by several business units of these companies and
governmental entities. Although such business units are affiliated with the
parent entities, the Company's experience has indicated that the particular
engagements are subject to the discretion of each individual business and
governmental unit.
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Backlog
The Company's backlog represents an estimate of the remaining future
revenues from existing signed contracts and letters of intent concerning
contracts that have been awarded but in some cases not yet signed. The backlog
estimates include revenues expected under the current terms of executed
contracts and revenues from contracts in which the scope and duration of the
services required are not definite but estimable.
At December 31, 1999 the Company's backlog was approximately $114 million.
The Company's engagements are terminable at will and no assurance can be given
that the Company will receive any of the fees associated with the backlog
described above.
Sales and Marketing
The Company markets its services directly to senior executives of major
corporations. The Company employs a variety of business development and
marketing techniques to communicate directly with current and prospective
clients, including making on-site presentations, trade advertising, attending
industry seminars featuring presentations by SM&A personnel, attending trade
shows, demonstrating its software products and authoring articles and other
publications about the industry and the Company's methodologies, processes and
technologies.
A significant portion of new business arises from prior client engagements.
Clients frequently expand the scope of engagements during delivery to add
complementary activities. Also, the Company's on-site presence affords it the
opportunity to become aware of, and to help define, additional project
opportunities as they are identified by the client. The strong client
relationships arising out of many engagements facilitates the Company's
ability to market additional capabilities to its clients in the future. In
addition, the SM&A senior management team is actively involved in meeting with
companies that have not yet engaged SM&A and newly appointed senior managers
in current SM&A clients who might not be thoroughly knowledgeable of SM&A's
previous assistance to the client.
Government Contracts
In 1999, 27.7% (24.8% in 1998) of the Company's revenues resulted from
contracts directly with the U.S. Government. Contracts with the U.S.
Government are subject to termination, reduction or modification as a result
of changes in the U.S. Government's requirements or budgetary restrictions, at
the convenience of the U.S. Government, or when we participate as a
subcontractor, if the primary contractor is in default. Upon termination of a
contract at the convenience of the U.S. Government, the contractor is
generally entitled to reimbursement for allowable costs incurred up to the
date of termination and a proportionate amount of the stipulated profits or
fees attributable to the work actually performed.
Competition
In each of its markets, SM&A has able competitors, which differ depending
upon the characteristics of the customer including its size, geographic
location, and computing environment. Many established competitors have greater
marketing, technical, and financial resources than the Company, and there can
be no assurance that SM&A will be able to continue to compete successfully
with existing or new competitors.
IT Services and Systems Engineering
The IT services and systems engineering markets are highly competitive and
include a large number of highly capable firms in the United States. The
market is also highly fragmented. The Company, however, has found increasing
opportunities to work with clients who have previously retained SM&A. The
Company believes that the principal competitive factors in the professional
services market include industry and program knowledge, rapidly deployable
skilled personnel, responsiveness, reputation and price.
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Proprietary Software Products
In the proprietary software products business, the Company competes with
other providers of application software and companies offering to develop
custom software. Competition also varies by vertical market. Within the
telecommunications market, the Company's principal competitors are Information
View and TEOCO. The integrated command and control and network operating
system markets are highly fragmented and competition varies significantly
within these markets depending upon the customers' computing platforms.
Competitive factors in all the proprietary software products markets served by
the Company include price and performance, technology, functionality,
portability, software support, and the level of market acceptance of the
competitors' products.
Proposal Management
The market for proposal management services in the procurement of
government and commercial contracts for aerospace and defense is a niche
market with a number of competitors. The Company is the largest provider of
such services and principally competes with numerous smaller proposal
management companies in this highly specialized industry. The Company also
competes with some of its client's internal proposal development resources. A
number of SM&A's clients maintain internal business acquisition teams that are
designed to handle the procurement of government contracts, although the
number of such in-house departments has been decreasing in recent years.
The Company believes that the principal competitive factors in the market
for proposal management include reputation, the level of experience and skill
of staff professionals, industry expertise, quality of service,
responsiveness, and procurement success rate. The need to provide efficient
and cost-effective service is of even greater importance where the cost of
proposal development is likely to be a larger percentage of the contract
amount than with a large program.
Employees
As of December 31, 1999, the Company had approximately 778 employees.
Approximately 93% are information technology and proposal management
professionals and 7% are administrative personnel. The Company believes that
its success depends significantly upon attracting, retaining and motivating
talented, innovative and experienced professionals. For this reason, SM&A is
comprised of highly experienced information technology specialists, program
managers, engineers and skilled technicians, tested in some of the largest and
most complex military, commercial and government programs of the past 30
years. The typical SM&A employee has more than 19 years of applicable
experience and a majority of our employees possess advanced degrees in
science, engineering or information technology fields.
The Company has instituted a training and recruitment program to help
acquire and ensure retention of high quality personnel and to enable it to
respond to expanding customer needs. The performance of each SM&A employee is
being constantly evaluated both by the SM&A team with whom the employee is
working and by the client who has engaged SM&A. SM&A executives are always on
call to discuss any and all personnel issues. SM&A has maintained the highest
standards of performance to ensure client satisfaction. The Company also
attracts and motivates its professional and administrative staff by offering
competitive packages of base and incentive compensation and benefits.
The Company's employees are not represented by any labor union and the
Company has never experienced a work stoppage. The Company believes that its
relations with its employees are good.
In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered carefully in evaluating us and our
business and prospects.
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RISK FACTORS
There are risks associated with our acquisition strategy
An element of our growth strategy is to expand our operations through the
acquisition of complementary businesses. We cannot be sure that we will be
able to identify suitable acquisition candidates. If identified, we are not
sure we will be able to acquire such companies on suitable terms. Also, other
companies which may have greater resources than us may compete for acquisition
candidates. Such competition could result in an increase in the price of
acquisition targets and a decrease in the number of attractive companies
available for acquisition by us.
There can be no assurance that the anticipated economic, operational and
other benefits of our 1998 and 1999 Acquisitions, or any future acquisitions
will be realized. We cannot be sure that we will be able to successfully
integrate acquired businesses in a timely manner without substantial costs,
delays or other operational or financial problems. The difficulties of such
integration may initially be increased by our need to integrate personnel with
different business backgrounds and corporate cultures. In addition,
acquisitions may involve our spending significant funds. Our failure to
effectively integrate the acquired companies may adversely affect our ability
to bid successfully on certain engagements and otherwise grow our business.
Client dissatisfaction or performance problems at a single acquired company
could have an adverse effect on our reputation as a whole, and this could
result in increased difficulty in marketing services or acquiring companies in
the future. In addition, we cannot be certain that the acquired companies will
operate profitably or will not otherwise hurt operating results. There are
other risks with acquisitions. These include diversion of management
attention, potential loss of key clients or personnel, risks associated with
unanticipated problems, liabilities or contingencies and risks of entering
markets in which we have limited or no direct expertise The occurrence of some
or all of the events described in these risks could have a material adverse
effect on our business, operating results and financial condition.
We may fail to manage our future growth effectively
We are currently experiencing significant growth and we intend to pursue
further growth as part of our business strategy. Our ability to manage the
growth of our operations will require us to continue to improve our
operational, financial and other internal systems and to attract, develop,
motivate and retain our employees. Our rapid growth has presented and will
continue to present numerous operational challenges, such as the assimilation
of financial reporting systems and increased pressure on our senior management
and will increase the demands on our systems and internal controls. In
addition, our success depends in large part upon our ability to attract,
develop, motivate and retain highly-skilled professionals and administrative
employees. Our growth strategy will require an increase in our personnel,
particularly skilled information technology professionals, systems engineers
and program managers. Qualified professionals are currently in great demand
and there is significant competition for employees with the requisite skills
from other major and boutique consulting firms, research firms, government
contractors, proposal management or business acquisition departments of major
corporations and other professional services firms. There can be no assurance
that we will be able to attract and retain the qualified personnel necessary
to pursue our growth strategy. There can be no assurance that we will be able
to maintain or increase our current rate of growth, effectively manage our
expanding operations or achieve planned growth on a timely or profitable
basis. To the extent that we are unable to manage our growth effectively and
efficiently, our business, financial condition and results of operations could
be materially and adversely affected.
Our business depends substantially on the defense industry
Approximately 54.5% of our revenues were derived from Proposal Management
Group services related to government procurement contracts for the fiscal year
ended December 31, 1999. In addition, a significant portion of our revenues
are derived from contracts or subcontracts with the U.S. Government. For the
foreseeable future, we expect that the percentage of revenues attributable to
such contracts will continue to be substantial. U.S. Government expenditures
for defense products may decline in the future with such reductions having an
effect on our clients, or, indirectly, on us. A number of trends may
contribute to such a decline, including:
9
<PAGE>
. large weapon systems being replaced with smaller, more precise high
technology systems
. multiple procurements for similar weapons being consolidated into joint
service procurements, such as the Joint Strike Fighter program
. threat scenarios evolving away from global conflicts to regional
conflicts
. the continuing draw down of U.S. military forces in response to the end
of the Cold War
In the event expenditures for products of the type manufactured by our
clients are reduced and not offset by other new programs or products, there
will be a reduction in the volume of contracts or subcontracts to be bid upon
by our clients and, as a result, a reduction in the volume of proposals
managed by us. Unless offset, such reductions could materially and adversely
affect our business, operating results and financial condition.
There are risks associated with government contracting
We are subject to risks associated with compliance with governmental
regulations, both directly and through government-contractor clients. The
fines and penalties which could result from noncompliance with appropriate
standards and regulations, or a client's suspension or disbarment from the
bidding process for future government contracts could have a material adverse
effect on our business, operating results and financial condition. We rely for
the continuance and expansion of our business on a facility security clearance
from the U.S. Government, and individual security clearances, at various
levels, for nearly all members of staff. There can be no assurance that
necessary security clearances will continue to be made available by the U.S.
Government.
In addition, a significant portion of our revenues are derived from
contracts or subcontracts with the U.S. Government. Our services are performed
pursuant to the following types of contracts:
. cost reimbursable
. time-and-materials
. fixed-price contracts and subcontracts
Under fixed-price contracts and time-and-materials contracts, we bear any risk
of increased or unexpected costs that may reduce our profits or cause us to
sustain a loss.
Our U.S. Government contracts and subcontracts are subject to termination,
reduction or modification as a result of changes in the U.S. Government's
requirements or budgetary restrictions, or at the convenience of the U.S.
Government. When we participate as a subcontractor, we are also subject to the
risk that the primary contractor may fail or become unable to perform its
duties and responsibilities as a prime contractor. If a contract were to be
terminated for convenience, we would be reimbursed for allowable costs
incurred up to the date of termination and would be paid a proportionate
amount of the stipulated profits or fees attributable to the work actually
performed.
Contracts with the U.S. Government are generally complex in nature, and
require us to comply with numerous U.S. Government regulations regarding
discrimination in the hiring of personnel, fringe benefits for employees,
safety, safeguarding classified information, responsibility for U.S.
Government property, fire prevention, equipment maintenance, record keeping
and accounting, management qualifications, drug free work place and numerous
other matters.
Under certain circumstances the U.S. Government can suspend or bar
individuals or firms from obtaining future contracts with the U.S. Government
for specified periods of time. Any such suspension or disbarment of us or of
our major clients could have a material adverse effect upon us. Our books and
records are subject to annual audit by the Defense Contract Audit Agency,
which can result in adjustments to contract costs and fees. If any costs are
improperly allocated to a contract, such costs are not reimbursable and, if
already reimbursed, will require us to refund such amounts to the government.
If improper or illegal activities are discovered in the
10
<PAGE>
course of any audits or investigations, the contractor may also be subject to
various civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeitures of profits, suspension of payments,
fines and suspension or disqualification from doing business with the
government. If we become subject to penalties or sanctions, such penalties or
sanctions could have a material adverse effect on our business, financial
condition and results of operations.
We rely on a relatively limited number of clients
We derive a significant portion of revenues from a relatively limited
number of clients. For example, our revenues from the ten most significant
clients accounted for approximately 80.0%, 76.0%, 90.3%, 98.0% and 92.9% of
our total revenues for the years ended December 31, 1999, 1998, 1997, 1996 and
1995, respectively. Three clients, the U.S. Government, Raytheon Company, and
Lockheed Martin Corporation accounted for approximately 64.1%, 57.2% and 33.3%
of our total revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. Raytheon Company is our single largest commercial client,
accounting for approximately 20.5%, 15.8% and 10.9% of our total revenues for
the years ended December 31, 1999, 1998 and 1997, respectively.
Clients typically retain our services as needed on an engagement basis
rather than pursuant to long-term contracts, and a client can usually
terminate our engagement at any time without a significant penalty. Moreover,
there can be no assurance that our existing clients will continue to engage us
for additional assignments or do so at the same revenue levels. The loss of
any significant client could materially and adversely affect our business,
financial condition and results of operations. In addition, the level of our
services required by an individual client may diminish over the life of our
relationship with us, and there can be no assurance that we will be successful
in establishing relationships with new clients as this occurs. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business--Clients."
The markets in which we compete are highly competitive
The market for proposal management services in the procurement of
government and commercial contracts for aerospace and defense is a niche
market with a number of competitors. We are the largest provider of such
services and principally compete with numerous smaller proposal management
companies in this highly specialized industry. We also compete with some of
our clients' internal proposal development resources.
We recently entered and seek to achieve significant growth in the IT
services systems engineering and proprietary software products markets;
however, there can be no assurance that we will be successful in such efforts.
The markets for services in these sectors are highly competitive, highly
fragmented and subject to rapid change. Such competition is likely to increase
in the future. Many of our competitors have greater personnel, financial,
technical and marketing resources than us. Such competitors include many
larger management consulting firms such as McKinsey & Company, Booz Allen &
Hamilton, and Science Applications International Corp., consulting arms of
major accounting firms, IT service and solutions firms such as American
Management Systems, Answer Think Consulting Group, Diamond Technology
Partners, Inc., and CACI International. We also compete with our clients' in-
house resources. This source of competition may increase as consolidation of
the aerospace and defense industry creates larger organizations. In addition,
there can be no assurance that we will be successful in such efforts. In
addition, significant further expense for sales and marketing may require us
to promote a major expansion of our services in such area. If we are
unsuccessful in our efforts to penetrate further the market for such services,
or our current 86.5% win rate in the proposal management business drops
significantly, our growth prospects could be materially and adversely
affected.
Because we believe our proprietary rights are material to our success,
misappropriation of such rights or claims of infringement or legal actions
related to intellectual property could adversely impact our financial
condition
We rely upon a combination of nondisclosure and other contractual
arrangements and trade secret, patent, copyright and trademark laws to protect
our proprietary rights. There can be no assurance that the steps taken by
11
<PAGE>
us to protect our proprietary rights will be adequate to deter
misappropriation of proprietary information or that we will be able to detect
unauthorized use and take appropriate steps to enforce our intellectual
property rights.
Although we believe that our services do not infringe on the intellectual
property rights of others and that we have all rights necessary to utilize the
intellectual property employed in our business, we are subject to the risk of
claims alleging infringement of third-party intellectual property rights. Any
such claims could require us to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to
the intellectual property which is the subject of asserted infringement.
We rely heavily upon our key employees
Our success is highly dependent upon the efforts, abilities, business
generation capabilities and project execution of our executive officers, in
particular those of Steven S. Myers, our Chief Executive Officer and Chairman
of the Board, and Michael A. Piraino, our President and Chief Operating
Officer. The loss of the services of either of these individuals for any
reason could materially and adversely affect our business, operating results
and financial condition, including our ability to secure and complete
engagements. We currently maintain key-man life insurance policies in the
amount of $2.0 million each, for Mr. Myers and Mr. Piraino.
Our quarterly results may fluctuate significantly
We may experience significant fluctuations in future quarterly operating
results due to a number of factors, including the size, timing and duration of
client engagements and the timing of software products licensing revenues. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our stock price is subject to significant volatility
Our common stock was first publicly traded on January 29, 1998 after our
initial public offering at $12.00 per share. Between January 29, 1998 and
March 30, 2000, the closing sale price has ranged from a low of $4.88 per
share to a high of $31.13 per share. The market price of our common stock
could continue to fluctuate substantially due to a variety of factors,
including:
. quarterly fluctuations in results of operations
. adverse circumstances affecting the introduction or market acceptance of
new services offered by us
. announcements of new services by our competitors
. our loss of key employees
. changes in the regulatory environment or market conditions affecting the
defense and aerospace industry
. changes in earnings estimates ratings by analysts
. lack of market liquidity resulting from a relatively small amount of
public stock float
. changes in generally accepted accounting principles
. sales of common stock by existing holders
. the announcement and market acceptance of proposed acquisitions
Year 2000 issues could affect our business
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failure or
miscalculations. Thus far, we have had no significant problems related to year
2000 issues associated with the computer systems,
12
<PAGE>
software, or other property and equipment currently in use. However, we cannot
guarantee that the year 2000 problem will not adversely affect our business,
operating results, or financial condition at some point in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
We cannot be sure that we will be completely successful in our efforts to
address the year 2000 issue or that problems arising from the year 2000 issue
will not cause a material adverse effect on our operating results or financial
condition. We are limited in our efforts to address the year 2000 issue as it
relates to third parties and rely solely on the assurances of these third
parties as to their year 2000 preparedness.
Our principal shareholder has significant control over SM&A
Steven S. Myers, our Chief Executive Officer and Chairman of the Board,
beneficially owns approximately 44.4% of our outstanding common stock and will
have the ability to control or significantly influence the election of
directors and the results of other matters submitted to a vote of
shareholders. Such concentration of ownership may have the effect of delaying
or preventing a change in control of SM&A and may adversely affect the voting
or other rights of other holders of common stock. Our board of directors is
currently comprised entirely of individuals supported by Mr. Myers.
ITEM 2--Properties
Facilities
The Company occupies its principal executive and Proposal Management Group
offices adjacent to the Orange County (John Wayne) Airport in Newport Beach,
California. The Company has approximately 19,500 square feet of office space
in this location.
As of December 31, 1999, the Company's other primary offices included an
approximately 96,000 square foot facility in Vienna, Virginia and an
approximately 48,200 square foot facility in Colorado Springs, Colorado. The
Company maintains four additional offices, each consisting of 12,000 square
feet or less, throughout the Unites States, in Albuquerque, New Mexico; Largo,
Maryland; Sierra Vista, Arizona, and Rome, New York. The Company is actively
attempting to sublease its excess facility space.
The Company leases all of its facilities, several of which maintain a top
secret clearance rating.
ITEM 3--Legal Proceedings
Legal Proceedings
The Company is involved in routine litigation incidental to the conduct of
its business. There are currently no material pending litigation proceedings
to which the Company is a party or to which any of its property is subject.
ITEM 4--Submission of Matters to a Vote of Security Holders
Not applicable.
13
<PAGE>
PART II
ITEM 5--Market for the Registrant's Common Stock and Related Stockholder
Matters
Price Range Of Common Stock
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "WINS" since January 29, 1998. The following table sets forth
for the quarters indicated the high and low closing sale prices as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
High Low High Low
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
First Quarter............................ $18 3/4 $9 $17 3/4 $10 11/16
Second Quarter........................... 10 3/4 6 1/16 21 17 1/4
Third Quarter............................ 8 7/8 7 3/8 31 1/8 17 1/4
Fourth Quarter........................... 7 15/16 4 7/8 19 8 3/4
</TABLE>
At March 20, 2000, there were approximately 133 registered holders of the
Company's outstanding shares of Common Stock and on March 20, 2000 the closing
sale price of the Common Stock on the Nasdaq National Market was $5.06 per
share.
Dividends
On January 27, 1998, immediately prior to consummating its initial public
offering, the Company declared an S corporation dividend, in the amount of
$711,000, to its then-current shareholders, representing all undistributed
earnings of the Company from January 1, 1998 through January 28, 1998 (the "S
Corporation Dividend"). Purchasers of Common Stock in the Company's initial
public offering did not receive any portion of the S Corporation Dividend. The
Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among
other things, future earnings, capital requirements, the general financial
condition of the Company and restrictions that may be contained in the
Company's financing agreements.
Recent Sales of Unregistered Securities
On May 29, 1998, the Company acquired SAC. In connection with such
acquisition and in exchange for all of the issued and outstanding SAC common
stock and options, the Company issued an aggregate of 819,743 shares of its
common stock and 175,906 options to purchase its common stock to the
shareholders and option holders of SAC, respectively, consisting mainly of SAC
employees, executives and directors. The exchange involved 35 or fewer persons
not established to the reasonable satisfaction of the Company as "accredited
investors" under Rule 501(a) of the Securities Act of 1933, as amended (the
"Act"), and was consummated in reliance upon Section 4(2) of the Act, and the
rules and regulations thereunder. Pursuant to Rule 506(b), all investors were
either accredited investors, reasonably believed by the Company to have such
knowledge and experience in financial and business matters that such investor
was capable of evaluating the merits and risks of the investment, or retained
a purchaser representative not affiliated with the Company in connection with
the transaction.
On August 20, 1998, the Company acquired DSA. In connection with such
acquisition and in exchange for all of the issued and outstanding DSA common
stock, the Company issued an aggregate of 714,839 shares of its common stock
and $14,035,419 cash to the shareholders of DSA, consisting mainly of DSA
employees, executives and directors. The exchange involved 35 or fewer persons
not established to the reasonable satisfaction of the Company as "accredited
investors" under Rule 501(a) of the Act and was consummated in reliance upon
Section 4(2) of the Act, and the rules and regulations thereunder. Pursuant to
Rule 506(a), all investors were either accredited investors, reasonably
believed by the Company to have such knowledge and
14
<PAGE>
experience in financial and business matters that such investor was capable of
evaluating the merits and risks of the investment, or retained a purchaser
representative not affiliated with the Company in connection with the
transaction.
The shareholders of common stock issued in the SAC and DSA acquisitions had
demand registration rights. Substantially all of the shareholders exercised
such demand rights on February 1, 1999 and on April 29, 1999, the Company
filed a registration statement with the SEC on Form S-3 to register these
common shares (such registration statement was amended on May 13, 1999).
15
<PAGE>
ITEM 6--Selected Financial Data
The statement of operations data for the years ended December 31, 1999,
1998, and 1997, and the balance sheet data as of December 1999 and 1998, have
been derived from the Company's audited Consolidated Financial Statements and
Notes thereto. The balance sheet data as of December 31, 1997, 1996, and 1995
and the statement of operations data for the fiscal years ended December 31,
1996 and 1995 have been derived from the Company's audited financial
statements, which statements are not included herein. The following
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
Fiscal Years Ended December 31,
---------------------------------------------
1999(1) 1998(1) 1997 1996 1995
-------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues...................... $106,743 $68,449 $36,962 $25,699 $20,777
Cost of revenues.................. 65,087 40,483 20,529 14,512 12,313
-------- ------- ------- ------- -------
Gross margin.................... 41,656 27,966 16,433 11,187 8,464
Selling, general and
administrative expenses (2)...... 26,511 13,756 8,184 8,274 5,851
Software development costs........ 6,206 -- -- -- --
Amortization of goodwill and other
intangibles...................... 1,498 770 -- -- --
Cancelled secondary offering
costs............................ -- 361 -- -- --
-------- ------- ------- ------- -------
Operating income................ 7,441 13,079 8,249 2,913 2,613
Other income (expense)............ (702) 1,520 (292) 136 7
-------- ------- ------- ------- -------
Income before income taxes...... 6,739 14,599 7,957 3,049 2,620
Income tax expense (3)............ 2,729 6,072 3,183 1,219 1,048
-------- ------- ------- ------- -------
Income or pro forma income from
continuing Operations 4,010 8,527 4,774 1,830 1,572
Loss from operations of
discontinued business, net of
income tax benefit of $137(4).... -- (208) -- -- --
Loss from disposal of discontinued
business, net of income tax
benefit of $390(4)............... -- (607) -- -- --
-------- ------- ------- ------- -------
Net income or pro forma net
income......................... $ 4,010 $ 7,712 $ 4,774 $ 1,830 $ 1,572
======== ======= ======= ======= =======
Income or pro forma income per
share from continuing
operations(5):
Basic........................... $ .25 $ .55 $ .37 $ .12 $ .11
Diluted......................... $ .24 $ .53 $ .37 $ .12 $ .11
======== ======= ======= ======= =======
Loss per share from discontinued
operations(5):
Basic........................... -- $ (.05) -- -- --
Diluted......................... -- $ (.05) -- -- --
======== ======= ======= ======= =======
Net income or pro forma net income
per share(5):
Basic........................... $ .25 $ .50 $ .37 $ .12 $ .11
Diluted......................... $ .24 $ .48 $ .37 $ .12 $ .11
======== ======= ======= ======= =======
Weighted average shares
outstanding(5):
Basic........................... 16,257 15,645 12,948 14,893 14,893
Diluted......................... 16,431 15,984 12,948 14,893 14,893
======== ======= ======= ======= =======
Balance Sheet Data:
Cash and cash equivalents......... $ 1,226 $ 454 $ 150 $ 1,927 $ 269
Working capital................... 22,224 15,979 101 (279) 794
Total assets...................... 96,842 66,324 5,331 11,820 3,034
Long-term debt, including current
portion(6)(7).................... 29,017 -- 7,729 6,250 605
Shareholders' equity
(deficit)(6)..................... 50,456 55,329 (6,328) 755 668
</TABLE>
16
<PAGE>
Footnotes
(1) The statements of income and balance sheet data include the results of
operations and acquired net assets of the Company and Space Applications
Corporation beginning May 15, 1998, Decision Science Applications
beginning August 1, 1998, Systems Information Solutions, Inc. beginning
March 1, 1999, and Kapos Associates Inc. beginning September 1, 1999.
(2) Selling, general and administrative expenses for fiscal 1997, 1996 and
1995 reflect pro forma adjustments for compensation for the principal
executive officers (which have historically been included in SG&A
expenses) who are to be paid a maximum of $2.7 million in salaries and
bonuses for 1998 under the Executive Compensation Program. For additional
pro forma statement of operations data for 1997 and 1996 see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Amounts reflect pro forma adjustments for provisions for federal and state
income taxes as if the Company had been taxed as a C corporation at an
assumed statutory rate of approximately 40% for years prior to 1998.
(4) Loss from operations on discontinued business and loss from disposal of
discontinued business were computed as explained in Note 5 to the
Consolidated Financial Statements.
(5) Net income or pro forma net income (loss) per share was computed as
explained in Note 1 to the Consolidated Financial Statements.
(6) In 1999, the Company purchased 1,204,000 of its common shares for
approximately $9.3 million in cash using funds borrowed under the
Company's currently existing bank facility. In January 1998, the Company
sold 2,100,000 shares of Common Stock in the IPO for net proceeds of
approximately $22.4 million and repaid all of the Company's then existing
indebtedness of $7.4 million. In January 1997, the Company repurchased
1,995,125 shares of Common Stock from certain of its existing shareholders
for approximately $5.9 million using borrowings under its then existing
bank facility
(7) In April 1996, the Company purchased an aircraft for $5.8 million and
financed the purchase through a bank. In January 1997, the Company sold
the aircraft to a company which is owned by Steven S. Myers, the Company's
principal shareholder. See footnotes to the "Consolidated Financial
Statements."
17
<PAGE>
ITEM 7--Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors Concerning Forward-Looking Statements
From time to time, SM&A, through its management, may make forward-looking
public statements, such as statements concerning then expected future revenues
or earnings or concerning projected plans, performance, contract procurement as
well as other estimates relating to future operations. Forward-looking
statements may be in reports filed under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), in press releases or informal statements made
with the approval of an authorized executive officer. The words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements" within the meaning of Section 21E of the Exchange
Act and Section 27A of the Securities Act of 1933, as amended, as enacted by
the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements, which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in
any current statement.
The Company will not undertake and specifically declines any obligation to
publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events which may
cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those projected in forward-looking statements
of the Company made by or on behalf of the Company.
18
<PAGE>
Quarterly Results of Operations (Unaudited)
The following table presents unaudited quarterly consolidated financial
information for each of the Company's last eight fiscal quarters. In the
opinion of the Company's management, this quarterly information has been
prepared on the same basis as the audited consolidated financial statements
appearing elsewhere in this Form 10-K and includes all adjustments necessary
to present fairly the unaudited quarterly results set forth herein. The
Company's quarterly results have in the past been subject to fluctuations, and
thus, the operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
1999(1) 1998
-------------------------------- ---------------------------------
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $28,089 $26,813 $26,527 $25,314 $24,560 $20,546 $12,684 $10,659
Cost of revenues........ 18,380 16,756 15,539 14,412 15,458 12,077 6,960 5,988
------- ------- ------- ------- ------- ------- ------- -------
Gross margin........... 9,709 10,057 10,988 10,902 9,102 8,469 5,724 4,671
Selling, general and
administrative
expenses............... 8,572 6,588 5,852 5,499 4,000 5,343 2,667 1,746
Amortization of goodwill
and other intangibles.. 441 427 285 345 382 302 86 --
Software development
costs.................. 2,405 1,660 973 1,168 -- -- -- --
Cancelled secondary
offering costs......... -- -- -- -- 361 -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................ (1,709) 1,382 3,878 3,890 4,359 2,824 2,971 2,925
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) or pro
forma income from
continuing
operations............ (1,257) 735 2,202 2,330 2,652 1,699 2,427 1,749
Discontinued operations:
Income (loss) from
operations of
discontinued business,
net................... -- -- -- -- (151) (86) 29 --
Loss from disposal of
discontinued business,
net................... -- -- -- -- (607) -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income or pro forma
net income (loss)...... $(1,257) $ 735 $ 2,202 $ 2,330 $ 1,894 $ 1,613 $ 2,456 $ 1,749
======= ======= ======= ======= ======= ======= ======= =======
Income or pro forma
income per share from
Continuing Operations:
Basic.................. $ (.08) $ .05 $ .14 $ .14 $ .16 $ .10 $ .16 $ .12
Diluted................ $ (.08) $ .04 $ .14 $ .14 $ .16 $ .10 $ .16 $ .12
======= ======= ======= ======= ======= ======= ======= =======
Loss per share from
discontinued
Operations:
Basic.................. -- -- -- -- $ (.05) $ -- $ -- $ --
Diluted................ -- -- -- -- $ (.05) $ -- $ -- $ --
======= ======= ======= ======= ======= ======= ======= =======
Net income or pro forma
net income per share:
Basic.................. $ (.08) $ .05 $ .14 $ .14 $ .11 $ .10 $ .16 $ .12
Diluted................ $ (.08) $ .04 $ .14 $ .14 $ .11 $ .10 $ .16 $ .12
======= ======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding:
Basic.................. 16,093 16,307 16,090 16,515 16,535 16,371 15,297 14,347
Diluted................ 16,190 16,371 16,247 16,927 16,780 16,794 15,630 14,431
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- -------
(1) As restated for periods ended September 30, June 30 and March 31, 1999.
Capitalized software development costs were expensed in the quarters
incurred. See table below for summary of restated quarters.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
March 31, 1999 June 30, 1999 September 30, 1999
------------------------- ------------------------- -------------------------
As Previously As Previously As Previously
Reported As Restated Reported As Restated Reported As Restated
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $25,314 $25,314 $26,927 $26,527 $27,183 $26,813
Cost of revenues........ 14,737 14,430 15,665 15,539 17,027 16,756
------- ------- ------- ------- ------- -------
Gross margin........... 10,577 10,884 11,262 10,988 10,156 10,057
Selling, general &
administrative
expenses............... 5,223 5,481 5,630 5,852 6,182 6,588
Amortization of goodwill
and other intangibles.. 345 345 285 285 322 427
Software development
costs.................. -- 1,168 -- 973 -- 1,660
------- ------- ------- ------- ------- -------
5,568 6,994 5,915 7,110 6,504 8,675
------- ------- ------- ------- ------- -------
Operating income ...... 5,009 3,890 5,347 3,878 3,652 1,382
Other income (expense).. 39 39 (129) (129) (154) (154)
------- ------- ------- ------- ------- -------
Profit before taxes.... 5,048 3,929 5,218 3,749 3,498 1,228
Income tax expense ..... 2,069 1,599 2,164 1,547 1,447 493
------- ------- ------- ------- ------- -------
Net income.............. $ 2,979 $ 2,330 $ 3,054 $ 2,202 $ 2,051 $ 735
======= ======= ======= ======= ======= =======
Net income per share:
Basic.................. $ 0.18 $ 0.14 $ 0.19 $ 0.14 $ 0.13 $ 0.05
Diluted................ $ 0.18 $ 0.14 $ 0.19 $ 0.14 $ 0.13 $ 0.04
======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding:
Basic.................. 16,515 16,515 16,090 16,090 16,307 16,307
Diluted................ 16,927 16,927 16,247 16,247 16,371 16,371
</TABLE>
Certain amounts in prior quarters have been reclassified to conform to current
presentation.
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain historical operating results as a
percentage of net revenues for 1999 and 1998, and certain supplemental pro
forma operating results as a percentage of net revenues for 1997.
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues.............................................. 100.0% 100.0% 100.0%
Cost of revenues.......................................... 61.0% 59.1% 55.5%
----- ----- -----
Gross margin............................................. 39.0% 40.9% 44.5%
Selling, general and administrative expenses.............. 32.0% 21.8% 22.2%
----- ----- -----
Operating income.......................................... 7.0% 19.1% 22.3%
Income from continuing operations......................... 3.8% 12.5% 12.9%
Loss from discontinued operations......................... -- (1.2%) --
----- ----- -----
Net income................................................ 3.8% 11.3% 12.9%
===== ===== =====
</TABLE>
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended December 31,
1998
Net Revenues. Net revenues increased $38.3 million, or 55.9% to $106.7
million for fiscal 1999 compared to $68.4 million for fiscal 1998. The
increase resulted primarily from a combination of acquisitions (SIS and KAI
contributed 1999 revenue of $3.9 million and $1.8 million, respectively) and
internal revenue growth. The internal revenue growth rate, which excludes
revenue from the first twelve months after the closing date for each
acquisition, was approximately 18%. Factors contributing to our internal
growth rate include: (i) increased demand in the information technology and
high-end contract support services market; (ii) increased billing rates
resulting from an increase in associates' wages; and (iii) sales of internally
developed software products.
Gross Margin. Gross margin increased $13.7 million, or 48.9%, to $41.7
million, for fiscal 1999 as compared to $28.0 million for fiscal 1998. As a
percentage of net revenues, gross margin decreased to 39.0% compared to 40.9%
for the prior year period. The decrease in gross margin as a percentage of
revenues was attributed to an increase in compensation and benefits to direct
employees and a reduction in PMG's contribution as a percentage of total
revenues.
Selling, General and Administrative Expenses, Software Development Costs
and Amortization of Goodwill and Other Intangibles. Selling, general and
administrative expenses increased $19.3 million, or 129.5%, to $34.2 million
for fiscal 1999, as compared to $14.9 million for fiscal 1998. As a percentage
of revenues, selling, general and administrative expenses increased to 32.1%
for fiscal 1999, as compared to 21.7% for the prior year period. This increase
was the result of increases in administrative costs related to the increase in
number of personnel as well as facility expenses attributable to the Company's
new office facilities in Vienna, Virginia and Colorado Springs, Colorado. In
1999, the Company expensed $6.2 million of development costs for software
products being sold or to be sold to commercial customers and recognized
$1.4 million in costs related to reorganization expenses, related severance
payments and legal fees, and costs to construct the customer care center.
Amortization of goodwill and other intangibles increased from $0.8 million in
1998 to $1.5 million in 1999 reflecting a full year of amortization related to
the goodwill and intangibles recorded in conjunction with the SAC and DSA
acquisitions in 1998.
Operating Income. Operating income was $7.4 million for 1999 compared to
$13.1 million for 1998, a decrease of $5.7 million. As a percentage of net
revenues, operating income decreased to 7.0% for 1999 from 19.1% the prior
year, which is attributed to the increase in software development expense,
discussed above.
Other Income (Expense). Other expense, net was $0.7 million for 1999
compared to other income, net of $1.5 million for 1998. The net expense in
1999 results from higher interest expense of $0.9 million based on increased
bank borrowings and net other income in 1998 was due to a gain of
approximately $0.8 million on the sale of an aircraft and a higher level of
interest income earned on proceeds from the initial public offering, which
were invested in short-term marketable securities.
20
<PAGE>
Income From Continuing Operations. Income from continuing operations was
$4.0 million for 1999 compared to $8.5 million for 1998, a decrease of $4.5
million or 52.9%.
Net Income. Net income was $4.0 million for 1999 compared to $7.7 million
for 1998, a decrease of $3.7 million or 48.1%.
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Net Revenues. Net revenues increased $31.5 million, or 85.1% to $68.5
million for fiscal 1998 compared to $37.0 million for fiscal 1997. Net
revenues from the Proposal Management Group were $39.6 million for fiscal 1998
(net revenues would have been $41.6 million had certain projects not been
transferred to other operating groups) compared to $37.0 million for fiscal
1997, an increase of $2.6 million. This increase was attributable to an
increase in the Company's customer base and the number of proposals managed as
a result of increased marketing efforts. Net revenues from high-end contract
support services, provided by the Systems Solutions Group and the Information
Technology Solutions Group, were collectively $28.9 million. The Company
expanded their scope of high-end contract support services as a result of the
acquisitions of SAC and DSA in May and August 1998, respectively.
Gross Margin. Gross margin increased $11.6 million, or 70.7%, to $28.0
million, for fiscal 1998 as compared to $16.4 million for fiscal 1997. As a
percentage of net revenues, gross margin decreased to 40.9% compared to 44.5%
for the prior year period. The decrease in gross margin as a percentage of
revenues was primarily attributable to lower gross margin contributions from
the newly acquired entities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.7 million, or 81.7%, to $14.9 million for
fiscal 1998, as compared to $8.2 million for fiscal 1997. As a percentage of
revenues, selling, general and administrative expenses decreased to 21.8% for
fiscal 1998, as compared to 22.2% for the prior year period. This decrease was
the result of lower compensation for the executive group offset by an increase
in administrative costs and facility expenses related to the operations of SAC
and DSA.
Operating Income. Operating income was $13.1 million for 1998 compared to
$8.2 million for 1997, an increase of $4.9 million or 59.8%. As a percentage
of net revenues, operating income decreased to 19.1% for 1998 from 22.3% the
prior year.
Other Income (Expense). Other income, net was $1.5 million for 1998
compared to a net expense of $.3 million for 1997. This decrease in expense
was attributed to lower interest expense in the current year based on lower
bank borrowings, net other income related to a gain of approximately $0.8
million on the sale of aircraft and interest income earned in the current year
on proceeds from the initial public offering, which were invested in short-
term marketable securities.
Income From Continuing Operations. Income from continuing operations was
$8.5 million for 1998 compared to $4.8 million for 1997, an increase of $3.7
million or 77.1%.
Net Income. Net income was $7.7 million for 1998 compared to $4.8 million
for 1997, an increase of $2.9 million or 60.4%.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1999, the Company's net cash used by
operating activities was $9.8 million, compared to cash flows provided by
operating activities of $2.5 million for the prior year. This change was
mainly due to increases in accounts receivable days sales outstanding to 100
days and software development expenses of $6.2 million in 1999.
Net cash used in investing activities was $9.5 million for the year ended
December 31, 1999, compared to $14.5 million for the prior year. The Company's
primary use of funds on investing activities during 1998 was the acquisition
of SIS and KAI, and purchases of property and equipment.
21
<PAGE>
Net cash provided by financing activities was $20.1 million for the year
ended December 31, 1999, compared to net cash used of $12.3 million for the
prior year. Financing activities provided funds of $22.4 million to the
Company in 1998 as a result of the initial public offering. The primary source
of cash in 1999 was net borrowings of $29.0 million of bank debt as compared
to net repayments of $9.2 million for 1998. In 1999, repurchases of common
stock totaled $9.3 million as compared to $0.1 million in 1998.
The Company previously completed the acquisition of all the outstanding
common shares of SIS in March, 1999. The definitive agreement obligates the
Company to make an earnout payment contingent upon the achievement of certain
operating results. The earnout is payable in cash and is due in April, 2000.
The Company believes that the final earnout payment, as adjusted, should range
between $6.0 and $7.2 million. An estimate of $6.0 million was recorded in
goodwill and accrued earnout payable as of December 31, 1999. The Company
expects to pay such earnout payment from existing cash and cash equivalents,
cash flow from operations and available borrowings under the credit agreement.
The definitive agreements with KAI and S3I obligate the Company to make
earnout payments contingent upon the achievement of certain operating results.
The earnouts are payable in cash and are due within the next eighteen months.
The Company believes that the final earnout payments, as adjusted, should
range between $3.0 and $4.0 million. The Company expects to pay such earnout
payments from existing cash and cash equivalents, cash flow from operations
and available borrowings under the credit agreement.
The Company believes that funds generated by operations will provide
adequate cash to fund its anticipated operating cash needs for at least the
next twelve months. The Company has a $50.0 million revolving line of credit
facility with a bank. The revolving line of the credit will be used, as
considered necessary, for operating cash and for future acquisitions. As of
December 31, 1999, the Company had borrowings of $29.0 million outstanding
under the credit agreement.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in major system failure or
miscalculations. We rely on numerous computer systems for day-to-day
operations and may be adversely affected by the Year 2000 situation. Our costs
in connection with Year 2000 remediation and preparations totaled
approximately $0.2 million, with substantially all of such costs occurring in
1999.
Substantially all of our clients are similarly dependent on computer
systems and they also may be adversely affected by the Year 2000 situation.
Although neither we nor any client known to us have experienced any material
Year 2000 problems to date, some experts have warned of the possibility of
lingering Year 2000 problems that may not become apparent until later in the
Year 2000 or beyond. We continue to believe that the Year 2000 problem will
not pose significant operational problems for our business and operations on a
going forward basis.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as amended by SFAS 137. SFAS 137 is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts and for hedging activities.
Application of this accounting standard is not expected to have a material
impact on the Company's consolidated financial position, results of operations
or liquidity.
22
<PAGE>
ITEM 7A
The Securities and Exchange Commission requires that registrants include
information about potential effects of changes in interest rates in their
financial statements. The Company's exposure to interest rate changes is
primarily related to its variable rate debt based on fluctuations in the
Bank's Prime rate or LIBOR. To assess exposure to interest rate changes, the
Company has performed a sensitivity analysis assuming a hypothetical 100 basis
point increase in interest rates in the first quarter of fiscal year 2000.
This analysis indicates that such market movements would reduce fiscal 2000
net income, based on the December 1999 debt balance, by approximately $0.3
million. Actual gains and losses in the future may differ materially from this
hypothetical amount based on changes in the timing and amount of interest rate
movements and the Company's actual debt balances.
ITEM 8--Consolidated Financial Statements and Supplemental Data
The Consolidated Financial Statements of the Company are annexed to the
report as pages F-1 through F-21. An index to such materials appears on page
F-1.
23
<PAGE>
ITEM 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
ITEM 10--Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by this
reference to the section entitled "Election of Directors" in the Company's
definitive Proxy Statement prepared pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, for the Company's 2000 Annual
Meeting of Shareholders involving, among other things, the election of
directors. Such Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
Form 10-K.
ITEM 11--Executive Compensation
The information required by this item is incorporated herein by this
reference to the section entitled "Executive Compensation" in the Company's
definitive Proxy Statement prepared pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, for the Company's 2000 Annual
Meeting of Shareholders involving, among other things, the election of
directors. Such Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
Form 10-K.
ITEM 12--Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by this
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive Proxy Statement prepared
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, for the Company's 2000 Annual Meeting of Shareholders involving,
among other things, the election of directors. Such Proxy Statement will be
filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year covered by this Form 10-K.
ITEM 13--Certain Relationships and Related Transactions
The information required by this item is incorporated herein by this
reference to the section entitled "Executive Compensation--Certain
Transactions" in the Company's definitive Proxy Statement prepared pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended, for the
Company's 2000 Annual Meeting of Shareholders involving, among other things,
the election of directors. Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K.
24
<PAGE>
PART IV
ITEM 14--Exhibits, Financial Statements and Reports on Form 8-K
(a)(1). Consolidated Financial Statements (included in Part II of this
Annual Report on Form 10-K).
Independent Auditor's Report
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2). Financial Statement Schedules (included in Part II of this Annual
Report on Form 10-K).
Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 1999, 1998 and 1997.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(a)(3). Exhibits (see Exhibit Index)
(b). Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the last
quarter of the fiscal year ended December 31, 1999.
25
<PAGE>
INDEX
<TABLE>
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998................ F-3
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997........................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficiency) for the
Years Ended December 31, 1999, 1998 and 1997............................ F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-7
Notes to Consolidated Financial Statements............................... F-9
Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 1999, 1998 and 1997........................................ F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
SM&A Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of SM&A
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the years in the three year period ended December 31,
1999. In connection with our audits of the consolidated financial statements,
we also audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SM&A
Corporation and subsidiaries at December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth herein.
/s/ KPMG LLP
Orange County, California
March 13, 2000
F-2
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
------- -------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 1,226 $ 454
Accounts receivable, net of allowance of $935 and $643,
respectively................................................ 22,676 15,326
Costs and estimated earnings in excess of billings on
contracts in progress....................................... 7,851 7,545
Prepaid income taxes......................................... 4,665 2,085
Prepaid expenses and other assets............................ 440 559
Deferred income taxes........................................ 1,466 --
------- -------
Total current assets....................................... 38,324 25,969
Property and equipment, net.................................... 5,636 2,390
Notes receivable--affiliates................................... 1,744 2,832
Other assets................................................... 2,360 3,346
Goodwill....................................................... 48,778 31,787
------- -------
$96,842 $66,324
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Trade accounts payable....................................... $ 3,475 $ 2,496
Accrued compensation and payroll taxes....................... 6,093 6,585
Accrued earnout payable...................................... 6,000 --
Deferred income taxes........................................ 269 265
Other liabilities............................................ 263 644
------- -------
Total current liabilities.................................. 16,100 9,990
Deferred income taxes.......................................... 399 725
Other liabilities.............................................. 870 280
Long-term debt................................................. 29,017 --
------- -------
Total liabilities.......................................... 46,386 10,995
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; Authorized 50,000,000 shares.
Shares issued and outstanding 16,109,000 and 16,522,000,
respectively................................................ 161 165
Additional paid-in capital................................... 45,285 54,164
Retained earnings............................................ 5,010 1,000
------- -------
Total shareholders' equity................................. 50,456 55,329
------- -------
$96,842 $66,324
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net revenues....................................... $106,743 $68,449 $36,962
Cost of revenues................................... 65,087 40,483 20,529
-------- ------- -------
Gross margin................................... 41,656 27,966 16,433
Selling, general and administrative expenses....... 26,511 13,756 7,177
Software development costs......................... 6,206 -- --
Amortization of goodwill and other intangibles..... 1,498 770 --
Cancelled secondary offering costs................. -- 361 --
-------- ------- -------
Operating income............................... 7,441 13,079 9,256
Other income (expense):
Interest expense................................. (1,053) (148) (505)
Other, net....................................... 351 1,668 213
-------- ------- -------
Income before income taxes..................... 6,739 14,599 8,964
Income tax expense................................. 2,729 6,072 147
-------- ------- -------
Income from continuing operations.............. 4,010 8,527 8,817
Discontinued operations:
Loss from operations of discontinued business,
net of income tax benefit of $137............... -- (208) --
Loss from disposal of discontinued business, net
of income tax benefit of $390................... -- (607) --
-------- ------- -------
Net income......................................... $ 4,010 $ 7,712 $ 8,817
======== ======= =======
Income per share from continuing operations:
Basic............................................ $ .25 $ .55 *
Diluted.......................................... $ .24 $ .53 *
======== ======= =======
Loss from discontinued operations:
Basic............................................ $ -- $ (.05) *
Diluted.......................................... $ -- $ (.05) *
======== ======= =======
Net income per share:
Basic............................................ $ .25 $ .50 *
Diluted.......................................... $ .24 $ .48 *
======== ======= =======
Weighted average shares outstanding:
Basic............................................ 16,257 15,645 *
Diluted.......................................... 16,431 15,984 *
======== ======= =======
</TABLE>
- --------
* See Pro Forma Supplemental Data on next page.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME--(Continued)
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Pro Forma Supplemental Data (Unaudited):
Historical income before income taxes........................... $ 8,964
Pro forma adjustment to selling, general and administrative
expenses....................................................... (1,007)
-------
Pro forma income before income taxes............................ 7,957
Pro forma income tax expense.................................... 3,183
-------
Pro forma net income............................................ $ 4,774
=======
</TABLE>
The pro forma adjustments for the year ended December 31, 1997 include the
elimination of compensation for the principal executive officers (which have
historically been included in selling, general and administrative expenses)
who are to be paid a maximum of $2.7 million in salaries and bonuses under the
1998 Executive Compensation Program and adjustments for federal and state
income taxes as if the Company had been taxed as a C corporation rather than
an S corporation.
<TABLE>
<CAPTION>
1997
------
<S> <C>
Pro Forma net income per share:
Basic.............................................................. $ .37
Diluted............................................................ $ .37
======
Weighted average shares outstanding:
Basic.............................................................. 12,948
Diluted............................................................ 12,948
======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
December 31, 1999, 1998 and 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Stock Retained Total
------------------- Additional subscription earnings shareholders'
Shares paid-in note Due from (accumulated equity
outstanding Amount capital receivable shareholder deficit) (deficiency)
----------- ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996...... 14,895,000 $ 5 $ 316 $(51) $(632) $ 1,117 $ 755
Net income.............. -- -- -- -- -- 8,817 8,817
Collection of stock
subscription
receivable............. -- -- -- 51 -- -- 51
Note due from
shareholder............ -- -- -- -- (47) -- (47)
Dividends declared...... -- -- -- -- -- (10,041) (10,041)
Repurchase and
retirement of common
stock.................. (1,995,000) -- -- -- -- (5,863) (5,863)
---------- ---- ------- ---- ----- ------- -------
Balances at
December 31, 1997...... 12,900,000 5 316 -- (679) (5,970) (6,328)
Net income.............. -- -- -- -- -- 7,712 7,712
Collection of
shareholder note....... -- -- -- -- 679 -- 679
Issuance of common
shares in initial
public offering........ 2,100,000 145 22,276 -- -- -- 22,421
Issuance of common
shares in connection
with acquisitions...... 1,535,000 15 31,717 -- -- -- 31,732
Dividends declared...... -- -- -- -- -- (717) (711)
Repurchase and
retirement of common
stock.................. (13,000) (145) -- -- (31) (176)
---------- ---- ------- ---- ----- ------- -------
Balances at
December 31, 1998...... 16,522,000 165 54,164 -- -- 1,000 55,329
Net income.............. -- -- -- -- -- 4,010 4,010
Repurchase and
retirement of common
stock.................. (1,204,000) (12) (9,330) -- -- -- (9,342)
Shares issued upon
exercise of options.... 77,000 1 458 -- -- -- 459
Issuance of common
shares in connection
with 1998 acquisition.. 714,000 7 (7) -- -- -- --
---------- ---- ------- ---- ----- ------- -------
Balances at
December 31, 1999...... 16,109,000 $161 $45,285 $-- $-- $ 5,010 $50,456
========== ==== ======= ==== ===== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 4,010 $ 7,712 $ 8,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts............... 82 18 (27)
Depreciation and amortization................. 2,260 1,432 139
Deferred income taxes......................... (1,788) 588 --
Gain on sale of property and equipment........ (5) (772) (137)
Changes in assets and liabilities, net of
effect of acquisitions:
Accounts receivable, net.................... (7,953) (1,249) (581)
Costs and estimated earnings in excess of
billings................................... (2,708) (1,873) --
Prepaid expenses and other assets........... (778) 644 (171)
Trade accounts payable...................... 877 (956) (34)
Accrued compensation and payroll taxes...... (957) (1,650) (1,003)
Income taxes payable........................ (2,589) (603) --
Other liabilities........................... (296) (776) 152
------- -------- --------
Net cash (used in) provided by operating
activities............................... (9,845) 2,515 7,155
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.............. (6,198) (12,181) --
Additional consideration on prior year
acquisition.................................... (716) -- --
Payment on stock options in acquisition......... -- (2,449) --
Payment on note receivable from affiliate....... -- 92 --
Proceeds from sale of minority interest in
investment..................................... -- 200 --
Purchases of property and equipment............. (4,134) (401) (140)
Repayments from (advances to) shareholder....... 1,088 679 (47)
Other........................................... 445 (445) --
------- -------- --------
Net cash used in investing activities..... (9,515) (14,505) (187)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.......... 457 22,421 --
Borrowings under long-term credit facility...... 30,050 7,553 27,336
Repayments under long-term credit facility...... (1,033) (16,793) (20,228)
Distributions to shareholders................... -- (711) (10,041)
Repurchase of common stock...................... (9,342) (176) (5,863)
Decrease in stock subscription note receivable.. -- -- 51
------- -------- --------
Net cash provided by (used in) financing
activities............................... 20,132 12,294 (8,745)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents.............................. 772 304 (1,777)
Cash and cash equivalents at beginning of year.. 454 150 1,927
------- -------- --------
Cash and cash equivalents at end of year........ $ 1,226 $ 454 $ 150
======= ======== ========
SUPPLEMENTAL INFORMATION--CASH PAID FOR:
Interest........................................ $ 936 $ 232 $ 505
======= ======== ========
Income taxes.................................... $ 7,051 $ 5,552 $ 100
======= ======== ========
</TABLE>
F-7
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
Supplemental schedule of noncash investing activities:
In September 1998, the Company sold its approximate 37% ownership interest
in Savant Corporation to an affiliated company. Payment included a $1.8
million note guaranteed by a principal shareholder.
In June 1998, the Company sold an aircraft to an affiliated company.
Payment included a note for $880,000.
In January 1997, the Company sold an aircraft to an affiliated company.
Payment included a note in the amount of $5.6 million.
In December 1999, the Company accrued $6.0 million to satisfy an amount
obligation related the acquisition of SIS.
Detail of businesses acquired in purchase transactions (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ -------
<S> <C> <C>
Total consideration....................................... $5,636 $45,767
Less stock consideration issued in acquisitions........... -- (31,732)
------ -------
Cash consideration paid for acquisitions.................. 5,636 14,035
Plus acquisition expenses................................. 661 1,215
Less cash acquired in acquisitions........................ (99) (3,069)
------ -------
Cash paid for acquisitions, net of cash acquired........ $6,198 $12,181
====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998, and 1997
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company's primary business is providing information technology
solutions for complex problems. In January 1998, the Company completed an
initial public offering ("IPO") of Common Stock. In May 1998 the Company
acquired Space Applications Corporation ("SAC"). SAC provides information
technology, systems engineering, scientific research, program management
support and technical services to the military, civilian space programs, the
intelligence community, and the armed services. In August 1998, the Company
acquired Decision-Science Applications, Inc. ("DSA"). DSA provides information
technology, system engineering, information systems development, scientific
research and program management support to the U.S. Government, principally
the Department of Defense. The acquisitions of SAC and DSA are collectively
referred to as the "1998 Acquisitions." In November 1998, DSA changed its name
to SM&A Corporation (East), and in December 1998, SAC merged into SM&A
Corporation (East).
In March 1999, the Company acquired Systems Integration Software, Inc.
("SIS"). SIS provides systems engineering, information systems development,
scientific research and program management support to the U.S. Government,
primarily the Department of Defense. In September 1999, the Company acquired
Kapos Associates Inc. ("KAI"). KAI provides simulation and test systems
engineering services to the U.S. Government. These transactions were accounted
for as purchases and, accordingly, the consolidated financial statements
include the financial results of the 1999 acquisitions from the effective
dates of each such acquisition. SIS and KAI are collectively referred to as
the "1999 Acquisitions."
Principles of Consolidation
The consolidated financial statements include the accounts of the SM&A
Corporation and wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original
maturity of three months or less to be cash equivalents.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 30 years. The recoverability of goodwill is
evaluated by comparing the carrying value of intangible assets to the
estimated future operating income of the Company on an undiscounted cash-flow
basis. Should the carrying value of goodwill exceed the estimated operating
income for the expected period of benefit, an impairment for the excess would
be recorded at that time. As of December 31, 1999, no impairment has been
recognized.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
straight-line and accelerated methods based on the estimated useful lives of
the related assets, generally five to seven years. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of
the lease term or estimated useful life of the asset.
F-9
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Information Technology Services and Systems Engineering--A significant
portion of the Company's professional services are performed for the
United States Government under various cost reimbursable, time and material
and fixed-price contracts and subcontracts. The Company records revenues from
cost-reimbursable contracts, including cost-plus-fixed-fee contracts, on the
basis of reimbursable costs plus a pro rata portion of the fee. Revenue from
time and materials contracts (government and commercial) are recognized based
on the contractual hourly billing rates as the services are performed. For
financial reporting purposes, the Company records revenue from fixed-price
contracts on the percentage-of-completion method. Accrued income is based on
the percentage of estimated total income that costs incurred to date bear to
estimated total costs after giving effect to the most recent estimates of cost
and estimated contract price at completion. Some contracts contain incentive
provisions based upon performance in relation to established targets to which
applicable recognition has been given in the contract revenue estimates.
Proposal Management Services--The majority of proposal management services
activities are provided under "time and expenses" billing arrangements, and
revenues are recorded as work is performed. Revenue is directly related to the
total number of hours billed to clients and the associated hourly billing
rates. A limited amount of revenues are also derived from success fees offered
to clients as a pricing option, and recorded as revenue only upon the
attainment of the specified incentive criteria. Success fees are billable by
the Company when a contract is won by the client.
As many contracts extend over a long period of time, revisions in cost and
price estimates during the progress of work are accounted for prospectively.
When the contract estimate indicates a loss, provision is made for the total
anticipated loss. In accordance with these practices, contracts in progress
are stated at cost plus estimated profit, but not in excess of realizable
value. Contract costs for services supplied to the U.S. Government, including
indirect expenses, are subject to audit by the Government's representatives.
All contract revenues are recorded in amounts that are expected to be realized
upon final settlement.
Royalty Income--The Company has a Master Development and Distribution
Agreement for licensing of several software products to a manufacturer of test
instruments. The Company receives royalties from the instrument manufacturer
as software product units are sold and distributed. The Company recognizes
royalty revenue as payments are received from the instrument manufacturer.
Software Development Costs
Costs related to research, design and development of computer software to
be sold are expensed as incurred. Software development costs subsequent to
establishment of technological feasibility, normally at the completion of a
detail program design, are insignificant.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, other accounts receivable,
trade accounts payable and other accrued liabilities are measured at cost
which approximates their fair value.
Income Taxes
The Company provides for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
Prior to the initial public offering, the Company and its shareholders
elected to be treated as an S corporation under the Internal Revenue Code of
1986, as amended (the "Code"). Under the provisions of the Code, the
F-10
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's shareholders included their pro rata share of the Company's income
on their personal tax returns. Accordingly, the Company was not subject to
federal and most state income taxes.
In January 1998, the Company still operated as an S corporation; thus, the
consolidated income statement presentation for the year ended December 31,
1998 includes only applicable federal and state income taxes for the period in
which the Company was a C corporation. Upon termination of the S corporation
status on January 28, 1998, the Company recorded income tax expense resulting
from the establishment of net deferred tax liabilities of approximately
$510,000, which was based upon temporary book to tax differences existing at
the date of termination of the Company's S corporation status.
Net Income Per Share
Basic net income per share is computed by dividing net income available to
common shareholders by the weighted average number of common shares
outstanding during the periods presented. Diluted net income per share is
computed by dividing net income available to common shareholders by the
weighted average number of common and common equivalent shares outstanding
during the periods presented assuming the exercise of all in-the-money stock
options. Common equivalent shares have not been included where inclusion would
be anti-dilutive.
The following is a reconciliation between the number of shares used in the
basic and diluted net income per share calculations (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Basic net income per share:
Weighted average number of shares outstanding........ 16,257 15,645 12,948
Dilutive effect of stock options..................... 174 339 --
------ ------ ------
Diluted net income per share:
Weighted average number of shares outstanding........ 16,431 15,984 12,948
====== ====== ======
</TABLE>
Anti-dilutive shares excluded from the reconciliation above were 1,602,500,
114,500, and 0, for 1999, 1998, and 1997, respectively.
Stock Option Plan
The Company continues to account for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting For Stock Issued To Employees, and its related
interpretations. No compensation expense has been recognized in the financial
statements for employee stock options. The Company provides pro forma net
income and pro forma earnings per share disclosures for employee stock options
grants as if the fair value-based method defined in Statement of Accounting
Standards No. 123, Accounting For Stock-Based Compensation, had been applied.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain items in the prior period financial statements have been
reclassified to conform to the current period presentation.
F-11
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities, " as amended by SFAS 137. The provisions of the
statement require the recognition of all derivatives as either assets or
liabilities in the consolidated balance sheet and the measurement of those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. This statement, as amended, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company does not believe
that adoption of this pronouncement will have a material impact on the
financial statements.
Note 2. Acquisitions
In May 1998, the Company issued 819,743 unregistered shares of common stock
valued at approximately $14.7 million and stock options with a fair value of
$2.7 million for all the outstanding common stock of SAC. This transaction was
accounted for as a purchase and, accordingly, the consolidated financial
statements include the financial results of SAC from May 18, 1998, the date
the definitive agreement was approved by all relevant parties, and the date of
the private placement memorandum for SAC. Due to certain price protection
provisions relating to the shares of common stock issued in connection with
the acquisition of SAC and the market price of the Company's stock during
1999, the Company issued 703,530 additional shares of common stock to former
shareholders of SAC based upon the market price of the common stock at certain
defined liquidation dates.
In August 1998, the Company issued 714,839 unregistered shares of common
stock valued at approximately $14.4 million, and $14.0 million cash for all
the outstanding common stock and options of DSA. This transaction was
accounted for as a purchase and, accordingly, the consolidated financial
statements include the financial results of DSA from August 1, 1998, the
beginning of the accounting period in which the purchase transaction was
finalized.
The Company acquired SIS in March 1999, and KAI in September 1999, for an
aggregate amount of $5.5 million in cash and additional consideration
contingent upon the achievement of certain operating results. The Company has
accrued an estimated $6.0 million earnout payment due in April 2000,
contingent upon the achievement of certain operating results under the SIS
acquisition agreement. These transactions were accounted for as purchases and,
accordingly, the consolidated financial statements include the financial
results of the 1999 acquisitions from the effective dates of each such
acquisition.
The allocation of the purchase prices for both the 1999 Acquisitions and
1998 Acquisitions is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1999 1998
------ --------
<S> <C> <C>
Total purchase price, net..................................... $5,636 $ 45,767
Net assets acquired........................................... (837) (14,661)
Acquisition costs............................................. 661 1,215
------ --------
Excess of purchase price over net assets acquired............. $5,460 $ 32,321
====== ========
</TABLE>
F-12
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unaudited pro forma combined results of operations for the period ended
December 31, 1998 would have been as follows had each of the acquisitions
occurred as of the beginning of 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Pro forma net revenues.......................................... $96,442
=======
Pro forma income from continuing operations..................... $ 6,601
Pro forma loss from discontinued operations..................... (598)
-------
Net income...................................................... $ 6,003
=======
Pro forma income per share from continuing operations:
Basic......................................................... $ .40
Diluted....................................................... $ .39
=======
Pro forma loss per share from discontinued operations:
Basic......................................................... $ (.03)
Diluted....................................................... $ (.03)
=======
Pro forma net income per share:
Basic......................................................... $ .37
Diluted....................................................... $ .36
=======
Weighted average shares outstanding:
Basic......................................................... 16,373
Diluted....................................................... 16,758
</TABLE>
For the combined pro forma basic earnings per share figures, it is assumed
that 12,900,000 shares of SM&A common stock were outstanding since January 1,
1998 along with 819,743 shares issued in the SAC acquisition and 714,839
shares issued in the DSA acquisition. The pro forma results presented above
may not be indicative of future performance. Results of operations for 1999
and 1998 would not have been materially impacted on a pro forma basis if the
1999 Acquisitions had occurred as of the beginning of the respective periods.
Note 3. Property and Equipment
A summary of property and equipment follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Computer equipment....................................... $ 3,209 $1,855
Furniture and equipment.................................. 2,211 891
Leasehold improvements................................... 1,887 257
------- ------
7,307 3,003
Less accumulated depreciation and amortization........... (1,671) (613)
------- ------
$ 5,636 $2,390
======= ======
</TABLE>
Note 4. Due From Affiliates and Related Party Transactions
In June 1998, the Company sold an aircraft to an affiliate of the Company's
principal shareholder. Terms included a promissory note for the total sales
price of $880,000, which was paid in April 1999. As the aircraft was nearly
fully depreciated at the time of sale, the majority of the proceeds were
recognized as a gain on sale.
F-13
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1998, SAC, a subsidiary of SM&A Corporation, sold its 37%
ownership interest in Savant, an equity investment, to an affiliate of the
Company's principal shareholder for its net book value of $2.0 million. The
sales proceeds were $200,000 cash and a promissory note for $1.8 million. The
note bears interest at 9% and is payable in thirty monthly installments of
$30,000 commencing on October 31, 1998 through March 31, 2001. All remaining
principal is due and payable on March 31, 2001. The note is guaranteed by the
principal shareholder of the Company. No principal payments were received in
1999. As of December 31, 1999 and 1998, $1.7 million remained outstanding on
the promissory note.
In November 1998, Savant engaged the Company to perform certain consulting
services through December 31, 1998. Included in accounts receivable as of
December 31, 1999 and 1998 is $225,000 and $300,000, respectively, due from
Savant for this consulting project. This receivable is guaranteed by the
principal shareholder of the Company. Terms of the agreement were commensurate
with market rates for similar consulting services.
The Company charters aircraft from time to time through an air service
chartering company controlled by the Company's principal shareholder. The
terms of use and charter rates paid by the Company are established by the air
service chartering company and are considered by the Company to be competitive
with charter rates and on terms as favorable as those from unaffiliated third
parties for similar aircraft. Charter fees amounted to approximately $396,000,
$300,000, and $471,000 for the years ended December 31, 1999, 1998, and 1997,
respectively.
Note 5. Discontinued Operations
On December 1, 1998, the Company's Board of Directors adopted a plan to
discontinue the operations of Staminet, Inc., a subsidiary of SAC, which was
acquired in a purchase combination in May 1998. Accordingly, the operating
results of Staminet, including provisions for estimated losses during the
phase-out period, severance, facility lease costs and other shut down expenses
expected to be incurred in connection with the disposal, were accrued for as
of December 31, 1998. Estimated expenses and operating losses from the
measurement date through the anticipated date of disposal amounted to
$997,000. The operations of Staminet were fully terminated by March 31, 1999.
Note 6. Long-Term Debt
In September 1998, the Company entered into a credit agreement with a bank
which provided a $25.0 million revolving line of credit. In June 1999, the
Company renegotiated with its lenders to increase the amount provided under
the agreement to $50.0 million. The credit agreement, which is secured by a
first priority interest in substantially all of the assets of the Company,
matures in May 2004 and has two interest rate options; the Bank's Prime rate
or LIBOR plus 1.25% to 2.0%, based on the ratio of total indebtedness to
earnings before interest and taxes. The credit agreement requires payment of a
fee of 0.25% of the average unused portion of the facility and contains
certain covenants. The most restrictive covenants require the Company to
maintain minimum consolidated net worth, maximum indebtedness to EBITDA,
maximum indebtedness to consolidated net worth and minimum fixed charge
coverage ratio as defined in the credit agreement. As of December 31, 1999,
the Company was not in compliance with certain of these financial covenants;
however waivers have been obtained from the lenders contingent upon the
Company's requirement to amend the credit agreement. The Company is currently
in negotiation with the lenders to finalize terms and conditions of the
amendment. Outstanding borrowings under the credit line at December 31, 1999
were $29,017,000 bearing an effective interest rate of 7.95%. There were no
amounts outstanding under the credit agreement as of December 31, 1998.
Availability of funds was reduced by a standby letter of credit in the amount
of $1.1 million at December 31, 1999 and 1998.
F-14
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2000, the Company renegotiated certain terms of its credit
agreement including maturity date, pricing levels, dividend and stock
repurchase limitations and mandatory prepayments. In addition, pursuant to the
amendment, the Company may not make any further acquisitions without the
consent of the lenders.
Note 7. Income Taxes
Income tax expense attributable to income from continuing operations
consists of (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- ------
<S> <C> <C> <C>
Year ended December 31, 1999:
Federal.......................................... $3,700 $(1,508) $2,192
State............................................ 817 (280) 537
------ ------- ------
$4,517 $(1,788) $2,729
====== ======= ======
Year ended December 31, 1998:
Federal.......................................... $4,470 $ 484 $4,954
State............................................ 1,014 104 1,118
------ ------- ------
$5,484 $ 588 $6,072
====== ======= ======
</TABLE>
A reconciliation of the Company's effective tax rate compared to the
statutory federal tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income taxes at statutory federal rates...................... 35.0 % 34.0 %
State taxes, net of federal income tax benefit............... 5.2 5.5
Amortization of non-deductible goodwill...................... 7.1 3.7
Other, net................................................... (6.8) (1.6)
---- ----
40.5 % 41.6 %
==== ====
</TABLE>
The Company provides deferred income taxes for temporary differences
between assets and liabilities recognized for financial reporting and income
tax purposes. The income effects of these temporary differences representing
significant portions of deferred tax assets and deferred tax liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---- -------
<S> <C> <C>
Accrued expenses not currently deductible for tax
purposes.................................................. $781 $ 868
Project reserves........................................... 222 140
Allowance for doubtful accounts............................ 303 248
Depreciation............................................... 54 52
Change of accounting from cash to accrual method for
acquired subsidiaries..................................... (598) (1,023)
Prepaid expenses........................................... (40) (164)
Installment sale transaction............................... 61 (439)
Capitalized software....................................... -- (664)
Other...................................................... 15 (8)
---- -------
Total net deferred income tax asset (liability).......... $798 $ (990)
==== =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
F-15
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future taxable
income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
Note 8. Shareholders' Equity
The Company completed an initial public offering ("IPO") of common stock
during January 1998. Of the 3,150,000 shares of Common Stock sold in the IPO
at an offering price of $12.00 per share, 1,050,000 were sold by existing
shareholders and 2,100,000 were sold by the Company, generating $22.4 million
in net proceeds to the Company, net of offering expenses of $1.0 million.
The Company made cash payments of S corporation distributions (the "S
Corporation dividend") to shareholders totaling $711,000 which were accrued as
of January 28, 1998 and paid February 5, 1998. The S Corporation dividend
represented the undistributed earnings of the Company taxed or taxable to the
shareholders through the date of the IPO. Cash provided from the operating
activities of the Company prior to the IPO was used to fund the dividend
payment.
In December 1998, the Company repurchased and retired 13,000 shares of
common stock pursuant to a Board authorization to reacquire up to 300,000
shares of Company stock. Repurchase prices ranged from $13.31 to $14.00 per
share. During 1999, the Company repurchased and retired 1,204,000 shares of
common stock pursuant to a Board authorization at an average purchase price of
$7.76 per share.
Note 9. Stock Option Plan and Employee Benefit Plans
In 1997, the Company adopted the 1997 Stock Option Plan (the "Option Plan")
under which incentive and non-statutory stock options to acquire shares of the
Company's common stock may be granted to officers, employees, and consultants
of the Company. The Option Plan is administered by the Board of Directors and
permits the issuance of up to 2,500,000 shares of the Company's common stock.
Incentive stock options must be issued at an exercise price not less than the
fair market value of the underlying shares on the date of grant. Options
granted under the Option Plan vest over various terms up to four years and are
exercisable over a period of time, not to exceed ten years, and are subject to
other terms and conditions specified in each individual employee option
agreement. A summary of employee stock options follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Weighted Average Fair Value of
Shares Exercise Price Options Granted
--------- ---------------- ----------------
<S> <C> <C> <C>
Outstanding as of December
31, 1997.................... -- --
Granted.................... 1,515,700 $12.86 $7.41
Canceled................... (58,500) 13.14
Options converted in
acquisition............... 175,906 5.67
---------
Outstanding as of December
31, 1998.................... 1,633,106 11.52
Granted.................... 1,616,629 7.06 $5.68
Exercised.................. (77,382) 6.58
Canceled................... (833,780) 10.81
---------
Outstanding as of December
31, 1999.................... 2,338,573 $ 9.19
=========
</TABLE>
F-16
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information concerning currently outstanding
options:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Options Contractual Exercise Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.42- $8.69......... 1,289,348 9.4 $ 6.04 25,881 $ 5.29
$9.00-$14.38......... 842,950 8.8 12.02 189,094 12.23
$15.00-$19.13......... 206,275 8.8 17.30 39,969 17.46
--------- --- ------ ------- ------
$3.42-$19.13......... 2,338,573 9.1 $ 9.19 254,944 $12.34
========= === ====== ======= ======
</TABLE>
As part of the SAC acquisition, SAC's outstanding options were converted
into SM&A options for 175,906 shares of the Company's common stock. These
options have been included in the stock option summary above, but are not part
of the Option Plan. The SFAS No. 123 calculation below does not include the
effect of these converted options as their fair value has been included in the
calculation of goodwill from acquisition.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share as if the Company
had adopted the fair value method as of the beginning of fiscal 1995.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option-pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option-pricing model, with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Stock volatility............................................... 62.93% 51.76%
Risk-free interest rate........................................ 5.50% 6.00%
Option term in years........................................... 6.25 6.25
Stock dividend yield........................................... 0.00 0.00
</TABLE>
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of
the 1999 and 1998 awards had been amortized to expense over the vesting period
of the awards, pro forma net income would have been $2.7 million, or $0.16 per
basic share and $0.16 per diluted share in 1999; and $6.9 million, or $0.44
per basic share and $0.43 per diluted share in 1998.
Employee Stock Purchase Plan
In 1999, the Company adopted an Employee Stock Purchase Plan (the "ESP
Plan") with an initial allocation of 250,000 shares. The ESP Plan allows
employees of the Company to purchase common stock, through bi-weekly payroll
deductions, at a 15% discount. Employee contributions to the ESP Plan are
limited to 15% of the employee's annual compensation.
Defined Contribution Plans
The Steven Myers & Associates 401(k) Plan and Trust is a defined
contribution plan. The Plan includes a tax-deferred 401(k) provision. The Plan
covers all employees of the heritage entity Steven Myers & Associates.
Contributions are made to the Plan by participants only.
F-17
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SAC and DSA each maintained 401(k) and profit sharing plans for their
employees. Contributions were made to the Plan by both the employees and the
Company. The Company's expense under these plans was $110,000 and $479,000 for
the years ended December 31, 1999 and 1998, respectively. In March 1999, the
defined contribution pension plans of Steven Myers & Associates, SAC, and DSA
were merged to form a single 401(k) plan. The new plan, the SM&A Corporation
401(k) Plan and Trust, provides for employee contributions of up to 15% of
eligible compensation with Company matching, supplemental contributions for
certain classes of employees based on performance criteria and profit sharing
under certain conditions.
Note 10. Commitment and Contingencies
The Company leases office facilities and certain equipment under lease
agreements classified as operating leases. Future minimum lease payments under
noncancelable operating leases as of December 31, 1999 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
2000........................................................... $ 4,744
2001........................................................... 4,606
2002........................................................... 4,617
2003........................................................... 4,715
2004........................................................... 4,396
Thereafter..................................................... 16,547
-------
Total future minimum lease payments.............................. $39,625
=======
</TABLE>
Rent expense amounted to $3,943,000, $1,700,000 and $392,000 for the years
ended December 31, 1999, 1998 and 1997, respectively, and has been included in
selling, general and administrative expenses in the accompanying consolidated
statements of income.
The Company is party to various legal actions which arose in the normal
course of business. In the opinion of management, the settlement of these
matters will not materially affect the Company's financial position or results
of operations.
F-18
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11. Segment Reporting Data
SM&A classifies its operations into three lines of business, each offering
a distinct set of services. These lines of business are summarized as follows;
Proposal Management, which involves assisting clients with the procurement of
government and commercial programs; Systems Solutions, which includes systems
engineering, scientific research, program management and technical support
services, and Information Technology Solutions, which focuses on information
systems development.
The Company evaluates performance based on several factors, of which the
primary financial measure is business segment operating income. The accounting
policies of the business segments are the same as those described in the
summary of significant accounting policies.
Information as to the operations of the lines of business is set forth
below. The information presented for the year ended December 31, 1997
represents pro forma supplemental data as described on the statements of
income.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net revenues:
Proposal Management Group......................... $ 38,135 $ 39,594 $36,962
Systems Solutions Group........................... 51,779 20,327 --
Information Technology Solutions Group............ 16,829 8,528 --
-------- -------- -------
Total net revenues.............................. $106,743 $ 68,449 $36,962
======== ======== =======
Depreciation and amortization expense:
Proposal Management Group......................... $ 98 $ 115 $ 139
Systems Solutions Group........................... 1,568 935 --
Information Technology Solutions Group............ 227 108 --
Executive Group................................... 367 274 --
-------- -------- -------
Total depreciation and amortization expense..... $ 2,260 $ 1,432 $ 139
======== ======== =======
Operating income (loss):
Proposal Management Group......................... $ 12,820 $ 15,730 $ 8,249
Systems Solutions Group........................... 12,702 6,259 --
Information Technology Solutions Group............ (1,792) 3,015 --
Executive Group................................... (16,289) (11,925) --
-------- -------- -------
Total operating income.......................... $ 7,441 $ 13,079 $ 8,249
======== ======== =======
Income (loss) from continuing operations:
Proposal Management Group......................... $ 7,628 $ 8,990 $ 4,774
Systems Solutions Group........................... 7,558 3,936 --
Information Technology Solutions Group............ (1,066) 1,896 --
Executive Group................................... (10,110) (6,295) --
-------- -------- -------
Total income from continuing operations......... $ 4,010 $ 8,527 $ 4,774
======== ======== =======
Assets:
Proposal Management Group......................... $ 10,146 $ 8,906 $ 5,331
Systems Solutions Group........................... 16,184 8,654 --
Information Technology Solutions Group............ 24,403 9,492 --
Executive Group................................... 46,109 39,272 --
-------- -------- -------
Total assets.................................... $ 96,842 $ 66,324 $ 5,331
======== ======== =======
</TABLE>
F-19
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12. Concentrations of Credit Risk and Major Customers
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivable.
The majority of the Company's receivables are from the U.S. Government and
large companies in the aerospace and defense industries. The Company's ten
largest customers represented 80% of total revenue for fiscal 1999. The
Company controls credit risk through credit approvals and monitoring
procedures. Credit losses have historically been minimal.
The percentage of the Company's net revenues arising from major customers
is summarized as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S. Government......................................... 28% 25% -- %
Raytheon Systems Company................................ 20 16 11
Lockheed Martin Corporation............................. 16 17 22
The Boeing Company...................................... 9 8 10
Litton Systems, Inc..................................... 3 5 15
Motorola Corporation.................................... -- 6 13
Hughes Space & Communications Company................... -- -- 10
</TABLE>
Note 13. Subsequent Events
In February 2000, the Company acquired substantially all of the assets and
assumption of certain liabilities of System Simulation Solutions, Inc. ("S3I")
for approximately $6.3 million in cash. S3I has the right to receive up to
approximately $1 million in additional consideration contingent upon S3I's
achievement of certain operating results for the twelve month periods ending
February 28, 2001, and February 28, 2002. The earnouts are payable in cash and
are due within 60 days after each of the first and second anniversary of the
closing date, and will be recorded as an addition to goodwill. This
transaction will be accounted for as a purchase and, accordingly, the
consolidated financial statements will include the financial results of S3I
from February 1, 2000, the beginning of the accounting period in which the
purchase transaction was finalized.
F-20
<PAGE>
SM&A CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charges to Recoveries Balance at
the Beginning Bad Debts and Deductions/ the End
of the Period Expense Other(1) Write-Offs of the Period
------------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
1999
Allowance for Doubtful
Accounts............... $643 $142 $210 $(60) $935
---- ---- ---- ---- ----
1998
Allowance for Doubtful
Accounts............... $-- $ 60 $625 $(42) $643
---- ---- ---- ---- ----
1997
Allowance for Doubtful
Accounts............... $ 27 $-- $-- $(27) $--
==== ==== ==== ==== ====
</TABLE>
- --------
(1)Represents amounts acquired in acquisitions.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SM&A CORPORATION
/s/ Steven S. Myers
By: _________________________________
Steven S. Myers
Chief Executive Officer
Dated: April 6, 2000
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven S. Myers and Michael A. Piraino
his attorneys-in-fact, each with the power of substitution, for him in any and
all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with Exhibits thereto and other documents in connection
therewith with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or substitute or
substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Steven S. Myers Chairman of the Board and April 6, 2000
____________________________________ Chief Executive Officer
Steven S. Myers (Principal Executive
Officer)
/s/ Michael A. Piraino President, Chief Operating April 6, 2000
____________________________________ Officer, Acting Chief
Michael A. Piraino Financial Officer,
Secretary and Director
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ J. Christopher Lewis Director April 6, 2000
____________________________________
J. Christopher Lewis
/s/ James R. Mellor Director April 6, 2000
____________________________________
James R. Mellor
/s/ Malcolm R. Currie Director April 6, 2000
____________________________________
Malcolm R. Currie
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
(3) Exhibits (numbered in accordance with item 601 of Regulation S-K).
2.1 Agreement and Plan of Reorganization and Merger dated May 18, 1998, by
and among the Registrant, Space Applications Corporation, SAC
Acquisition, Inc. and the individual shareholders named therein (filed
on June 4, 1998 as Exhibit 2 to the Registrant's Current Report on Form
8-K and incorporated herein by reference)
2.2 Agreement and Plan of Reorganization and Merger dated July 22, 1998, by
and among the Registrant, Decision-Science Applications, Inc., DSA
Acquisition, Inc. and the individual shareholders named therein (filed
on August 21 1998 as Exhibit 2.1 to the Registrant's Current Report on
Form 8-K and incorporated herein by reference)
2.3 Agreement and Plan of Reorganization and Merger dated March 30, 1999,
by and among SM&A Corporation, Systems Integration Software, Inc., SIS
Acquisition, Inc. and the individuals named therein (filed on May 17,
1999 as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999 and incorporated herein by
reference)
2.4 Stock Purchase Agreement dated as of September 20, 1999, by and among
SM&A Corporation (East), Kapos Associates Inc., Ervin Kapos and June
Kapos and Verona Oliver and Cordellia Scruggs (filed on November 15,
1999 as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999 and incorporated herein by
reference)
2.5 Agreement of Merger dated November 24, 1998 between Space Applications
Corporation and SM&A Corporation (East), effective date December 31,
1998 (filed on March 31, 1999 as Exhibit 2.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference)
3.1 Articles of Incorporation, as amended and restated (filed on January
27, 1998 as Exhibit 3.1 to the Registrant's Registration Statement on
Form S-1 (Registration No. 333-4075) and incorporated herein by
reference)
3.2 Bylaws of the Registrant, as amended and restated (filed on January 5,
1998 as Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1 (Registration No. 333-4075) and incorporated herein by reference)
3.3 Certificate of Ownership as filed with the California Secretary of
State on August 6, 1998 (filed on August 19, 1998 as Exhibit 3.1 to the
Registrant's Current Report on Form 8-K and incorporated herein by
reference)
10.1 Amended 1997 Stock Option Plan and related form of Stock Option
Agreement*
10.2 Amended and Restated Employee Stock Purchase Plan*
10.3 Form of Indemnification Agreement (filed on November 21, 1997 as
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1
(Registration No. 3334075) and incorporated herein by reference)
10.4 Office Facilities Lease (filed on November 21, 1997 as Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1 (Registration No.
333-4075) and incorporated herein by reference)
10.5 Hawker Aircraft Sale Agreement (filed on November 21, 1997 as Exhibit
10.4 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by reference)
10.6 Employment Agreement with Steven S. Myers (filed on November 21, 1997
as Exhibit 10.5 to the Registrant's Registration Statement on Form S-1
(Registration No. 333-4075) and incorporated herein by reference)
10.7 Employment Agreement dated December 10, 1998 between the Registrant and
Michael A. Piraino (filed on March 31, 1999 as Exhibit 10.27 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.8 Commercial Note dated May 30, 1995 between NationsBank, N.A. and the
Registrant and related Aircraft Security--Chattel Mortgage, Security
Agreement and Unconditional Guaranty of Payment (filed on November 21,
1997 as Exhibit 10.8 to the Registrant's Registration Statement on
Form S-1 (Registration No. 3334075) and incorporated herein by
reference)
10.9 Executive Bonus Plan (filed on November 21, 1997 as Exhibit 10.11 to
the Registrant's Registration Statement on Form S-1 (Registration No.
3334075) and incorporated herein by reference)
10.10 Registration Rights Agreement dated May 29, 1998 by and among the
Registrant and certain shareholders of Space Applications Corporation
identified therein (filed on June 4, 1998 as Exhibit 2 to the
Registrant's Current Report on Form 8-K and incorporated herein by
reference)
10.11 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Roger Skinner (filed on June 4, 1998 as
Exhibit 2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.12 Employment Agreement dated May 29, 1998 by and between Space
Applications Corporation and Stanley Hee (filed on June 4, 1998 as
Exhibit 2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.13 Registration Rights Agreement dated August 20, 1998 by and among
Registrant and certain shareholders of Decision-Science Applications,
Inc. set forth therein (filed on August 21, 1998 as Exhibit 10.1 to the
Registrant's Current Report on Form 8-K and incorporated herein by
reference)
10.14 Employment Agreement dated August 20, 1998 by and between Decision-
Science Applications, Inc. and Guy A. Ackerson (filed on August 21,
1998 as Exhibit 10.2 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.15 Employment Agreement dated August 20, 1998 by and between Decision-
Science Applications, Inc. and Gary L. Lucas (filed on August 21, 1998
as Exhibit 10.3 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.16 Employment Agreement dated August 20, 1998 by and between Decision-
Science Applications, Inc. and Dana R. Raucher (filed on August 21,
1998 as Exhibit 10.4 to the Registrant's Current Report on Form 8-K and
incorporated herein by reference)
10.17 Employment Agreement dated March 30, 1999, between Systems Integration
Software, Inc. and Gary Markle*
10.18 Employment Agreement dated September 20, 1999, by and between Kapos
Associates Inc. and Ervin Kapos*
10.19 Escrow Agreement dated September 20, 1999, among SM&A Corporation
(East), Kapos Associates Inc., Ervin Kapos and June Kapos and First
American Trust Company (filed on November 15, 1999 as Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 and incorporated herein by reference)
10.20 Escrow Agreement dated March 30, 1999, among the Registrant, Systems
Integration Software, Inc., First American Trust Company and the
individuals names therein (filed on May 17, 1999 as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 and incorporated herein by reference)
10.21 Escrow Agreement dated August 20, 1998 by and between Decision-Science
Applications, Inc., First American Trust Company and certain
shareholders identified therein (filed on August 21, 1998 as Exhibit
10.5 to the Registrant's Current Report on Form 8-K and incorporated
herein by reference)
10.22 Escrow Agreement dated May 29, 1998, by and between the Registrant,
Space Applications Corporation, First American Trust Company, Stanley
Y.H. Hee and certain shareholders identified therein (filed on March
31, 1999 as Exhibit 10.16 to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1998 and incorporated herein by
reference)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.23 Note dated June 25, 1998 for sale of Turbo Commander aircraft (filed
on March 31, 1999 as Exhibit 10.18 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference)
10.24 Credit and Security Agreement dated September 11, 1998 between the
Registrant and the financial institutions listed thereon, as Lenders
and Mellon Bank, N.A., as Agent, and Amendment Number One thereto
dated December 4, 1998 (filed on March 31, 1999 as Exhibit 10.19 to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference)
10.25 Promissory Note dated September 11, 1998 executed by the Registrant in
favor of Mellon Bank in the principal amount of $15,000,000 (filed on
March 31, 1999 as Exhibit 10.20 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 and incorporated herein
by reference)
10.26 Promissory Note dated September 11, 1998 executed by the Registrant in
favor of Imperial Bank in the principal amount of $10,000,000 (filed
on March 31, 1999 as Exhibit 10.21 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998 and incorporated
herein by reference)
10.27 General Continuing Guaranty dated September 11, 1998 of Space
Applications Corporation securing obligations of the Registrant under
promissory note in favor of Mellon Bank (filed on March 31, 1999 as
Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference)
10.28 General Continuing Guaranty dated September 11, 1998 of Decision-
Science Applications, Inc. securing obligations of the Registrant
under promissory note in favor of Mellon Bank (filed on March 31, 1999
as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by reference)
10.29 Security Agreement dated September 11, 1998 between Mellon Bank, N.A.
and Space Applications Corporation (filed on March 31, 1999 as Exhibit
10.24 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998 and incorporated herein
by reference)
10.30 Security Agreement dated September 11, 1998 between Mellon Bank, N.A.
and Decision-Science Applications, Inc. (filed on March 31, 1999 as
Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference)
10.31 Common Stock Purchase Agreement dated September 30, 1998 between Space
Applications Corporation and Summit Aviation (filed on March 31, 1999
as Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 and incorporated herein by reference)
10.32 Office Lease between Orix Prime West Colorado Springs Venture and
Decision-Science Applications, Inc., as amended by First Amendment to
Office Lease and Second Amendment to Office Lease*
21 Subsidiaries of the Registrant*
23 Consent of KPMG LLP*
27 Financial Data Schedule*
</TABLE>
- --------
* Filed herewith.
<PAGE>
EXHIBIT 10.1
SM&A
CORPORATION
AMENDED
1997 STOCK OPTION PLAN
NOTICE: QUALIFIED OPTIONS UNDER THIS PLAN BEAR RESTRICTIONS GOVERNED BY SECTION
422 OF THE INTERNAL REVENUE CODE. PLAN PARTICIPANTS ARE URGED TO READ SECTION
422 AND TO UNDERSTAND THE RESTRICTIONS CONTAINED THEREIN. NOT ALL SECTION 422
-------------------
RESTRICTIONS ARE REFERENCED IN THIS PLAN. OPTIONS GRANTED HEREUNDER MAY BEAR
- -----------------------------------------
RESTRICTIONS IMPOSED BY FEDERAL AND STATE SECURITIES LAWS. PLAN PARTICIPANTS
ARE URGED TO CONSULT WITH THEIR TAX AND LEGAL ADVISORS CONCERNING THE NATURE AND
RESTRICTIONS UPON THE OPTIONS GOVERNED HEREBY.
1. Purposes.
--------
(a) The purpose of the Plan is to provide a means by which selected
employees, Directors and Consultants of the Company and its Affiliates, may be
given an opportunity to benefit from increases in value of the stock of the
Company through the granting of Incentive Stock Options and Nonstatutory Stock
Options, as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants of the Company or its
Affiliates, to secure and retain the services of new Employees, Directors and
Consultants, and to provide incentives for such persons to exert maximum efforts
for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to Section 3(c), be
------------
either Incentive Stock Options and Nonstatutory Stock Options. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and in such form as issued pursuant to Section 6,
---------
and a certificate or certificates will be issued for shares purchased on
exercise of such Options.
2. Definitions.
-----------
(a) "Affiliate" means any parent corporation or subsidiary corporation,
---------
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
<PAGE>
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means a Committee appointed by the Board in accordance with
---------
Section 3(c) of the Plan.
- ------------
(e) "Company" means SM&A Corporation, a California corporation.
-------
(f) "Consultant" means any person, including an advisor, engaged by the
----------
Company or an Affiliate to render consulting or advisory services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
(g) "Continuous Status as an Employee, Director or Consultant" means the
--------------------------------------------------------
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave or any other personal leave; provided, however, that for
-----------------
purposes of Incentive Stock Options, any such leave may not exceed three (3)
months, unless reemployment upon the expiration of such leave is guaranteed by
contract, Company policies or statute; or (ii) transfers between locations of
the Company or between the Company, Affiliates or their successors.
(h) "Director" means a member of the Board.
--------
(i) "Employee" means any person, including Officers and Directors, employed
--------
by the Company or any Affiliate of the Company. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(k) "Fair Market Value" means, as of any date, the value of the Common
-----------------
Stock of the Company determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a
------
share of Common Stock shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such system or
exchange on the last market trading day prior to the day of determination,
as reported in the Wall Street Journal or such other source as the Board
deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a share of Common Stock shall be
2
<PAGE>
the mean between the bid and asked prices for the Common Stock on the last
market trading day prior to the day of determination, as reported in the
Wall Street Journal or such other source as the Board deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Board.
(l) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(m) "Non-Employee Director" shall mean a director who:
---------------------
(i) Is not currently an officer (as defined in Rule 16a-1(f)
of the Exchange Act) of the Company or a parent or subsidiary of the
Company, or otherwise currently employed by the Company or a parent or
subsidiary of the Company;
(ii) Does not receive compensation, either directly or
indirectly, from the Company or a parent or subsidiary of the Company, for
services rendered as a consultant or in any capacity other than as a
director, except for an amount that does not exceed the dollar amount for
which disclosure would be required pursuant to Rule 404(a) of the Exchange
Act;
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Rule 404(a) of the Exchange
Act; and
(iv) Is not engaged in a business relationship for which
disclosure would be required pursuant to Rule 404(b) of the Exchange Act.
(n) "Nonstatutory Stock Option" means an Option not intended to qualify as
-------------------------
an Incentive Stock Option.
(o) "Officer" means a person who is an officer of the Company within the
-------
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
------
(q) "Option Agreement" means a written agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(r) "Optionee" means an Employee, Director or Consultant who holds an
--------
outstanding Option.
(s) "Participant" means an Employee, Director or Consultant who is granted
-----------
Options.
(t) "Plan" means this Amended 1997 Stock Option Plan.
----
3
<PAGE>
(u) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
----------
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(v) "Securities Act" means the Securities Act of 1933, as amended.
--------------
3. Administration.
--------------
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in Section 3(c).
------------
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Options; when and how Options
shall be granted; whether an Option will be an Incentive Stock Option or a
Nonstatutory Stock Option, the provisions of each Option granted (which
need not be identical), including the vesting schedule for the Options, and
the number of shares underlying such Options to be granted to each such
person;
(ii) To construe and interpret the Plan and Options granted
under it, and to establish amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement,
in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective;
(iii) To amend the Plan as provided in Section 12; and
----------
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or advisable to promote the best
interests of the Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"), all
---------
of the members of which Committee shall be Non-Employee Directors. If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board (and references in this Plan to the Board shall thereafter be to
the Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
4
<PAGE>
4. Shares Subject to the Plan.
--------------------------
Subject to the provisions of Section 11 relating to adjustments upon
----------
changes in stock, the stock that may be issued pursuant to Options shall not
exceed in the aggregate Two Million Five Hundred Thousand (2,500,000) shares of
the Company's Common Stock. If any Option shall for any reason expire or
otherwise terminates, in whole or in part, without having been exercised in
full, the stock not acquired under such Option shall revert to and again become
available for issuance under the Plan.
5. Eligibility.
-----------
(a) Incentive Stock Options may be granted only to Employees. Nonstatutory
Stock Options may be granted only to Employees, Directors or Consultants.
(b) A Director shall be eligible for the benefits of the Plan provided that
such Director's participation conforms to the requirements of Rule 16b-3, if
applicable.
(c) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any of
its Affiliates unless the exercise price of such Incentive Stock Option is at
least one hundred ten percent (110%) of the Fair Market Value of such stock at
the date of grant.
6. Option Provisions.
-----------------
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten (10)
----
years from the date it was granted.
(b) Price. The exercise price of each Incentive Stock Option shall be not
-----
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, the exercise price of any Incentive Stock Option granted hereunder to
any stockholder possessing at least 10% of the total combined voting power of
all classes of stock of the Company shall be not less than one hundred ten
percent (110%) of the Fair Market Value of the stock subject to the Option on
the date the Option is granted.
(c) Consideration. The purchase price of stock acquired pursuant to an
-------------
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, (ii) at the
discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, by delivering to the Company other shares of Common
Stock of the Company (provided that the shares have been held for the period
required to avoid a charge to the
5
<PAGE>
Company's reported earnings), (iii) at the discretion of the Board or the
Committee, either at the time of the grant or exercise of the Option, by
delivering to the Company all or any part of an Option granted under this Plan
for a cashless exercise (provided that such cashless exchange will not result in
a charge to the Company's reported earnings), or (iv) by tendering any other
form of legal consideration that may be acceptable to the Board.
(d) Transferability. An Incentive Stock Option shall not be transferable
---------------
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option granted to an
Optionee subject to Section 16 of the Exchange Act on the date of grant shall
not be transferable except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order satisfying the requirements of
Rule 16b-3 and the rules thereunder (a "QDRO"), and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such person or
any transferee pursuant to a QDRO. A Nonstatutory Stock Option granted to an
Optionee who is not subject to Section 16 of the Exchange Act on the date of
grant may not be transferable except by will or by the laws of descent and
distribution, unless otherwise permitted by the Board. The person to whom the
Option is granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionee, shall thereafter be entitled to exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option may,
-------
but need not, be allotted in periodic installments (which may, but need not, be
equal). The Option Agreement may provide that from time to time during each of
such installment periods, the Option may become exercisable ("vest") with
----
respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
Section 6(e) are subject to any Option provisions governing the minimum number
- ------------
of shares as to which an Option may be exercised.
(f) Termination of Employment or Relationship as a Director or Consultant.
---------------------------------------------------------------------
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it at the date of termination) but only within such period
of time ending on the earlier of (i) the date ninety (90) days after the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer period specified in the Option Agreement), or (ii)
the expiration of the term of the Option as set forth in the Option Agreement.
If, after termination, the Optionee does not exercise his or her Option within
the time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(g) Disability of Optionee. In the event an Optionee's Continuous Status
----------------------
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date six (6)
6
<PAGE>
months following such termination (or such longer period specified in the Option
Agreement), or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, at the date of termination, the Optionee is not entitled
to exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(h) Death of Optionee. In the event of the death of an Optionee during, or
-----------------
within a period specified in the Option after the termination of, the Optionee's
Continuous Status as an Employee, Director or Consultant, the Option may be
exercised (to the extent the Optionee was entitled to exercise the Option at the
date of death) by the Optionee's estate, by a person who acquired the right to
exercise the Option by bequest or inheritance or by a person designated to
exercise the option upon the Optionee's death pursuant to Section 6(d), but only
------------
within the period ending on the earlier of (i) the date twelve (12) months
following the date of death (or such longer period specified in the Option
Agreement), or (ii) the expiration of the term of such Option as set forth in
the Option Agreement. If, at the time of death, the Optionee was not entitled
to exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
7. Cancellation and Regrant of Options.
-----------------------------------
The Board or the Committee shall have the authority to effect, at any time
and from time to time, (i) the repricing of any outstanding Options under the
Plan, and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of stock, but having an exercise price per share not
less than one hundred percent (100%) of the Fair Market Value in the case of an
Incentive Stock Option or, in the case of a ten percent (10%) stockholder (as
described in Section 5(c)) not less than one hundred ten percent (110%) of the
------------
Fair Market Value in the case of an Incentive Stock Option.
8. Covenants of the Company.
------------------------
(a) During the terms of the Options, the Company shall keep available at
all times the number of shares of stock which would be issuable under such
outstanding Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Options or any stock issued or issuable
pursuant to any such Options. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless
7
<PAGE>
and until such authority is obtained.
9. Use of Proceeds from Stock.
--------------------------
Proceeds from the sale of Common Stock upon exercise of the Options shall
constitute general funds of the Company.
10. Miscellaneous.
-------------
(a) Neither an Optionee nor any person to whom an Option is transferred
under Section 6(d) shall be deemed to be the holder of, or to have any of the
------------
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(b) Nothing in the Plan or any Option granted pursuant thereto shall confer
upon any Employee, Director, Consultant or other holder of Options any right to
continue in the employ of the Company or any Affiliate (or to continue acting as
a Director or Consultant) or shall affect the right of the Company or any
Affiliate to terminate the employment or relationship as a Director or
Consultant of any Employee, Director, Consultant or other holder of Options with
or without cause.
(c) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
granted are exercisable for the first time by an Optionee during any calendar
year under all plans of the Company and its Affiliates exceeds One Hundred
Thousand Dollars ($100,000), the Options or portions thereof which exceed such
limit (according to the order in which they were granted) shall be treated as
Nonstatutory Stock Options.
(d) The Company may require any person to whom an Option is granted, or any
person to whom an Option is transferred under Section 6(d), as a condition of
------------
exercising any Option, (1) to give written assurances satisfactory to the
Company as to such person's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Option; and (2)
to give written assurances satisfactory to the Company stating that such person
is acquiring the stock subject to the Option for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Option has been registered under a
then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
8
<PAGE>
(e) To the extent provided by the terms of an Option Agreement, the person
to whom an Option is granted may, at the discretion of the Board, satisfy any
mandatory federal, state or local tax withholding obligation relating to the
exercise or acquisition of stock under an Option by any of the following means
or by a combination of such means: (1) tendering cash payment; (2) authorizing
the Company to withhold shares from the shares of the Common Stock otherwise
issuable to the Participant as a result of the exercise or acquisition of stock
under the Option provided that such arrangement will not result in a charge to
the Company's reported earnings; or (3) delivering to the Company owned and
unencumbered shares of the Common Stock of the Company that have been held for
the period required to avoid a charge to the Company's reported earnings. The
exercise of the Option may be conditioned upon the receipt by the Company of
satisfactory evidence of the Participant's satisfaction of any withholding
obligations.
11. Adjustments Upon Changes in Stock.
---------------------------------
(a) Subject to any required action by stockholders, the number of shares
which may be purchased upon the exercise of each outstanding Option shall be
proportionately increased or decreased upon the occurrence of any change,
increase or decrease in the number and type of issued shares of Common Stock of
the Company, without receipt of consideration by the Company, which change
results from a stock split, a stock dividend, a merger, consolidation,
reorganization, reincorporation, a recapitalization, a combination of shares,
change in corporate structure or other like capital adjustment, so that upon the
exercise of each Option the holders of such Options shall receive the number and
type of securities which the holders would have received had the Options been
exercised on the date preceding such change, increase or decrease. In the event
of any such adjustment, the exercise price for each share shall be likewise
adjusted in inverse proportion to the increase or decrease in the number of
shares purchasable.
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then to the extent permitted by applicable law: (i) any
surviving corporation shall assume any Options outstanding under the Plan or
shall substitute similar Options for those outstanding under the Plan, or (ii)
such Options shall continue in full force and effect. In the event any
surviving corporation refuses to assume or continue such Options, or to
substitute similar options for those outstanding under the Plan, then, with
respect to Options held by persons then performing services as Employees,
Directors or Consultants, the time during which such Options vest shall be
accelerated and the Options terminated if not exercised prior to such event.
12. Amendment of the Plan.
---------------------
(a) The Board at any time, and from time to time, may amend the Plan
provided that the implementation of such amendment by the Company complies with
all applicable law.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for
9
<PAGE>
stockholder approval, including, but not limited to, amendments to the Plan
intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees,
Directors or Consultants with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Option granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan unless (i)
the Company requests the consent of the person to whom the Option was granted,
and (ii) such person consents in writing.
13. Termination or Suspension of the Plan.
-------------------------------------
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on October 1, 2007, which shall be within
ten (10) years from the date the Plan is adopted by the Board or approved by the
stockholders of the Company, whichever is earlier. No Options may be granted
under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent to the person to whom the Option was granted.
14. Effective Date of Plan.
----------------------
The Plan shall become effective as determined by the Board, but no Options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
15. Financial Information.
---------------------
The Company will provide to each Optionee financial statements of the
Company at least annually in accordance with Section 260.140.46 of Title 10 of
the California Code of Regulations.
10
<PAGE>
SM&A
CORPORATION
OPTION TO
PURCHASE COMMON STOCK
OF
SM&A CORPORATION
VOID AFTER
EXPIRATION DATE
---------------
This certifies that HOLDER'S NAME ("Holder") is entitled to purchase from
-------------
SM&A CORPORATION, a California corporation (the "Corporation"):
QUANTITY (NUMERIC QUANTITY)
--------
shares of Common Stock, of the Corporation (the "Shares"), subject to the terms
and conditions of the Corporation's 1997 Amended Stock Option Plan (the "Plan")
and such additional terms and conditions contained herein. Any conflict between
the terms and conditions of the Plan and those contained herein shall be
resolved in favor of the Plan. A copy of the Plan is attached hereto as Exhibit
-------
"A". Capitalized terms not otherwise defined herein shall have such definition
- ---
as is set forth in the Plan. The number of shares of Common Stock purchasable
hereunder may be adjusted upon the occurrence of certain events, as specified in
the Plan and as set forth below.
The options granted hereby are (check one): ______ Qualified
______ Nonqualified;
and are governed by the terms of the Plan concerning such type of options
thereunder.
IMPORTANT! IF THESE ARE QUALIFIED OPTIONS, YOU ARE URGED TO REVIEW CAREFULLY
THE REQUIREMENTS AND RESTRICTIONS OF QUALIFIED OPTIONS UNDER THE PLAN AND
SECTION 422 OF THE INTERNAL REVENUE CODE. WHETHER THE OPTIONS ARE QUALIFIED OR
NONQUALIFIED, YOU ARE URGED TO SEEK INDEPENDENT ADVICE CONCERNING THE LEGAL AND
TAX EFFECTS OF THESE OPTIONS AND SHOULD NOT RELY ON ANY SUMMARY OF SUCH MATTERS
CONTAINED HEREIN.
The purchase price to be paid for the Shares upon the exercise of all or
any portion of this Option shall be:
$PRICE PER SHARE
----------------
per share of Common Stock purchased (the "Purchase Price").
1. Exercise of Option: Vesting.
----------------------------
Holder may exercise this Option at any time until 5:00P.M., California time
on
MMMM/DD/YYYY (the "Expiration Date"),
------------
Page 1 of 3
<PAGE>
SM&A
CORPORATION
in accordance with the Vesting Schedule (the "Vesting Schedule") set forth below
by delivery to the Corporation, at its principal office, of:
(a) this Option,
(b) the Exercise Form, attached to this Option, duly executed and
specifying the number of Shares of Common Stock to be purchased hereunder, and
(c) cash or a certified or official bank check payable to the order of the
Corporation in the amount of the aggregate Purchase Price for the number of
Shares to be purchased.
Upon receipt thereof, the Corporation shall, as promptly as practicable,
and in any event within 30 days thereafter, cause to be executed and delivered
to Holder a certificate or certificates for the aggregate number of the Shares
issuable upon such exercise. If this Option shall have been exercised only in
part of the total number of vested options, the Corporation shall, at the time
of delivery of such certificate or certificates, deliver to Holder a new Option
evidencing the rights of Holder to purchase the remaining Shares of Common Stock
called for by this Option, pursuant to the same terms and conditions and with
the same restrictions specified herein, and which new Option shall be of like
tenor to this Option. The Corporation shall pay all expenses, taxes and other
charges payable in connection with the preparation, issuance and delivery of
stock certificates.
All shares of Common Stock issuable upon the exercise of this Option will
be validly issued, fully paid and nonassessable.
The Options shall vest in accordance with the following Vesting Schedule
beginning one (1) year following the date Option was granted.
First Year 25%
Second Year 25%
Third Year 25%
Fourth Year 25%
2. Lost, Stolen, Mutilated or Destroyed Option.
-------------------------------------------
If this Option is lost, stolen, mutilated or destroyed, the Corporation
may, on such terms as to indemnity or otherwise as the Corporation may in its
discretion impose (which shall, in the case of a mutilated Option, include the
surrender thereof), issue a new Option of like denomination, tenor and date as
this Option.
3. Restrictions on Transfer: Compliance with Securities Act: Legend
------------------------------------------------------------------
Condition.
- ---------
Neither this Option nor the right to purchase shares of Common Stock upon
exercise of this Option may be transferred by Holder in whole or in part except
that this Option may be exercised by Holder's conservator, trustee or estate
subject to all the terms and conditions set forth herein. To the extent not
exercised by Holder on the Expiration Date, this Option and all rights hereunder
shall expire and the Option and such rights shall thereupon automatically be
cancelled and shall cease to exist. Common Stock issued upon valid exercise of
this Option in whole or in part shall not be transferable by Holder other than
in accordance with the Securities Act of 1933, as amended ("Securities Act"),
and the rules and regulations promulgated thereunder, together with applicable
state securities laws. Unless a Registration Statement concerning such shares
is then in effect with the Securities and Exchange
Page 2 of 3
<PAGE>
SM&A
CORPORATION
Commission, certificates evidencing shares of the Common Stock issued upon
exercise of this Option shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE OFFERED FOR RESALE OR RESOLD UNLESS REGISTERED
PURSUANT TO THE PROVISIONS OF THAT ACT, UNLESS AN EXEMPTION
FROM REGISTRATION IS AVAILABLE.
4. Notices.
-------
Any notice or other document required or permitted to be given or delivered
to Holder shall be deemed given to him if given at the following address:
Holder: Holder's First and Last Name
Address
City, State, Zip
Any such notice or other document shall be mailed first-class, postage prepaid,
to such address or such other address as shall have been furnished to the
Corporation in writing by Holder. Any notice or other document required or
permitted to be given or delivered to the Corporation shall be mailed first-
class, postage prepaid to the Corporation at its principal executive offices,
4695 MacArthur Court, Eighth Floor, Newport Beach, California 92660, Attention:
Chief Financial Officer.
5. Applicable Law.
--------------
This Option shall be construed and enforced in accordance with and governed
by the laws of the State of California.
6. Headings.
--------
The headings herein are for convenience only and are not part of this
Option and shall not affect the interpretation hereof.
IN WITNESS WHEREOF, the Corporation has caused this Option to be executed
in its name by its President and Assistant Secretary, thereunto duly authorized.
MMMM/DD/YYYY SM&A CORPORATION,
- ------------
Date Stock Option Granted a California corporation
By:_________________________________
Michael A. Piraino, President
By:_________________________________
Daniel P. O'Connell, Assistant Secretary
Page 3 of 3
<PAGE>
EXHIBIT 10.2
________________________________
AMENDED AND RESTATED
EMPLOYEE STOCK PURCHASE PLAN
THIS AMENDED AND RESTATED EMPLOYEE STOCK PURCHASE PLAN (the "Plan") was
-----
established by SM&A Corporation, a California corporation (the "Company")
-------
effective as of March 1, 1999 (the "Effective Date"). The Plan has been amended
--------------
and restated as provided herein effective as of July 1, 1999.
ARTICLE 1
PURPOSE OF THE PLAN
-------------------
1.1 Purpose. The Company has determined that it is in its best interest
-------
to provide incentives to attract and retain employees and to increase employee
morale by providing a program through which employees of the Company, and the
Company's subsidiaries as the Company's Board of Directors (the "Board of
--------
Directors") may from time to time designate (each a "Designated Subsidiary," and
- --------- ---------------------
collectively, "Designated Subsidiaries"), may acquire a proprietary interest in
-----------------------
the Company through the purchase of shares of the Common Stock of the Company
("Company Stock"). The Plan is hereby established by the Company to permit
-------------
employees to subscribe for, and purchase directly from the Company, shares of
the Company Stock at a discount from the market price and to pay the purchase
price in installments by payroll deductions. The Plan is intended to qualify as
an "employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986, as amended from time to time (the "Code"). Accordingly, the provisions
----
of the Plan shall be administered, interpreted, and construed in a matter
consistent with the requirements of that section of the Code. The Plan is not
intended to be an employee benefit plan under the Employee Retirement Income
Security Act of 1974, and therefore is not required to comply with that Act.
ARTICLE 2
DEFINITIONS
-----------
2.1 Compensation. "Compensation" means wages, tips, overtime pay,
------------ ------------
bonuses, commissions, and other Compensation reported on Form W-2. Compensation
shall include any amounts contributed by the Employer pursuant to a salary
reduction agreement that is not currently includible in the Participant's gross
income by reason of the application of Code Sections 125, 402(e)(3), 402(g)(3),
402(h)(1)(B), 403(b), 414(h)(2), or 457(b). Compensation excludes the sum of all
of the following items, even if otherwise includible in gross income: (i)
reimbursements or other expense allowances; (ii) cash and noncash fringe
benefits; (iii) moving expenses; (iv) deferred compensation; and (v) welfare
benefits.
2.2 Eligibility Date. "Eligibility Date" means ninety (90) calendar days
---------------- ----------------
from an Employee's initial date of employment with the Company or any of its
Designated Subsidiaries.
1
<PAGE>
2.3 Employee. "Employee" means each person currently employed by the
-------- --------
Company or any of its Designated Subsidiaries, any portion of whose income is
subject to withholding of income tax or for whom Social Security retirement
contributions are made by the Company or any Designated Subsidiary and excluding
any persons employed by the Company or any Designated Subsidiary on a part-time
or temporary basis.
2.4 Enrollment Date. "Enrollment Date" means the first day of each
--------------- ---------------
Offering Period (January 1 and July 1) under the Plan. However, for the first
Offering Period, the Enrollment Date shall be July 1, 1999 and shall extend
through July 31, 1999.
2.5 Five Percent (5%) Owner. "5% Owner" means an Employee who,
----------------------- --------
immediately after the grant of any rights under the Plan, would own Company
Stock or hold outstanding options to purchase Company Stock possessing five
percent (5%) or more of the total combined voting power of all classes of stock
of the Company. For purposes of this Section, the ownership attribution rules
of Code Section 425(d) shall apply.
2.6 Offering Period. "Offering Period" means the six-month periods from
--------------- ---------------
January 1 through June 30 and July 1 through December 31 of each Plan Year. The
first Offering Period shall commence on July 1, 1999 and shall end December 31,
1999.
2.7 Participant. "Participant" means an Employee who has satisfied the
----------- -----------
eligibility requirements of Section 3.1 and has become a participant in the Plan
-----------
in accordance with Section 3.2.
-----------
2.8 Plan Year. "Plan Year" means the twelve consecutive month period
--------- ---------
ending on the last day of December.
2.9 Purchase Date. "Purchase Date" means the last day of each Offering
------------- -------------
Period (June 30 or December 31).
ARTICLE 3
ELIGIBILITY AND PARTICIPATION
-----------------------------
3.1 Eligibility. Subject to limitations imposed by Section 423(b) of the
-----------
Code, each Employee of the Company or any Designated Subsidiary may become a
Participant in the Plan on the Enrollment Date coincident with or next following
the Eligibility Date.
3.2 Participation. An Employee who has satisfied the eligibility
-------------
requirements of Section 3.1 may become a Participant in the Plan upon his
-----------
completion and delivery to the Human Resources Department of the Company of a
stock purchase agreement provided by the Company (the "Stock Purchase
--------------
Agreement") authorizing payroll deductions. Payroll deductions for a
Participant shall commence on the Enrollment Date coincident with or next
following the filing of the Participant's Stock Purchase Agreement and shall
remain in effect until revoked by the Participant by the filing of a notice of
withdrawal from the Plan under Article 8 or by the filing of a new Stock
---------
Purchase Agreement providing for a change in the Participant's payroll deduction
rate in accordance with Section 5.2.
-----------
2
<PAGE>
3.3 Special Rules. Under no circumstances shall:
-------------
(a) A 5% Owner be granted a right to purchase Company Stock under the
Plan;
(b) A Participant be entitled to purchase Company Stock under the
Plan which, when aggregated with all other employee stock purchase plans of
the Company, exceed an amount equal to the Aggregate Maximum. "Aggregate
---------
Maximum" means an amount equal to $20,000 worth of Company Stock
-------
(determined using the fair market value of such Company Stock at each
applicable Enrollment Date) during each calendar year; or
(c) The number of shares of Company Stock purchasable by a
Participant on any Purchase Date exceed 5,000 shares, subject to periodic
adjustments under Section 10.4.
------------
ARTICLE 4
OFFERING PERIOD
---------------
The initial grant of the right to purchase Company Stock under the Plan
shall occur on July 1, 1999 and terminate on December 31, 1999. Thereafter, the
Plan shall provide for Offering Periods commencing on each Enrollment Date and
terminating on the next following Purchase Date.
ARTICLE 5
PAYROLL DEDUCTIONS
------------------
5.1 Participant Election. Upon completion of the Stock Purchase
--------------------
Agreement, each Participant shall designate the amount of payroll deductions to
be made from his or her paycheck to purchase Company Stock under the Plan. The
amount of payroll deductions shall be designated in whole percentages of
Compensation, not to exceed 15%. The amount so designated upon the Stock
Purchase Agreement shall be effective as of the next payroll period and shall
continue until terminated or altered in accordance with Section 5.2 below.
-----------
5.2 Changes in Election. A Participant may terminate participation in the
-------------------
Plan at any time prior to the close of an Offering Period as provided in Article
-------
8. A Participant may increase or decrease the rate of payroll deductions once
- -
during each Offering Period by completing and delivering to the Human Resources
Department of the Company a new Stock Purchase Agreement setting forth the
desired change. A Participant may also terminate payroll deductions and have
accumulated deductions for the Offering Period applied to the purchase of
Company Stock as of the next Purchase Date by completing and delivering to the
Human Resources Department a new Stock Purchase Agreement setting forth the
desired change. Any change under this Section shall become effective on the
next payroll period (to the extent practical under the Company's payroll
practices) following the delivery of the new Stock Purchase Agreement.
3
<PAGE>
5.3 Participant Accounts. The Company shall establish and maintain a
--------------------
separate account ("Account") for each Participant. The amount of each
-------
Participant's payroll deductions shall be credited to his / her Account. No
interest will be paid or allowed on amounts credited to a Participant's Account.
All payroll deductions received by the Company under the Plan are general
corporate assets of the Company and may be used by the Company for any corporate
purpose. The Company is not obligated to segregate such payroll deductions.
ARTICLE 6
GRANT OF PURCHASE RIGHTS
------------------------
6.1 Right to Purchase Shares. On each Purchase Date, each Participant
------------------------
shall have the right to purchase at the price determined under Section 6.2 that
-----------
number of whole shares of Company Stock that can be purchased or issued by the
------------
Company based upon that price with the amounts held in his Account, subject to
the limits set forth in Section 3.3. In the event that there are amounts held in
---------
a Participant's Account that are not used to purchase Company Stock, such
amounts shall remain in the Participant's Account and shall be eligible to
purchase Company Stock in any subsequent Offering Period.
6.2 Purchase Price. The purchase price for any Offering Period shall be
--------------
the lesser of:
(a) 85% of the Fair Market Value of Company Stock on the Enrollment
Date; or
(b) 85% of the Fair Market Value of Company Stock on the Purchase
Date.
6.3 Fair Market Value. "Fair Market Value" shall be determined as
----------------- -----------------
follows:
(a) If the Company Stock is then listed or admitted to trading on the
NASDAQ National Market or a stock exchange which reports closing sale
prices, the Fair Market Value shall be the closing sale price on the date
of valuation on the NASDAQ National Market or principal stock exchange on
which the Company Stock is then listed or admitted to trading, or, if no
closing sale price is quoted or no sale takes place on such day, then the
Fair Market Value shall be the closing sale price of the Company Stock on
the NASDAQ National Market or such exchange on the next preceding day on
which a sale occurred.
(b) If the Company Stock is not then listed or admitted to trading on
the NASDAQ National Market or a stock exchange which reports closing sale
prices, the Fair Market Value shall be the average of the closing bid and
asked prices of the Company Stock in the over-the-counter market on the
date of valuation.
(c) If neither (a) nor (b) is applicable as of the date of valuation,
then the Fair Market Value shall be determined by the Administrator (see
Section 7.2) in good faith using any reasonable method of valuation, which
determination shall be conclusive and binding on all interested parties.
4
<PAGE>
ARTICLE 7
PURCHASE OF STOCK
-----------------
7.1 Purchase of Company Stock. A Participant who does not, prior to a
-------------------------
Purchase Date, notify the Company that such Participant does not want to
purchase any shares of Company Stock pursuant to the Plan or that such
Participant wants to purchase fewer than the maximum number of shares available
for purchase, shall be deemed to elect to purchase the maximum number of whole
shares of Company Stock purchasable with the amounts held in such Participant's
Account, at the purchase price determined under Section 6.2 above and, on each
Purchase Date, the Plan shall purchase such shares on behalf of such
Participant." In the event that there are amounts held in a Participant's
Account that are not used to purchase Company Stock, all such amounts shall be
held in the Participant's Account and carried forward to the next Offering
Period.
7.2 Delivery of Company Stock.
-------------------------
(a) Company Stock acquired under the Plan shall be issued directly to
a contract administrator ("Administrator") engaged by the Company to
--------------
administer the Plan under Article 9. All Company Stock so issued ("Plan
--------- ----
Held Stock") shall be held in the name of the Administrator for the benefit
----------
of the Plan. The Administrator shall maintain accounts for the benefit of
the Participants that shall reflect each Participant's interest in the Plan
Held Stock. Such accounts shall reflect the number of whole shares of
Company Stock that are being held by the Administrator for the benefit of
each Participant.
(b) Where Company Stock is issued under this paragraph, only full
shares of stock will be issued to a Participant. The time of issuance and
delivery of shares may be postponed for such period as may be necessary to
comply with the registration requirements under the Securities Act of 1933,
as amended, the listing requirements of any securities exchange on which
the Company Stock may then be listed, or the requirements under other laws
or regulations applicable to the issuance or sale of such shares.
ARTICLE 8
WITHDRAWAL
----------
8.1 In Service withdrawal. At any time prior to the Purchase Date of an
---------------------
Offering Period, any Participant may withdraw the amounts held in his/her
Account by executing and delivering to the Human Resources Department of the
Company written notice of withdrawal on the form provided by the Company. In
such a case, the entire balance of the Participant's Account shall be paid to
the Participant, without interest, as soon as is practicable. Upon such
notification, the Participant shall cease to participate in the Plan for the
remainder of the Offering Period in which the notice is given. Any Employee who
has withdrawn under this Section shall be excluded from participation in the
Plan for the remainder of the Offering Period, but may then be reinstated as a
participant for a subsequent Offering Period by executing and delivering a new
Stock Purchase Agreement to the Human Resources Department of the Company.
5
<PAGE>
8.2 Termination of Employment.
-------------------------
(a) In the event that a Participant's employment with the Company
terminates for any reason, the Participant shall cease to participate in
the Plan on the date of termination. As soon as is practical following the
date of termination, the entire balance of the Participant's Account shall
be paid to the Participant or his beneficiary, without interest.
(b) A Participant may file a written designation of a beneficiary who
is to receive any shares of Company Stock purchased under the Plan or any
cash from the Participant's Account in the event of his or her death
subsequent to a Purchase Date, but prior to delivery of such shares and
cash. In addition, a Participant may file a written designation of a
beneficiary who is to receive any cash from the Participant's Account under
the Plan in the event of his death prior to a Purchase Date under paragraph
(a) above.
(c) Any beneficiary designation under paragraph (b) above may be
changed by the Participant at any time by written notice. In the event of
the death of a Participant, the Committee (see Section 9.1) may rely upon
the most recent beneficiary designation it has on file as being the
appropriate beneficiary. In the event of the death of a Participant where
no valid beneficiary designation exists or the beneficiary has predeceased
the Participant, the Committee shall deliver any cash or shares of Company
Stock to the executor or administrator of the estate of the Participant, or
if no such executor or administrator has been appointed to the knowledge of
the Committee, the Committee, in its sole discretion, may deliver such
shares of Company Stock or cash to the spouse or any one or more dependents
or relatives of the Participant, or if no spouse, dependent or relative is
known to the Committee, then to such other person as the Committee may
designate.
ARTICLE 9
PLAN ADMINISTRATION
-------------------
9.1 Plan Administration.
-------------------
(a) Authority to control and manage the operation and administration
of the Plan shall be vested in the Board of Directors (the "Board") for the
-----
Company, or a committee ("Committee") thereof. The Board or Committee
---------
shall have all powers necessary to supervise the administration of the Plan
and control its operations.
(b) In addition to any powers and authority conferred on the Board or
Committee elsewhere in the Plan or by law, the Board or the Committee shall
have the following powers and authority:
(i) To designate agents to carry out responsibilities
relating to the Plan;
6
<PAGE>
(ii) To administer, interpret, construe and apply this Plan
and to answer all questions which may arise or which may be raised
under this Plan by a Participant, his beneficiary or any other person
whatsoever;
(iii) To establish rules and procedures from time to time
for the conduct of its business and for the administration and
effectuation of its responsibilities under the Plan; and
(iv) To perform or cause to be performed such further acts
as it may deem to be necessary, appropriate, or convenient for the
operation of the Plan.
(c) Any action taken in good faith by the Board or Committee in the
exercise of authority conferred upon it by this Plan shall be conclusive
and binding upon a Participant and his beneficiaries. All discretionary
powers conferred upon the Board shall be absolute.
9.2 Limitation on Liability. No Employee of the Company or member of the
-----------------------
Board or Committee shall be subject to any liability with respect to his duties
under the Plan unless the person acts fraudulently or in bad faith. To the
extent permitted by law, the Company shall indemnify each member of the Board or
Committee, and any other Employee of the Company with duties under the Plan who
was or is a party, or is threatened to be made a party, to any threatened,
pending or completed proceeding, whether civil, criminal, administrative, or
investigative, by reason of the person's conduct in the performance of his
duties under the Plan.
ARTICLE 10
COMPANY STOCK
-------------
10.1 Limitations on Purchase of Shares. The maximum number of shares of
---------------------------------
Company Stock that shall be made available for sale under the Plan shall be
250,000 shares, subject to adjustment under Section 10.4 below. The shares of
------------
Company Stock to be sold to Participants under the Plan will be issued by the
Company. If the total number of shares of Company Stock that would otherwise be
issuable pursuant to rights granted pursuant to Section 6.1 of the Plan at the
-----------
Purchase Date exceeds the number of shares then available under the Plan, the
Company shall make a pro rata allocation of the shares remaining available in as
uniform and equitable manner as is practicable. In such event, the Company
shall give written notice of such reduction of the number of shares to each
participant affected thereby and any unused payroll deductions shall be returned
to such participant if necessary.
10.2 Voting Company Stock. The Participant will have no interest or
--------------------
voting right in shares to be purchased under Section 6.1 of the Plan until such
-----------
shares have been purchased.
10.3 Registration of Company Stock. Shares to be delivered to a
-----------------------------
Participant under the Plan will be registered in the name of the Participant
unless designated otherwise by the Participant.
7
<PAGE>
10.4 Changes in Capitalization of the Company. Subject to any required
----------------------------------------
action by the shareholders of the Company, the number of shares of Company Stock
covered by each right under the Plan which has not yet been exercised and the
number of shares of Company Stock which have been authorized for issuance under
the Plan but have not yet been placed under rights or which have been returned
to the Plan upon the cancellation of a right, as well as the Purchase Price per
share of Company Stock covered by each right under the Plan which has not yet
been exercised, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Company Stock resulting from a stock split,
stock dividend, spin-off, reorganization, recapitalization, merger,
consolidation, exchange of shares or the like. Such adjustment shall be made by
the Board of Directors for the Company, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein, no
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of Company
Stock subject to any right granted hereunder.
10.5 Merger of Company. In the event that the Company at any time
-----------------
proposes to merge into, consolidate with or enter into any other reorganization
pursuant to which the Company is not the surviving entity (including the sale of
substantially all of its assets or a "reverse" merger in which the Company is
the surviving entity), then, to the extent permitted by applicable law: (i) any
surviving corporation shall assume the rights theretofore granted or substitute
for such rights new rights covering the shares of a successor corporation, with
appropriate adjustments as to the number and kind of shares and prices, or (ii)
the Plan and the rights theretofore granted shall continue in full force and
effect. In the event any surviving corporation refuses to assume or continue
the Plan, or to substitute similar options for those under the Plan, then the
Board of Directors or its committee shall cause written notice of the proposed
action to be given to the persons holding rights not less than 10 days prior to
the anticipated effective date of the proposed transaction and, concurrent with
the effective date of the proposed transaction, such rights shall be exercised
automatically in accordance with Section 7.1 as if such effective date were a
Purchase Date of the applicable Offering Period unless a Participant withdraws
from the Plan as provided in Section 8.1.
ARTICLE 11
MISCELLANEOUS
-------------
11.1 Amendment and Termination. The Plan shall terminate on December 31,
-------------------------
2008. Since future conditions affecting the Company cannot be anticipated or
foreseen, the Company reserves the right to amend, modify, or terminate the Plan
at any time. Upon termination of the Plan, all benefits shall become payable
immediately. Notwithstanding the foregoing, no such amendment or termination
shall affect rights previously granted, nor may an amendment make any change in
any right previously granted which adversely affects the rights of any
Participant. In addition, no amendment may be made without prior approval of
the shareholders of the Company if such amendment would:
(a) Increase the number of shares of Company Stock that may be issued
under the Plan;
(b) Materially modify the requirements as to eligibility for
participation in the Plan; or
8
<PAGE>
(c) Materially increase the benefits that accrue to Participants
under the Plan.
11.2 Shareholder Approval. Continuance of the Plan and the effectiveness
--------------------
of any right granted hereunder shall be subject to approval by the shareholders
of the Company, within twelve months before or after the date the Plan is
adopted by the Board.
11.3 Benefits Not Alienable. Benefits under the Plan may not be assigned
----------------------
or alienated, whether voluntarily or involuntarily. Any attempt at assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may treat such act as an election to withdraw funds in accordance with
Article 8.
11.4 No Enlargement of Employee Rights. This Plan is strictly a voluntary
---------------------------------
undertaking on the part of the Company and shall not be deemed to constitute a
contract between the Company and any Employee or to be consideration for, or an
inducement to, or a condition of, the employment of any Employee. Nothing
contained in the Plan shall be deemed to give the right to any Employee to be
retained in the employ of the Company or to interfere with the right of the
Company to discharge any Employee at any time.
11.5 Governing Law. To the extent not preempted by Federal law, all legal
-------------
questions pertaining to the Plan shall be determined in accordance with the laws
of the State of California.
11.6 Non-business Days. When any act under the Plan is required to be
-----------------
performed on a day that falls on a Saturday, Sunday or legal holiday, that act
shall be performed on the next succeeding day which is not a Saturday, Sunday or
legal holiday. Notwithstanding the above, Fair Market Value shall be determined
in accordance with Section 6.3.
-----------
11.7 Compliance With Securities Laws. Notwithstanding any provision of
-------------------------------
the Plan, the Committee shall administer the Plan in such a way to ensure that
the Plan at all times complies with any requirements of Federal Securities Laws.
9
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement"), dated as of March 30, 1999, between
SYSTEMS INTEGRATION SOFTWARE, INC., a Delaware corporation (the "Company"), and
-------
Gary Markle, an individual residing at 5945 Daltry Ln., Colorado Springs, CO
80906 (the "Employee").
--------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company is a wholly owned subsidiary of SM&A Corporation, a
California corporation (the "Parent");
------
WHEREAS, the Parent, the Company, SIS Acquisition, Inc., a California
corporation ("SIS"), and certain of the Company's shareholders have entered into
---
an Agreement and Plan of Reorganization and Merger, dated as of March 30, 1999
(the "Merger Agreement"), pursuant to which the Company will merge with and into
----------------
SIS, with SIS being the surviving entity to continue to carry on the Company's
existing business (the "Business") and to assume the obligations of this
--------
Agreement;
WHEREAS, the Employee is currently employed by the Company as its
President, CEO and Treasurer and, as such, possesses unique and valuable
technical, financial and other knowledge, experience and ability;
WHEREAS, the Company desires to retain the services of the Employee, has
offered to engage him on the terms and conditions hereinafter set forth and
would not have otherwise entered into the Merger Agreement without the Employee
agreeing to be bound hereby;
WHEREAS, the Employee is willing to accept such employment upon the terms
and conditions hereinafter set forth; and
WHEREAS, it is a condition to the closing of the transactions contemplated
by the Merger Agreement that the Company and Employee enter into this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the Company and the Employee agree as follows (capitalized
terms used in this Agreement not otherwise defined herein shall have the
meanings given to them in the Merger Agreement):
Section 1. Term of Employment.
- --------- ------------------
Subject to the provisions set forth in Sections 2 and 7 hereof, the Company
----------------
hereby employs the Employee as its VP and GM of ITSG - CS and the Employee
agrees to be employed by the Company, on the terms and conditions contained
herein, for a period commencing on the date hereof and terminating on the second
anniversary of the date hereof (the "Employment Term").
---------------
<PAGE>
Section 2. Duties.
- --------- ------
(a) Office. The Employee is hereby appointed to serve as VP and GM of
------
ITSG-CS of the Company, and shall have responsibility for managing the Company
and performing such services and duties for the Company as now or hereafter
existing, as are customarily performed by an employee in that position.
The Employee shall report directly to G. Meier (or any successor in such
office), and shall have responsibility for the management of the Company's
Business, operations and affairs. All subordinate officers and employees shall
report to the Employee or his designee.
It is understood that the respective Boards of Directors of the Company and
of the Parent will have general supervisory authority over the financial
condition and operating activities of the Company, budgets, long-term plans,
acquisitions and divestitures and other strategic alternatives and will seek
input from the Employee as and when needed.
(b) Full-Time Position. The Employee shall devote his entire time,
------------------
attention, abilities, energy and skill during regular business hours to carrying
out his duties hereunder, and shall faithfully, efficiently and diligently
perform such duties to promote the business and affairs of the Company and its
subsidiaries and affiliated companies. During the Employment Term, the
Employee's services shall be exclusive to the Company. The Employee shall not
directly or indirectly engage in any activity competitive with or adverse to the
Company's business or welfare or services of a business, professional or
commercial nature to any other person or firm, whether for compensation or
otherwise.
Section 3. Compensation.
- --------- ------------
(a) Base Salary. For services rendered by the Employee under this
-----------
Agreement, the Company shall pay the Employee or cause to be paid to the
Employee during the Employment Term a base salary (the "Base Salary") at a rate
-----------
equal to $100,000 per year. The Base Salary shall be earned and shall be payable
at such intervals and otherwise in such manner as is consistent with the normal
payroll practices of the Company for remuneration of its employees. The Company
shall review the Base Salary at least annually to determine whether an increase
is warranted in accordance with the Company's normal policies and procedures.
(b) Withholding. The Company shall be entitled to withhold amounts from
-----------
any compensation or other form of remuneration or benefit payable by the Company
to the Employee that the Company reasonably believes it is required to withhold
under any federal, state, local or foreign tax law to which the Company is
subject.
Section 4. Other Benefits.
- --------- --------------
During the Employment Term, except as may be otherwise provided herein, the
Employee shall be entitled to medical benefits, holiday, vacation or similar
rights and such other benefits, perquisites and privileges as are from time to
time provided by the Company, the Parent and their
-2-
<PAGE>
subsidiaries and affiliated companies to their full-time employees in comparable
positions, as the same may change from time to time and communicated to the
Employee.
Section 5. Expenses.
- --------- --------
The Company shall, during the Employment Term, reimburse the Employee for
all reasonable documented business expenses actually and necessarily incurred by
him in the course of, and in connection with, his employment by the Company.
The Employee shall keep detailed and accurate records of expenses incurred in
connection with his employment by the Company, and reimbursement therefor shall
be made in accordance with policies and procedures established by the Company's
management from time to time.
Section 6. Representations and Covenants of the Employee.
- --------- ---------------------------------------------
(a) The Employee represents and warrants to the Company that he is not a
party to or bound by any presently effective agreement or contract, whether of
employment or otherwise, with any third person or entity that would in any way
restrict or prohibit the Employee from undertaking or performing his obligations
on the terms and conditions set forth in this Agreement.
(b) The Employee covenants with the Company that he shall not, during the
Employment Term, enter into any such agreement, contract or understanding
described in Section 6(a) above so as to cause the Company, or any of its
------------
subsidiaries or affiliated companies, to be liable in connection therewith.
Section 7. Termination.
- --------- -----------
The Employment Term shall terminate upon any of the following occurrences:
(a) By Reason of Death. If the Employee shall die during the Employment
------------------
Term, this Agreement shall terminate except that the Employee's estate shall be
entitled to receive the Base Salary provided in Section 3(a) and any pro rata
------------
amount of any earned bonus, each to the last day of the month in which his death
occurs. Such termination shall not affect any vested rights which the Employee
may have at the time of his death pursuant to any insurance or other death
benefit plans or arrangements of the Company or any affiliate of the Company.
(b) Termination For Cause; Resignation Without Good Reason.
------------------------------------------------------
(i) Payments. If, prior to the expiration of the Employment Term,
--------
the Employee's employment is terminated by the Company for Cause, as
defined in Section 7(c) hereof, or if the Employee resigns from his
------------
employment hereunder other than for Good Reason, as defined in Section 7(e)
------------
hereof, the Employee shall be entitled to payment of his Base Salary
accrued through and including the date of such termination or resignation,
plus any other accrued but unpaid benefits or compensation, but shall not
be entitled to any other compensation or benefits under this Agreement.
-3-
<PAGE>
(ii) Notice of Termination. Termination of the Employee's employment
---------------------
for Cause shall be communicated by delivery to the Employee of a copy of a
resolution duly adopted by the Company's Board of Directors (a "Notice of
---------
Termination"). The Notice of Termination shall specify the effective date
-----------
of the termination of the Employee's employment.
(iii) Date of Termination. The date of a termination for Cause shall
-------------------
be the date specified in the Notice of Termination provided for in this
Section 7(b). The date of a resignation by the Employee without Good Reason
------------
shall be the date specified in a written notice of resignation from the
Employee to the Company. The Employee shall provide at least sixty (60)
days' advance written notice of the date of his resignation without Good
Reason.
(c) Definition of Cause. For the purposes of this Agreement, "Cause"
------------------- -----
shall mean (i) the failure or inability of the Employee to cure, within thirty
(30) days of receipt of written notice on behalf of the Company's Board of
Directors, the Employee's failure to substantially perform the primary duties of
his employment hereunder; (ii) the conviction of the Employee of a felony under
state or federal criminal laws; (iii) the commission by the Employee of any act
of fraud or willful misconduct against the Company or any of its subsidiaries or
affiliated companies; (iv) the commission by the Employee of any act of gross
negligence or malfeasance, resulting in an adverse impact upon the Company, its
reputation or its business operations; or (v) the violation by the Employee of
his covenants contained in Sections 6 and 8 hereof.
----------------
(d) Termination Upon Disability. If, during the Employment Term, the
---------------------------
Employee shall become incapable of fulfilling his obligations hereunder because
of injury or physical or mental illness, and such incapacity shall exist or
reasonably may be expected to continue to exist, upon the competent medical
opinion of a doctor chosen by the Company and Employee, for a period exceeding
sixty (60) consecutive days or ninety (90) nonconsecutive days within a six-
month period, the Company shall nevertheless continue to pay the Employee his
Base Salary through the last day of the sixtieth (60th) day of disability or, if
applicable, the date upon which the shorter periods of disability shall have
aggregated more than ninety (90) days within the six-month period (in either
event, the "Disability Date") plus any other benefits or compensation accrued
---------------
through, but unpaid as of, the Disability Date; provided, however, that nothing
in this Agreement shall operate to deprive the Employee of any rights he may
have pursuant to the Family and Medical Leave Act, the Americans with
Disabilities Act or any analogous state statutes. The Company may, at any time
on or after the Disability Date, terminate this Agreement and all further rights
and obligations of the parties under this Agreement, other than the obligations
of the Employee under Section 8 hereof, which obligations shall continue in
---------
effect for the periods therein stated.
(e) Termination Without Cause; Resignation for Good Reason.
------------------------------------------------------
(i) Liquidated Damages Paid by Company. If, prior to the expiration
----------------------------------
of the Employment Term, the Employee's employment is terminated by the
Company without Cause, or if the Employee resigns from his employment
hereunder for Good Reason, the Company shall pay to the Employee his Base
Salary accrued up to and including the date of such termination or
resignation plus any other accrued but unpaid benefits or compensation.
-4-
<PAGE>
In addition, for the period commencing immediately following the date
of such termination or resignation and ending six months thereafter (the
"Offset Period"), the Company shall pay to the Employee as liquidated
-------------
damages (the "Company Paid Liquidated Damages") his Base Salary, as in
-------------------------------
effect on the date of such termination.
The Company Paid Liquidated Damages shall be payable in accordance
with the Company's then effective payroll practices and at such intervals
as Base Salary would have been paid if the Employee had remained in the
active service of the Company; provided, however, that payments of Base
-------- -------
Salary during the Offset Period shall be made not less frequently than
monthly.
(ii) Other Benefits. In the event of the Employee's termination or
--------------
resignation as provided in this Section 7(e), the Employee shall continue
------------
to participate on the same terms and conditions as in effect immediately
prior to such termination or resignation in each pension, welfare, life
insurance, health, disability and other fringe benefit plan or program
(including automobile allowances) provided to the Employee at the time of
such termination or resignation until the earlier to occur of:
(A) six months thereafter; or
(B) such time as the Employee is otherwise covered by similar
programs.
Anything herein to the contrary notwithstanding, the Company shall
have no obligation to continue to maintain during the Offset Period any
plan or program solely as a result of the provisions of this Agreement. If,
during the Offset Period, the Employee is precluded from participating in a
plan or program by its terms or applicable law or if the Company elects not
to maintain such plan or program, the Company shall provide the Employee
with compensation the aggregate value of which is sufficient to purchase a
similar benefit program.
(iii) Death During Offset Period. If the Employee dies during the
--------------------------
Offset Period, the balance of the Company Paid Liquidated Damages will be
paid to his Beneficiary. "Beneficiary" shall mean the person or persons
-----------
designated by the Employee in writing to the Company to receive payments
under this Agreement or, if no such person or persons are designated, the
Employee's estate.
(iv) No Other Benefits. Except as expressly provided in this Section
----------------- -------
7(e), in the event the Employee's employment is terminated by the Company
----
without Cause or the Employee resigns his employment with the Company for
Good Reason, the Employee shall not be entitled to any other compensation,
benefits or damages under, or related to, this Agreement with respect to
the year of his termination or resignation or any subsequent year.
(v) Date of Termination. The date of termination of employment
-------------------
without Cause shall be the date specified in a written notice of
termination to the Employee. The date of resignation for Good Reason shall
be the date specified in a written notice of resignation from the Employee
to the Company, provided, however, that no such written notice shall be
-------- -------
effective unless the cure period specified in Section 7(f) has expired
------------
without the Company
-5-
<PAGE>
having corrected, to the reasonable satisfaction of the Employee, the event
or events subject to cure. The Employee shall provide at least thirty (30)
days advance written notice of resignation.
(f) Definition of Good Reason. For purposes of this Agreement, "Good
------------------------- ----
Reason" shall mean any one or more of the following events:
- ------
(i) a material reduction in the Employee's Base Salary as then in
effect or failure of the Company to pay any amount owing to the Employee
hereunder when due;
(ii) failure by the Company to obtain the specific assumption of this
Agreement by any successor of the Company, as contemplated in Section 10
----------
hereof; or
(iii) relocation to further than twenty (20) miles outside of Colorado
Springs, Colorado at any time during the calendar year ending December 31,
1999.
Unless the Employee provides written notification of an event described in
clauses (i) or (ii) of the preceding sentence to the Parent within thirty (30)
days, after the Employee knows or has reason to know of the occurrence of any
such event, the Employee shall be deemed to have consented thereto and such
event shall no longer constitute Good Reason for purposes of this Agreement. If
the Employee provided such written notice to the Parent, the Parent or the
Company shall have thirty (30) days from the date of receipt of such notice to
effect a cure of the event described therein and, upon cure thereof by the
Parent or the Company, as the case may be, to the reasonable satisfaction of the
Employee, such event shall no longer constitute Good Reason for purposes of this
Agreement.
Section 8. Proprietary Information and Inventions.
- --------- --------------------------------------
(a) Employee Acknowledgments. The Employee recognizes that the Company is
------------------------
engaged in a continuous program of research, development, design and production
respecting its business, present and future, and understands that as part of his
employment by the Company or any of its subsidiaries or affiliates, he is, or
may be expected, to make new contributions and inventions of value to the
Company or any of its subsidiaries or affiliates. The Employee understands that
his employment by the Company or any of its subsidiaries or affiliates creates
in him a duty of trust and confidentiality to the Company or any of its
subsidiaries or affiliates with respect to any information (i) related,
applicable or useful to the business of the Company or any of its subsidiaries
or affiliates, including the Company's or any of its subsidiaries' or
affiliates' anticipated research and development; (ii) resulting from tasks
assigned to the Employee by the Company or any of its subsidiaries or
affiliates; (iii) resulting from the use of equipment, supplies or facilities
owned, leased or contracted for by the Company or any of its subsidiaries or
affiliates; or (iv) related, applicable or useful to the business of any client
or customer of (A) the Company or (B) any of the Company's subsidiaries or
affiliates, which may be made known to him by the Company or any of the
Company's subsidiaries or affiliates, or by any client or customer of (A) the
Company or (B) any of the Company's subsidiaries or affiliates, or learned by
him during the Employment Term.
-6-
<PAGE>
(b) Assignment of Proprietary Information and Inventions to the Company.
-------------------------------------------------------------------
The Employee agrees that all Proprietary Information (as defined on Exhibit A
---------
hereto) and Inventions (as defined on Exhibit A hereto) shall be the sole
---------
property of the Company and its assigns, and the Company and its assigns shall
be the sole owner of all patents, trademarks, service marks, copyrights and
other rights (collectively referred to herein as "Rights") pertaining to
------
Proprietary Information and Inventions in any part of the world. The Employee
hereby assigns to the Company any rights he may have or acquire in Proprietary
Information or Inventions or Rights pertaining to Proprietary Information or
Inventions or Rights. The Employee further agrees as to all Proprietary
Information or Inventions to assist the Company or any person designated by it
in every proper way to obtain and from time to time enforce Rights relating to
said Proprietary Information or Inventions in any and all countries. The
Employee shall execute all documents for use in applying for, obtaining and
enforcing such Rights on such Proprietary Information or Inventions as the
Company may desire, together with any assignments thereof to the Company or
persons designated by it. The Employee's obligation to assist the Company or any
person designated by it in obtaining and enforcing Rights relating to
Proprietary Information or Inventions shall continue beyond the date of the
termination of the Employment Term (the "Termination Date"), but the Company
----------------
shall compensate the Employee at a reasonable rate after the Termination Date
for time actually spent by the Employee upon the Company's request for such
assistance. In the event the Company is unable, after reasonable effort, to
secure the Employee's signature on any document or documents needed to apply for
or to enforce any Right relating to Proprietary Information or to an Invention,
whether because of the Employee's physical or mental incapacity or for any other
reason whatsoever, the Employee hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as his agents and attorneys-
in-fact to act on his behalf and in his stead in the execution and filing of any
such application and in furthering the application for and enforcement of Rights
with the same legal force and effect as if such acts were performed by the
Employee. The Employee hereby acknowledges that all original works of authorship
which are made by the Employee (solely or jointly with others) within the scope
of his employment and which are protectable by copyright are "works for hire" as
that term is defined in the United States Copyright Act (17 USCA, Section 101).
(c) Disclosure of Discoveries, Etc. to the Company. The Employee will
----------------------------------------------
promptly and from time to time disclose in writing to the Company, and the
Company hereby agrees to receive such disclosures in confidence, all
discoveries, developments, designs, improvements, inventions, formulas, software
programs, processes, techniques, know-how, negative know-how and data, whether
or not patentable or registrable under patent, copyright or similar statutes, or
reduced to practice, made, conceived or learned by the Employee, either alone or
jointly with others during the Employment Term, for the purpose of permitting
the Company to determine whether they constitute Inventions. In order to
facilitate the complete and accurate disclosures described above, the Employee
agrees to maintain complete written records of all Inventions, and of all work,
study and investigation done by him during the Employment Term, which records
shall be the property of the Company.
(d) Employee Acts. The Employee shall not knowingly do anything to
-------------
imperil the validity of any such patent, design or protection or any application
therefor and shall, at the reasonable cost of the Company, render all possible
assistance to the Company both in obtaining and maintaining such patent, design
or other protection, and the Employee shall not, either during the Employment
Term or thereafter, exploit or make public or disclose any such Invention or
give any information in respect thereof except to the Company or as it may
direct.
-7-
<PAGE>
(e) Confidentiality. During the Employment Term, and for a period ending
---------------
three (3) years after the termination of this Agreement, whether the termination
is voluntary or involuntary, for cause or without cause, or by disability, the
Employee will keep all Proprietary Information, Inventions and Rights in the
strictest confidence and trust, and the Employee will not disclose, use or
induce or assist in the use or disclosure of any Proprietary Information,
Inventions or Rights pertaining to Proprietary Information, or anything related
thereto, without the prior express written consent of the Company, except as may
be necessary in the ordinary course of performing his duties as an employee of
the Company or as may be required by law. The Employee recognizes that the
Company has received and in the future will receive from third parties their
confidential or proprietary information subject to a duty on the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. The Employee agrees that he owes the Company and such
third parties, during the Employment Term and for a period of three (3) years
thereafter, a duty to hold all such confidential or proprietary information in
the strictest confidence, and he shall not disclose, use or induce or assist in
the use or disclosure of any such confidential or proprietary information
without the prior express written consent of the Company, except as may be
necessary in the ordinary course of performing his duties as an employee of the
Company consistent with the Company's agreement with such third party or as
required by law.
(f) Noncompetition; Nonsolicitation.
-------------------------------
(i) During the Employment Term, the Employee shall not (A) directly
or by other means with intent engage in any activity which the Company
shall determine in good faith to be in competition with the Company, or (B)
plan or otherwise take any preliminary steps, either alone or in concert
with others, to set up or engage in any business enterprise that would be
in competition with the Company.
(ii) During the Employment Term and for a period ending on the later
of (A) three (3) years after the date of this Agreement first set forth
above, and (B) one (1) year after the (x) termination or (y) expiration of
the Employment Term of this Agreement, the Employee shall not, either
directly or by other means with intent, either alone or in concert with
others, (A) solicit or entice any employee of or consultant to the Company
to leave the Company or to work for anyone other than the Company, or (B)
solicit, entice or in any way divert any customer or supplier with whom the
Employee has conducted business or assisted the Company in providing
business, to do business with any business entity in competition with the
Company.
(iii) During the Employment Term and for a period ending on the later
of (A) three (3) years after the date of this Agreement first set forth
above, and (B) one (1) year after the (x) termination or (y) expiration of
the Employment Term of this Agreement, the Employee shall not, directly or
by other means with intent, through affiliates, a partnership, a joint
venture or otherwise, (A) enter into, engage in, conduct or carry on any
business which competes with the business conducted by the Company at the
end of the Employment Term, (including developments and products of the
Company toward which the Employee has contributed or will, during the
Employment Term, contribute)(collectively referred to herein as a
"Competitive Business") or (B) participate in the management of any person,
--------------------
firm,
-8-
<PAGE>
enterprise or corporation if such person, firm, enterprise or corporation
engages or proposes to engage in a Competitive Business, in the geographic
areas where the Company conducts business at the end of the Employment
Term.
(iv) If any of the covenants contained in this Section 8(f) is
------------
determined to be unenforceable because of the duration of such covenants or
the area covered thereby, or the scope of such prohibited activities, then
the court making the determination shall have the power to reduce the
duration of such covenant, area covered and/or the scope of prohibited
activities covered thereby, and such covenants, in their reduced form shall
be enforceable. If any of the covenants contained in this Section 8(f) is
determined to be wholly unenforceable by the courts of any domestic or
foreign jurisdiction, such covenant shall be deemed severable into
independent covenants and shall be enforceable as so severed to the extent
permitted by such court.
(g) Delivery of Materials to the Company. Upon the termination of the
------------------------------------
Employment Term, the Employee shall deliver to the Company all devices, records,
sketches, reports, proposals, lists, correspondence, equipment, documents,
photographs, photostats, negatives, undeveloped film, notes, drawings,
specifications, tape recordings or other electronic recordings, programs, data
and other materials or property of any nature belonging to the Company or
pertaining to the Employee's work with the Company. The Employee shall not take
with him any of the foregoing or any reproduction of any of the foregoing.
(h) Prior Inventions of the Employee. Listed in Item 1 of Exhibit B
-------------------------------- ------ ---------
attached hereto are all inventions or improvements relevant to the subject
matter of the Employee's employment which have been made, conceived of or first
reduced to practice by the Employee alone or jointly with others prior to the
Employment Term and which the Employee desires to remove from the operation of
this Agreement. The Employee represents and warrants that such list is complete.
If there is no such list in Item 1 of Exhibit B, the Employee represents and
------ ---------
warrants that he has made no such inventions or improvements prior to the
Employment Term.
(i) Prior Confidentiality Agreements. The Employee represents and
--------------------------------
warrants that his performance of all of the terms and provisions of this
Agreement as an employee of the Company does not and will not breach any
agreement to keep in confidence proprietary information acquired by the Employee
in confidence or in trust prior to his employment by the Company. The Employee
also represents and warrants that he has not entered into, and covenants that he
will not enter into, any agreement, either written or oral, in conflict
herewith.
(j) Materials or Documents of a Former Employer. The Employee represents
-------------------------------------------
and warrants to and covenants with the Company that he has not brought and will
not bring with him to the Company, or use in his employment with the Company,
any materials or documents of a former employer (which term, for purposes of
this Section 8, shall also include persons, firms, corporations and other
---------
entities for which the Employee has acted as an independent contractor or
consultant), other than materials and documents of the Company relating to its
business and acquired by SIS under the Merger Agreement, which are not generally
available to the public, unless he has obtained express written authorization
from any such former employer for their possession and use. The materials or
documents of a former employer (other than the Company) which are not generally
-9-
<PAGE>
available to the public but which he will bring to the Company for use in his
employment are identified in Item 2 of Exhibit B attached hereto. As to each
------ ---------
such item, the Employee represents and warrants that he has obtained prior to
the effective date of his employment hereunder express written authorization for
their possession and use in his service to the Company. The Employee also
understands that, in his service to the Company, he is not to breach any
obligation of confidentiality that he has to former employers, and he shall
fulfill all such obligations during his employment hereunder.
(k) Services Provided as a Consultant; Delivery of the Termination
--------------------------------------------------------------
Certificate by the Employee. The terms and conditions of this Section 8 shall
- --------------------------- ---------
apply to any period, if any, during which the Employee performs services for the
Company as a consultant or independent contractor, as well as any time during
which he is employed directly by the Company. Upon the termination of the
Employment Term, the Employee agrees to sign and deliver the "Termination
Certificate" attached hereto as Exhibit C. The Employee's failure to sign such
---------
Termination Certificate, however, shall not affect his obligations under this
Agreement.
Section 9. Remedies; Liquidated Damages Paid by Employee.
- --------- ---------------------------------------------
If the Employee commits a breach, or threatens to commit a breach, of any
of the provisions of Section 8 hereof, the Company shall have (i) the right to
---------
have such provisions specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company, and (ii) the right
to require the Employee to account for and pay over to the Company all
compensation or profits derived or received by the Employee as a result of any
breach of any of the provisions of such Section 8, and the Employee hereby
---------
agrees to account for and pay over such compensation or profits to the Company.
The invalidity or unenforceability of all or any portion of Section 8 shall not
---------
affect the validity or enforceability of any other provision or portion hereof
or thereof, and if any provision or portion of this Agreement shall be
determined by any court of competent jurisdiction to be unenforceable or
otherwise invalid as written, then each such provision or portion shall be
enforced and validated to the full extent permitted by law.
Section 10. Successors and Assigns.
- ---------- ----------------------
This Agreement shall be binding upon and inure to the benefit of the
Company and its respective successors and assigns and shall be binding upon and
inure to the benefit of the Employee and his executors and administrators. This
Agreement, and the Employee's rights and obligations hereunder, may not be
assigned by the Employee. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
and to agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place.
-10-
<PAGE>
Section 11. Waiver of Breach.
- ---------- ----------------
The waiver by the Company or the Employee of a breach of any provision of
this Agreement by the other party shall not be construed as a waiver of any
subsequent breach of the same provision or of any other provision of this
Agreement.
Section 12. Notices.
- ---------- -------
All notices, requests, demands and other communications submitted hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand or by express service or if mailed by first-class registered mail, return
receipt requested, postage and registry fees prepaid, and addressed: if to the
Employee, to the address set forth in the first paragraph hereof; and if to the
Company, to:
Systems Integration Software, Inc.
c/o SM&A Corporation
4695 MacArthur Court, Suite 800
Newport Beach, California 92660
Attention: President
with a copy to:
Thomas J. Crane, Esq.
Rutan & Tucker
611 Anton Blvd., Suite 1400
Costa Mesa, California 92626
or at such other address as either party shall furnish to the other.
Section 13. Miscellaneous.
- ---------- -------------
This Agreement shall be governed by, and construed in accordance with, the
laws of Colorado without regard to its conflict of laws statutes, as if this
Agreement were executed and performed entirely within Colorado. This Agreement
incorporates the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements, arrangements and
understandings, whether written or oral, relating to such subject matter. The
invalidity of any section, provision or portion of this Agreement shall not
affect the validity of any other section, provision or portion of this
Agreement, and each such section, provision or portion shall be enforced to the
full extent permitted by law. This Agreement may not be modified or amended, or
any term or provision hereof waived or discharged, except by a written
instrument signed by the party against which such amendment, modification,
waiver or discharge is sought to be enforced. The headings of this Agreement
are for the purposes of reference only and shall not limit or otherwise affect
the meaning hereof. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
-11-
<PAGE>
Section 14. Indemnification.
- ---------- ---------------
The Company and the Parent will indemnify the Employee in the same manner
and to the same extent to which they indemnify their other senior executives.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY: SYSTEMS INTEGRATION SOFTWARE, INC.
By: /s/ Michael A. Piraino
--------------------------------
Title:_____________________________
EMPLOYEE: ___________________________________
[print name]
/s/ Gary Markle
-----------------------------------
[signature]
-12-
<PAGE>
EXHIBIT A
"Proprietary Information" Defined:
--------------------------------
For purposes of this Agreement, "Proprietary Information" shall mean
-----------------------
information that has been created, discovered, developed or otherwise become
known to the Employee or the Company or in which property rights have been
assigned or otherwise conveyed to the Employee or the Company, which the
Employee may have learned or discovered, or may make, learn of or discover while
in employment of the Company, whether before the commencement of this Agreement
or during the term hereof, which information has material economic value or
potential material economic value to the business in which the Company is or
will be engaged. Proprietary Information shall include, but not be limited to,
trade secrets, processes, formulas, data, know-how, negative know-how,
improvements, discoveries, developments, designs, ideas, Inventions, techniques,
all technical data, customer and supplier lists, and any modifications or
enhancements thereto, programs and information (whether or not in writing) which
have actual or potential economic value to the Company, together with any
copyright or patent therein. For purposes of this Agreement, Proprietary
Information shall not include information that has become public knowledge
through legal means without fault by the Employee, or is already public
knowledge prior to disclosure of the same by the Company and/or its subsidiaries
or affiliates to the Employee.
"Inventions" Defined:
-------------------
For purposes of this Agreement, "Inventions" shall mean all discoveries,
----------
developments, designs, improvements, inventions, formulas, software programs,
processes, techniques, know-how, negative know-how and data, whether or not
patentable or registrable under patent, copyright or similar statutes, that are
related to or useful in the business or future business of the Company or result
from use of premises or other property owned, leased or contracted for by the
Company. Without limiting the generality of the foregoing, Inventions shall
also include anything that derives actual or potential economic value from not
being generally known to the public or to other persons who can obtain economic
value from its disclosure or use.
-13-
<PAGE>
EXHIBIT B
ITEM 1:
The following is a complete list of all inventions or improvements relevant
to the subject matter of the Employee's employment by the Company that have been
made or conceived of or first reduced to practice by the Employee alone or
jointly with others prior to his employment by the Company:
Item 2:
The following is a complete list of all materials and documents of a former
employer that are not generally available to the public that the Employee will
bring or have brought to the Company or have used or will use in his employment
by the Company:
-14-
<PAGE>
EXHIBIT C
TERMINATION CERTIFICATION
-------------------------
I certify as follows:
1. When I signed the attached Employment Agreement (the "Agreement"), I
---------
read and understood the terms of the Agreement.
2. I hereby acknowledge that I have fully complied with the terms of the
Agreement, including, without limitation, the disclosure and assignment to
Systems Integration Software, Inc. (or its successors or assigns) (the
"Company") of any Inventions covered by that Agreement, and the return of any
-------
documents and other materials of any nature relating to my employment with the
Company.
3. I hereby acknowledge and agree to comply with my continuing
obligations under this Agreement, including, without limitation, my obligation
not to use for personal benefit or to disclose to others any Proprietary
Information of the Company.
4. I understand and acknowledge that should I fail to comply with my
obligations under the Agreement, the Company shall have the right to injunctive
relief against me, including, without limitation, an injunction prohibiting me
from disclosing Proprietary Information to a third party.
Dated as of: ________________
___________________________________
Signature of Employee
___________________________________
Print Name
-15-
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement"), dated as of September 20, 1999, between
KAPOS ASSOCIATES INC., a Virginia corporation (the "Company"), and ERVIN KAPOS,
-------
an individual residing at 908 Turkey Run Road, McLean, Virginia 22101 (the
"Employee").
--------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, concurrently with the execution of this Agreement, SM&A
Corporation (East), a California corporation (the "Parent"), the Company, and
------
all of the Company's shareholders have entered into a Stock Purchase Agreement
of even date herewith (the "Purchase Agreement"), pursuant to which the Parent
------------------
is acquiring all of the outstanding shares of capital stock;
WHEREAS, the Employee is currently employed by the Company as its President
and, as such, possesses unique and valuable technical, financial and other
knowledge, experience and ability;
WHEREAS, the Company desires to retain the services of the Employee, has
offered to engage him on the terms and conditions hereinafter set forth and
would not have otherwise entered into the Purchase Agreement without the
Employee agreeing to be bound hereby;
WHEREAS, the Employee is willing to accept such employment upon the terms
and conditions hereinafter set forth; and
WHEREAS, it is a condition to the closing of the transactions contemplated
by the Purchase Agreement that the Company and Employee enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the Company and the Employee agree as follows (capitalized
terms used in this Agreement not otherwise defined herein shall have the
meanings given to them in the Purchase Agreement):
1. Term of Employment.
------------------
Subject to the provisions set forth in Sections 2 and 7 hereof, the
----------------
Company hereby employs the Employee as its President and the Employee agrees to
be employed by the Company, on the terms and conditions contained herein, for a
period commencing on the date hereof and terminating on the second anniversary
of the date hereof (the "Employment Term").
---------------
2. Duties.
------
(a) Office. The Employee is hereby appointed to serve as President of the
------
Company, and shall have responsibility for managing the Company and performing
such services and duties for the Company as now or hereafter existing, as are
customarily performed by an employee in that position.
The Employee shall report directly to Thomas Amrhein, Group President
of Parent's Systems Solutions Group (or any successor in such office), and shall
have responsibility for the
<PAGE>
management of the Company's business, operations and affairs. All subordinate
officers and employees shall report to the Employee or his designee.
It is understood that the respective Boards of Directors of the
Company and of the Parent will have general supervisory authority over the
financial condition and operating activities of the Company, budgets, long-term
plans, acquisitions and divestitures and other strategic alternatives and will
seek input from the Employee as and when needed.
(b) Full-Time Position. The Employee shall devote his entire time,
------------------
attention, abilities, energy and skill during regular business hours to carrying
out his duties hereunder, and shall faithfully, efficiently and diligently
perform such duties to promote the business and affairs of the Company and its
subsidiaries and affiliated companies. During the Employment Term, the
Employee's services shall be exclusive to the Company, and the Employee shall
not directly or indirectly engage in any activity competitive with or adverse to
the Company's business or welfare or services of a business, professional or
commercial nature to any other person or firm, whether for compensation or
otherwise.
3. Compensation.
------------
(a) Base Salary. For services rendered by the Employee under this
-----------
Agreement, the Company shall pay to the Employee or cause to be paid to the
Employee during the Employment Term a base salary (the "Base Salary") at a rate
-----------
equal to $160,000 per year. The Base Salary shall be earned and shall be payable
at such intervals and otherwise in such manner as is consistent with the normal
payroll practices of the Company for remuneration of its employees. The Company
shall review the Base Salary at least annually to determine whether an increase
is warranted in accordance with the Company's normal policies and procedures.
(b) Incentive Compensation. In addition to the Base Salary, the Employee
----------------------
shall be eligible to receive additional compensation (a "Bonus") of up to
-----
$40,000 at the end of each year of the Employment Term, promptly after the
determination thereof, in an amount determined by the Company's Board of
Directors, in its sole discretion (with the Employee abstaining from the vote or
written consent regarding such matter), based upon the Employee's achievement of
mutually agreeable goals and objectives set by the Company and the Employee at
the beginning of each year of the Employment Term. A pro rated Bonus may, in the
Company's sole discretion, be paid for any partial year that occurs during the
Employment Term.
(c) Withholding. The Company shall be entitled to withhold amounts from
-----------
any compensation or other form of remuneration or benefit payable by the Company
to the Employee that the Company reasonably believes it is required to withhold
under any federal, state, local or foreign tax law to which the Company is
subject.
4. Other Benefits.
--------------
During the Employment Term, except as may be otherwise provided herein, the
Employee shall be entitled to medical benefits, holiday, vacation or similar
rights and such other benefits, perquisites and privileges as are from time to
time provided by the Company, the Parent and their
-2-
<PAGE>
subsidiaries and affiliated companies to their full-time employees in comparable
positions, as the same may change from time to time and be communicated to the
Employee.
5. Expenses.
--------
The Company shall, during the Employment Term, reimburse the Employee for
all reasonable documented business expenses actually and necessarily incurred by
him in the course of, and in connection with, his employment by the Company. The
Employee shall keep detailed and accurate records of expenses incurred in
connection with his employment by the Company, and reimbursement therefor shall
be made in accordance with policies and procedures established by the Company's
management from time to time.
6. Representations and Covenants of the Employee.
---------------------------------------------
(a) The Employee represents and warrants to the Company that he is not a
party to or bound by any presently effective agreement or contract, whether of
employment or otherwise, with any third person or entity that would in any way
restrict or prohibit the Employee from undertaking or performing his obligations
on the terms and conditions set forth in this Agreement.
(b) The Employee covenants with the Company that he shall not, during the
Employment Term, enter into any such agreement, contract or understanding
described in Section 6(a) above so as to cause the Company, or any of its
------------
subsidiaries or affiliated companies, to be liable in connection therewith.
7. Termination.
-----------
The Employment Term shall terminate upon any of the following occurrences:
(a) By Reason of Death. If the Employee shall die during the Employment
------------------
Term, this Agreement shall terminate except that the Employee's estate shall be
entitled to receive the Base Salary provided in Section 3(a) and any pro
------------
rata amount of any earned Bonus, each to the last day of the month in which his
death occurs. Such termination shall not affect any vested rights which the
Employee may have at the time of his death pursuant to any insurance or other
death benefit plans or arrangements of the Company or any affiliate of the
Company.
(b) Termination For Cause; Resignation Without Good Reason.
------------------------------------------------------
(i) Payments. If, prior to the expiration of the Employment Term, the
--------
Employee's employment is terminated by the Company for Cause, as defined in
Section 7(c) hereof, or if the Employee resigns from his employment
------------
hereunder other than for Good Reason, as defined in Section 7(e) hereof,
------------
the Employee shall be entitled to payment of his Base Salary accrued
through and including the date of such termination or resignation, plus any
other accrued but unpaid benefits or compensation, but shall not be
entitled to any other compensation or benefits under this Agreement.
-3-
<PAGE>
(ii) Notice of Termination. Termination of the Employee's employment
---------------------
for Cause shall be communicated by delivery to the Employee of a copy of a
resolution duly adopted by the Company's Board of Directors (a "Notice of
---------
Termination"). The Notice of Termination shall specify the Cause and the
-----------
effective date of the termination of the Employee's employment.
(iii) Date of Termination. The date of a termination for Cause shall
-------------------
be the date specified in the Notice of Termination provided for in this
Section 7(b). The date of a resignation by the Employee without Good Reason
------------
shall be the date specified in a written notice of resignation from the
Employee to the Company. The Employee shall provide at least sixty (60)
days' advance written notice of the date of his resignation without Good
Reason.
(c) Definition of Cause. For the purposes of this Agreement, "Cause" shall
------------------- -----
mean (i) the failure or inability of the Employee to cure, within thirty (30)
days of receipt of written notice on behalf of the Company's Board of Directors,
the Employee's failure to substantially perform the primary duties of his
employment hereunder; (ii) the conviction of the Employee of a felony under
state or federal criminal laws; (iii) the commission by the Employee of any act
of fraud or willful misconduct against the Company or any of its subsidiaries or
affiliated companies; (iv) the commission by the Employee of any act of gross
negligence or malfeasance, resulting in an adverse impact upon the Company, its
reputation or its business operations; or (v) the violation by the Employee of
his covenants contained in Sections 6 or 8 hereof.
---------------
(d) Termination Upon Disability. If, during the Employment Term, the
---------------------------
Employee shall become incapable of fulfilling his obligations hereunder because
of injury or physical or mental illness, and such incapacity shall exist or
reasonably may be expected to continue to exist, upon the competent medical
opinion of a doctor chosen by the Company and Employee, for a period exceeding
sixty (60) consecutive days or ninety (90) nonconsecutive days within a six-
month period, the Company shall nevertheless continue to pay the Employee his
Base Salary through the last day of the sixtieth (60th) day of disability or, if
applicable, the date upon which the shorter periods of disability shall have
aggregated more than ninety (90) days within the six-month period (in either
event, the "Disability Date") plus any other benefits or compensation accrued
---------------
accrued through, but unpaid as of, the Disability Date; provided, however, that
-------- -------
nothing in this Agreement shall operate to deprive the Employee of any rights he
may have pursuant to the Family and Medical Leave Act, the Americans with
Disabilities Act or any analogous state statutes. The Company may, at any time
on or after the Disability Date, terminate this Agreement and all further rights
and obligations of the parties under this Agreement, other than the obligations
of the Employee under Section 8 hereof, which obligations shall continue in
---------
effect for the periods therein stated.
(e) Termination Without Cause; Resignation for Good Reason.
------------------------------------------------------
(i) Liquidated Damages Paid by Company. If, prior to the expiration
----------------------------------
of the Employment Term, the Employee's employment is terminated by the
Company without Cause, or if the Employee resigns from his employment
hereunder for Good Reason, the Company shall pay to the Employee his Base
Salary accrued up to and including the date of such termination or
resignation plus any other accrued but unpaid benefits or compensation.
-4-
<PAGE>
In addition, for the period commencing immediately following the
date of such termination or resignation and ending on the earlier of the
date that is twelve months thereafter or the expiration of the Employment
Term (the "Offset Period"), the Company shall pay to the Employee as
--------------
liquidated damages (the "Company Paid Liquidated Damages") his Base Salary,
-------------------------------
as in effect on the date of such termination.
The Company Paid Liquidated Damages shall be payable in
accordance with the Company's then effective payroll practices and at such
intervals as Base Salary would have been paid if the Employee had remained
in the active service of the Company; provided, however, that payments of
-------- -------
Base Salary during the Offset Period shall be made not less frequently than
monthly.
(ii) Other Benefits. In the event of the Employee's termination or
--------------
resignation as provided in this Section 7(e), the Employee shall continue
------------
to participate on the same terms and conditions as in effect immediately
prior to such termination or resignation in each pension, welfare, life
insurance, health, disability and other fringe benefit plan or program
(including automobile allowances) provided to the Employee at the time of
such termination or resignation until the earlier to occur of:
(A) twelve months thereafter, or such later time, if any, as is
mandated by applicable law (e.g., COBRA); or
(B) such time as the Employee is otherwise covered by similar
programs.
Anything herein to the contrary notwithstanding, the Company
shall have no obligation to continue to maintain during the Offset Period
any plan or program solely as a result of the provisions of this Agreement.
If, during the Offset Period, the Employee is precluded from participating
in a plan or program by its terms or applicable law or if the Company
elects not to maintain such plan or program, the Company shall provide the
Employee with compensation the aggregate value of which is sufficient to
purchase a similar benefit program.
(iii) Death During Offset Period. If the Employee dies during the
--------------------------
Offset Period, the balance of the Company Paid Liquidated Damages will be
paid to his Beneficiary. "Beneficiary" shall mean the person or persons
-----------
designated by the Employee in writing to the Company to receive payments
under this Agreement or, if no such person or persons are designated, the
Employee's estate.
(iv) No Other Benefits. Except as expressly provided in this Section
----------------- -------
7(e), in the event the Employee's employment is terminated by the Company
-----
without Cause or the Employee resigns his employment with the Company for
Good Reason, the Employee shall not be entitled to any other compensation,
benefits or damages under, or related to, this Agreement with respect to
the year of his termination or resignation or any subsequent year.
-5-
<PAGE>
(v) Date of Termination. The date of termination of employment
-------------------
without Cause shall be the date specified in a written notice of
termination to the Employee. The date of resignation for Good Reason shall
be the date specified in a written notice of resignation from the Employee
to the Company which states the Good Reason; provided, however, that no
-------- -------
such written notice shall be effective unless the cure period specified in
Section 7(f) has expired without the Company having corrected, to the
------------
reasonable satisfaction of the Employee, the event or events subject to
cure. The Employee shall provide at least thirty (30) days' advance written
notice of resignation.
(f) Definition of Good Reason. For purposes of this Agreement, "Good
------------------------- ----
Reason" shall mean any one or more of the following events:
------
(i) a change in the Employee's duties such that his primary duties
are substantially inconsistent with those customarily performed by an
employee in his position; or
(ii) a material reduction in the level of resources, including
support services and staff available to the Employee during the Employment
Term, which reduction is not generally effective for other full-time
employees in comparable positions within the SM&A Systems Solutions Group;
or
(iii) a material reduction in the Employee's Base Salary as then in
effect or failure of the Company to pay any amount owing to the Employee
hereunder when due; or
(iv) failure by the Company to obtain the specific assumption of this
Agreement by any successor of the Company, as contemplated in Section 10
----------
hereof; or
(v) relocation by the Company of the Employee outside of the
Washington, D.C. metropolitan area at any time during the Employment Term.
Unless the Employee provides written notification of an event described in
clauses (i) through (iv) of the preceding sentence to the Parent within thirty
(30) days after the Employee knows or has reason to know of the occurrence of
any such event, the Employee shall be deemed to have consented thereto and such
event shall no longer constitute Good Reason for purposes of this Agreement. If
the Employee provided such written notice to the Parent, the Parent or the
Company shall have thirty (30) days from the date of receipt of such notice to
effect a cure of the event described therein and, upon cure thereof by the
Parent or the Company, as the case may be, to the reasonable satisfaction of the
Employee, such event shall no longer constitute Good Reason for purposes of this
Agreement.
8. Proprietary Information and Inventions.
--------------------------------------
(a) Employee Acknowledgments. The Employee recognizes that the Company is
-------------------------
engaged in a continuous program of research, development, design and production
respecting its business, present and future, and understands that as part of his
employment by the Company or any of its subsidiaries or affiliates, he is, or
may be expected, to make new contributions and inventions of value to the
Company or any of its subsidiaries or affiliates. The Employee understands that
his employment by the Company or any of its subsidiaries or affiliates creates
in him a duty of trust and confidentiality to the Company or any of its
subsidiaries or affiliates with respect to any information (i) related,
-6-
<PAGE>
applicable or useful to the business of the Company or any of its subsidiaries
or affiliates, including the Company's or any of its subsidiaries' or
affiliates' anticipated research and development; (ii) resulting from tasks
assigned to the Employee by the Company or any of its subsidiaries or
affiliates; (iii) resulting from the use of equipment, supplies or facilities
owned, leased or contracted for by the Company or any of its subsidiaries or
affiliates; or (iv) related, applicable or useful to the business of any client
or customer of (A) the Company or (B) any of the Company's subsidiaries or
affiliates, which may be made known to him by the Company or any of the
Company's subsidiaries or affiliates, or by any client or customer of (A) the
Company or (B) any of the Company's subsidiaries or affiliates, or learned by
him during the Employment Term.
(b) Assignment of Proprietary Information and Inventions to the Company.
-------------------------------------------------------------------
The Employee agrees that all Proprietary Information (as defined on Exhibit A
---------
hereto) and Inventions (as defined on Exhibit A hereto) shall be the sole
---------
property of the Company and its assigns, and the Company and its assigns shall
be the sole owner of all patents, trademarks, service marks, copyrights and
other rights (collectively referred to herein as "Rights") pertaining to
------
Proprietary Information and Inventions in any part of the world. The Employee
hereby assigns to the Company any rights he may have or acquire in Proprietary
Information or Inventions or Rights pertaining to Proprietary Information or
Inventions or Rights. The Employee further agrees as to all Proprietary
Information or Inventions to assist the Company or any person designated by it
in every proper way to obtain and from time to time enforce Rights relating to
said Proprietary Information or Inventions in any and all countries. The
Employee shall execute all documents for use in applying for, obtaining and
enforcing such Rights on such Proprietary Information or Inventions as the
Company may desire, together with any assignments thereof to the Company or
persons designated by it. The Employee's obligation to assist the Company or any
person designated by it in obtaining and enforcing Rights relating to
Proprietary Information or Inventions shall continue beyond the date of the
termination of the Employment Term (the "Termination Date"), but the Company
----------------
shall compensate the Employee at a reasonable rate after the Termination Date
for time actually spent by the Employee upon the Company's request for such
assistance. In the event the Company is unable, after reasonable effort, to
secure the Employee's signature on any document or documents needed to apply for
or to enforce any Right relating to Proprietary Information or to an Invention,
whether because of the Employee's physical or mental incapacity or for any other
reason whatsoever, the Employee hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as his agents and attorneys-
in-fact to act on his behalf and in his stead in the execution and filing of any
such application and in furthering the application for and enforcement of Rights
with the same legal force and effect as if such acts were performed by the
Employee. The Employee hereby acknowledges that all original works of authorship
which are made by the Employee (solely or jointly with others) within the scope
of his employment and which are protectable by copyright are "works for hire" as
that term is defined in the United States Copyright Act (17 USCA Section 101).
(c) Disclosure of Discoveries, Etc. to the Company. The Employee will
----------------------------------------------
promptly and from time to time disclose in writing to the Company, and the
Company hereby agrees to receive such disclosures in confidence, all
discoveries, developments, designs, improvements, inventions, formulas, software
programs, processes, techniques, know-how, negative know-how and data, whether
or not patentable or registrable under patent, copyright or similar statutes, or
reduced to practice, made, conceived or learned by the Employee, either alone or
jointly with others during the Employment Term, for the purpose of permitting
the Company to determine whether they constitute Inventions.
-7-
<PAGE>
In order to facilitate the complete and accurate disclosures described above,
the Employee agrees to maintain complete written records of all Inventions, and
of all work, study and investigation done by him during the Employment Term,
which records shall be the property of the Company.
(d) Employee Acts. The Employee shall not knowingly do anything to
-------------
imperil the validity of any such patent, design or protection or any application
therefor and shall, at the reasonable cost of the Company, render all possible
assistance to the Company both in obtaining and maintaining such patent, design
or other protection, and the Employee shall not, either during the Employment
Term or thereafter, exploit or make public or disclose any such Invention or
give any information in respect thereof except to the Company or as it may
direct.
(e) Confidentiality. The Employee will keep all Proprietary Information,
---------------
Inventions and Rights in the strictest confidence and trust, and the Employee
will not disclose, use or induce or assist in the use or disclosure of any
Proprietary Information, Inventions or Rights pertaining to Proprietary
Information, or anything related thereto except as (i) may be necessary in the
ordinary course of performing his duties as an employee of the Company, (ii) may
be required by law, (iii) authorized by the Board of Directors of the Company,
(iv) such Proprietary Information, Inventions or Rights are or become available
to the general public though no fault of the Employee or are disclosed to the
Employee without restriction on disclosure by a third party who had the lawful
right to make such disclosure. The Employee recognizes that the Company has
received and in the future will receive from third parties their confidential or
proprietary information subject to a duty on the Company's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. The Employee agrees that he owes the Company and such third parties a
duty to hold all such confidential or proprietary information in the strictest
confidence, and he shall not disclose, use or induce or assist in the use or
disclosure of any such confidential or proprietary information without the prior
express written consent of the Company, except as may be necessary in the
ordinary course of performing his duties as an employee of the Company
consistent with the Company's agreement with such third party or as required by
law. The covenants and agreements contained in this Section 8(e) shall survive
------------
the expiration or other termination of this Agreement.
(f) Noncompetition; Nonsolicitation.
-------------------------------
(i) For a period ending on the later of (A) three (3) years after the
date of this Agreement and (B) one (1) year after the (x) termination or
(y) expiration of the Employment Term of this Agreement (except as set
forth in the following paragraph), the Employee shall not for any reason
whatsoever, directly or by other means with intent, for himself or on
behalf of or in conjunction with any other person or entity, engage, as an
officer, director, shareholder, owner, partner, joint venturer, lender or
in any capacity, whether as an employee, independent contractor, consultant
or advisor, or as a sales representative, in any business selling any
products or services in direct or indirect competition with the Company,
the Parent or any of their Affiliates or successors, in the geographic
areas where the Company, the Parent or their Affiliates or successors are
conducting business during such period, including without limitation, the
United States and each state, county, city and other political subdivision
thereof.
-8-
<PAGE>
Notwithstanding the foregoing provisions of this paragraph (i),
the Employee may (A) be a passive investor owning no more than five percent
(5%) of the outstanding equity securities of any corporation the equity
securities of which are listed on a national securities exchange or traded
on the NASDAQ National Market and with which the Employee no other
connection whatsoever or (B) invest in or act as an employee, consultant or
other position for the Parent or any of its Affiliates.
(ii) For a period ending on the later of (A) three (3) years after
the date of this Agreement and (B) one (1) year after the (x) termination
or (y) expiration of the Employment Term of this Agreement, the Employee
shall not, either directly or by other means with intent, either alone or
in concert with others, (A) solicit or entice any person who is, at that
time, or who has been within one (1) year prior to that time, an employee
of or consultant to the Company, the Parent or their respective Affiliates
or successors, to leave the Company, the Parent or their respective
Affiliates or successors or to work for anyone other than the Company, the
Parent or their respective Affiliates or successors, or (B) solicit, entice
or in any way divert any customer or supplier with whom the Employee has
conducted business or assisted the Company, the Parent or their respective
Affiliates or successors in providing business, to do business with any
business entity in competition with the Company, the Parent or their
respective Affiliates or successors. For the purposes of this Section 8(f),
------------
general advertising concerning available employment opportunities through
newspapers or trade journals shall not constitute solicitation.
(iii) If any of the covenants contained in this Section 8(f) is
------------
determined to be unenforceable because of the duration of such covenants or
the area covered thereby, or the scope of such prohibited activities, then
the court making the determination shall have the power to reduce the
duration of such covenant, area covered and/or the scope of prohibited
activities covered thereby, and such covenants, in their reduced form shall
be enforceable. If any of the covenants contained in this Section 8(f) is
------------
determined to be wholly unenforceable by the courts of any domestic or
foreign jurisdiction, such covenant shall be deemed severable into
independent covenants and shall be enforceable as so severed to the extent
permitted by such court.
(iv) The Employee acknowledges that the covenants contained in this
Section 8 are made in consideration for the fees to be paid under this
---------
Agreement and a portion of the Base Purchase Price under the Purchase
Agreement and in recognition of the duty of loyalty owed by the Employee to
the Company as a unique and valuable employee of the Company.
(g) Delivery of Materials to the Company. Upon the termination of the
------------------------------------
Employment Term, the Employee shall deliver to the Company all devices, records,
sketches, reports, proposals, lists, correspondence, equipment, documents,
photographs, photostats, negatives, undeveloped film, notes, drawings,
specifications, tape recordings or other electronic recordings, programs, data
and other materials or property of any nature belonging to the Company or
pertaining to the Employee's work with the Company. The Employee shall not take
with him any of the foregoing or any reproduction of any of the foregoing.
-9-
<PAGE>
(h) Prior Inventions of the Employee. Listed in Item 1 of Exhibit B
-------------------------------- ------ ---------
attached hereto are all inventions or improvements relevant to the subject
matter of the Employee's employment which have been made, conceived of or first
reduced to practice by the Employee alone or jointly with others prior to the
Employment Term and which the Employee desires to remove from the operation of
this Agreement. The Employee represents and warrants that such list is complete.
If there is no such list in Item 1 of Exhibit B, the Employee represents and
------ ---------
warrants that he has made no such inventions or improvements prior to the
Employment Term.
(i) Prior Confidentiality Agreements. The Employee represents and warrants
--------------------------------
that his performance of all of the terms and provisions of this Agreement as an
employee of the Company does not and will not breach any agreement to keep in
confidence proprietary information acquired by the Employee in confidence or in
trust prior to his employment by the Company. The Employee also represents and
warrants that he has not entered into, and covenants that he will not enter
into, any agreement, either written or oral, in conflict herewith.
(j) Materials or Documents of a Former Employer. The Employee represents
-------------------------------------------
and warrants to and covenants with the Company that he has not brought and will
not bring with him to the Company, or use in his employment with the Company,
any materials or documents of a former employer (which term, for purposes of
this Section 8, shall also include persons, firms, corporations and other
---------
entities for which the Employee has acted as an independent contractor or
consultant), other than materials and documents of the Company relating to its
business and acquired by Parent under the Purchase Agreement, which are not
generally available to the public, unless he has obtained express written
authorization from any such former employer for their possession and use. The
materials or documents of a former employer (other than the Company) which are
not generally available to the public but which he will bring to the Company for
use in his employment are identified in Item 2 of Exhibit B attached hereto. As
------ ---------
to each such item, the Employee represents and warrants that he has obtained
prior to the effective date of his employment hereunder express written
authorization for their possession and use in his service to the Company. The
Employee also understands that, in his service to the Company, he is not to
breach any obligation of confidentiality that he has to former employers, and he
shall fulfill all such obligations during his employment hereunder.
(k) Services Provided as a Consultant; Delivery of the Termination
--------------------------------------------------------------
Certificate by the Employee. The terms and conditions of this Section 8 shall
- --------------------------- ---------
apply to any period, if any, during which the Employee performs services for the
Company as a consultant or independent contractor, as well as any time during
which he is employed directly by the Company. Upon the termination of the
Employment Term, the Employee agrees to sign and deliver the "Termination
Certificate" attached hereto as Exhibit C. The Employee's failure to sign such
---------
Termination Certificate, however, shall not affect his obligations under this
Agreement, nor shall it affect the Company's obligations, if any, to the
Employee under this Agreement.
9. Remedies; Liquidated Damages Paid by Employee.
---------------------------------------------
If the Employee commits a breach, or threatens to commit a breach, of any
of the provisions of Section 8 hereof, the Company shall have (i) the right to
---------
have such provisions specifically enforced by any court having equity
jurisdiction, it being acknowledged and agreed that any such breach or
-10-
<PAGE>
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company, and (ii) the right
to require the Employee to account for and pay over to the Company all
compensation or profits derived or received by the Employee as a result of any
breach of any of the provisions of such Section 8, and the Employee hereby
---------
agrees to account for and pay over such compensation or profits to the Company.
The invalidity or unenforceability of all or any portion of Section 8 shall not
---------
affect the validity or enforceability of any other provision or portion hereof
or thereof, and if any provision or portion of this Agreement shall be
determined by any court of competent jurisdiction to be unenforceable or
otherwise invalid as written, then each such provision or portion shall be
enforced and validated to the full extent permitted by law.
10. Successors and Assigns.
----------------------
This Agreement shall be binding upon and inure to the benefit of the
Company and its respective successors and assigns and shall be binding upon and
inure to the benefit of the Employee and his executors and administrators. This
Agreement, and the Employee's rights and obligations hereunder, may not be
assigned by the Employee. The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
and to agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession had taken
place.
11. Waiver of Breach.
----------------
The waiver by the Company or the Employee of a breach of any provision of
this Agreement by the other party shall not be construed as a waiver of any
subsequent breach of the same provision or of any other provision of this
Agreement.
12. Notices.
-------
All notices, requests, demands and other communications submitted hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand or by express service or if mailed by first-class registered mail, return
receipt requested, postage and registry fees prepaid, and addressed: if to the
Employee, to the address set forth in the first paragraph hereof; and if to the
Company, to:
Kapos Associates Inc.
c/o SM&A Corporation (East)
4695 MacArthur Court, Suite 800
Newport Beach, California 92660
Attention: President
-11-
<PAGE>
with a copy to:
Thomas J. Crane, Esq.
Rutan & Tucker
611 Anton Blvd.,14th Floor
Costa Mesa, California 92626
or at such other address as either party shall furnish to the other.
13. Miscellaneous.
-------------
This Agreement shall be governed by, and construed in accordance with, the
laws of Virginia without regard to its conflict of laws statutes, as if this
Agreement were executed and performed entirely within Virginia. This Agreement,
together with the Purchase Agreement and the exhibits and schedules hereto and
thereto incorporate the entire understanding of the parties hereto with respect
to the subject matter hereof and supersede all prior agreements, arrangements
and understandings, whether written or oral, relating to such subject matter. In
that regard, to the extent that there is any inconsistency between the
provisions of Section 8 of this Agreement and the corresponding provisions of
---------
the Purchase Agreement, the provisions of Section 8 of this Agreement shall
---------
control. The invalidity of any section, provision or portion of this Agreement
shall not affect the validity of any other section, provision or portion of this
Agreement, and each such section, provision or portion shall be enforced to the
full extent permitted by law. This Agreement may not be modified or amended, or
any term or provision hereof waived or discharged, except by a written
instrument signed by the party against which such amendment, modification,
waiver or discharge is sought to be enforced. The headings of this Agreement are
for the purposes of reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original and all of which together shall constitute
one and the same instrument.
14. Indemnification.
---------------
The Company will indemnify the Employee in the same manner and to the same
extent to which they indemnify its other senior executives.
15. Dispute Resolution.
------------------
(a) Arbitration; Attorneys' Fees, Prevailing Party. Except as set forth in
----------------------------------------------
Section 15(b), all disputes arising under this contract will be resolved by
- -------------
submission to binding arbitration at the Washington D.C. offices of Judicial
Arbitration & Mediation Services, Inc. ("JAMS"). If JAMS is unable to arbitrate
----
the dispute, then the dispute will be arbitrated at the Washington D.C. offices
of the American Arbitration Association ("AAA"). No party shall commence an
---
arbitration proceeding unless such party shall first give a written notice
("Dispute Notice") to the other parties setting forth the nature of the dispute.
If the parties cannot agree on the selection of an arbitrator within twenty (20)
days after delivery of the Dispute Notice, the arbitrator will be selected by
JAMS or AAA, as the case may be. Except as specifically modified by this clause,
the Commercial Arbitration Rules of the AAA will apply to all arbitrations
before JAMS and the AAA. Except as specifically modified by
-12-
<PAGE>
this clause, Virginia law, including Virginia evidence law, shall be applied to
determine all arbitrated issues. Virginia discovery law will apply to provide
all discovery available in Virginia Superior Court cases. Judgment upon an
arbitration award may be entered in any court having competent jurisdiction and
shall be binding, final and nonappealable. Should any proceeding be commenced
between the parties to this Agreement seeking to enforce any of its provisions,
the prevailing party in such proceeding shall be entitled, in addition to such
other relief as may be granted, to a reasonable sum for attorneys' fees and all
legal expenses and fees incurred on appeal and all interest thereon. For the
purposes of this provision, "prevailing party" shall include a party which
----------------
dismisses an action for recovery hereunder in exchange for payment of the sum
allegedly due, performance of covenants allegedly breached, or consideration
substantially equal to the relief sought in the action or proceeding.
(b) Acknowledgments. The parties hereto agree and acknowledge that the
---------------
damages that would be suffered by a nonbreaching party as a result of any breach
of the provisions of Sections 6 or 8 may not be calculable and that an award of
---------------
a monetary judgment for such a breach would be an inadequate remedy.
Consequently, a nonbreaching party shall have the right, in addition to any
other rights it may have, to obtain, in any court of competent jurisdiction,
injunctive relief to restrain any breach or threatened breach of any provision
of Section 6 or 8 or otherwise to specifically enforce any of the provisions
--------------
hereof. This remedy is in addition to damages directly or indirectly suffered by
a nonbreaching party and reasonable attorneys' fees. The parties hereto agree
that the restraint, duration and area for which the covenants in Section 8 are
---------
to be effective are reasonable in light of the business and activities of the
parties hereto. In the event that any court finally determines that the time
period or the geographic scope of any such covenant is unreasonable or excessive
and any covenant is to that extent made unenforceable, the parties agree that
the restrictions in Section 8 shall remain in full force
---------
and effect for the greatest time period and within the greatest geographic area
that would not render it unenforceable. The parties intend that each of the
covenants in Section 8 shall be deemed to be a separate covenant.
---------
(c) Independent Covenant. All of the covenants in Sections 6 and 8 shall
-------------------- ----------------
be construed as an agreement independent of any other provision of this
Agreement, and the existence of any claim or cause of action of a nonbreaching
party against a breaching party, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by any party of
such covenants.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
COMPANY: KAPOS ASSOCIATES INC.
By: /s/ ERVIN KAPOS
______________________________
Title:___________________________
EMPLOYEE: /s/ ERVIN KAPOS
_________________________________
ERVIN KAPOS
-14-
<PAGE>
EXHIBIT A
"Proprietary Information" Defined:
--------------------------------
For purposes of this Agreement, "Proprietary Information" shall mean
-----------------------
information that has been created, discovered, developed or otherwise become
known to the Employee or the Company or in which property rights have been
assigned or otherwise conveyed to the Employee or the Company, which the
Employee may have learned or discovered, or may make, learn of or discover while
in employment of the Company, whether before the commencement of this Agreement
or during the term hereof, which information has material economic value or
potential material economic value to the business in which the Company is or
will be engaged. Proprietary Information shall include, but not be limited to,
trade secrets, processes, formulas, data, know-how, negative know-how,
improvements, discoveries, developments, designs, ideas, Inventions, techniques,
all technical data, customer and supplier lists, and any modifications or
enhancements thereto, programs and information (whether or not in writing) which
have actual or potential economic value to the Company, together with any
copyright or patent therein. For purposes of this Agreement, Proprietary
Information shall not include information that has become public knowledge
through legal means without fault by the Employee, or is already public
knowledge prior to disclosure of the same by the Company and/or its subsidiaries
or affiliates to the Employee.
"Inventions" Defined:
-------------------
For purposes of this Agreement, "Inventions" shall mean all discoveries,
----------
developments, designs, improvements, inventions, formulas, software programs,
processes, techniques, know-how, negative know-how and data, whether or not
patentable or registrable under patent, copyright or similar statutes, that are
related to or useful in the business or future business of the Company or result
from use of premises or other property owned, leased or contracted for by the
Company. Without limiting the generality of the foregoing, Inventions shall also
include anything that derives actual or potential economic value from not being
generally known to the public or to other persons who can obtain economic value
from its disclosure or use.
-15-
<PAGE>
EXHIBIT B
ITEM 1:
The following is a complete list of all inventions or improvements relevant
to the subject matter of the Employee's employment by the Company that have been
made or conceived of or first reduced to practice by the Employee alone or
jointly with others prior to his employment by the Company:
Item 2:
The following is a complete list of all materials and documents of a former
employer that are not generally available to the public that the Employee will
bring or have brought to the Company or have used or will use in his employment
by the Company:
-16-
<PAGE>
EXHIBIT C
TERMINATION CERTIFICATION
-------------------------
I certify as follows:
1. When I signed the attached Employment Agreement (the "Agreement"), I
---------
read and understood the terms of the Agreement.
2. I hereby acknowledge that I have fully complied with the terms of the
Agreement, including, without limitation, the disclosure and assignment to Kapos
Associates Inc. (or its successors or assigns) (the "Company") of any Inventions
-------
covered by that Agreement, and the return of any documents and other materials
of any nature relating to my employment with the Company.
3. I hereby acknowledge and agree to comply with my continuing
obligations under this Agreement, including, without limitation, my obligation
not to use for personal benefit or to disclose to others any Proprietary
Information of the Company.
4. I understand and acknowledge that should I fail to comply with my
obligations under the Agreement, the Company shall have the right to injunctive
relief against me, including, without limitation, an injunction prohibiting me
from disclosing Proprietary Information to a third party.
Dated as of: ___________________
_________________________________
Signature of Employee
_________________________________
Print Name
-17-
<PAGE>
EXHIBIT 10.32
OFFICE LEASE
by and between
ORIX PRIME WEST COLORADO SPRINGS VENTURE,
a Colorado general partnership
(LANDLORD)
and
DECISION-SCIENCE APPLICATIONS, INC.,
a Virginia corporation
(TENANT)
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
<TABLE>
<C> <S> <C>
ARTICLE 1 - DEMISE............................................... 1
1.1 Demise............................................... 1
ARTICLE 2 - TERM................................................. 1
2.1 Term................................................. 1
2.2 Supplemental Agereement.............................. 2
2.3 Landlord's Work...................................... 2
ARTICLE 3 - RENT................................................. 2
3.1 Base Rent............................................ 2
3.2 Additional Rent...................................... 3
3.3 Interest on Late Payments and Late Payment Charge.... 3
ARTICLE 4 - TAXES AND OPERATING EXPENSE ADJUSTMENT............... 3
4.1 Definitions.......................................... 3
4.2 Payments -of Taxes and Operating Expenses............ 7
4.3 Reimbursement Survives Termination................... 8
ARTICLE 5 - BUILDING SERVICES.................................... 8
5.1 Standard Services.................................... 8
5.2 Interruption of Standard Services.................... 9
5.3 Services Paid by Tenant.............................. 9
5.4 Above-Standard Service Requirements.................. 10
5.5 Cleaning............................................. 10
5.6 Re-Lamping........................................... 10
5.7 After Hours Access................................... 10
5.8 Landlord's Obligation................................ 10
ARTICLE 6 - TENANT REPAIR........................................ 10
6.1 Damage by Tenant..................................... 10
6.2 Maintenance.......................................... 11
6.3 Good Condition....................................... 11
6.4 Surrender............................................ 11
6.5 Broken Glass......................................... 11
ARTICLE 7 - ASSIGNMENT AND SUBLETTING............................ 11
7.1 Limitations.......................................... 11
7.2 Acceptance of Performance............................ 12
7.3 Document Review...................................... 12
7.4 Affiliated Entities.................................. 12
ARTICLE 8 - TRANSFER BY LANDLORD AND LIMITED LIABILITY........... 13
8.1 Transfer of Landlord's Interest...................... 13
8.2 Limited Liability of Landlord........................ 13
ARTICLE 9 - USE OF PREMISES...................................... 13
9.1 Use.................................................. 13
9.2 Compliance with Rules and Regulations................ 13
ARTICLE 10 - INSURANCE............................................ 14
10.1 Tenant's Insurance................................... 14
10.2 Landlord's Insurance................................. 15
10.3 Subrogation.......................................... 15
ARTICLE 11 - OBSERVANCE OF LAW.................................... 15
11.1 Law and Covenants.................................... 15
11.2 Taxes................................................ 16
</TABLE>
i
<PAGE>
ARTICLE 12 - WASTE, AND NUISANCE; ENVIRONMENTAL................... 16
12.1 Waste and Nuisance................................... 16
12.2 Environmental Covenant............................... 16
12.3 Hazardous Substances................................. 16
12.4 Environmental Laws................................... 16
ARTICLE 13 - ENTRY BY LANDLORD.................................... 17
ARTICLE 14 - INDEMNIFICATION...................................... 17
14.1 Indemnification by Tenant............................ 17
14.2 Indemnification by Landlord.......................... 17
14.3 Comparative Fault.................................... 18
ARTICLE 15 - ALTERATIONS.......................................... 18
15.1 Alterations by Tenant................................ 18
15.2 Alterations by Landlord.............................. 19
ARTICLE 16 - SIGNS AND ADVERTISING................................ 19
ARTICLE 17 - SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST........ 20
ARTICLE 18 - ESTOPPEL CERTIFICATE/FINANCIAL INFORMATION........... 21
18.1 Estoppel Certificate................................. 21
18.2 Financial Information................................ 21
ARTICLE 19 - QUIET ENJOYMENT...................................... 21
ARTICLE 20 - FIXTURES............................................. 21
ARTICLE 21 - DAMAGE OR DESTRUCTION................................ 21
21.1 Casualty............................................. 21
21.2 Casualty Caused by Tenant............................ 22
21.3 Rent................................................. 22
ARTICLE 22 - CONDEMNATION......................................... 22
22.1 Eminent Domain....................................... 22
22.2 Damages.............................................. 23
22.3 Restoration.......................................... 23
ARTICLE 23 - LOSS AND DAMAGE AND DELAY............................ 23
23.1 Loss and Damage...................................... 23
23.2 Delays............................................... 23
ARTICLE 24 - DEFAULT AND REMEDIES................................. 24
24.1 Default by Tenant.................................... 24
24.2 Remedies of Landlord................................. 25
24.3 Landlord's Default................................... 26
24.4 Personal Property Lien............................... 26
ARTICLE 25 - HOLDING OVER......................................... 26
ARTICLE 26 - NOTICE............................................... 27
26.1 Notice............................................... 27
26.2 Change of Address.................................... 28
ARTICLE 27 - SECURITY DEPOSIT..................................... 28
ARTICLE 28 - MISCELLANEOUS PROVISIONS............................. 28
28.1 Captions............................................. 28
28.2 Waiver............................................... 28
ii
<PAGE>
28.3 Entire Agreement..................................... 28
28.4 Severability......................................... 28
28.5 Modification......................................... 28
28.6 Governing Law........................................ 28
28.7 Successors and Assigns............................... 28
28.8 Authorization to Execute............................. 29
28.9 Guaranty of Lease.................................... 29
28.10 Approval of Documents................................ 29
28.11 Prime Rate........................................... 29
28.12 Attorneys' Fees...................................... 29
ARTICLE 29 - SUBSTITUTION OF PREMISES............................. 29
ARTICLE 30 - RECORDING............................................ 29
ARTICLE 31 - REAL ESTATE BROKER................................... 29
ARTICLE 32 - OTHER PROVISIONS..................................... 30
32.1 Rent Concession...................................... 30
32.2 Moving Concession.................................... 30
32.3 Exercise Facility.................................... 30
32.4 Base Rent Adjustment................................. 30
32.5 Parking.............................................. 30
32.6 Access System........................................ 30
32.7 Exterior Signage..................................... 31
32.8 Options to Expand.................................... 31
32.9 Right of First Refusal............................... 32
32.10 Option to Extend..................................... 33
32.11 Vacation............................................. 34
32.12 Right to Test Equipment.............................. 34
EXHIBIT A - FLOOR PLAN THIRD FLOOR............................... A-1
EXHIBIT A-1 - FLOOR PLAN/SECOND FLOOR.............................. A-2
EXHIBIT A-2 - SECOND EXPANSION SPACE............................... A-3
EXHIBIT A-3 - SITE PLAN............................................ A-4
EXHIBIT B - LEGAL DESCRIPTION.................................... B-1
EXHIBIT C - WORK LETTER.......................................... C-1
EXHIBIT D - SUPPLEMENTAL AGREEMENT............................... D-1
EXHIBIT E - RULES AND REGULATIONS................................ E-1
EXHIBIT F - COMPONENTS OF SITE, SHELL AND CORE................... F-1
EXHIBIT G - COMPONENTS OF STANDARD TENANT FINISH................. G-1
EXHIBIT H - PRELIMINARY CONSTRUCTION SCHEDULE SITE, SHELL
AND CORE............................................. H-1
EXHIBIT I - JANITORIAL SPECIFICATIONS............................ I-1
EXHIBIT J - FORM SUBLEASE AGREEMENT.............................. J-1
EXHIBIT J-1 - FORM ASSIGNMENT AND ASSUMPTION AGREEMENT............. J-4
EXHIBIT K - ROOF TESTING AREA.................................... K-1
EXHIBIT L - COMMUNICATIONS LICENSE AGREEMENT..................... L-1
iii
<PAGE>
OFFICE LEASE
THIS LEASE is made this 7th day of May, 1998, by and between ORIX PRIME
WEST COLORADO SPRINGS VENTURE, a Colorado general partnership ("Landlord") and
DECISION-SCIENCE APPLICATIONS, INC., a Virginia corporation ("Tenant").
WITNESSETH:
ARTICLE 1
DEMISE
------
1.1 Demise. Landlord does hereby lease to Tenant and Tenant hereby
------
leases from Landlord Suites 300 and 250 (the "Premises") consisting of the
entire third floor and approximately 12,781 rentable square feet on the second
floor for a total of approximately 35,234 rentable square feet (the "Rentable
Area"), such Premises being generally depicted on the floor plans attached
hereto as Exhibit A and A-1, which Premises may be adjusted as set forth
--------- ---
herein. The Premises are situated in that certain building known as 2060
Briargate Parkway, located in El Paso County, Colorado Springs, Colorado (the
"Building"), which Building will be constructed by Landlord substantially in
accordance with (i) the Building Outline Specifications dated October 24, 1997
(revised March 18, 1998) prepared by OZ Architecture, a copy of which has been
provided to and approved by Tenant (the "Outline Specifications") and (ii) the
Site Plan attached hereto as Exhibit A-3 and situated on that certain real
-----------
property (the "Property") legally described in - Exhibit B, attached hereto,
---------
together with a non-exclusive right subject to the provisions hereof, to use all
appurtenances thereto, including, but not limited to, any plazas, common areas,
walkways or other areas in the Building or on the Property designated by
Landlord from time to time for the non-exclusive use of the tenants of the
Building, all of which inclusive of the Building are hereinafter collectively
called the "Building Complex."
Such letting and hiring is upon and subject to the terms, conditions and
covenants herein set forth, and Tenant covenants as a material part of the
consideration for this Lease to keep and perform each and all of said terms,
conditions and covenants by it to be kept and performed and that this Lease is
made upon the condition of such performance.
ARTICLE 2
TERM
----
2.1 Term. The term of this Lease and Tenant's obligation to pay rent
----
shall commence on the earlier to occur of (a) February 1, 1999, or (b) the date
upon which Tenant commences the operation of its business in the Premises (the
"Commencement Date") and shall end at 5:00 p.m. on the last day of the ninety-
ninth (99th) month thereafter, unless sooner terminated as herein provided (the
"Lease Term"). As further specified in Exhibit C, Landlord shall provide Tenant
---------
access to the Premises (i) thirty (30) days prior to the Commencement Date for
purposes of installing Tenant's voice data cabling equipment and related
materials and (ii) fourteen (14) days prior to the Commencement Date for
purposes of installing certain of Tenant's furniture, fixtures and equipment, In
addition to the foregoing, Landlord will be reasonable in providing Tenant's
contractors access to the Premises at such other times necessary for
installation of Tenant's equipment and related materials, provided that (i)
Tenant schedules and coordinates such access needs with Landlord within five (5)
days prior to the date of such desired access, (ii) such work by Tenant's
contractors does not unreasonably interfere with or in any way delay Landlord's
work in the Premises and (iii) the terms and conditions of the Lease shall
govern and control during such access periods. All such installation work by
Tenant shall be performed in a good and workmanlike manner and at Tenant's sole
cost and expense. Tenant shall indemnify and hold Landlord harmless for any
claims asserted against Landlord or for any damage, loss, cost or expense
incurred by Landlord as a result of such work by Tenant on the Premises.
Notwithstanding the above, if the Premises are not Substantially Complete (as
defined in Exhibit C) on February 1, 1999 due to any reason other than Tenant
---------
Delay (as defined in Exhibit C), then the Commencement Date shall be extended to
---------
the date of Substantial Completion (or, in the event of Tenant Delay, to the
date on which the Premises would have been
1
<PAGE>
Substantially Complete in the absence of the Tenant Delay). If the plat and
development plan for the Property have not been approved by the City of Colorado
Springs, Colorado and/or any other governmental authority, association or
committee as may be required by any recorded covenants affecting the Property on
or before June 30, 1998, Landlord or Tenant may elect to terminate this Lease by
providing prior written notice thereof to the other party on or before July 31,
1998 and in such event, both Landlord and Tenant shall be relieved of their
respective obligations hereunder. Landlord has submitted the appropriate
development plans to the City of Colorado Springs for approval and Landlord
shall use reasonable efforts to obtain any such required approvals as promptly
as possible. If Landlord has not commenced construction of the Building on or
before August 3, 1998 or if Landlord has not commenced erection of steel with
respect to the Building on or before September 24, 1998, Tenant may elect to
terminate this Lease by providing prior written notice thereof to Landlord
within thirty (30) days following the respective termination dates referenced
above and in such event, both Landlord and Tenant will be relieved of their
respective obligations hereunder. Landlord agrees to provide Tenant with at
least thirty (30) days prior written notice of the date that the Premises will
be Substantially Complete. If, however, the Commencement Date has not occur-red
on or before May 1, 1999, Tenant may elect to terminate this Lease by providing
prior written notice thereof to Landlord on or before May 31, 1999 and in such
event, both Landlord and Tenant shall be relieved of their respective
obligations hereunder. If the Commencement Date has not occurred on or before
May 1, 1999 (as such date shall be extended by one (1) day for each day of a
Tenant Delay, as defined in Exhibit C) due to a delay caused by Landlord and
---------
Tenant does not elect to terminate the Lease as set forth above, Landlord will
agree to reimburse Tenant for Tenant's holdover costs in the amount of
$12,405.56 per month (the "Holdover Costs") incurred by Tenant as a result of
such delay beyond May 1, 1999 (as extended by one (1) day for each day of a
Tenant Delay) until Substantial Completion. If the Commencement Date has not
occurred on or before May 1, 1999 (as such date shall be extended by one (1) day
for each day of a Tenant Delay) due to a Force Majeure Delay and Tenant does not
elect to terminate the Lease, Landlord will agree to reimburse Tenant for fifty
percent (50%) of Tenant's Holdover Costs in the amount of $6,202.78 per month
incurred by Tenant as a result of such delay beyond May 1, 1999 (as extended by
one (1) day for each day of a Tenant Delay) until the earlier of Substantial
Completion or October 31, 1999. Notwithstanding the foregoing, in no event will
Landlord's liability in connection with payment of Tenant's Holdover Costs in
connection with a Force Majeure Delay exceed $38,000.00 and if the Commencement
Date has not occurred on or before October 31, 1999, either party shall have the
right to terminate the Lease by providing prior written notice thereof to the
other party and in such event, both Landlord and Tenant shall be relieved of
their respective obligations hereunder.
2.2 Supplemental Agreement. Within five (5) days after the commencement
----------------------
of the term of this Lease, Tenant agrees to execute a Supplemental Agreement in
the form attached as Exhibit D to become a part hereof, setting forth the
---------
Commencement and termination dates of the term of this Lease in accordance with
Paragraph 2.1 above and such other information as the parties may agree to as
set forth therein, including the actual Rentable Area of the Premises, Base Rent
and Tenant's Pro Rata Share as defined herein.
2.3 Landlord's Work. Other than as set forth in the Work Letter Landlord
---------------
shall have no obligation for the completion or condition of the Premises and
Tenant shall accept the Premises in its "AS IS" condition as of the date
Landlord delivers possession thereof in accordance with the provisions of the
Work Letter, subject to any Punch List Items (as defined in the Work Letter) and
any defects in the Premises constructed by Landlord and discovered by Tenant
(and written notice of which is given to Landlord) within one (1) year following
the date of Substantial Completion, which defects will be substantially cured by
Landlord or Landlord will cause to be substantially cured within a reasonable
time following written notice thereof by Tenant to Landlord within such one year
period. In addition to the foregoing, Landlord will assign to Tenant all
warranties relating to items of which Landlord is not obligated to maintain
under this Lease and will use reasonable efforts to enforce all unassigned
warranties for Tenant's benefit.
ARTICLE 3
RENT
----
3.1 Base Rent. Tenant agrees to pay as base annual rent (the "Base Rent")
---------
during the Term of this Lease a sum equal to $15.90 per rentable square foot of
Premises per annum triple net which Base Rent shall be increased annually on
each anniversary of the Commencement Date by
2
<PAGE>
1.50% over the preceding Lease Year's Base Rent. The Base Rent shall be payable
in equal monthly installments without notice, deduction, set-off or abatement
(except as set forth in Articles 21 and 22 hereof) to Landlord at the address
for Landlord set forth in Article 26 or such other address as Landlord may
notify Tenant of in writing, in lawful money of the United States payable in
advance on the first day of each month. If the Lease Term commences or
terminates on a day other than the first or last day of a calendar month
respectively, then the installments of Base Rent for such month or months shall
be prorated and the installments so prorated shall be paid in advance. The term
"Lease Year" shall mean each twelve month period subsequent to the Commencement
Date. Annual Base Rent is subject to adjustment upon final determination of the
rentable square feet of the Premises as set forth in Exhibit D. Notwithstanding
---------
the foregoing, in no event will an adjustment be made to the $15.90 amount per
rentable square foot referenced above, unless otherwise agreed to by Landlord
and Tenant.
3.2 Additional Rent. Any other sums of money or charges to be paid by
---------------
Tenant pursuant to the provisions of this Lease are designated as "Additional
Rent". A failure to pay Additional Rent shall be treated in all events as the
failure to pay rent.
3.3 Interest on Late Payments and Late Payment Charge.
-------------------------------------------------
Any rent (whether Base Rent or Additional Rent) or other amount due from Tenant
to Landlord under this Lease not paid when due shall bear interest from the date
due until the date paid at the per annum rate of the Prime Rate (as defined in
Section 28.11) plus two percent (2%) (the "Default Rate"), but the payment of
such interest shall not excuse or cure any default by Tenant under this Lease.
Failure to charge or collect such interest in connection with any one or more
such late payments shall not constitute a waiver of Landlord's right to charge
and collect such interest in connection with any other or similar or like late
payments.
In addition, in the event any rent or other amounts owing hereunder are not
paid within three (3) days after the due date, then Landlord and Tenant agree
that Landlord will incur additional administrative expenses, the amount of which
will be difficult if not impossible to determine. Accordingly, in addition to
such required payment, Tenant shall pay to Landlord an additional late charge
for any such late payment in the amount of three percent (3%) of the amount of
such late payment. Notwithstanding the above, Landlord agrees that if Landlord
receives payment of such amounts due within five (5) days of Tenant's written
receipt of notice of nonpayment from Landlord, then Landlord shall waive the
interest on such late payment and the late charge, but Landlord (i) shall have
no obligation to waive such charges and interest more than twice during any
calendar year; (ii) shall have no obligation to give notice more than twice
during any calendar year; and (iii) shall have no obligation to waive any
charges if there is any prior existing uncured default under this Lease.
ARTICLE 4
TAXES AND OPERATING EXPENSE ADJUSTMENT
--------------------------------------
In addition to Base Rent, Tenant shall reimburse Landlord for Real Estate
Taxes and Operating Expenses (which sum may be adjusted pursuant to Section 4.2)
for the Building Complex as hereinafter set forth in this Section.
4.1 Definitions. The following terms shall have the following meanings
-----------
with respect to the provisions of this Lease:
(a) "Tenant's Proportionate or Pro Rata Share" shall mean that
fraction, the numerator of which is the Rentable Area of the Premises as
determined by Landlord and the denominator of which is estimated to be
approximately 72,626 rentable square feet being the total Rentable Area of the
Building Complex as determined by Landlord and is estimated to be 48.51% which
calculation shall be determined by Landlord and included in the Supplemental
Agreement. At such time, if ever, any space is added to or subtracted from the
Premises as hereinbelow provided, Tenant's Pro Rata Share shall be adjusted by
Landlord accordingly. Landlord's system for measurement of rentable area shall
be a modified BOMA with the total Building rentable/useable ratio applied to
every floor based upon Final Plans (as defined in the Work Letter) for the
Premises and the Building, as determined by Landlord's architect. Said number
for the Premises shall also
3
<PAGE>
be "field verified" by Landlord's architect and may be so verified, at Tenant's
election, by Tenant's architect. If the field verification of Tenant's architect
and Landlord's architect vary by more than 500 square feet, each party shall
appoint an architect having at least five years' full-time commercial
architectural experience to determine the rentable square feet of the Premises,
such process to be completed within twenty (20) days after the date of the
appointment of the last architect. If a party does not appoint a qualified
architect within five (5) days after the other party has given notice of the
name of its architect, then the single architect shall be the sole architect and
shall set the square footage number for the Premises. If the selected architects
are unable to agree on the number within twenty (20) days after the date the
second architect has been appointed, they shall elect a third architect meeting
the qualifications stated in this paragraph within seven (7) days after the last
day the two (2) architects are to set the square footage number for the
Premises. Each of the parties shall pay for the architect appointed by it and
shall bear one-half of the cost of the third architect. The third architect,
however selected, shall be a person who has not previously acted in any capacity
for either party. Within thirty (30) days after the selection of the third
architect, a majority of the architects shall set the rentable square footage
for the Premises. If a majority of the. architects are unable to agree on the
number within the stipulated period of time, the average of the three architects
shall be the applicable number. If the architects fail to establish the square
footage number in question prior to the Commencement Date, Tenant shall pay rent
in accordance with the square footage determined by Landlord's architect until
the architects have made their determination. The square footage in question,
when finally determined by the architects, shall be retroactive to the
Commencement Date, and the first Base Rent payment becoming due after the
determination of the applicable square footage shall be adjusted accordingly.
(b) "Real Estate Taxes" shall include (i) any form of assessment
(including any so-called "special" assessments related to the Building or the
Property), license tax, business license fee, business license tax, commercial
rental tax, levy, charge, penalty or tax, imposed by any authority having the
direct power to tax, including any city, county, state or federal government, or
any school, agricultural, lighting, water, drainage or other improvement or
special district thereof, against the Premises, the Building, Property, or
Building Complex or any legal or equitable interest of Landlord therein; and
(ii) any assessments, tax, fee, levy or charge in substitution, partially or
totally, of or in addition to any assessment, tax, fee, levy or charge
previously included within the definition of Real Estate Taxes, including,
without limitation, those which may be imposed by governmental agencies for such
services as fire protection, street, sidewalk and road maintenance, refuse
removal and for other governmental services formerly provided without charge to
property owners or occupants. It is the intention of Landlord and Tenant that
all such new and increased assessments, taxes, fees, levies and charges be
included within the definition of Real Estate Taxes for purposes of this Lease.
The following shall also be included within the definition of Real Estate Taxes
for purposes of this Lease, provided, however, that Tenant shall pay Landlord
the entire amount thereof. (x) any tax allocable to or measured by the area of
the Premises or the rental payable hereunder, including without limitation, any
gross income, privilege, sales or excise tax levied by the State, any political
subdivision thereof, city, municipal or federal government, with respect to the
receipt of such rental, or upon or with respect to the possession, leasing,
operating, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises or any portion thereof, and (y) any tax upon this
transaction or any document to which Tenant is a party, creating or transferring
an interest or an estate in the Premises. Notwithstanding anything to the
contrary, "Real Estate Taxes" shall not include Landlord's federal or state
income or net profit taxes (it being understood that net profit taxes are
separate and distinct from the gross taxes referenced in subparagraph (x)
above), franchise, stock, gift, corporation, excise, transfer, recordation,
inheritance or estate taxes. "Real Estate Taxes" included in this definition
mean taxes or assessments as estimated for the current year and not due and
payable until the following year. Upon receipt of the applicable tax bill, an
adjustment will be made between the parties as specifically set forth in Section
4.2 hereof.
(c) "Operating Expenses" shall mean all maintenance and operating
costs of any kind or nature with respect to the operation, ownership and
maintenance of the Building Complex, determined in accordance with generally
accepted accounting principles consistently applied, and shall include, but not
be limited to, the cost of building supplies, window cleaning, costs incurred in
connection with all energy sources for the Building Complex such as propane,
butane, natural gas, steam, electricity, solar energy and fuel oil; the costs of
water and sewer service, janitorial services, both interior and exterior,
general maintenance, repair and decorating of the Building Complex including the
heating and air conditioning systems and structural components of the Building;
4
<PAGE>
landscaping, maintenance, repair and striping of all parking areas; insurance,
including fire and extended coverage and public liability insurance and any
rental insurance and all risk insurance carried by Landlord, including, without
limitation, insurance carried pursuant to Section 10.2; labor costs incurred in
the operation and maintenance of the Building Complex, including wages and other
payments; costs to Landlord for Workmen's Compensation and disability insurance;
payroll taxes and welfare fringe benefits; professional building management fees
consistent with competitive arms-length management fees charged for comparable
buildings in the Colorado Springs, Colorado market not to exceed 4.5% of the
gross annual rents and other income received in connection with the Building
Complex, legal, accounting, inspection and reasonable consultation fees incurred
in connection with the Building Complex; any association or similar fees or
dues; costs of complying with recorded restrictions, covenants and/or easements;
any expense attributable to costs incurred by Landlord for any capital
improvements or structural repairs to the Building or Property required by any
change in the laws, ordinances, rules, regulations or otherwise which were not
in effect on the date Landlord obtained its building permit to construct the
Building required by any governmental or quasi-governmental authority having
jurisdiction over the Building which costs shall be amortized over the useful
life of the capital improvements or structural repair; any expense attributable
to costs incurred by Landlord for any capital improvements designed primarily to
reduce Operating Expenses; and any costs incurred by Landlord in making other
capital improvements or other modifications to the Building or any part thereof
(except such other capital improvements or modifications affecting the base
structure of the Building, the addition of any new base building system in the
Building or the replacement of an existing base building system in the Building
as specified in subparagraph (xvi) below, and as otherwise specifically excluded
below), which costs shall be amortized over the useful life of such improvement
or modification with interest on the unamortized amount at the rate paid by
Landlord on any funds borrowed for such expenditures in accordance with such
reasonable life and amortization schedules and shall be determined in accordance
with generally accepted accounting principles. Notwithstanding anything to the
contrary contained herein, Operating Expenses shall expressly exclude the
following:
(i) Costs of maintenance and repair reimbursed by construction
warranties, insurance proceeds, condemnation awards, guaranties, service
contracts (excluding any mandatory deductibles) or for which Landlord is
actually reimbursed by a tenant of the Building;
(ii) Alterations or other specific costs attributable solely to
other tenant's space in the Building which under the terms of the respective
lease is such tenant's responsibility;
(iii) Landlord's income taxes;
(iv) Leasing commissions, advertising and marketing expenses,
tenant finish for other tenants of the Building Complex, costs of preparing
leases, including attorneys' fees, and other costs of Landlord related solely to
leasing space for other tenants in the Building Complex or for which other
tenants are directly responsible (or would be responsible if their lease terms
conformed to the terms hereto;
(v) Interest on debt or amortization payments on any mortgages
or deeds of trust, ground lease rent or other charges or expenses in connection
with the financing or refinancing of the Building Complex;
(vi) Landlord's costs in enforcing leases for other tenants in
the Building Complex including without limitation, all legal fees, costs and
expenses to collect rent arrearages and recover possession;
(vii) Any charge for depreciation of the Building;
(viii) Salaries of Landlord's executives or employees above the
level (or equivalent status) of a building manager;
(ix) Costs allocable to structural defects in the roof or
defects in structural portions of the Building;
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(x) Costs allocable to environmental causes either caused by
Landlord's negligence or willful misconduct or by a particular tenant of the
Building held responsible therefor by the terms of such tenant's lease;
(xi) Repair costs allocable to Landlord's failure to cause
construction of the Building Complex in compliance with the then applicable laws
in effect at the time of construction;
(xii) Fines or penalties imposed by any governmental authority
arising from Landlord's violation of applicable law;
(xiii) Above-market payment to entities affiliated with Landlord
or overhead costs of Landlord to the extent that such costs result in above-
market costs for the particular service rendered for comparable buildings in El
Paso County, Colorado;
(xiv) Other than vending machines or pay telephones, the costs
of installing, operating and maintaining any specialty service within the
Building, which service is installed and operated without the consent of Tenant;
(xv) The cost of any work performed or service provided for any
tenant of the Building (other than Tenant) to a materially greater extent or in
a materially more favorable manner than that furnished generally to the other
tenants and occupants;
(xvi) The cost of any structural additions to the Building or
the addition of any new base building system in the Building (or Operating
Expenses generated by such additions) or the replacement of an existing base
building system in the Building, without the consent of Tenant, unless required
by any change in laws or designed primarily to reduce Operating Expenses as set
forth in Section 4.1(c) hereof;
(xvii) The cost of any repair made in response to any fire or
casualty damage (except for the amount of any commercially reasonable
"deductible" under Landlord's property insurance) reimbursed by insurance
proceeds;
(xviii) Payments for rented equipment, the cost of which equipment
would constitute a capital expenditure if the equipment were purchased (unless
such equipment, if purchased, would be included within the permitted capital
expenditures set forth in (c) above);
(xix) Legal expenses and costs arising out of the construction,
sale or financing of the Building, or the enforcement of the provisions of any
other tenant's lease;
(xx) Costs necessitated by or resulting from the gross
negligence of Landlord or its agents and employees acting within the scope of
their employment;
(xxi) Bad debt loss, rent loss or reserves for bad debt loss
or rent loss (but not the premiums for rent loss/business interruption
insurance);
(xxii) Costs associated with the operation of the business
entity of Landlord, including partnership audit, business entity accounting and
business entity legal matters, to the extent such matters are not related to the
operation of the Building;
(xxiii) Fines and penalties associated with Landlord making late
payments;
(xxiv) Any personal property tax payable with respect to
Landlord's property located at the Building, but not in any way benefiting the
Building or any tenants of the Building;
(xxv) Wages, salaries and other compensation or benefits paid
to any off-site employees of Landlord (other than Landlord's reasonable
allocation, based on time spent in connection with the Building, of wages,
salaries compensation and benefits paid to such off-site employees who are
assigned part-time to the operation, management, maintenance or repair of the
Building);
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(xxvi) A single expenditure paying for the provision of a good
or service to both the Building and any other building owned by Landlord (other
than the portion of such payment that is equitably allocable to the Building, as
reasonably determined by Landlord).
(d) "Variable Operating Expenses" shall mean those Operating Expenses
which vary with occupancy levels or which vary with areas serviced based upon
occupied Rentable Area or which are paid directly by tenants of the Building. If
less than 100% of the total rentable square feet in the Building is occupied at
any time during any calendar year, or if any office tenant is separately paying
for electricity or other utility services or janitorial services furnished to
its premises, then Operating Expenses for such calendar year shall be deemed to
include all additional expenses with respect to those Variable Operating
Expenses, as reasonably estimated by Landlord, which would have been incurred
during such calendar year if the occupancy rate for the Building had been 100%
and if Landlord paid for electricity, other utility services and janitorial
services furnished to such premises.
4.2 Payments of Taxes and Operating Expenses. It is hereby agreed that
----------------------------------------
during each Lease Year of the Lease Term Tenant shall pay to Landlord Tenant's
Pro Rata Share of the amount of the Operating Expenses and Real Estate Taxes for
the Building Complex as set forth above. It is agreed that Tenant shall during
each calendar ear pay to Landlord an estimate of Tenant's Pro Rata Share of such
Real Estate Taxes and Operating Expenses as hereinafter set forth. Beginning
with the calendar year 1999, the Tenant shall pay to Landlord each month
following the Commencement Date on the first day of the month an amount equal to
one-twelfth (1/12) of Tenant's Pro Rata Share of the Real Estate Taxes and
Operating Expenses for such calendar year as reasonably estimated by Landlord,
with an adjustment to be made between the parties at a later date as hereinafter
provided. Furthermore, Landlord may from time to time but no more than once
during any Lease Year furnish Tenant with notice of a re-estimation of the
amount of Tenant's Pro Rata Share and Tenant shall commence paying its re-
estimated Pro Rata Share on the first day of the month following receipt of said
notice. As soon as practicable following the end of any calendar year, but not
later than April 30 of the following year, Landlord shall submit to Tenant a
detailed and itemized statement setting forth the exact amount of Tenant's Pro
Rata Share of the Real Estate Taxes and Operating Expenses for the calendar year
just completed and the difference, if any, between Tenant's actual Pro Rata
Share of the Real Estate Taxes and Operating Expenses for the calendar year just
completed and the estimated amount of Tenant's Pro Rata Share of the Real Estate
Taxes and Operating Expenses (which were paid in accordance with this
subparagraph) for such year. Such statement shall also set forth the amount of
the estimated Real Estate Taxes and Operating Expenses reimbursement for the new
calendar year computed in accordance with the foregoing provisions. To the
extent that Tenant's Pro Rata Share of the actual Real Estate Taxes and
Operating Expenses for the period covered by such statement is higher than the
estimated payments which Tenant previously paid during the calendar year just
completed, Tenant shall pay to Landlord the difference within thirty (30) days
following receipt of said statement from Landlord. To the extent that Tenant's
Pro Rata Share of the actual Real Estate Taxes and Operating Expenses for the
period covered by the Statements is less than the estimated payments which
Tenant previously paid during the calendar year just completed, Landlord shall
refund said amount to Tenant within thirty (30) days unless Tenant is in default
in which event Landlord shall credit the difference against Tenant's estimated
reimbursement for such Real Estate Taxes and Operating Expenses for the current
year. In addition, with respect to the monthly reimbursement, until Tenant
receives such statement, Tenant's monthly reimbursement for the new calendar
year shall continue to be paid at the then current rate, but Tenant shall
commence payment to Landlord of the monthly installments of reimbursement on the
basis of the statement beginning on the first day of the month following the
month in which Tenant receives such statement. Landlord's failure to provide
such statement to Tenant as specified above shall in no way relieve Landlord or
Tenant from their respective payment obligations upon an adjustment for actual
Real Estate Taxes and Operating Expenses in the manner provided above. Landlord
agrees to contract only with unaffiliated third party vendors with respect to
the services to be provided and included as Operating Expenses under this Lease
and agrees to bid such service contracts at least once per annum.
Tenant's obligation with respect to its Pro Rata Share of the Real Estate
Taxes and Operating Expenses shall survive the expiration or early termination
of this Lease and Landlord shall have the right to retain the Security Deposit,
or so much thereof as it deems necessary, to secure payment of Tenant's Pro Rata
Share of the actual Real Estate Taxes and Operating Expenses for the portion of
the final calendar year of the Lease during which Tenant was obligated to pay
such expenses. If
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Tenant occupies the Premises for less than a full calendar year during the first
or last calendar years of the term hereof, Tenant's Pro Rata Share for such
partial year shall be calculated by proportionately reducing the Real Estate
Taxes and Operating Expenses to reflect the number of months in such year during
which Tenant occupied the Premises. Tenant shall pay its Pro Rata Share within
thirty (30) days following receipt of notice thereof.
Tenant shall have the right, but not more than once per annum, at any time
within one (1) year after a statement of actual Real Estate Taxes and Operating
Expenses for a particular calendar year has been rendered by, Landlord as
provided herein, at Tenant's sole cost and expense, to examine and audit
Landlord's books and records at Landlord's office and during normal business
hours and after reasonable notice to Landlord, relating to the determination of
such Real Estate Taxes and Operating Expenses. Unless Tenant objects to the
statement provided by Landlord within sixty (60) days of receipt of such
statement, the adjustment and statement shall be deemed conclusive.
In the event of any error in the statement, the amount due the other shall
be paid or credited, if applicable, within thirty (30) days of the determination
of the error. Notwithstanding anything to the contrary set forth herein, if
Tenant initiates an audit of any statement and such audit reflects an error in
the statement of more than five percent (5%) in the computation of the total
amount of Operating Expenses as set forth in such statement, Landlord shall
reimburse Tenant for the reasonable costs incurred by Tenant in obtaining such
audit.
Tenant may request that Landlord initiate a tax appeal, not more than once
per annum, and Landlord shall initiate such appeal unless, based upon the
reasonable judgment of Landlord's business consultants, Landlord is advised
otherwise. If, at any time during the Lease Term, Landlord is awarded proceeds
from a tax protest or appeal arising from taxes paid during the Lease Term,
Landlord shall pay to Tenant its pro rata share of the net proceeds within sixty
(60) days following such final ruling and receipt of such proceeds.
4.3 Reimbursement Survives Termination. In the event of the termination
----------------------------------
of this Lease by expiration of the stated term or for any other cause or reason
whatsoever prior to the determination of rental adjustment as hereinafter set
forth, Tenant's agreement to reimburse Landlord up to the time of termination
shall survive termination of the Lease and Tenant shall pay any amount due to
Landlord within thirty (30) days after being billed therefor. In the event of
the termination of this Lease by expiration of the stated term or for any other
cause or reason whatsoever, prior to the determination of rental adjustments as
hereinabove set forth, Landlord's agreement to refund any excess additional
rental paid by Tenant up to the time of termination shall survive termination of
the Lease and Landlord shall pay the amount due to Tenant within thirty (30)
days of Landlord's determination of such amount unless Tenant is in default in
which event it shall be credited against sums due Landlord. This covenant shall
survive the expiration or termination of this Lease.
If the last year of the term of this Lease ends on any day other than the
last day of December, any payment due to Landlord of Tenant's Pro Rata Share of
Real Estate Taxes and Operating Costs shall be prorated on the basis by which
the number of days in such partial year bears to 365.
Any failure of Landlord to furnish Tenant with an estimate of its Pro Rata
Share of Real Estate Taxes and Operating Expenses or any statements as set forth
in this Section 4 shall not act to relieve Tenant of its liability therefor; and
with respect to any deficiencies, Tenant agrees to pay same within thirty (30)
days of written demand from Landlord.
ARTICLE 5
BUILDING SERVICES
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5.1 Standard Services. Landlord shall maintain the base building systems
-----------------
within the Building (other than those installed by Tenant in the Premises, if
any). Such base building systems include plumbing, electrical and heating
ventilation and air conditioning equipment. Specifically, Landlord agrees to
furnish to the Premises during regular business hours from 7:00 a.m. to 7:00
p.m. Mondays through Fridays and from 7:00 a.m. to 1:00 p.m. Saturdays, except
for Thanksgiving Day, Christmas Day, New Year's Day, Memorial Day, Independence
Day and Labor Day, and subject to
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the rules and regulations of the Building, heat and air conditioning for the use
and occupancy of the Premises, passenger elevator service and freight elevator
service, if any, subject to scheduling by Landlord. The heat and air
conditioning shall be provided to the Premises substantially in accordance with
the Outline Specifications. Landlord shall not be liable for repairs
necessitated by Tenant's misuse, abuse or negligence of said base building
systems. Landlord shall also furnish: (1) electric current to be supplied for
lighting the Premises and public halls and for the operation of Ordinary Office
Equipment, as defined below; (ii) janitorial and cleaning services, and (iii)
domestic water in reasonable quantity. Elevator service shall mean service
either by non-attended automatic elevators or elevators with attendants at the
option of Landlord which shall be available at all times subject to repair,
maintenance, casualty and Force Majeure. Landlord shall also furnish to the
Premises (at rates reasonably set by Landlord, not to exceed its actual costs)
heating and air conditioning during times other than regular business hours and
such other items as are not provided for herein, provided Tenant gives Landlord
not less than twenty-four (24) hours notice of Tenant's needs for such
additional heating or air conditioning; provided however, Landlord shall use
reasonable efforts to provide such additional needs to Tenant as soon as
reasonably possible following receipt of Tenant's notice. Landlord shall also,
at said times, maintain and keep lighted the common stairs, entries, and toilet
rooms in the Building that would reasonably be subject to use by Tenant, its
agents and employees during other than regular business hours. Landlord also has
the right to charge Tenant for energy costs, including any increase in utility
rates, incurred because of Tenant's above Building average usage at any time or
by reason of usage of the Premises or the Building during other than regular
business hours. Any additional or above-average usage of services by Tenant
shall be measured in accordance with Landlord's energy management system or by
meter or submeter (at Tenant's expense if Landlord reasonably identifies, after
review of Tenant's space plans, that an area in the Premises is likely to
require additional or above-average usage of services by Tenant) and the costs
to Tenant for such additional services shall be calculated in accordance
therewith. For purposes hereof, Ordinary Office Equipment shall include current
(or comparable to current) everyday office equipment, both in size of the
equipment and number of units utilized within the Premises, for office tenants
in first class office buildings in Briargate Business Campus in Colorado
Springs, Colorado and shall specifically exclude computers or other equipment
that require special cooling, venting or generators for the operation thereof.
5.2 Interruption of Standard Services. Tenant agrees that Landlord shall
---------------------------------
not be liable for failure to supply any heating, air conditioning, elevator,
janitorial services, electric current, or any other service described in Section
5.1 above during any period if Landlord uses reasonable diligence to restore or
to supply such services or electric current, it being further agreed that
Landlord reserves the right to temporarily discontinue such services or any of
them, or electric current at such times as may be necessary by reason of
accident, unavailability of employees, repairs, alterations, or improvements, or
whenever by reason of strikes, lockouts, riots, acts of God, legal requirements
or any other happening or occurrence beyond the reasonable control of Landlord.
If Landlord is unable to furnish such services or electric current, Landlord
shall not be liable for damages to persons or property for any such
discontinuance, nor shall such discontinuance in any way be construed as a
constructive or actual eviction of Tenant or cause an abatement of rent or
operate to release Tenant from any of Tenant's obligations hereunder. Landlord's
obligation to furnish services or electric current shall be conditioned upon the
availability of adequate energy sources from the public utility companies
presently serving the Building Complex. Landlord shall have the right to reduce
heating, cooling or lighting within the Premises and in the public area in the
Building as required by any mandatory fuel or energy-saving program.
Furthermore, due to energy code design requirements as promulgated from time to
time, Tenant hereby acknowledges that it may on certain days experience
discomfort with the heating and air conditioning cycle, and Landlord shall have
no responsibility or liability therefor. Notwithstanding the foregoing, Landlord
hereby agrees that if there is an interruption or discontinuance of the services
which Landlord has agreed to provide that renders the Premises untenantable and
such interruption or discontinuance is within Landlord's reasonable control and
continues for a period of ten (10) or more consecutive days after Landlord
receives written notice thereof from Tenant (hereinafter referred to as an
"Unauthorized Interruption"), Tenant's rent shall abate, provided Landlord can
recover such rent through Landlord's rent loss/business interruption insurance
covering the Building, commencing at the end of said ten (10) day period and
continuing until such time as the Premises are rendered tenantable, if Landlord
has failed to correct or premeditate the cause of such Unauthorized Interruption
within such ten day period. In any case, if the Unauthorized Interruption is the
result of any willful misconduct or negligent acts on the part of Tenant, its
agents or employees, or due to Tenant's default, Tenant's rent shall not abate.
If Tenant continues to nonetheless use any part of the Premises for conducting
its business,
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the rent shall abate only in proportion to the part rendered untenantable and
not so used. Furthermore, if Landlord's rent loss/business interruption
insurance will only cover a portion of Tenant's rent, the rent shall abate only
as to the portion covered by such insurance.
5.3 Services Paid by Tenant. Unless otherwise provided by Landlord,
-----------------------
Tenant shall separately arrange with the applicable local public authorities or
utilities, as the case may be, for the furnishing of and payment for all
telephone services as may be required by Tenant in the use of the Premises.
Tenant shall directly pay for telephone services, including the establishment
and connection thereof, at the rates charged for such services by said authority
or utility, and the failure of Tenant to obtain or to continue to receive such
services for any reason whatsoever shall not relieve Tenant of any of its
obligations under this Lease.
5.4 Above-Standard Service Requirements. If heat-generating machines or
-----------------------------------
equipment other than Ordinary Office Equipment, including telephone equipment,
cause the temperature in the Premises, or any part thereof, to exceed the
temperatures the Building's air conditioning system would be able to maintain in
such Premises were it not for such heat generating equipment, then after notice
to Tenant and reasonable opportunity to cure, Landlord reserves the right to
install supplementary air conditioning units in the Premises, and the reasonable
cost thereof, including the cost of installation and the cost of operation and
maintenance thereof, shall be paid by Tenant to Landlord upon demand by
Landlord.
Tenant shall not, without the written consent of Landlord, use any
apparatus or device which will in any way increase the amount of electricity or
water which Landlord reasonably determines to be reasonable for use of the
Premises as general office space, nor connect with electric current (except
through existing electrical outlets in the Premises) or water pipes any
apparatus or device for the purposes of using electric current, other energy or
water. Landlord shall (if it reasonably determines that Tenant's use may be
excessive) have the right to install one or more separately submetered
electrical circuits to serve all of Tenant's equipment, machinery or appliances
which equipment, machinery or appliances requires electrical current supplied to
the Premises as the same is determined by Landlord which reasonable costs of
submetering shall be payable by Tenant to Landlord upon demand. Tenant agrees
to reimburse Landlord for the submetered electrical current utilized by Tenant
at the rates charged to Landlord to purchase electrical current for the
Building, such reimbursement to be made within thirty (30) days of the date of
the billing therefor; such billing to occur no more frequently than monthly.
5.5 Cleaning. Tenant shall not provide any janitorial or cleaning
--------
services without Landlord's written consent (which may be given or withheld in
Landlord's sole discretion), and then only subject to supervision of Landlord,
at Tenant's sole responsibility, and by a janitorial or cleaning contractor or
employees at all times reasonably satisfactory to Landlord.
5.6 Re-Lamping. Landlord shall have the exclusive right to make any
----------
replacement of Building standard electric light bulbs, fluorescent tubes and
ballasts in the Building Complex throughout the Lease Term and any renewal
thereof. Landlord may adopt a system of revamping and Reba lasting periodically
on a group basis as may be required in accordance with good management practice.
5.7 After Hours Access. Tenant shall have the right at all times to after
------------------
hours access to the Building by means of a card-key or other similar system
installed from time to time by Landlord, subject to repair, maintenance,
casualty and applicable reasonable Rules and Regulations.
5.8 Landlord's Obligation. Landlord agrees to construct the Building
---------------------
substantially in accordance with all applicable Laws (as defined in Section 11.1
hereof), in effect at the time the building permit for the Building is issued
and agrees (as an Operating Expense, to the extent permitted pursuant to Section
4.1(c) hereof) to keep and maintain the common areas, structural portions and
exterior of the Building Complex and to provide standard services therefor in a
mariner and at levels reasonably consistent with first class office buildings of
similar age, size and structure in Briargate Business Campus in Colorado
Springs, Colorado. Landlord will use reasonable efforts to uniformly enforce the
Rules and Regulations attached hereto as Exhibit E with respect to all tenants
in the Building and Landlord agrees to include in the Rules and Regulations of
each lease entered into with all tenants of the Building, paragraph 24 of
Exhibit E hereof.
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ARTICLE 6
TENANT REPAIR
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6.1 Damage by Tenant. Subject to the provisions of Section 10.3, if the
----------------
Building Complex, the Building, the Premises or any portion thereof including
but not limited to the elevators, boilers, engines, pipes and other apparatus,
or members of elements of the Building (or any of them) used for the purpose of
climate control of the Building or operating the elevators, or if the water
pipes, drainage pipes, electric lighting or other equipment of the Building or
the roof or outside walls of the Building or parking facilities of Landlord and
also Tenant Improvements (as hereinafter defined) including but not limited to
the carpet, wall covering, doors and woodwork, become damaged or are destroyed
through the negligence, carelessness or misuse of Tenant, its contractors,
servants, agents, employees or anyone permitted by Tenant to be in the Building,
or through it or them, then the reasonable cost of the necessary repairs,
replacements or alterations shall be borne by Tenant who shall pay the same
within thirty (30) days of receipt of an invoice for such costs to Landlord as
Additional Rent. Landlord shall have the exclusive right, but not the
obligation, to make any repairs necessitated by such damage following written
notice to Tenant and a reasonable opportunity to initiate and complete such
repairs.
6.2 Maintenance. Tenant shall keep the Premises, including all fixtures
-----------
and improvements installed by Tenant or at Tenant's request, in good order,
condition and repair and in secure and lawful condition, ordinary wear and tear
and damage by acts of God excepted. If Tenant, after receipt of written notice
and a reasonable period to commence and cure such default as set forth in
Article 24 hereof, fails to keep the Premises in such good order, condition and
repair as required hereunder to the reasonable satisfaction of Landlord,
Landlord may restore the Premises to such good order and condition and make such
repairs without liability to Tenant for any loss or damage that may accrue to
Tenant's property or business by reason thereof, and upon completion thereof,
Tenant shall pay to Landlord, as Additional-Rent, upon demand, the cost of
restoring the Premises to such good order and condition and the making of the
repairs.- If as a result of any changes in governmental laws, ordinances, rules
or regulations, the Premises must be altered to lawfully accommodate the use or
occupancy of Tenant, such alterations shall be made only with Landlord's prior
consent, and shall be made in accordance with Article 15 hereof and the entire
cost shall be borne by Tenant. In no event shall the requirement of Landlord's
consent for alterations create any liability of Landlord to Tenant or any third
party arising from or related to such legal requirements.
6.3 Good Condition. Tenant shall leave the Premises at the end of each
--------------
day in a reasonable condition for the purpose of allowing the performance of
Landlord's cleaning services hereinafter described.
6.4 Surrender. At termination of this Lease, upon its expiration or
---------
otherwise, Tenant shall remove from the Premises all personal property and trade
fixtures of Tenant; repair any damage caused by such removal; deliver up the
Premises with all improvements located thereon (except as herein provided) in
good repair and condition, reasonable wear and tear and damage by casualty
excepted, broom clean and free of all debris, execute and deliver such
conveyance as Landlord may reasonably deem necessary or desirable to evidence
the same and any other conveyances pursuant to this Lease; and continue to
insure all of the same; as otherwise required pursuant hereto, until this
Section 6.4 has been complied with. Tenant shall give written notice to Landlord
at least thirty (30) days prior to vacating in advance of the expiration of the
Lease Term and shall arrange to meet with Landlord for a joint inspection of the
Premises. In the event of Tenant's failure to give such notice or arrange such
joint inspection, Landlord's inspection at or after Tenant's vacating the
Premises shall be conclusively correct for purposes of determining Tenant's
responsibility for repairs and restoration.
6.5 Broken Glass. Tenant shall pay within thirty (30) days after demand
------------
the reasonable cost of replacement with identical quality, size and
characteristics of glass broken on the Premises, including outside windows and
doors of the perimeter of the Premises (including perimeter windows in the
exterior walls) during the continuance of this Lease, unless the glass shall be
broken by Landlord, its employees, contractors, servants, or agents acting on
its behalf.
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ARTICLE 7
ASSIGNMENT AND SUBLETTING
-------------------------
7.1 Limitations. Except as set forth in Section 7.4 below, Tenant shall
-----------
not assign or in any manner transfer this Lease or any estate or interest
therein or sublet Premises or any part thereof, or grant any license, concession
or other right to occupy any portion of Premises without the prior written
consent of Landlord as set forth herein. Landlord shall not unreasonably
withhold or delay consent to any subletting or assignment provided Tenant
requests such consent in writing at least fifteen (15) days prior to the
proposed assignment or subletting and (i) Tenant is not in default (following
written notice and expiration of any applicable cure period) of this Lease, (ii)
the use of the Premises does not violate the Lease, including the Rules and
Regulations attached hereto as Exhibit E, (iii) the proposed sublessee or
---------
assignee has a good business reputation, (iv) Tenant submits and Landlord
approves the most current audited current financials (or such other financial
information as is available) for such sublessee or assignee, but only to the
extent that Tenant intends to assign to such sublessee or assignee its rights to
the Third Expansion Space (as defined in Section 32.8(c))and/or to the Option to
Extend (as set forth in Section 32.10), (v) Tenant submits the form of
assignment or sublease for Landlord's prior reasonable review and approval, such
forms being deemed approved to the extent Tenant uses the forms attached hereto
as Exhibits J and J-1 (without modification) and (vi) such sublessee or assignee
------------------
is not a tenant in the Building. Landlord shall provide to Tenant its response
to Tenant's request for assignment or subletting within fifteen (15) days
following the date that Landlord receives such written request from Tenant. If
Landlord does not provide its response within such fifteen (15) day period, the
request shall be deemed disapproved. Landlord acknowledges Tenant's desire to
sublease approximately 7,000 square feet of the Premises to a third party upon
commencement of the Lease Term. Such sublease, however, shall remain subject to
Landlord's consent upon its evaluation of the criteria specified in this Section
7.1. Consent by Landlord to one or more assignments of this Lease or to one or
more subletting of Premises shall not operate as a waiver of Landlord's rights
under this section. Any such assignment or subletting without Landlord's consent
shall be deemed void and confer no rights upon a third party. Notwithstanding
any assignment or subletting, Tenant and any guarantor of Tenant's obligations
under this Lease shall at all times remain fully responsible and liable for the
payment of the rental herein specified and for compliance with all other terms
and conditions of this Lease. Without in any way limiting Landlord's right to
refuse to give consent, Landlord reserves the right in the event it does give
consent to impose such conditions upon its consent as Landlord deems necessary,
including the requirement of additional security which in Landlord's reasonable
business judgment shall insure the existing state of Premises and the rentals
due under this Lease.
Except as set forth in Section 7.4 below, neither this Lease nor any
interest therein shall be assignable as to the interest of Tenant by operation
of law, without the written consent of Landlord. Except as permitted pursuant
to Section 7.4 below, a sale by Tenant of all or substantially all of its assets
or all or substantially all of its stock (if Tenant is a publicly traded
corporation); a merger of Tenant with another corporation; or the transfer of
fifty-one percent (51%) or more of the stock of Tenant if Tenant's stock is not
publicly traded; or the transfer of fifty-one percent (51%) or more of the
beneficial ownership interest in Tenant if Tenant is a partnership or a limited
liability company without the prior written consent of Landlord, shall
constitute a prohibited assignment hereunder.
7.2 Acceptance of Performance. If this Lease be assigned or if the
-------------------------
Premises or any part thereof be sublet or occupied by anybody other than Tenant,
Landlord may, after a default by Tenant not cured within any applicable notice
and cure period, collect the rent from the assignee, subtenant or occupant and
apply the net amount collected to the rent or any other amounts owed by Tenant
herein reserved retaining the remainder, if any, for the account of Tenant, but
no such assignment, subletting, occupancy or collection shall be deemed an
acceptance of the assignee, subtenant or occupant as the tenant hereof, or
constitute a release of Tenant from further performance by Tenant of the
covenants on the part of Tenant herein contained.
7.3 Document Review. Intentionally Deleted.
---------------
7.4 Affiliated Entities. Provided Tenant is not in default (following
-------------------
written notice and expiration of any applicable cure period) hereunder, Tenant
may sublet or assign to any Affiliated Entity (as defined below) without
Landlord's prior consent provided Tenant delivers to Landlord a copy of the
executed sublease or assignment on a Landlord approved form to Landlord within
ten (10) days of such subletting or assignment, which subletting or assignment
shall be subject to all of
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the liabilities and obligations set forth herein and Tenant shall not be
released of any of its liabilities hereunder. In no event, however, in the event
of an assignment shall such assignment have any material adverse financial
impact on Tenant's financial status. Tenant shall, prior to such transfer,
provide written evidence reasonably satisfactory to Landlord that there shall be
no material adverse financial impact on Tenant or Landlord resulting from such
assignment. For purposes hereof, Affiliated Entity shall mean an entity which
(i) controls, is controlled by, or is in common control with Tenant; or (ii)
results from the merger or consolidation with Tenant or acquires all or
substantially all of the assets or stock of Tenant.
ARTICLE 8
TRANSFER BY LANDLORD AND LIMITED LIABILITY
------------------------------------------
8.1 Transfer of Landlord's Interest. In the event of a sale, conveyance,
-------------------------------
or assignment by Landlord of Landlord's interest in the Building Complex (other
than a transfer for security purposes only), Landlord shall be relieved from and
after the date of such transfer or assignment of all of Landlord's obligations
and liabilities accruing thereafter on the part of Landlord if and to the extent
the same are expressly assumed by such assignee or transferee, and in such event
Tenant agrees to look only toward such assignee or transferee of Landlord's
interest for performance of obligations and liabilities arising after the date
of such transfer; provided, however, that no successor landlord shall be
responsible for the return of security deposits unless such successor actually
receives such deposits.
8.2 Limited Liability of Landlord. Anything contained in this Lease to
-----------------------------
the contrary notwithstanding, Tenant agrees that Tenant shall look solely to the
estate of Landlord in the Building Complex and all insurance proceeds in
connection therewith (to the extent such insurance proceeds have not been
expended by Landlord in connection with the Building Complex or are not subject
to any rights of the holders of any mortgages encumbering the Building Complex),
which shall be subordinate to the rights of any lender or mortgagee of Landlord,
for the collection of any judgment (or other judicial process) requiring the
payment of money by Landlord in the event of any default or breach by Landlord
with respect to any of the terms and provisions of this Lease to be observed or
performed by Landlord, subject, however, to the rights of the holder of any
mortgage covering the Building Complex, and no other assets of Landlord, its
partners, agents, employees, officers, or the employees or officers of any of
its partners shall be subject to levy, execution or other judicial process for
the satisfaction of Tenant's claim and Landlord shall not be liable for any such
default or breach except to the extent of Landlord's estate in the Building
Complex and such insurance proceeds as are above-referenced.
ARTICLE 9
USE OF PREMISES
---------------
9.1 Use. Except as expressly permitted by prior written consent of Landlord,
---
which may be given or withheld in its sole discretion, the Premises shall not be
used other than for general business office purposes. All use of the Premises
shall comply with the terms of this Lease and all applicable laws, ordinances,
regulations or other governmental ordinances, recorded restrictions, covenants
and easements and association rules and regulations from time to time in
existence, including, without limitation, obtaining any and all necessary
licenses and permits (collectively, "Permits"), to the extent that Tenant has
actual notice thereof or has received copies thereof from Landlord.
Notwithstanding anything to the contrary contained herein, Landlord represents
and warrants that the use of the Premises permitted under this Lease is
permitted pursuant to all such Permits.
9.2 Compliance with Rules and Regulations. Tenant and employees and all
-------------------------------------
persons visiting or doing business with Tenant in the Premises shall be bound by
and shall observe the Rules and Regulations as set forth in Exhibit E, attached
---------
hereto and made a part hereof, which may, at Landlord's reasonable discretion,
be promulgated, amended, or expanded from time to time during the Lease term by
Landlord relating to the Building, the Building Complex and/or the Premises of
which reasonable prior notice in writing shall be given to Tenant and all such
rules and regulations as changed from time to time shall be deemed to be
incorporated into and form a part of this Lease. Tenant shall further be
responsible for the compliance with such rules and regulations by Tenant's
employees, agents, patrons and invitees while in the Building. Any default in
the performance or
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observance of such rules and regulations shall be a default hereunder pursuant
to the terms of Section 24.1 and Landlord shall have all remedies provided for
in Section 24.2 in the event of an uncured default by Tenant. Except as
otherwise provided herein, Landlord however, shall not be responsible to Tenant
for nonobservance by any other tenant or person of any tenant or person of any
such rules and regulations. Landlord agrees to enforce the Rules and Regulations
against Tenant in a manner reasonably consistent with its enforcement of such
rules and regulations against other tenants; however, Tenant acknowledges that
certain rules or regulations may be specific to a tenant or use and that such
rules or regulations may not be applicable to all tenants and cannot be enforced
uniformly. For example, a. tenant with a banquet area in its premises may have
different rules governing preparation and serving of food.
ARTICLE 10
INSURANCE
---------
10.1 Tenant's Insurance. Tenant shall, during its occupancy of the
------------------
Premises and during the entire term hereof, at its sole cost and expense,
obtain, maintain and keep in full force and effect, and with Tenant, Landlord,
the property manager and mortgages of Landlord (of which Tenant was provided
notice of) named as additional insureds therein as their respective interests
may appear, the following types and kinds of insurance:
(a) Upon property of every description and kind owned by Tenant and
located in the Building Complex or for which Tenant is legally liable or
installed by or on behalf of Tenant, including, without limitation, furniture,
fittings, installations, alterations, additions, partitions, fixtures and
anything in the nature of a leasehold improvement in an amount not less than the
full replacement cost thereof, with a Minimum Coverage on the Special Causes of
Loss Form including Sprinkler Leakage; and in the event that there shall be a
dispute as to the amount which comprises full replacement cost, the decision of
Landlord or the mortgages of Landlord shall be conclusive. In no event shall the
deductible for such insurance be more than $1,000.00.
(b) Bodily Injury Property Damage and Commercial General Liability
insurance including personal liability, contractual liability, non-owned
automotive liability, tenants' legal liability for the full replacement costs of
the Premises, and which coverage shall include the business operations conducted
by Tenant and any other persons on the Premises. Such policies shall be written
on a comprehensive basis with limits of not less than $1,000,000.00 for any one
occurrence for bodily injury and property damage with limits of not less than
$2,000,000 general aggregate for bodily injury and property damage, together
with not less than a $5,000,000 umbrella policy, and such higher limits for all
such insurance as Landlord or the mortgages of Landlord may reasonably require,
provided that such higher limits are customarily held by comparable tenants of
comparable buildings in Colorado Springs, Colorado. All policies shall name
Landlord, its managers and mortgages (of which Tenant was provided notice) as
additional insureds. All policies shall be primary and noncontributing over any
valid and collectible insurance of any of the additional insureds.
(c) Any other form or forms of insurance as Landlord or the mortgages
of Landlord may reasonably require from time to time in form, in amounts and for
insurance risks consistent with then prevalent insurance industry practices and
policies for comparable tenants of comparable buildings in Colorado Springs,
Colorado.
(d) Business interruption insurance in such amounts as will reimburse
Tenant for direct loss of earnings for two (2) years attributable to all perils
commonly insured against by prudent tenants or attributable to prevention of
access to the Premises or to the Building as a result of such perils.
(e) Workers' Compensation Insurance, as required by law, including
Employers liability limits in amounts not less than $500,000 each employee,
$500,000 policy limit and $500,000 by disease.
(f) If Tenant performs any work on the Premises, prior to the
commencement of any such work, Tenant shall deliver to Landlord certificates
issued by insurance companies qualified to do business in the State of Colorado,
evidencing that workmen's compensation and public liability
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insurance and property damage insurance, all with companies in form and in
amounts reasonably satisfactory to Landlord, are in force and effect and
maintained by all contractors and subcontractors engaged by Tenant to perform
such work and shall name Landlord, its manager and mortgagee (of which Tenant
has been provided notice) as additional insureds. To the extent customary for
comparable tenants of comparable buildings in Colorado Springs, Colorado,
Landlord or its mortgagee may require any other form or types of insurance of
such parties, and may be added as an additional insured thereunder if so
requested. All policies shall be primary and noncontributory over any valid
collectible insurance made available to any of the additional insureds.
All policies shall be taken out with insurers acceptable to Landlord and in
form reasonably satisfactory from time to time to Landlord. Tenant agrees that
certificates of insurance, or, if required by Landlord or the mortgagees of
Landlord, certified copies of each such insurance policies will be delivered to
Landlord as soon as practicable after the placing of the required insurance, but
in no event later than ten (10) days after Tenant takes possession of all or any
part of the Premises. All policies shall contain an undertaking by the insurers
to notify Landlord and the mortgagees of Landlord (of which Tenant has been
provided notice) in writing not less than thirty (30) days prior to any material
change, cancellation or sooner termination thereof.
Tenant covenants and agrees that in the event of damage or destruction to
the leasehold improvements in the Premises covered by insurance as required to
be taken out by Tenant herein, and if Landlord or Tenant do not terminate this
Lease pursuant to Section 21.1 herein, Tenant will use the proceeds of such
insurance for the purpose of repairing or restoring such leasehold improvements.
In the event that Landlord or Tenant are entitled to terminate the Lease
pursuant to Article 21, then if the Premises have also been damaged, Tenant
shall pay to Landlord that amount of its insurance proceeds necessary to repair
the leasehold improvements.
10.2 Landlord's Insurance. Landlord agrees to carry during the term
--------------------
hereof insurance for fire, extended coverage, vandalism and malicious mischief,
insuring the Building Complex (excluding foundations, excavations and other non-
insurable items) for the full replacement cost thereof and with a Minimum
Coverage on the Special Causes of Loss Form including Sprinkler Leakage.
Landlord shall also agree to carry commercial general liability insurance of
$5,000,000 in conjunction with an umbrella policy. Such policies shall be issued
by insurance companies qualified to do business in the State of Colorado.
Landlord may, but shall not be obligated to, take out and carry any other form
or forms of insurance as it or the mortgagees of Landlord may reasonably
determine to be advisable. All costs of such insurance shall be included as
Operating Expenses and notwithstanding any contribution by Tenant to the cost of
insurance premiums, as provided in Article 4, Tenant acknowledges that it has no
right to receive any proceeds from any such insurance policies carried by
Landlord, and that such insurance will be for the sole benefit of Landlord, with
no coverage for Tenant for any risk insured against.
10.3 Subrogation. The parties hereto agree that any and all fire,
-----------
extended coverage and/or property damage insurance which is required to be
carried by either shall be endorsed with a subrogation clause, substantially as
follows: "This insurance shall not be invalidated should the insured waive, in
writing prior to a loss, any and all right of recovery against any party for
loss occurring to the property described therein"; and each party hereto waives
all claims for recovery from the other party, its officers, agents or employees
for any loss or damage (whether or not such loss or damage is caused by
negligence of the other party), and notwithstanding any provisions contained in
this Lease to the contrary, as a result of damage to any of its real or personal
property insured under valid and collectible insurance policies to the extent of
the collectible recovery under such insurance or which would have been
collectible had the party carried the insurance required to be maintained
hereunder.
ARTICLE 11
OBSERVANCE OF LAW
-----------------
11.1 Law and Covenants. Tenant shall comply with all provisions of any
-----------------
applicable covenants, rules or restrictions of which Tenant has received prior
written notice, including the architectural control committee, and all
provisions of law, including without limitation, federal, state, county and city
laws, ordinances and regulations and any other governmental, quasi-governmental
or municipal regulations (collectively, "Laws"), which shall impose any duty
upon Landlord or
15
<PAGE>
Tenant, and which relate to Premises, including, without limitation, the
partitioning, equipment operation, alteration, occupancy and use of the
Premises, and to the making of any repairs, replacements, alterations,
additions, changes, substitutions or improvements of or to the Premises.
Moreover, Tenant shall comply with all police, fire and sanitary regulations
imposed by any federal, state, county or municipal authorities, or made by
insurance underwriters, and to observe and obey all governmental and municipal
regulations and other requirements governing the conduct of any business
conducted in the Premises or the use or occupancy thereof. Notwithstanding
anything to the contrary contained herein, Landlord shall comply with all Laws
which relate to the base building structure, the base building systems and the
common areas of the Building (the costs of which may be passed through to the
tenants as Operating Expenses as provided in Article 4 hereof).
11.2 Taxes. Tenant shall fully and timely pay all business and other
-----
taxes, charges, rates, duties, assessments and license fees levied, rates
imposed, charged or assessed against or in respect of Tenant's occupancy of the
Premises or in respect of the personal property, trade fixtures, furniture and
facilities of Tenant or the business or income of Tenant on and from the
Premises, if any, as and when the same shall become due, and to indemnify and
hold Landlord harmless from and against all payment of such taxes, charges,
rates, duties, assessments and license fees and against all loss, costs, charges
and expenses occasioned by or arising from any and all such taxes, rates,
duties, assessments and license fees, and to promptly deliver to Landlord for
inspection, upon written request of Landlord, evidence satisfactory to Landlord
of any such payments.
ARTICLE 12
WASTE AND NUISANCE; ENVIRONMENTAL
---------------------------------
12.1 Waste and Nuisance. Tenant shall not commit, suffer or permit any
------------------
waste or damage or disfiguration or injury to the Premises or common areas in
the Building Complex or the fixtures and equipment located therein or thereon,
or permit or suffer any overloading of the floors thereof and shall not place
therein any safe, heavy business machinery, computers, data processing machines,
or other heavy things (other than as set forth on Tenant's plans for the
leasehold improvements, as approved by Landlord) without first obtaining the
consent in writing of Landlord and, if reasonably requested, Landlord's
architect or engineer (at Tenant's expense), and not use or permit to be used
any part of the Premises for any dangerous, noxious or offensive trade or
business, and shall not cause or permit any nuisance in, at or on the Premises.
12.2 Environmental Covenant. Except for De Minimis Amounts (as hereinafter
----------------------
defined) of Hazardous Substances (as hereinafter defined) used in accordance
with law and in conjunction with normal general office purposes, Tenant or any
of its agents, employees, representatives, contract ors, suppliers, customers,
subtenants, concessionaires, licensees, or invitees shall not cause or permit
any Hazardous Substance to be used, stored, generated, or disposed of on, in or
about the Premises, the Building, the Property or the Building Complex unless
Tenant shall have received Landlord's prior written consent, which Landlord may
withhold or at any time revoke in its sole discretion. "De Minimis Amounts" as
used herein shall mean any Hazardous Substance customarily used in the
management, maintenance or repair of office buildings in Colorado Springs,
Colorado or in connection with general office use, in both instances in a manner
that (a) does not constitute a violation or threatened violation of any
Environmental Law or require any reporting or disclosure under any Environmental
Law and (b) is consistent with customary business practice for such operations
in the state where the property is located, provided that such storage or use
does not constitute a release. Without limitation of the foregoing, if Tenant
causes or permits the presence of any Hazardous Substance on the Premises and
that results in any contamination in violation of Environmental Laws, Tenant
shall promptly, at its sole expense, take any and all necessary or appropriate
actions to return the Premises to the condition required by Environmental Laws.
Tenant shall first obtain Landlord's written approval for any such remedial
action.
12.3 Hazardous Substances. As used herein, "Hazardous Substance" means
--------------------
any substance that is regulated by any local government, the State of Colorado,
the United States government, or any agency, authority and/or instrumentality
thereof and includes any and all materials or substances that are defined as
"hazardous waste," "extremely hazardous waste," or a "hazardous substance"
pursuant to any Environmental Law. "Hazardous Substance" includes but is not
restricted to petroleum and petroleum byproducts, asbestos, explosives,
polychlorinated biphenyls ("PCBs") and infectious waste.
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12.4 Environmental Laws. As used herein, "Environmental Laws" means all
------------------
federal, state and local laws, including statutes, regulations, and
requirements, relating to the discharge of air pollutants, water pollutants or
process waste water or otherwise relating to the environment or Hazardous
Substances, including, but not limited to, the Federal Clean Water Act, the
Federal Resource Conservation and Recovery Act of 1976, the Federal
Comprehensive Environmental Responsibility Cleanup and Liability Act of 1980,
regulations of the Environmental Protection Agency, regulations of the Nuclear
Regulatory Commission, and regulations of any state department of natural
resources or state environmental protection agency, as amended or supplemented
from time to time, now or at any time hereafter in effect.
ARTICLE 13
ENTRY BY LANDLORD
-----------------
13.1 Landlord and its agents shall have the right to enter the Premises
at all reasonable times upon reasonable prior notice for the purpose of
examining or inspecting the same, to supply janitorial services and any other
services to be provided by Landlord to Tenant hereunder, to show the same to
prospective purchasers, lenders or investors, and to make such alterations,
repairs, improvements or additions, whether structural or otherwise, to the
Premises or to the Building as Landlord may deem necessary or desirable.
Landlord may enter during last twelve months of Lease Term to show the Premises
to prospective tenants. Landlord may enter the Premises for any of the foregoing
reasons including entry by means of a master key without liability to Tenant
including any claims of interference and without affecting this Lease or
Tenant's obligations under this Lease. Landlord shall use reasonable efforts to
avoid interference with Tenant's business in the Premises.
ARTICLE 14
INDEMNIFICATION
---------------
14.1 Indemnification by Tenant. Subject to the waiver set forth in
-------------------------
Section 10.3, Tenant shall indemnify Landlord and save it harmless from and
against any and all claims, damages, fines, judgments, penalties, costs,
expenses, liability or losses (including loss of rentals payable by Tenant or
other tenants in the event of loss either directly or indirectly caused by any
negligent act or omission, willful misconduct or default (whether or not
applicable cure periods have expired) under the Lease of or by Tenant, its
agents, contractors, employees, servants, licensees, or concessionaires or
invitees or by anyone permitted to be on the Premises by Tenant, claims,
actions, damages, liability and expenses arising out of or in connection with
the use and/or occupancy of the Premises, including, without limitation, from
any occurrence in, upon or at the Premises or any part thereof, occasioned
wholly or in part by any negligent act or omission, willful misconduct of Tenant
or default (whether or not applicable cure periods have expired) under the Lease
of or by Tenant, its agents, contractors, employees, servants, licensees, or
concessionaires or invitees or by anyone permitted to be on the Premises by
Tenant. Subject to the waiver set forth in Section 10.3 above, Tenant shall
additionally indemnify, defend and hold harmless Landlord from and against any
and all claims, damages, fines, judgments, penalties, costs, expenses,
liabilities, or losses relating to any violation by Tenant of any Environmental
Law (as hereinafter defined) or of Section 12.2 (including, without limitation,
a decrease in value of the Premises, damages caused by loss or restriction of
rentable or usable space, damages caused by adverse impact on marketing of
space, and any and all sums paid for settlement of claims, attorneys' fees,
consultant fees, and expert fees, in each case if and to the extent related
directly to such violation) incurred by or asserted against Landlord arising
during or after the term of this Lease as a result thereof. This indemnification
includes, without limitation, any and all reasonable costs incurred because of
any investigation of the site or any cleanup, removal, testing, or restoration
mandated or conducted by or on behalf of any federal, state, or local agency or
political subdivision with respect to Tenant's violation of any applicable
Environmental Laws. In the event Landlord shall be made a party to any
litigation commenced by or against Tenant or by anyone permitted to be on the
Premises by Tenant, its agents, contractors, employees, servants, licensees,
concessionaires or invitees, then Tenant shall protect and hold Landlord
harmless and shall pay all reasonable costs, expenses and reasonable attorney's
fees incurred or paid by Landlord in connection with such litigation whether or
not such action is contested or prosecuted to judgment, subject to Section 28.12
hereof. All personal property on the Premises shall be at Tenant's sole risk,
and Landlord shall not be liable for, and subject to the waiver set forth in
Section 10.3 hereof, Tenant shall indemnify and hold Landlord harmless from any
17
<PAGE>
liability in connection with, any damage done to or loss of such personal
property or for damage or loss suffered by Tenant, unless due to the gross
negligence or willful misconduct of Landlord or its agents or employees acting
within the scope of their employment. Notwithstanding the foregoing, the
indemnification obligations set forth herein shall not be applicable to the
extent that the act from which the indemnity arose was caused by the willful or
grossly negligent acts of the Landlord.
14.2 Indemnification by Landlord. Other than as expressly set forth in
---------------------------
that certain Phase I Environmental Report dated August, 1997 and prepared by
CTL/Thompson Inc. (a copy of which has been provided to Tenant), Landlord has no
actual knowledge of the release or disposal of any Hazardous Substances within
the Building Complex and, except for De Minimis Amounts, Landlord shall not
cause or permit any Hazardous Substance to be used, stored, generated or
disposed of on, in or about the Building Complex in violation of any applicable
Environmental Laws. Subject to the waiver set forth in Section 10.3, Landlord
agrees to indemnify, defend and hold Tenant harmless from and against any and
all claims, damages, fines, judgments, penalties, costs, expenses, liabilities
or losses arising from any governmental entity or other third party seeking to
enforce against Tenant or seeking damages from Tenant, or seeking to join Tenant
in any legal action pertaining to the violation by Landlord of any Environmental
Law(s). Subject to the waiver set forth in Section 10.3, Landlord agrees to
further indemnify, defend and hold Tenant harmless of and from all liability,
loss, damages, costs or expenses on account of bodily injury to the person of
Tenant or of any third party rightfully in the Building Complex or property
damage of any such third party, where the injuries or property damage are caused
by the gross negligence or willful misconduct of Landlord or its agents or
employees acting within the scope of their employment. Notwithstanding the
foregoing, the indemnification obligations set forth herein shall not be
applicable to the extent that the act from which the indemnity arose was caused
by the willful or grossly negligent acts of the Tenant. The indemnity set forth
in this Section 14.2 shall not be binding upon any Mortgagee and Tenant shall
look solely to the respective landlord when such landlord is finally held to
have violated the Environmental Law or caused injury or damage as set forth
above. Neither the predecessor in interest nor the successor in interest to such
landlord shall be liable to Tenant for this indemnity.
14.3 Comparative Fault. To the extent that either Landlord or Tenant
-----------------
(inclusive of their respective employees, agents, contractors, servants,
concessionaires, licensees, or invitees) is finally held by a court of competent
jurisdiction to be partially at fault for any claim for which an indemnity
obligation arises hereunder, then neither Landlord nor Tenant as against each
other shall indemnify, defend or hold the other harmless and each party shall be
liable only to the extent of the percentage of its own fault as finally held by
the court of competent jurisdiction.
ARTICLE 15
ALTERATIONS
-----------
15.1 Alterations by Tenant. Other than (i) alterations of a cosmetic
---------------------
nature, including painting, carpeting, wall coverings or such other
modifications of a similar nature and (ii) alterations resulting in a total cost
to Tenant of $10,000.00 or less per event, Tenant shall not make, install or
erect in or to the Premises any installations, alterations, modifications,
additions or partitions without obtaining a building permit therefor, if
applicable, and without submitting the drawings and specifications to Landlord
and obtaining Landlord's prior written consent in each instance, which consent
will not be unreasonably withheld or delayed (in no event shall Tenant be
permitted to make any alterations to any building systems, structural,
mechanical, electrical or otherwise, or to any portion of the Building or
Building Complex other than within the Premises as shown in the Final Plans
approved pursuant to the Work Plan). Furthermore, Tenant shall obtain Landlord's
prior written consent, which consent shall not be unreasonably withheld or
delayed, to any change or changes in such drawings or specifications submitted
as aforesaid. Tenant shall pay the reasonable cost to Landlord of having its
architects, engineers, or other consultants review such plans and changes
thereto prior to proceeding with any work based on such drawings or
specifications. All such work shall be performed in a good and workmanlike
manner, free and clear of all mechanic's liens, and in compliance with the
provisions of Article II hereof, and once commenced shall be diligently pursued
through completion, and Landlord shall have no liability for the performance of
such work, notwithstanding its consent to any plans and specifications. PROVIDED
NEVERTHELESS that Landlord may, at its option, at Tenant's expense, require that
Landlord's contractors be engaged for any mechanical or electrical work or other
leasehold improvement affecting the base building systems for the Building
Complex. Without limiting the generality of
18
<PAGE>
the foregoing, any work performed by or for Tenant shall be performed by
competent workmen whose labor union affiliations are not incompatible with those
of any workmen who may be employed in the Building Complex by Landlord, its
contractors or subcontractors. In addition to the above all contractors and
subcontractors must meet Landlord's specifications, as reasonably determined by
Landlord, for minimum requirements for insurance, bonds, quality of work,
experience and such other reasonably applicable factors. Tenant shall submit to
Landlord's supervision over construction, shall, if the total cost for any such
alteration will exceed S50,000, provide Landlord upon request with financial
assurances prior to the commencement of such alteration, and promptly pay to
Landlord's or Tenant's subcontractors, as the case may be, when due, the costs
of all such work and of all materials, labor and services involved therein and
of all decoration and all changes in the Building, its equipment or services
necessitated thereby. Tenant covenants that Tenant will not suffer or permit
during the Term hereof any mechanics' or other liens for work, labor, services
or materials ordered by Tenant or for the cost of which Tenant may be in any way
obligated, to attach to the Premises or to the Building Complex and that
whenever and so often as any such liens shall attach or claims therefor shall be
filed, Tenant shall, within thirty (30) days after Tenant has notice of the
claim for lien, procure the discharge thereof by payment or by giving security
or in such other manner as is or may be required or permitted by law or which
shall otherwise satisfy Landlord and or Landlord's mortgagee. Tenant hereby
indemnifies and saves Landlord harmless from and against any and all loss,
liability, damage, penalty, cost expense or fee (including, without limitation,
court costs and reasonable attorneys' fees) incurred by or asserted against
Landlord as a result of the existence of any lien against the Building, Premises
or the Property arising from any labor, materials or other claims against Tenant
or work or materials ordered by or for Tenant. Tenant shall, at its own cost and
expense, take out or cause to be taken out any additional insurance reasonably
required by Landlord to protect Landlord's, the mortgagee's and Tenant's
interest during the period of alteration, to the extent commercially
reasonable..
At least five (5) days prior to the commencement of any work permitted to be
done by persons requested by Tenant on the Premises, Tenant shall notify
Landlord of the proposed work and the names and addresses of the persons
supplying labor and materials for the proposed work so that Landlord may avail
itself of the provisions of statutes such as Section 38-22-105(2) of the
Colorado Revised Statutes (1973). During any such work on the Premises,
Landlord, or its representatives, shall have the right to go upon and inspect
the Promises at all reasonable times, and shall have the right to post and keep
posted thereon notices such as those provided for by Section 38-22-105(2) C.R.S.
(1973) or to take any further commercially reasonable action which Landlord may
deem to be proper for the protection of Landlord's interest in the Premises.
15.2 Alterations by Landlord. Provided such change does not in any way
-----------------------
materially adversely affect Tenant's use of the Premises as contemplated herein,
Landlord hereby reserves the right at any time and from time to time and without
any liability to Tenant for any claims, to make changes in, additions to,
subtractions from or rearrangements of the Building Complex, including, without
limitation, all improvements at any time thereof, all entrances and exits
thereto, and to grant, modify and terminate easements or other agreements
pertaining to the Building Complex, including, but not limited to, the entrance
foyer and lobby, and the common corridors and to make changes or additions to
the pipes, conduits, ducts, utilities and other building services in the
Premises which serve other portions of the Building, provided further that prior
to the Commencement Date, Landlord may alter the Premises to the extent found
necessary by Landlord to accommodate changes in construction design or
facilities including major alterations but the Premises, as altered, shall be in
all material aspects comparable to the Premises as defined herein.
Notwithstanding the foregoing, if Landlord intends to materially modify the
scope of work with respect to construction of the Building from that which is
set forth in the Outline Specifications and Site Plan attached hereto, Landlord
agrees to notify Tenant of the same and to obtain Tenant's consent, which shall
not be unreasonably withheld or delayed, to such modification. If Tenant does
not respond to Landlord within five (5) business days following written
notification by Landlord, such non-response shall be deemed an approval of such
modification. Any expense by Landlord of the above rights including entry upon
the Premises shall be without liability to Tenant, including any claims of
interference and without affecting this Lease or the obligations of Tenant under
this Lease. Landlord shall use reasonable effort to avoid interference with
Tenant's business in the Premises.
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ARTICLE 16
SIGNS AND ADVERTISING
---------------------
16.1 Except as set forth in Section 32.7, Tenant shall not install, paint,
display, inscribe, place or affix any sign, picture, advertisements, notice,
lettering or direction on any part of the Building Complex or in the interior of
the Premises or other portion of the Building. Landlord will prescribe a
uniform pattern of identification signs for tenants to be placed on the outside
corridor wall which is near the door leading into the Premises and will provide
for standard directory identification in the lobby of the Building and other
than such identification signs, Tenant shall not install, paint, display,
inscribe, place or affix, or otherwise attach, any sign, picture, advertisement,
notice, lettering or direction on the inside or outside of the Premises for
exterior view without the written consent of Landlord which may be given or
withheld in Landlord's sole discretion. The costs for installation of the
identification signs described herein shall be credited against the amount of
the Allowance described in Exhibit C.
---------
ARTICLE 17
SUBORDINATION TO MORTGAGES AND DEEDS OF TRUST
---------------------------------------------
17.1 Subject to Landlord's obligation to obtain for Tenant non-disturbance
agreements in accordance with the terms and conditions of this Article 17, this
Lease and the rights of Tenant hereunder shall be and are hereby made subject
and subordinate to the lien of any mortgages or deeds of trust now or hereafter
existing against the Building Complex and to all renewals, modifications,
consolidations, replacements and extensions thereof and to all advances made, or
hereafter to be made, upon the security thereof. Although such subordination
shall be self-operating, Tenant, or its successors in interest, shall upon
Landlord's request, execute and deliver within ten (10) business days any and
all instruments desired by Landlord, subordinating, in the manner reasonably
requested by Landlord, this Lease to any such mortgage or deed of trust. If
Tenant fails to return the subordination documents within ten (10) business days
then all subordination documents at Landlord's option shall irrevocably and
conclusively be deemed affirmed and approved by Tenant and Landlord may exercise
any other right or remedy for Tenant's failure to execute and return the
subordination documents.
Should any mortgage or deed of trust affecting the Building Complex be
foreclosed, then:
(a) except for certain maintenance and repair obligations that are
of a continuing nature (and continue beyond the date of transfer to the extent
of such continuance), the liability of the mortgagee, beneficiary or purchaser
at such foreclosure sale or transfer in lieu of foreclosure shall exist only as
to the liability and obligations of Landlord accruing or arising after the date
of such transfer and only so long as such mortgagee, beneficiary or purchaser is
the owner of the Building Complex and such liability shall not continue or
survive after further transfer of ownership; and
(b) the liability for any security deposits or prepaid rents of the
mortgagee, beneficiary or purchaser at such foreclosure sale or transfer in lieu
of foreclosure sale shall exist only to the extent that the mortgagee,
beneficiary or purchaser actually received the security deposits or prepaid
rents and failed to apply such sums in accordance with the Lease or, if
applicable, failed to transfer or assign such sums to any subsequent purchaser
or transferee.
(c) Tenant shall be deemed to have attorned, as Tenant under this
Lease, to the purchaser at any foreclosure sale thereunder or transferee
pursuant to a deed in lieu of foreclosure, and this Lease shall continue in full
force and effect as a direct lease between and binding upon Tenant and such
purchaser or transferee, subject to the terms of any subordination and non-
disturbance agreements obtained as set forth in this Article 17.
As used in this Article 17 "mortgagee" and "beneficiary" shall include
successors and assigns of any such party, whether immediate or remote, the
purchaser of any mortgage or deed of trust, whether at foreclosure or otherwise,
and the successors, assigns and mortgagees and beneficiaries of such purchaser,
whether immediate or remote.
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Landlord agrees to obtain a non-disturbance agreement from its current
construction lender, ORIX Real Estate Equities, Inc., in a form satisfactory to
such lender and approved by Tenant, and at the written request of Tenant, agrees
to grant to Tenant a non-disturbance agreement from Landlord. The subordination
and attornment set forth in this Article 17 are expressly subject to receipt by
Tenant from any future mortgagee or beneficiary of a non-disturbance agreement
with respect to Tenant, which agreement shall be evidenced on such mortgagee's
standard form of nondisturbance agreement (or on a commercially reasonable form
acceptable to mortgagee if mortgagee does not have a standard form), stating
that Tenant's right to the continued use and possession of the Premises shall be
under the same terms and conditions as set forth in this Lease provided that at
such time Tenant is not in default of its obligations herein. All of the
provisions of this Article 17 will be effective including without limitation
subsections (a) through (c) set forth above. Tenant shall execute any
subordination and attornment and non-disturbance agreement that conforms to the
conditions set forth herein within ten (10) business days after receipt thereof.
Failure of any party to return the subordination and attornment and non-
disturbance agreement set forth in this Article 17 within the ten (10) business
day period shall conclusively and irrevocably be deemed an affirmation and
approval of such agreements by the applicable party and the requesting party may
exercise any other right or remedy for such other party's failure to properly
and/or timely execute and return such agreements.
ARTICLE 18
ESTOPPEL CERTIFICATE/FINANCIAL INFORMATION
------------------------------------------
18.1 Estoppel Certificate. Tenant and Landlord agree that they will each
--------------------
from time to time, upon request by the other (for the benefit of the requesting
party and its designated proposed mortgagee or purchaser), execute and deliver
to the other within ten (10) business days after demand therefor an estoppel
certificate on a commercially reasonable form (or the form of any prospective
mortgagee or purchaser) certifying, among other items, that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as so modified) and, to the best of
such party's knowledge, there are no defaults under the Lease or if so
specifying such defaults. Failure to return the estoppel certificate within the
ten (10) business day period shall conclusively and irrevocably be deemed an
affirmation and approval of the estoppel certificate by such party and the
requesting party may exercise any other right or remedy for such other party's
failure to properly and/or timely execute and return the estoppel certificate.
18.2 Financial Information. Tenant shall, from time to time at reasonable
---------------------
intervals upon Landlord's written request but not more than once each fiscal
year, deliver to Landlord a copy of Tenant's most recent audited financial
statements, which audited financial statements shall be prepared by Tenant or
Tenant's accountant no less often than once per year in accordance with
generally accepted accounting principals ("GAAP"), any interim financial
statements which have been prepared after the date of the most current audited
financial statement, and 10-Q's or 10-K's when issued, if any.
ARTICLE 19
QUIET ENJOYMENT
---------------
19.1 Subject to the terms and provisions of this Lease, Landlord
covenants and agrees that Tenant shall peaceably and quietly have possession of
the Premises during the term hereof, without hindrance by Landlord or those
claiming by or through Landlord. Landlord shall not be liable for any
interference by other tenants or third parties nor shall this Lease or Tenant's
obligations hereunder be affected thereby.
ARTICLE 20
FIXTURES
--------
20.1 Any or all installations, alterations, additions, partitions and
fixtures other than Tenant's trade fixtures in or upon the Premises, whether
placed there by Tenant or Landlord, shall, immediately upon such placement,
become the property of Landlord without compensation therefor to Tenant.
Notwithstanding anything herein contained, Landlord shall be under no obligation
to
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repair, maintain or insure such installations, alterations, additions,
partitions and fixtures or anything in the nature of a leasehold improvement
made or installed by or on behalf of Tenant. Landlord may elect that any or all
installations made or installed by or on behalf of Tenant be removed at the end
of the Lease Term and, if Landlord so elects, it shall be Tenant's obligation to
restore the Premises to the condition it was in previous to such alterations,
installations, partitions and fixtures, on or before the termination of this
Lease. Such removal and restoration shall be at the sole expense of Tenant.
Notwithstanding anything in this Lease to the contrary, to the extent that
Landlord's consent to any such installation as set forth above is required,
Landlord, if it gives such consent, will, if requested by Tenant, notify Tenant
as to whether removal of such installation will be required.
ARTICLE 21
DAMAGE OR DESTRUCTION
---------------------
21.1 Casualty. In the event that the Building should be totally
--------
destroyed by fire, tornado or other casualty, or should be so damaged that
rebuilding or repairs cannot be completed in Landlord's reasonable estimation
within one hundred eighty (180) days after the date of such damage, Landlord
may, at its option, terminate this Lease in which event the rent shall be abated
during the unexpired portion of this Lease effective with the date of such
damage, or Landlord may proceed to rebuild the Building and the Premises. In the
event the Building should be damaged by fire, tornado or other casualty, but
only to such extent that rebuilding or repairs in Landlord's reasonable
estimation can be completed within one hundred eighty (I 80) days after the date
of such damage, or if the damage cannot be repaired within such time frame but
Landlord elects not to terminate this Lease, in such event, Landlord shall,
promptly following receipt of all applicable permits and insurance proceeds, but
in no event more than ninety (90) days after the date of such damage commence to
rebuild or repair the Building and shall proceed with reasonable diligence to
restore the Building to substantially the same condition in which it was
immediately prior to the happening of the casualty, except that Landlord shall
not be required to rebuild, repair or replace any part of the partitions,
fixtures and other improvements which may have been placed by Tenant or other
tenants within the Building. If the Premises are damaged and in Landlord's
reasonable estimation the repairs cannot be completed within two hundred ten
(210) days after the date of such damage, then if Landlord has not otherwise
terminated the Lease Tenant may elect to terminate this Lease within ninety (90)
days of the date of such damage. In the event any mortgagee under a deed of
trust, security agreement or mortgage on the Building should require that the
insurance proceeds be used to retire the mortgage debt, Landlord shall have no
obligation to rebuild and if Landlord so elects, this Lease shall terminate upon
notice to Tenant. Unless otherwise provided in this Lease, any insurance which
may be carried by Landlord or Tenant against loss or damage to the Building or
to the Premises shall be for the sole benefit of the party carrying such
insurance and under its sole control. If Tenant's Premises are untenantable and
Landlord does not complete the repair thereof within the time periods estimated
by Landlord, subject to extension thereof by Force Majeure, and such failure to
complete is not a result of Tenant Delay, then Tenant may elect to terminate
this Lease upon thirty (30) days prior written notice to Landlord, if during
such thirty (30) day period the repairs are not completed by Landlord. If Tenant
does not so elect to terminate and Landlord elects to rebuild the Building or
portions thereof, so long as Tenant provides Landlord with the plans and if
specifications necessary for the re-construction of its leasehold improvements
and the insurance proceeds or other source of funds provided by Tenant are
collectively sufficient in amount to cover such administrative, hard and soft
construction, and such other costs incurred by Landlord, Landlord agrees to re-
construct Tenant's damaged leasehold improvements for and on behalf of Tenant.
21.2 Casualty Caused by Tenant. If fire or other casualty causing injury
-------------------------
to the Premises or other parts of the Building shall have been caused by the
negligence or willful misconduct of Tenant, its agents, servants or employees,
or by any other persons entering the Building under express or implied
invitation of Tenant, such injury may be repaired by Landlord at the expense of
Tenant provided such injury is not recoverable under any applicable insurance
policy covering the Premises or the Building (required to be carried under this
Lease), and in no event shall Tenant have any right to terminate or abate rent.
21.3 Rent. If the Lease is not terminated then Base Rent and Tenant's
----
Pro Rata Share of Operating Expenses and Real Estate Taxes shall be equitably
abated based upon the portion of the Premises rendered untenantable by such
casualty, from the date of the casualty until completion, provided such casualty
was not caused by Tenant, its agents or employees.
22
<PAGE>
ARTICLE 22
CONDEMNATION
------------
22.1 Eminent Domain. If five percent (5%) or more of the Rentable Area
--------------
of the Premises is taken by eminent domain, or by conveyance in lieu thereof,
and if such taking interferes substantially with Tenant's use of the Premises in
Tenant's reasonable determination, then this Lease, at the option of either
party evidenced by notice to the other given within thirty (30) days from such
taking or conveyance, shall forthwith cease and terminate entirely. In the event
of such termination of this Lease, then rental shall be due and payable to the
actual date of such termination. If less than five percent (5%) of the Rentable
Area of the Premises is taken, or if five percent (5%) or more of the Premises
is taken and neither party terminates this Lease, this Lease shall cease and
terminate as to that portion of the Premises so taken as of the date of such
taking, and the rental thereafter payable under this Lease shall be abated pro
rata from the date of such taking in an amount by which that portion of the
Rentable Area of the Premises so taken shall bear to the Rentable Area of the
Premises prior to such taking. If any part of the Building Complex shall be
taken by eminent domain, or by conveyance in lieu thereof, and if such taking
substantially interferes with Landlord's ownership or use of the Building
Complex in Landlord's reasonable determination, Landlord, at its option, may
upon ninety (90) days' notice to Tenant (or such longer period of time allowed
by the subject taking), terminate this Lease as of the date specified in such
notice.
22.2 Damages. All compensation awarded for any taking (or the proceeds of
-------
private sale in lieu thereof) of the Premises or Building Complex shall be the
property of Landlord and Tenant hereby assigns its interest in any such award to
Landlord; provided, however, Landlord shall have no interest in any award made
to Tenant for the taking of Tenant's fixtures and other personal property or
moving expenses if a separate award for such items is made to Tenant.
22.3 Restoration. If both Landlord and Tenant elect not to terminate this
-----------
Lease, Tenant shall remain in that portion of the Premises which shall not have
been appropriated or taken as herein provided, and Landlord agrees, at
Landlord's sole cost and expense (to the extent of proceeds received), to, as
soon as reasonably possible, restore the remaining portion of the Premises to a
complete unit of like quality and character as existed prior to such
appropriation or taking.
ARTICLE 23
LOSS AND DAMAGE AND DELAY
-------------------------
23.1 Loss and Damage. Landlord shall not be liable or responsible in any
---------------
way for:
(a) any death or injury arising from or out of any occurrence in,
upon or at the Building Complex or for damage to property of Tenant or others
located on the Premises, nor shall it be responsible in any event for damage to
any property of Tenant or others from any cause whatsoever, unless such damage,
loss, injury or death results from the intentional misconduct or gross or sole
negligence of Landlord, its agents or employees. Without limiting the generality
of the foregoing, Landlord shall not be liable for any injury or damage to
persons or property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain, snow or leaks from any part of the Premises or from
the pipes, appliances, plumbing works, roof, street, or subsurface of any floor
or ceiling or from any other place or because of dampness or climatic conditions
from any other cause of whatsoever kind. Landlord shall not be liable for any
damage whatsoever caused by any other tenant or persons in or about the Building
Complex, or by an occupant of adjacent property thereto, or the public, or
construction of any private, public or quasi-public work. All property of Tenant
kept or stored on the Premises shall be kept or stored at the risk of Tenant
only and unless damage to such property is caused by the gross negligence or
willful misconduct of Landlord and such damage is not covered by Tenant's
insurance required to be carried hereunder, Tenant shall indemnify Landlord in
the event of any claims arising out of damages to the same, including any
subrogation claim by Tenant's insurers;
(b) any act or omission (including theft, malfeasance or
negligence) on the part of any agent, contractor or person from time to time
employed by Landlord to perform janitorial services or security services, or
repairs or maintenance services, in or about the Premises or the Building
(unless such injury to person or damage to property is caused by the gross
negligence or
23
<PAGE>
willful misconduct of any such agent, contractor or person acting within the
scope of their employment and is not covered by Tenant's insurance required to
be carried hereunder); or
(c) loss or damage, however caused, to money, securities, negotiable
instruments papers or other valuables of Tenant.
23.2 Delays.
------
(a) Except for any obligation to obtain insurance or to pay sums
due Tenant hereunder, if any, whenever and to the extent that Landlord shall be
unable to fulfill, or shall be delayed or restricted in the fulfillment of any
obligation hereunder in respect to the supply of or provision for, any service
or utility or the doing of any work or the making of any repairs by reason of
being unable to obtain the material, goods, equipment, service, utility or labor
required to enable it to fulfill such obligation or by reason of any statute,
law or any regulation or order passed or made pursuant thereto or by reason of
the order or direction of any administrator, controller or board, or any
governmental department or officer or other authority, or by reason of not being
able to obtain any permission or authority required thereby, or by reason of any
other cause beyond Landlord's control, whether of the foregoing character or
not, Landlord shall be entitled to extend the time for fulfillment of such
obligation by a time equal to the duration of such delay or restriction, and
Tenant shall not be entitled to compensation for any inconvenience, nuisance or
discomfort thereby occasioned nor shall its obligations under this Lease be
affected thereby; provided that Landlord shall use reasonable efforts in good
faith to minimize any delays or restrictions.
(b) Except for any obligation to obtain insurance or to pay rent or
other sums due Landlord, whenever and to the extent that Tenant shall be unable
to fulfill, or shall be delayed or restricted in the fulfillment of any
obligation hereunder in respect to the supply of or provision for, any service
or utility or the doing of any work or the making of any repairs by reason of
being unable to obtain the material, goods, equipment, service, utility or labor
required to enable it to fulfill such obligation or by reason of any statute,
law or any regulation or order passed or made pursuant thereto or by reason of
the order or direction of any administrator, controller or board, or any
governmental department or officer or other authority, or by reason of not being
able to obtain any permission or authority required thereby, or by reason of any
other cause beyond Tenant's control, whether of the foregoing character or not,
Tenant shall be entitled to extend the time for fulfillment of such obligation
by a time equal to the duration of such delay or restriction, and Landlord shall
not be entitled to compensation for any inconvenience, nuisance or discomfort
thereby occasioned nor shall its obligations under this Lease be affected
thereby; provided that Tenant shall use reasonable efforts in good faith to
minimize any delays or restrictions.
ARTICLE 24
DEFAULT AND REMEDIES
--------------------
24.1 Default by Tenant. The following events shall be deemed to be
-----------------
events of default by Tenant under this Lease:
(a) Subject to Section 3.3, Tenant shall fail to pay any installment
of rent or any other sum due to Landlord when due. Notwithstanding the above,
Tenant shall not be deemed in default if not more than twice during any calendar
year it pays such installment of rent or any other sum due Landlord within five
(5) business days of receipt of written notice of nonpayment. After delivery of
the two notices as set forth above, Landlord shall have no obligation to give
other notices of nonpayment during such calendar year and any such other event
of nonpayment shall cause an automatic event of default under this Lease.
(b) Tenant shall fail to comply with any term, provision or
covenant of this Lease, other than payment of rent or other sums due to
Landlord, and shall not cure such failure within thirty (30) days after written
notice thereof to Tenant provided, however that if such default cannot
reasonably be cured within such thirty (30) day period, Tenant shall not be
deemed in default if it has commenced to cure, is diligently prosecuting same to
completion, provides Landlord with reasonably satisfactory evidence of same and
the cure period does not exceed one hundred eighty (180) days from the date such
cure was timely commenced.
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(c) Except for a permitted assignment as set forth in Article 7
hereof, Tenant shall die, cease to exist as a corporation or partnership or be
otherwise dissolved or liquidated or become insolvent, or shall make a transfer
in fraud of creditors, or shall make an assignment for the benefit of creditors
or is otherwise unable to pay its debts as they come due.
(d) Tenant shall file a petition under any section or chapter of
the national bankruptcy act as amended or under any similar law or statute of
the United States or any state thereof, or have a petition filed or a request
for a receiver (unless dismissed within ninety (90) days of filing); or Tenant
shall be adjudged bankrupt or insolvent in proceedings filed against Tenant
(unless dismissed within ninety (90) days of filing).
(e) A receiver or trustee shall be appointed for all of the
Premises or for all or substantially all of the assets of Tenant or any
guarantor of Tenant's obligations under this Lease.
(f) Tenant shall abandon or vacate any portion of the Premises, in
whole or in part, in violation of Section 32.11 hereof.
(g) Tenant assigns or sublets in violation of the provisions of
this Lease.
(h) Tenant fails to deliver the instruments pursuant to Articles 17
and 18 hereof, time being of the essence.
24.2 Remedies of Landlord. Upon the occurrence of any such events of
--------------------
default, Landlord shall have the option to pursue (in accordance with applicable
law) any one or more of the following remedies without any notice or demand
whatsoever:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may,
without prejudice to any other remedy which it may have for possession or
arrearages in rent, enter upon and take possession of the Premises and expel or
remove Tenant and any other person who may be occupying such Premises or any
part thereof, by force if necessary, without being liable for prosecution of any
claim of damages therefor.
(b) Without terminating the Lease, enter upon and take possession
of the Premises and expel or remove Tenant and any other person who may be
occupying such Premises or any part thereof, by force if necessary, without
being liable for prosecution or any claim for damages therefor, and relet the
Premises and receive the rent therefor.
(c) Enter upon the Premises, by force if necessary, without being
liable for prosecution or any claim for damages therefor, and do whatever Tenant
is obligated to do under the terms of this Lease; and Tenant agrees to
reimburse Landlord on demand for any expenses which Landlord may incur in thus
effecting compliance with Tenant's obligations under this Lease, and Tenant
further agrees that Landlord shall not be liable for any damages resulting to
Tenant from such action, unless caused by the gross negligence or willful
misconduct of Landlord.
(d) Alter all locks and other security devices at the Premises
without terminating this Lease.
In the event Landlord may elect to regain possession of the Premises by
forcible detainer proceeding, Tenant hereby specifically waives, to the extent
permitted by law, any statutory notice which may be required prior to such
proceeding, and agrees that Landlord's execution of this Lease, is in part
consideration for this waiver.
Exercise by Landlord of any one or more of the remedies hereunder granted
or otherwise available shall not be deemed to be an acceptance of surrender of
the Premises by Tenant, whether by agreement or by operation of law, it being
understood that such surrender can be effected only by the written agreement of
Landlord and Tenant. No such alteration of locks or other security devices and
no removal or other exercise of dominion by Landlord over the property of Tenant
or others at the Premises shall be deemed unauthorized or constitute a
conversion, provided the same is performed substantially in accordance with all
applicable laws, Tenant hereby consenting, after any event of default, to the
aforesaid exercise of dominion over Tenant's property within the
25
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Premises. All claims for damages by reason of such reentry and/or repossession
and/or alteration of locks or other security devices are hereby waived, provided
the same is performed substantially in accordance with all applicable laws, as
all claims for damages by reason of any distress warrant, forcible detainer
proceedings, sequestration proceedings or other legal process, to the extent
permitted by law. Tenant agrees that any reentry by Landlord may be pursuant to
judgment obtained in forcible detainer proceedings or other legal proceedings or
without the necessity for any legal proceedings, as Landlord may elect, and
Landlord shall not be liable in trespass or otherwise, provided the same is
performed substantially in accordance with all applicable laws.
In the event Landlord elects to terminate the Lease by reason of an event
of default then notwithstanding such termination, Tenant shall be liable for and
shall pay to Landlord, at the address specified for notice to Landlord herein,
the sum of all rental and other indebtedness accrued to date of such
termination, plus, as damages, an amount equal to the total rental hereunder for
the remaining portion of the Lease term (had such term not been terminated by
Landlord prior to the date of expiration as stated herein) less the Market Base
Rental Rate (determined in accordance with Section 32.10 hereof) for such
remaining term (net of all reasonably estimated costs of re-leasing for such
remaining term).
In the event that Landlord elects to repossess the Premises without
terminating the Lease, then Tenant shall be liable for and shall pay to Landlord
at the address specified for notice to Landlord herein, all rental and other
indebtedness accrued to the date of such repossession, plus rent required to
paid by Tenant to Landlord during the remainder of the Lease term until the date
of expiration of the term as stated herein diminished by any net sums thereafter
received by Landlord through relenting the Premises during such period (after
deducting expenses incurred by Landlord as provided below). In no event shall
Tenant be entitled to any excess of any rental obtained by reletting over and
above the rental herein reserved. Actions to collect amounts due by Tenant to
Landlord under this subparagraph may be brought from time to time, on one or
more occasions, without the necessity of Landlord's waiting until expiration of
the Lease term.
In the event of any default or breach by Tenant, not cured within any
applicable grace period, Tenant shall also be liable and shall pay to Landlord,
in addition to any sums provided to be paid above, broker's fees incurred by
Landlord in connection with reletting the whole or any part of the Premises; the
costs of removing and storing Tenant's or other occupants' property; the costs
of repairing, altering, remodeling, or otherwise putting the Premises into
condition acceptable to a new tenant or tenants; and all reasonable expenses
incurred by Landlord in enforcing or defending Landlord's rights and/or
remedies, including reasonable attorney's fees whether suit was actually filed
or not.
In the event of termination or repossession of the Premises for an event of
default, Landlord shall not have any obligation to relet or attempt to relet the
Premises or any portion thereof, or to collect rental after reletting; and in
the event of reletting, Landlord may relet the whole or any portion of the
Premises, or let the Premises as part of a larger premises, for any period to
any tenant and for any use or purpose.
If Tenant shall fail to make any payment or cure any default hereunder
within the time herein permitted, Landlord, without being under any obligation
to do so and without thereby waiving such default, may make such payment and/or
remedy such other default for the account of Tenant (and enter the Premises for
such purpose), and thereupon Tenant shall be obligated to, and hereby agrees to
pay Landlord upon demand all reasonable costs, expenses and disbursements,
including reasonable attorney's fees incurred by Landlord in taking such
remedial action.
Landlord is entitled to accept, receive in cash or deposit any payment made
by Tenant for any reason or purpose or in any amount whatsoever, and apply the
same at Landlord's option to any obligation of Tenant and the same shall not
constitute payment of any amount owed except that to which Landlord has applied
the same. No endorsement or statement on any check or letter of Tenant shall be
deemed an accord and satisfaction or recognized for any purpose whatsoever. The
acceptance of any such check or payment shall be without prejudice to Landlord's
rights to recover any and all amounts owed by Tenant hereunder and shall not be
deemed to cure any other default nor prejudice Landlord's rights to pursue any
other available remedy.
26
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Notwithstanding anything to the contrary contained in this Lease, Landlord
agrees to use reasonable efforts to mitigate its damages however in no event
shall Landlord be required to (i) lease space for less than market rates
applicable for comparable space in first-class Buildings in Briargate Business
Campus in Colorado Springs, Colorado, (ii) expend any sums or (iii) lease the
Premises prior to any other available space in the Building or any building
owned by Landlord or an affiliated entity of Landlord.
24.3 Landlord's Default. Landlord shall not be deemed in default
------------------
hereunder unless Tenant shall have given Landlord written notice of such default
specifying such default with particularity and Landlord shall thereupon have
thirty (30) days in which to cure any default unless such default cannot
reasonably be cured within such period wherein Landlord shall not be in default
if it commences to cure the default within the thirty (30) day period and
diligently pursues completion of same for a period not to exceed one hundred
eighty (180) days.
24.4 Personal Property Lien. Intentionally Deleted.
----------------------
ARTICLE 25
HOLDING OVER
------------
25.1 If Tenant shall continue to occupy and continue to pay rent for the
Premises after the expiration of this Lease with or without the consent of
Landlord, and without any further written agreement, Tenant shall be a tenant
from month to month at a monthly Base Rent equal to one hundred fifty percent
(150%) of the last full monthly Base Rent payment due hereunder, and subject to
all of the additional rentals, terms and conditions herein set out except as to
expiration of the Lease Term. Such holding over may be terminated by Landlord
or Tenant upon thirty (30) days' notice. In the event that Tenant fails to
surrender the Premises upon termination or expiration of this Lease or such
month to month tenancy, then Tenant shall indemnify Landlord against loss or
liability resulting from any delay of Tenant in not surrendering the Premises
within sixty (60) days following such expiration or termination, including, but
not limited to, any amounts required to be paid to third parties who were to
have occupied the Premises and any attorney's fees related thereto.
ARTICLE 26
NOTICE
------
26.1 Notice. Any notice, request, statement or other writing pursuant to
------
this Lease shall be deemed to have been given if sent by registered, certified
mail or recognized receipted overnight mail service, postage prepaid, return
receipt requested or delivered by hand to the party at the addresses set forth
below:
TENANT: Decision-Science Applications
1110 North Glebe Road, Suite 400
Arlington, Virginia 22201
Attention: Theresa McGrath
With copy to: Prior to occupancy:
Decision-Science Applications
1775 Telstar Drive, Suite 201
Colorado Springs, Colorado 80920
Attention: William Nevills
After occupancy:
Decision-Science Applications
2060 Briargate Parkway, Suite 300
Colorado Springs, Colorado 80920
Attention: William Nevills
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With copy to: Shaw, Pittman, Potts & Trowbridge
2300 N Street NW
Washington, DC 20037
Attention: Barbara Rossotti, Esq.
LANDLORD: ORIX PRIME WEST Colorado Springs Venture
c/o Prime West Development
6025 South Quebec, Suite 110
Englewood, Colorado 80111
Attention: Stephen F. Clarke, President
With copy to: Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-5367
Attention: Sarah 0. Jelencic, Esq.
With copy to: Brownstein Hyatt Farber & Strickland, P.C.
410 17th Street, 22nd Floor
Denver, Colorado 80202
Attention: Lea Ann T. Groesser, Esq.
and such notice shall be deemed to have been received by Landlord or Tenant, as
the case may be, on the earlier of actual receipt or the second business day
after the date on which it shall have been so mailed.
26.2 Change of Address. Any party may, by notice to the other, from time
-----------------
to time, designate another address, to which notices mailed more than ten (10)
days thereafter shall be addressed.
ARTICLE 27
SECURITY DEPOSIT
----------------
27.1 Tenant has deposited with Landlord the sum of Forty-Nine Thousand
Twenty-Five and No/100 Dollars ($49,025.00), which is estimated to be equal to
the first month's Base Rent, as security for the performance by Tenant of all of
the terms, covenants, and conditions required to be performed by it hereunder
and which sum shall be adjusted accordingly upon final determination of the
rentable square feet of the Premises as set forth in Exhibit D hereof Such sum
---------
shall be returned to Tenant after a reasonable period after the expiration of
the Lease Term and delivery of possession of the Premises to Landlord if, at
such time, Tenant has fully performed all such terms, covenants and conditions.
Promptly upon receipt of the security deposit, Landlord shall deposit such
security deposit into an interest bearing account and unless Tenant is in
default under the Lease, following the expiration of any applicable notice and
cure periods, Tenant shall have the right to withdraw any accrued interest
thereon annually, upon thirty (30) days prior written notice to Landlord. Upon
an uncured event of default as set forth in Article 24, Landlord may, in
addition to any other right or remedy available to Landlord hereunder, use,
apply, or retain all or any part of this security deposit for the payment of any
unpaid rent or for any other amount which Landlord may be required to expend by
reason of the default of Tenant, including any damages or deficiency in the
reletting of the Premises or any attorney's fees associated therewith,
regardless of the whether the accrual of such damages or deficiency occurs
before or after an eviction. If a portion of the security deposit is used or
applied by Landlord during the term hereof, Tenant shall, upon five (5) business
days written demand, deposit with Landlord an amount sufficient to restore the
security deposit to its original amount.
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ARTICLE 28
MISCELLANEOUS PROVISIONS
------------------------
28.1 Captions. The captions used herein are for convenience only and do
--------
not limit or amplify the provisions hereof. Whenever the singular is used the
same shall include the plural, and words of any gender shall include the other
gender.
28.2 Waiver. One or more waivers of any covenant, term or condition of
------
this Lease by either party should not be construed as a waiver of a subsequent
breach of the same covenant, term or condition. The consent or approval by
either party shall not be construed as a waiver of a subsequent breach of the
same covenant, term or condition. The consent or approval by either party to or
of any act by the other party requiring such consent or approval should not be
deemed to waive or render unnecessary consent to or approval of any subsequent
similar act.
28.3 Entire Agreement. This Lease contains the entire agreement between
----------------
the parties and no agreement shall be effective to change, modify or terminate
this Lease in whole or in part unless such agreement is in writing and duly
signed by the parties hereto.
28.4 Severability. The invalidity or unenforceability of any provision
------------
hereof shall not affect or impair any other provision.
28.5 Modification. Should any mortgagee or beneficiary under a deed of
------------
trust require a modification of this Lease, which modification will not bring
about any increased cost or expense to Tenant or will in any way substantially
change the rights and obligations of Tenant hereunder, then and in such event,
Tenant agrees that this Lease may be so modified.
28.6 Governing Law. This Lease shall be governed by and construed
-------------
pursuant to the laws of the State of Colorado.
28.7 Successors and Assigns. The covenants and conditions herein
----------------------
contained shall inure to and bind the respective heirs, permitted successors,
executors, administrators and assigns of the parties hereto, and the terms
"Landlord" and "Tenant" shall include the successors and assigns of either such
party, whether immediate or remote, except as otherwise specifically set forth
in this Lease to the contrary.
28.8 Authorization to Execute. The parties executing this Lease on
------------------------
behalf of Landlord and Tenant hereby covenant and warrant for the benefit of the
other that with respect to their respective entity that (i) in the event such
entity shall be a corporation, the entity is a duly qualified entity and all
steps have been taken prior to the date hereof to qualify such entity to do
business in the State of Colorado; (ii) all franchise and corporate or other
applicable taxes have been paid to date, and all future forms, reports, fees and
other documents necessary to comply with applicable laws will be filed, such
entity is authorized to perform its obligations under this Lease and the person
executing this Lease is duly authorized to do so on behalf of such entity.
28.9 Guaranty of Lease. Intentionally Deleted.
-----------------
28.10 Approval of Documents. Landlord's approval of Tenant's plans for
---------------------
work performed by Landlord or Tenant in the Premises shall create no
responsibility or liability on the part of Landlord for their completeness,
design, sufficiency, or compliance with any laws, rules, or regulations of
governmental agencies or authorities.
28.11 Prime Rate. As used herein, Prime Rate shall be the rate published
----------
in the Midwestern Edition of The Wall Street Journal under "Money Rates." If for
any reason the prime rate is no longer published in The Wall Street Journal,
then Landlord shall select another financial publication and reasonably
equivalent announced rate as the "Prime Rate."
28.12 Attorneys' Fees. In the event of any dispute regarding the terms
---------------
of this Lease and the enforcement thereof, the prevailing party in such dispute
shall be entitled to its reasonable attorneys' fees and costs from the
nonprevailing party as such fees and costs are determined by the court.
29
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ARTICLE 29
SUBSTITUTION OF PREMISES
------------------------
Intentionally Deleted.
ARTICLE 30
RECORDING
---------
30.1 Tenant agrees not to place this Lease of record unless requested to
execute a Memorandum of Lease by Landlord, which may, at Landlord's option, be
placed of record.
Any recording by Tenant without Landlord's prior written consent shall at
Landlord's option be deemed a default pursuant to Article 24 hereof and Landlord
shall have all of the rights and remedies set forth therein.
ARTICLE 31
REAL ESTATE BROKER
------------------
31.1 Tenant and Landlord each represent and warrant to the other,
respectively, that it has not dealt with any broker in connection with this
Lease, and that insofar as such party knows, no other broker negotiated or
participated in the negotiations of this Lease, or submitted or showed the
Premises, or is entitled to any commission in connection herewith (except
Tenant's brokers, CB Commercial Real Estate Group, Inc., and Landlord's listing
brokers, Highlands Commercial Group) and each party agrees to indemnify the
other against any liability arising from a breach of their respective
representation and warranty including reasonable attorney's fees.
ARTICLE 32
OTHER PROVISIONS
----------------
32.1 Rent Concession. Provided there is no uncured event of default as
---------------
set forth in Article 24 of this Lease, Landlord agrees that it shall not demand
from nor shall Tenant be obligated to pay, the Base Rent for the Premises and
Tenant's Pro Rata Share of Operating Expenses and Real Estate Taxes for a period
equivalent to three (3) months (the "Rent Concession") from the date that
Tenant's obligation to pay rent would otherwise commence. If the date that
Tenant's obligation to commence paying Base Rent under the Lease commences on a
day other than the first day of a calendar month then this Rent Concession shall
expire on the same day of the third month thereafter, and Tenant shall pay in
advance on the last day of the Rent Concession the prorated rent due for the
remaining portion of the month.
32.2 Moving Concession. Provided there is no uncured event of default as
-----------------
set forth in Article 24 of this Lease, Landlord agrees to pay to Tenant within
two (2) days after the later of the expiration of the Rent Concession or the
cure of any default a sum equal to $3.00 per rentable square foot of the
Premises.
32.3 Exercise Facility. Tenant shall have the nonexclusive right (at no
-----------------
additional cost to Tenant other than its pro rata share of operating and
maintenance expenses) to use the fitness center in the Building, subject to the
reasonable rules and regulations promulgated from time to time by Landlord
regarding such use. Such fitness center shall include one (1) weight machine,
two (2) treadmills and two (2) Stairmasters or like kind equipment. Tenant
acknowledges that there are risks associated with the use of such facilities and
that Landlord makes no representations or warranties of any kind or nature
regarding the Exercise Facility and that all use is at the sole risk of Tenant
and that any claims arising from the Exercise Facility are specifically included
in the indemnity set forth in Article 14 hereof.
32.4 Base Rent Adjustment. If the total actual cost of Tenant
--------------------
Improvements is less than $34.11 per rentable square foot of the Premises as
determined by Landlord within ninety (90) days of completion then Landlord
agrees that the Base Rent of $15.90 per rentable square foot of the Premises
shall be reduced based upon a factor of ten percent (10%) return on cost. For
example, if
30
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the actual cost of Tenant Improvements is equal to $33.00 RSF, then the Base
Rent of $15.90 RSF would be $15.79 RSF. Furthermore, if Landlord's payments to
Space Planner made pursuant to Exhibit C are less than $1.55 RSF, then the Base
---------
Rent shall be decreased by a factor of ten percent (10%) return on cost unless
the savings are applied elsewhere by Tenant.
32.5 Parking. Landlord agrees that, subject to applicable zoning and
-------
condemnation, the Building shall be constructed to provide four (4) non-
exclusive parking spaces for every 1,000 rentable square feet of leasable space
in the Building, inclusive of handicapped and visitor parking (the "Parking
Ratio"). Landlord represents and warrants that the Parking Ratio set forth
herein is permitted for the Building under applicable zoning regulations in
effect as of the date of this Lease. Landlord agrees that it shall not initiate
a change in applicable zoning which would result in a decreases in the Parking
Ratio, without first obtaining Tenant's consent thereto, which consent shall not
be unreasonably withheld or delayed. Tenant agrees to comply and cause its
employees and invitees to comply with rules and regulations governing parking as
promulgated by Landlord from time to time. Tenant agrees that its use of parking
shall not exceed the "Parking Ratio" as such ratio applies to its Premises with
appropriate adjustment for handicap and visitor parking. Landlord agrees that
parking provided to any other tenant in the Building Complex will also be on a
nonexclusive basis and that the Parking Ratio will be enforced uniformly among
all tenants of the Building.
32.6 Access System. Landlord agrees to cause the Building to be
-------------
constructed with a card reader type of entry system for after-hours access to
the Building. Landlord also agrees to cause the installation of an after-hours
telephone system such that after-hours visitors may contact tenants of the
Building to gain access thereto. Tenant agrees to comply and to cause its
employees, agents, invitees and contractors to comply with reasonable rules and
regulations promulgated from time to time by Landlord regarding same, and Tenant
agrees to pay Landlord's actual cost for the initial cards, if any, and for
replacement cards issued to Tenant with respect to the system. The system may be
updated or replaced with a system which provides comparable or better after-
hours access from time to time in Landlord's reasonable discretion. Any costs
relating to the system would be an Operating Expense, to the extent permitted
pursuant to Article 4 hereof, unless caused by Tenant, its employees, agents,
invitees or contractors.
32.7 Exterior Signage. Provided there is no uncured default hereunder
----------------
(following expiration of any applicable notice and cure periods) Landlord agrees
that Tenant may install one sign on the parapet of the west side of the
Building. Although Landlord shall assure that electrical power is available for
the signage, all costs for fabrication, installation, maintenance and removal of
the sign shall be at Tenant's sole cost. Landlord, at Tenant's cost, may
install a check meter or submeter for determining the cost of the power utilized
by the sign, which shall be paid within thirty (30) days of Tenant's receipt of
demand therefor from Landlord. Tenant agrees to keep and maintain all signage
in good condition and repair during the term of the Lease and any extended term.
Upon termination of this Lease Tenant shall immediately remove its signage and
repair any damage caused thereby. If Tenant fails to maintain or remove the
signage in accordance herewith, Landlord upon five (5) days prior written notice
to Tenant may maintain or remove the signage and Tenant shall reimburse Landlord
for same upon demand. Landlord shall have no liability to Tenant for any acts
of Landlord with regard to the signage if such acts of Landlord arose by reason
of Tenant's failure to maintain or remove the signage in accordance herewith.
Tenant also agrees to pay upon demand Landlord's reasonable estimate of the
electrical costs for such signage.
32.8 Options to Expand. Provided (i) there is no uncured event of
-----------------
default as set forth in Article 24 and (ii) Tenant has not sublet or assigned
any portion of the Premises except to an Affiliated Entity as set forth in
Section 7.4 of the Lease or as permitted pursuant to Section 7.1 of the Lease,
Tenant shall have the following rights to expand:
(a) First Expansion Right. During the first eighteen (18) months
---------------------
of the Lease Term, Tenant may elect to lease any then unleashed and available
space in the Building (the "First Expansion Space") which right must be
exercised in writing and received by Landlord on or before the last day of the
eighteenth (18th) month. The exact configuration of the space is subject to the
reasonable prior approval of Landlord based upon considerations concerning the
leasability of any adjoining unleased space. The First Expansion Space shall
become a part of the Premises pursuant to the terms of the Lease on the same
terms and conditions as this Lease except (i) Base Rent shall be the Base Rent
as then escalated, (ii) the Tenant Improvement Allowance including the allowance
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for the Space Planner shall be adjusted to the actual per rentable square foot
cost of the Tenant Improvement costs for the initial Premises and shall be
reduced proportionately based upon the shorter remaining term of the Lease and
(iii) the Rent Concession and Moving Allowance shall not be applicable. Rent for
the First Expansion Space shall commence on the earlier of Substantial
Completion of the First Expansion Space or the last day of the eighteenth (18th)
month.
(b) Second Expansion Right. Tenant shall lease on the first day of
----------------------
the fourth Lease Year 4,500 rentable square feet of contiguous space on the
second floor as shown on Exhibit A-2 attached hereto (the "Second Expansion
-----------
Space"). This expansion right is in fact an obligation of Tenant and not an
option. The preconditions to exercise as set forth above are not applicable. The
Second Expansion Space shall become a part of the Premises on the same terms as
applicable to the First Expansion Space except that (i) the Tenant Improvement
Allowance including the allowance for the Space Planner shall be reduced
proportionately based upon the shorter remaining term of the Lease, (ii) Base
Rent shall commence on the earlier of Substantial Completion of the Second
Expansion Space with no adjustment for Force Majeure Delays or the first day of
the fourth Lease Year, and (iii) the Rent Concession and Moving Allowance shall
not be applicable.
(c) Third Expansion Right. Tenant shall upon not less than twelve
---------------------
(12) months written notice to Landlord have the option to lease approximately
9,704 rentable square feet of space on the second and/or first floor of the
Building (the "Third Expansion Space"). The exact site and configuration shall
be determined by Landlord and Landlord shall make such space available to Tenant
between the sixtieth (60th) and seventy-second (72nd) month of the Lease Term,
but in any event Landlord must have received Tenant's written election to
exercise this Third Expansion Right no later than the last day of the fifty-
ninth (59th) month of the Lease Term. The Third Expansion Space shall be added
to the Premises on the same terms as this Lease except (i) Base Rent shall be
equal to the Market Base Rental Rate but not greater than $1.50 per rentable
square foot above the Base Rent as escalated nor less than the Base Rent as
escalated, (ii) the Tenant Improvement Allowance shall be $2.00 per rentable
square foot of the Third Expansion Space per lease year remaining of the Lease
Term prorated for any partial year, however, Tenant may elect to increase the
Tenant Improvement Allowance for such Third Expansion Space by $1.00 per
rentable square foot of the Third Expansion Space per Lease Year for the term of
such expansion in which event Base Rent shall be increased accordingly
amortizing such costs over the term of the Lease at nine percent (9%) per annum
and (iii) the Rent Concession and Moving Allowance shall not be applicable. The
obligation to pay rent shall commence upon Substantial Completion of the Third
Expansion Space or 72nd month, whichever is earlier. To the extent of any
dispute concerning Market Base Rental Rate, it shall be determined in accordance
with Section 32.10 of this Lease.
(d) Fourth Expansion Right. Tenant shall upon not less than twelve
----------------------
(12) months written notice to Landlord have the option to lease between 10,000
and 15,000 rentable square feet of space as determined by Landlord on the second
and/or first floor of the Building (the "Fourth Expansion Space"). The exact
site and configuration shall be determined by Landlord and Landlord shall make
such space available to Tenant between the ninetieth (90th) and one hundred
second (102nd) month of the Lease Term, but in any event Landlord must have
received Tenant's written election to exercise this Fourth Expansion Right no
later than the last day of the eighty-ninth (89th) month of the Lease Term. The
Fourth Expansion Space shall be added to the Premises on the same terms as this
Lease except (i) Base Rent shall be equal to Market Base Rental Rate but not
greater than $1.50 per rentable square foot above the Base Rent as escalated nor
less than the Base Rent as escalated, (ii) the Tenant Improvement Allowance
shall be $2.00 per rentable square foot of the Fourth Expansion Space per lease
year remaining of the Lease Term prorated for any partial year, however, Tenant
may elect to increase the Tenant Improvement Allowance for such Fourth Expansion
Space by $1.00 per rentable square foot of the Fourth Expansion Space per Lease
Year for the ten-n of such expansion in which event Base Rent shall be increased
accordingly amortizing such costs over the term of the Lease at nine percent
(9%) per annum and (iii) the Rent Concession and Moving Allowance shall not be
applicable. The obligation to pay rent shall commence upon Substantial
Completion of the Fourth Expansion Space or 102nd month, whichever is earlier.
To the extent of any dispute concerning Market Base Rental Rate, it shall be
determined in accordance with Section 32.10 of this Lease.
32
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(e) Miscellaneous Expansion Provisions.
----------------------------------
(i) Landlord's obligation to deliver space is subject to Tenant not
having previously leased such space in the Building.
(ii) Time is of the essence hereof Failure of Tenant to give notices
in accordance herewith shall render all options (except the Second Expansion
Option) null and void.
(iii) As "expansion premises" are added to the Premises, the Lease
shall be amended and Tenant's Pro Rata Share shall be increased accordingly.
(iv) If the Third and/or Fourth Expansion Options are exercised and
there are less than thirty-six (36) months remaining on the then Lease Term,
upon exercise of either such option, the Lease Term shall be automatically
extended so that there are thirty-six (36) months remaining from the date that
rent commences for the applicable Expansion Space (such thirty-six (36) or
other applicable month extension to occur only one time in connection with each
applicable Expansion Option). Notwithstanding the above, Tenant may elect to
lease up to 1,500 rentable square feet or less of unleased space in the Building
for which Landlord has not otherwise entered into a letter of intent at any time
on the same terms as set forth in the Third and Fourth Expansion Rights provided
there is no Tenant Improvement Allowance and any remaining adjacent unleased
space must be of a size and configuration that are leasable in Landlord's
reasonable discretion.
(v) Base Rent once determined for the applicable Expansion Space
continues to escalate at the same rate and at the same time as the Base Rent
for the remainder of the Premises.
32.9 Right of First Refusal. Landlord hereby grants to Tenant a right of
----------------------
first refusal (the "Right of First Refusal") to lease any space in the Premises
of the Building subject to and in accordance with the following provisions:
(a) Prior to Landlord executing any lease with a bona fide third
party for such contiguous space (the "Refusal Space"), Landlord shall deliver to
Tenant a written notice identifying a proposed lease or letter of intent which
Landlord is willing to accept, subject to this Right of First Refusal (the
"Offer Notice"). The Offer Notice shall set forth the date that such proposed
lease is to commence (the "Refusal Space Commencement Date"). Tenant agrees to
keep the information contained in the letter of intent confidential.
(b) The Tenant shall have five (5) business days from receipt of
the Offer Notice to either accept or reject the Refusal Space. If Tenant rejects
the Refusal Space or if Landlord has not received the written acceptance or
rejection of the Refusal Space from Tenant by 5:00 p.m. on the fifth (5th)
business day as set forth herein, time being of the essence, then Landlord shall
have no further obligation or liability to Tenant pertaining to the Refusal
Space and Landlord may enter into a lease with such tenant on such terms and
conditions as set forth in the Offer Notice, unless Landlord and such tenant, or
an affiliated entity of such tenant, fails to enter into a lease for the Refusal
Space for any reason in which event Tenant's Right of First Refusal shall be
deemed reinstated.
(c) If the Refusal Space is accepted by Tenant in accordance
herewith, this Lease shall be amended effective as of the Refusal Space
Commencement Date to include the Refusal Space on the same terms and conditions
as applicable to the Third and Fourth Expansion Spaces.
(d) This Right of Refusal shall not be applicable unless there are
at least thirty-six months remaining on the Lease.
(e) This Right of First Refusal is subject to any rights of tenants
under leases for which Tenant did not exercise this Right of First Refusal.
(f) This Right of First Refusal shall be deemed void and of no
further force and effect if there is an uncured event of default as set forth in
Article 24 or if Tenant assigns this Lease or sublets the Premises in violation
of the terms of this Lease.
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32.10 Option to Extend. Tenant shall have an option to extend the Lease
----------------
for three (3) additional consecutive terms, each consisting of five (5) years.
In order to exercise such option, Tenant shall notify Landlord in writing at
least 120, but not more than 240, days prior to the expiration of the respective
lease term of its election to exercise the option, upon which time Landlord
shall submit in writing within 30 days thereafter a proposal for the then
current Market Base Rental Rate (per rentable square foot per annum) for the
extended term. Tenant shall have thirty (30) days from the receipt of said
notice to (i) accept the proposed Base Rental Rate in writing to Landlord (ii)
to reject the Base Rental Rate and elect the appraisal process set forth below
or (iii) elect not to extend. If Tenant elects not to extend or fails to timely
exercise its option, time being of the essence, the options shall automatically
terminate and be of no further force and effect and this Lease shall terminate
upon expiration of the then Lease term. Any such extension shall be upon all of
the terms, conditions and covenants of this Lease except as to (i) the amount of
Base Rent, which shall be determined as set forth herein, (ii) other than as
remain applicable under this Lease, options to extend, expand or rights of
refusal, which shall not be applicable, and (iii) Tenant Allowances or other
economic concessions which shall not be applicable to the extension term. As
used herein, "Market Base Rental Rate" shall mean the then Base Rental Rate for
comparable first class multi-tenant office buildings of comparable size,
location and age, with comparable tenants leasing comparable amounts of space,
in the County of El Paso, Colorado, at such time, taking into account the
following factors (1) rent per rentable square foot; (2) operating expenses and
real estate tax payments; (3) current rental escalators; and (4) rental
concessions, including tenant improvement allowances, if any, as applicable to
market renewals of leases.
If Tenant, by written notice delivered no later than thirty (30) days after
the date Landlord notifies Tenant of the Market Base Rental Rate, objects to the
Market Base Rental Rate determined by Landlord and elects to submit the rate
determination to appraisal, then, within seven (7) days of the date of Tenant's
objection, each party shall appoint a non-affiliated certified M.A.I. Appraiser
that has at least five (5) years' full-time commercial appraisal experience in
El Paso County to determine the Market Base Rental Rate, such process to be
completed within twenty (20) days after the date of the appointment of the last
appraiser. If a party does not appoint a qualified appraiser within five (5)
days after the other party has given notice of the name of its appraiser then
the single appraiser shall be the sole appraiser and shall set the Market Base
Rental Rate. The appraisers appointed by the parties shall meet promptly and
attempt to set the Market Base Rental Rate. If they are unable to agree on the
Market Base Rental Rate within twenty (20) days after the date the second
appraiser has been appointed, they shall elect a third appraiser meeting the
qualifications stated in this paragraph within seven (7) days after the last day
the two (2) appraisers are to set the Market Base Rental Rate. If the
appraisers are unable to agree on the third appraiser within said time frame,
either of the parties to this Lease, after giving five (5) days' prior written
notice to the other party, may apply to the then president of the real estate
board of Denver, Colorado for the selection of a third appraiser who meets the
qualifications stated in this Section, which selection shall be made within
three (3) business days. All determinations of Market Base Rental Rate shall be
subject to the limitations on Market Base Rental Rate set forth in the first
paragraph of this Section. Each of the parties shall pay for the appraiser
appointed by it and shall bear one-half of the cost of appointing the third
appraiser and of paying the third appraiser's fee. The third appraiser, however
selected, shall be a person who has not previously acted in any capacity for
either party.
Within twenty (20) days after the selection of the third appraiser, the
third appraiser shall determine the Market Base Rental Rate and all three of the
appraiser's Market Base Rental Rates shall be averaged excluding any single
Market Base Rental Rate which is either ten percent (10%) higher or lower than
the middle appraisal of Market Base Rental Rate and the remaining appraisals
shall then be averaged.
If the Market Base Rental Rate is not established for the extended term
prior to its commencement, Tenant shall continue to pay the applicable Base Rent
required for the last full month of the Lease term until the appraisers have
made their determination. The Market Base Rental Rate in question, when finally
determined by the appraisers, shall be retroactive to the commencement of the
extension term, and the first Base Rent payment becoming due after the
determination of the applicable Market Base Rental Rate shall include the
retroactive amounts of monthly Base Rent installments accrued and unpaid. In no
event may either Landlord or Tenant elect not to extend the Lease based upon the
Market Base Rental Rate established in accordance herewith.
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<PAGE>
This option to extend may not be exercised and the Lease shall not be
extended if Tenant is in default which default is not cured within any
applicable cure periods or if this Lease has been sublet or assigned other than
to an Affiliated Entity as set forth in Section 7.4 hereof or to an entity for
which financials have been provided to and approved by Landlord as set forth in
Section 7.1 hereof. Furthermore, time is of the essence hereof, any failure of
Tenant to give any notice required hereunder within the required time period
shall render this option null and void.
32.11 Vacation. Tenant may, provided it complies with all other terms of
--------
this Lease, including payment of Rent, vacate the Premises in whole or in part
provided Tenant gives Landlord thirty (30) days prior written notice of its
intent to vacate.
32.12 Right to Test Equipment. Provided Tenant is not in default under
-----------------------
this Lease, Landlord shall install for Tenant's use during the Lease Term, a
testing area on the roof of the Building, as more particularly set forth on
Exhibit K attached hereto (the "Testing Area"), a walkway providing access to
- ---------
the Testing Area and one (1) 120 volt duplex outlet in the Testing Area. The
Testing Area shall be for purposes of testing Tenant's communications equipment
(the "Equipment"). Tenant in accessing the roof and testing its Equipment, shall
be permitted to enter only upon the walkway and the Testing Area, which Testing
Area may be relocated by Landlord in Landlord's reasonable discretion and at
Landlord's sole expense; provided, however, that in all such events the Testing
Area shall be in a location that allows Tenant to use the same as necessary for
Tenant's business, and Tenant shall not interfere with any base building systems
or other systems of the Building and shall not attach any fixture to the roof.
Tenant, at Tenant's sole cost and expense, agrees to keep, maintain, operate and
remove the Equipment in and from the Testing Area in accordance with all
applicable laws, rules, regulations, statutes, ordinances or other requirements
of any kind or nature of any governmental or quasi-governmental authority or the
requirements of Landlord's insurance underwriters and in compliance with any
roofing warranties of which Tenant has knowledge. As of the date of this Lease,
Landlord's insurance underwriters have imposed no additional requirements or
insurance premiums in connection with the Testing Area and Tenant's use thereof
Subject to the waiver of subrogation as set forth in Section 10.3 of the Lease,
which is incorporated herein by reference, if the Building, Building Complex,
elevators, boilers, engines, pipes, electrical apparatus, or any other elements
of the Building or the Building roof or any portion thereof, become damaged or
destroyed through any act of Tenant, its servants, agents, employees,
contractors or anyone permitted by Tenant to be working in the Building or on
the Equipment or the Testing Area, whether or not such act was a result of the
negligence or willful misconduct of Tenant or any such party, then the
reasonable cost of any repairs, replacements, alterations and all damages
incurred by Landlord shall be borne by Tenant who shall, within thirty (30) days
of demand, pay the same to Landlord. If, during the term of the Lease, Tenant
desires to install any of its equipment on the roof of the Building, such
installation shall be performed in accordance with that certain Communications
License, attached hereto as Exhibit L, to be executed by and between the parties
---------
prior to any such installation.
32.13 Self Help Rights. Notwithstanding anything to the contrary
----------------
contained in this Lease, if (i) Landlord fails to perform any maintenance or
repair obligations of Landlord under this Lease (excluding any maintenance and
repair to the base building structure and/or base building systems of the
Building); (ii) such failure materially adversely affects Tenant's ability to
conduct its business in the Premises, and (iii) such failure is not cured within
ten (10) business days (or such longer period of time if such cure cannot be
accomplished within ten (10) business days, provided Landlord commences such
cure within such ten (10) day period and diligently pursues such cure to
completion) after receipt of written notice to Landlord (and any mortgagee of
which Tenant has been provided written notice) (the "Self-Help Notice"), then
Tenant shall have the right, but not the obligation, to have performed such
maintenance or repair. In such event, such work shall be performed by competent
workmen whose labor union affiliations are not incompatible with those of any
workmen then employed in the Building Complex by Landlord, its contractors and
subcontractors and such workmen shall carry insurance which complies with the
requirements set forth in Section 10.1(f) hereof. Subject to the waiver set
forth in Section 10.3 hereof, Tenant shall indemnify, defend and hold harmless
Landlord from and against any and all claims, damages, fines, judgments,
penalties, costs, expenses, liabilities, or losses relating to any work
performed by Tenant's workmen with respect to this Section 32.13. Within thirty
(30) business days after receipt by Landlord of written notice from Tenant
evidencing all commercially reasonable amounts incurred by Tenant in connection
with the performance of any such maintenance or repair (the "Invoice Notice"),
Landlord shall pay to Tenant all such amounts, together with interest thereon at
the Default
35
<PAGE>
Rate from the date of the Invoice Notice until the date on which such amounts
are paid to Tenant in full.
IN WITNESS WHEREOF, the parties hereto have executed this Lease this 7th
---
day of May 1998.
LANDLORD:
ORIX PRIME WEST COLORADO SPRINGS VENTURE,
a Colorado general partnership
By: ORIX COLORADO SPRINGS, INC., an Illinois
corporation, General Partner
By: /s/ JAMES PURINGTON
-------------------------
Name: James Purington
-----------------------
Its: President
-----------------------
By: PRIME WEST EL PASO COUNTY I, INC., a
Colorado corporation
By: /s/ STEPHEN F. CLARKE
-------------------------
Name: Stephen F. Clarke
Its: President
TENANT:
DECISION-SCIENCE APPLICATIONS, INC.,
a Virginia corporation
By: /s/ GUY A. ACKERSON
-------------------------
Title: President/CEO
-------------------------
36
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF _________________________ )
The foregoing instrument was acknowledged before me this ____ day of April,
1998, by ________________, __________________ of ORIX Colorado Springs, Inc.,
an Illinois Corporation, General Partner of ORIX PRIME WEST Colorado Springs
Venture, a Colorado general partnership.
WITNESS my hand and official seal.
-------------------------------
Notary Public
(SEAL) My commission expires:_________________
STATE OF COLORADO )
) ss.
COUNTY OF _________________ )
The foregoing instrument was acknowledged before me this _____ day of
April, 1998, by Stephen F. Clarke, President of Prime West El Paso County I,
Inc., a Colorado corporation, General Partner of ORIX PRIME WEST Colorado
Springs Venture, a Colorado general partnership.
WITNESS my hand and official seal.
________________________________
Notary Public
(SEAL) My commission expires:_____________________
STATE OF Virginia )
--------
) ss.
COUNTY OF Arlington )
---------
The foregoing instrument was acknowledged before me this 5th day of May,
---
1998, by Guy Albert Ackerson, President/CEO of Decision-Science Applications,
----------------------------------
Inc., a Virginia corporation.
WITNESS my hand and official seal.
/s/ JACQUELINE HARMON
---------------------
Notary Public
(SEAL) My commission expires:6/30/00 [STAMP]
-------
37
<PAGE>
EXHIBIT B
---------
12 SOUTH, RANGE 66 WEST OF THE SIXTH PRINCIPAL MERIDIAN, BEING MONUMENTED
AT THE NORTHWEST CORNER BY A 3-1/4" DEPARTMENT OF INTERIOR BUREAU OF LAND
MANAGEMENT BRASS CAP AND AT THE WEST QUARTER CORNER BY A 3-1/4" DEPARTMENT
OF INTERIOR BUREAU OF LAND MANAGEMENT BRASS CAP, BEING ASSUMED TO BEAR S 00
DEGREES 21 MINUTES 28 SECONDS E, A DISTANCE OF 2649.65 FEET.
COMMENCING AT THE SOUTHEASTERLY CORNER OF BRIARGATE BUSINESS CAMPUS FILING
NO. 17, UNDER RECEPTION NO. 97149307, RECORDS OF EL PASO COUNTY, COLORADO,
SAID POINT BEING THE POINT OF BEGINNING; THENCE NORTHERLY AND WESTERLY AND
ALONG SAID BRIARGATE BUSINESS CAMPUS FILING NO. 17, THE FOLLOWING COURSE:
1. ON THE ARC OF A CURVE TO THE RIGHT, WHOSE CENTER BEARS NORTH 75 DEGREES
59 MINUTES 52 SECONDS EAST, HAVING A DELTA OF 60 DEGREES 17 MINUTES 16
SECONDS, A RADIUS OF 382.54 FEET, A DISTANCE OF 402.52 FEET;
THENCE SOUTH 43 DEGREES 42 MINUTES 52 SECONDS EAST, A DISTANCE OF 2.50 FEET
TO A POINT ON CURVE; THENCE ON THE ARC OF A CURVE TO THE RIGHT, WHOSE
CENTER BEARS SOUTH 43 DEGREES 42 MINUTES 52 SECONDS EAST, HAVING A DELTA OF
15 DEGREES 00 MINUTES 43 SECONDS, A RADIUS OF 397.77 FEET, A DISTANCE OF
104.22 FEET TO A POINT OF TANGENT; THENCE NORTH 61 DEGREES 17 MINUTES 51
SECONDS EAST, A DISTANCE OF 368.28 FEET; THENCE SOUTH 28 DEGREES 21 MINUTES
47 SECONDS EAST, A DISTANCE OF 364.96 FEET TO A POINT ON THE NORTHERLY
RIGHT OF WAY LINE OF BRIARGATE PARKWAY, AS RECORDED IN PLAT BOOK E-5 AT
PAGE 55; THENCE SOUTHERLY, WESTERLY, AND NORTHERLY, THE FOLLOWING TWO (2)
COURSES.
1. SOUTH 61 DEGREES 38 MINUTES 13 SECONDS WEST, A DISTANCE OF 203.24 FEET
TO A POINT OF CURVE;
2. ON THE ARC OF A CURVE TO THE RIGHT, HAVING A DELTA OF 16 DEGREES 17
MINUTES 34 SECONDS, A RADIUS OF 1917.50 FEET, A DISTANCE OF 545.27 FEET TO
THE POINT OF BEGINNING.
LEGAL DESCRIPTION PREPARED BY:
PAUL J. HUSSONG
JR ENGINEERING, LTD
4935 N. 30TH STREET
COLORADO SPRINGS, CO 80919
DATED JULY 23, 1996
JOB NO. 8714.70
===
PAGE 2
<PAGE>
EXHIBIT C
WORK LETTER
This WORK LETTER ("Work Letter") is entered into as of the _____ day of
April, 1998, by and between ORIX PRIME WEST COLORADO SPRINGS VENTURE, a Colorado
general partnership ("Landlord"), and DECISION-SCIENCE APPLICATIONS, INC., a
Virginia corporation ("Tenant").
R E C I T A L S:
- - - - - - - -
A. Concurrently with the execution of this Work Letter, Landlord and Tenant
have entered into a lease (the "Lease") covering certain premises (the
"Premises") more particularly described in Exhibit A attached to the Lease. To
---------
the extent applicable, the provisions of the Lease are incorporated herein by
this reference.
B. In order to induce Tenant to enter into the Lease and in consideration of
the mutual covenants hereinafter contained, Landlord and Tenant agree as
follows:
1. TENANT IMPROVEMENTS. As used in the Lease and this Work Letter, the term
-------------------
"Tenant Improvements" or "Tenant Improvement Work" means those items of general
tenant improvement construction shown on the Final Plans (described in Paragraph
4 below), more particularly described in Paragraph 5 below. The selection of
the general contractor (the "Contractor") to perform such Tenant Improvement
Work, the Contractor's fee for overhead and profit and the Contractor's budget
for general conditions shall all be reasonably acceptable to Landlord and
Tenant, such approval not to be unreasonably withheld or delayed by either
party. Landlord shall contract with such mutually agreed upon Contractor and
with the architect and all mechanical, electrical and plumbing engineers to be
hired to perform the design of the Premises.
2. WORK SCHEDULE. Attached to this Exhibit C is a schedule ("Work Schedule")
------------- ---------
which sets forth a timetable of critical dates for the planning and completion
of the installation of the Tenant Improvements and the Commencement Date of the
Lease. The Work Schedule describes certain of the critical items of work to be
done or approval to be given by Landlord and Tenant in connection with the
completion of the Tenant Improvements. All plans and drawings required by this
Work Letter and all work performed pursuant thereto are to be prepared and
performed in accordance with the Work Schedule. Based upon developments during
construction of the Tenant Improvements, the parties may modify the Work
Schedule as appropriate to reflect changes to the Work Schedule agreed to in
writing by both Landlord and Tenant and changes to the Work Schedule of which
Tenant is provided reasonable notice, resulting from Tenant Delays or Force
Majeure Delays and Landlord caused delays.
3. TENANT CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following
-----------------------------------
person(s) as Landlord's representative ("Landlord's Representative") to act for
Landlord in all matters covered by this Work Letter: James Crain, telephone
(303) 741-0700, facsimile (303) 741-6988. Tenant is entitled to rely on
information and decisions of Landlord's Representative, and the signature of
Landlord's Representative on documents, change orders and other instruments
delivered in connection with this Work Letter, shall be conclusive evidence of
Landlord's approval.
Tenant hereby appoints the following person(s) as Tenant's representative
("Tenant's Representative") to act for Tenant in all matters covered by this
Work Letter: William Nevills, telephone (719) 593-5974, facsimile (719) 593-
5978. Landlord is entitled to rely on information and decisions of Tenant's
Representative, and the signature of Tenant's Representative on documents,
change orders, Work Cost Estimate and other instruments delivered in connection
with this Work Letter, shall be conclusive evidence of Tenant's approval.
All communications with respect to the matters covered by this Work Letter are
to be made to Landlord's Representative or Tenant's Representative, as the case
may be, in writing in compliance
C-1
<PAGE>
with the notice provisions of the Lease. Either party may change its
representative under this Work Letter at any time by written notice to the other
party in compliance with the notice provisions of the Lease.
4. TENANT IMPROVEMENT PLANS.
------------------------
(a) Preparation of Space Plans. Tenant and Landlord have approved Gensler
--------------------------
("Space Planner") to prepare the architectural drawings for the Premises. Tenant
acknowledges that Landlord shall have no liability to assure that the design of
the Premises is satisfactory for Tenant and for Tenant's use. Tenant agrees to
cause the Space Planner to prepare the preliminary space plans for the layout of
Premises ("Space Plans") on or before the outside date for preparation of the
Space Plans set forth in the Work Schedule. The Space Plans are to be sufficient
to convey the architectural design of the Premises and layout of the Tenant
Improvements therein and are to be submitted to Landlord upon completion for
Landlord approval. If Landlord disapproves any aspect of the Space Plans,
Landlord will advise Tenant in writing of such disapproval and the reasons
therefor in accordance with the Work Schedule. Tenant will have until the
outside date specified in the Work Schedule to cause the Space Planner to
redesign the Space Plans incorporating the revisions required by Landlord and to
obtain Landlord's final approval of the Space Plans.
(b) Preparation of Final Plans. Based on the approved Space Plans, Tenant
--------------------------
will cause its Space Planner to prepare complete architectural plans, drawings
and specifications and complete engineered mechanical, plumbing, structural (if
required) and electrical working drawings for all of the Tenant Improvements for
the Premises (collectively, the "Final Plans"). The Tenant shall also cause the
Space Planner to use building standard materials and details for building spaces
in accordance with the "Components of Standard Tenant Finish for General Office
Purposes" attached hereto as Exhibit G and shall also use at Tenant's cost
---------
Landlord's engineers and consultants for preparation of such working drawing,
provided such costs are commercially reasonable. The Final Plans are to be
completed on or before the outside date for completion of the Final Plans set
forth in the Work Schedule. The Final Plans will show: (a) the subdivision
(including partitions and walls), layout, lighting, finish and decoration work
(including carpeting and other floor coverings) for the Premises, (b) all
internal and external communications and utility facilities which will require
conduiting or other improvements from the base Building shell work and/or within
common areas; and (c) all other specifications for the Tenant Improvements. The
Final Plans will be submitted to Landlord for signature to confirm that they are
consistent with the Space Plans. If Landlord reasonably disapproves any aspect
of the Final Plans based on any inconsistency with the Space Plans, Landlord
agrees to advise Tenant in writing of such disapproval and the reasons therefor
within the time frame set forth in the Work Schedule. In addition, if Tenant
requests, Landlord will identify any Tenant Improvements which Landlord will
require removed upon termination of the Lease. Tenant will have until the
outside date specified in the Work Schedule to cause the Space Planner to
redesign the Final Plans incorporating the revisions reasonably requested by
Landlord or to adjust the Plans based upon requested removal items as to make
the Final Plans consistent with the Space Plans and to obtain Landlord's final
approval of the Space Plans.
(c) Requirements of Tenant's Final Plans. Tenant's Final Plans will
------------------------------------
include locations and complete dimensions, and the Tenant Improvements, as shown
on the Final Plans, will: (i) be compatible with the Building shell and with the
design, construction and equipment of the Building; (ii) comply with all
applicable laws, ordinances, rules and regulations of all governmental
authorities having jurisdiction, and will comply with all applicable insurance
regulations of which Tenant has knowledge; (iii) not require Building service
beyond the level normally provided to other tenants in the Building and will not
overload the Building floors; and (iv) be of a nature and quality consistent
with the overall objectives of Landlord for the Building, as determined by
Landlord in its reasonable but subjective discretion.
(d) Submittal of Final Plans. Once approved by Landlord and Tenant, as
------------------------
provided in the Work Schedule, Tenant will cause the Space Planner to
coordinate for submittal of the Final Plans to the appropriate governmental
agencies for plan checking and the issuance of a building permit in cooperation
with the Contractor; however, ultimate responsibility to obtain the permit shall
be the Space Planner's. Landlord will have the right to review Space Planner's
submittal package prior to delivery to such governmental agencies. Space
Planner, with the approval of Landlord and Tenant, will make any changes to the
Final Plans which are requested by the applicable governmental authorities to
obtain the building permit. After approval of the Final Plans no further
C-2
<PAGE>
changes may be made without the prior written approval of both Landlord and
Tenant, and then only after agreement by Tenant to pay any excess costs
resulting from the design and/or construction of such changes, if any. Tenant
hereby acknowledges that any such changes will be subject to the terms of
Paragraph 8 below. Landlord shall have no obligation to approve any further
changes to the Final Plans or any amendment thereof or supplement thereto, but
shall not unreasonably withhold its approval of appropriate change orders
necessary for obtaining the permit.
(e) Work Cost Estimate and Statement. Prior to the commencement of
--------------------------------
construction of any of the Tenant Improvements shown on the Final Plan, as
provided in the Work Schedule, Landlord will cause the Contractor to submit to
Landlord and Tenant a written estimate of the cost to complete the Tenant
Improvement Work, which written estimate will be based on the Final Plans which
shall not take into account any modifications which may be required to reflect
changes in the Final Plans required by the City, County, Fire Department,
Architectural Control Committee, and other governmental approvals in which the
Premises are located together with all space planning, architectural
engineering, supervision and other costs incurred in connection therewith (the
"Work Cost Estimate"). Tenant will either approve the Work Cost Estimate or
disapprove specific items and submit to Landlord revisions to the Final Plans to
reflect deletions of and/or substitutions for such disapproved items, and delays
attributable to such changes shall be Tenant Delays, if and to the extent
provided pursuant to Paragraph 8 below. Submission and approval of the Work Cost
Estimate will proceed in accordance with the Work Schedule. Upon Tenant's
written approval of the Work Cost Estimate (such approved Work Cost Estimate to
be hereinafter known as the "Work Cost Statement"), Landlord will cause the
Contractor to purchase materials and to commence the construction of the items
included in the Work Cost Statement pursuant to Paragraph 6 hereof. The Work
Cost Statement will include a guaranteed maximum price contract with the
Contractor, subject to allowances where the scope of the work is not
specifically defined, and such Work Cost Statement will not materially change
without the prior consent of Tenant, unless such change is caused by a
governmental requirement or such other third party requirement (other than with
respect to the changes set forth in the guaranteed maximum price contract)
beyond the control of Landlord, and in such event, Landlord will promptly notify
Tenant of such requirement and corresponding change to the Work Cost Statement.
In connection with the work set forth in the Work Cost Statement, the Contractor
shall cap its fee for overhead and profit and its budget for general conditions
at an amount not to exceed ten percent (10%) of the guaranteed maximum price
contract. If the total costs reflected in the Work Cost Statement exceed the
Allowance as more specifically described in Paragraph 5 below, Tenant agrees to
pay such excess within twenty (20) days after billing therefor by Landlord
without further notice (provided that such billed amount reflects work
performed), and Landlord's billing will be within thirty (30) days of the date
that said funds are due by Landlord to its contractor or subcontractor.
Throughout the course of construction, any differences between the estimated
Work Cost in the Work Cost Statement and the actual Work Cost will be determined
by Landlord and appropriate adjustments and payments by Landlord or Tenant, as
the case may be, will be made within twenty (20) days of billing, as set forth
above. Delays in completion of the Tenant Improvements shall be Tenant Delays,
if caused by matters set forth in Paragraph 8 below.
5. PAYMENT FOR THE TENANT IMPROVEMENTS.
-----------------------------------
(a) Allowance. Landlord hereby grants to Tenant a tenant improvement
---------
allowance of $34.11 per rentable square foot of the Premises, plus at Tenant's
election, if the Work Cost Statement exceeds the $34.11 per rentable square foot
allowance, an additional $5.00 per rentable square foot, which amount if used by
Tenant shall be added to Base Rent and amortized over the initial Lease term at
the rate of ten percent per annum (such $34.11 per rentable square foot
allowance and $5.00 per rentable square foot allowance, if applicable, being
collectively referred to as the "Allowance"). The Allowance is to be used for
all design, construction, permitting and consulting costs incurred for the
construction of the Premises (expressly excluding furniture, fixtures and
equipment and design related to furniture, fixtures and equipment) including,
but not limited to the following:
(i) The payment of plan check, permit and license fees relating to
construction of the Tenant Improvements.
(ii) Construction of the Tenant Improvements, including, without
limitation, the following:
C-3
<PAGE>
(aa) Installation within the Premises of all partitioning, doors,
floor coverings, ceilings, wall coverings and painting, millwork and similar
items;
(bb) All electrical wiring, lighting fixtures, outlets and
switches, and other electrical work necessary for the Premises, including voice
data cabling costs;
(cc) The furnishing and installation of all matters relating to
the heating, ventilation and air conditioning systems within the Premises,
including temperature control and the cost of meter and key control for after-
hour air conditioning;
(dd) Any additional improvements to the Premises required for
Tenant's use of the Premises including, but not limited to, odor control,
special heating, ventilation and air conditioning, noise or vibration control or
other special systems or improvements;
(ee) All fire and life safety control systems such as fire walls,
sprinklers, halon, fire alarms, smoke detectors, fire dampers, including piping,
wiring and accessories, necessary for the Premises;
(ff) All plumbing, fixtures, pipes and accessories necessary for
the Premises;
(gg) Testing and inspection costs; and
(hh) Fees for the Contractor, including, but not limited to,
fees and costs attributable to general conditions associated with the
construction of the Tenant Improvements.
In addition to the above, Landlord will provide an additional Allowance not
to exceed $2.45 per rentable square foot for Space Planner and all other
consultants, which additional Allowance shall include $8,000.00 of work already
performed for Tenant by Gensler.
(b) Payment Process. All invoices and pay requests relating to any Tenant
---------------
Improvement Work performed hereunder shall be submitted and paid in accordance
with the following procedure:
(i) Any invoices received by Tenant's Representative for work
described in Section 5(a) hereof shall be submitted to Landlord, with the
appropriate back up documentation, on or before the 25th day of the month.
(ii) Landlord will process such invoices and provide an overall pay
application, summarizing all such bills to be submitted for payment, to Tenant's
Representative for review on or before the 10th day of the following month.
(iii) Landlord will cause its lender to fund such amounts set forth
on the pay application no later than thirty (30) days following the date on
which it is provided to Tenant's Representative as set forth in subsection (ii)
above.
(c) Excess Costs. The cost of each item referenced in Paragraph 5(a) above
------------
shall be charged against the Allowance. If the Work Cost exceeds the Allowance,
Tenant agrees to deposit with Landlord such excess within twenty (20) days after
invoice therefor (provided that such billed amount reflects work performed), and
Landlord's billing will be within thirty (30) days of the date that said funds
are due by Landlord to its contractor or subcontractor. In no event shall Tenant
be entitled to any remaining balance of the Allowance. Notwithstanding the
foregoing, if the Work Cost exceeds the Allowance and if such excess amount is
greater than $1.00 per rentable square foot of the Premises, then any amount
over such $1.00 per square foot amount will be immediately deposited with
Landlord prior to the commencement of any such work, with the balance to be paid
in accordance with this subsection (c).
(d) Changes. If, after the Final Plans have been prepared and the Work
-------
Cost Statement has been established, Tenant requires any changes or
substitutions to the Final Plans, any additional estimated costs related thereto
are to be paid by Tenant to Landlord prior to the commencement of construction
of the Tenant Improvements, subject to subparagraph (c) above. Any changes to
the Final Plans will be approved by Landlord and Tenant in the manner set forth
in Paragraph 4 above
C-4
<PAGE>
and will, if necessary, require the Work Cost Statement to be revised and agreed
upon between Landlord and Tenant in the manner set forth in Subparagraph 4(f)
above. Changes to the Final Plans which delay completion of the Tenant
Improvements will constitute "Tenant Delays" as provided in Paragraph 8 below.
(e) Government Cost Increases. If increases in the cost of the Tenant
-------------------------
Improvements as set forth in the Work Cost Statement are due to requirements of
any governmental agency, Tenant agrees to pay Landlord the amount of such
increases within twenty (20) days of Landlord's written notice, subject to
subparagraph (c) above, and Landlord's billing will be within thirty (30) days
of the date that said funds are due by Landlord to its contractor or
subcontractor.
(f) Unused Amounts. Any unused portion of either Allowance upon
--------------
completion of the Tenant Improvements will not be refunded to Tenant and will
not be available to Tenant as a credit against any obligations of Tenant under
the Lease; provided, however, Tenant may apply such unused portion, if any,
toward cabling costs.
(g) Standard Improvements. The base building improvements that Landlord
---------------------
will construct and not include within the costs for which Tenant will be
responsible hereunder are listed on Exhibit F, attached hereto and incorporated
---------
herein by this reference.
6. CONSTRUCTION OF TENANT IMPROVEMENTS. Until Tenant approves the Final Plans
-----------------------------------
and Work Cost Statement, Landlord will be under no obligation to cause the
Contractor to commence the construction of any of the Tenant Improvements.
Following Tenant's approval of the Work Cost Statement described in Subparagraph
4(f) above and upon Tenant's payment of the total amount by which such Work Cost
Statement exceeds the Allowance, if any, subject to subparagraph (c) above,
Landlord will cause the Contractor to commence and diligently proceed with the
construction of the Tenant Improvements, subject to Tenant Delays (as described
in Paragraph 8 below) and Force Majeure Delays (as described in Paragraph 9
below).
7. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION.
--------------------------------------------
(a) Commencement Date. No Tenant Delay of any kind shall cause an
-----------------
extension of the Commencement Date as set forth in Section 2.1 of the Lease.
(b) Substantial Completion; Punch-List. The Tenant Improvements will be
----------------------------------
deemed to be substantially completed ("Substantial Completion") when: (a)
Landlord is able to provide Tenant with reasonable access to the Premises; (b)
when the Space Planner certifies to Tenant and Landlord that the Contractor has
substantially performed all of the Tenant Improvement Work required to be
performed by Landlord under this Work Letter substantially in accordance with
the Final Plans, other than minor "punch-list" type items and adjustments which
do not materially interfere with Tenant's access to or use of the Premises (the
"Punch List"); (c) Contractor has obtained a temporary certificate of occupancy
or other required equivalent approval from the local governmental authority
permitting occupancy of the Premises; (d) the construction of the base building
structure and the installation of the base building systems have been performed
substantially in accordance with the Outline Specifications and such systems are
operational, subject to any Punch List items; provided, however, that while the
elevators may not be Substantially Complete, they will be operational and at
least one of the elevators will be Substantially Complete no more than two (2)
weeks following the Commencement Date, with the second elevator to be completed
no more than thirty (30) days following the date of issuance of the certificate
of occupancy for the Building; and (e) the parking lot and site improvements
will be Substantially Complete, except for landscaping. Within five (5) business
days after the date of Substantial Completion, Tenant will conduct a walkthrough
inspection of the Premises with Landlord, Tenant's Representative and the
Contractor, and the parties will jointly prepare a written Punch List specifying
those Punch List items which require completion, which items Landlord will cause
the Contractor to thereafter diligently complete, subject to Force Majeure.
Landlord will use reasonable efforts to substantially complete such Punchlist
items within thirty (30) days following finalization of the Punch List, subject
to Force Majeure or other delays beyond the reasonable control of Landlord.
Except as permitted by Paragraph 13 hereof, Tenant may not take occupancy prior
to preparation of the Punch List. If Tenant takes occupancy prior to completion
of the Punch List, it shall take possession subject to all terms and conditions
of this Lease and in no event may Tenant interfere with or delay the completion
of the Punch List.
C-5
<PAGE>
8. TENANT DELAYS. For purposes of this Work Letter, "Tenant Delays" means any
-------------
delay in the completion of the Tenant Improvements resulting from any or all of
the following: (a) Tenant's failure to timely perform any of its obligations
pursuant to this Work Letter, including any failure to complete, on or before
the due date therefor, any action item which is Tenant's responsibility pursuant
to the Work Schedule delivered by Landlord to Tenant pursuant to this Work
Letter provided Landlord notifies Tenant in writing within a reasonable time
that Tenant's failure to act will delay the completion of the Tenant
Improvements and provided that such delay is due to reasons other than a
Landlord delay; (b) Tenant's changes to Space Plans or Final Plans after
Landlord's approval thereof; (c) in the delivery, installation or completion of
Tenant's requested materials, finishes, or installations, provided, however,
Landlord will request in the bid instructions that the Contractor notify
Landlord of any long lead items and if Landlord is made aware of any such items,
Landlord will notify Tenant of same and in such event, Tenant shall have five
(5) business days to request another material, finish or installation to the
extent such new request will reduce the delay (it being agreed that any such
substitution made within such five (5) business day period shall not constitute
a Tenant Delay if the substituted item does not cause a delay and Landlord will
reasonably inform the Tenant of the applicable delivery times for any such
substituted item in order for Tenant to have the option of substituting such
items that may cause a delay); (d) any delay of Tenant in making payment to
Landlord for Tenant's share of the Work Cost; or (e) any other act, delay or
failure to act caused directly or indirectly by Tenant, Tenant's employees,
agents, architects, contractors, independent contractors, consultants and/or any
other person performing or required to perform services on behalf of Tenant,
including without limitation, delay, action or inaction by Space Planner, it
being acknowledged by Tenant that Tenant has selected such party to provide
services pursuant to this Work Letter. These items will only amount to Tenant
Delays if such events actually delay the Commencement Date of this Lease.
Landlord agrees to use reasonable efforts to notify Tenant of Tenant Delays.
9. FORCE MAJEURE DELAYS. For purposes of the Lease and this Work Letter,
--------------------
"Force Majeure Delays" means any actual delay in the construction of the Tenant
Improvements resulting from events beyond the reasonable control of either
party, including but not limited to, delays caused or contributed to by
governmental or quasi-governmental entities, lenders, and acts of God.
10. TENANT APPROVALS. Anything submitted to Landlord by Tenant's
----------------
Representative shall be deemed to have the prior approval of Tenant.
Furthermore, anything submitted to Tenant's Representative for approval which is
not disapproved within five (5) business days of receipt of the submission shall
be deemed approved in all respects. The five (5) business day response period
does not extend the dates set forth in the Work Schedule for such approvals.
All notices given in connection with this Work Letter shall be in accordance
with Section 26.1 of the Lease.
11. UPDATES. Upon request, Landlord shall provide Tenant with updates as to
the status of the completion of the Tenant Improvements.
12. ADA. Landlord, at its expense, agrees to cause the common areas of the
---
Building to be constructed in accordance with Title III of the Americans with
Disabilities Act as then in effect, including the restroom facilities on the
third floor. After issuance of the building permit for the Building, all
capital improvements thereafter required for ADA compliance by any change in the
laws, ordinances, rules, regulations or otherwise which were not in effect on
the date Landlord obtained its building permit shall be amortized over the
useful life thereof at the rate of two percent (2%) above the Prime Rate and
included as an Operating Expense. This does not include the subsequent costs of
compliance for any full floor tenant (including the restrooms on the third
floor), which costs shall be borne by such tenant.
13. EARLY ENTRY. Landlord agrees that Tenant may have access to the Premises
-----------
prior to the anticipated date of Substantial Completion, as specified in Section
2.1 of the Lease, provided that (i) there is no interference with the Tenant
Improvement Work (ii) all entry shall be at Tenant's sole risk and Tenant shall
indemnify Landlord against any claims in accordance with Article 14 of the Lease
and (iii) any delay in Substantial Completion arising from or related to such
entry, directly or indirectly, shall be deemed Tenant Delay.
14. WARRANTY. Except as set forth in Paragraph 8 above and subject to Force
--------
Majeure, Landlord agrees to cause Contractor to construct the Building Complex
and the Premises in substantial compliance with the outline plans and
specifications previously delivered to Tenant and
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<PAGE>
substantially in accordance with the approved site plan, in a good and
workmanlike manner and to obtain a one-year standard construction warranty from
the Contractor, to the extent the Contractor performs such work in the Premises.
Tenant shall provide Landlord with specific written notice of any warranty work
to be performed by Contractor which must be received not less than thirty (30)
days prior to expiration of the one-year warranty. Landlord will cause the
Contractor to perform the warranty work subject to the terms of the warranty and
Tenant agrees to reasonably cooperate with Landlord and Contractor regarding the
enforcement of such warranty and performance of the warranty work.
15. BIDS. Tenant may elect to have Landlord bid the Tenant Improvement Work to
----
up to three additional contractors if (i) there have been no delays to date in
the preparation of the Final Plans by the Space Planner, (ii) the preliminary
Work Cost Estimate from the Contractor is reasonably considered to be too high
and (iii) the bid process will not cause any delays in the Schedule.
IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this
Work Letter to be duly executed by their duly authorized representatives as of
the date of the Lease.
LANDLORD: TENANT:
ORIX PRIME WEST COLORADO DECISION-SCIENCE APPLICATIONS,
SPRINGS VENTURE, a Colorado general INC., a Virginia corporation
partnership
By: /s/ Guy A. Ackerson
___________________________
Title: PRESIDENT/CEO
________________________
By: ORIX COLORADO SPRINGS, INC.,
an Illinois corporation, General
Partner
By: ____________________________
Name: __________________________
Its: ___________________________
By: PRIME WEST EL PASO COUNTY I,
INC., a Colorado corporation
By: ____________________________
Name: Stephen F. Clark
Its: President
C-7
<PAGE>
EXHIBIT C
WORK LETTER
WORK SCHEDULE
(See Attached)
C-8
<PAGE>
EXHIBIT "C"
WORK LETTER
WORK SCHEDULE
Decision Science Applications
Corporate Center at Briargate Ph. 1
<PAGE>
EXHIBIT D
SUPPLEMENTAL AGREEMENT
THIS SUPPLEMENTAL AGREEMENT is attached to and made a part of the Lease
dated as of the ____ day of April, 1998, by and between PRIME WEST EL PASO
COUNTY I, INC., a Colorado corporation, as Landlord, and DECISION-SCIENCE
APPLICATIONS, INC., a Virginia corporation as Tenant. By this Supplemental
Agreement dated as of the ____ day of __________, ____, the parties to the lease
dated April __, 1998 (the "Lease") agree as follows:
1. All defined terms in the Lease are incorporated herein by reference.
2. Any Tenant Work required to be constructed and finished by Landlord in
accordance with the terms of the Lease for the Premises were completed by
Landlord on __________, 19__, subject to the completion of Punch List Items
identified on the attachment hereto, if any.
3. Any work to be performed by Landlord has been completed. The temporary
or permanent certificate of occupancy for the Premises was issued on
__________________.
4. The final determination of rentable square feet for the Premises is
_____________.
5. The Commencement Date pursuant to the terms of the Lease is
______________.
6. The Base Rent has/has not (circle one) been adjusted pursuant to
Paragraph 4 above and the annual Base Rent is $______________.
7. Tenant's Pro Rata Share has/has not (circle one) been adjusted pursuant
to Paragraph above and the Tenant's Pro Rata Share is $______________.
8. In accordance with the provisions of the Lease, Tenant's obligation to
pay Base Rent and Additional Rent shall commence on the date set forth in
Paragraph 5 above (which payment shall be prorated as set forth in the Lease if
the date set forth in Paragraph 5 above is any day other than the first day of a
month).
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Agreement to be executed the day and year first above written.
LANDLORD:
PRIME WEST EL PASO COUNTY I, INC.,
a Colorado corporation
By: __________________________________
Stephen F. Clarke, President
TENANT:
DECISION-SCIENCE APPLICATIONS, INC.,
a Virginia corporation
By: __________________________________
Title: _______________________________
D-1
<PAGE>
EXHIBIT E
RULES AND REGULATIONS
1. Tenant shall not obstruct or interfere with the rights of other tenants
of the Building Complex or of persons having business in the Building Complex or
in any way injure such tenants or persons or create any nuisance.
2. Tenant shall not commit any act or permit anything in or about the
Building Complex which in Landlord's reasonable judgment subject Landlord to any
liability or responsibility for injury to any person or property by reason of
any business or operation being carried on, in or about the Building Complex or
for any other reason, subject to the terms of this Lease.
3. Tenant shall not use the Building for lodging, sleeping, or for any
immoral or illegal purposes or for any purpose that will damage the Building
Complex, or the reputation thereof, or for any purposes other than those
specified in the Lease in the Landlord's reasonable judgment.
4. Canvassing, soliciting, and peddling in the Building Complex are
prohibited, and Tenant shall cooperate to prevent such activities.
5. Tenant shall not bring or keep within the Building any animal (except
animals to assist the visually impaired), bicycle, or motorcycle.
6. Tenant shall not commercially cook or prepare food, or place or use any
inflammable, combustible, explosive or hazardous fluid, chemical, device,
substance or material in or about the Building, except as otherwise set forth in
the Lease, without the prior written consent of Landlord over and above its
initial use and leased purpose of the Premises. Subject to the terms of the
Lease, Tenant shall comply with the statutes, ordinances, rules, orders,
regulations and requirements imposed by governmental or quasi-governmental
authorities in connection with fire and panic safety and fire prevention and
shall not commit any act or permit any object to be brought or kept in the
Building Complex, which shall result in a change of rating of any portion of the
Building Complex by the Insurance Services Office or similar person or entity
subject to the terms of this Lease. Tenant shall not commit any act or permit
any object to be brought or kept in the Building which shall increase the rate
of fire insurance on the Building or on property located therein, subject to the
terms of this Lease. In the event that Tenant's use increases the rate of fire
insurance, then Tenant shall, if Landlord permits such use and if Tenant desires
to continue such use after notice of the additional charge that will be required
in connection therewith, pay to Landlord upon demand, as Additional Rent, an
amount equal to the increase in the rate.
7. Tenant shall not occupy the Building or permit any portion of the
Building Complex to be occupied for the manufacture or direct sale of liquor,
narcotics, or tobacco in any form, or as a medical office, barber shop, manicure
shop, music or dance studio or employment agency. Tenant shall not conduct in or
about the Building Complex any auction, public or private without the prior
written approval of Landlord.
8. Except as set forth in Tenant's plans for leasehold improvements, as
approved by Landlord, Tenant shall not install or use in the Building Complex
any air conditioning unit, engine, boiler, generator, machinery, heating unit,
stove, ventilator, radiator or any other similar apparatus without the express
prior written consent of Landlord, and then only as Landlord may reasonably
direct.
9. All office equipment and any other device of any electrical or
mechanical nature shall be placed by Tenant in the Premises in settings
reasonably approved by Landlord, so as to absorb or prevent any vibration,
noise, or annoyance. Tenant shall not cause improper noises, vibrations, or
odors within the Building Complex.
10. During Tenant's initial move in of the Premises, Tenant shall move all
freight, supplies, furniture, fixtures, and other similar personal property
into, within and out of the Building only through such entrances as may be
reasonably designated by Landlord, and such movement of such items shall be
under the reasonable supervision of Landlord. At all other times during the term
E-1
<PAGE>
of the Lease, Landlord reserves the right to supervise the delivery or removal
of all such freight, supplies, furniture, fixtures and other personal property
(other than items received or sent out in the ordinary course of Tenant's
business) to be brought into the Building and to exclude from the Building
Complex all such objects which violate any of these rules and regulations or the
provisions of the Lease. Tenant shall not move or install such objects in or
about the Building Complex in such a fashion as to unreasonably obstruct the
activities of the other tenants, and all such moving shall be at the sole
expense (no fee, however, will be charged by Landlord in connection therewith),
risk, and responsibility of Tenant.
11. Tenant shall not place within the Building any objects which exceed
the floor weight specifications of the Building without the express prior
written consent of Landlord. The placement and positioning of all such objects
within the Building shall be reasonably prescribed by Landlord and such objects
shall, in all cases, be placed upon plates or footings of such size as shall be
reasonably prescribed by Landlord.
12. Tenant shall not deposit any trash, refuse, cigarettes, or other
substances of any kind within or out of the Building except in refuse containers
provided therefor. Tenant shall exercise its reasonable efforts to keep the
sidewalks, entrances, passages, courts, lobby areas, parking areas, vestibules,
public corridors and halls in and about the Building (hereinafter "Common
Areas") clean and free from rubbish.
13. Tenant shall use the Common Area only as a means of ingress and egress
and other designed purposes, and Tenant shall permit no loitering by any of
Tenant's employees or their invitees upon Common Areas or elsewhere within the
Building Complex. The Common Areas and roof of the Building are not for the use
of the general public, and Landlord shall in all cases retain the right to
control or prevent access thereto by all persons whose presence in the
reasonable judgment of Landlord, shall be prejudicial to the safety, character,
reputation or interests of the Building Complex and its tenants. Except as
permitted pursuant to Section 32.12 of the Lease and the Communications License
Agreement attached to the Lease as Exhibit L, if applicable, Tenant shall not go
upon the roof of the Building without the express prior written consent of
Landlord.
14. Landlord reserves the right to exclude or expel from the Building
Complex any person who, in the reasonable judgment of Landlord, is intoxicated
or under the influence of liquor or drugs or who shall in any manner act in
violation of the rules and regulations of the Building Complex.
15. Tenant and its servants, employees, contractors, jobbers, agents,
licensees, invitees, guests and visitors shall observe and comply with all
driving and parking signs and markers within and about the Building Complex. All
parking ramps and areas and any pedestrian walkways, plazas or other public
areas forming and part of the Building or the land upon which the Building
Complex is situated shall be under the reasonable control of Landlord, who shall
have the right to reasonably regulate and control those areas, subject to the
terms of the Lease.
16. Tenant shall not use the washrooms, restrooms and plumbing fixtures of
the Building Complex, and appurtenances thereto, for any other purpose than the
purposes for which they were constructed, and Tenant shall not deposit any
sweepings, rubbish, rags or other improper substances therein. Tenant shall not
waste water by interfering or tampering with the faucets. If Tenant or Tenant's
servants, employees, contractors, jobbers, agents, licensees, invitees, guests
or visitors, cause any damage to such washrooms, restrooms, plumbing fixtures or
appurtenances, subject to the waiver of subrogation set forth in Section 10.3 of
the Lease, such damage shall be repaired at Tenant's reasonable expense within
fifteen (15) days of receipt of written notification from Landlord during which
period Tenant may repair same, and Landlord shall not be responsible therefor.
17. Except as set forth in the Lease, Tenant shall not mark, paint, drill
into, cut, string wires within, or in any way deface any part of the Building
Complex, without the express prior written consent of Landlord. Upon removal of
any wall decorations or installations or floor coverings by Tenant, any damage
to the walls or floors shall be repaired by Tenant at Tenant's sole cost and
expense. Other than (i) alterations of a cosmetic nature, including painting,
carpeting, wall coverings or other modifications of a similar nature and (ii)
alterations resulting in a total cost to Tenant of $10,000 or less per event,
Tenant shall refer all contractors representatives, installation technicians,
and other mechanics, artisans and laborers rendering any service in connection
with the
E-2
<PAGE>
repair, or permanent improvements of the Premises to Landlord for Landlord's
approval before performance of any such service. This Paragraph 18 shall apply
to all work performed in the Building, including without limitation installation
of telephones, telegraph equipment, electrical devices and attachments and
installations of any nature affecting floors, walls, woodwork, trim, windows,
ceilings, equipment or any other portion of the Building Complex. Subject to the
terms of the Lease, plans and specifications for such work, prepared at Tenant's
sole expense, shall be submitted to Landlord and shall be subject to Landlord's
express prior written approval in each instance before the commencement of work.
All installations, alterations and additions shall be constructed by Tenant in a
good and workmanlike manner and only good grades of material shall be used in
connection therewith. The means by which telephone, telegraph and similar wires
are to be introduced to the Premises and the location of telephones, call boxes
and other office equipment affixed to the Premises shall be subject to the
express prior written approval of Landlord. Tenant shall not lay linoleum or
similar floor coverings so that the same shall come into direct contact with the
floor of the Premises and, if linoleum or other similar floor covering is to be
used, an interlining of builder's deadening felt shall be first affixed to the
floor, by a paste or other material soluble in water. The use of cement or other
similar adhesive materials is expressly prohibited.
18. No signs, awning, showcases, advertising devices or other projections
or obstructions shall be attached to the outside walls of the Building Complex
or attached or placed upon any Common Areas without the express prior written
consent of Landlord. No blinds, drapes or other window coverings shall be
installed in the Building without the express prior written consent of Landlord.
No sign, picture, advertisement, window display or other public display or
notice shall be inscribed, exhibited, painted or affixed by Tenant upon or
within any part of the Premises in such a fashion as to be seen from the outside
of the Premises or the Building without the express prior written consent of
Landlord. In the event of the violation of any of the foregoing by Tenant,
Landlord may within fifteen (15) days of written notice to Tenant during which
period Tenant may repair same, remove the articles constituting the violation
without any liability unless a loss other then said removal, arises from
Landlord's willful or negligent acts or omissions, and Tenant shall reimburse
Landlord for the reasonable expenses incurred in such removal upon demand and
upon submission of applicable bills as additional rent under the Lease. Interior
signs on doors and upon the Building directory shall be subject to the express
prior written approval of Landlord and shall be inscribed, painted, or affixed
by Landlord at the reasonable expense of Tenant upon submission of applicable
bills to Tenant.
19. Tenant shall not use the name of the Building or the name of the
Landlord in its business name, trademarks, signs, advertisements, descriptive
material, letterhead, insignia or any other similar item without Landlord's
express prior written consent.
20. The sashes, sash doors, skylights, windows, and doors that reflect or
admit light or air into the Common Areas shall not be covered or obstructed by
Tenant, through placement of objects upon windowsills or otherwise. Tenant shall
cooperate with Landlord in obtaining maximum effectiveness of the cooling system
of the Building by closing drapes and other window coverings when the sun's rays
fall upon windows of the Premises. Tenant shall not obstruct, alter or in any
way impair the efficient operation of Landlord's heating, ventilating, air
conditioning, electrical, fire, safety, or lighting systems.
21. Subject to applicable fire or other safety regulations, all doors
opening onto Common Areas and all doors upon the perimeter of the Premises shall
be kept closed and, during non-business hours, locked, except when in use for
ingress or egress. If Tenant uses the Premises after regular business hours or
on non-business days, Tenant shall lock any entrance doors to the Building or to
the Premises used by Tenant immediately after using such doors.
22. Employees of Landlord shall not receive or carry messages for or to
Tenant or any other person, nor contract with nor render free or paid services
to Tenant or Tenant's servants, employees, contractors, jobbers, agents,
invitees, licensees, guests or visitors, except as provided in the Lease.
23. All keys to the exterior doors of the Premises shall be obtained by
Tenant from Landlord. Tenant shall not make duplicate copies of such keys.
Tenant shall not install additional locks or bolts of any kind upon any of the
doors or windows of, or within, the Building, nor shall Tenant make any changes
in existing locks or the mechanisms thereof. Tenant shall, upon the
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<PAGE>
termination of its tenancy, provide Landlord with the combinations to all
combination locks on safes, safe cabinets and vaults and deliver to Landlord all
keys to the Building, the Premises and all interior doors, cabinets, and other
key-controlled mechanisms therein, whether or not such keys were furnished to
Tenant by Landlord. Tenant shall pay to Landlord the actual cost to Landlord of
replacing the same or of changing the lock or locks opened by such lost key if
Landlord shall reasonably deem it necessary to make such a change.
24. Except for the interior of the Premises, no smoking is permitted by
any person, including employees of Tenant, in on or about the Building Complex,
including the lobby, the stairwells, parking areas, landscaped areas and
Building entrances. Within the Premises, Tenant may impose such smoking
regulations as are permitted by applicable law and shall not permit and shall
take all steps to prevent any migration of smoke from the Premises to any other
part of the Building.
25. For purposes hereof, the terms "Landlord," "Tenant," "Building," and
"Premises" are defined as those terms are defined in the Lease to which these
Rules and Regulations are attached. Wherever Tenant is obligated under these
Rules and Regulations to do or refrain from doing an act or thing, such
obligation shall include the exercise by Tenant of its reasonable efforts to
secure compliance with such obligation by the servants, employees, contractors,
jobbers, agents, invitees, licensees, guests and visitors of Tenant. The term
"Building" and "Building Complex" shall include the Premises, and any
obligations of Tenant hereunder with regard to the Building and Building Complex
shall apply with equal force to the Premises and to other parts of the Building
Complex.
E-4
<PAGE>
EXHIBIT F
COMPONENTS OF SITE, SHELL AND CORE
(See Attached)
F-1
<PAGE>
Revision Date: 16 January 1998
Exhibit F
CORPORATE CENTER AT BRIARGATE - PHASE I
COLORADO SPRINGS, COLORADO
COMPONENTS OF SITE, SHELL AND CORE
1 SHELL and CORE CONSTRUCTION:
2 Landscaping and Irrigation
3 Parking and Drives
4 Interior and Exterior Common Area Signage
5 Toilet Rooms and 1st floor shower/locker rooms
6 First Floor Exercise Room and equipment
7 HVAC Main roof top Air Handling Units and Main Supply Ducts
8 HVAC Temperature Control System
9 Fire Sprinkler System on standard grid and heads at standard elevation
10 Building Standard Power distributed to panels in Electrical Closet on
each floor
11 HVAC Fan Powered Boxes (FPB) and Variable Air Volume (VAV) boxes on a
12 standard grid, with thermostats
13 Window Sills
14 Window Coverings - building standard 1" mini-blinds
15 Two (2) Hydraulic Elevators
16 Common Area Stairs
17 Common Area Finishes
18 Common Area Lighting
19 Exterior Lighting
20 Building Directory
21 Building Entry Card Reader type of Access System
22 Entry Vestibule Building Access Phone
23 Mail Boxes
24 Water Fountains in Common Area
25 Janitor Closets
26 Electrical/Telephone Closets on each floor (not for Tenant Equipment)
27 Electricity, Water, Sewer and Natural Gas utilities to the building
28 Telephone Service by U.S. West to the Main Telephone Room
29 Conduit from the property line to the building's main telephone room for
Fiber Optic access
30 45 Mil., Single Ply EPDM Baliasted synthetic rubber roof with a 10 year
warranty
31 Insulated, tinted perimeter glazing
32 Perimeter wall metal studs and insulation
<PAGE>
EXHIBIT G
COMPONENTS OF STANDARD TENANT FINISH
(See Attached)
G-1
<PAGE>
Revision Date: 16 January 1998
Exhibit G
CORPORATE CENTER AT BRIARGATE
COLORADO SPRINGS, COLORADO
COMPONENTS OF STANDARD TENANT FINISH
1 CONSTRUCTION COSTS:
2 DRYWALL & METAL STUDS (INCLUDING PERIMETER WALL DRYWALL)
3 DOORS, FRAMES, & HARDWARE
4 CABINETS & COUNTER TOPS
5 SHELVING & CLOSET RODS
6 OTHER MILLWORK & CARPENTRY
7 INSULATION OTHER THAN EXISTING PERIMETER WALL INSULATION
8 PLUMBING BEYOND EXISTING SHELL FACILITIES
9 ELECTRICAL - DISTRIBUTION and/or UPGRADE FROM BUILDING STANDARD SERVICE
10 SPECIAL ELECTRICAL REQUIREMENTS TO INCLUDE SEPARATE PANELS, TRANSFORMERS,
ETC.
11 ELECTRICAL PREPARATION FOR AUDIO-VISUAL EQUIPMENT
12 ELECTRICAL PREPARATION FOR VOICE/DATA and/or COMPUTER EQUIPMENT
13 LIGHT FIXTURES, INSTALLATION AND SWITCHING
14 ALARM SYSTEMS - FIRE AND SECURITY
15 RELOCATION OF EXISTING FPB and/or VAV BOXES
16 DISTRIBUTION DUCT WORK FROM EXISTING FPB and/or VAV BOXES TO INCLUDE
DIFFUSERS AND RETURN AIR GRILLS
17 ADDITIONAL FPB and/or VAV BOXES AND THERMOSTATS
18 MOUNTING AND CALIBRATION OF ALL THERMOSTATS
19 PROGRAMMING OF TEMPERATURE CONTROL SYSTEM RELATED TO TENANT FINISH
20 SPECIAL HEATING OR COOLING REQUIREMENTS TO INCLUDE SEPARATE OR STAND ALONE
UNITS
21 OTHER MECHANICAL (Not already included in Site, Shell and Core)
22 BALANCING OF HVAC SYSTEM
23 MODIFICATIONS, CAUSED BY TENANT, TO EXISTING BUILDING EQUIPMENT SUCH AS
ELEVATORS
24 FIRE SPRINKLER SYSTEM MODIFICATIONS OR ADDITIONS CAUSED BY TENANT
25 BUILDING STANDARD CEILING GRID AND ACOUSTICAL TILE
26 PAINT
27 WALLCOVERING
28 FLOOR COVERING & BASE
29 FLOOR PREPARATION
30 GLASS & GLAZING - INTERIOR
31 KEYING
32 SPECIALTIES and EQUIPMENT SUCH AS APPLIANCES, ETC.
33 MODIFICATIONS TO EXISTING BUILDING HARDWARE CAUSED BY TENANT
34 ROOFING MODIFICATIONS CAUSED BY TENANT
35 LANDSCAPE MODIFICATIONS CAUSED BY TENANT
36 CLEANING
37 GENERAL CONDITIONS FOR TENANT WORK
38 PERMITS FOR TENANT WORK AND COSTS FOR PLANS CHECK FEES
39 USE, SALES OR OTHER TAXES FOR TENANT WORK
40 GENERAL CONTRACTOR'S O.H.&P. FOR TENANT WORK
41 TENANT SIGNAGE AND DIRECTORY STRIPS
42 STRUCTURAL MODIFICATIONS REQUIRED BY TENANTS EQUIPMENT, LOADS, FURNITURE
LAYOUT, ETC.
43 OTHER BUILDING MODIFICATIONS CAUSED BY TENANT
44
45 OTHER COSTS:
46 ARCHITECTURAL AND ENGINEERING FEES FOR TENANT WORK
47 INTERIOR DESIGN
48 CONSULTANT TIME AT RELEVANT PROJECT MEETINGS
49 CONSULTANT TIME MEETING WITH TENANT OR TENANT'S CONSULTANTS OR CONTRACTORS
50 CONSTRUCTION ADMINISTRATION BY CONSULTANTS, IF REQUIRED
51 TESTING - IF REQUIRED
52 WATER & SEWER TAP FEE ADJUSTMENTS, IF REQUIRED
53 LEGAL EXPENSES, IF APPLICABLE
54 INSURANCE PREMIUMS RELATED TO THE WORK
55 ALL OTHER ITEMS UNIQUE TO TENANT'S BUSINESS
56 ANY OTHER COSTS NOT INCLUDED IN THE SITE, SHELL AND CORE COSTS
57
58 ITEMS THAT ARE NORMALLY ACCOMPLISHED BY TENANT DURING TENANT
59 FINISH, BUT WHICH ARE NOT PART OF THE TENANT FINISH ALLOWANCE OR
60 PROVIDED BY LANDLORD:
61 TELEPHONE SERVICE FROM MAIN PHONE ROOM TO TENANT SPACE
62 TELEPHONE DISTRIBUTION WITHIN TENANT SPACE
63 AUDIO-VISUAL DESIGN, EQUIPMENT, WIRING, HOOK-UP AND INSTALLATION
64 VOICE/DATA DESIGN, EQUIPMENT, WRING. HOOK-UP AND INSTALLATION
65 COMPUTER SYSTEM DESIGN, EQUIPMENT, WIRING, HOOK-UP AND INSTALLATION
66 TENANT'S FURNITURE/WORKSTATIONS DESIGN, WIRING, HOOK-UP AND INSTALLATION
<PAGE>
EXHIBIT H
PRELIMINARY CONSTRUCTION SCHEDULE
SITE, SHELL AND CORE
(See Attached)
H-1
<PAGE>
Exhibit H
Development Schedule
Prime West Development
<PAGE>
EXHIBIT I
JANITORIAL SPECIFICATIONS
TENANT-OCCUPIED SPACES
- ----------------------
NIGHTLY
All doors are to be locked and secured while the space is being cleaned. Upon
completion of cleaning the suite, all lights are to be turned off and doors are
to be locked and secured. If a tenant is still working, do not turn off the
lights, but lock the doors.
Do not move, remove, or rearrange any papers or files located on any desks,
table tops or other furniture in a tenant's space.
Vacuum all carpeted areas thoroughly and in corners and edges of the baseboard
with hand-held vacuum. Use care so as not to scuff rubber base.
Wipe down baseboard with a treated cloth.
Spot clean any minor carpet stains, and report all stains to the management
---
office.
Dust mop all resilient and composition floors with treated mops.
Damp mop to remove spills and water stains as required.
Remove all scuff marks from the composition floors.
Clean all threshold metal plates and plastic strips as necessary.
Dust all tops of desks, office furniture and filing cabinets with treated
cloths.
Empty all ash trays, clean and sanitize as required.
Clean all glass desk/table tops with glass cleaner.
Remove fingerprints, dirt smudges, and stains from all doors, frames and vinyl
walls.
Clean all sidelight glass and window partitions with a glass cleaner.
Dust all sidelight frames and window frames.
Dust all windowsills.
Empty and clean all trash receptacles, waste paper baskets and return to
original position. Remove all refuse, boxes or bags, marked "trash."
Wipe clean all polished metal and other brightwork.
Clean and sanitize kitchen sinks, counter tops and tabletops.
Wipe down cabinet doors and outside of kitchen appliances.
Check for burned out lights and replace with new, leave a list of burned out
lights (with locations) at the Management Office.
WEEKLY
Remove all recycle paper from large containers and place in exterior bins as
needed.
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Sanitize all telephone receivers.
Dust all low and high reach areas including chair rungs, chair legs, sides of
desks, tops of all partitions, sides of filing cabinets, pictures and frames.
Dust inside of all doorjambs.
Vacuum all cloth covered furnishings.
Remove all plastic carpet protectors to vacuum under and around the areas where
they were located.
MONTHLY
Dust all air conditioning diffusers and return air grills, light lenses and any
spotlights in ceiling.
Dust all mini-blinds.
QUARTERLY
Strip and re-wax all resilient or composition flooring to provide a level of
appearance equivalent to a completely refinished floor. Extra cost per square
foot.
RESTROOMS
- ---------
NIGHTLY
Restock all restrooms with supplies to include paper towels, toilet tissue, air
fresheners, and soap. All items supplied by contractor.
Restock all sanitary napkins and tampon dispensers, items supplied by
contractor. All money from machines to be retained by contractor.
Wash and polish all mirrors, dispensers, faucets, grab bars, flushometers, kick
plates and brightwork with non-scratch disinfectant cleaner.
Wash and sanitize all toilets, toilet seats, urinals, and sinks with non-scratch
disinfectant germicidal cleaner.
Remove stains, de-scale toilets, urinals and sinks as required.
Empty and sanitize all waste and sanitary napkin receptacles.
Remove all restroom trash.
Wipe clean all walls, partition walls, glass, aluminum and light switches with
an approved cleaner.
Dust lower doors and slats.
Wipe clean hinges on stalls and entry doors.
Replace all burned out lights. Report any broken lights and fixtures, broken
plumbing, leaky faucets, or any restroom equipment in need of repair to the
Management Office.
MONTHLY
Polish all doors with treated cloth.
Dust and clean all ventilation grills.
Dust all doors and doorjambs.
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Dust all return air grills, light lenses and spotlights.
Clean and polish floor drain covers.
QUARTERLY
Thoroughly clean and reseal all ceramic tile floors, using approved sealers.
MAIN LOBBY, ELEVATOR LOBBIES AND PUBLIC CORRIDORS
- -------------------------------------------------
NIGHTLY
Vacuum all carpeted areas thoroughly.
Vacuum edges and comers in all hallways with hand held vacuum cleaner.
Dust all baseboards with treated cloth.
Spot clean all spills on carpeted floors.
Sweep and damp mop all ceramic tile floors.
Clean all glass entry doors and windows with a glass cleaner.
Dust and clean directly board covers and the ledges around the directory boards.
Dust and clean all directional signage and tenant identification signage.
Clean and sanitize all drinking fountains.
Empty, clean and sanitize all ash urns and waste receptacles.
Clean elevator lobbies as per the specs provided.
Vacuum any rug flooring, sweep and damp mop all tiled flooring between the
entrance doors.
Pour out all mop water, rinse hand mops and stack supplies neatly in janitor's
closets.
Spot clean all metal work inside lobby and at doors with approved cleaner.
WEEKLY
Mop janitor's closets' floors, clean and disinfect sinks in janitor's closets.
Wipe down inside of all plant containers.
Dust all paintings and picture frames.
Dust all columns.
MONTHLY
Dust all return air grills.
PASSENGER ELEVATORS AND STAIRWELLS
- ----------------------------------
NIGHTLY
Spot clean cab walls with approved cleaner.
Clean bright surfaces in elevator cab with approved cleaner.
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Clean outside surface of elevator doors and frames.
Vacuum all carpeted floors in elevators.
Dust and clean telephone wells in elevators.
Wipe down elevator signage.
Pick up all trash in building stairwells.
WEEKLY
Sweep out all building stairwells
Wipe down handrails, light fixtures, and all stairwell signage.
MONTHLY
Dust clean all elevators cab light lenses.
Dust clean entire cab ceiling.
DESIGNATED UNOCCUPIED TENANT SPACES
- -----------------------------------
WEEKLY
Vacuum all carpeted areas.
Dust mop all resilient floors.
Dust all window ledges and mini-blinds.
Dust any built-in countertops.
Remove any trash or debris.
GENERAL CONDITIONS
An updated Certificate of Insurance shall be kept on file at all times, naming
the building ownership and management as additional insured. The liability limit
shall be $1,000,000.00.
Employees should at all times be identified by badge, uniform, or smock as
employees of the janitorial contractor.
It is understood that janitorial employees shall comply with any building rules.
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EXHIBIT J
FORM SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT is entered into as of the ____ day of _________,
19__, by and between ________________________ ("Sublessor") and
____________________ ("Sublessee").
R E C I T A L S:
A. On or about ____________, _______________________ ("Landlord") and
Sublessor entered into a written lease agreement (the "Lease") pertaining to
approximately ______ square feet of space located on the ____ floor of the
___________________ Building, located at __________________, _________,
Colorado, known as Suite ________ (the "Premises").
B. The Lease has been amended by Amendment(s) Number ___ dated
_____________, which ________________________________.
C. Sublessor desires to sublease to Sublessee approximately ______ square
feet of the Premises to be known as Suite ____ and delineated on Exhibit __
attached hereto, made a part hereof, and incorporated herein by reference (the
"Sublet Premises").
D. Subject to the provisions of Section 7.4 of the Lease, the consent of
Landlord is required to permit such subletting.
NOW, THEREFORE, for good and valuable consideration, Sublessor and
Sublessee agree as follows:
1. For value received, Sublessor, subject to the consent of Landlord (in
accordance with and subject to the terms and provisions of the attached Consent,
which shall be deemed part hereof), hereby sublets the Sublet Premises to
Sublessee for a term commencing on ____________, or when vacated by
_____________________, the present tenant thereof, whichever first occurs, (the
"Occupancy Date"), and terminating on _______________. If Sublessor is unable to
deliver possession of the Sublet Premises to Sublessee in accordance with the
foregoing provisions as a result of _______________'s failure to timely vacate
the same, then, notwithstanding the foregoing, Sublessee's right to occupy and
obligation to pay rental for the Sublet Premises shall be delayed until
Sublessor is able to obtain possession of the Sublet Premises and the deferral
of Sublessee's obligation to pay such rental shall be in full satisfaction of
any and all claims which Sublessee might otherwise have as a result of such
delayed delivery of possession. Such subleasing shall be on the following terms
and conditions:
A. The base rental to be paid by Sublessee shall be ___________________
Dollars ($_______ ) per month, payable to Sublessor at _____________,
____________, Colorado. If Sublessee obtains occupancy of the Sublet Premises
prior to the first day of any month, the rent due for that month shall be
prorated based upon the number of days Sublessee occupied the Sublet Premises
and shall be payable in advance. All other rent shall be payable on the first
day of each month without notice commencing ______________, and on the first day
of each month thereafter for the balance of the term of the Sublease.
Sublessee's prorata share of __________________ (Operating Expenses & Taxes)
shall be _____________________ and shall be payable to Sublessor in accordance
with the terms of the Lease.
B. Sublessee accepts the Sublet Premises in its present "as is"
condition. All alterations and improvements to the Sublet Premises shall be
subject to Landlord's prior written consent pursuant to the terms and provisions
of the Lease and shall be at Sublessee's sole cost and expense. All changes and
alterations to designation signs for the Sublet Premises and in the Building
directory located in the lobby of the Building, any changes in locks required,
and any changes required in the HVAC systems as a result of Sublessee's use of
the Sublet Premises shall likewise be at Sublessee's sole cost and expense and
shall require the prior written approval of Landlord.
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C. Sublessee agrees to deposit with Sublessor the sum of
______________________ Dollars ($________ ) (the "Security Deposit"), which
amount Sublessor agrees to hold in accordance with the provisions of Paragraph
__ of the Lease. With respect to the terms and provisions pertaining to said
Security Deposit, Sublessor shall be deemed to be the landlord and Sublessee
shall be deemed to be the tenant.
D. During the term of this Sublease, Sublessor agrees to pay to
Landlord 50% any increase in Sublessee's base rent set forth herein over the
Base Rent set forth in the Lease attributable to the Sublet Premises, after
subtracting therefrom all actual costs incurred by Sublessor in connection with
the Sublease.
2. Sublessee shall not assign this Sublease Agreement or further sublet
the Sublet Premises, in whole or in part. Any assignment or sublease in
violation of this provision shall be null and void.
3. Sublessee hereby acknowledges receipt of copies of the lease documents
described in Recitals A and B above, and in consideration of the Sublease
Agreement, Sublessee hereby assumes and agrees to make all payments with respect
to the Sublet Premises and to perform and be bound by all Sublessor's covenants
contained in the Lease as if Sublessee were the tenant thereunder with respect
to the Sublet Premises, except to the extent they do not relate to the Sublet
Premises or are modified or eliminated by the terms of this Sublease.
4. This Sublease Agreement is further conditioned upon execution and
delivery hereof to Landlord on or before 5:00 p.m., _________________ (which
condition Landlord shall have the right, but not the obligation to waive) and
subject to the consent of Landlord attached hereto within fifteen (15) days
after delivery to Landlord, it being understood and agreed that Landlord's
failure to provide notice of consent (or withholding thereof) within the
referenced time period shall be deemed a rejection of such sublease.
5. In the event of any default under the terms and provisions of the Lease
that remains uncured following the expiration of all applicable notice and cure
periods, Landlord shall have the right to collect the rental attributable to the
Sublet Premises directly from Sublessee without waiving any of Landlord's rights
against Sublessor as a result of such default and Sublessee shall attorn to
Landlord. The termination or mutual cancellation of the Lease shall not work a
merger, and such termination or mutual cancellation shall, at the option of the
Landlord, exercised within fifteen (15) days following such termination, either
terminate this Sublease or operate as an assignment to Landlord of the Sublease.
6. The Sublease constitutes the entire agreement between Sublessor and
Sublessee, and there are no other oral or written agreements between the two
parties with respect to the Sublet Premises. There shall be no modification or
amendment of the Sublease without the prior written consent of Landlord.
7. In the event of any conflict between the terms and provisions of the
Lease and the Sublease, the terms and provisions of the Lease shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Sublease
Agreement the day and year first above written.
_________________________________ ________________________________
_________________________________ ________________________________
By:______________________________ By:_____________________________
Title: _________________________ Title: ________________________
"Sublessee" "Sublessor"
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<PAGE>
CONSENT
Landlord does hereby consent to the subletting of the Sublet Premises
consisting of approximately ________ square feet of office space situated in the
________________________ located at _______________________, Denver, Colorado,
and known as Suite ___, in accordance with the terms and conditions of the
Sublease Agreement dated ________________, by and between
________________________________________ ("Sublessor") and _________________
("Sublessee") upon the express following conditions:
A. Sublessor shall continue to remain primarily liable for the payment of
all amounts of rental and other sums and the performance of all covenants
required of Sublessor under the Lease and in accordance with the terms thereof.
B. No further subletting or assignment of all or any portion of the Sublet
Premises or the Premises covered by the Sublease or the Lease shall be made
without the prior written consent of Landlord.
C. The Lease is an agreement solely between Landlord and Sublessor, and any
and all rights and remedies of Sublessee, if any, shall be solely against
Sublessor. This Consent to Sublease or the Sublease shall not be construed as
giving Sublessee any rights under the Lease except those expressly granted by
the Sublease during the term hereof.
"LANDLORD"
By:_______________________________
Its:______________________________
Date:_____________________________
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<PAGE>
EXHIBIT J-1
FORM ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into as of the ___ day
of _______, 19__, by and between _______________________ ("Assignor") and
__________________ ("Assignee").
R E C I T A L S:
A. On or about ________, _______________________________ ("Landlord") and
Assignor entered into a written lease agreement (the "Lease") pertaining to
approximately __ square feet of space located on the _____ floor of the
___________________ Building, located at ______________________, ______________,
Colorado, known as Suite _______ (the "Premises").
B. The Lease has been amended by Amendment(s) Number _____ dated
__________, which ________________________.
C. Assignor desires to assign to Assignee all of Assignor's right, title
and interest in the Lease.
D. Subject to the provisions of Section 7.4 of the Lease, the consent of
Landlord is required to permit such assignment.
NOW, THEREFORE, for good and valuable consideration, Assignor and Assignee
agree as follows:
1. Effective __________, 19__ and for value received, Assignor, subject to
the consent of Landlord (in accordance with and subject to the terms and
provisions of the attached Consent, which shall be deemed part hereof), hereby
assigns all of Assignor's rights and obligations under the Lease accruing from
and after _____________, to Assignee and Assignee hereby assumes all of such
obligations of Assignor under the Lease. Such assignment shall be on the
following terms and conditions:
A. The rental to be paid by Assignee shall be as set forth in the Lease,
and Assignee shall commence paying rent on __________, 19__.
B. Assignee accepts the Premises in its present "as is" condition. All
alterations and improvements to the Premises shall be subject to Landlord's
prior written consent pursuant to the terms and provisions of the Lease and
shall be at Assignee's sole cost and expense. All changes and alterations to
designation signs for the Premises and in the Building directory located in the
lobby of the Building, any changes in locks required, and any changes required
in the HVAC systems as a result of Assignee's use of the Premises shall likewise
be at Assignee's sole cost and expense and shall require the prior written
approval of Landlord pursuant to the terms of the Lease.
C. Assignee agrees to deposit with Landlord the sum of _________________
Dollars ($_______) (the "Security Deposit"), which amount shall be held in
accordance with the provisions of Paragraph __ of the Lease.
D. During the remaining term of the Lease, Assignee agrees to pay to
Landlord any increase in rent pursuant to Paragraph(s) _____ of the Lease.
2. Assignee shall not assign the Lease or sublet the Premises, in whole or
in part except as otherwise provided in the Lease. Any assignment or sublease in
violation of this provision shall be null and void.
3. Assignee hereby acknowledges receipt of copies of the lease documents
described in Recitals A and B above.
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4. This Assignment Agreement is further conditioned upon execution and
delivery hereof to Landlord on or before 5:00 p.m., ___________ (which condition
Landlord shall have the right, but not the obligation to waive) and subject to
the consent of Landlord attached hereto within fifteen (15) days after delivery
to Landlord, it being understood and agreed that Landlord's failure to provide
notice of such consent (or withholding thereof) within the referenced time
period shall be deemed a rejection of such assignment.
5. Assignor, in consideration of Landlord's consent to this assignment,
agrees to remain primarily liable under the Lease.
6. This Assignment and Assumption Agreement constitutes the entire
agreement between Assignor and Assignee, and there are no other oral or written
agreements between the two parties with respect to the Premises. There shall be
no modification or amendment of the Lease without the prior written consent of
Landlord.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment and
Assumption Agreement the day and year first above written.
ASSIGNEE: ASSIGNOR:
_________________________________ ________________________________
_________________________________ ________________________________
By:______________________________ By:_____________________________
Title:___________________________ Title:__________________________
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CONSENT
Landlord does hereby consent to the assignment of the Lease, in accordance
with the terms and conditions of the Assignment and Assumption Agreement dated
____________, by and between _____________________ ("Assignor") and
_____________________ ("Assignee") upon the express following conditions:
A. Assignor shall continue to remain primarily liable for the payment of
all amounts of rental and other sums and the performance of all covenants
required of Assignor under the Lease and in accordance with the terms thereof
B. No further subletting or assignment of all or any portion of the Lease
shall be made without the prior written consent of Landlord.
[C. The guarantor of the Lease, _________________, has consented to the
above assignment, and its guaranty of the Lease shall remain in full force and
effect.]
LANDLORD
___________________________________
___________________________________
By:________________________________
Its:_______________________________
Date:______________________________
[The undersigned Guarantor consents to the above-referenced assignment and
acknowledges that its guaranty of the Lease remains in full force and effect.
GUARANTOR
By:________________________________
Name:______________________________
Date:_____________________________]
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<PAGE>
EXHIBIT K
ROOF TESTING AREA
(See Attached)
K-1
<PAGE>
2060 BRIARGATE PARKWAY
----------------------
ROOF PLAN
<PAGE>
EXHIBIT L
COMMUNICATIONS LICENSE
THIS COMMUNICATIONS LICENSE is made and entered into this __ day of April,
1998, by and between ORIX PRIME WEST COLORADO SPRINGS VENTURE., a Colorado
general partnership ("Prime West") and DECISION-SCIENCE APPLICATIONS, INC., a
Virginia corporation ("DSA").
W I T N E S S E T H:
WHEREAS, Prime West and DSA have entered into a Lease dated April ___, 1998
(the "Lease") for premises located in that certain building known as 2060
Briargate Parkway located in Colorado Springs, State of Colorado (the
"Building"); and
WHEREAS, DSA is desirous of installing communications equipment on the roof
of the Building; and
WHEREAS, Prime West is willing to permit same only upon the following terms
and conditions.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the parties hereto agree as follows:
1. Grant of License. Provided DSA provides Prime West with detailed
----------------
information regarding the extent and type of communications equipment (the
"Equipment"), Prime West grants to DSA a non-exclusive license for the term of
the Lease, said term being more specifically described in Section 3 below, for
the purpose of installing on a portion of the roof located on the Building as
shown on Appendix __ attached hereto (the "Roof Space"). The actual location of
the Roof Space shall be in Prime West's reasonable discretion. The grant of this
license is for the sole benefit of and use by DSA and the rights granted
hereunder shall be personal to DSA and may not be assigned, sublet or
transferred in whole or in part except pursuant to an assignment or sublease
according to the Lease to be used solely by such sublessee or assignee for its
own purposes. No third party may use the Roof Space nor may DSA receive any fees
or other payment for the use of such Roof Space. Prime West makes no
representation or warranty as to the fitness for any purpose of the Roof Space
and shall have no liability of any kind or nature directly or indirectly arising
from or related to the Equipment or the Roof Space.
2. Installation of Equipment on Roof Space. Prior to commencing the
---------------------------------------
installation of the Equipment and any related equipment, conduits, cables and
materials located on the Roof Space or in other parts of the Building
(collectively, the "Related Equipment"), DSA shall submit plans and
specifications regarding installation of the Antenna(s) and any Related
Equipment to Prime West for review and reasonable approval. DSA shall have a
reasonable right of access to the chases telephone and electrical closets
located in the Building for purposes of installing, repairing and maintaining
the Related Equipment, provided, however, such access shall be subject to the
reasonable approval of Prime West. The Related Equipment to be installed in the
telephone and electrical closets shall consist of ____________________ and shall
not occupy more than _______ cubic inches. The plans and specifications shall
include load factors, electrical platforms leading to the Roof Space and any
other specifications as Prime West may require. DSA agrees that Prime West may
require certain aesthetic specifications concerning the appearance of the
Testing Area and any Equipment, which specifications shall be in the
commercially reasonable discretion of Prime West.
3. Term. DSA's right to use the Roof Space shall commence on the date on
----
which DSA commences installation of the Antenna or any of the Equipment, but in
no event later than _____________, 19__ nor earlier than __________ , 19__, and
shall terminate upon the termination of the Lease (the "Term") as such Lease may
be extended. Upon the termination hereof, the Equipment (including any Related
Equipment), shall be removed by DSA at DSA's expense, and DSA shall repair any
damage to the building and roof caused by the removal and restore the roof.
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4. Reroofing and Repair. DSA acknowledges that Prime West may be repairing
--------------------
or installing a new roof on the Building during the term of this License. Prime
West, the roofing contractor or consultant and DSA shall coordinate the repair
and/or reroofing of the Roof and DSA shall pay in advance on demand all
increases in costs of repair or reroofing arising from or related solely to the
Equipment. Furthermore, to the extent that the Equipment needs to be dismantled,
relocated, repaired or replaced in conjunction with such reroofing or repair,
all reasonable costs and expenses shall be borne by DSA, and Prime West shall
have no liability in connection therewith, including, without limitation, any
interruption in service.
5. Permits. Prior to commencing the installation of the Equipment, DSA
-------
shall, at its own cost and expense, obtain each and every permit including
building permits and approvals of any applicable architectural control committee
for same and deliver same to Prime West. Prime West makes no representations or
warranties with respect to zoning or any other approvals. If DSA cannot obtain
such necessary permits or such permits affect the Building or the Roof Space in
any way by means of additional requirements (unless Tenant agrees to comply with
such additional requirements at its sole cost and expense), then this License
shall be deemed null and void and of no further force and effect, unless Prime
West in writing waives the conditions set forth herein.
6. Repair and Maintenance of Antenna and Related Equipment. DSA agrees
-------------------------------------------------------
that it shall keep and maintain the Equipment, and the Roof Space in good
condition and repair, at DSA's sole cost and expense, in such a manner so as not
to conflict or interfere with the use of other facilities installed in the
Building and consistent with first-class office buildings in Colorado Springs,
Colorado. Furthermore, DSA agrees that it shall not damage nor shall it permit
any damage to the roof or the Roof Space or the Building in conjunction with
this License. DSA agrees that the Equipment shall be of such types and
frequencies that will not cause interference with other antennas or dishes in
the Building Complex in operation at the time of DSA's installation. In the
event the Equipment causes such interference, DSA shall immediately take all
reasonable steps necessary to correct and eliminate the interference. If DSA
cannot eliminate the interference within a reasonable time of notification
thereof, it shall remove the Equipment causing the interference. DSA shall use
its best efforts to notify any telephone and/or electrical service persons of
the location of the Equipment in the Building in order to minimize any
interference with such equipment.
7. Repair and Maintenance of the Roof. DSA hereby acknowledges and agrees
----------------------------------
that Prime West, its agents, employees, contractors or anyone else permitted by
Prime West to be on the roof of the Building may from time to time inspect,
repair, replace or maintain the roof or any part or parts thereof, or install
additional improvements or fixtures on the said roof. DSA shall maintain the
Roof Space at it sole expense, except Prime West shall be liable for the cost of
repairs or maintenance to the Equipment, the Roof Space and the roof caused by
Prime West's misconduct or gross negligence, notwithstanding anything to the
contrary contained in this Agreement.
8. Compliance with Law and Warranties. DSA, at DSA's sole cost and
----------------------------------
expense, agrees to install, keep, maintain, operate and remove the Equipment, in
accordance with all applicable laws, rules, regulations, statutes, ordinances or
other requirements of any kind or nature of any governmental or quasi-
governmental authority or the requirements of Prime West's insurance
underwriters and in compliance with any roofing warranties of which Tenant has
knowledge.
9. Alterations and Mechanic's Liens. DSA shall not without the prior
--------------------------------
written consent of Prime West, which consent shall not be unreasonably withheld,
make any alterations, improvements or additions to the Equipment or the Test
Area. DSA agrees that it shall not alter, add to or move the Equipment, without
Prime West's consent, which consent shall not be unreasonably withheld by Prime
West. In the event that DSA desires to perform any alterations, improvements,
additions, repairs or other work on the Equipment, DSA shall first submit to
Prime West a written request therefor outlining the repairs, alterations, or
other matters which DSA is requesting Prime West's consent. The work necessary
to perform any of the repairs or alterations under this section shall be done by
employees or contractors approved (such approval not to be unreasonably withheld
conditioned or delayed) in advance by DSA subject to written contracts
containing all conditions Prime West may reasonably impose, including insurance
provisions. DSA agrees that it shall defend and hold Prime West harmless from
all costs, damages, liens, for labor, services or materials related to any work
done on the additions by DSA, pursuant to the terms of the indemnity set forth
in Section 14 of the Lease.
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<PAGE>
10. Damage by DSA. Subject to the waiver of subrogation as set forth in
-------------
Section 10.3 of the Lease, which is incorporated herein by reference, if the
Building, Building Complex, elevators, boilers, engines, pipes, electrical
apparatus, or any other elements of the Building or the Building roof or any
portion thereof, become damaged or destroyed through any act of DSA, its
servants, agents, employees, contractors or anyone permitted by DSA to be
working in the Building or on the Equipment, whether or not such act was a
result of the negligence or willful misconduct of DSA or any such party, then
the cost of any repairs, replacements, alterations and all damages incurred by
Prime West shall be born by DSA who shall, within thirty (30) days of demand,
pay the same to Prime West.
11. DSA's Insurance. DSA shall with respect solely to the Equipment and
---------------
the Roof Space, during the entire term of this License, at its sole cost and
expense, obtain, maintain, and keep in full force and effect insurance with
coverages, amounts, with companies and in form reasonably acceptable to Prime
West naming Prime West and any lenders (secured by the Building and of which DSA
has knowledge) as insureds thereunder. If the cost of Prime West's insurance
increases as a result directly or indirectly of this License, then DSA shall pay
the costs of such increases directly to Prime West upon demand. Notwithstanding
the foregoing, DSA shall have the opportunity, at its sole cost and expense, to
take reasonable steps to correct the situation giving rise to such increased
insurance costs, provided such corrective measure does not otherwise violate any
other provision hereof or the Lease.
12. Attorneys' Fees. In the event of any litigation or arbitration between
---------------
Prime West and DSA to enforce any provision of this License or any right of
either party hereto, the unsuccessful party to such litigation or arbitration
shall pay to the successful party all reasonable costs and expenses, including
reasonable attorneys' fees, incurred therein.
13. Indemnification; Release. From and after the Effective Date and
------------------------
subject to the waiver set forth in Section 10.3 of the Lease, DSA hereby agrees
to indemnify, defend, and save Prime West harmless from and against all claims,
demands, liability, loss, cost, damage, or expense, including attorneys' fees,
incurred by or asserted against Prime West as a result of or arising out of this
License including the installation, use or existence of the Equipment and the
Roof Space by DSA. This indemnity shall survive expiration or termination of
this License and/or the Lease. DSA hereby irrevocably releases Prime West, its
agents, employees, invitees or contractors, from any claims, damages, expenses
or costs of any kind or nature, whether known or unknown, arising from or
related to this License or any act or the negligence of Prime West, its
employees, agents, invitees or contractors, it being understood and agreed that
the Equipment and the Roof Space are at the sole risk, cost and expense of DSA.
Notwithstanding the foregoing, the indemnification obligations set forth herein
shall not be applicable to the extent that the act from which the indemnity
arose was caused by the willful or grossly negligent acts of the Landlord.
14. Default by DSA. Each one of the following events is herein referred to
--------------
as an "event of default":
(1) DSA shall fail to make due and punctual payment of any amounts
payable hereunder, and such failure shall continue for five (5) days after
receipt of written notice from Prime West;
(2) DSA shall default on any term or condition to be performed by
it under the Lease and such default is not cured within the applicable cure
period, if any;
(3) This License or the estate of DSA hereunder shall be
transferred to or shall pass to or devolve upon any other person or party except
in the manner set forth in Section 12;
(4) DSA shall fail to perform any of the other agreements, terms,
covenants or conditions hereof on DSA's part to be performed, and such
nonperformance shall continue for a period of ten (10) days after written notice
thereof by Prime West to DSA, or if such performance cannot be reasonably had
within such ten (10) day period, DSA shall not in good faith have commenced such
performance within such ten (10) day period and shall not thereafter diligently
proceed to completion;
L-3
<PAGE>
15. Remedies of Prime West. If any one or more events of default shall
----------------------
occur and remain uncured beyond any applicable cure period, if any, then Prime
West shall have the right, at Prime West's election, to terminate this License
by written notice to DSA, and to pursue any other remedy provided in law or in
equity for damages incurred by Prime West.
16. Notice. Any notice from Prime West to DSA or from DSA to Prime West
------
shall be in writing and shall be delivered in accordance with the terms of the
Lease.
17. Equipment. DSA hereby agrees that its Equipment may not interfere with
---------
any antenna or receiver now or hereafter placed upon the roof by Landlord or any
antenna or receiver now placed upon the roof by another tenant, nor may such
Equipment cause any interference with any tenant's use of their premises and
equipment therein nor may the Equipment cause or pose any possible health risk
of any kind or nature.
IN WITNESS WHEREOF, the parties have executed this License the day and year
first above written.
LANDLORD:
ORIX PRIME WEST COLORADO SPRINGS VENTURE,
a Colorado general partnership
By: ORIX COLORADO SPRINGS, INC., an Illinois
corporation, General Partner
By: __________________________________
Name: __________________________________
Its: __________________________________
By: PRIME WEST EL PASO COUNTY I, INC., a
Colorado corporation
By: __________________________________
Name: Stephen F. Clarke
Its: President
TENANT:
DECISION-SCIENCE APPLICATIONS, INC.,
a Virginia corporation
By:__________________________________________
Title:_______________________________________
L-4
<PAGE>
2060 BRIARGATE PARKWAY
----------------------
LEVEL 2 FLOOR PLAN
EXHIBIT A-1
<PAGE>
2060 BRIARGATE PARKWAY
----------------------
LEVEL 2 FLOOR PLAN
EXHIBIT A-2
<PAGE>
EXHIBIT A
FLOOR PLAN/THIRD FLOOR
A-1
<PAGE>
2060 BRIARGATE PARKWAY
----------------------
LEVEL 3 FLOOR PLAN
EXHIBIT A
<PAGE>
EXHIBIT A-1
FLOOR PLAN/SECOND FLOOR
A-2
<PAGE>
2060 BRIARGATE PARKWAY
----------------------
LEVEL 2 FLOOR PLAN
EXHIBIT A-1
SUBJECT TO MINOR MODIFICATIONS
UPON FURTHER REVIEW BY LANDLORD
AND TENANT
<PAGE>
EXHIBIT A-2
SECOND EXPANSION SPACE
A-3
<PAGE>
2060 BRIARGATE PARKWAY
----------------------
LEVEL 2 FLOOR PLAN
EXHIBIT A-2
SUBJECT TO MINOR MODIFICATIONS
UPON FURTHER REVIEW BY LANDLORD
AND TENANT
<PAGE>
EXHIBIT A-3
SITE PLAN
A-4
<PAGE>
- SITE MAP -
BRIARGATE
AN ORIX/PRIME WEST VENTURE
<PAGE>
EXHIBIT B
LEGAL DESCRIPTION
(See Attached)
B-1
<PAGE>
FIRST AMENDMENT TO OFFICE LEASE
-------------------------------
THIS FIRST AMENDMENT TO OFFICE LEASE ("First Amendment") is made and
entered into effective as of the 28th day of May, 1999, by and between ORIX
------
PRIME WEST COLORADO SPRINGS VENTURE, a Colorado general partnership ("Landlord")
and SM&A CORPORATION, a California corporation, formerly known as DECISION-
SCIENCE APPLICATIONS, INC., a Virginia corporation ("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant entered into a Lease (the "Lease") dated May
7, 1998 for those certain leased premises known as Suites 300 and 250 in the
building known as 2060 Briargate Parkway, located in Colorado Springs, Colorado;
WHEREAS, Landlord and Tenant are desirous of amending the Lease to expand
the Premises pursuant to Tenant's First Expansion Right and Second Expansion
Right as set forth in Section 32.8 of the Lease;
NOW THEREFORE in consideration of the above referenced premises and other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree to amend the Lease as set forth herein.
1. All defined terms in the Lease are incorporated herein by reference
except as may be amended by the provisions of this First Amendment.
2. PREMISES. Commencing as of the Effective Date set forth herein, the
--------
Premises as defined in Subsection 1.1 of the Lease shall be amended to mean the
initial Premises described in the Lease containing 35,234 rentable square feet
(the "Initial Space"), together with approximately 10,807 rentable square feet
of additional contiguous space located on the second floor (the "Additional
Space"), which Additional Space shall include approximately 4,500 rentable
square feet of space described in Section 32.8(b) of the Lease as the "Second
Expansion Space," all as outlined on the diagram attached hereto as Exhibit A.
3. TERM. The term of the Lease with respect to the Additional Space shall
----
commence on the earlier to occur of (a) September 1, 1999 or (b) the date of
Substantial Completion of the Additional Space (the "Effective Date") and shall
expire upon the expiration of the Lease Term as defined in Subsection 2.1 of the
Lease.
4. RENT. Commencing as of the Effective Date, Tenant shall pay the Base
----
Rent, as then escalated, for the Initial Space and for 4,000 rentable square
feet of the Additional Space, together with all Additional Rent for the Initial
Space and the entire portion of the Additional Space, it being understood and
agreed that Base Rent for approximately 6,807 rentable square feet of the
Additional Space shall be abated through and including September 30,1999.
Commencing as of October 1, 1999, Tenant shall pay Base Rent, as then escalated,
and Additional Rent for the Initial Space and for the entire portion of the
Additional Space in accordance with the rental rates and in the manner set forth
in Article 3 of the Lease.
<PAGE>
5. TAXES AND OPERATING EXPENSE ADJUSTMENT. Tenant's Proportionate or Pro
--------------------------------------
Rata Share as defined in Section 4.1 of the Lease shall be amended, as of the
Effective Date, to 63.40%.
6. TENANT IMPROVEMENT ALLOWANCE. The Allowance (as defined in the Work
----------------------------
Letter attached as Exhibit C to the Lease) applicable to the Additional Space
---------
shall be $33.97 per rentable square foot of the Additional Space (assuming
September 1, 1999 is the Effective Date), it being understood and agreed that
the Allowance has been adjusted to the actual per rentable square foot cost of
the Tenant Improvement costs for the Initial Space ($36.56) and reduced
proportionately based upon the shorter remaining ten-n of the Lease. Any unused
portion of the Allowance may be utilized for cabling costs only. The Allowance
applicable to the Additional Space, as set forth above, shall be payable
pursuant to the terms and conditions set forth in the Work Letter attached as
Exhibit C to the Lease.
- ---------
7. OTHER PROVISIONS.
----------------
(a) Subsection 32.1 - Rent Concession, and Subsection 32.2 - Moving
--------------- ------
Concession, shall not be applicable as to the Additional Space.
- ----------
(b) Subsection 32.5 - Parking. The Parking Ratio of four (4)
-------
nonexclusive parking spaces for every 1,000 rentable square feet of leasable
space in the Building, inclusive of handicapped and visitor parking, as set
forth in subsection 32.5 of the Lease shall be applicable to the Additional
Space.
(c) Subsection 32.8(b) - Second Expansion Right. Landlord and Tenant
----------------------
acknowledge and agree that Tenant's expansion of the Premises to include the
Additional Space as set forth herein satisfies Tenant's obligation to lease the
Second Expansion Space as set forth in subsection 32.8(b) of the Lease.
(d) Subsection 32.8(c) - Third Expansion Right. Tenant and Landlord
---------------------
acknowledge and agree that the Third Expansion Space, as defined in subsection
32.8(c) of the Lease, shall be amended from 9,704 rentable square feet of space
on the second and/or first floor of the Building to 3,397 rentable square feet
of space on the second and/or first floor of the Building.
(e) Subsection 32.8(d) - Fourth Expansion Right. Tenant and Landlord
----------------------
acknowledge and agree that the time period for making the Fourth Expansion Space
(as defined in subsection 32.8(d) of the Lease) available to Tenant shall be
amended from the ninetieth (90') through the one hundred second (1 02 d) month
of the Lease Term (the "Delivery Period"), as currently set forth in subsection
32.8(d), to such period commencing upon the day following the expiration of the
first three (3) year extension term of McLeod USA Telecommunications Services,
Inc. ("McLeod"), a tenant on the first floor of the Building (such expiration
date estimated to be June 30, 2007) through the twelfth (12th) month thereafter
(the "Amended Delivery Period"). If, however, McLeod does not exercise its three
(3) year right to extend, then, in such event, the Fourth Expansion Right may be
exercised and shall be made available to Tenant, as currently set forth in
subsection 32.8(d) of the Lease, without any modification to the
-2-
<PAGE>
Delivery Period set forth above and the Amended Delivery Period shall not be
applicable. In addition, if McLeod does not exercise its three (3) year right to
extend, Tenant's notice to Landlord of its election to exercise the Fourth
Expansion Right shall be given no later than the eighty-ninth (89th) month of
the Lease Term, as currently set forth in subsection 32.8(d) of the Lease and
the Fourth Expansion Space shall be delivered during the Delivery Period. If
McLeod does exercise its three (3) year right to extend, Tenant's notice to
Landlord of its election to exercise the Fourth Expansion Right shall be given
no later than the ninety-ninth (99th) month of the Lease Term and the Fourth
Expansion Space shall be delivered during the Amended Delivery Period.
Irrespective of the foregoing, Tenant may also provide notice to Landlord of its
election to exercise the Fourth Expansion Right at any time prior the date which
is 240 days prior to the expiration of the initial lease term for McLeod (which
date will be confirmed by Landlord to Tenant subsequent hereto) and in such
event the Fourth Expansion Space shall be delivered during the Delivery Period
and the Amended Delivery Period shall not be applicable.
8. MISCELLANEOUS.
-------------
(a) Any reference to the "Lease" shall hereinafter refer to the
Lease as amended by the First Amendment.
(b) The Lease is in full force and effect and all terms shall remain
as set forth except as amended. To the extent of any conflict, the terms of
this First Amendment shall control.
(c) Each party hereby represents to the other that neither party has
any knowledge of any default or breach of this Lease by the other and each party
hereto is relying upon this representation by the other as partial consideration
for entering into this First Amendment.
-3-
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this First Amendment
effective on the date first above written.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
ORIX PRIME WEST COLORADO SM&A CORPORATION, a California
SPRINGS VENTURE, a Colorado corporation, formerly known as DECISION-
general partnership SCIENCE APPLICATIONS, INC.,
a Virginia corporation
By: ORIX COLORADO SPRINGS INC., By: /S/ THERESA M. MCGRATH
an Illinois corporation, ------------------------------------
General Partner Name: Theresa M. McGrath
------------------------------------
Title: Director, Facilities and Admin. Ops.
------------------------------------
</TABLE>
By: /S/ JAMES PURINGTON
---------------------------
Name: James Purington
---------------------------
Its: President
---------------------------
By: PRIME WEST EL PASO
COUNTY, I, INC., a Colorado
corporation
By: /S/ STEPHEN F. CLARKE
-----------------------------
Name: Stephen F. Clarke
Its: President
-4-
<PAGE>
EXHIBIT A
SECOND EXPANSION SPACE
<PAGE>
SECOND AMENDMENT TO OFFICE LEASE
--------------------------------
THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is made and entered
into effective as of the 7th day of September, 1999, by and between ORIX PRIME
---
WEST COLORADO SPRINGS VENTURE, a Colorado general partnership ("Landlord") and
SM&A CORPORATION, a California corporation, formerly known as DECISION-SCIENCE
APPLICATIONS, INC., a Virginia corporation ("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant entered into a Lease (the "Lease") dated May
7, 1998 for those certain leased premises known as Suites 300 and 250 in the
building known as 2060 Briargate Parkway, located in Colorado Springs, Colorado;
WHEREAS, the Lease was amended by a First Amendment to Office Lease dated
May 28, 1999 (the "First Amendment"), wherein the Premises was expanded to
include an additional approximately 10,807 rentable square feet of additional
space on the second floor;
WHEREAS, Landlord and Tenant are desirous of amending the Lease to further
expand the Premises;
NOW THEREFORE in consideration of the above referenced premises and other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree to amend the Lease as set forth herein.
1. All defined terms in the Lease are incorporated herein by reference
except as may be amended by the provisions of this Second Amendment.
2. PREMISES. Commencing as of the Effective Date set forth herein, the
--------
Premises as defined in Subsection 1. I of the Lease shall be amended to mean the
initial Premises described in the Lease containing 35,118 rentable square feet
(the "Initial Space"), together with approximately 10,997 rentable square feet
of additional contiguous space located on the second floor as described in the
First Amendment (the "Second Floor Expansion Space"), together with
approximately 2,048 rentable square feet of additional space located on the
first floor (the "First Floor Expansion Space"), as outlined on the diagram
attached hereto as Exhibit A. Within ten (10) days after Tenant receives from
---------
Landlord an Amended and Restated Supplemental Agreement in substantially the
form attached to the Lease as Exhibit D. Tenant agrees to execute such Amended
---------
and Restated Supplemental Agreement to become a part hereof, setting forth the
commencement and termination dates of the term of the Lease, as amended, and
such other information as set forth therein, including the final determination
of the number of rentable square feet in the Premises, as expanded, and any
corresponding adjustments to the Lease, as amended.
3. TERM. The term of the Lease with respect to the First Floor Expansion
----
Space shall commence on the earlier to occur of (a) November 1, 1999 or (b) the
date of Substantial Completion of the First Floor Expansion Space (the
"Effective Date") and shall expire upon the expiration of the Lease Term as
defined in Subsection 2.1 of the Lease.
<PAGE>
4. RENT. Commencing as of the Effective Date, Tenant shall pay the Base
----
Rent, as then escalated, for the Initial Space and the Second Floor Expansion
Space, together with all Additional Rent for the entire portion of the Premises,
as amended, in accordance with the rental rates and in the manner set forth in
Article 3 of the Lease.
5. TAXES AND OPERATING EXPENSE ADJUSTMENT. Tenant's Proportionate or Pro
--------------------------------------
Rata Share as defined in Section 4.1 of the Lease shall be amended, as of the
Effective Date, to 66.42%.
6. TENANT IMPROVEMENT ALLOWANCE. The Allowance (as defined in the Work
----------------------------
Letter attached as Exhibit C to the Lease) applicable to the First Floor
---------
Expansion Space shall be $33.24 per rentable square foot of the First Floor
Expansion Space (assuming November 1, 1999 is the Effective Date), it being
understood and agreed that the Allowance has been adjusted to the actual per
rentable square foot cost of the Tenant Improvement costs for the Initial Space
($36.56) and reduced proportionately based upon the shorter remaining term of
the Lease. The Allowance applicable to the First Floor Expansion Space, as set
forth above, shall be payable pursuant to the terms and conditions set forth in
the Work Letter attached as Exhibit C to the Lease.
---------
7. OTHER PROVISIONS.
----------------
(a) Subsection 32.1 - Rent Concession, and Subsection 32.2 - Moving
--------------- ------
Concession, shall not be applicable as to the First Floor Expansion Space.
----------
(b) Subsection 32.5 - Parking. The Parking Ratio of four (4) non-
-------
exclusive parking spaces for every 1,000 rentable square feet of leasable
space in the Building, inclusive of handicapped and visitor parking, as set
forth in subsection 32.5 of the Lease shall be applicable to the First
Floor Expansion Space.
(c) Subsection 32.8(c) - Third Expansion Right. Tenant and Landlord
---------------------
acknowledge and agree that the Third Expansion Right, as defined in
subsection 32.8(c) of the Lease, shall be deemed to have been exercised in
connection with the addition of the First Floor Expansion Space to the
Premises in accordance with this Second Amendment and such Third Expansion
Right shall be deemed void and of no further force or effect.
(d) Subsection 32.8(d) - Fourth Expansion Right. Tenant and Landlord
----------------------
acknowledge and agree that the Fourth Expansion Space, as defined in
subsection 32.8(d) of the Lease, shall be amended from between 10,000 and
15,000 rentable square feet of space on the second and/or first floor of
the Building to between 10,000 and 16,355 rentable square feet of space on
the second and/or first floor of the Building subject to availability as
determined by Landlord in its sole discretion. The Fourth Expansion Right,
as modified by the First Amendment, shall otherwise remain in full force
and effect.
-2-
<PAGE>
8. MISCELLANEOUS.
-------------
(a) Any reference to the "Lease" shall hereinafter refer to the Lease
as amended by the First Amendment and the Second Amendment.
(b) The Lease is in full force and effect and all terms shall remain
as set forth except as amended. To the extent of any conflict, the terms of
this Second Amendment shall control.
(c) Each party hereby represents to the other that neither party has
any knowledge of any default or breach of this Lease by the other and each
party hereto is relying upon this representation by the other as partial
consideration for entering into this Second Amendment.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-3-
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed this Second Amendment
effective on the date first above written.
LANDLORD: TENANT:
ORIX PRIME WEST COLORADO SM&A CORPORATION, a California
SPRINGS VENTURE, a Colorado corporation, formerly known as DECISION-
general partnership SCIENCE APPLICATIONS, INC.,
a Virginia corporation
By: ORIX COLORADO SPRINGS By: /S/ ALFRED WILLIS
INC., an Illinois corporation, -----------------------------
General Partner Name: Alfred Willis
---------------------------
By:/S/ MICHAEL MCCULLOUGH Title: Dir. Fac. & Admin. Ops.
------------------------- --------------------------
Name: Michael J. McCullough
-----------------------
Its:Executive Vice President
------------------------
By: PRIME WEST EL PASO
COUNTY, I, INC., a Colorado
corporation
By:/S/ STEPHEN F. CLARKE
---------------------
Name: Stephen F. Clarke
Its: President
-4-
<PAGE>
CONSENT TO AMENDMENT
--------------------
By execution hereof the undersigned Lender hereby consents to the Second
Amendment to Office Lease by and between ORIX PRIME WEST COLORADO SPRINGS
VENTURE, a Colorado general partnership, and SM&A CORPORATION, a California
corporation, formerly known as DECISION-SCIENCE APPLICATIONS, INC., a Virginia
corporation.
LENDER
ORIX REAL ESTATE EQUITIES, INC.,
a Delaware corporation
By:/S/ JAMES PURINGTON
----------------------------------
Its:President
---------------------------------
Date: Sept. 7, 1999
--------------------------------
-5-
<PAGE>
EXHIBIT A
FIRST FLOOR EXPANSION SPACE
<PAGE>
SUBORDINATION, NON-DISTURBANCE
AND ATTORNMENT AGREEMENT
------------------------
THIS SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (this
"Agreement") dated for reference purposes only as of the _____ day of
____________, 1998, by and among ORIX REAL ESTATE EQUITIES, INC., a Delaware
corporation ("Lender"), DECISION-SCIENCE APPLICATIONS, INC., a Virginia
corporation ("Tenant") and ORIX PRIME WEST COLORADO SPRINGS VENTURE, a Colorado
general partnership ("Landlord").
WITNESSETH:
-----------
WHEREAS, Lender has made a loan (the "Loan") to Landlord;
WHEREAS, the Loan is evidenced by a promissory note (the "Note") made by
Landlord to order of Lender and is secured by, among other things, a deed of
trust, assignment of rents and leases, security agreement and fixture filing
(the "Deed of Trust") filed with the Clerk and Recorder of the County of El Paso
on April 2, 1998, made by Landlord to Lender covering the land (the "Land")
described on Schedule A hereto and all improvements (the "Improvements") now or
hereafter located on the land (the Land and the Improvements hereinafter
collectively referred to as the "Trust Property"); and
WHEREAS, pursuant to a prospective Lease by and between Landlord and Tenant
(which Lease, as the same may have been amended and supplemented, is hereinafter
called the "Lease"), Landlord shall Lease to Tenant approximately 35,234 total
rentable square feet of space located in the Improvements (the "Premises"); and
WHEREAS, the parties hereto desire to make the Lease when fully executed
and delivered subject and subordinate to the Deed of Trust.
NOW, THEREFORE, the parties hereto, in consideration of the covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, hereby agree as follows:
1. The Lease, as the same may hereafter be modified, amended or extended,
and all of Tenant's right, title and interest in and to the Premises and all
rights, remedies and options of Tenant under the Lease, are and shall be
unconditionally subject and subordinate to the Deed of Trust and the lien
thereof, to all the terms, conditions and provisions of the Deed of Trust, to
each and every advance made or hereafter made under the Deed of Trust, and to
all renewals, modifications, consolidations, replacements, substitutions and
extensions of the Deed of Trust, so that at all times the Deed of Trust shall be
and remain a lien on the Trust Property prior and superior to the Lease for all
purposes; provided, however, and Lender agrees, that so long as (A) no event has
occurred and no condition exists beyond any applicable cure period, which would
entitle Landlord to terminate the Lease or would cause, without further action
of Landlord, the termination of the Lease or would entitle Landlord to
dispossess Tenant from the Premises, (B) the Lease shall be in full force and
effect and shall not have been otherwise modified or supplemented in any way
without Lender's prior written consent (if and to the extent Lender's
<PAGE>
consent is required for the same under the documents evidencing or securing the
Loan), (C) Tenant shall duly confirm its attornment to Lender or its successor
or assign by written instrument as set forth in Paragraph 3 hereof, and (D)
-----------
NEITHER Lender, nor its successors or assigns shall be liable under any warranty
of construction contained in the Lease or any implied warranty of construction
unless Tenant attorns to Lender (or its successors or assigns) and recognizes
Lender as the landlord under the Lease, and (E) all representations and
warranties made herein by Tenant shall be true and correct as of the date of
such attornment; then, and in such event provided Tenant is not in monetary
default or material nor monetary default under the Lease (in either event
following the expiration of all applicable notice and cure periods), Tenant's
leasehold estate under the Lease shall not be terminated, Tenant's possession of
the Premises shall not be disturbed by Lender, Lender shall not join Tenant in
any foreclosure proceedings except as necessary to effectuate a foreclosure,
Lender will accept the attornment of Tenant, and Lender, if it becomes the
successor landlord under the Lease, shall be bound to Tenant under the terms and
conditions of the Lease (except as otherwise provided in this Agreement).
2. Notwithstanding anything to the contrary contained in the Lease, Tenant
hereby agrees that in the event of any act, omission or default by Landlord or
Landlord's agents, employees, contractors, licensees or invitees which would
give Tenant the right, either immediately or after the lapse of a period of
time, to terminate the Lease in accordance with the terms of the Lease, or to
claim a partial or total eviction, or to reduce the rent payable thereunder or
credit or offset any amounts against future rents payable thereunder, Tenant
will not exercise any such right (i) until it has given written notice of such
act, omission or default to Lender by delivering notice of such act, omission or
default, in accordance with Paragraph 8 hereof, and (ii) until a period of not
-----------
less than sixty (60) days for remedying such act, omission or default shall have
elapsed following the giving of such notice. Notwithstanding the foregoing, in
the case of any default of Landlord which cannot be cured within such sixty (60)
day period, if Lender shall within such period proceed promptly to cure the same
(including such time as may be necessary to acquire possession of the Premises
if possession is necessary to effect such cure) and thereafter shall prosecute
the curing of such default with diligence, then the time within which such
default may be cured by Lender shall be extended for such period as may be
necessary to complete the curing of the same with diligence. Lender's cure of
Landlord's default shall not be considered an assumption by Lender of Landlord's
other obligations under the Lease. Unless Lender otherwise agrees in writing or
as otherwise set forth herein, Landlord shall remain solely liable to perform
Landlord's obligations under the Lease (but only to the extent required by and
subject to the limitation included with the Lease), both before and after
Lender's exercise of any right or remedy under this Agreement. If Lender or any
successor or assign becomes obligated to perform as Landlord under the Lease,
such person or entity will be released from those obligations accruing after the
date on which such person or entity assigns, sells or otherwise transfers its
interest in the Premises or the Trust Property.
3. Without limitation of any of the provisions of the Lease, in the event
that Lender succeeds to the interest of Landlord or any successor to Landlord,
then subject to the provisions of this Agreement including, without limitation,
Paragraph 1 above, the Lease shall nevertheless continue in full force and
- -----------
effect and Tenant shall and does hereby agree to attorn to and accept Lender and
to recognize Lender as its Landlord under the Lease for the then remaining
balance
-2-
<PAGE>
of the term thereof, and upon request of Lender, Tenant shall execute and
deliver to Lender an agreement of attornment reasonably satisfactory to Lender.
4. If Lender succeeds to the interest of Landlord or any successor to
Landlord, in no event shall Lender have any liability for any act or omission of
any prior landlord under the Lease which occurs prior to the date Lender
succeeds to the rights of Landlord under the Lease, nor any liability for
claims, offsets or defenses which Tenant might have had against Landlord, except
in either case, with respect to any and all obligations that are of a continuing
nature (but only to the extent of any liability arising solely from the
continuance of said obligations and that continue beyond the date of transfer
unless otherwise set forth herein). In no event shall Lender have any personal
liability as successor to Landlord and Tenant shall look only to the estate and
property of Lender in the Land and the Improvements for the satisfaction of
Tenant's remedies for the collection of a judgment (or other judicial process)
requiring the payment of money in the event of any default by Lender as Landlord
under the Lease, and no other property or assets of Lender shall be subject to
levy, execution or other enforcement procedure for the satisfaction of Tenant's
remedies under or with respect to the Lease.
5. Tenant agrees that no prepayment of rent or additional rent due under
the Lease of more than one month in advance, and no amendment, modification,
surrender or cancellation of the Lease, shall be binding upon or as against
Lender, as holder of the Deed of Trust, or as Landlord under the Lease if it
succeeds to that position, unless consented to in writing by Lender (if and to
the extent Lender's consent is required for the same under the documents
evidencing or securing the Loan). In addition, and notwithstanding anything to
the contrary set forth in this Agreement, Tenant agrees that Lender, so long as
it is only holder of the Deed of Trust, shall in no event have any liability for
the performance or completion of any initial work or installations or for any
loan or contribution or rent concession towards initial work, which are required
to be made by Landlord (A) under the Lease or under any related Lease documents
or (B) for any space which may hereafter become part of said Premises. Tenant
further agrees with Lender that Tenant will not voluntarily subordinate the
Lease to any lien or encumbrance without Lender's prior written consent.
6. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute and
be construed as one and the same instrument.
7. All remedies which Lender may have against Landlord provided herein, if
any, are cumulative and shall be in addition to any and all other rights and
remedies provided by law and by other agreements between Lender and Landlord or
others. If any party consists of multiple individuals or entities, each of same
shall be jointly and severally liable for the obligations of such party
hereunder.
8. All notices to be given under this Agreement shall be in writing and
shall be deemed delivered upon receipt by the addressee if served personally or,
if mailed, upon the first to occur of receipt or the refusal of delivery as
shown on a return receipt, after deposit in the United States Postal Service
certified mail, postage prepaid, addressed to the address of Landlord, Tenant or
Lender appearing below, or, if sent by telegram, when delivered by or refused
upon attempted delivery by the telegraph office. Such addresses may be changed
by
-3-
<PAGE>
notice given in the same manner. If any party consists of multiple
individuals or entities, then notice to any one of same shall be deemed notice
to such party.
Lender's Address: ORIX Real Estate Equities, Inc.
100 North Riverside Plaza, Suite 1400
Chicago, Illinois 60606
Tenant's Address: Decision-Science Applications
1110 North Glebe Road, Suite 400
Arlington, Virginia 22201
Attention: Theresa McGrath
Landlord's Address: ORIX PRIME WEST Colorado Springs Venture
c/o Prime West Development
6025 South Quebec, Suite 110
Englewood, Colorado 80111
Attention: Stephen F. Clarke
9. This Agreement shall be interpreted and construed in accordance with
and governed by the laws of the State of Colorado.
10. This Agreement shall apply to, bind and inure to the benefit of the
parties hereto and their respective successors and assigns. As used herein
"Lender" shall include any subsequent holder of the Deed of Trust.
11. Tenant acknowledges that Landlord has assigned to Lender its right,
title and interest in the Lease and to the rents, issues and profits of the
Trust Property and the Property pursuant to the Deed of Trust, and that Landlord
has been granted the license to collect such rents provided no Event of Default
has occurred under, and as defined in, the Deed of Trust. Tenant agrees to pay
all rents and other amounts due under the Lease directly to Lender upon receipt
of written demand by Lender, and Landlord hereby consents thereto. Any amounts
paid by Tenant to Lender in accordance herewith shall be credited against any
sums due Landlord under the Lease. The assignment of the Lease to Lender, or the
collection of rents by Lender pursuant to such assignment, shall not obligate
Lender to perform Landlord's obligations under the Lease.
12. Landlord and Tenant acknowledge and agree that this Agreement is
entered into with an affiliated lender and does not necessarily represent the
form of agreement that would be executed with an unaffiliated third party
lender.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
LENDER:
ORIX REAL ESTATE EQUITIES, INC.,
a Delaware corporation
By:__________________________________________
Name:________________________________________
Title:_______________________________________
LANDLORD:
ORIX PRIME WEST COLORADO SPRINGS
VENTURE, a Colorado general partnership
By: ORIX COLORADO SPRINGS, INC.,
an Illinois corporation, General Partner
By:_____________________________________
Name:___________________________________
Title:__________________________________
By: PRIME WEST EL PASO COUNTY
I, INC., a Colorado corporation
By:________________________________
Name:______________________________
Title:_____________________________
TENANT:
DECISION-SCIENCE APPLICATIONS, INC.,
a Virginia corporation
By:/S/ GUY A. ACKERSON
------------------------------------------
Name: Guy A. Ackerson
----------------------------------------
Title:President/CEO
---------------------------------------
-5-
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF ________________)
The foregoing instrument was acknowledged before me this _____ day of
____________, 1998, by _______________________, as _________________ of ORIX
REAL ESTATE EQUITIES, INC., a Delaware corporation.
WITNESS my hand and official seal.
___________________________________
Notary Public
My commission expires:_____________
STATE OF COLORADO )
) ss.
COUNTY OF ________________)
The foregoing instrument was acknowledged before me this _____ day of
____________, 1998, by _______________________, as _________________ of ORIX
COLORADO SPRINGS, INC., an Illinois corporation, General Partner of ORIX PRIME
WEST COLORADO SPRINGS VENTURE, a Colorado general partnership.
WITNESS my hand and official seal.
___________________________________
Notary Public
My commission expires:_____________
-6-
<PAGE>
STATE OF COLORADO )
) ss.
COUNTY OF ________________)
The foregoing instrument was acknowledged before me this _____ day of
____________, 1998, by _______________________, as _________________ of PRIME
WEST EL PASO COUNTY I, INC., a Colorado corporation.
WITNESS my hand and official seal.
___________________________________
Notary Public
My commission expires:_____________
STATE OF VIRGINIA )
) ss.
COUNTY OF ARLINGTON )
The foregoing instrument was acknowledged before me this 5th day of May ,
--- ------
1998, by Guy Albert Ackerson, as President/CEO of DECISION-SCIENCE APPLICATIONS,
------------------- -------------
INC., a Virginia corporation.
WITNESS my hand and official seal.
/s/ Jacqueline L. Harmon
------------------------
Notary Public
My commission expires: 6/30/00
-------
-7-
<PAGE>
SCHEDULE A
LEGAL DESCRIPTION OF THE PROPERTY
(See Attached)
-8-
<PAGE>
EXHIBIT B
---------
12 SOUTH, RANGE 66 WEST OF THE SIXTH PRINCIPAL MERIDIAN, BEING MONUMENTED AT THE
NORTHWEST CORNER BY A 3-1/4" DEPARTMENT OF INTERIOR BUREAU OF LAND MANAGEMENT
BRASS CAP AND AT THE WEST QUARTER CORNER BY A 3-1/4" DEPARTMENT OF INTERIOR
BUREAU OF LAND MANAGEMENT BRASS CAP, BEING ASSUMED TO BEAR S 00 DEGREES 21
MINUTES 28 SECONDS E, A DISTANCE OF 2649.65 FEET.
COMMENCING AT THE SOUTHEASTERLY CORNER OF BRIARGATE BUSINESS CAMPUS FILING NO.
17, UNDER RECEPTION NO. 97149307, RECORDS OF EL PASO COUNTY, COLORADO, SAID
POINT BEING THE POINT OF BEGINNING; THENCE NORTHERLY AND WESTERLY AND ALONG SAID
BRIARGATE BUSINESS CAMPUS FILING NO. 17, THE FOLLOWING COURSE:
1. ON THE ARC OF A CURVE TO THE RIGHT, WHOSE CENTER BEARS NORTH 75 DEGREES 59
MINUTES 52 SECONDS EAST, HAVING A DELTA OF 60 DEGREES 17 MINUTES 16 SECONDS, A
RADIUS OF 382.54 FEET, A DISTANCE OF 402.52 FEET;
THENCE SOUTH 43 DEGREES 42 MINUTES 52 SECONDS EAST, A DISTANCE OF 2.50 FEET TO A
POINT ON CURVE; THENCE ON THE ARC OF A CURVE TO THE RIGHT, WHOSE CENTER BEARS
SOUTH 43 DEGREES 42 MINUTES 52 SECONDS EAST, HAVING A DELTA OF 15 DEGREES 00
MINUTES 43 SECONDS, A RADIUS OF 397.77 FEET, A DISTANCE OF 104.22 FEET TO A
POINT OF TANGENT; THENCE NORTH 61 DEGREES 17 MINUTES 51 SECONDS EAST, A DISTANCE
OF 368.28 FEET; THENCE SOUTH 28 DEGREES 21 MINUTES 47 SECONDS EAST, A DISTANCE
OF 364.96 FEET TO A POINT ON THE NORTHERLY RIGHT OF WAY LINE OF BRIARGATE
PARKWAY, AS RECORDED IN PLAT BOOK E-5 AT PAGE 55; THENCE SOUTHERLY, WESTERLY,
AND NORTHERLY, THE FOLLOWING TWO (2) COURSES.
1. SOUTH 61 DEGREES 38 MINUTES 13 SECONDS WEST, A DISTANCE OF 203.24 FEET TO A
POINT OF CURVE;
2. ON THE ARC OF A CURVE TO THE RIGHT, HAVING A DELTA OF 16 DEGREES 17 MINUTES
34 SECONDS, A RADIUS OF 1917.50 FEET, A DISTANCE OF 545.27 FEET TO THE POINT OF
BEGINNING.
LEGAL DESCRIPTION PREPARED BY:
PAUL J. HUSSONG
JR ENGINEERING, LTD
4935 N. 30TH STREET
COLORADO SPRINGS, CO 80919
DATED JULY 23, 1996
JOB NO. 8714.70
-9-
<PAGE>
EXHIBIT 21
SM&A Corporation (East), a California corporation
Steven Myers & Associates, Inc., a California corporation
Systems Integration Software, Inc., a California corporation (a subsidiary of
SM&A Corporation (East))
Kapos Associates Inc., a Virginia corporation (a subsidiary of
SM&A Corporation (East))
System Simulation Solutions, Inc., a Virginia corporation (a subsidiary of
SM&A Corporation (East))
StamiNet, Inc., a California corporation (a subsidiary of
SM&A Corporation (East))
<PAGE>
EXHIBIT 23
CONSENT OF KPMG LLP
The Board of Directors and Shareholders of SM&A Corporation
We consent to incorporation by reference in the Annual Report on Form 10-K of
SM&A Corporation of our report dated March 13, 2000, relating to the
consolidated balance sheets of SM&A Corporation and subsidiaries as of December
31, 1999, and 1998, and the related consolidated statements of income,
shareholders' equity (deficiency), and cash flows for each of the years in the
three-year period ended December 31, 1999, and related schedule, which report
appears in the December 31, 1999 Annual Report on Form 10-K of SM&A Corporation.
Orange County, CA
April 7, 2000
/s/ KPMG LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 1,226 454
<SECURITIES> 0 0
<RECEIVABLES> 31,462 23,514
<ALLOWANCES> (935) 643
<INVENTORY> 0 0
<CURRENT-ASSETS> 38,324 25,969
<PP&E> 7,307 3,003
<DEPRECIATION> (1,671) (613)
<TOTAL-ASSETS> 96,842 66,324
<CURRENT-LIABILITIES> 16,100 9,990
<BONDS> 0 0
0 0
0 0
<COMMON> 161 165
<OTHER-SE> 50,295 55,164
<TOTAL-LIABILITY-AND-EQUITY> 96,842 66,324
<SALES> 106,743 68,449
<TOTAL-REVENUES> 106,743 68,449
<CGS> 65,087 40,483
<TOTAL-COSTS> 65,087 40,483
<OTHER-EXPENSES> 34,215 14,887
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 702 1,520
<INCOME-PRETAX> 6,739 14,599
<INCOME-TAX> 2,729 6,072
<INCOME-CONTINUING> 4,010 8,527
<DISCONTINUED> 0 (815)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,010 7,712
<EPS-BASIC> 0.25 0.55
<EPS-DILUTED> 0.24 0.53
</TABLE>
