- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- ------------------------------------------------------------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-12734
STANFORD TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2207636
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Crossman Avenue 94089
Sunnyvale, California (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(408) 745-0818
Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
Common Stock
Common Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (l) 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 ___
<PAGE>
[X] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K.
As of May 29, 1998, the aggregate market value of voting stock held by
non-affiliates of the registrant, based on the closing sale price of such stock
on the Nasdaq National Market, was $148,382,115. Shares of Common Stock held by
each officer, director and ten percent stockholder of the registrant, except for
Kopp Investment Advisors, Inc., have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares of the registrant's Common Stock outstanding on May 29,
1998 was 12,975,588.
Documents Incorporated by Reference
Portions of the registrant's Annual Report to Stockholders for the fiscal year
ended March 31, 1998 (the "Annual Report to Stockholders"), are incorporated by
reference in Parts II and IV of this Form 10-K. Portions of the definitive proxy
statement for the Annual Meeting of Stockholders to be held on June 24, 1998
(the "Proxy Statement"), are incorporated by reference in Part III of this Form
10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
Stanford Telecommunications, Inc. ("Stanford Telecom" or the "Company")
designs, manufactures, and markets advanced digital communications products and
systems to establish or enhance communications via satellites, terrestrial
wireless and cable. The Company's technical strengths include: system design,
communication waveforms, modulation and demodulation techniques, ASIC design,
Radio Frequency (RF) antennas and downconverters, software and firmware,
Asynchronous Transfer Mode (ATM) design and advanced manufacturing techniques
and processes.
The Company was incorporated in California in 1973 and reincorporated
in Delaware in 1988. The Company's fiscal year is composed of four 13-week
quarters, each of which ends on the Thursday closest to the corresponding
calendar quarter end. Fiscal year 1998 ended on March 26, 1998.
BASE BUSINESS DISCUSSION
The Company's principal base business areas and products include:
Advanced Communications for Government Agencies and Commercial Applications
Satellite Earth Terminals
Air Traffic Control Systems Modernization
Global Position Satellite (GPS) Design and Development
Commercial Telecommunications Chip and Board Level Products
Commercial Electronic Contract Manufacturing
Advanced Communications for Government Agencies and Commercial Applications
DSCS Operational Control System ("DOCS"). The Company developed,
installed and now assists in the operation of an extensive network of computers
and software which performs control and monitoring functions for the Defense
Satellite Communication System ("DSCS"). Control of the DSCS is complex due to
the different types of multiple access techniques used and the need to react
quickly to communications requirements and to hostile jamming actions. The task
of optimizing and controlling the many thousands of parameters in the DSCS
network is a sophisticated computational problem requiring both advanced
computers and extensive information processing. The DOCS is comprised of network
management and control subsystems that are used as tools for managing the DSCS
ground station and space communication payload assets. The DSCS must be operated
and maintained at peak efficiency and maximum availability as it is often the
only means of communication with deployed forces. The DOCS3 contract was awarded
to Stanford Telecom in December 1996 by the U.S. Army Space Command. With the
award of this contract, Stanford Telecom continues to provide on-site operations
and maintenance support, software support, integrated logistics support,
training, and depot support services at twelve worldwide sites. The contract
consists of a one-year base and four one-year options, with a total base value
if all options are exercised, of approximately $43.9 million. Option I was
exercised during fiscal year 1998. Stanford Telecom has been the incumbent
contractor for these services since 1981. In addition to these basic support
tasks, the contract includes provisions which would allow the Government to
increase the existing scope of the contract by adding tasks associated with
system enhancements and system modifications, which may be required to extend
the system's life expectancy.
-1-
<PAGE>
Universal Modem. Stanford Telecom was awarded a contract as a team
member on the Rockwell Universal Modem System (UMS) Terminal Production Program.
The UMS will provide Army, Air Force, and Joint Communications Support Element
users with low data rate and medium data rate satellite communications
capability using Super High Frequency (SHF), Defense Satellite Communications
System (DSCS), NATO, and commercial satellites to include C and Ku bands. The
initial contract, priced at $5.8 million is for the first article qualification
testing and delivery of ten System Planning Computers for field operational test
and evaluation. The UMS operates in the SHF band and will provide an
interoperable digital voice and data satellite communications capability under
jamming and scintillation for ground (fixed and transportable), airborne, and
shipboard users. This system will enable satellite communications between the
United States, United Kingdom, France, and other NATO forces. Deliveries are
expected to commence during fiscal year 2000.
Replacement BATSON (RBATSON). During fiscal year 1997, the Company was
awarded the RBATSON contract by the U.S. Army which has a total value including
options of $14.0 million. The RBATSON provides protection for the U.S. Army
critical satellite commanding and data transmission. The RBATSON system which
consists of a Key Generator/Data Processing Assembly chassis, a Frequency
Generator/Radio Frequency Transmission chassis, and Maintenance Test Equipment
and provides the capability for the Satellite Configuration Control Element
(SCCE) of the DOCS to interface with the DSCS satellites. Deliveries are
expected to commence in fiscal 1999.
Replacement Satellite Configuration Control Element. The Company was
awarded a contract in fiscal year 1996 from the U.S. Army to provide the
configuration control element in support of network management for the DSCS. The
total value of this contract, including options, is approximately $21.7 million.
Under this contract, the Company will provide the software and hardware
necessary to fully configure, test, and deliver this element of the satellite
system. The base contract is expected to be completed during fiscal 1999.
Production options are expected to extend the contract's period of performance
through the year 2001 although there can be no assurance that the Government
will exercise options to procure additional production hardware.
Single Channel Transponder Injection Subsystem (SCTIS). The Company has
employed its spread spectrum technology in the design, production and
installation of high performance anti-jam uplink transmission systems for the
U.S. Air Force. These systems protect emergency messages being sent through the
DSCS against jamming and interception. Since the program commenced in 1978, the
Company has delivered twelve SCTIS systems plus spare parts to the U.S. Air
Force. The Company has received numerous contract modifications requiring
delivery of system enhancements, spares and additional support equipment. During
fiscal year 1998, the Company completed deliveries on the twelve upgraded
systems and an Enhanced Link Simulator. Delivery of the SCTIS upgraded spares is
expected to be completed during fiscal 1999.
Tracking and Data Relay Satellite Systems (TDRSS). The National
Aeronautics and Space Administration (NASA) Tracking and Data Relay Satellites
enable NASA to maintain global continuous communications with the space shuttle
and NASA satellites, even when they are not in direct line-of-sight to tracking
stations in the continental United States. The Company has been supporting NASA
on the TDRSS Program since 1977. During fiscal year 1996, the Company was
awarded a follow-on contract consisting of a one year base plus two one year
options, with a total value including options of $21 million. During fiscal year
1998, the Government exercised an option which extends the contract through
February 1999. The Company has several important roles in this billion dollar
satellite system, including study and system engineering support, a major
long-term subcontract to support TDRSS network control, prime contracts to
develop and assess space/ground
-2-
<PAGE>
segment architectures for upgrading the TDRSS system, and assisting NASA in the
deployment of a new TDRSS ground terminal in Guam. The Company is in the process
of developing a variety of advanced products for communications via TDRSS. These
advanced products include: Space Station Early Communication System; Software
Programmable Advanced Receiver and Third Generation Beamforming System. The
Company believes there may be market opportunities for these products or their
derivatives; however, revenues from these products have not been material to
date and there can be no assurance that these products will gain market
acceptance.
WorldSpace. The WorldSpace network, is a digital, multi-media satellite
radio broadcasting service to the emerging and under-serviced regions of the
world. By the end of the decade, WorldSpace is expected to have three satellites
in orbit. The first, AfriStar is scheduled to be launched in late 1998, followed
by AsiaStar and AmeriStar. Each satellite will deliver 80+ channels of crystal
clear audio programming directly to portable receivers. This unique global
service will transmit quality information, education and entertainment
programming to a service area that includes 4.6 billion people. During fiscal
year 1998, the Company signed a contract to develop the business and network
management software, the WorldSpace Business System, which is the foundation of
the business operations for the WorldSpace network. Recently the Company signed
contracts with WorldSpace to provide development and system integration
services, including incorporation of terrestrial repeaters, which are a critical
component of the WorldSpace digital audio and multimedia satellite network. The
total value of the current contracts is approximately $10.9 million.
Satellite Earth Terminals
Global Broadcast Services (GBS) Satellite Terminal. During fiscal year
1998, the Company was awarded a contract with Hughes Information Technology,
Inc., valued at $8.4 million, with options for an additional $9.6 million to
support the Government's GBS Program. The GBS system operates at Ka and Ku bands
with a throughput of 24 Mbps and provides the means to broadcast military
photographs, video from unmanned aerial vehicles, and programming from the Armed
Forces Radio and Television Network to our military forces overseas. As the
provider of the GBS uplink ground stations, the Company will deliver three
Primary Injection Point (PIP) terminals. Contract options provide for up to
seven dual-band (Ka and Ku) Transportable Theater Injection (TTI) terminals,
spares, and upgrades to the existing Joint-In-Theater Injection terminal;
however, there can be no assurance that the Government will fund Hughes to
exercise the options.
Digital Satellite Terminals. During fiscal year 1998, the Company was
awarded a task order contract to provide a family of Defense Satellite
Communication System (DSCS) and INTELSAT-type approved Digital Satellite
Terminal earth stations. The earth stations will range in size from 1.8 meters
to 7.6 meters and will provide communications over a variety of commercial C and
Ku band satellite networks as well as the DSCS network. The contract will expand
the Company's current offering of complete earth stations, ranging in size from
1.0 to 11 meters in S, C, X, Ku, Ka, and military Ka (MILSTAR) bands. During
fiscal year 1998, the Company received task orders valued at $7.4 million. The
contract contains options which could increase the value to $25 million,
however, there can be no assurance that the Government will exercise these
options.
Milstar Satellite Communications Terminal. The Company has been
involved since 1981 in development of the U.S. Government's Milstar satellite
communications program, designed to support stationary and mobile users in the
joint military services in the 1990's and beyond. In addition to performing
system engineering tasks, the Company has developed special test equipment in
support of the Milstar program, including a subcontract for the Milstar EHF Test
System to test the Milstar satellites in orbit. Presently, the Company is under
contract to upgrade its Milstar Test
-3-
<PAGE>
Terminals to support the Medium Data Rate communication capabilities being added
to the Milstar Block II satellites. The Company was selected by Lockheed Martin
Missiles & Space (Sunnyvale, CA), prime contractor for the Milstar satellites,
to provide three of these transportable Milstar terminals for use on special
on-orbit satellite test operations. The Company plans to deliver these terminals
during fiscal year 1999.
Air Traffic Control System Modernization
Automation and Communication System Engineering. Since 1984, the
Company has been supporting a FAA program to upgrade and modernize the nation's
air traffic control (ATC) and air transport navigation system. The Company's
activities include ATC automation and communications system engineering and
support to FAA special projects activities such as the relocation of the Chicago
O'Hare ATC Tower Complex. The Company is also supporting the FAA in its
acquisition of the new terminal area ATC automation system. The above activities
are being performed under two separate Department of Transportation contracts:
one to the FAA for support in the communications, navigation, surveillance,
automation and weather areas which was awarded during fiscal year 1998 with a
potential value of $10 million including options, and one to the Volpe National
Transportation System for transportation, system engineering and R&D support.
Satellite Based Air Traffic Control System. The Company was awarded a
contract during fiscal year 1997 to support the FAA's implementation of a Global
Positioning System (GPS) Wide Area Augmentation System (WAAS). The contract
consists of a one-year base and two six-month options with a value after
exercise of all options of $23 million. Through fiscal year 1998, the FAA had
funded tasks totaling approximately $1.5 million. The Company has been
supporting the WAAS Program since 1990. The FAA's WAAS Program is a central
element of the FAA's plans to move toward a satellite based ATC System. The
Company's support of WAAS has also included development of testbeds for related
programs in Italy and Australia. As part of this work, the Company has supported
an international flight between the U.S. and Italy that demonstrated
international interoperability capabilities of WAAS. The Company believes that
an international need exists for WAAS capabilities and it plans to pursue such
opportunities as they arise.
Global Positioning Satellite (GPS) Design and Development
GPS L-Band Test System. During fiscal year 1998, the Company was
awarded a contract with a value of $5.6 million by Boeing North American to
design and deliver factory test sets for the next generation Block IIF Global
Positioning System Satellites. Each of the deliverable systems will be housed in
equipment racks and consist of a combination of commercial test equipment and
Company-designed equipment. The system will be used in Boeing's Seal Beach
facility to provide extremely accurate measurements of critical L-Band signal
parameters and satellite delays. Deliveries are expected to commence during
fiscal year 1999.
Commercial Telecommunications Chip and Board Level Products
Commercial Telecommunications Chip and Board Level Products. The
Company designs, manufactures and markets a wide range of Application Specific
Integrated Circuits (ASIC) and board level assemblies for a variety of
commercial telecommunication applications. These products provide the digital
signal processing required to transmit and receive information. The Company
offers products for Phase Shift Key (PSK) modulation and demodulation, digital
down conversion, the reception and transmission of spread spectrum information,
forward error correction, adaptive equalization and direct digital frequency
synthesis. Key market areas addressed by the Company
-4-
<PAGE>
include:
- Cable/Internet Communications. Stanford Telecom has developed and
patented the modulation/ demodulation technology required for the
"upstream" (from the subscriber set-top box to the cable "headend")
transmission of data over hybrid fiber/coax (HFC) networks. Products
offered include the STEL-1109, a single-chip complete BPSK/QPSK
(Bi-Phase Shift Key/Quadra-Phase Shift Key) modulator ASIC,
specifically designed for the transmission of data from the subscriber
to the headend and the STEL-9257, a Burst Demodulator board level
assembly that provides demodulation of burst QPSK signals in the
upstream environment. The Company is working with certain cable modem
manufacturers which have incorporated the Company's products into their
designs. In addition, during fiscal year 1998, the Company announced
the STEL-2176 Cable Modem subscriber ASIC which is the world's first
integrated upstream and downstream single chip solution for the primary
cable modem standards MCNS and DAVIC. The Company believes it to be the
highest performance, competitively priced solution in the market. It is
designed specifically for reception and transmission of data over HFC
cable communications networks-- receiving 16/64/256 QAM signals and
sending QPSK & 16QAM modulated signals. Although revenues from these
products have not been material to date, the Company believes that
future revenues may increase if production orders are forthcoming.
- Very Small Aperture Terminal (VSAT) Receiver Assemblies. The Company
offers board level receiver assemblies for use in VSAT satellite
systems. These digital demodulator assembly products are used for rural
telephony, background music services and business data transmissions.
The STEL-9258 Variable Bit Rate product can provide signal timing
recovery, demodulation, down conversion, carrier tracking and forward
error correction functions. During fiscal year 1998, the Company
introduced the STEL-9260 which is the Company's first complete
BPSK/QPSK modem. It is intended for use in systems where the
combination of modulator and demodulator functions in a single package
is important. Although revenues from the STEL-9260 has not been
material to date, the Company believes revenues may be significant if
production orders are forthcoming.
- Catalog Products. The Company offers a wide range of ASIC and board
level products providing various digital communications functions such
as ASICs for spread spectrum wireless data links, a family of ASICs for
forward error correction in communication links, and a series of
numerically controlled oscillators and direct digital synthesizers for
precise signal generation and control.
Commercial Electronic Contract Manufacturing
During fiscal year 1993, the Company began to pursue opportunities in
commercial contract manufacturing. In addition to producing its own products,
the Company offers its contract manufacturing services to commercial customers.
Revenues for the Company's contract manufacturing business amounted to
approximately 17% of total revenues for fiscal year 1998. The Company's
Sunnyvale, California manufacturing facilities received ISO-9001 certification
during fiscal year 1996. During fiscal year 1998, approximately 17% of the
Company's manufacturing activities were associated with the Company's own
products. The Company expects to increase the amount of manufacturing of its own
products, if orders for wireless broadband equipment are realized. The Company
believes that sufficient capacity currently exists to meet future demands
associated with the potential increase in manufacturing levels over the next two
fiscal years.
-5-
<PAGE>
COMMERCIAL STRATEGIC PRODUCT DEVELOPMENT
Stanford Telecom has initiated a number of strategic product
developments and business arrangements, including those addressed below, to
address a growing worldwide market for digital telecommunication products and
services. Revenues from these initiates have not been significant to date and
there is no assurance that the Company will be successful in the development,
marketing, distribution and sales of these products; however the Company
believes that the market for these product and services is substantial.
Wireless Broadband Communications
Wireless broadband communications, also called Local Multipoint
Distribution System (LMDS), Multichannel/Multipoint Distribution System (MMDS)
or "wireless cable", is a new technique for two-way transmission of high speed
digital data using terrestrial microwave links to homes and offices. The Company
has had an MMDS demonstration system operating in Sunnyvale, California since
October 1996, and has performed demonstrations for a wide range of international
and domestic customers. In addition, the Company received orders for two market
trials for MMDS equipment and at fiscal year end deployment of these trial
systems was underway. The Company believes that there is sizable interest in the
telephony potential in offshore markets and a growing interest in providing both
telephony and data services in the domestic market. The U.S. Wireless Cable
Association has applied for authorization to use MMDS spectrum for two-way
digital multimedia services, which will greatly enhance the business prospects
for this technology. Recently, the Company installed 10 MMDS subscriber
terminals as part of a technical trial system on the West Coast which is being
used to test high speed data services. This trial uses 16 QAM downstream and
QPSK upstream. Testing is expected to continue through the Summer of 1998, when
telephony services are expected to be implemented at the test site. The Company
is under contract to expand the number of subscriber terminals to approximately
150 in market tests of the services being offered.
The Company's LMDS development continued throughout fiscal year 1998,
with the pace accelerating as the fiscal year ended. The FCC auction was delayed
until late in the fiscal year, but has now been completed. The Company is now
conducting LMDS technology demonstrations and building field trial systems. The
Company expects to deploy market trial systems in mid-fiscal year 1999, with
production volumes expected to be ordered later in fiscal year 1999. These
systems operate in the 28-31 GHz microwave frequency spectrum. At fiscal year
end, two trial systems were deployed, one in Asia, and the other in the United
States. Additional trial systems are on order for deployment in the second
quarter of fiscal year 1999. The Company has entered into development and
supplier agreements with two major communication systems integrators for LMDS
equipment.
Satellite Personal Communications
In recent years a number of worldwide satellite-based cellular systems
have been proposed, and in some cases implementation has begun, including
Inmarsat's ICO, Motorola's Iridium and Loral/Qualcomm's Globalstar. The Company
had been carrying out research and development on the medium altitude Odyssey
system being proposed by TRW/Teleglobe. During fiscal year 1998, TRW/Teleglobe
announced that they would not proceed with the Odyssey Program. Notwithstanding,
the Company believes that its proprietary version of the OCDMA (Orthogonal Code
Division Multiple Access) waveform in transmission of voice data communications
is applicable to other programs and is pursuing opportunities with other
companies for the use of the
-6-
<PAGE>
waveform as well as development support. There can be no assurance that the
Company will successfully produce revenues from satellite personal communication
systems during fiscal year 1999, or at all.
OTHER BUSINESS
Manufacturing
Stanford Telecom's products are generally manufactured from standard
components, its proprietary ASICs and other components or subsystems produced to
the Company's specifications. Most of the Company's current products contain
microprocessors for which proprietary software is designed and tested by the
Company's engineers. The Company does not have a semiconductor foundry or
fabrication facility. For the production of ASICs, the Company contracts with
companies that have foundry capability, including Lucent Technology Inc., and
Amercian Microsystems Inc.
In many cases only a single source is available for specific
components, and thus there is a risk of delay in delivering finished systems
within contractual schedules. The Company attempts to minimize this risk by
securing second sources, finding alternate technologies to perform the same
function and maintaining adequate inventories of single source components. To
date, the Company has experienced no material adverse impact due to component
unavailability, product returns or contract renegotiations. Many of the
Company's products are covered by a 90-day to one-year warranty under which the
Company will repair or replace defective parts. To date, warranty expense has
not been significant.
Marketing and Customers
The Company markets its products and services to agencies of the U.S.
Government, prime contractors to these agencies and an increasing number of
commercial customers. The Company's marketing is conducted by its management and
technical staff, and in the case of its commercial business, domestic and
international sales representatives are also utilized. The Company's marketing
efforts for its government business consist of responding to requests for
proposals and solicitations for bids from U.S. Government agencies or prime
contractors to these agencies and direct marketing of its off-the-shelf,
standardized products. The Company markets its ASICs and commercial products
primarily through its direct sales personnel consisting of 9 full-time
employees, 18 independent sales representative locations covering the U.S. and
Canada and 27 other independent sales representative offices covering other
international territories. The Company also places advertisements for commercial
products, particularly its Wireless Broadband (LMDS/MMDS) and ASIC products, in
a number of trade magazines and participates in trade shows and industry
symposiums. In some cases, the major communication system integrators who are
pursuing wireless broadband opportunities market the Company's' products
directly to the service providers. The Company may be requested to support these
marketing activities from time to time.
During fiscal years 1998, 1997 and 1996 approximately 62%, 59% and 54%,
respectively, of the Company's revenues were attributable to contracts with
numerous agencies of the U.S. Government. No single contract accounted for more
than 10% of revenues during fiscal years 1998, 1997 or 1996. Some of the
Company's U.S. Government sales are made under letter contracts in which the
final contract price is agreed upon after work has begun. To date, the Company
has had a small amount of revenue from international customers. Such sales are
often subject to U.S. State Department approval and export license requirements.
-7-
<PAGE>
Competition
Competition is intense among providers of digital telecommunications
equipment, products and services. In the Company's government business,
competitors include major defense contractors, telecommunications equipment and
electronics firms, and systems integrators, most of which have significantly
greater financial, marketing and operating resources than the Company, as well
as broader product lines and technological capabilities. As a result of reduced
defense spending by the U.S. and other governments, competition has become more
intense in the Company's government business. Although no single competitor
competes with the Company in all of its product lines, a number of competitors
such as Harris Corporation, Loral-Space, Lockheed-Martin, TRW, BDM, Hughes, CSC,
Broadcom Corporation, Hitachi, and Rockwell International compete with the
Company in various market segments. Certain of the Company's customers have
technological capabilities in the Company's product areas and could choose to
develop and manufacture certain products themselves rather than purchase from
suppliers such as the Company. As the Company continues to transition to more
commercial business, it expects to face new and increasing competition with
respect to its commercially oriented products and services. The Company believes
that, in its highly specialized technical environment, price, performance,
reputation, reliability, on-time delivery and customer support are the primary
competitive factors among companies having similar technical capabilities.
Backlog and Bookings
Funded backlog includes: (i) projects and orders covered by signed
contracts for which the government has specifically allocated funding; and (ii)
purchase orders from commercial customers. The Company's backlog is largely
attributable to agencies of the U.S. Government. In the case of certain
long-term contract awards, the U.S. Government typically makes the funds
available over the life of the contract as opposed to the time of the contract
award. In such cases the Company reports as funded bookings only the amount of
the funds specifically allocated and the resultant backlog as funded backlog.
The Company does not include unexercised options in backlog. The Company's
funded bookings for fiscal 1998 and 1997 were $163.0 million and $168.5 million,
respectively, and the Company's backlog at the end of fiscal 1998 and 1997 was
$93.6 million and $83.9 million, respectively. At March 31, 1998 backlog from
the Company's government and commercial businesses were approximately $59.3
million and $34.3 million, respectively. There can be no assurance that funded
backlog will be completed and booked as revenue. The Company's contracts
typically contain contingency provisions permitting termination by the customer
at any time. Cancellation of pending contracts or termination or reductions of
contracts in progress may have a material adverse effect on the Company's
results of operations.
Research and Development
The telecommunications industry is characterized by rapid technological
change, requiring a continuous effort to enhance existing products and develop
new products. The Company believes that its continued success depends in large
part on its ability to develop new and enhanced digital telecommunications
products. The Company conducts extensive research, development and engineering
activities with the objective of developing products and systems that provide
for cost-effective, digital wireless telecommunications and high-quality
satellite communications. Since its inception, the Company has developed a
number of innovative and proprietary digital telecommunications technologies
through a combination of customer and internally funded research and
development. Company-funded expenditures for research and development including
bid and proposal activities for fiscal years 1998, 1997, and 1996 were
approximately $13.6 million, $11.9
-8-
<PAGE>
million and $8.4 million, respectively, which represented 8.9%, 7.1%, and 5.8%
of total revenues, respectively.
The Company's revenues have historically been derived primarily from
performing contract research and development and engaging in limited production
contracts with agencies of the U.S. Government and their prime contractors. As a
result, a substantial portion of the digital telecommunications research and
development performed by the Company since its inception has been funded by its
customers and recorded as revenues by the Company. Accordingly, the cost of
performing this customer-funded research and development is included in "Costs
of Revenues" in the Company's financial statements.
The Company continually seeks to develop new products for commercial
applications to leverage its leading digital telecommunications technologies
that have been funded through many military and government research and
development contracts since the early 1970's. Over the last two years, the
Company has significantly increased its level of independent research and
development expenditures. This increase is necessary to successfully develop
competitive products for the commercial telecommunications market. During fiscal
year 1998 approximately $10.0 million, or 72% of the Company's R&D was invested
in these strategic commercial initiatives. The Company has applied much of its
research and development expenditures to commercial products and initiatives in
the areas of wireless and cable broadband communications.
Employees
As of March 31, 1998, the Company employed 969 full-time and 24
part-time employees and 13 professional consultants. Of the full-time employees,
564 are in technical operations, 124 in manufacturing operations, 120 in
management, 99 professional non-technical, and 62 in support positions. The
majority of the Company's employees are highly skilled technical personnel.
Several are nationally known leaders in the field of digital telecommunications.
Over 612 employees hold advanced degrees, including approximately 39 with
doctoral degrees. None of the employees are represented by a labor union and the
Company has never had a work stoppage. The Company believes its employee
relations to be good. Due to the nature of the Company's business, a large
number of its technical employees must obtain security clearances from the U.S.
Government, which limits the available pool of eligible candidates for such
positions to those who can satisfy prerequisites for such clearances.
Patents and Proprietary Rights
The success of the Company's business depends in part upon its ability
to protect trade secrets, obtain or license patents and operate without
infringing on the rights of others. Although the Company has obtained patents
covering certain of its technologies, it believes that the ownership of patents
has not generally been a significant factor in its government business and that
its success depends primarily on innovative skills, technical competence, and
the marketing and managerial abilities of its personnel. The Company relies on a
combination of trade secrets, copyrights, patents, nondisclosure agreements and
technical measures to protect its proprietary rights in its products and
technology. Such protection may not preclude competitors from developing
products with features similar to the Company's products. The Company believes
that patents will play an increasingly important role in its commercial business
and during the past two years the Company has received or filed for
approximately 70 patents with the U.S. Patent and Trademark Office. The Company
expects it will continue to aggressively pursue additional patents to protect
its intellectual property.
-9-
<PAGE>
The Company requires its employees to execute proprietary rights and
nondisclosure agreements and to maintain the confidentiality of the Company's
proprietary information.
Government Regulation
The Company's operations are subject to compliance with regulatory
requirements of federal, state and local authorities, including regulations
concerning employment obligations and affirmative action, workplace safety and
protection of the environment. In addition, many of the Company's products and
proposed products are or will be subject to various regulations including
regulations promulgated by the Federal Communications Commission, the FAA and
the DoD. While compliance with applicable regulations has not adversely affected
the Company's operations in the past, there can be no assurance that the Company
will continue to be in compliance in the future or that these regulations will
not change.
In addition, the Company must comply with detailed government
procurement and contracting regulations and with U.S. Government security
regulations, including those necessary to maintain required facility clearances.
Certain of these regulations carry substantial penalty provisions for
nonperformance or misrepresentation in the course of negotiations. Failure of
the Company to comply with its government procurement, contracting or security
obligations could result in penalties or suspension of the Company from
government contracting, which would have a material adverse effect on the
Company's results of operations.
The Company is required to maintain a U.S. Government facility
clearance at most of its locations. This clearance could be suspended or revoked
if the Company is found not to be in compliance with applicable security
regulations. Any such revocation or suspension would delay the Company's
delivery of its products to customers. Although the Company has adopted policies
designed to assure its compliance with applicable regulations and there have
been no suspensions or revocations of any of its facilities, there can be no
assurance that the approved status of the Company's facilities will continue
without interruption.
Forward Looking and Cautionary Statements
In the interest of providing the Company's shareholders and potential
investors with certain Company information, including management's assessment of
the Company's future potential, certain statements set forth herein (a) contain
or are based on projections of revenue, income, earnings per share and other
financial items or (b) relate to management's future plans, expectations,
objectives or to the Company's future economic performance. Such statements are
"forward-looking statements" within the meaning of Section 27A(i) of the
Securities Act of 1933, as amended, and in Section 21E(i) of the Securities
Exchange Act of 1934, as amended.
Although any forward-looking statements contained herein or otherwise
expressed by or on behalf of the Company are to the knowledge and in the
judgment of the officers and directors of the Company, expected to prove true
and to come to pass, management is not able to predict the future with absolute
certainty. Accordingly, shareholders and potential investors are hereby
cautioned that certain events or circumstances could cause actual results to
differ materially from those projected or predicted. In addition,
forward-looking statements are based on management's knowledge and judgment as
of the date such statements are made, and the Company does not intend to update
any forward-looking statements to reflect events occurring or circumstances
existing thereafter.
-10-
<PAGE>
In particular, the Company believes that the following factors could
impact forward-looking statements made herein or in other written or oral
releases and by hindsight, prove such statements to be overly optimistic and
unachievable:
1. Future revenues on government contracts, including contracts in
progress, are subject to reduction or cancellation without prior notice at the
convenience of the U.S. Government. Budgetary constraints and changes in
spending priorities in government agencies such as the Department of Defense,
NASA, and the FAA in the past have resulted in sudden program changes,
reductions or cancellations and such conditions are expected to continue.
2. The Company has in the past accepted fixed price development
commitments for both government and commercial contracts. Although the Company
attempts to bid fixed price development contracts at an amount above the
expected costs of development and production, the Company has from time to time
experienced significant cost overruns which cannot be recovered from the
customer. The Company may in the future experience material cost overruns which
could adversely affect operating results over the life of the program.
3. The Company's basic strategy is to employ its technology in wireless
telecommunications and digital signal processing in the commercial environment,
generally as components or subsystems in the product or service offerings for
large telecommunications companies. The transition from a government contracts
focus to commercial development will expose the Company to certain business
risks not previously encountered. Of greatest significance will be the success
of the Company's customers in marketing the products or services for which the
Company provides key technology components, or subsystems. A successful product
development effort will not produce meaningful long-term revenues or profits for
the Company unless its customer obtains market acceptance of its end product or
service. Factors such as system price, competitive pressures, consumer demand
and the like will impact the customer's and the Company's level of commercial
success. In addition, even if a product or service achieves commercial success,
the Company will experience the continued risk that the customer will develop or
obtain lower cost alternatives to the Company's products or technical solutions.
4. Most of the Company's material contracts are awarded to the Company
with options to extend the contracts. A contracting party's decision regarding
the options particularly in the case of government contracts, can be based on
numerous factors, events and circumstances which may be outside the control of
the contracting party and which are difficult to predict. For example a change
in government priorities, budgets and or technologies. The Company has little or
no control over whether these options are exercised.
5. The Company's Commercial Manufacturing Division has grown
significantly since being established in 1993. The Division provides
manufacturing services to producers of electronics and medical products on
either an inventory consignment or turnkey basis. The contract manufacturing
business is subject to wide swings in demand, is price sensitive and extremely
competitive. In addition, to the extent inventory is purchased in anticipation
of future contracts, the failure to obtain such contracts can lead to a
reduction in the value of such inventory. The Company's Commercial Manufacturing
Division does not generally operate with long-term contracts and is often
required to bid each new job even for major customers.
6. Many of the components incorporated in the Company's commercial
products, including all semiconductor components, are purchased from third party
vendors. Certain key components are sole sourced. From time to time, the Company
may experience significant delays in component
-11-
<PAGE>
availability which could adversely impact its ability to make timely deliveries
to its customers. Such events could cause expected revenues to be delayed and
the possible loss of future orders.
ITEM 2. PROPERTIES
The Company's headquarters and principal engineering and manufacturing
facilities are currently located in four adjacent buildings in Sunnyvale,
California where it leases approximately 172,000 square feet. The Company's
Sunnyvale facility leases will expire in the year 2000. The leases contain
options for renewal under terms and conditions to be negotiated at the time of
expiration. The Company also leases approximately 84,000, 46,400, 39,900,
30,900, 15,300, 11,300, and 8,000 square feet of office space in Reston,
Virginia, Colorado Springs, Colorado, Ashburn, Virginia, Annapolis Junction,
Maryland, Lowell, Massachusetts, Seabrook, Maryland, and Tinton Falls, New
Jersey, respectively, which space is used primarily for the performance of
study, system engineering and hardware contracts. The Ashburn, Reston, Annapolis
Junction, Colorado Springs, Tinton Falls, Lowell, and Seabrook leases expire in
2008, 2006, 2003, 2002, 2002, 2001 and 2001, respectively. The Company believes
its current facilities are suitable and adequate for the Company's operations
over the next fiscal year.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in litigation incidental to
its business. Management believes that the outcome of current litigation will
not have a material adverse effect on its financial position or results of
operations.
In December 1996, the Company filed an action against Broadcom
Corporation alleging that certain Broadcom product(s) infringe a patent owned by
the Company. The complaint seeks an injunction against Broadcom Corporation, as
well as the recovery of monetary damages. Broadcom Corporation has asserted a
counterclaim requesting relief and has asserted that they do not infringe the
patent. The Company and Broadcom Corporation are currently in discovery. A
claims construction hearing was completed in April 1998 and an order regarding
claims construction was filed by the Court on June 10, 1998. A trial date has
not yet been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
CORPORATE OFFICERS OF THE COMPANY
Set forth below are the names and ages of the executive officers of the
Company, their principal occupations at present and for the past five years,
certain directorships held by each, and the term of office with the Company.
Dr. James J. Spilker, Jr. (age 64), a founder of the Company, has been Chairman
of the Board since 1983. He served as President and Chief Executive Officer of
the Company from August 1981 to June 1995. Since June 1995, Dr. Spilker also has
been serving as Principal Scientist for the Company.
Dr. Val P. Peline (age 67) was elected as a Director of the Company in October
1985. Dr. Peline joined the Company as its President and Chief Executive Officer
effective June 5, 1995. Dr. Peline served as President of the Electronic Systems
Group, a division of Lockheed Corp., from 1987 until
-12-
<PAGE>
he retired from such position in March 1995. Dr. Peline had been President of
the Lockheed Space Division from 1984 to March 1987.
Mr. Leonard Schuchman (age 61) was elected as a Director of the Company in April
1985. Mr. Schuchman joined the Company in January 1976 and became Vice President
in February 1977. He is responsible for directing the Company's Communications
and Navigation Systems Operation.
Mr. Ernest L. Dickens, Jr. (age 51) joined the Company in October 1981. From
April 1990 to October 1995 he directed the Company's Government Systems Services
operation. Mr. Dickens was elected Vice President in November 1995 and currently
directs the Company's Satcom Ground Systems operation.
Mr. Bronic C. Knarr (age 52) joined the Company in November 1988. From November
1988 to April 1992 Mr. Knarr held various management positions at the Company in
support of key programs. From April 1992 to September 1995 Mr. Knarr directed
the Company's Satellite Communications operations. In September 1995 Mr. Knarr
was appointed director of the Company's Manufacturing and Quality Assurance
operation and was elected Vice President in November 1995.
Dr. John E. Ohlson (age 58) joined the Company in March 1981 as Director of
Telecommunications Programs Operations and became Vice President in January
1982. In February 1991 he was named Director of Military Ground Terminals. Dr.
Ohlson directed the Satellite Communications Group from June 1992 to November
1994. Dr. Ohlson was named as the Company's Chief Technical Officer in November
1994 and currently directs the Company's Satellite Personal Communications
Operation.
Mr. Gary S. Wolf (age 47) joined the Company in May 1978 and was elected Vice
President, Chief Financial Officer, Secretary and Treasurer in December 1984. In
January 1997 he was promoted to Executive Vice President.
Mr. Jerome F. Klajbor (age 42) joined the Company in February 1989. Mr. Klajbor
served as a Contracts Manager for the Company from 1989 to 1991. From 1991 to
1996, Mr. Klajbor served as Director and subsequently Vice President of
Administration and Finance for the Company's Communication Navigation Systems
Operation. He was appointed Vice President and Chief Financial Officer of the
Company in January 1997.
-13-
<PAGE>
PART II
ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Incorporated by reference from page 36 of the Company's 1998 Annual Report to
Stockholders.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from page 35 of the Company's 1998 Annual Report to
Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated by reference from pages 22 through 25 of the Annual Report to
Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of Stanford Telecommunications, Inc. as of March
31, 1998 and March 31, 1997 and for each of the three years in the period ended
March 31, 1998 and the report of independent public accountants thereon are
incorporated by reference from pages 26 through 34 of the Annual Report to
Stockholders. See Part IV, Item 14(a).
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Inapplicable.
-14-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "Election of
Directors-Information with Respect to Nominees and Directors" beginning on page
2 of the Company's Proxy Statement relating to the 1998 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference and
made a part hereof in response to the information required by this item. In
addition, certain information pertaining to executive officers of the Company is
set forth on pages 12-13 hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
beginning on page 5 of the Proxy Statement is incorporated herein by reference
and made a part hereof in response to the information required by this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Stock Ownership" beginning
on page 12 of the Company's Proxy Statement is incorporated herein by reference
and made a part hereof in response to the information required by this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Inapplicable.
-15-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following report, financial statements and other information are
incorporated by reference from the Annual Report to stockholders and form a part
of this report:
Reference Page
------------------
1998
Annual
Report Form 10-K
------ ---------
1. Financial Statements.
Report of Independent Public
Accountants 26
Statements of income for each
of the three years in the period
ended March 31, 1998 26
Balance sheets at March 31, 1998 and
March 31, 1997 27
Statements of shareholders' equity for
each of the three years in the period
ended March 31, 1998 28
Statements of cash flow for each of
the three years in the period ended
March 31, 1998 29
Notes to financial statements 30
2. Financial Statement Schedules
Report of Independent Public Accountants on Schedules 21
Schedule II - Valuation and Qualifying Accounts 22
All other schedules have been omitted because the required information
is not present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements or notes thereto.
With the exception of such information in the 1998 Annual Report to
Stockholders specifically incorporated herein by reference, the 1998 Annual
Report to Stockholders is not deemed "filed" as part of this report.
-16-
<PAGE>
3. Exhibits.
Exhibit Number Description
- -------------- -----------
3.1(2) Certificate of Incorporation, as amended.
3.2(2) Bylaws, as amended.
4.1(6) Rights Agreement dated as of May 9, 1995 between the Company and
The First National Bank of Boston.
4.2 Agreement re. Rights of Holders of Long-Term Debt.
10.1(5) Consolidated, Amended and Restated Deed of Lease for the premises
located at 1761 Business Center Drive, Reston, Virginia dated
October 1, 1993 between the Company and the Variable Annuity Life
Insurance Company.
10.2*(1) 1982 Stock Option Plan, as amended, and form of Agreements.
10.3*(3) 1992 Employee Stock Purchase Plan.
10.4(4) Lease dated November 19, 1992 for 480 Java Drive, Sunnyvale,
California, 440 Moffett Park Drive, Sunnyvale, California, and
1221 Crossman Avenue, Sunnyvale, California.
10.5(5) Office Lease Agreement for 141 National Business Parkway,
Annapolis Junction, Maryland dated March 1, 1993 between the
Company and Constellation Real Estate, Inc.
10.6*(8) 1991 Stock Option Plan and form of Agreements.
10.7*(8) Management Incentive Plan.
10.8(8) Credit Agreement dated December 5, 1996 between the Company and
Bank of America National Trust and Savings Association (the
"Credit Agreement").
10.9 Second Amendment to the "Credit Agreement" dated December 12,
1997.
10.10 Office lease Agreement for 45145 Research Place, Ashburn,
Virginia dated June 17, 1997 between the Company and Opus East,
LLC a Delware limited liability company.
10.11 Rider No. three (3) to consolidated, amended and restated deed of
lease agreement dated May 15, 1998, between the Company and A&A
Fairfax Four L.L.C.
13.1(7) Annual Report to Stockholders for the fiscal year ended March 31,
1998.
23.1 Consent of Arthur Andersen LLP, independent public accountants.
24.1 Power of Attorney (included on the signature pages hereof).
27.1 Financial Data Schedule
- ---------------------------
*Compensatory Plan
-17-
<PAGE>
(1) Incorporated by reference from the Company's Annual Report on Form l0-K
for the fiscal year ended March 31, 1987.
(2) Incorporated by reference from the Company's Annual Report on Form l0-K
for the fiscal year ended March 31, 1989.
(3) Incorporated by reference from the Company's Annual Report on Form l0-K
for the fiscal year ended March 31, 1992.
(4) Incorporated by reference from the Company's Annual Report on Form l0-K
for the fiscal year ended March 31, 1993.
(5) Incorporated by reference from the Company's Registration Statement on
Form S-1, No. 33-72720.
(6) Incorporated by reference from the Company's Registration Statement on
Form 8-A, dated May 24, 1995.
(7) Only those portions of the Annual Report to Stockholders that are
specifically incorporated by reference in this form 10-K are included
in this exhibit.
(8) Incorporated by reference from the Company's Annual Report on Form 10K
for the fiscal year ended March 31, 1996.
Reports of Form 8-K
No current Reports on Form 8-K were filed by the Company with the Securities and
Exchange Commission during the last quarter of the period covered by this Form
10-K.
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
STANFORD TELECOMMUNICATIONS, INC.
Dated: June 24, 1998 /s/ James J. Spilker, Jr.
------------------------------
James J. Spilker, Jr.
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James J. Spilker, Jr. and Jerome F.
Klajbor and each of them, as his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Form 10-K and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James J. Spilker, Jr. Chairman of the Board June 19, 1998
- -------------------------
James J. Spilker, Jr.
/s/ Val P. Peline President (Principal Executive June 20, 1998
- ----------------- Officer) and Director
Val P. Peline
/s/ Jerome F. Klajbor Vice President and Secretary, June 19, 1998
- --------------------- (Principal Financial
Jerome F. Klajbor and Accounting Officer)
-19-
<PAGE>
/s/ Michael Berberian Director June 19, 1998
- ---------------------
Michael Berberian
/s/ John W. Brownie Director June 22, 1998
- -------------------
John W. Brownie
/s/ Leonard Schuchman Vice President and Director June 22, 1998
- ---------------------
Leonard Schuchman
/s/ C.J. Waylan Director June 22, 1998
- ---------------
C. J. Waylan
</TABLE>
-20-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULES
To Stanford Telecommunications, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Stanford Telecommunications, Inc.'s annual
report to stockholders incorporated by reference in this Form l0-K, and have
issued our report thereon dated April 22, 1998. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed at Item 14(a)(2) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
San Jose, California
April 22, 1998
-21-
<PAGE>
SCHEDULE II
STANFORD TELECOMMUNICATIONS, INC.
Valuation and Qualifying Accounts
Three years ended March 31, 1998
(In Thousands)
Allowance for doubtful accounts
Bal. at Beg. Charged to Bad Debts Bal. at End
Year of Period Expense Written Off of Period
---- ----------- ---------- ----------- -----------
1996 $ 650 $ 468 $ (198) $ 920
1997 $ 920 $ 135 $ (32) $1,023
1998 $1,023 $ (290) $ (22) $ 711
-22-
EXHIBIT NUMBER 4.2
AGREEMENT RE. RIGHTS OF HOLDERS OF LONG-TERM DEBT
The Company hereby agrees to furnish to the Securities and Exchange Commission,
upon request, a copy of the instruments which define the rights of holders of
long-term debt of the Company. None of such instruments not included as exhibits
herein represents long-term debt in excess of 10% of the total assets of the
Company.
EXHIBIT 10.9
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(MULTICURRENCY)
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
(MULTICURRENCY) (the "Amendment"), dated as of December 12, 1997, is entered
into by and between STANFORD TELECOMMUNICATIONS, INC. (the "Borrower") and BANK
OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank").
RECITALS
A. The Borrower and the Bank are parties to an Amended and Restated
Credit Agreement (Multicurrency) dated as of December 20, 1995, as amended by a
First Amendment to Amended and Restated Credit Agreement (Multicurrency) dated
as of December 5, 1996 (as so amended, the "Credit Agreement"), pursuant to
which the Bank has extended certain credit facilities to the Borrower.
B. The Borrower has requested that the Bank agree to certain amendments
of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
(a) Section 1.01 of the Credit Agreement shall be amended at
the defined term "Availability Period" by amending and restating such defined
term as follows:
"'Availability Period': the period commencing on the date of
this Agreement and ending on the date that is the earlier to
occur of (a) December 18, 1998, and (b) the date on which the
Bank's commitment to extend credit hereunder terminates. "
(b) Section 1.01 of the Credit Agreement shall be amended at
the defined term "Final Maturity Date" by amending and restating such defined
term as follows:
"'Final Maturitv Date': (a) in respect of any Advances,
December 18, 1998;
(b) in respect of any commercial letters of credit, June 18,
1999;
(c) in respect of any standby letters of credit, December 17,
1999;
(d) in respect of any Bank Guaranties, December 17, 1999; and
(e) in respect of any acceptances, June 18, 1999."
<PAGE>
3. Representations and Warranties. The Borrower hereby represents and
warrants to the Bank as follows:
(a) No Default or Event of Default has occurred and is
continuing.
(b) That certain resolution of the Board of Directors of the
Borrower dated March 28, 1991, which authorizes the credit facilities provided
under the Credit Agreement remains in full force and effect. The execution,
delivery and performance by the Borrower of this Amendment have been duly
authorized by all necessary corporate and other action and do not and will not
require any registration with, consent or approval of, notice to or action by,
any person (including any governmental authority) in order to be effective and
enforceable. The Credit Agreement as amended by this Amendment constitutes the
legal, valid and binding obligations of the Borrower, enforceable against it in
accordance with its respective terms, without defense, counterclaim or offset.
(c) All representations and warranties of the Borrower
contained in the Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis
of its own investigation and for its own reasons, without reliance upon the Bank
or any other person.
4. Effective Date. This Second Amendment will become effective as of
the date first above written (the "Effective Date"), provided that the Bank has
received from the Borrower a duly executed original (or, if elected by the Bank,
an executed facsimile copy) of this Amendment.
5. Reservation of Rights. The Borrower acknowledges and agrees that the
execution and delivery by the Bank of this Amendment shall not be deemed to
create a course of dealing or otherwise obligate the Bank to forbear or execute
similar amendments under the same or similar circumstances in the future.
6. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants
and provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein to such Credit Agreement shall henceforth
refer to the Credit Agreement as amended by this Amendment. This Amendment shall
be deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective successors and
assigns. No third party baneficiaries are intended in connection with this
Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
<PAGE>
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each of
the parties hereto understands and agrees that this document (and any other
document required herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Bank of a facsimile transmitted document purportedly bearing
the signature of the Borrower shall bind the Borrower with the same force and
effect as the delivery of a hard copy original. Any failure by the Bank to
receive the hard copy executed original of such document shall not diminish the
binding effect of receipt of the facsimile transmitted executed original of such
document which hard copy page was not received by the Bank.
(e) This Amendment, together with the Credit Agreement,
contains the entire and exclusive agreement of the parties hereto with reference
to the matters discussed herein and therein. This Amendment supersedes all prior
drafts and communications with respect thereto. This Amendment may not be
amended or mod)fied except in writing executed by both of the parties hereto.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Credit Agreement, respectively.
(g) Borrower covenants to pay to or reimburse the Bank, upon
demand, for all reasonable costs and expenses (including allocated costs of
in-house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
STANFORD TELECOMMUNICATIONS, INC.
By: /s/ Jerome F. Klajbor
---------------------
Name: Jerome F. Klajbor
Title: Chief Financial Officer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ Debra G. Staiger
--------------------
Name: Debra G. Staiger
Title: Vice President
EXHIBIT 10.10
DEED OF LEASE
THIS DEED OF LEASE, dated this 17 day of June, 1997, by and between
Opus East, L.L.C., a Delaware limited liability company, ("Landlord") and
Stanford Telecommunications, Inc., a Delaware corporation ("Tenant").
WITNESSETH:
That Landlord, in consideration of the rents and mutual covenants
hereinafter set forth, does hereby lease, demise and let unto Tenant, and
Tenant does hereby hire and take from Landlord the Premises (as hereinafter
defined) which includes all of the space located in the office building
("Building") to be constructed on the land located in Loudoun County, Virginia
described on Exhibit A attached hereto and incorporated herein by reference.
The Building will be constructed in accordance with the Work Agreement attached
hereto as Exhibit B. The land (including all easement areas appurtenant
thereto) upon which the Building is located is hereinafter referred to as the
"Property"; the Property and the Building are collectively hereinafter referred
to as the "Premises"; and the Premises and all buildings and improvements and
personal property of Landlord used in connection with the operation or
maintenance thereof located therein and thereon and the appurtenant parking
facilities are hereinafter called the "Office Complex."
Tenant hereby accepts this Lease and the Premises upon the covenants
and conditions set forth herein and subject to any encumbrances, covenants,
conditions, restrictions and other matters of record as of the date hereof and
all applicable zoning, municipal, county, state and federal laws, ordinances
and regulations governing and regulating the use of the Premises.
TO HAVE AND TO HOLD THE SAME, for a "term" of approximately ten (10)
years commencing on the earlier to occur of (i) Final Completion of the
Building (as defined in Exhibit B), or (ii) use and occupancy by Tenant of any
portion of the Building, but in no event prior to June 1, 1998, and ending on
the tenth (10) anniversary of the Commencement Date, unless sooner terminated
in the manner provided hereinafter. The date on which the term of the Lease
begins is sometimes hereinafter referred to as the "Commencement Date".
Following the Commencement Date, Landlord shall deliver to Tenant a
Commencement Notice which shall contain the exact Commencement Date, the number
of square feet of net rentable area contained in the Building, and other
reasonably pertinent date. If Tenant disputes the square footage as set forth
in the Commencement Notice, Tenant shall notify Landlord in writing within ten
(10) days of Landlord's delivery of the Commencement Notice. If Landlord and
Tenant are unable to resolve the dispute within twenty (20) days of Landlord's
delivery of the Commencement Notice, a measurement shall be made by a third
party mutually acceptable to Landlord and Tenant using the method specified in
Section 16.31 hereof, and the third party's determination shall govern. Upon
execution of the Commencement Notice by Landlord and Tenant, the Commencement
Notice shall be conclusive and binding on Landlord and Tenant as to all matters
set forth therein.
Notwithstanding anything to the contrary contained in this Lease, in
the event the Commencement Date has not occurred on or before December 1, 1998,
the terms of paragraph A(l)(c) of the Work Agreement shall govern.
ARTICLE I
BASE RENT
Section 1.1 Base Rent. In consideration of the leasing aforesaid,
Tenant agrees to pay to Landlord, at 6707 Democracy Boulevard, Suite 510,
Bethesda, Maryland, 20817 or at such other place as Landlord from time to time
may designate in writing, annual rental based on the number of square feet of
net rentable area contained in the Building as the same is measured in
accordance with Section 16.31 below multiplied by $14.75 per square foot of net
rentable area for the duration of the first Lease Year. During the second Lease
Year (as hereinafter defined) and each Lease Year thereafter during the term of
this Lease, the Base Rent shall be increased annually by an amount equal to
four percent (4%) of the prior Lease Year's Base Rent.
The aforesaid amount is sometimes hereinafter referred to as the "Base
Rent," and shall be payable monthly, in advance, in equal installments
commencing on the first day of the term and continuing on the first day of each
and every month thereafter for the next succeeding months during the balance of
the term. If the term commences on a date other than the first day of a
calendar month or ends on a date other than the last day of a calendar month,
monthly rent for the first month of the term or the last month of the term, as
the case may be, shall be prorated based upon the ratio that the number of days
in the term within such month bears to the total number of days in such month.
<PAGE>
ARTICLE 2
ADDITIONAL RENT
Section 2.1 Additional Rent. In addition to the Base Rent payable by
Tenant under the provisions of Article 1 hereof, Tenant shall pay to Landlord
"Additional Rent" as hereinafter provided for in this Article 2. All sums under
this Article and all other sums and charges required to be paid by Tenant under
the Lease (except Base Rent), however denoted, shall be cleaned to be
"Additional Rent." If any such amounts or charges are not paid at the time
provided in the Lease, they shall nevertheless be collectible as Additional Rent
with the next installment of Base Rent falling due.
Section 2.2 Definitions. For the purposes of this Article 2, the
parties hereto agree upon the following Definitions:
(a) "Days" or days shall mean business days in accordance with local
business and governmental observances, unless otherwise specified herein. "Lease
Year" shall mean each twelve (12) month period commencing with and including the
month during which the term of this Lease commences, and ending with the month
during which the term of this Lease (including any extensions or renewals)
terminates.
(b) "Real Estate Taxes" shall mean and include all personal property
taxes of Landlord relating to Landlord's personal property located in the
Office Complex and used in connection with the operation and maintenance
thereof (however, if the equipment is shared between the Office Complex and
other projects, only the proportionate share of taxes applicable to the Office
Complex shall be included), real estate taxes, water rates and charges, sewer
rates and charges, charges for public utilities, street lighting, excise
levies, licenses, permits, inspection fees, installments of special
assessments, including interest thereon, relating to the Property and Office
Complex, and all other governmental charges, general and special, ordinary and
extraordinary, foreseen as well as unforeseen, of any kind and nature
whatsoever, or other tax, however described, which is levied or assessed in
substitution for any of the foregoing by the United States of America or the
state in which the Office Complex is located or any political subdivision
thereof, against Landlord or all or any part of the Of Office Complex as a
result of Landlord's ownership of the Property or Office Complex, and payable
during the respective Lease Year. It shall not include any net income tax,
estate tax, or inheritance tax. Tenant shall be solely responsible for all Real
Estate Taxes.
(c) In the event Landlord accepts responsibility for the operation and
maintenance of the Office Complex pursuant to Section 5.7 of this Lease, Tenant
shall reimburse Landlord for all Operating Expenses. "Operating Expenses" shall
mean and include all expenses incurred with respect to the maintenance and
operation of the Property and Office Complex as determined by Landlord's
accountant in accordance with generally accepted accounting principles
consistently followed, including, but not limited to, insurance premiums,
maintenance and repair costs, steam, electricity, water, sewer, gas and other
utility charges, fuel, lighting, window washing, janitorial services, trash and
rubbish removal, wages payable to employees of Landlord whose duties are
connected with the operation and maintenance of the Property and Office Complex
(but only for the portion of their time allocable to work related to the
Property and Office Complex), amounts paid to contractors or subcontractors for
work or services performed in connection with the operation and maintenance of
the Property and Office Complex including air quality monitoring and
remediation efforts, all costs of uniforms, supplies and materials used in
connection with the operation and maintenance of the Property and Office
Complex, all payroll taxes, unemployment insurance costs, vacation allowances,
and the cost of providing disability insurance or benefits, pensions, profit
sharing benefits, hospitalization, retirement or other so-called fringe
benefits to employees below the level of building manager (but only for the
portion of their time allocable to work related to the Property and Of Office
Complex), and any other expense imposed on Landlord, its contractors or
subcontractors, pursuant to law or pursuant to any collective bargaining
agreement covering such employees, all services, supplies, repairs,
replacements or other expenses for maintaining and operating the Property and
Office Complex, reasonable attorneys' fees and costs in connection with appeal
or contest of real estate or other taxes or levies, and such other expenses as
may be ordinarily incurred in the operation and maintenance of an of Office
complex in Loudoun County and not specifically set forth herein, including
reasonable management fees. The term "Operating Expenses" shall also include
capital improvements to the Office Complex, and replacements required for
normal maintenance and repair, and expenses incurred by Landlord in connection
with sidewalks adjacent to the Property and any pedestrian walkway system
(either above or below ground) or other public facility required by applicable
law to which Landlord or the Of Office Complex is from time to time subject in
connection with operations of the Property and Office Complex. Tenant shall be
solely responsible for all Operating Expenses.
"Operating Expenses" shall not include Real Estate Taxes, repairs,
restoration or other work occasioned by fire, windstorm or other insured
casualty, or occasioned by condemnation; leasing commissions; legal expenses
incident to enforcement by Landlord of the terms of any existing or potential
lease; interest or principal payments on any mortgage or
<PAGE>
other indebtedness of Landlord; payment under any ground lease; compensation
paid to any employee of Landlord at or above the grade of building manager; any
depreciation allowance or expense; capital expenditures required by Landlord's
failure to comply with Legal Requirements (as defined in the Work Agreement);
overtime expenses to Landlord due to Landlord's defaults hereunder; any cost
representing an amount paid for first class services and/or materials to a
related person, firm, or entity to the extent such amount exceeds the amount
that would be paid for such first class services and/or materials at the then
existing market rates to an unrelated person, firm or entity; costs directly
resulting from the gross negligence or misconduct of Landlord, its employees,
agents or contractors; costs or fees relating to the defense of Landlord's title
or interest in the Property; costs and expenses incurred by Landlord in forming,
operating or maintaining the ownership entity for the Premises including legal
fees incurred in connection therewith; or costs or expenses incurred by Landlord
in financing, refinancing, pledging, selling, granting or otherwise transferring
or encumbering ownership rights in the Premises. Any costs incurred by Landlord
in connection with its construction guaranty referenced in the Work Agreement,
or in connection with repairing any latent defects discovered in the Building
during the first twelve (12) months of the term shall also be excluded from
"Operating Expenses". All items contracted for and paid directly by Tenant that
would otherwise be included within the term, Operating Expenses shall be
excluded from such definition. In no event shall the Operating Expenses billed
to Tenant exceed one hundred percent ( 100%) of the costs incurred by Landlord
for same.
Notwithstanding the foregoing provisions of this Section 2.2, prior to
or on the Commencement Date, Tenant shall secure all utilities for the Premises
in Tenant's name and for Tenant's account. During the term of this Lease,
Tenant will pay, when due, all charges of every nature, kind or description for
such utilities furnished to the Premises or chargeable against the Premises,
including all charges for water, sewage, heat, gas, light, garbage,
electricity, telephone, steam, power, or other public or private utility
services. Prior to the Commencement Date, Tenant shall reimburse Landlord for
all utilities or services at the Premises used directly and exclusively by
Tenant or its agents, employees or contractors.
In the event that any charge or fee is required after the Commencement
Date by the state in which the Premises are located, or by any agency,
subdivision, or instrumentality thereof, or by any utility company furnishing
services or utilities to the Premises, as a condition precedent to furnishing
or continuing to furnish utilities or services to the Premises, such charge or
fee shall be deemed to be a utility charge payable by Tenant. The provisions of
this Section 2.2 shall include, but not be limited to, any charges or fees for
present or future water or sewer capacity to serve the Premises, any charges
for the underground installation of gas or other utilities or services, and
other charges relating to the extension of or change in the facilities
necessary to provide the Premises with adequate utility services, but shall
specifically exclude any charges levied to satisfy proffered conditions as set
forth in the proffers applicable to the Office Complex dated August 10, 1988,
and the Summary dated November, 1994, copies of which have been provided to
Tenant. In the event that Landlord has paid any such charge or fee after the
date hereof, Tenant shall reimburse Landlord for such utility charge.
Section 2.3 Applicability of Certain Sections. The following Sections
2.4 through and including Section 2.9 of this Lease shall only be applicable to
those periods of time during which Landlord is responsible for the maintenance
and operation of the Office Complex pursuant to the teens of Section 5.7
hereof.
Section 2.4 Estimated Operating Expenses for Initial Lease Year.
Intentionally Deleted.
Section 2.5 Estimated Expenses. Landlord shall estimate the total
amount of Operating Expenses for the coming twelve (12) month period. Said
estimate shall be in writing and shall be delivered or mailed to Tenant at the
Premises after delivery of the Assumption Certificate referenced in Section 5.7
below.
Section 2.6 Payment of Additional Rent Tenant shall pay, as Additional
Rent, Operating Expenses, so estimated, in equal monthly installments, in
advance, on the first day of each month during each applicable twelve (12)
month period ("Cycle"). If for any reason Landlord has not provided Tenant with
Landlord's estimate of Operating Expenses prior to the commencement of any
Cycle, then Tenant shall continue to pay in accordance with the prior Cycle's
estimate until it receives Landlord's estimate of same. Within thirty (30) days
of receipt of the Operating Expense estimate, Tenant shall pay to Landlord all
amounts due for the then current Cycle, and during the remainder of such Cycle,
Tenant shall pay to Landlord an amount equal to one-twelfth (1/12th) of
Tenant's Expenses as noted on Landlord's estimate.
Section 2.7 Re-estimates of Taxes and Expenses. From time to time
during any applicable Cycle, but not more than one (1) time per Cycle, Landlord
may re-estimate the amount of Operating Expenses, and in such event Landlord
shall notify Tenant, in writing, of such re-estimate in the manner above set
forth and fix monthly installments for the then remaining
<PAGE>
balance of such Cycle in an amount sufficient to pay the re-estimated amount
over the balance of such Cycle after giving credit for payments made by Tenant
on the previous estimate.
Section 2.8 Adjustment of Actual Expenses. Upon completion of each
Cycle, Landlord shall cause its accountants to determine the actual amount of
Operating Expenses for such Cycle and deliver a written certification of the
amounts thereof to Tenant within ninety (90) days after the end of each Cycle.
If Tenant has paid less than the actual Operating Expenses for any Cycle,
Tenant shall pay such deficiency within thirty (30) days after receipt of such
statement. If Tenant has paid more than the actual Operating Expenses for any
Cycle, Landlord shall, at Tenant's option, either (a) refund such excess, or
(b) credit such excess against the most current monthly installment or
installments due Landlord for its estimate of Operating Expenses for the next
following Cycle. If Tenant's overpayment is greater than the equivalent of one
month of Operating Expenses, Landlord shall refund the excess to Tenant
together with interest thereon at the Default Rate. A pro rata adjustment shall
be made for a fractional Cycle occurring during the term of this Lease or any
renewal or extension thereof based upon the number of days of the term of this
Lease during said Cycle as compared to three hundred sixty-five (365) days and
all additional sums payable by Tenant or credits due Tenant as a result of the
provisions of this Article 2 shall be adjusted accordingly.
Section 2.9 Tenant Audit Rights. Tenant shall have the right to
examine and audit Landlord's annual statement of Operating Expenses as presented
in Landlord's statement. Tenant shall commence its examination and if
applicable, its audit within forty-five (45) days after receipt of the annual
statement, shall perform its examination and audit with diligence and continuity
and shall complete its examination and audit within one hundred twenty (120)
days after receipt of the annual statement. The cost of any such examination and
audit shall be paid by Tenant, except that, if it is determined on the basis of
such audit (or if, in accordance with the following provisions, it is otherwise
ultimately determined) that the amount of Tenant's obligations for Operating
Expanses for any calendar year was overstated by more than three percent (3%),
then the reasonable cost of the audit shall be paid by Landlord. Landlord shall
refund to Tenant any overpayment for the calendar year in question within thirty
(30) days after the amount of the overpayment has been established by the audit
or as provided in this subsection. If Tenant fails to exercise its right of
audit within the forty-five (45) day period, the amount of Tenant's obligations
for Operating Expenses shall be conclusively established as the amount set forth
in the annual statement delivered by Landlord to Tenant. If, however, Tenant
timely exercises its right of audit, the amount of Tenant's obligations for
Operating Expenses shall be conclusively established as the amount determined as
a result of such audit unless, within sixty (60) days after receipt of a report
of the same from the independent auditors selected by Tenant, Landlord, at its
expense, shall contest the amount thereof, in which event Tenant shall be
entitled to pursue any legal remedies it may have to finally ascertain the
amount thereof and, if appropriate, a refund on account thereof.
Section 2.10 Taxes and Other Additional Rent. Beginning on the
Commencement Date and continuing throughout the Term of the Lease, Tenant shall
be responsible for all Real Estate Taxes. Tenant shall pay all amounts due
within thirty (30) days of receipt of written request and an invoice therefor,
including a copy of the tax bill. If by law any special assessment is payable
(without default) in installments (whether or not interest shall accrue on the
unpaid balance of such special assessment), and if Landlord elects to pay same
in installments, Tenant shall pay all amounts due in connection therewith,
together with any interest accrued, in installments within thirty (30) days of
receipt of Landlord's written request and invoice therefor. Landlord shall be
responsible for all installments of special assessments (including interest
accrued on the unpaid balance) which are payable prior to the Commencement Date
and after the termination date of the term of this Lease.
Further, Tenant shall pay, also as Additional Rent, all other sums and
charges required to be paid by Tenant under this Lease, and any tax or excise
on rents, gross receipts tax, or other tax, however described, which is levied
or assessed by the United States of America or the state in which the Office
Complex is located or any political subdivision thereof, against Landlord in
respect to the Base Rent, Additional Rent, or other charges reserved under this
Lease or as a result of Landlord's receipt of such rents or other charges
accruing under this Lease but only to the extent such levy, tax, assessment or
charge on rent shall be expressly in lieu of or in substitution for any
existing Real Estate Taxes; provided, however, Tenant shall have no obligation
to pay net income taxes of Landlord.
Section 2.11 Tenant's Right to Contest Real Estate Taxes. Tenant shall
have the right at its own expense to contest the amount or validity in whole or
in part, of any Real Estate Taxes by appropriate proceedings diligently
conducted in good faith, but only after payment of such Real Estate Taxes,
unless such payment, or a payment thereof under protest, would operate as a bar
to such contest or interfere materially with the prosecution thereof, in which
event, notwithstanding the provisions of Article 2, Tenant may postpone or
defer payment of such Real Estate Taxes if (a) neither the Premises nor any
portion thereof would, by reason of such postponement or deferment, be in
danger of being forfeited or lost, and (b) Tenant shall have deposited with
Landlord cash or a letter of credit payable to Landlord issued by a national
bank or
<PAGE>
federal savings and loan association in the amount of the Real Estate Taxes so
contested and unpaid. If, during the continuance of such proceedings, Landlord
shall, from time to time, reasonably deem the amount deposited, as aforesaid,
insufficient, Tenant shall, upon demand of Landlord, make additional deposits
of such additional sums of money or such additional certificates of deposit as
Landlord may reasonably request. Upon failure of Tenant to make such additional
deposits within thirty (30) days, the amount theretofore deposited may be
applied by Landlord to the payment, removal and discharge of such Real Estate
Taxes, and the interest, fines and penalties in connection therewith, and any
reasonable costs, fees (including reasonable attorney's fees) and other
liability (including costs incurred by Landlord, but excluding consequential or
punitive damages) accruing in any such proceedings. Upon the termination of any
such proceedings, Tenant shall pay the amount of such Real Estate Taxes or part
thereof, if any, as finally determined in such proceedings, the payment of
which may have been deferred during the prosecution of such proceedings,
together with any reasonable costs, fees (including reasonable attorney's
fees), interest, penalties, fines and other liability in connection therewith,
and upon such payment Landlord shall return all amounts deposited with it with
respect to the contest of such Real Estate Taxes, as aforesaid, or, at the
written direction of Tenant, Landlord shall make such payment out of the funds
on deposit with Landlord and the balance, if any, shall be resumed to Tenant.
Tenant shall be entitled to the refund of any Real Estate Taxes,
penalty, fine and interest thereon received by Landlord which has been paid by
Tenant or which has been paid by Landlord but for which Landlord has been
previously reimbursed in full by Tenant, such amount to be paid within thirty
(30) days of receipt by Landlord. Landlord shall not be required to join in any
proceedings referred to in this Section 2.11 unless the provisions of any law,
rule or regulation at the time in effect shall require that such proceedings be
brought by or in the name of Landlord, in which event Landlord shall join in
such proceedings or permit the same to be brought in Landlord's name upon
compliance with such conditions as Landlord may reasonably require. Landlord
shall not ultimately be subject to any liability for the payment of any fees,
including attorney's fees, costs and expenses in connection with such
proceedings. Tenant agrees to pay all such fees (including reasonable
attorney's fees), costs and expenses or, on demand, to make reimbursement to
Landlord for such payment. During the time when any such amount is on deposit
with Landlord, and prior to the time when the same is returned to Tenant or
applied against the payment, removal or discharge of Real Estate Taxes, as
above provided, Tenant shall be entitled to receive all interest paid thereon,
if any. Landlord agrees to cooperate with Tenant's efforts in connection with
this Section 2.11, at no cost or expense to Landlord.
Section 2.12 Landlord's Right to Contest Real Estate Taxes. In
addition to the right of Tenant under Section 2.11 to contest the amount or
validity of Real Estate Taxes, Landlord shall also have the right to contest
same; provided however, Landlord shall first give Tenant written notice of such
intention and Tenant shall have twenty (20) days from the date of Landlord's
notice within which to give Landlord written notice that Tenant will contest the
Real Estate Taxes, and to thereafter diligently pursue same. Landlord shall not
be obligated to contest Real Estate Taxes, and any such contest shall be by
appropriate proceedings conducted in the name of Landlord or in the name of
Landlord and Tenant. If Landlord elects to contest the amount or validity, in
whole or in part, of any Real Estate Taxes, such contests by Landlord shall be
at Landlord's expense, provided, however, that if the amounts payable by Tenant
for Real Estate Taxes are reduced (or if a proposed increase in such amounts is
avoided or reduced) by reason of Landlord's contest of Real Estate Taxes, Tenant
shall reimburse Landlord for costs incurred by Landlord in contesting Real
Estate Taxes, but such reimbursements shall not be in excess of the amount saved
by Tenant by reason of Landlord's actions in contesting such Real Estate Taxes.
If Real Estate Taxes are retroactively increased following a contest by
Landlord, Tenant shall not be responsible for such incremental increase.
Section 2.13 Evidence of Payment. Landlord covenants to furnish Tenant
written evidence of the payment of any Real Estate Taxes (i.e. paid tax bills)
for which Tenant has already paid Landlord.
Section 2.14 Escrow for Taxes and Assessments. At Landlord's written
demand after any Event of Default and for as long as such Event of Default is
uncured, Tenant shall pay to Landlord the known yearly Real Estate Taxes
assessments and other impositions payable with respect to the Property and
Office Complex in monthly payments equal to one-twelfth of the known yearly
Real Estate Taxes, assessments and other impositions next payable with respect
to the Property and Office Complex. If the total monthly payments made by
Tenant pursuant to this Section 2.14 shall exceed the amount of payments
necessary for said Real Estate Taxes, such excess shall be credited on
subsequent monthly payments of the same nature or, at Tenant's option, promptly
refunded, but if the total of such monthly payments so made under this
paragraph shall be insufficient to pay such Real Estate Taxes when due, then
Tenant shall pay to Landlord such amount as may be necessary to make up the
deficiency. Payment by Tenant of Real Estate Taxes under this section shall be
considered as performance of such obligation under the provisions of Section
2.14 hereof.
<PAGE>
ARTICLE 3
BASE AND ADDITIONAL RENT
Section 3.1 Interest and Late Fee on Past Due Obligations. Any
installment of Base Rent, Additional Rent, or other charges to be paid by
Tenant accruing under the provisions of this Lease which shall not be paid
within ten (10) days of the date when due, shall bear interest at the rate
("Default Rate") of fifteen percent (15%) per annum from the date when the same
is due until the same shall be paid, but if such rate exceeds the maximum
interest rate permitted by law, such rate shall be reduced to the highest rate
allowed by law under the circumstances. In addition, any installments of Base
Rent or Additional Rent or any other charges payable by Tenant under the
provisions hereof which shall not be paid when due and which remain unpaid ten
(10) days thereafter shall be subject to a late payment fee of five percent
(5%) of the unpaid amount.
Section 3.2 Rent Independent. Except as otherwise expressly set forth
herein, Tenant's covenants to pay the Base Rent and the Additional Rent are
independent of any other covenant, condition, provision or agreement herein
contained, and nothing herein contained shall be deemed to suspend or delay the
payment of any amount of money or charge at the time the same becomes due and
payable hereunder, or limit any other remedy of Landlord. Base Rent and
Additional Rent are sometimes collectively referred to as "Rent." Except as
otherwise expressly set forth in this Lease, Rent shall be payable without
deduction, offset, prior notice or demand, in lawful money of the United
States.
Section 3.3 Security Deposit. Intentionally Deleted.
ARTICLE 4
POSSESSION OF PREMISES
Section 4.1 Delayed or Earlier Possession. If Landlord shall be unable
to give possession of the Premises on the date of the commencement of the term
because the construction of the Building has not been sufficiently completed to
make the Premises ready for occupancy or for any other reason, Landlord shall
not be subject to any claims, damages or liabilities for the failure to give
possession on said date except as set forth in the Work Agreement. Under said
circumstances, the rent reserved and Tenant's covenant to pay same shall not
commence until possession of the Premises is given or the Premises are ready
for occupancy, whichever is earlier. Failure to give possession on the date of
commencement of the term shall in no way affect the validity of this Lease or
the obligations of Tenant hereunder, nor shall the same be construed in any way
to extend the expiration date of the term. If Tenant is given and accepts
possession of the Premises or a portion thereof on a date earlier than the date
above specified for commencement of the term the rent reserved herein and all
covenants, agreements and obligations herein and the term of this Lease shall
commence on the date that possession is given to Tenant.
Section 4.2 Effect of Possession. Intentionally Deleted.
Section 4.3 Permitted Use. The Premises shall be occupied and used by
Tenant for general of Office purposes, including, but not limited to, research,
development and testing of communications equipment, and for no other purpose,
subject to the covenants and agreements hereinafter contained. Tenant shall not
use or permit the Premises to be used for any other purpose without the prior
written consent of Landlord.
Section 4.4 Tenant's Compliance With Environmental Laws. Tenant shall
at all times and in all respects comply with all federal, state and local laws,
ordinances and regulations ("Hazardous Materials Laws") relating to the
industrial hygiene, environmental protection or the use, analysis, generation,
manufacture, storage, presence, disposal or transportation of any oil,
petroleum products, flammable explosives, asbestos, urea formaldehyde,
polychlorinated biphenyls, radioactive materials or waste, or other hazardous,
toxic, contaminated or polluting materials, substances or wastes, including
without limitation any "hazardous substances," "hazardous wastes," "hazardous
materials" or "toxic substances" under any such laws, ordinances or regulations
(collectively, "Hazardous Materials"). The foregoing shall not be construed to
prohibit Tenant from storing and using reasonable quantities of customary
office and cleaning supplies in the Building as contemplated by the permitted
use contained in Section 4.3 above.
Tenant shall at its own expense procure, maintain in effect and comply
with all conditions of any and all permits, licenses and other governmental and
regulatory approvals required for Tenant's use of the Premises and Office
Complex including, without limitation, discharge of (appropriately treated)
materials or waste into or through any sanitary sewer system serving the
Premises and Office Complex. Except as discharged into the sanitary sewer in
strict accordance 1and conformity with all applicable Hazardous Materials Laws,
Tenant shall cause any and all Hazardous Materials to be removed from the
Premises and Office Complex and transported solely by duly licensed haulers to
duly licensed facilities for final disposal of such Hazardous Materials and
wastes. Tenant shall in all respects, handle, treat, deal with and manage
<PAGE>
any and all Hazardous Materials in, on, under or about the Premises and Office
Complex in complete conformity with all applicable Hazardous Materials Laws and
prudent industry practices regarding the management of such Hazardous
Materials. All reporting obligations to the extent imposed upon Tenant by
Hazardous Materials Laws are solely the responsibility of Tenant. Upon
expiration or earlier termination of this Lease, Tenant shall cause all
Hazardous Materials (except to the extent such Hazardous Materials are
generated, stored, released or disposed of during the term of this Lease by
Landlord) to be removed from the Premises and Of Office Complex and transported
for use, storage or disposal in accordance and in compliance with all
applicable Hazardous Materials Laws. Tenant shall not take any remedial action
in response to the presence of any Hazardous Materials in, on, about or under
the Premises, the Building, the Office Complex or the Property, nor enter into
any settlement agreement, consent, decree or other compromise in respect to any
claims relating to any way connected with the foregoing without first notifying
Landlord of Tenant's intention to do so and affording Landlord ample
opportunity to appear, intervene or otherwise appropriately assert and protect
Landlord's interest with respect thereto. In addition, at Landlord's written
request, at the expiration of the term of this Lease or within sixty (60) days
following the date of such request, whichever is later, Tenant shall remove all
tanks or fixtures which were placed on the Premises and Office Complex during
the term of this Lease and which contain, or are contaminated with, Hazardous
Materials. Tenant shall immediately notify Landlord in writing of(a) any
enforcement, clean-up, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Laws;
(b) any claim made or threatened by any person against Landlord, or the
Premises or the Office Complex, relating to damage, contribution, cost
recovery, compensation, loss or injury resulting from or claimed to result from
any Hazardous Materials; and (c) any reports made to any environmental agency
arising out of or in connection with any Hazardous Materials in, on or about
the Premises or the Of Office Complex, or with respect to any Hazardous
Materials removed from the Premises or the Office Complex, including, any
complaints, notices, warnings, reports or asserted violations in connection
therewith. Tenant shall also provide to Landlord, as promptly as possible, and
in any event within five (5) business days after Tenant first receives or sends
the same, copies of all claims, reports, complaints, notices, warnings or
asserted violations relating in any way to the Hazardous Materials in or on the
Of Office Complex or Premises. Upon written request of Landlord (to enable
Landlord to defend itself from any claim or charge related to any Hazardous
Materials Law), Tenant shall promptly deliver to Landlord notices of hazardous
waste manifests reflecting the legal and proper disposal of all such Hazardous
Materials removed or to be removed from the Premises or Office Complex. All
such manifests shall list the Tenant or its agent as a responsible party and in
no way shall attribute responsibility for any such Hazardous Materials to
Landlord. Section 4.5 Landlord's Compliance with Environmental Laws. Landlord
covenants not to bring onto the Office Complex or into the Building, or common
areas, any Hazardous Materials, as that term is defined herein. Notwithstanding
the foregoing, Tenant recognizes and acknowledges that Landlord or its agents
may use and store within the Building reasonable quantities of customary office
and cleaning supplies; provided such items are stored, used and disposed of in
accordance with applicable federal, state or local law.
ARTICLE 5
SERVICES AND MAINTENANCE
Section 5.1 Property Management Services. The party responsible for
the maintenance and operation of the Building and Office Complex pursuant to
Section 5.7 hereof shall provide the following services on all days excepting
Saturdays, Sundays, holidays, and as otherwise stated in this Section 5.1:
(a) Janitorial Service. Janitorial and CHAR services for the Building.
(b) Parking Facilities and Landscaped Areas. Maintenance in good
order, condition and repair and appropriate illumination of the parking
facilities and all driveways leading thereto and keeping the same free from any
unreasonable accumulation of snow. Maintenance of the landscaped area and
parking facilities in a neat, safe and orderly condition.
(c) Heating and Air Conditioning. Heating and air conditioning in
amounts and ranges required by Tenant's Plans (as defined in the Work
Agreement) during regular business hours as the same are set by Tenant from
time to time. If Landlord is serving as property manager pursuant to Section
5.7, then (i) except in the case of an emergency, Landlord will give Tenant at
least five (5) business days prior notice if Landlord intends to interrupt any
of the services required to be furnished by Landlord, and (ii) provided Tenant
gives Landlord notice of its need for overtime HVAC service during normal
business hours, Landlord shall provide such service and Tenant shall only be
responsible for the actual utility costs relating to such overtime service.
Section 5.2 Tenant's Utility Services. During the term of this Lease,
Tenant will pay, when due, all charges of every nature, kind or description for
utilities furnished to the Premises including all charges for water, sewage,
heat, gas, light, garbage, electricity, telephone, power or other public or
private utility services. Prior to the Commencement Date, Tenant shall pay for
all
<PAGE>
utilities or services at the Premises directly and exclusively used by Tenant
or its agents, employees or contractors.
Section 5.3 Other Provisions Relating to Services. If Landlord is
serving as property manager pursuant to Section 5.7 hereof, (i) except as
specifically provided in this Section 5.3, no interruption in, or temporary
stoppage of, any of the aforesaid services caused by repairs, renewals,
improvements, alterations, strikes, lockouts, labor controversy, accidents,
inability to obtain fuel or supplies, or other Unavoidable Delays shall be
deemed an eviction or disturbance of Tenant's use and possession, or render
Landlord liable for damages, by abatement of rent or otherwise or relieve
Tenant from any obligation herein set forth; (ii) in no event shall Landlord be
required to provide any service in excess of that permitted by involuntary
guidelines or laws, ordinances or regulations of governmental authority; (iii)
Landlord shall have the right, from time to time, to make reasonable and
non-discriminatory modifications to the standards for utilities and services
set forth in this Article 5 upon providing not less than thirty (30) days'
notice to Tenant; and (iv) if utility services to the Premises are interrupted
for more than five (5) consecutive business days for any reason other than
Unavoidable Delay and, as a result thereof, Tenant ceases operating at the
Premises, Rent shall abate on a daily basis beginning on the sixth (6th)
consecutive business day and continuing until services are restored.
Section 5.4 Effects on Utilities. Tenant shall not connect with
electric current or water pipes, except through existing electrical or water
outlets already in the Premises, any apparatus or device for the purposes of
using electric current or water.
Section 5.5 Park Dues. Tenant acknowledges that the Property is part
of a larger development and that certain dues or assessments are owed on a
regular periodic basis for additional services or maintenance pursuant to
covenants, conditions and restrictions of record. Tenant will pay all such dues
attributable to the Property as Additional Rent, or directly, if possible.
Section 5.6 Maintenance. Intentionally Deleted.
Section 5.7 Property Manager. Notwithstanding anything to the contrary
contained herein, Tenant shall be responsible for all property management
functions referenced in this Lease or otherwise required to keep and maintain
the Building and Office Complex in good order and repair consistent with a
first class office building in Loudoun County, Virginia. The maintenance
responsibilities contained in Article 9 of this Lease shall not be deemed
"property management" functions, and Landlord and Tenant shall each be
responsible for their respective obligations as set forth in such Article
without regard to which party is serving as the property manager.
At any time during the Term, Tenant may, by written notice to
Landlord, request that Landlord assume all such property management functions.
If Landlord desires to assume the role of property manager, Landlord shall
respond affirmatively in writing to Tenant within firemen (15) days of receipt
of Tenant's written request, whereupon Landlord shall execute and deliver to
Tenant an Assumption of Property Management Services Certificate ("Assumption
Certificate") prepared by Landlord in form and content reasonably satisfactory
to Tenant. Such assumption shall be effective as of the date specified in the
Assumption Certificate, and shall continue in effect for twelve (12) months,
unless a longer period is agreed to by Landlord and Tenant. Notwithstanding the
foregoing, Landlord's obligation to provide the services and perform the duties
of the property manager shall be subject to Tenant's payment for same pursuant
to Article 2 hereof.
ARTICLE 6
INSURANCE
Section 6.1 Landlord's Casualty Insurance Obligations. Landlord shall
keep the Office Complex insured in an amount equivalent to the full replacement
value thereof (excluding foundation, grading and excavation costs) against:
(a) loss or damage by fire; and
(b) such other risk or risks of a similar or dissimilar nature as are
now or may be customarily covered with respect to buildings and improvements
similar in construction, general location, use, occupancy and design to the
Office Complex, including, but without limiting the generality of the
foregoing, windstorms, hail, explosion, vandalism, malicious mischief, civil
commotion, and such other coverage as may be deemed necessary by Landlord
including rental interruption insurance, provided such additional coverage is
obtainable and provided such additional coverage is such as is customarily
carried with respect to buildings and improvements similar in construction,
general location, use, occupancy and design to the Office Complex. The
foregoing insurance shall be on an agreed value basis.
<PAGE>
These insurance provisions shall in no way limit or modify any of the
obligations of Tenant under any provision of this Lease. Landlord agrees that
such policy or policies of insurance shall permit releases of liability as
provided herein and/or waiver of subrogation clause in favor of Tenant so long
as such release/waiver is available at a commercially reasonable rate. Subject
to the foregoing, Landlord waives, releases and discharges Tenant from all
claims or demands whatsoever which Landlord may have or acquire arising out of
damage to or destruction of the Of Office Complex or loss of use thereof
occasioned by fire or other casualty, which claim or demand may arise because of
the negligence or fault of Tenant, its agents, employees, customers or business
invitees, or otherwise, and Landlord agrees to look to the insurance coverage
only in the event of such loss. Notwithstanding the foregoing, Tenant shall be
obligated to pay the rental called for hereunder in the event of damage to or
destruction of the Premises or the Of Office Complex if such damage or
destruction is occasioned by the negligence or fault of Tenant, its agents or
employees, such fault to be established by arbitration or a judicial proceeding.
Section 6.2 Tenant's Casualty Insurance Obligations. Tenant shall keep
all of its improvements, betterments, machinery, equipment, furniture, fixtures
and personal property which may be located in, upon, or about the Premises
insured for the benefit of Tenant (and naming Landlord as an additional
insured) in an amount equivalent to the full insurable value thereof against:
(a) loss or damage by fire; and
(b) such other risk or risks of a similar or dissimilar nature as are
now, or may in the future be, customarily covered with respect to a tenant's
machinery, equipment, furniture, fixtures, personal property and business
located in a building similar in construction, general location, use, occupancy
and design to the Office Complex, including, but without limiting the
generality of the foregoing, windstorms, hail, explosions, vandalism, theft,
malicious mischief, civil commotion, and such other coverage as Tenant may deem
appropriate or necessary.
Tenant agrees that such policy or policies of insurance shall be on an
agreed value basis, and shall permit release of liability as provided herein
and/or waiver of subrogation clause as to Landlord so long as such
release/waiver is available at a commercially reasonable rate. Subject to the
foregoing, Tenant waives, releases and discharges Landlord, its agents,
employees, and contractors from all claims or demands whatsoever which Tenant
may have or acquire arising out of damage to or destruction of the machinery,
equipment, furniture, fixtures, personal property, and loss of use thereof
occasioned by fire or other casualty, whether such claim or demand may arise
because of the negligence or fault of Landlord, its agents, employees,
contractors or otherwise, and Tenant agrees to look to the insurance coverage
only in the event of such loss.
Section 6.3 Landlord's Liability and Other Insurance Obligations.
Landlord shall maintain, for its benefit and the benefit of Landlord and its
managing agent general public liability insurance against claims for personal
injury, death or property damage occurring upon, in or about the Office
Complex, such insurance to afford protection to Landlord and its managing agent
of a combined single limit of One Million and No/100 Dollars ($1,000,000.00) in
respect to the injury, death or property damage arising out of any accident or
occurrence. In addition, Landlord shall carry employer's liability insurance
with a minimum limit of $500,000 for bodily injury; excess liability insurance
over the public and employer's liability insurance required above with
combined, minimum coverage of $6,000,000; worker's compensation insurance in
statutory limits; and such other insurance coverage or increased amounts of
referenced coverages or deductibles as is customarily carried in respect of
comparable buildings in Loudoun County, Virginia. Landlord agrees to include in
its general public liability insurance policy the contractual liability
coverage insuring Landlord's indemnification obligations provided for herein.
Such insurance shall also afford coverage for all claims based upon acts,
omissions, injury or damage, which claims occurred or arose (or the onset of
which occurred or arose) in whole or in part during the policy period.
At Tenant's request, Landlord shall furnish Tenant with a certificate
of insurance certifying that the insurance coverage required of Landlord
pursuant to this Article 6 is in effect. Any insurance required by the terms of
this Lease to be carried by Landlord may be under a blanket policy (or
policies) covering the other properties of the Landlord and/or its related or
affiliated entities so long as the insurance requirements set forth herein are
satisfied. If such insurance is maintained under a blanket policy, Landlord
shall procure and deliver to Tenant a statement from the insurer or general
agent of the insurer setting forth the coverage maintained and the amounts
thereof allocated to the risks intended to be insured hereunder.
Section 6.4 Tenant's Liability Insurance Obligations. Tenant shall, at
Tenant's sole cost and expense but for the mutual benefit of Landlord, its
managing agent and Tenant, maintain general public liability insurance against
claims for personal injury, death or property damage occurring upon, in or
about the Premises, such insurance to afford protection to Landlord, its
managing agent and Tenant of a combined single limit of One Million and No/100
Dollars
<PAGE>
($1,000,000.00) in respect to the injury, death or property damage arising out
of any accident or occurrence in the Office Complex. In addition, Tenant shall
carry employer's liability insurance with a minimum limit of $500,000 for
bodily injury; worker's compensation insurance in statutory limits; and excess
liability insurance over the public and employer's liability insurance required
above with combined, minimum coverage of 6,000,000. Such policies of insurance
shall be written in companies reasonably satisfactory to Landlord, naming
Landlord and its managing agent as additional insureds thereunder (on a primary
and non-contributing basis), and such policies, or a memorandum or certificate
of such insurance, shall be delivered to Landlord with evidence reasonably
satisfactory to Landlord that the premium thereon has been paid. At such time
as insurance limits required of tenants in office buildings in the area in
which the Of Office Complex is located are generally increased to greater
amounts, Landlord shall have the right to require such greater limits as may
then be customary. Tenant agrees to include in such policy the contractual
liability coverage insuring Tenant's indemnification obligations provided for
herein. Any such coverage shall be deemed primary to any liability coverage
secured by Landlord. Such insurance shall also afford coverage for all claims
based upon acts, omissions, injury or damage, which claims occurred or arose
(or the onset of which occurred or arose) in whole or in part during the policy
period.
Section 6.5 Indemnifications. Tenant agrees to indemnify, protect,
defend and hold Landlord and Landlord's shareholders, employees, lender and
managing agent harmless from and against any and all claims, costs,
liabilities, actions, and damages, including, without limitation, attorneys'
fees and costs on behalf of any person or persons, firm or firms, corporation
or corporations, arising from any breach or default on the part of Tenant in
the performance of any covenant or agreement on the part of Tenant to be
performed, pursuant to the terms of this Lease, or arising from any act or
negligence on the part of Tenant or its agents, contractors, servants,
employees or licensees, or arising from any accident, injury or damage to the
extent caused by Tenant, its agents, and employees to any person, firm or
corporation occurring during the term of this Lease or any renewal thereof, in
or about the Premises and Office Complex, and from and against all reasonable
costs, reasonable counsel fees, expenses and liabilities incurred in or about
any such claim or action or proceeding brought thereon; and in case any action
or proceeding be brought against Landlord or its managing agent by reason of
any such claim, Tenant, upon notice from Landlord, covenants to resist or
defend such action or proceeding by counsel reasonably satisfactory to
Landlord. Tenant's indemnification shall not apply to losses, claims, costs and
the like arising as a result of the negligence or willful misconduct of
Landlord or its agents.
Landlord hereby waives all claims against Tenant for damage to any
property or injury to, or death of, any person in, upon, or about the Office
Complex, including the Premises, arising at any time and from any cause other
than by reason of those matters covered by Tenant's indemnity in the preceding
paragraph. Landlord shall, and hereby agrees to, indemnify and hold Tenant
harmless from any damage to any property or injury to, or death of, any person
arising from Landlord's breach of its obligation hereunder, unless the damage
is caused by the negligence or willful misconduct of the Tenant, its employees,
agents, contractors or representatives. Landlord's foregoing indemnity shall
include reasonable attorneys' fees, investigation costs, and all other
reasonable costs and expenses incurred by Tenant in any connection therewith;
and in case any action or proceeding be brought against Tenant or its managing
agent by reason of any such claim, Landlord, upon notice from Tenant, covenants
to resist or defend such action or proceeding by counsel reasonably
satisfactory to Tenant. The provisions of this paragraph shall survive the
termination of this Lease with regard to any occurrence prior to such
termination and any resulting damage, injury, or death. If Tenant is made a
party to any litigation commenced by or against Landlord or relating to this
Lease, and provided that in any such litigation Tenant is not adjudicated in a
court of final appeal to be at fault, then Landlord shall pay all costs and
expenses, including actual, but not unreasonable attorneys' fees and court
costs incurred by or imposed upon Tenant because of any such litigation, and
the amount of all such costs and expenses including actual but not unreasonable
attorneys' fees and court costs shall be a demand obligation owing by Landlord
to Tenant.
Section 6.6 Tenant's Waiver. Except to the extent covered by
Landlord's indemnity in Section 6.5 above, Tenant agrees, to the extent not
expressly prohibited by law, that Landlord, its agents, employees and servants
shall not be liable, and Tenant waives all claims for damage to property and
business sustained during the term of this Lease by Tenant occurring in or
about the Office Complex, resulting directly or indirectly from any existing or
future condition, defect, matter or thing in the Premises, the Office Complex,
or any part thereof, or from equipment or appurtenances becoming out of repair
or from accident, or from any occurrence or act or omission of Landlord, its
agents, employees or servants, or any tenant or occupant of the Building or any
other person. This paragraph shall apply especially but not exclusively, to
damage caused by aforesaid or by the flooding of basements or other subsurface
areas, or by refrigerators, sprinkling devices, air conditioning apparatus,
water, snow, frost, steam, excessive heat or cold, falling plaster, broken
glass, sewage, gas, odors or noise, or the bursting or leaking of pipes or
plumbing fixtures, and shall apply equally, whether any such damage results
from the act or omission of other tenants or occupants in the Office Complex or
any other persons, and whether such damage
<PAGE>
be caused by or result from any of the aforesaid, or shall be caused by or
result from other circumstances of a similar or dissimilar nature.
Section 6.7 Landlord's Deductible and Tenant's Property. Provisions
herein to the contrary notwithstanding, in the event any damage to the Office
Complex results directly and exclusively from any act or omission of Tenant,
its agents, employees or invitees, and all or any portion of Landlord's loss is
"deductible," Tenant shall pay to Landlord the amount of such deductible loss
(not to exceed $1,000 per event).
Section 6.8 Tenant's Property. All property in the Office Complex or
on the Premises belonging to Tenant, its agents, employees, invitees or
otherwise located at the Premises, shall be at the risk of Tenant only, and
Landlord, except to the extent covered by Landlord's indemnity in Section 6.5,
shall not be liable for damage thereto or theft, misappropriation or loss
thereof and Tenant agrees to defend and hold Landlord, its agents, employees
and servants harmless and indemnify them against claims and liability for
injuries to such property.
Section 6.9 Payment for Insurance. On an annual basis and within ten
(10) days of demand and presentation of invoices, Tenant shall reimburse
Landlord for the cost of the insurance carried by Landlord pursuant to the
provisions of this Lease. All amounts due from Tenant pursuant to this Section
6.9 shall constitute Additional Rent.
Section 6.10 Tenant's Failure to Insure. In the event Tenant fails to
provide Landlord with evidence of insurance required under this Article 6
within thirty (30) days of Landlord's written request therefor, but in any
event at least ten (10) days prior to the expiration of the existing policy,
Landlord may, but shall not be obligated to, without further demand upon
Tenant, and without waiving or releasing Tenant from any obligation contained
in this Lease, effect such insurance and Tenant agrees to repay, upon demand,
all such sums incurred by Landlord in effecting such insurance. All such sums
shall become a part of the Additional Rent payable hereunder, but no such
payment by Landlord shall relieve Tenant from any default under this Lease.
ARTICLE 7
CERTAIN RIGHTS RESERVED BY LANDLORD
Section 7.1 Rights Reserved by Landlord. Landlord reserves the
following rights without liability to Tenant and without effecting an eviction,
constructive or actual, or disturbance of Tenant's use or possession, or giving
rise to any claim for set off or abatement of rent except as otherwise
expressly set forth herein:
(a) Retain Keys. To retain at all times and to use in appropriate
instances keys to all doors within and into the Premises, except keys or other
devices allowing entry to the "secure areas" designated on the Tenant's Plans,
as such areas may be changed by Tenant from time to time following written
notice to Landlord. No locks shall be changed (except locks in or to the
"secure areas) without the prior written notice to Landlord. This provision
shall not apply to Tenant's safes, or other areas maintained by Tenant for the
safety and security of monies, securities, negotiable instruments, classified
materials or similar items. To the extent reasonably possible, (i) Landlord
shall give Tenant notice prior to entering the Premises, and (ii) Landlord's
entry shall be during normal business hours, and Landlord shall be accompanied
by a representative of Tenant at all times.
(b) Make Repairs. To make repairs, alterations, additions, or
improvements, whether structural or otherwise, in and about the Office Complex,
or any part thereof, and for such purposes to enter upon the Premises, and
during the continuation of any of said work, to temporarily close doors,
entryways, public spaces, and corridors in the Office Complex and to interrupt
or temporarily suspend services and facilities, so long as Landlord at all
times uses its best commercially reasonable efforts and endeavors in good faith
to limit any interference with the conduct of Tenant's business or its
occupancy and use of the Premises. If, as a result of Landlord's material and
adverse interference, Tenant ceases operating at the Premises for five (5)
consecutive business days, Tenant shall be entitled to an abatement of Rent on
a daily basis beginning on the sixth (6th) consecutive business day and
continuing until the earlier of (i) cessation of such material and adverse
interference, or (ii) the date on which Tenant resumes business operations at
the Premises. If, as a result of Landlord's material and adverse interference,
Tenant ceases operating at the Premises for ninety (90) consecutive business
days, Tenant shall be entitled to terminate the Lease by delivering written
notice to Landlord prior to the one hundredth (100th) consecutive business day
of material and adverse interference. In exercising its right to make repairs,
alterations and the like, to the extent reasonably possible, (i) Landlord shall
give Tenant notice prior to entering the Premises, (ii) Landlord's entry shall
be during normal business hours, and (iii) if required by Tenant, Landlord
shall be accompanied by a representative of Tenant.
<PAGE>
(c) Regulate Heavy Equipment. To approve the weight, size and location
of safes and other heavy equipment and articles in and about the Premises and
the Office Complex and to require all such items to be moved into and out of
the Office Complex and the Premises only at such times and in such manner as
Landlord shall direct in writing excluding initial move in and final move out.
Landlord hereby consents to the weight, size and location of equipment shown on
Tenant's Plans.
Section 7.2 Emergency Entry. Landlord and its agents may enter the
Premises at any time in case of emergency and shall have the right to use any
and all means which Landlord may reasonably deem proper to open such doors
during an emergency in order to obtain entry to the Premises, provided Landlord
promptly repairs all damages caused thereto. Any entry to the Premises obtained
by Landlord in the event of an emergency shall not, under any circumstances, be
construed or deemed to be a forcible or unlawful entry into, or detainer of,
the Premises, or to be an eviction of Tenant from the Premises or any portion
thereof. Landlord shall advise Tenant prior to or concurrent with any such
entry so long as Tenant shall have provided Landlord with an emergency call
list.
Section 7.3 Exhibition of Premises. Tenant shall permit Landlord and
its agents, upon not less than twenty four (24) hours' notice, to enter and
pass through the Premises or any part thereof at reasonable times during normal
business hours to: (a) post notices of non-responsibility; (b) exhibit the
Premises to holders of encumbrances on the interest of Landlord under the Lease
and to prospective purchasers or mortgagees of the Office Complex; and (c)
during the period of six (6) months prior to the expiration of the Lease Term,
exhibit the Premises to prospective tenants thereof. Tenant shall be entitled
to provide an escort if Landlord enters the Premises for any of the aforesaid
reasons. In addition, Landlord may post commercially reasonable signage
indicating that the Premises will be available for occupancy. If during the
last month of the Lease Term, Tenant shall have removed substantially all of
Tenant's property and personnel from the Premises, Landlord may, after
obtaining the consent of Tenant and satisfying such reasonable insurance
obligations and indemnification requirements as Tenant may impose, enter the
Premises and repair, alter, and redecorate the same, without abatement of Rent
and without liability to Tenant, and such acts shall have no effect on this
Lease.
Section 7.4 Right of Landlord to Perform. All covenants and agreements
to be performed by Tenant under any of the terms of this Lease shall be
performed by Tenant at Tenant's sole cost and expense and without any abatement
of Rent. If Tenant shall fail to pay any sum of money (other than Rent due
Landlord) required to be paid by it hereunder or shall fail to perform any
other act on its part to be performed hereunder, including; but not limited to,
the failure to commence and complete repairs promptly and adequately, and the
failure to remove any liens or otherwise to perform any act or fulfill any
obligation required of Tenant under this Lease, Landlord may, but shall not be
obligated to, and without waiving or releasing Tenant from any obligations of
Tenant, make any such payment or perform any such act on Tenant's part to be
made or performed as in this Lease provided. All sums so paid by Landlord and
all necessary incidental costs, together with an administrative overhead charge
equal to twenty percent (20%) of the actual costs incurred, shall be payable to
Landlord by Tenant as Rent on demand and Tenant covenants to pay all such sums.
Landlord shall have (in addition to any other right or remedy of Landlord) the
same rights and remedies in the event of Tenant's nonpayment of such sums, as
in the case of default by Tenant in the payment of Rent to Landlord.
Notwithstanding the foregoing, except in the case of an emergency, Landlord
agrees not to perform for Tenant's account until the expiration of all
applicable notice and cure periods referenced in Section 14.1 of this Lease.
ARTICLE 8
ALTERATIONS AND IMPROVEMENTS
Section 8.1 Tenant's Changes and Alterations. Tenant shall have the
right at any time, and from time to time during the term of this Lease, to make
such changes and alterations, structural or otherwise, to the Premises,
improvements and fixtures hereafter erected on the Premises as Tenant shall
deem necessary or desirable in connection with the requirements of its
business, which changes and alterations (other than changes or alterations of
Tenant's movable trade fixtures and equipment) shall be made in all cases
subject to the following conditions, which Tenant covenants to observe and
perform:
(a) Permits. No change or alteration shall be undertaken until Tenant shall
have procured and paid for, so far as the same may be required by the
applicable governmental authorities from time to time, all municipal,
state and federal permits and authorizations of the various governmental
bodies and departments having jurisdiction thereof, and Landlord agrees
to join in the application for such permits or authorizations whenever
such action is necessary, all at Tenant's sole cost and expense.
(b) Compliance with Plans and Specifications. Before commencement of any
change, alteration, restoration or construction (hereinafter sometimes
referred to as "Work") involving in the aggregate an estimated cost of
more than $10,000 or which would materially alter the mechanical or
electrical systems of the Building, Tenant shall (i) furnish Landlord
with
<PAGE>
detailed plans and specifications of the proposed change or alteration;
(ii) obtain Landlord's prior written consent, which consent shall not be
unreasonably withheld; (iii) provide Landlord with the name of the
licensed architect or licensed professional engineer selected and paid
for by Tenant, who shall supervise any such work (hereinafter referred to
as "Alterations Architect or Engineer"); and (iv) obtain Landlord's prior
written approval of detailed plans and specifications prepared and
approved in writing by said Alterations Architect or Engineer, and of
each amendment and change thereto.
(c) Value Maintained. Any change or alteration shall, when completed, be of
such character as not to reduce the value of the Premises or the Building
to which such change or alteration is made below its value immediately
before such change or alteration, nor shall such change or alteration
reduce the area or cubic content of the Building, nor change the Building
as to use without Landlord's express written consent. Tenant further
agrees that in no event shall any change or alteration void or impair any
of Landlord's warranties on the Building and, to the extent same are
voided or impaired, Landlord's corresponding warranties to Tenant as
contained in this Lease shall be likewise voided.
(d) Compliance with Laws. All Work done in connection with any change or
alteration shall be done promptly and in a good and workmanlike manner
and in compliance with all building and zoning laws of the place in which
the Premises are situated, and with all laws, ordinances, orders, rules,
regulations and requirements of all federal, state and municipal
governments and appropriate departments, commissions, boards and officers
thereof, and in accordance with the orders, rules and regulations of the
Board of Fire Underwriters where the Premises are located, or any other
body exercising similar functions. The cost of any such change or
alteration shall be paid so that the Premises and all portions thereof
shall at all times be free of liens for labor and materials supplied to
the Premises, or any portion thereof. The Work of any change or
alteration shall be prosecuted with reasonable dispatch, delays due to
strikes, lockouts, acts of God, inability to obtain labor or materials,
governmental restrictions or similar causes beyond the control of Tenant
excepted. Tenant shall obtain and maintain, or cause to be obtained and
maintained, at no expense to Landlord, during the performance of the
Work, workers" compensation insurance in normal and customary amounts,
covering all persons employed in connection with the Work and with
respect to which death or injury claims could be asserted against
Landlord or Tenant or against the Premises or any interest therein.
Tenant shall also cause any contractor performing work on Tenant's behalf
to carry and maintain, at no expense to Landlord, a non-deductible
comprehensive general liability insurance policy, which shall include
contractor's liability coverage, contractual liability coverage,
completed operations coverage, a broad form property damage endorsement
and contractor's protective liability coverage to afford protection with
limits, for each occurrence, of not less than Three Million Dollars
($3,000,000) combined single limit, written on an occurrence basis and
naming Landlord as an additional insured. In addition, the fire insurance
with "extended coverage" endorsement required by Section 6.1 hereof shall
be supplemented with "builder's risk" insurance on a completed value form
or other comparable coverage on the Work.
Tenant agrees that such policy or policies of insurance shall permit release
of liability as provided herein and/or waiver of subrogation clause as to
Landlord so long as such release/waiver is available at a commercially
reasonable rate. Subject to the foregoing, Landlord shall not be liable for any
claims or demands whatsoever relating to the performance of Work in or around
the Premises, and Tenant and its contractors shall look to insurance coverage
only in the event of such loss. All such insurance shall be in a company or
companies authorized to do business in the state in which the Premises are
located and reasonably satisfactory to Landlord, and all such policies of
insurance or, at Tenant's option, certificates of insurance shall be delivered
to Landlord endorsed "Premium Paid" by the company or agency issuing the same,
or with other evidence of payment of the premium satisfactory to Landlord.
(e) Property of Landlord. Unless otherwise designated by Tenant at
the time Landlord's consent is obtained, all improvements and
alterations (other than Tenant's movable trade fixtures and
equipment) made or installed by Tenant shall immediately, upon
completion or installation thereof, become the property of
Landlord without payment therefor by Landlord, and shall be
surrendered to Landlord on the expiration of the term of this
Lease.
(f) Location of Improvements. No change, alteration, restoration or
new construction shall be in or connect the Premises with any
property, building or other improvement located outside the
boundaries of the Land, nor shall the same obstruct or
interfere with any existing easement.
(g) Removal of Improvements. As a condition to granting approval
for any changes or alterations Landlord, by written notice to
Tenant, given at or prior to the time of granting such
approval, may require Tenant to remove any improvements,
additions or installations installed by Tenant in the Premises
at Tenant's sole cost and expense, and repair and restore any
damage caused by the
<PAGE>
installation and removal of such improvements, additions, or
installations; provided, however, the only improvements,
additions or installations which Tenant shall remove shall be
those specified in such notice. All improvements, additions or
installations installed by Tenant which did not require
Landlord's prior approval shall be removed by Tenant unless
Tenant has obtained a written waiver of such condition from
Landlord.
(h) Written Notification Required. Tenant shall notify Landlord in
writing ten (10) days prior to commencing any alterations,
additions or improvements to the Premises which have been
approved by Landlord so that Landlord shall have the right to
record and post notices of non-responsibility on the Premises.
(i) Landlord's Approval. Notwithstanding anything to the contrary
contained herein, any alterations, modifications or other
changes to the exterior structure and systems, load bearing
elements, foundations, pipes and conduits and roof that form a
part of the Building shall be subject to Landlord's prior
written consent, such consent not to be unreasonably withheld,
delayed or conditioned.
Section 8.2 Nonstructural Alterations/Without Landlord's Consent.
Notwithstanding the foregoing, Tenant shall have the right from time to time
and at any time, without Landlord's consent, to perform the following work
within the Premises: (i) install, remove and relocate nonstructural office
partitioning provided such work does not materially and adversely affect the
base building structure or HVAC systems, (ii) paint and install wall coverings,
(iii) install and remove office furniture, (iv) relocate electrical outlets,
(v) install and remove workstations, (vi) install and remove Tenant's equipment
and perform cable pulls in connection therewith, and (vii) install and remove
carpeting and other floor coverings.
Section 8.3 Freedom from Liens. Tenant shall not suffer or
permit any mechanic's lien or other lien to be filed against the Office
Complex, or any portion thereof, by reason of work, labor, skill, services,
equipment or materials supplied or claimed to have been supplied to the Of
Office Complex at the request of Tenant, or anyone holding the Premises, or any
portion thereof, through or under Tenant. If any such mechanic's lien or other
lien shall at any time be filed against the Office Complex, or any portion
thereof, Tenant shall cause the same to be discharged of record or satisfied by
bonding within 30 days of the date of filing the same. If Tenant shall fail to
discharge or bond off such mechanic's lien or liens or other lien within such
period, then, in addition to any other right or remedy of Landlord, after five
(5) days prior written notice to Tenant, Landlord may, but shall not be
obligated to, discharge the same by paying to the claimant the amount claimed
to be due or by procuring the discharge of such lien as to the Office Complex
by deposit in the court having jurisdiction of such lien, the foreclosure
thereof or other proceedings with respect thereto, of a cash sum sufficient to
secure the discharge of the same, or by the deposit of a bond or other security
with such court sufficient in form, content and amount to procure the discharge
of such lien, or in such other manner having reasonable cost as is now or may
in the future be provided by present or future law for the discharge of such
lien as a lien against the Of Office Complex. Such amount paid by Landlord, or
the value of such deposit so made by Landlord, together with all reasonable
costs, fees and expenses in connection therewith (including reasonable
attorney's fees of Landlord), together with interest thereon at the Default
Rate, shall be repaid by Tenant to Landlord within thirty (30) days following
demand by Landlord and if unpaid may be treated as Additional Rent. Tenant
shall indemnify and defend Landlord against and save Landlord and the Office
Complex, and any portion thereof, harmless from all losses, costs, damages,
expenses, liabilities, suits, penalties, claims, demands and obligations,
including, without limitation, reasonable attorney's fees resulting from the
assertion, filing, foreclosure or other legal proceedings with respect to any
such mechanic's lien or other lien.
Tenant shall specifically notify all materialmen, contractors,
artisans, mechanics, laborers and any other person now or hereafter furnishing
any labor, services, materials, supplies or equipment to Tenant with respect to
the Office Complex, or any portion thereof, that they must look exclusively to
Tenant to obtain payment for the same, and that Landlord shall not be liable
for any labor, services, materials, supplies, skill, machinery, fixtures or
equipment furnished or to be furnished to Tenant upon credit, and that no
mechanic's lien or other lien for any such labor, services, materials,
supplies, machinery, fixtures or equipment shall attach to or affect the estate
or interest of Landlord in and to the Office Complex, or any portion thereof.
Section 8.4 Landlord's Indemnification. The provisions of Section 8.3
above shall not apply to any mechanic's lien or other lien for labor, services,
materials, supplies, machinery, fixtures or equipment furnished to the Office
Complex in the performance of Landlord's obligations to construct required by
the Work Agreement, and Landlord does hereby agree to indemnify and defend
Tenant against and save Tenant and the Office Complex, and any portion thereof,
harmless from all losses, costs, damages, expenses, liabilities, suits,
penalties, claims, demands and obligations, including, without limitation,
reasonable attorney's fees resulting from the assertion, filing, foreclosure or
other legal proceedings with respect to any such mechanic's lien or other lien.
<PAGE>
Section 8.5 Removal of Liens. Except as otherwise provided for in this
Article 8, Tenant shall not create, permit or suffer, and shall promptly
discharge and satisfy of record, any other lien, encumbrance, charge, security
interest, or other right or interest which shall be or become a lien,
encumbrance, charge or security interest upon the Office Complex, or any
portion thereof, or the income therefrom, or on the interest of Landlord or
Tenant in the Office Complex, or any portion thereof, save and except for those
liens, encumbrances, charges, security interests, or other rights or interests
consented to, in writing, by Landlord, or those mortgages, assignments of
rents, assignments of leases and other mortgage documentation placed thereon by
Landlord in financing or refinancing the Office Complex.
ARTICLE 9
REPAIRS
Section 9.1 Tenant's Repair Obligations. Subject to Article 6 hereof,
and except to the extent the responsibility of Landlord pursuant to Section 9.2
below, Tenant shall, during the term of this Lease, at Tenant's expense, keep
the Building and all changes and alterations made by Tenant to the Building
(whether non-structural or structural) in as good order, condition and repair
as they were at the time Tenant took possession of the same, reasonable wear
and tear and damage from fire and other casualties excepted. Tenant shall keep
the Premises in a neat and sanitary condition and shall not commit any nuisance
or waste on the Premises or in, on, or about the Office Complex or throw
foreign substances in the plumbing facilities. All uninsured damage or injury
to the Premises, or to the Office Complex caused by Tenant moving furniture,
fixtures, equipment, or other devices in or out of the Premises or Office
Complex or by installation or removal of furniture, fixtures, equipment,
devices or other property of Tenant, its agents, contractors, servants or
employees, due to carelessness, omission, neglect, improper conduct, or other
cause of Tenant, its servants, employees, agents, visitors, or licensees, shall
be repaired, restored and replaced promptly by Tenant at its sole cost and
expense to the reasonable satisfaction of Landlord. All repairs, restorations
and replacements shall be in quality and class equal to the original work and
shall comply with all requirements of the Lease.
Section 9.2 Landlord's Repair Obligations. Subject to Tenant's
obligations contained in Section 9.1 above, Landlord shall keep the exterior
structure and systems, load bearing elements, foundations, pipes and conduits
and roof that form a part of the Building in good order, condition and repair.
Section 9.3 Joint Inspection Upon Vacation. Tenant shall give written
notice to Landlord at least thirty (30) days prior to vacating the Premises for
the express purpose of arranging a meeting with Landlord for a joint inspection
of the Premises. In the event of Tenant's failure to give such notice and
arrange such joint inspection, Landlord's inspection at or after Tenant's
vacation of the Premises shall be conclusively deemed correct for purposes of
determining Tenant's responsibility for repairs and restoration hereunder.
ARTICLE l0
ASSIGNMENT AND SUBLETTING
Section 10.1 Restriction on Transfer. Tenant shall not sublet the
Premises, or any portion thereof, nor assign, mortgage, pledge, transfer or
otherwise encumber or dispose of this Lease, or any interest therein, or in any
manner assign, mortgage, pledge, transfer or otherwise encumber or dispose of
its interest or estate in the Premises, or any portion thereof, without
obtaining Landlord's prior written consent in each and every instance, which
consent shall not be unreasonably withheld or delayed, provided the following
conditions are complied with:
(a) Any assignment of this Lease (but specifically excluding any sublease)
shall transfer to the assignee all of Tenant's right, title and
interest in this Lease and all of Tenant's estate or interest in the
Premises.
(b) At the time of any assignment or subletting, and at the time when
Tenant requests Landlord's written consent thereto, this Lease must be
in full force and effect, without any breach or default thereunder on
the part of Tenant beyond any applicable notice and cure period.
(c) Any such assignee (but specifically excluding any subleases) shall
assume, by written, recordable instrument, in form and content
reasonably satisfactory to Landlord and such assignee, the due
performance of all of Tenant's obligations under this Lease, an such
assumption agreement shall state that the same is made by the assignee
for the express benefit of Landlord as a third party beneficiary
thereof. A copy of the assignment and assumption agreement, both in
form and content reasonably satisfactory to Landlord, fully executed
and acknowledged by assignee, together with a certified copy of a
properly executed corporate resolution (if the assignee be a
corporation)
<PAGE>
authorizing the execution and delivery of such assumption agreement,
shall be sent to Landlord ten (10) days prior to the effective date of
such assignment.
(d) In the case of a subletting, a copy of any sublease fully executed and
acknowledged by Tenant and the subleases shall be mailed to Landlord
within thirty (30) days following the effective date of such
subletting.
(e) Such assignment or subletting shall be subject to all the provisions,
terms, covenants and conditions of this Lease (except, in the case of a
sublease, payment of the Base Rent and Additional Rent due under this
Lease), and Tenant-assignor (and the guarantor or guarantors of this
Lease, if any) and the assignee or assignees shall continue to be and
remain liable under this Lease.
(f) Each sublease permitted under this Section 10.1 shall contain
provisions to the effect that (i) such sublease is only for the use and
occupancy by the subleases and not any other third party; (ii) such
sublease is subject and subordinate to all of the terms, covenants and
conditions of this Lease and to all of the rights of Landlord
thereunder; and (iii) in the event this Lease shall terminate before
the expiration of such sublease, the subleases thereunder will,
provided Landlord and its lender(s) recognizes such sublessee's rights
under the sublease and agrees not to disturb Tenant's occupancy and
possession so long as Tenant is not in default thereunder, attorn to
Landlord and waive any rights the subleases may have to "terminate the
sublease or to surrender possession thereunder, as a result of the
termination of this Lease. Landlord agrees to enter into a
Subordination, Non-Disturbance and Attornment Agreement ("SNDA") with
the subtenants, the substance of which shall be substantially similar
to the SNDA attached as Exhibit C, and Landlord agrees to use its best
commercially reasonable efforts to obtain such an SNDA from Landlord's
Mortgagee(s) (as defined in Section 15.3 hereof) for the benefit of the
subtenants.
(g) Tenant agrees to pay on behalf of Landlord any and all reasonable,
actual out-of-pocket costs of Landlord, including reasonable attorney's
fees actually paid or payable to outside counsel, occasioned by such
assignment or subletting. Landlord agrees to use good faith efforts to
minimize the fees of outside counsel.
For purposes of this Lease, any transfer of less than fifty
percent (50%) in the aggregate of stock, membership interest or
partnership interest in Tenant shall not constitute an assignment.
Tenant may, without Landlord's prior written consent, (a) sublet all or
a portion of the Premises to any related corporation or entity which controls
Tenant, is controlled by Tenant or is under common control with Tenant; or (b)
assign this Lease to a successor corporation into which or with which Tenant is
merged or consolidated or which acquires substantially all of Tenant's assets
and property; provided that (i) in the case of an assignment, such successor
entity assumes all of the obligations and liabilities of Tenant, (ii) in the
case of an assignment or a sublease, such successor entity's net worth
indicates that the entity has similar financial capability as Tenant and the
ability to meet the obligations herein, and (iii) such subletting or assignment
does not violate the terms of any deeds of trust encumbering the Building of
which Tenant has been provided notice.
Section 10.2 Restriction From Further Assignment. Any further
assignment or subleasing shall be governed by the terms of this Article 10. No
assignment or subleasing shall relieve Tenant from any of Tenant's obligations
set forth in this Lease.
Section 10.3 Landlord's Termination Rights. Intentionally Deleted.
Section 10.4 Tenant's Failure to Comply. Tenant's failure to comply
with all of the foregoing provisions and conditions of this Article 10 shall
(whether or not Landlord's consent is required under this Article), at
Landlord's option, render any purported assignment or subletting null and void
and of no force and effect. Notwithstanding the foregoing, in the event
Landlord receives written notice specifically stating that Tenant has failed to
comply with the terms of this Article 10, then if Landlord desires to exercise
its right to render the applicable sublease and/or assignment null and void,
Landlord must do so within sixty (60) days of the date of receipt of such
notice.
Section 10.5 Sharing of Excess Rent. If Landlord consents to Tenant
assigning its interest under this Lease or subletting all or any portion of the
Premises, Tenant shall pay to Landlord (in addition to Rent and all other
amounts payable by Tenant under this Lease) 50% of the rents and other
considerations payable by such assignee or subtenant (net of brokerage
commissions, improvement costs, legal fees and other reasonable costs and
expenses incurred in connection with the assignment or subletting) in excess of
the Rent otherwise payable by Tenant from time to time under this Lease. For
the purposes of this computation, the additional amount payable by Tenant shall
be determined by either (i) application of the rental rate per square foot for
the Building or any portion thereof sublet, or (ii) the fair
<PAGE>
market rental rate for rooftop space or other space at the Premises sublet, as
applicable. Said additional amount shall be paid to Landlord immediately upon
receipt by Tenant of such Rent or other considerations from the assignee or
subtenant.
ARTICLE 11
DAMAGE BY FIRE OR OTHER CASUALTY
Section 11.1 Tenantable Within 180 Days. If fire or other casualty
shall render the whole or any material portion of the Premises untenantable,
Landlord shall obtain an estimate for the time required to rebuild from a
reputable licensed contractor, and shall forward the time estimate to Tenant
within thirty (30) days from the date of such damage or destruction. If,
pursuant to the estimate, the Premises can reasonably be expected to be made
tenantable within one hundred eighty (180) days from the date of such event,
then Landlord shall repair and restore the Premises and the Office Complex
within such one hundred eighty (180) day period. In the event of the foregoing,
this Lease shall remain in full force and effect.
Section 11.2 Not Tenantable Within 180 Days. If, pursuant to the time
estimate referenced in Section I I. I above, the Premises cannot reasonably be
expected to be made tenantable within one hundred eighty (180) days from the
date of the casualty event, then Tenant may, by written notice to Landlord
within thirty (30) days from the date of Landlord's time estimate, terminate
this Lease. Tenant's termination notice shall state a termination date which
shall be at least thirty (30) days but no more than sixty (60) days from the
date of the termination notice.
Section 11.3 Damage Occurring at End of Term. Notwithstanding the
terms of Sections 11.l and 11.2 above, in the event the Premises are damaged
during the last twenty-four (24) months of the initial term to the extent of
twenty-five percent (25%) or more of the replacement cost thereof, Landlord or
Tenant may terminate this Lease by giving written notice of such termination to
the other party within sixty (60) days of the date of the casualty. The
termination notice shall specify a termination date at least thirty (30) days
but not more than sixty (60) days after the date of such notice.
Notwithstanding anything to the contrary contained in this Section
11.3, Tenant shall be entitled to nullify Landlord's termination notice by
delivering to Landlord written notice ("Renewal Notice") of Tenant's exercise
of any then outstanding renewal options granted to Tenant pursuant to Section
16.32 of this Lease. The Renewal Notice shall be delivered within thirty (30)
days of the date of Landlord's termination notice.
Section 11.4 Uninsured Casualty. If an uninsured casualty event shall
render any portion of the Premises or any material portion of the Office
Complex untenantable, then so long as Landlord shall have had in effect all
insurance required by the terms of this Lease, Landlord may, by notice to
Tenant, mailed within thirty (30) days from the date of such damages or
destruction, terminate this Lease effective upon a date within thirty (30) days
from the date of such notice.
Section 11.5 Deductible Payments. If the Premises or the Office
Complex is damaged, and such damage is of the type insured against under the
fire and special form property damage insurance required to be maintained by
Landlord hereunder, the cost of repairing said damage up to the amount of the
deductible under said insurance policy shall be paid by Tenant to the extent
the same is reasonable and customary; provided, however, to the extent Tenant
has remised a portion of the Building back to Landlord and Landlord has
consented to same in writing, the deductible amount due from Tenant shall be
reduced proportionately. If the damage is not covered by such insurance
policies and Landlord elects to repair the damage, then Tenant shall pay
Landlord the "deductible amount" (if any) under Landlord's insurance policies,
and, if the damage was directly and exclusively caused by an act or omission of
Tenant, the difference between the actual cost of repair and any insurance
proceeds received by Landlord.
Section 11.6 Landlord's Repair Obligations. If fire or other casualty
shall render the whole or any material part of the Premises untenantable and
neither Landlord nor Tenant terminates this Lease pursuant to its rights
herein, then Landlord shall repair and restore the Premises and the Office
Complex to as near their condition prior to the fire or other casualty as is
reasonably possible with all due diligence and speed and within the applicable
time period required by this Article 11 (subject to delays for causes beyond
Landlord's reasonable control) and the Rent for the period during which the
Premises are untenantable shall be equitably abated (based upon the portion of
the Premises which is untenantable). In no event shall Landlord be obligated to
repair or restore any special equipment or improvements installed by Tenant at
Tenant's expense.
Section 11.7 Rent Apportionment. In the event of a termination of this
Lease pursuant to this Article ll, Rent shall be apportioned on a per diem
basis and paid to the date of the Lease termination.
<PAGE>
Section 11.8 Insurance Trustee. If Landlord fails to comply with its
obligation to rebuild the Premises pursuant to this Article ll and Tenant
elects to exercise its self-help rights as set forth in Section 14.7 hereof,
upon receipt of written instructions from Tenant, Landlord shall inform its
insurance company that Tenant has undertaken the rebuilding of the Premises and
all insurance proceeds shall thereafter be placed with an insurance trustee and
disbursed upon terms and conditions similar to those contained in an industry
standard construction loan agreement.
ARTICLE 12
EMINENT DOMAIN
Section 12.1 Tenant's Termination. If the whole of or a substantial
part of the Premises is taken by any public authority under the power of
eminent domain, or taken in any manner for any public or quasi-public use, so
as to render (in Tenant's reasonable judgment) the remaining portion of the
Premises unsuitable for the purposes intended hereunder, then Tenant shall give
Landlord written notice within thirty (30) days of receiving notice of the
taking and the term of this Lease shall cease as of the day possession shall be
taken by such public authority and Landlord shall make a pro rata refund of any
prepaid rent. Subject to Section 12.2, all damages awarded for such taking
under the power of eminent domain or any like proceedings shall belong to and
be the property of Landlord, Tenant hereby assigning to Landlord its interest,
if any, in said award. Further, if all or any material part of the Office
Complex is taken by public authority under the power of eminent domain, or
taken in any manner for any public or quasi-public use, so as to render any
remaining portion of the Premises unsuitable in Tenant's reasonable opinion,
for the purposes intended hereunder, upon delivery of possession to the
condemning authority pursuant to the proceedings, Tenant may, at its option,
terminate this Lease as to the remainder of the Premises by written notice to
Landlord, such notice to be given to Landlord within thirty (30) days after
Tenant receives notice of the taking. Tenant shall not have the right to
terminate this Lease pursuant to the preceding sentences unless the business of
Tenant cannot in Tenant's reasonable judgment be carried on with substantially
the same utility and efficiency in the remainder of the Premises. Any notice of
termination shall specify the date not more than sixty (60) days after the
giving of such notice as the date for such termination.
Section 12.2 Tenant's Participation. Provisions in this Article 12 to
the contrary notwithstanding, Tenant shall have the right to prove in any
condemnation proceedings and to receive any separate award which may be made
for damages to or condemnation of Tenant's movable trade fixtures and equipment
and for moving expenses; provided, however, Tenant shall in no event have any
right to receive any award for its interest in this Lease or for loss of
leasehold. Provisions in this Article 12 to the contrary notwithstanding, in
the event of a partial condemnation of the Office Complex or the Premises and
this Lease is not terminated, Landlord shall, at its sole cost and expense,
promptly restore the Premises and Office Complex to a complete architectural
unit as near as possible to that condition which existed prior to such partial
condemnation and the Base Rent provided for herein during the period from and
after the date of delivery of possession pursuant to such proceedings to the
termination of this Lease shall be reduced to the fair market rent of the
Premises after such taking.
ARTICLE 13
SURRENDER OF PREMISES
Section 13.1 Surrender of Possession. On the last day of the term of
this Lease, or on the sooner termination thereof, Tenant shall peaceably
surrender the Premises in good condition and repair consistent with Tenant's
duty to make repairs as herein provided, reasonable wear and tear and casualty
loss excluded. On or before the last day of the term of this Lease, or the date
of sooner termination thereof, Tenant shall, at its sole cost and expense,
remove all of its property and trade fixtures and equipment from the Premises
which Tenant is required to remove pursuant to the terms of this Lease. All
property not removed within ten (10) days following receipt of notice from
Landlord shall be deemed abandoned. Tenant hereby appoints Landlord its agent
to remove all abandoned property of Tenant from the Premises upon termination
of this Lease and to cause its transportation and storage for Tenant's benefit,
all at the sole cost and risk of Tenant and Landlord shall not be liable for
damage, theft, misappropriation or loss thereof and Landlord shall not be
liable in any manna in respect thereto. Tenant shall pay all reasonable costs
and expenses of such removal, transportation and storage.
Tenant shall reimburse Landlord upon demand for any reasonable
expenses incurred by Landlord with respect to removal, transportation, or
storage of abandoned property and with respect to restoring said Premises to
good order, condition and repair. All alterations, additions and fixtures,
other than those which Tenant may, or is required to, remove pursuant to the
terms of this Lease, shall remain the property of Landlord and shall be
surrendered with the Premises as a part thereof. Tenant shall promptly
surrender all keys for the Premises to Landlord at the place then fixed for the
payment of rent and shall inform Landlord of combinations on any vaults, locks
and safes left on the Premises. NOTWITHSTANDING ANY PROVISION TO THE CONTRARY
CONTAINED HEREIN, IN NO EVENT SHALL TENANT BE LIABLE FOR, OR OTHERWISE BE
OBLIGATED TO PAY, LOST ACTUAL OR POTENTIAL PROFITS OR
<PAGE>
ANY OTHER DAMAGES OF A CONSEQUENTIAL, SPECULATIVE, SPECIAL, PUNITIVE OR SIMILAR
NATURE. THE TERMS OF THIS SECTION 13.1 SHALL SURVIVE THE EXPIRATION OR EARLIER
TERMINATION OF THIS LEASE.
Section 13.2 Tenant Retaining Possession. In the event Tenant remains
in possession of the Premises after expiration of this Lease, and without the
execution of a new lease, but with Landlord's written consent, it shall be
deemed to be occupying the Premises as a tenant from month to month, subject to
all the provisions, conditions and obligations of this Lease insofar as the
same can be applicable to a month-to-month tenancy, except that the Base Rent
shall be 150% of the then current Base Rent for the Premises. In the event
Tenant remains in possession of the Premises after expiration of this Lease and
without the execution of a new lease and without Landlord's written consent,
Tenant shall be deemed to be occupying the Premises without claim of right and
Tenant shall pay a charge for each day of occupancy an amount equal to double
the Base Rent and Additional Rant (on a daily basis) then due under this Lease.
NOTWITHSTANDING ANY PROVISION TO THE CONTRARY CONTAINED HEREIN, IN NO EVENT
SHALL TENANT BE LIABLE FOR, OR OTHERWISE BE OBLIGATED TO PAY, LOST ACTUAL OR
POTENTIAL PROFITS OR ANY OTHER DAMAGES OF A CONSEQUENTIAL, SPECULATIVE,
SPECIAL, PUNITIVE OR SIMILAR NATURE.
ARTICLE 14
DEFAULT OF TENANT
Section 14.1 Events of Default. The occurrence of any one or more of
the following events (in this Article sometimes called "Event of Default")
shall constitute a default and breach of this Lease by Tenant:
(a) If Tenant fails to pay any Base Rent or Additional Rant payable
under this Lease or fails to pay any obligation required to be paid by Tenant
when and as the same shall become due and payable, and such default continues
for a period of ten (10) days after receipt of written notice thereof given by
Landlord to Tenant.
(b) If Tenant fails to perform any of Tenant's nonmonetary obligations
under this Lease for a period of thirty (30) days after receipt of written
notice from Landlord; provided that if more time is required to complete such
performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30) day period and thereafter diligently pursues
its completion within ninety (90) days. However, Landlord shall not be required
to give such notice if Tenant's failure to perform constitutes a non-curable
breach of this Lease. The notice required by this subsection is intended to
satisfy any and all notice requirements imposed by law on Landlord and is not
in addition to any such requirement.
(c) If Tenant, by operation of law or otherwise, violates the
provisions of Article 10 hereof relating to assignment, sublease, mortgage or
other transfer of Tenant's interest in this Lease or in the Premises and such
violation continues for ten (10) days after written notice from Landlord.
(d) If default shall be made by Tenant in keeping, observing or
performing any of the terms contained in this Lease, other than those referred
to in Subparagraphs (a) and (c) of this Section 14.1, and such default will
result in Landlord being subject to criminal liability, and such default shall
continue after written notice thereof given by Landlord to Tenant, and Tenant
fails to thereafter proceed timely and promptly with all due diligence and in
good faith to cure the same and thereafter to prosecute the curing of such
default with all due diligence, it being intended that in connection with a
default which exposes Landlord to criminal liability that Tenant shall proceed
immediately to cure or correct such condition with continuity and with all due
diligence and in good faith.
Section 14.2 Landlord's Remedies. Upon the occurrence of an Event of
Default by Tenant, and at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have, Landlord shall be entitled to the rights and remedies set
forth below.
(a) Termination of Possession. Terminate Tenant's right to possession
of the Premises by exercising self-help or any other lawful means, in which
case the Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event, Landlord shall have the
immediate right to reenter and remove all persons and property, and such
property may be removed and stored in a public warehouse or elsewhere at the
cost of, and for the account of Tenant, all without service of notice or resort
to legal process and without being deemed guilty of trespass, or becoming
liable for any loss or damage which may be occasioned thereby, except for
Landlord's gross negligence or willful misconduct. In the event that Landlord
shall elect to so terminate this Lease, then Landlord shall be entitled to
recover from Tenant all damages incurred by Landlord by reason of Tenant's
default, including:
(i) The equivalent of the amount of the Base Rent and
Additional Rent which would be payable under this Lease by Tenant if this Lease
were still in effect, less
<PAGE>
(ii) The net proceeds of any commercially reasonable reletting
affected pursuant to the provisions of Section 14.2(e) hereof after deducting
all of Landlord's reasonable expenses in connection with such reletting,
including, without limitation, all repossession costs, brokerage commissions,
legal expenses, reasonable attorneys' fees, alteration costs, and expenses of
preparation of the Premises, or any portion thereof, for such reletting.
Tenant shall pay such current damages in the amount determined
in accordance with the terms of this Section 14.2 as set forth in a written
statement thereof from Landlord to Tenant (hereinafter called the
"Deficiency"), to Landlord in monthly installments on the days on which the
Rent would have been payable under this Lease if this Lease were still in
effect, and Landlord shall be entitled to recover from Tenant each monthly
installment of the Deficiency as the same shall arise.
(b) Damages. At any time after an Event of Default and termination of
this Lease, whether or not Landlord shall have collected any monthly Deficiency
as set forth in Section 14.2, Landlord shall be entitled to recover from
Tenant, in lieu of continuing monthly payments for the Deficiency, and Tenant
shall pay to Landlord, on demand, as and for final damages for Tenant's
default, an amount equal to the difference between the then present worth of
the aggregate of the Base Rent and Additional Rent and any other charges to be
paid by Tenant hereunder for the remainder of the term of this Lease, and the
then present worth of the then aggregate fair and reasonable fair market rent
of the Premises for the same period, net of the costs and expenses referenced
in Section 14.2(a)(ii). In the computation of present worth, a discount rate
equal to the discount rate of the Federal Reserve Bank of New York plus one
percent (1%) shall be employed. If the Premises, or any portion thereof, shall
be relet by Landlord on commercially reasonable terms for the unexpired term of
this Lease, or any part thereof, before presentation of proof of such damages
to any court, commission or tribunal, the amount of Rent reserved upon such
reletting shall, prima facie, be the fair and reasonable fair market rent for
the part or the whole of the Premises so relet during the term of the
reletting. Nothing herein contained or contained in Section 14.2 shall limit or
prejudice the right of Landlord to prove for and obtain, as damages by reason
of such expiration or termination, an amount equal to the maximum allowed by
any statute or rule of law in effect at the time when, and governing the
proceedings in which, such damages are to be proved, whether or not such amount
be greater, equal to or less than the amount of the difference referred to
above.
(c) Reentry and Removal. Upon the occurrence of an Event of Default by
Tenant, Landlord shall also have the right, with or without terminating this
Lease, to reenter the Premises to remove all persons and property from the
Premises. Such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant. If Landlord shall elect
to reenter the Premises, Landlord shall not be liable for, and Tenant shall
indemnify and hold Landlord harmless for, damages by reason of such reentry
except for Landlord's gross negligence or willful misconduct.
(d) No Termination; Recovery of Rent. If Landlord does not elect to
terminate this Lease as provided in this Section 14.2, then Landlord may, from
time to time, recover all Rent as it becomes due under this Lease. At any time
thereafter, Landlord may elect to terminate this Lease and to recover damages
to which Landlord is entitled pursuant to this Article 14.
(e) Reletting the Premises. In the event that Landlord should elect to
terminate this Lease, Landlord shall use commercially reasonable efforts to
relet the Premises on commercially reasonable terms, in which event it may
execute any new lease in its own name. Tenant hereunder shall have no right or
authority whatsoever to collect any Rent from such tenant. The proceeds of any
such reletting shall be applied as follows:
(i) First, to the payment of any indebtedness other than Rent
due hereunder from Tenant to Landlord, including but not limited to reasonable
storage charges or reasonable brokerage commissions owing from Tenant to
Landlord as the result of such reletting;
(ii) Second, to the payment of the reasonable costs and
expenses of reletting the Premises, including alterations and repairs which
Landlord, in its sole discretion, reasonably deems necessary in connection with
such re-letting and reasonable attorneys' fees incurred by Landlord in
connection with the retaking of the said Premises and such reletting;
(iii) Third, to the payment of Rent and other charges due and
unpaid hereunder, and
(iv) under this Lease.
Fourth, to the payment of future Rent and other damages payable by
Tenant
The parties hereto shall, and they hereby do, waive trial by
jury in any action, proceeding, or counterclaim brought by either of the
parties hereto against the other on any matters
<PAGE>
whatsoever arising out of, or in any way connected with, this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises
and/or Of Office Complex, and/or claim or injury or damage. In the event
Landlord commences any proceeding to enforce this Lease or the Landlord/Tenant
relationship between the parties or for nonpayment of Rent (of any nature
whatsoever) or additional monies due Landlord from Tenant under this Lease,
Tenant will not interpose any counterclaim of whatever nature or description in
any such proceedings. In the event Tenant must, because of applicable court
rules, interpose any counterclaim or other claim against Landlord in such
proceedings, Landlord and Tenant covenant and agree that, in addition to any
other lawful remedy of Landlord, upon motion of Landlord, such counterclaim or
other claim asserted by Landlord shall be severed out of the proceeding
instituted by Landlord (and, if necessary, transferred to a court of different
jurisdiction), and the proceedings, instituted by Landlord may proceed to final
judgment separately and apart from and without consolidation with or reference
to the status of each counterclaim or any other claim asserted by Tenant.
Section 14.3 Written Notice of Termination Required. Landlord shall
not be deemed to have terminated this Lease and the Tenant's right to
possession of the leasehold or the liability of Tenant to pay Rent thereafter
to accrue or its liability for damages under any of the provisions hereof,
unless Landlord shall have notified Tenant in writing that it has so elected to
terminate this Lease. Tenant covenants that the service by Landlord of any
notice pursuant to the applicable unlawful detainer statutes of the state in
which the Office Complex is located and the Tenant's surrender of possession
pursuant to such notice shall not (unless Landlord elects to the contrary at
the time of, or at any time subsequent to the service of, such notice, and such
election be evidenced by a written notice to Tenant) be deemed to be a
termination of this Lease or of Tenant's right to possession thereof.
Section 14.4 Remedies Cumulative; No Waiver. All rights, options and
remedies of Landlord contained in this Lease shall be construed and held to be
cumulative, and no one of them shall be exclusive of the other, and Landlord
shall have the right to pursue any one or all of such remedies or any other
remedy or relief which may be provided at law or in equity whether or not
stated in this Lease, including, without limitation, the right of self help,
but subject to all applicable provisions of this Lease.
No waiver by Landlord or Tenant ("Waiving Party") of a breach of any
of the terms, covenants or conditions of this Lease by the other party
("Breaching Party") shall be construed or held to be a waiver of any succeeding
or preceding breach of the same or any other term, covenant or condition
therein contained. No waiver of any default of the Breaching Party hereunder
shall be implied from any omission by the Waiving Party to take any action on
account of such default if such default persists or is repeated, and no express
waiver shall affect default other than as specified in said waiver. The consent
or approval by the Waiving Party to or of any act by the Breaching Party
requiring the Waiving Party's consent or approval shall not be deemed to waive
or render unnecessary the Waiving Party's consent to or approval of any
subsequent similar acts by the Breaching Party.
Section 14.5 Legal Costs. Tenant shall reimburse Landlord, upon
demand, for any costs or expenses incurred by Landlord in connection with any
Event of Default of Tenant under this Lease, whether or not suit is commenced
or judgment entered. Such costs shall include reasonable legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for an Event of Default to enforce the
provisions of this Lease is commenced, the court in such action shall award to
the party in whose favor a judgment is entered a reasonable sum as attorneys'
fees and costs. Such attorneys' fees and costs shall be paid by the losing
party in such action at such time as it is no longer subject to appeal. Tenant
shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability incurred by Landlord if Landlord becomes
or is made a party to any claim or action (a) instituted by Tenant, or by any
third party against Tenant; (b) for foreclosure of any lien for labor or
material furnished to or for Tenant or such other person; (c) otherwise arising
out of or resulting from any act or transaction of Tenant or such other person;
or (d) necessary to protect Landlord's interest under this Lease in a
bankruptcy proceeding, or other proceeding under Title 11 of the United States
Code, as amended. Tenant shall defend Landlord against any such claim or action
at Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any reasonable legal
fees or costs incurred by Landlord in any such claim or action.
In addition, Tenant shall pay Landlord's reasonable attorneys' fees
incurred in connection with Tenant's request for Landlord's consent in
connection with any act which Tenant proposes to do and which requires
Landlord's consent.
Section 14.6 Waiver of Damages for Reentry. Intentionally Deleted.
<PAGE>
Section 14.7 Tenant Self-Help. Tenant may provide Landlord written
notice if Landlord fails to (i) comply with any of its repair and maintenance
obligations under this Lease, or (ii) comply with its obligations to provide
services under the terms of this Lease, both subject to Unavoidable Delay (as
defined in the Work Agreement). Tenant's written notice shall specify the
action required to be taken, demand that Landlord proceed with such action, and
indicate that Tenant may perform on Landlord's behalf if Landlord fails to
timely respond. Landlord shall, within seven (7) days after receipt of such
notice (or immediately after receipt of such notice if Landlord's failure to
comply with its Lease obligations gives rise to an emergency), commence
investigation of the cause of the asserted problem. Landlord shall promptly
commence such repair or replacement, or other action, and diligently pursue
completion thereof. In the event that (x) Landlord fails to respond to Tenant's
notice within the foregoing seven (7) day period, or (y) fails to promptly
commence, diligently pursue and ultimately complete same within thirty (30)
days of commencement (or such shorter or longer period of time as is
commercially reasonable under the circumstances) any action set forth in
clauses (i) and (ii) above, then, if the repair, replacement or other action
required to be taken does not affect the structure of the Building and does not
affect the mechanical, electrical, plumbing or other base building systems
then, upon written notice to Landlord, Tenant shall have the right to effect
such repair or replacement, or pursue such other action as may reasonably be
necessary in order to correct the condition; provided, however, in no event
shall Landlord be liable for consequential or punitive damages. Landlord shall
reimburse Tenant on demand for all of the reasonable costs and expenses
incurred by Tenant in connection with such foregoing remedial activities plus
an administrative overhead charge equal to twenty percent (20%) of the actual
cost of repair. Any repair, replacement or other work performed by Tenant shall
be performed in a good and workmanlike manner and in strict compliance with any
Federal, state, local and municipal laws, rules, regulations and ordinances,
and shall be performed by licensed and bonded contractors carrying customary
insurance coverage, which insurance shall include Landlord as an additional
insured. Notwithstanding anything to the contrary contained herein, no payment
by Tenant shall be construed as a waiver of a default by Landlord under this
Section 14.7.
ARTICLE 15
SUBORDINATION/ESTOPPEL
Section 15.1 Lease Subordinate. This Lease shall be subject and
subordinate to any mortgage, deed of trust or ground lease now encumbering the
Premises, the Office Complex, the Property, or any portion thereof by Landlord,
its successors or assigns. The foregoing subordination shall be effective
without the necessity of the execution and delivery of any further instruments
on the part of Tenant to effectuate such subordination. Provided Tenant
receives a non-disturbance agreement substantially in the form attached hereto
as Exhibit C, this Lease shall be further subject and subordinate to any future
mortgages, deeds of trust or ground leases and any amendments, replacements,
renewals and extensions thereof. Tenant agrees at any time hereafter, within
fifteen (15) days following demand, to execute and deliver any instruments,
releases, or other documents that may be reasonably required for the purpose of
subjecting and subordinating this Lease, as above provided, to the lien of any
such mortgage, deed of trust or ground lease, provided such documents shall be
reasonably acceptable to Tenant. It is agreed, nevertheless, that as long as
Tenant is not in default in the payment of Base Rent, Additional Rent, and the
payment of other charges to be paid by Tenant under this Lease, and the
performance of all covenants, agreements and conditions to be performed by
Tenant under this Lease beyond any applicable notice and cure period, then
neither Tenant's right to quiet enjoyment under this Lease, nor the right of
Tenant to continue to occupy the Premises and to conduct its business thereon,
in accordance with the terms of this Lease as against any Landlord, mortgagee,
trustee, or their successors or assigns shall be interfered with.
Section 15.2 Attornment. Subject to the terms of this Article 15, in
the event the holder of any mortgage, deed of trust or ground lease shall at
any time elect to have this Lease constitute a prior and superior lien to its
mortgage, deed of trust or ground lease, then, and in such event, upon any such
holder or landlord notifying Tenant to that effect in writing, this Lease shall
be deemed prior and superior in lien to such mortgage, deed of trust, ground
lease, whether this Lease is dated prior or subsequent to the date of such
mortgage, deed of trust or ground lease and Tenant shall execute such
attornment agreement as may be reasonably requested by said holder or landlord,
provided the form and content thereof are reasonably acceptable to Tenant and
contain recognition and non-disturbance covenants satisfactory to Tenant.
Section 15.3 Tenant's Notice of Default. Tenant agrees, provided the
mortgagee, ground landlord or trust deed holder under any mortgage, ground
lease, deed of trust or other security instrument ("Mortgagee") shall have
notified Tenant in writing (by the way of a notice of assignment of lease or
otherwise) of its address, Tenant shall give such Mortgagee, simultaneously
with delivery of notice to Landlord, by registered or certified mail, a copy of
any such notice of default served upon Landlord. Tenant further agrees that
said Mortgagee shall have the right to cure any alleged default during the same
period that Landlord has to cure such default.
Section 15.4 Estoppel Certificates. Landlord and Tenant shall, each
without charge at any time and from time to time, within fifteen (15) days
after written request by the other party, but not
<PAGE>
more frequently than two (2) times in any twelve month period, certify, to the
extent true, by written instrument, duly executed, acknowledged and delivered
to any mortgagee, assignee of a mortgagee, proposed mortgagee, or to any
purchaser or proposed purchaser, or to any other person transacting business
with Landlord or Tenant and relating to the Premises:
(a) That this Lease (and all guaranties, if any) is unmodified and in
full force and effect (or, if there have been modifications, that the same is
in full force and effect, as modified, and stating the modifications);
(b) The dates to which the Base Rent or Additional Rent have been paid
in advance;
(c) Whether or not there are then existing any breaches or defaults by
such party or the other party known by such party under any of the covenants,
conditions, provisions, terms or agreements of this Lease, and specifying such
breach or default, if any, or any setoffs or defenses against the enforcement
of any covenant, condition, provision, term or agreement of this Lease (or of
any guaranties) upon the part of Landlord or Tenant (or any guarantor), as the
case may be, to be performed or complied with (and, if so, specifying the same
and the steps being taken to remedy the same); and
(d) Such other statements or certificates as Landlord, Tenant or any
mortgagee may reasonably request.
It is the intention of the parties hereto that any statement delivered
pursuant to this Section may be relied upon by any of such parties transacting
business with Landlord or Tenant and relating to the Premises. If Landlord or
Tenant does not deliver such statement to the requesting party within such
fifteen (15) day period, and such failure continues for five (5) additional
days following receipt of a second notice stipulating that such continuing
failure shall have the consequences set forth herein, the requesting party, and
any applicable party transacting business relative to the Premises with the
requesting party, may conclusively presume and rely upon the following facts:
(i) that the terms and provisions of this Lease have not been changed except as
otherwise represented by the requesting party; (ii) that this Lease has not
been canceled or terminated and is in full force and effect, except as
otherwise represented by the requesting party; that the current amount of the
Base Rent is as represented by the requesting party; that there have been no
subleases or assignments of the Lease; (iii) that not more than one month's
Base Rent or other charges have been paid in advance; and (iv) that the
requesting party is not in default under the Lease. In such event, the
non-requesting party shall be estopped from denying the truth of such facts.
ARTICLE 16
MISCELLANEOUS
Section 16.1 Time is of the Essence. Time is of the essence with
respect to the performance of every provision of this Lease in which time of
performance is a factor.
Section 16.2 Memorandum of Lease. Upon not less than ten (10) days
prior written request by either party, the parties hereto agree to execute and
deliver to each other a Memorandum Lease, in recordable form, setting forth the
following:
(a) The date of this Lease;
(b) The parties to this Lease;
(c) The term of this Lease;
(d) The legal description of the Premises; and
(e) Such other matters reasonably requested by Landlord or Tenant
to be stated therein.
The cost of recording the memorandum and all taxes related thereto
shall be at the expense of the requesting party. Upon the expiration or earlier
termination of this Lease, or upon the termination of Tenant's right to
possession of the Premises, Tenant shall execute and deliver to Landlord within
ten (10) days after receipt of Landlord's written request therefor, a
termination of such memorandum of lease. In the event Tenant fails to deliver
such termination of the memorandum of lease to Landlord upon the expiration of
such ten (10) day period, Landlord shall be permitted to execute and record
such termination, and Tenant hereby appoints Landlord as its attorney-in-fact
to execute such termination on behalf of Tenant. The terms and conditions of
this Section 16.2 shall survive the expiration or early termination of this
Lease.
Section 16.3 Joint and Several Liability. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 16.4 Broker. Landlord and Tenant represent to each other that
they have not dealt with any brokers in connection with this Lease except
Julien J. Studley, inc. and The Charles E.
<PAGE>
Smith Companies, who will be paid by Landlord pursuant to a separate agreement.
Landlord and Tenant shall indemnify and hold each other harmless against any
claims for brokerage or other commissions arising by reason of a breach of the
aforesaid representation and warranty .
Section 16.5 Notices. All notices, demands and requests shall be in
writing, and shall be effectively served by forwarding such notice, demand or
request by certified or registered mail, postage prepaid, or by commercial
overnight courier service, or by hand delivery with signed receipts, addressed
as follows:
(a) If addressed to Tenant:
Stanford Telecommunications, Inc. (prior to the Commencement Date)
1761 Business Center Drive Suite 300 Reston, Virginia 20190 Attn: Kim Kreider
(after the Commencement Date: The Premises)
with a copy to:
Watt Tieder & Hoffer 7929 Westpark Drive, Suite 400 McLean, Virginia
22102 Attn: John G. Lavoie, Esq.
(b) If addressed to Landlord:
Opus East, L.L.C. 6707 Democracy Boulevard Suite 5 10 Bethesda,
Maryland 208
with a copy to:
Opus U.S. Corporation 700 Opus Center 9900 Bren Road Minnetonka,
Minnesota 55343 Attn: Dan F. Nicol, Esq.
and
Hazel & Thomas, P.C. 3110 Fairview Park Drive Suite 1400 Falls Church,
Virginia 22042 Attn: Donna P. Shafer, Esq.
or at such other address as Landlord and Tenant may hereafter
designate by written notice to the other party. The effective date of all
notices shall be (i) three (3) days after the date of mailing if sent by United
States Postal Service, (ii) the date of delivery if sent by a nationally
recognized overnight courier service, or (iii) the date of receipt if sent by
hand delivery with signed receipts.
Section 16.6 Landlord's Agent. All rights and remedies of Landlord
under this Lease or that may be provided by law may be executed by Landlord in
its own name individually, or in the name of its agent, and all legal
proceedings for the enforcement of any such rights or remedies, including those
set forth in Article 14, may be commenced and prosecuted to final judgment and
execution by Landlord in its own name or in the name of its agent.
Section 16.7 Quiet Possession. Landlord covenants and agrees that
Tenant, upon paying the Base Rent, Additional Rent and other charges herein
provided for and observing and keeping the covenants, agreements and conditions
of this Lease on its part to be kept and performed, shall lawfully and quietly
hold, occupy and enjoy the Premises during the term of this Lease without
hindrance or molestation by Landlord or by any person claiming under or through
Landlord.
Section 16.8 Successors and Assigns. The covenants and agreements
herein contained shall bind and inure to the benefit of the Landlord, its
successors and assigns, and Tenant and its permitted successors and assigns.
Section 16.9 Severability. If any term or provision of this Lease
shall to any extent be held invalid or unenforceable, the remaining terms and
provisions of this Lease shall not be affected thereby, but each term and
provision of this Lease shall be valid and enforced to the fullest extent
permitted by law. This Lease shall be construed and enforced in accordance with
the laws of the state in which the Premises are located.
Section 16.10 No Abandonment or Waste. Tenant covenants not to do or
suffer any waste or damage or disfigurement or injury to the Premises or Office
Complex.
Section 16.11 Transfers by Landlord. The term "Landlord" as used in
this Lease so far as covenants or obligations on the part of Landlord are
concerned shall be limited to mean and include only the owner or owners of the
Office Complex at the time in question, and in the event of any transfer or
transfers or conveyances the then grantor shall be automatically freed and
released (except to the extent otherwise provided in Section 16.20 hereof) from
all liability accruing from and After the date of such transfer or conveyance
as
<PAGE>
respects the performance of any covenant or obligation on the part of Landlord
contained in this Lease to be performed so long as the successor landlord
agrees to assume the original landlord's obligations and a copy of such
instrument is promptly delivered to Tenant. It is intended hereby that the
covenants and obligations contained in this Lease on the part of Landlord shall
be binding on the Landlord, its successors and assigns, only during and in
respect to their respective successive periods of ownership.
In the event of a sale or conveyance by Landlord of the Office Complex
or any part of the Office Complex, the same shall operate to release Landlord
from any future liability upon any of the covenants or conditions herein
contained and in such event Tenant agrees to look solely to the responsibility
of the successor in interest of Landlord in and to this Lease. This Lease shall
not be affected by any such sale or conveyance, and Tenant agrees to attorn to
the purchaser or grantee, which shall be personally obligated on this Lease
only so long as it is the owner of Landlord's interest in and to this Lease.
Notwithstanding anything to the contrary contained in this Section 16.11,
Landlord shall not assign its interest in this Lease prior to the Commencement
Date without the prior written consent of Tenant.
Section 16.12 Headings. The marginal or topical headings of the
several articles and sections are for convenience only and do not define, limit
or construe the contents of said articles and sections.
Section 16.13 Written Agreement. All preliminary negotiations are
merged into and incorporated in this Lease, except for written collateral
agreements executed contemporaneously herewith.
Section 16.14 Modifications or Amendments. This Lease can only be
modified or amended by an agreement in writing signed by the parties hereto. No
receipt of money by Landlord from Tenant or any other person after termination
of this Lease or after the service of any notice or after the commencement of
any suit, or after final judgment for possession of the Premises shall
reinstate, continue or extend the term of this Lease or affect any such notice,
demand or suit, or imply consent for any action for which Landlord's consent is
required, unless specifically agreed to in writing by Landlord. Any amounts
received by Landlord may be allocated to any specific amounts due from Tenant
to Landlord as Landlord determines.
Section 16.15 Landlord Control. Landlord shall have the right to
temporarily close any portion of the building area or land area to the extent
as may, in Landlord's reasonable opinion, be necessary to prevent a dedication
thereof or the accrual of any rights to any person or the public therein.
Section 16.16 Utility Easement. Provided such does not materially
interfere with Tenant's business or reduce the size or utility of the Premises
as contemplated by this Lease, Tenant shall permit Landlord (or its designees)
to erect, use, maintain, replace and repair pipes, cables, conduits, plumbing,
vents, and telephone, electric and other wires or other items, in, to and
through the Premises, as and to the extent that Landlord may now or hereafter
deem necessary or appropriate for the proper operation and maintenance of the
Office Complex.
Section 16.17 Not Binding Until Properly Executed. Employees or agents
of Landlord have no authority to make or agree to make a lease or other
agreement or undertaking in connection herewith. The submission of this
document for examination does not constitute an offer to lease, or a
reservation of, or option for, the Premises. This document becomes effective
and binding only upon the execution and delivery hereof by the proper officers
of Landlord and by Tenant. Tenant confirms that Landlord and its agents have
made no representations or promises with respect to the Premises or the making
of or entry into this Lease except as in this Lease expressly set forth, and
agrees that no claim or liability shall be asserted by Tenant against Landlord
for, and Landlord shall not be liable by reason of, breach of any
representations or promises not expressly stated in this Lease. This Lease,
except for the Building Rules and Regulations, in respect to which Section
16.18 of this Article shall prevail, can be modified or altered only by
agreement in writing between landlord and Tenant, and no act or omission of any
employee or agent of Landlord shall alter, change or modify any of the
provisions hereof.
Section 16.18 Building Rules and Regulations. Tenant shall perform,
observe and comply with the Building Rules and Regulations of the Office
Complex as set forth below, with respect to the safety, care and cleanliness of
the Premises and the Office Complex, and the preservation of good order
thereon, and, upon written notice thereof to Tenant, Tenant shall perform,
observe, and comply with any changes, amendments or additions thereto as from
time to time shall be established and deemed advisable by Landlord for tenants
of the Office Complex. Notwithstanding the foregoing, in no event shall any
amendments or revisions to the Rules and Regulations change or alter Tenant's
obligations or rights under this Lease, and in the event of a discrepancy
between the Rules and Regulations and the Lease, the Lease shall govern.
<PAGE>
Section 16.19 Compliance with Laws and Recorded Covenants. Tenant
shall not use the Premises or permit anything to be done in or about the
Premises which will, in any way, conflict with any law, statute, ordinance or
governmental rule or regulation now in force or which may hereafter be enacted
or promulgated. Tenant shall, at its sole cost and expense, promptly comply
with all laws, statutes, ordinances and governmental rules and regulations now
in force or which may hereafter be in force, and with the requirements of any
fire insurance underwriters or other similar body now or hereafter constituted
relating to or affecting the condition, use or occupancy of the Premises.
Tenant shall use the Premises and comply with any recorded covenants,
conditions, and restrictions affecting the Premises and the Office Complex as
of the commencement of the Lease or which are recorded during the Lease term
following notice to and acceptance by Tenant.
Except as specifically provided in the Work Agreement, Tenant shall
have the responsibility to comply with the requirements of the ADA in the
Premises only after the Commencement Date. As used in this Lease, "ADA" shall
mean the Americans with Disabilities Act of 1991, 42 U.S.C. ss. 12.101 et seq.
and all regulations applicable thereto promulgated as of the date hereof
(collectively, "ADA").
Section 16.20 Obligations Survive Termination. All obligations of
Landlord and Tenant hereunder not fully performed as of the expiration or
earlier termination of the term of this Lease shall survive the expiration or
earlier termination of the term hereof, including, without limitation, all
payment or repayment/refund obligations with respect to Operating Expenses,
insurance premiums, and Real Estate Taxes and all obligations concerning the
condition of the Premises.
Section 16.21 Tenant's Waiver. Intentionally Deleted.
Section 16.22 Authorization. Landlord and Tenant shall furnish to each
other, within ten (10) business days of written request from the other party, a
corporate resolution, proof of due authorization of partners, or other
appropriate and reasonable documentation evidencing the due authorization to
enter into this Lease.
Section 16.23 No Partnership or Joint Venture. This Lease shall not be
deemed or construed to create or establish any relationship or partnership or
joint venture or similar relationship or arrangement between Landlord and
Tenant hereunder.
Section 16.24 Landlord's Right to Substitute Premises. Intentionally
Deleted.
Section 16.25 Tenant's Obligation to Pay Miscellaneous Taxes. Tenant
shall pay, prior to delinquency, all taxes assessed or levied upon its
occupancy of the Premises, or upon the trade fixtures, furnishings, equipment
and all other personal property of Tenant located in the Premises, and when
possible Tenant shall cause such trade fixtures. furnishings, equipment and
other personal property to be assessed and billed separately from the property
of Landlord. In the event any or all of Tenant's trade fixtures, furnishings,
equipment or other personal property, or Tenant's occupancy of the Premises,
shall be assessed and taxed with the property of Landlord, Tenant shall pay to
Landlord its share of such taxes within thirty (30) days after delivery to
Tenant by Landlord of a statement in writing setting forth the amount of such
taxes applicable to Tenant's personal property.
Section 16.26 Signs. In addition to the signs shown on the Final Plans
and Specifications, Tenant may erect additional signs on the exterior or
interior of the Building or on the landscaped area adjacent thereto, provided
that such sign or signs are acceptable to Landlord in Landlord's reasonable
discretion, and such signs (a) do not cause any structural damage or other
damage to the Building; (b) do not violate applicable governmental laws,
ordinances, rules or regulations; (c) do not violate any existing restrictions
affecting the Premises; and (d) are compatible with the architecture of the
Building and the landscaped area adjacent thereto. Landlord further agrees that
Tenant's name and the names of its key employees shall be listed on the lobby
directory of the Premises without additional cost to Tenant.
Section 16.27 Exhibits. The following are made a part hereof, with the
same force and effect as if specifically set forth herein:
(a) Exhibit A - Legal Description of the Land
(b) Exhibit B - Work Agreement
(c) Exhibit C - Non Disturbance Agreement
(d) Exhibit D - Intentionally Deleted
(e) Exhibit E - Rules and Regulations
(f) Exhibit F - Base Building
Section 16.28 Landlord's Limited Liability. Anything contained in this
Lease to the contrary notwithstanding, but subject to the terms of this Section
16.28, from and after the Final
<PAGE>
Completion of the Building (as defined in the Work Agreement), Tenant agrees
that Tenant shall look solely to the estate and property of Landlord in the
Premises or the proceeds from the sale, transfer, foreclosure, refinance or
conversion thereof, and insurance and condemnation proceeds for the collection
of any judgment or other judicial process requiring the payment of money by
Landlord for any default or breach by Landlord under this Lease, subject,
however, to the prior rights of any mortgagee or Landlord of the Premises. No
other assets of Landlord or any partners, shareholders, or other principals of
Landlord shall be subject to levy, execution or other judicial process for the
satisfaction of Tenant's claim. In the event Tenant obtains a final,
non-appealable judgment against Landlord, but the estate and property of
Landlord in the Premises are not sufficient to satisfy the judgment, then
Tenant may, at its option, offset the judgment against Rent coming due under
the Lease and, if the judgment remains unsatisfied as of the end of the term,
extend the term and continue to offset its Rent obligations.
Section 16.29 Rooftop Rights. Subject to Landlord's review and prior
written approval, which shall not be unreasonably withheld, and subject to
compliance with applicable laws and all restrictions of record, Tenant shall,
at all times during the term of this Lease, have the right to use the
Building's shafts for conduits between the Premises and the roof of the
Building for the installation and maintenance of conduits and cables to extend
to communications equipment located or to be located on the roof. Further,
subject to availability of space and Landlord's prior written approval (not to
be unreasonably withheld, conditioned or delayed) of the size, location,
esthetics, and height thereof, Tenant shall have the right at all times to
install and operate microwave or satellite dishes or other antenna
communications system on the roof of the Building subject to compliance with
all applicable laws and all restrictions of record. Landlord's approval rights
shall include without limitation, review and approval of the procedures and
personnel with respect to installation, maintenance, and operation. Tenant
shall not be obligated to pay rental for any equipment which may be installed.
Use of such roof space shall be subject to reasonable rules and regulations
specified by Landlord and to Tenant's obtaining such insurance coverage as
Landlord shall reasonably require. At the expiration or earlier termination of
the Lease, Tenant, at its expense, shall remove the communications equipment.
Any work required to restore the roof or any other part of the Building from
any damage occasioned by the installation, maintenance, relocation or removal
of the communications equipment shall be borne by Tenant. Tenant shall
indemnify and hold harmless Landlord from all costs, damages, expenses,
liabilities, and suits, including reasonable attorneys' fees, occasioned by
Tenant's installation, maintenance, relocation, removal or use of the
communications equipment, including without limitation, any damage to property
and/or injury or death to persons caused thereby from the installation,
maintenance, and operation. The installation, maintenance, relocation, and
removal of the communications equipment will be performed in such a manner as
not to interfere with the operation of the Building. All communications
equipment shall be maintained by the Tenant at Tenant's sole cost and expense
in good and safe condition. The communications equipment shall be used solely
by Tenant in the ordinary course of its business, and Tenant shall not allow
any parties other than Tenant to use such equipment or the rooftop without
Landlord's prior written consent, not be unreasonably withheld. The terms of
this Section 16.29 shall survive the expiration or earlier termination of this
Lease.
Section 16.30 Parking. Notwithstanding anything to the contrary
contained in this Lease, if any event or action or omission by Landlord renders
the parking areas for the Building and/or Tenant's parking space allocation
(including reserved spaces, if any) for whatever reason inaccessible or
unusable, or which causes the number of parking spaces for the Premises to be
reduced below applicable Loudoun County code requirements (which reasons may
include but are not limited to repairs, maintenance, casualty, condemnation, or
displacement or dislocation caused by future construction), Landlord shall
immediately provide substitute parking areas for Tenant's use and its invitees
which areas shall (i) cause no net reduction in Tenant's parking space
allocation, (ii) be similarly convenient in terms of location, quality and
safety, and (iii) except in the case of an emergency, be designated by prior
written notice to Tenant with the exact location of such substitute parking
areas subject to Tenant's approval not to be unreasonably withheld, conditioned
or delayed. In no event shall Landlord charge any separate or additional charge
or rent for use of the parking areas located on the Property from time to time.
Section 16.31 Measurement of Premises. As used in this Lease, the term
"net rentable area" shall mean the number of square feet as measured in
accordance with the June, 1996 Building Owners and Managers Association
Standard Method of Measurement.
Section 16.32 Renewal Option. Tenant shall have the right to renew and
extend the term of this Lease for the Renewal Term (herein so called) upon and
subject to the following terms and conditions:
Tenant may extend this Lease for one (1) Renewal Term of five (5)
years by Tenant's giving Landlord a Renewal Notice no more than twelve (12)
months and no less than nine (9) months prior to the expiration of the initial
term. Such Renewal Term shall commence immediately
<PAGE>
upon the expiration of the initial term and upon exercise of such renewal
option the expiration date of the term shall automatically become the last day
of the Renewal Term. If Tenant does not renew the Lease in a timely manner for
the Renewal Term, then Tenant's rights with respect to such Renewal Term shall
expire and be of no further force and effect.
The exercise by Tenant of the renewal option set forth herein must be
made, if at all, by delivery of the Renewal Notice to Landlord on or before the
dates set forth above. Once Tenant shall exercise such renewal option, Tenant
may not thereafter revoke such exercise. At Landlord's election, Tenant's
renewal option shall terminate and be of no further force or effect if (i) an
Event of Default exists under the Lease at the time Tenant attempts to exercise
its renewal option, (ii) Tenant defaults under any provision of the Lease after
exercising its renewal option and such default continues beyond any applicable
cure period provided in the Lease, (iii) at any time during the Term of the
Lease, as extended, Tenant assigns the Lease to a third party, or (iv) at the
time Tenant attempts to exercise its renewal option, Tenant has subleased or
has demonstrated an intention to sublease more than fifty percent (50%) or more
of the Premises to an unrelated third party.
Tenant shall take the Premises "as is" for the Renewal Term and, other
than as may then be a component of the "Fair Market Rental Rate", Landlord
shall have no obligation to make any improvements or alterations to same;
provided, however, Landlord shall comply with its repair and maintenance
obligations as set forth in this Lease.
Annual Base Rent for the Renewal Term shall be the "Fair Market Rental
Rate" multiplied by the number of square feet of net rentable area in the
Building, but in no event less than the Base Rent for the last Lease Year of
the initial term. Within thirty (30) days after the date of Tenant's Renewal
Notice, Landlord and Tenant shall endeavor in good faith to agree upon the Fair
Market Rental Rate applicable to the Building for each year of the Renewal
Term. In the event Landlord and Tenant are unable to agree upon the Fair Market
Rental Rate within the aforesaid thirty (30) day period, Landlord and Tenant
shall each select a broker to determine the Fair Market Rental Rate within
thirty-five (35) days after the date of the Renewal Notice. Each broker shall
make an independent determination of the Fair Market Rental Rate of the
Building for each year of the Renewal Term. If the two brokers so appointed
agree on the Fair Market Rental Rate for each year of the Renewal Term within
forty (40) days after the date of the Renewal Notice, the Fair Market Rental
Rate shall be the amount determined by them.
If the two brokers so appointed do not agree on the Fair Market Rental
Rate within forty (40) days after the date of the Renewal Notice, the two
brokers shall jointly appoint a third broker on or before the forty-fifth
(45th) day after the date of the Renewal Notice. The third broker shall make a
valuation within fifty (50) days after the date of the Renewal Notice and the
Fair Market Rental Rate for each year of the Renewal Term shall be an amount
equal to the quotient obtained by dividing the sum of the Fair Market Rental
Rates determined by the two brokers who were closest to each other in amount,
by two.
Each broker appointed shall be an individual of recognized competence
who has a minimum of ten (10) consecutive years' experience in the leasing of
office space in the suburban Northern Virginia area immediately preceding such
engagement. All valuations of the Fair Market Rental Rate shall be in writing,
shall be expressed in terms of an annual rent per square foot of rentable area,
and shall take into consideration that the Premises are to be taken in "as is"
condition for any renewal period. Each broker shall determine the Fair Market
Rental Rate on the basis of all relevant factors affecting Fair Market Rental
Rates such as concessions then being offered in the marketplace. The party
appointing each broker shall be obligated, promptly after receipt of the
valuation report prepared by the broker appointed by such party, to deliver a
copy of such valuation report to the other party in the manner provided
elsewhere in this Lease for the giving of notices. If a third broker is
appointed, the third broker shall be directed, at the time of his appointment,
to deliver copies of his valuation report, promptly after its completion, to
Landlord and Tenant in the manner provided elsewhere in this Lease for the
giving of notices. The expenses of each of the first two brokers appointed
shall be borne by the party appointing such broker. The expenses of the third
broker appointed shall be paid one-half by Landlord and one-half by Tenant.
Tenant shall not be entitled to any rental abatement concessions,
additional renewal options or other similar concessions during any Renewal
Term, except to the extent they constitute part of the determination of the
Fair Market Rental Rate.
Except as set forth herein, the leasing of the Premises for the
Renewal Term shall be upon the same terms and conditions as are applicable for
the initial term and shall be upon and subject to all of the provisions of this
Lease, including, without limitation, the obligation of Tenant to pay any costs
or amounts payable by Tenant to Landlord under the Lease.
Tenant's rights under this Section 16.32 shall be personal to Tenant
and shall not inure to the benefit of any assignee or occupant of the Premises
other than an assignee which is a successor
<PAGE>
corporation into which or with which Tenant is merged or consolidated or which
acquires substantially all of Tenant's assets and property, or to any
subsidiary, affiliate or parent company of Tenant, or any subsidiary of the
parent company of Tenant.
Section 16.33 Right of First Offer to Purchase. Landlord shall notify
Tenant of its intent to market the Property for sale, and shall accord Tenant
thirty (30) days from the date of notice (which notice shall include the
purchase price to be sought by Landlord) to reach agreement with Landlord on
terms and conditions of sale, in which event, the parties will enter into a
contract memorializing such terms and proceed to closing. If the parties do not
reach agreement within such thirty (30) day period, Landlord shall have the
absolute right to sell the Property to any other party on such terms and
conditions as may be acceptable to Landlord in its sole discretion.
Section 16.34 Indoor Air Quality. The party performing the property
management functions shall have the Building tested for indoor air quality on
an annual basis. To the extent Landlord is serving as property manager, (i) the
costs of the tests shall constitute an Operating Expense, (ii) Landlord shall
promptly provide to Tenant copies of such annual written test reports relating
to the air quality in the Building, or any other written report, information,
or data prepared as an evaluation of the indoor air quality of the Building,
and (iii) Landlord shall implement recommendations set forth in the report as
appropriate to cause all air quality in the Building to conform to then
existing local, state or federal regulations and the costs arising in
connection with such implementation shall constitute Operating Expenses.
In the event that any problem with indoor air quality which is caused
by the negligent actions or omissions of Landlord or Landlord's licensees,
employees, agents, contractors or invitees use or occupancy of the Building
prevents Tenant from conducting its business in the Building for five (5)
consecutive business days, then beginning on the sixth (6th) consecutive
business day, Tenant's obligation to pay Rent shall abate until the air quality
condition is corrected and Tenant is able to resume its business operations in
the Building.
Tenant covenants and agrees that the Building shall be a "smoke free"
building.
Section 16.35 Landlord's Representations and Warranties. Landlord is
the contract purchaser of the Property pursuant to the Standard Retail Purchase
and Sale Agreement ("Purchase Contract") between Landlord as buyer and
Washington Engineering Associates Limited Partnership ("WEALP") dated April 23,
1997. The Purchase Contract contains certain representations and warranties
("Contract Reps") from WEALP as the owner to Landlord as the buyer. Landlord
represents and warrants that the substance of the Contract Reps is included in
the representations and warranties contained in this Section 16.35. as follows.
In connection therewith, Landlord represents and warrants to Tenant
(i) To the best of Landlord's knowledge and belief and based on an
environmental report to be prepared by ECS Limited, a copy of which will be
delivered to Tenant after receipt by Landlord, there are no Hazardous Materials
on, in or under the Property, Building or Office Complex. Landlord further
represents that the current owner of the Property ("Owner") has not provided
Landlord with, nor has Landlord otherwise received, copies of any summons,
citation, directive, notice, complaint, letter or other written communication,
from the United States Environmental Protection Agency or other governmental
authority concerning any alleged violation of any environmental law or rule or
regulation at the Property. Landlord further represents and warrants that, to
its actual knowledge, there are no buried fuel tanks within the Property or the
Option Parcel (as defined in the Purchase Contract) or within any land
adjoining or in the immediate vicinity of either. The representations and
warranties contained in this Section 16.35 shall be true and correct as of the
Commencement Date, and Landlord shall indemnify Tenant and hold it harmless
against any claims, damages, losses or liabilities (including reasonable
attorney's fees) incurred by Tenant and arising from any breach of same.
(ii) To the best of Landlord's knowledge and belief, the Premises will
be in compliance with applicable laws, statutes, ordinances and regulations in
effect as of the Commencement Date. Landlord hereby agrees that Tenant shall
have no responsibility for failure of the Premises or the Office Complex to
comply with applicable laws, statutes, ordinances and regulations which are in
effect and applicable to the Premises or the Office Complex as of the
Commencement Date.
(iii) As of the Commencement Date, the Premises shall be in compliance
with all recorded covenants, conditions and restrictions affecting the
Premises.
(iv) To the best of Landlord's knowledge and belief, the Premises will
be in compliance with the requirements of the ADA as of the Commencement Date.
Landlord further represents and warrants that the work to be performed in
accordance with the Work Agreement shall be in compliance with or shall be made
to comply with the requirements of the ADA;
<PAGE>
provided, however, Landlord shall not be responsible for any ADA non-compliance
arising from Tenant's Space Plan prepared by Tenant's Architect (as such terms
are defined in the Work Agreement).
(v) To the best of Landlord's knowledge, fiber optic service is
available to the development of which the Property is a part. Landlord will
cooperate with Tenant at Tenant's sole cost and expense to bring the fiber
optic service to the Premises, if requested.
(vi) Based on a representation and warranty from Owner contained in
the Purchase Contract, Owner has not received any written notice of any
violation ("Violation Notice") of any applicable laws, ordinances, regulations,
statutes, rules and restrictions pertaining to and affecting the Property.
Landlord further represents and warrants that it has not received any Violation
Notice relating to the Property.
(vii) Based on a representation and warranty from Owner contained in
the Purchase Contract, there is no pending, or to Owner's actual knowledge,
threatened condemnation or similar proceeding affecting the Property or any
portion thereof, and Owner has no knowledge that any such action is presently
contemplated. Landlord represents and warrants that to its actual knowledge,
there is no such condemnation proceeding affecting any portion of the Property,
and Landlord does not have knowledge that a condemnation proceeding affecting
the Property is contemplated.
(viii) Based on a representation and warranty from Owner contained in
the Purchase Contract, (a) Owner has granted to no other person, firm
corporation or other entity any right or option to acquire the Property or any
portion thereof or any interest therein from Owner, and (b) Owner shall not
enter into any other agreement, contract or option to sell the Property or any
portion thereof or interest therein with any other person, firm or entity
during the term of the Purchase Contract. Landlord represents and warrants
that, to its knowledge, neither Landlord nor Owner has granted any other
person, firm, corporation or entity any right or option to acquire any portion
of the Property or the Option Parcel.
(ix) Based on a representation and warranty from Owner contained in
the Purchase Contract, Owner has not received any notice regarding proceedings
to change the zoning or land use classification of the Property or the
conditions applicable thereto. Landlord represents and warrants that it has not
received any such notice to change the zoning applicable to the Property.
(x) Based on a representation and warranty from Owner contained in the
Purchase Contract, Owner has not received any notice that the Property was ever
used as a landfill or as a garbage dump during the period of Owner's ownership.
Landlord represents and warrants that it has not received any notice that the
Property was ever used as a landfill or a garbage dump during the period of
Owner's ownership.
(xi) Based on a representation and warranty from Owner contained in
the Purchase Contract, neither Owner nor any of its agents or employees have
made unrecorded commitments or side agreements with any governmental authority,
utility company, school board, church or other religious body, or any
homeowners or homeowners' association or with any other organization, group,
party, or individual (collectively, "Side Agreements"), relating to the
Property which would impose an obligation upon Landlord or its successors or
assigns to make any contribution or dedication of money or land or to
construct, install, or maintain any improvements of a public or private nature
on or off the Property. Landlord represents and warrants that, to its
knowledge, Owner has not entered into any such Side Agreements.
(xii) Based on a representation and warranty from Owner contained in
the Purchase Contract, Owner has not received written notice ("Preservation
Notice") that the Property has been identified by any governmental body or
private organization as the habitat of any species of plant or animal which is
endangered or which requires special conservation measures. Landlord represents
and warrants that Landlord has not received any such Preservation Notice.
(xiii) Based on a representation and warranty from Owner contained in
the Purchase Contract, Owner has not received written notice that any human
burial grounds or archaeological sites have been identified as existing upon
the Property and Owner has not received written notice that any improvements
upon the Property have been designated by any governmental authority as having
special architectural or historical significance. Landlord represents and
warrants that, to its knowledge, the Property has not been so designated as
having special architectural or historical significance.
(xiv) After Closing (as defined in the Purchase Contract), Landlord
will own fee simple title to the Property, free and clear of all restrictions,
liens, encumbrances, easements, exceptions, covenants, conditions and
reservations, except for Permitted Exceptions (as defined in the Purchase
Contract), financing agreements for which Tenant has received a non-disturbance
agreement as contemplated by Section 15.1 of this Lease, and other title
matters expressly permitted by the terms of this Lease.
<PAGE>
Section 16.36 Expansion Option.
Landlord intends to purchase the parcel ("Expansion Parcel")
immediately adjacent to the Land containing approximately 5.5 acres upon the
terms and conditions more particularly set forth in the Purchase Contract. The
Expansion Parcel is also known as parcel L-3. Tenant shall be entitled to lease
the Expansion Parcel and the Expansion Building (as hereinafter defined) on the
terms and conditions set forth in this Section 16.36.
If Tenant desires to lease the Expansion Parcel and the Expansion
Building (collectively, the "Expansion Premises"), Tenant shall give Landlord
written notice prior to the first anniversary of the Commencement Date. If
Tenant fails to timely give Landlord such written notice, time being of the
essence, Tenant's expansion option shall automatically expire and be of no
further force or effect. Tenant shall not have the right to exercise this
expansion option if, at any time prior to the time Tenant takes occupancy of
the Expansion Premises, Tenant has defaulted under the Lease beyond any
applicable notice and cure period contained in the Lease.
If Tenant timely gives Landlord written notice of its desire to
exercise its expansion option in accordance with this Section 16.36, Landlord
shall commence and thereafter diligently pursue completion of the Expansion
Building on the Expansion Parcel. As used herein, the term "Expansion Building"
shall mean and refer to an of Office building containing no less than 40,000
square feet of net rentable area and incorporating building materials and
leasehold improvements, the quantity and quality of which shall be
substantially similar to the Building to be built pursuant to the Work
Agreement. Notwithstanding the foregoing, Landlord shall incorporate all
changes to the Expansion Building requested by Tenant which are acceptable to
Landlord in its sole but reasonable discretion. Also notwithstanding anything
to the contrary contained in this Section 16.36, Landlord shall be entitled to
construct the Expansion Building such that it contains more than 40,000 square
feet of net rentable area, in which event (i) "Expansion Premises" shall only
refer to the number of square feet of net rentable area in the Expansion
Building to be leased by Tenant (but in no event less than 40,000 square feet
of net rentable area), and not the entire Expansion Building and the Expansion
Parcel; (ii) Landlord shall be entitled to lease the excess space in the
Expansion Building to third parties; and (iii) Landlord shall assume all
property management responsibilities for the Expansion Building and Tenant
shall only be responsible for its proportionate share of the costs and expenses
incurred in connection with same.
The Expansion Building shall be constructed within eighteen (18)
months of the date of Tenant's notice exercising its expansion option, subject
to all the same delay provisions as are applicable to the construction of the
Building. Tenant shall lease the Expansion Premises for a minimum term of ten
(10) years, commencing on the date of Final Completion of the Expansion
Building, and ending on the tenth (10th) anniversary of such date.
Tenant shall commence payment of Base Rent, Additional Rent and all
other applicable sums with respect to the Expansion Premises immediately upon
Landlord's Final Completion of same. Base Rent for the Expansion Premises shall
be equal to the product of (i) the then-currently escalated Base Rent rate for
the Premises as set forth in the Lease, and (ii) the greater of (x) 40,000
square feet of net rentable area, or (y) the number of square feet of net
rentable area contained in the Expansion Premises. Base Rent for the second and
all subsequent years during the term for the Expansion Premises shall be
recomputed in accordance with the rental escalation provisions applicable to
the Premises, provided the number of square feet of net rentable area for the
Expansion Premises shall not be less than 40,000 for purposes of computing
rent. At the time the Expansion Premises are added to the Premises, the Term of
the Lease for the initial Premises shall be automatically extended such that
the Term of the Lease for both the initial Premises and the Expansion Premises
shall expire on the tenth (l0th) anniversary of the date of Final Completion of
the Expansion Premises, unless sooner terminated.
Tenant's rights under this Section 16.36 shall be personal to Tenant
and shall not inure to the benefit of any assignee or occupant of the Premises
other than an assignee which is a successor corporation into which or with
which Tenant is merged or consolidated or which acquires substantially all of
Tenant's assets and property, or to any subsidiary, affiliate or parent company
of Tenant, or any subsidiary of the parent company of Tenant.
Landlord and Tenant acknowledge that, given the uncertainties of
Tenant's expansion needs and Landlord's opportunities to accommodate additional
parties in the Expansion Building, it is not possible to set out all the terms
and conditions relative to Tenant's leasing the Expansion Premises as of the
date of this Lease. As such, if Tenant exercises its expansion right in
accordance with the terms of this Lease, Landlord and Tenant shall, in good
faith, negotiate a lease amendment which addresses all matters relative to such
expansion; provided, however, the parties agree that, to the extent reasonably
possible, the leasing of the Expansion Premises shall be on and subject to the
same terms and conditions as are applicable to the leasing of the initial
Premises. In the event Landlord and Tenant are unable to finalize the terms of
the lease amendment within sixty (60) days after the date on which Tenant gives
Landlord written notice exercising the option,
<PAGE>
Tenant's Expansion Option shall automatically expire and be of no further force
and effect unless the sixty (60) day period is extended by mutual agreement of
Landlord and Tenant.
Section 16.37 Refurbishing. In the event Tenant elects to paint,
re-carpet or make other leasehold improvements to the Premises After the fifth
(5th) anniversary of the Commencement Date, Landlord shall, subject to this
Section 16.37, finance a portion of Tenant's costs incurred in connection
therewith up to an amount equal to the product of $5.00 and the number of
square feet of net rentable area contained in the Premises ("Refurbishing
Loan"). The items for which the proceeds of the Refurbishing Loan may be used
shall be subject to Landlord's prior written approval, such approval not to be
unreasonably withheld.
If Tenant desires the Refurbishing Loan, then prior to the sixth (6th)
anniversary of the Commencement Date Tenant shall deliver to Landlord (i) a
certificate signed by an officer of Tenant stating that the refurbishing work
is complete; (ii) final lien waivers from all subcontractors performing the
refurbishing work; and (iii) paid invoices related to the refurbishing work. So
long as Tenant is not then in default under the terms of the Lease beyond any
applicable notice and cure period provided in Section 14.1 hereof, Landlord
shall disburse the Refurbishing Loan proceeds to Tenant within thirty (30) days
of receipt of the items referenced above.
The Refurbishing Loan shall bear interest at 9% per annum (the
"Interest Rate"). Commencing on the first (1st) day of the month next
succeeding the date on which the Refurbishing Loan proceeds are distributed to
Tenant and continuing monthly thereafter, Tenant shall pay to Landlord monthly
installments sufficient in amount to fully amortize all principal and interest
during the period remaining in the Term of the Lease (approximately 5 years).
Such payments shall, for collection and Default purposes, constitute Additional
Rent.
The entire unpaid balance of the Refurbishing Loan, including accrued
and unpaid interest, shall be accelerated and become immediately due and
payable in full upon the expiration or earlier termination of the Term of the
Lease.
All refurbishing work shall be carried out in accordance with the
provisions of this Lease, including, without limitation, the provisions of
Article 8 governing improvements to the Premises by Tenant.
Section 16.38 Site License. Landlord acknowledges that Tenant is
currently negotiating with WEALP for a license to allow Tenant to maintain and
operate a telescope on other property owned by WEALP in the vicinity of the
Property. If, at any time during the term of this Lease, Tenant desires to
relocate the telescope onto the Property or the Expansion Parcel, then provided
Tenant is not in default beyond any applicable notice and cure period, Landlord
and Tenant shall use good faith efforts to negotiate a mutually acceptable
license agreement for the relocation of the telescope onto the Property or the
Expansion Parcel.
IN WITNESS WHEREOF the parties have executed this Lease as of the day
and year first above written.
Landlord:
Opus East, L.L.C.
By [SEAL]
Its PRESIDENT
Tenant:
Stanford Telecommunications, Inc.
By
Its [SEAL]
EXHIBIT 10.11
RIDER TO CONSOLIDATED, AMENDED AND RESTATED DEED OF LEASE
RIDER NO. THREE
THIS RIDER TO CONSOLIDATED AMENDED AND RESTATED DEED OF LEASE AGREEMENT, made
this 15 day of May, 1998 by and between A & A Fairfax Four L.L.C. as successor
in interest to The Variable Annuity Life Insurance Company (hereinafter referred
to as "Landlord"), and Stanford Telecommunications, Inc. (hereinafter referred
to as "Tenant").
WITNESSETH THAT:
WHEREAS, Landlord and Tenant entered into a CONSOLIDATED, AMENDED AND RESTATED
DEED OF LEASE dated October 1, 1993 (hereinafter the "Lease"); and
WHEREAS, Landlord and Tenant entered into Rider No. 1 to the CONSOLIDATED,
AMENDED AND RESTATED DEED OF LEASE dated June of 1995; and,
WHEREAS, Landlord and Tenant entered into Rider No. 2 to the CONSOLIDATED,
AMENDED AND RESTATED DEED OF LEASE dated September 30 of 1996; and,
WHEREAS, Landlord and Tenant desire to further modify the Lease so as to extend
the Lease under the terms as set forth herein.
NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged by the parties hereto, the parties hereto agree as follows:
1. Terms. All terms used and not defined herein shall have the same meaning as
set forth in the Lease.
2. Premises. The Premises as defined in the Lease, shall be deemed to include
the Second Expansion Space (as defined in Section 4 herein) effective July 1,
1998 and shall total 79,659 rentable square feet subject to the adjustment
provided in Section 6 herein.
3. Extension Term. The Term of the Lease currently expires on September 30, 1999
and the parties hereby agree to extend the Term of the Lease for a period of
Seven (7) years terminating at 11:59 P.M. on September 30, 2006 (the "Extension
Term").
4. Additional Space. Commencing July 1, 1998, Landlord shall deliver and Tenant
hereby accepts, a portion of the first floor comprising of 1,687 rentable square
feet of additional space as outlined on the attached Exhibit A ("Second
Expansion Space"). For the period July 1, 1 998 through September 30, 1999, the
Base Rent for the Second Expansion Space shall be $1,000.00 per month.
5. Tenant's Proportionate Share. Effective July 1, 1998, Tenant's Proportionate
Share of Operating Expenses and Real Estate Taxes as defined in Section 1.9 of
the Lease shall be increased to 83.65%. Tenant's Proportionate Share of
Operating Expenses and Real Estate Taxes shall be further adjusted in accordance
with Section 6.
6. Subleased Premises. It is understood and acknowledged that Tenant and
Lockheed Martin as successor in interest to Loral Corporation have entered into
a Sublease agreement dated August of 1994 (the "Sublease"). The Sublease is
governed by a certain lease agreement between Lockheed Martin as successor in
interest to Loral Corporation and Landlord, as amended (hereinafter referred to
as the "Lockheed Lease"). The Sublease is comprised of approximately 13,521,
located on the third (3rd) floor of
<PAGE>
the Building (the "Subleased Premises"). It is further understood that upon the
expiration of the Lockheed Lease, either through its natural expiration or by
early termination of the Lockheed Lease in accordance with the terms contained
therein, the Subleased Premises shall be incorporated into the Premises and the
rentable area which comprises the Premises shall be increased to 93,180 rentable
square feet. Accordingly, Tenant's Proportionate Share of Operating Expenses and
Real Estate Taxes as defined in Section 1.9 of the Lease shall be increased to
97.85% immediately upon the expiration of the Lockheed Lease. For the purposes
of the schedule of Base Rent set forth in Section 7 herein, it is assumed that
the Sublease shall expire at its natural expiration of November 30, 2001.
Notwithstanding anything to the contrary, in the event the Lockheed Lease is
terminated prior to its natural expiration for any reason whatsoever, the
Subleased Premises shall then immediately be incorporated into the Premises in
accordance with this paragraph and the base Rent schedule shall be adjusted so
as to incorporate the Subleased Premises. The Base Rent for the Subleased
Premises at the expiration of the Lockheed Lease shall be the then escalated
rate for the Premises on a per square foot basis (see Section 7).
<TABLE>
7. Adjustment of Rent. In addition to all Base Rent and other sums to be paid by
the Tenant pursuant to the Lease Tenant agrees to pay the following amounts of
Base Rent for the Extension Term:
<CAPTION>
- ----------------------- -------------------- ------------------ --------------------- ---------------------
LEASE YEAR RENTABLE BASE RENT ANNUAL MONTHLY
SQUARE FEET PER S.F. BASE RENT BASE RENT
- ----------------------- -------------------- ------------------ --------------------- ---------------------
<S> <C> <C> <C> <C>
10/1/99-9/30/00 79,659 $20.60 $1,640,975.40 $136,747.95
- ----------------------- -------------------- ------------------ --------------------- ---------------------
10/1/00-9/31/01 79,659 $21.22 $1,690,204.66 $140,850.39
- ----------------------- -------------------- ------------------ --------------------- ---------------------
10/1/01-1/30/01 79,659 $21.85 $1,740,910.80 $145,075.90
- ----------------------- -------------------- ------------------ --------------------- ---------------------
12/1/01-9/30/02 93,180 $21.85 $2,036,406.04 $169,700.50
- ----------------------- -------------------- ------------------ --------------------- ---------------------
10/1/02-9/30/03 93,180 $22.51 $2,097,498.22 $174,791.52
- ----------------------- -------------------- ------------------ --------------------- ---------------------
10/1/03-9/30/04 93,180 $23.19 $2,160,423.16 $180,035.26
- ----------------------- -------------------- ------------------ --------------------- ---------------------
10/1/04-9/30/05 93,180 $23.88 $2,225,235.86 $185,436.32
- ----------------------- -------------------- ------------------ --------------------- ---------------------
10/1/05-9/30/06 93,180 $24.60 $2,291,992.94 $190,999.41
- ----------------------- -------------------- ------------------ --------------------- ---------------------
</TABLE>
For the purposes of the schedule above, it is assumed that the Sublease shall
survive until the natural expiration of its term. In the event the Sublease is
terminated prior to its natural expiration for any reason whatsoever, the
schedule above shall be adjusted to include the Subleased Premises.
8. Improvements to the Premises. Tenant accepts the Premises in its absolute
"as-is" condition. The cost of any additional improvements will be paid directly
by Tenant and shall be deemed Additional Rent as defined in the Lease. All
improvements shall be completed in accordance with Sections 13.2 and 13.3.
Notwithstanding the above, Landlord shall contribute a total of two hundred
twenty thousand dollars ($220,000) towards the cost of improvements to the
Premises (the "Allowance"). The Allowance shall be funded in accordance with the
following schedule; (I) Landlord shall provide $140,000 on or about September 1,
1999 and (ii) $80,000 at the conclusion of the fourth Lease Year for the Term so
extended (i.e. September 30, 2003). Each installment of the Allowance shall be
funded within 45 days of Tenant's written request to Landlord.
9. Assignment and Subletting. Notwithstanding anything contained in the Lease to
the contrary, Tenant and Landlord shall share equally in any sublease or
assignment revenue which exceeds the Rent for the proposed sublease premises,
less the costs of Tenant's reasonable transaction fees directly incurred as a
result of the proposed sublease/assignment. Tenant shall provide Landlord with a
detailed accounting of all transaction fees (including invoices from 3rd party
vendors/consultants) within thirty (30) days of the proposed sublease/assignment
effective date. It is specifically understood that the language contained herein
shall supersede the Lease
<PAGE>
10. Base Year for Operating Expenses and Real Estate Taxes. Effective September
1, 1999, the Base Year for Operating Expenses and Real Estate Taxes, as defined
in Section 1.8 of the Lease (as more specifically defined in Sections 7 and 8
respectively), shall be adjusted to reflect a Base Year cost of $7.20 per square
foot and upon such date all references to the "Calendar Year 1993" as the Base
Year shall be deleted. As such, Tenant shall be required to pay its Pro-Rata
share of Operating Expenses and Real Estate Taxes which exceed the new Base Year
amount (i.e. $7.20 per s.f.) provided however that Tenant shall not be required
to make such payment prior to January 1, 2000. All other terms of the Lease
governing Operating Expenses and Real Estate Taxes shall apply, specifically
including any cap on Operating Expenses provided therein.
11. Option To Extend. As long as Tenant has not been in Default more than three
(3) times during the Term of the Lease as so extended by this Rider No. Three
and is not in an Event of Default under the Lease at the time of its exercise of
this option, Tenant shall have one (1) option to extend this Lease in accordance
with the provisions of this paragraph for an additional term of three (3) years,
on all the same terms and conditions with the exception of Base Rent payable
under Section 2 of the Lease, which shall be Landlord's then prevailing fair
market value being charged by landlord's for space reasonably comparable to the
Premises. If Tenant elects to exercise the foregoing option to extend, it shall
give Landlord written notice of its election to do so on or before the date
which is two hundred and twenty (220) days prior to the expiration of the Term
of the Lease, but not prior to three hundred twenty (320) days prior to the
expiration of the Term of the Lease, time being of the essence, which notice
shall also request that Landlord shall furnish Tenant with the base rent for the
extended term which shall be derived using Landlord's reasonable estimate of the
fair market rate for space comparable to the Premises. Landlord shall furnish
Tenant within thirty (30) days of receipt of Tenant's notice of exercise with
the base rent figure for the term extension. Provided, however, in the event
Landlord and Tenant have not signed an amendment to this Lease for any reason
confirming the extended term of the Lease and setting forth the base rent for
that term by a date which is no less than one hundred and eighty (180) days
prior to the expiration of the Term of the Lease, time being of the essence,
then Tenant's extension of the Lease shall be deemed null and void and this
Lease shall expire on the termination date as if the above extension option had
not been exercised. This option to extend is personal to Tenant only, and is not
assignable. Tenant has no option(s) to extend this Lease except as set forth in
this paragraph.
12. Brokerage Landlord and Tenant acknowledge that no real estate broker, agent
or finder, other than Cambridge Property Group Limited Partnership as Agent for
Landlord, has been involved in procuring or otherwise negotiating this
transaction on either parties behalf. Further Tenant shall indemnify, defend and
hold harmless Landlord against and from any claims made by any other agent or
finder claiming to represent Tenant. Notwithstanding the above, Landlord agrees
to pay Cambridge Property Group Limited Partnership a commission based upon the
terms contained in a separate written agreement between the parties.
13. Ratification. Except as specifically modified herein, all terms and
conditions of the Lease are hereby ratified by the parties hereto and shall
remain in full force and effect.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this Rider as of the date
first written above.
WITNESS: LANDLORD: A & A Fairfax Four L.L.C.
By: Cambridge Asset Advisors Limited Partnership,
As Agent
By: Cambridge Property Advisors, Inc., as General
Partner
/s/ Andrew J. Czekaj
--------------------
Mr. Andrew J. Czekaj
Chairman
WITNESS: TENANT: Stanford Telecommunications, Inc.
/s/ Leonard Schuchman
---------------------
Mr. Leonard Schuchman
Vice President
Exhibit 13.1
Management's Discussion and Analysis
of Financial Condition and Results of Operation
OVERVIEW
Since the Company's inception in 1973, revenues have been generated primarily
from sales to agencies of the U.S. Government, including the DoD, the U.S. Air
Force, Army and Navy, NASA and the FAA, or their prime contractors. Such
revenues are generated from many contracts including programs requiring
multi-year hardware and software development and limited production of products
and systems. The Company's contracts often require the design, production,
operation and maintenance of sophisticated equipment and systems and provision
of system integration services in the digital telecommunications and satellite
communications fields. A substantial portion of the digital telecommunications
and satellite communications research and development performed by the Company
since its inception has been funded by its customers and recorded as revenues by
the Company. Accordingly, the cost of performing this customer-funded research
and development is included in "Cost of Revenues" in the Company's financial
statements. The Company's government contracts are generally cost-reimbursement
plus profit or fixed-price contracts. The Company generally recognizes revenues
from its long-term government contracts on a percentage-of-completion basis.
Commencing in the late 1980's, the Company began to pursue commercial
opportunities using its digital telecommunications technology developed and
enhanced by the Company since its inception. Commercial revenues have risen from
less than 6% of total revenues in fiscal year 1989 to approximately 38% of total
revenues in fiscal year 1998. During fiscal year 1998, commercial revenues which
amounted to approximately $57.7 million included: (i) contract manufacturing
revenues from the Company's electronics assembly business ($25.5 million); (ii)
sales of ASICs, circuit boards and subsystems to the telecommunications industry
($14.2 million); and (iii) other commercial systems and product business ($18.0
million). Future commercial revenues are anticipated from existing products and
products to be introduced in the coming fiscal year. The Company includes in
commercial revenues sales of standardized or off-the-shelf products to any
customers, including government customers.
Over the last two fiscal years, the Company has greatly increased its level of
independent research and development expenditures. Research and development
expenses increased from $8.4 million in fiscal year 1996 to $11.9 million in
fiscal year 1997 and $13.6 million in fiscal year 1998. The Company believes
that this increase is necessary to successfully develop competitive products for
the commercial telecommunications market. During fiscal year 1998, approximately
$10.0 million, or 72% of the Company's R&D was invested in these strategic
commercial initiatives. The Company has applied much of its research and
development expenditures to commercial products and initiatives in the areas of
wireless and cable broadband communications.
The Company's operating results have from time to time been adversely affected
by non-recoverable cost overruns on certain fixed-price contracts, primarily
fixed-price development contracts that have included significant software and
hardware development. The Company has instituted additional management controls
to more closely monitor its bidding process and costs incurred on fixed-price
development contracts, however, no assurance can be given that the Company will
not incur losses on future fixed-price contracts or additional losses on
existing contracts. The Company believes that development contracts are an
important element in maintaining its technological leadership position in
digital telecommunications. As a result, the Company may incur losses on certain
fixed-price contracts. Such losses will be charged against results of operations
in the period when they first become known, typically near the initiation of the
contract and may have a material adverse effect on the Company's results of
operations.
CAUTIONARY STATEMENTS
In the interest of providing the Company's shareholders and potential investors
with certain Company information, including management's assessment of the
Company's future potential, certain statements set forth herein (a) contain or
are based on projections of revenue, income, earnings per share and other
financial items or (b) relate to management's future plans and objectives or to
the Company's future economic performance. Such statements are "forward-looking
statements" within the meaning of Section 27A(i) of the Securities Act of 1933,
as amended, and in Section 21E(i) of the Securities Exchange Act of 1934, as
amended.
Although any forward-looking statements contained herein or otherwise expressed
by or on behalf of the Company are to the knowledge and in the judgment of the
officers and directors of the Company, expected to prove true and to come to
pass, management is not able to predict the future with absolute certainty.
Accordingly, shareholders and potential investors are hereby cautioned that
certain events or circumstances could cause actual results to differ materially
from those projected or predicted herein. In addition, the forward-looking
statements herein are based on management's knowledge and judgment as of the
date hereof, and the Company does not intend to update any forward-looking
statements to reflect events occurring or circumstances existing hereafter.
For further information on the foregoing, reference is made to the Company's
Securities and Exchange Commission reports including its recent reports on Forms
10-Q and 10-K.
22
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain items from
the Company's Statements of Income expressed as a percentage of the Company's
total revenues:
Year ended March 31
1998 1997 1996
- --------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 76.1% 76.3% 80.0%
------ ------ ------
Gross profit 23.9% 23.7% 20.0%
------ ------ ------
Expenses
Research and development 8.9% 7.1% 5.8%
Marketing and administrative 11.3% 10.1% 8.4%
------ ------ ------
Total expenses 20.2% 17.2% 14.2%
Operating income 3.7% 6.5% 5.8%
Interest income, net 1.2% 0.8% 0.6%
------ ------ ------
Income before provision for income taxes 4.9% 7.3% 6.4%
Provision for income taxes (1.5)% (2.5)% (2.1)%
------ ------ ------
Net income 3.4% 4.8% 4.3%
------ ------ ------
COMPARISION OF THE FISCAL YEARS
Revenues. Revenues were $145.1 million, $167.0 million and $153.3 million in
fiscal years 1996, 1997, and 1998, respectively, representing a year-to-year
increase in fiscal year 1997 of 15% and a year-to-year decrease of 8% in fiscal
year 1998. The increase in revenues from fiscal year 1996 to fiscal year 1997
was primarily attributable to increases in the Company's government business
sector. Revenues generated by its government business sector increased from
approximately $79.0 million in fiscal year 1996 to $98.5 million in fiscal year
1997. The decrease in revenues from fiscal year 1997 to fiscal year 1998 was
primarily the result of a decrease in commercial revenues significantly
attributable to an $8.6 million, or 25%, reduction in sales from the Company's
commercial manufacturing services from fiscal year 1997. Revenues generated from
commercial products and services were $66.2 million, $68.5 and $57.7 million in
fiscal years 1996, 1997 and 1998, respectively. Revenues generated by its
government business sector decreased from $98.5 million in fiscal year 1997 to
$95.6 million in fiscal year 1998.
Although the Company experienced a slight decrease in its government business
revenues during fiscal year 1998, the Company did win four significant new
government contracts during the fiscal year. As such, the Company anticipates
that its revenue from its government customers may increase in future periods.
However, we believe budgetary pressures will continue to affect Department of
Defense, FAA and NASA. All contracts with the government may be canceled at any
time for the convenience of the government. The Company is not aware of the
cancellation or proposed cancellation of any of its current contracts. The
Company plans to continue to selectively pursue government business where it has
a competitive advantage, can be the sole provider or can be a prime contractor
rather than a subcontractor.
The Company's commercial business represented approximately 46% in fiscal year
1996, 41% in fiscal year 1997, and 38% in fiscal year 1998. The reduction in the
Company's commercial business sector in fiscal year 1998 was mainly attributable
to a decrease in the Company's commercial manufacturing services. The Company is
currently pursuing commercial opportunities in satellite, wireless and cable
broadband communication products. The Company expects that the percentage of its
overall business represented by commercial sales will increase if it
successfully develops, markets and sells those products currently under
development.
Cost of Revenues. Cost of revenues were $116.0 million, $127.4 million and
$116.6 million in fiscal years 1996, 1997 and 1998, respectively, representing
80.0%, 76.3% and 76.1% of revenues. The decrease in cost of revenues as a
percentage of revenues in fiscal year 1997 relative to 1996 can be attributable
to a profitable completion of the final phases of certain commercial development
programs and increased margins on both commercial and government contracts. The
decrease in cost of revenues in fiscal year 1998 relative to 1997 was the result
of recognition of costs on lower revenues and a reduction in lower margin
commercial electronic manufacturing revenues.
23
<PAGE>
Management's Discussion and Analysis continued
Gross Profit. Gross profit was $29.1 million, $39.6 million and $36.6 million in
fiscal years 1996, 1997 and 1998, respectively. Gross profit increased during
fiscal year 1997 relative to fiscal year 1996 as the Company experienced
operational efficiencies as a result of its expanding business base, and
increased margins on its Government sales, commercial catalog products and
certain commercial programs. The decrease in gross profit during fiscal year
1998 relative to fiscal year 1997 is primarily due to a lower revenue base.
Research and Development. Research and development expenses, including bid and
proposal expenses were $8.4 million, $11.9 million and $13.6 million in fiscal
year 1996, 1997 and 1998, respectively. The Company's research and development
expenses include bid and proposal expenses associated with government contracts
and certain large commercial programs. The Company has applied much of its
research and development expenditures to commercial products and initiatives in
the areas of wireless and cable broadband communications. The Company's research
and development expenses were $5.7 million, $9.5 million and $11.3 million in
fiscal years 1996, 1997 and 1998, respectively. The Company expects research and
development expenses in fiscal year 1999 to decrease slightly as a percentage of
revenues compared to the percentage experienced in fiscal year 1998. Bid and
proposal expenditures are largely the initial advanced technology development
efforts directed toward a specific product or technical task for which the
Company must show technical viability. Bid and proposal expenses have decreased
since fiscal year 1996 as the Company has focused its available research and
development funds on the development of commercial products.
Marketing and Administrative. Marketing and administrative expenses were $12.2
million, $16.8 million and $17.3 million in fiscal years 1996, 1997, and 1998.
The increase in costs from fiscal year 1996 to fiscal year 1997 was primarily a
result of hiring additional technical marketing personnel and increased
marketing expenses in pursuit of commercial opportunities. The increase in costs
from fiscal year 1997 to fiscal year 1998 is a result of increase legal expenses
primarily associated with a patent infringement case brought by the Company in
December 1996 and increased marketing expenses in pursuit of commercial
opportunities.
Operating Income. Operating income was $8.4 million, $10.9 million, and $5.7
million for fiscal years 1996, 1997 and 1998. The increase in fiscal year 1997
was primarily attributable to operational efficiencies experienced as the
Company expanded its business base, the avoidance of material cost overruns on
its contracts and increased margins on its commercial catalog products. The
decrease in operating income from fiscal year 1997 to fiscal year 1998 was
primarily the result of a decrease in revenues, an increase in research and
development, and an increase in marketing and administrative expenses.
Interest Income, Net. Interest income, net was $.8 million, $1.3 million and
$1.9 million in fiscal years 1996, 1997 and 1998, respectively. In fiscal years
1997 and 1998, the Company has increased its interest income over previous
periods as a result of maintaining a higher overall average balance in U.S.
Treasury instruments and money market accounts.
Provision for income Taxes. Provision for income taxes was $3.1 million, $4.2
million and $2.3 million in fiscal years 1996, 1997 and 1998, respectively. This
represents an effective tax rate of 33.5% for fiscal year 1996, 34.5% for fiscal
year 1997 and 31.0% for fiscal year 1998. The increase in the effective tax rate
in fiscal year 1997 was primarily attributable to a non-recurring reduction of a
valuation allowance in fiscal year 1996. The decrease in the effective tax rate
during fiscal year 1998 compared to fiscal year 1997 results primarily from
increased Research and Development (R&D) tax credits and other state income tax
credits. The Company anticipates that its effective tax rate in fiscal year 1999
will be approximately the same as experienced in fiscal year 1998 assuming
continued extension of the federal R&D tax credit.
Bookings and Backlog. Funded bookings were $155.0 million, $168.5 million and
$163.0 million in fiscal years 1996, 1997 and 1998, respectively. Government
contract bookings were $79.7 million, $103.5 and $102.8 million during fiscal
years 1996, 1997 and 1998, respectively Commercial contract bookings were $75.3
million, $65.0 million and $60.2 during fiscal year 1996, 1997 and 1998,
respectively The Company's backlog increased from $82.4 million at the end of
fiscal year 1996 to $83.9 million at the end of fiscal year 1997 and a further
12% to $93.6 million at the end of fiscal year 1998.
24
<PAGE>
Summary. The Company's revenues and results of operations are subject to
fluctuation from period to period. Factors that could cause the Company's
revenues and operating results to vary from period to period include: timing,
bidding activity and delivery of significant commercial and government contracts
and orders; mix of products and systems sold, and services provided; disruptions
in delivery of components or subsystems; underestimating costs on fixed-price
contracts particularly for software and hardware development; termination of
contracts; regulatory developments; and general economic conditions. Research
and development expenses include both research and development costs as well as
bid and proposal expenses. Bid and proposal expenses vary significantly from
period to period based on the number of proposals being prepared at any time.
These requests for proposals are not received evenly during the year or in any
predictable pattern.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $56.5 million to $66.4 million at March 31, 1996
and March 31, 1997, respectively, and increased to $73.1 million at March 31,
1998. The increases in working capital at March 31, 1997 and March 31, 1998 were
primarily attributable to cash generated from net income and proceeds from
transactions under stock plans.
Net cash provided by operating activities for the years ended March 31, 1996,
1997 and 1998 was $8.7 million, $18.6 million and $4.4 million, respectively.
The increase from 1996 to fiscal year 1997 can be largely attributed to an
increase in net income and the reduction of inventories. The decrease from
fiscal year 1997 to fiscal year 1998 is the result of lower net income and an
increase in inventories to support future delivery of commercial products.
The Company used its cash for the purchase of property and equipment totaling
$4.5 million, $5.5 million and $5.9 million in fiscal year 1996, 1997 and 1998,
respectively. Capital expenditures in recent years are primarily attributable to
increased investments in the Company's commercial activities and leasehold
improvements in the Company's facilities in order to support its growth.
During fiscal years 1996, 1997 and 1998, $1.1 million, $1.6 million and $1.6
million respectively, of net cash was provided by financing activities. These
amounts represent primarily the proceeds from transactions under the stock
plans.
The Company has a bank credit commitment of $15.0 million which it has used to
augment cash flow needs and to secure term loans or standby letters of credit.
Available borrowings under this line at March 31, 1998, were $15.0 million.
Under this credit line, the Company must maintain certain financial covenants.
The Company was in compliance with all covenants throughout fiscal year 1998. At
March 31, 1998, the Company's long-term obligations (including current
maturities) and capital lease obligations totaled approximately $.1 million. At
March 31, 1998, cash and cash equivalents of $13.9 million were held
significantly in money market accounts and short-term investments of $19.5
million were held in U.S. Government Treasury instruments.
The Company believes that its current cash position, funds generated from
operations and funds available from its existing bank credit agreement, will be
adequate to meet the Company's requirements for working capital, capital
expenditures and debt service for the next fiscal year.
The Company is in the process of identifying anticipated costs, problems and
uncertainties associated with making both the Company's products as well as
internal-use software applications Year 2000 compliant. In general, the Company
plans to resolve Year 2000 issues associated with its own products either
through Company and/or customer paid upgrades. In the case of third party,
internal-use software, the Company is planning to obtain Year 2000 compliance
certifications from the suppliers and, where necessary, replace or upgrade those
software packages which are not compliant. Although management does not expect
Year 2000 issues to have a material impact on its business or future results of
operations, there can be no assurances that there will not be interruptions or
other limitations of system functionality or that the Company will not incur
significant costs to avoid such interruptions or limitations.
25
<PAGE>
Report of Independent Public Accountants
To Stanford Telecommunications, Inc.:
We have audited the accompanying balance sheets of Stanford Telecommunications,
Inc. (a Delaware Corporation) as of March 31, 1998 and 1997, and the related
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Stanford Telecommunications,
Inc. as of March 31, 1998 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
-----------------------------
ARTHUR ANDERSEN LLP
San Jose, California, April 22, 1998
Statements of income
Year ended March 31
(In thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------
Revenues $153,260 $167,002 $145,100
Cost of revenues 116,629 127,432 116,014
-------- -------- --------
Gross profit 36,631 39,570 29,086
-------- -------- --------
Expenses
Research and Development 13,647 11,868 8,429
Marketing and Administrative 17,321 16,808 12,213
-------- -------- --------
Total expenses 30,968 28,676 20,642
-------- -------- --------
Operating income 5,663 10,894 8,444
Interest income, net 1,896 1,336 839
-------- -------- --------
Income before provision for income taxes 7,559 12,230 9,283
Provision for income taxes 2,343 4,219 3,110
-------- -------- --------
Net income $ 5,216 $ 8,011 $ 6,173
======== ======== ========
Earnings per share--basic and diluted $ 0.40 $ 0.61 $ 0.49
======== ======== ========
Weighted average number of common
and potential common shares outstanding:
Basic 12,953 12,775 12,556
======== ======== ========
Diluted 13,179 13,070 12,702
======== ======== ========
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Balance Sheets
Year ended March 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,914 $ 8,235
Short-term investments 19,493 25,074
Accounts receivable 26,958 25,856
Unbilled receivables 20,911 19,754
Inventories, net of related progress billings 14,276 6,011
Prepaid expenses and other 1,919 4,201
--------- ---------
Total current assets 97,471 89,131
--------- ---------
Property and equipment at cost:
Electronic test equipment 46,768 42,797
Furniture and fixtures 3,887 3,613
Leasehold improvements 3,996 3,722
--------- ---------
54,651 50,132
--------- ---------
Less: Accumulated depreciation and amortization (40,516) (36,019)
--------- ---------
Net property and equipment 14,135 14,113
--------- ---------
Other assets 535 274
--------- ---------
$ 112,141 $ 103,518
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 44 $ 88
Accounts payable 10,739 5,902
Advance payments from customers 1,909 1,581
Accrued liabilities 8,218 10,601
Accrued income taxes 3,462 4,549
--------- ---------
Total current liabilities 24,372 22,721
--------- ---------
Long-term obligations, less current maturities 41 30
--------- ---------
Other long-term liabilities 855 1,061
--------- ---------
Commitments and contingencies (Notes 3 and 7)
Shareholder' equity
Common stock -- par value $01; 25,000
shares authorized; 12,975 and 12,833
shares issued and outstanding in 1998
and 1997, respectively 130 128
Paid-in capital 42,359 40,410
Retained earnings 44,384 39,168
--------- ---------
Total shareholders' equity 86,873 79,706
--------- ---------
$ 112,141 $ 103,518
========= =========
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
<TABLE>
Statements of Shareholders' Equity
<CAPTION>
Total
Common Stock Paid-in Retained Shareholders'
(In thousands) Shares Amount Capital Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1995 12,468 $ 125 $36,988 $24,984 $62,097
Sale of common stock under Employee Stock
Purchase Plan 70 1 539 -- 540
Sale of common stock under Employee Stock
Option Plan 110 1 479 -- 480
Issuance of common stock as awards to employees 8 -- 74 -- 74
Tax benefits from employee stock transactions -- -- 225 -- 225
Net income -- -- -- 6,173 6,173
------- ------- ------- ------- -------
BALANCE, MARCH 31, 1996 12,656 $ 127 $38,305 $31,157 $69,589
Sale of common stock under Employee Stock
Purchase Plan 67 -- 959 -- 959
Sale of common stock under Employee Stock
Option Plan 105 1 729 -- 730
Issuance of common stock as awards to employees 5 -- 102 -- 102
Tax benefits from employee stock transactions -- -- 315 -- 315
Net income -- -- -- 8,011 8,011
------- ------- ------- ------- -------
BALANCE, MARCH 31, 1997 12,833 $ 128 $40,410 $39,168 $79,706
Sale of common stock under Employee Stock
Purchase Plan 91 1 1,198 -- 1,199
Sale of common stock under Employee Stock
Option Plan 49 1 417 -- 418
Issuance of common stock as awards to employees 2 -- 50 -- 50
Tax benefits from employee stock transactions -- -- 284 -- 284
Net income -- -- -- 5,216 5,216
------- ------- ------- ------- -------
BALANCE, MARCH 31, 1998 12,975 $ 130 $42,359 $44,384 $86,873
======= ======= ======= ======= =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
28
<PAGE>
<TABLE>
Statements of Cash Flows
<CAPTION>
Year ended March 31
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,216 $ 8,011 $ 6,173
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,807 5,558 5,009
Issuances of stock to employees under award plans 50 102 74
Change in provision for losses on receivables, contracts and inventories (2,041) 1,388 857
Loss on disposition of property and equipment 20 305 143
(Increase) decrease in assets:
Receivables billed and unbilled (1,549) (11,803) 5,634
Inventories (6,934) 11,446 (3,492)
Prepaid expenses and other assets 2,021 724 (1,238)
Increase (decrease) in liabilities:
Accounts payable, advance payments and accrued expenses 2,782 1,489 (5,851)
Other long-term liabilities (55) (76) 59
Accrued and deferred income taxes (954) 1,463 1,304
-------- -------- --------
Net cash provided by operating activities 4,363 18,607 8,672
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturities (purchase) of short-term investments, net 5,581 (10,947) (4,220)
Purchases of property and equipment (5,852) (5,501) (4,482)
Proceeds from sale of property and equipment 3 25 438
-------- -------- --------
Net cash used in investing activities (268) (16,423) (8,264)
-------- -------- --------
Cash flows from financing activities:
Payments on capital lease obligations (33) (47) (154)
Proceeds from transactions under stock plans 1,617 1,689 1,245
-------- -------- --------
Net cash provided by financing activities 1,584 1,642 1,091
-------- -------- --------
Net increase in cash and cash equivalents 5,679 3,826 1,499
Cash and cash equivalents at beginning of year 8,235 4,409 2,910
-------- -------- --------
Cash and cash equivalents at the end of year $ 13,914 $ 8,235 $ 4,409
======== ======== ========
</TABLE>
1998 1997 1996
- --------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes
Interest $ 19 $ 7 $ 12
Income taxes $ 942 $1,736 $3,987
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Notes to Financial Statements
NOTE 1: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. Stanford Telecommunications, Inc. (the Company), incorporated in
Delaware, designs, manufactures and markets advanced digital telecommunication
products and systems to establish or enhance communications via satellites,
terrestrial wireless and cable. The Company's technical strengths include:
system design, communication waveforms, modulation and demodulation techniques,
ASIC design Radio Frequency (RF) antennas and downconverters, software and
firmware, Asynchronous Transfer Mode (ATM) design and advanced manufacturing
techniques and processes. The Company's government revenues are generated from
U.S. government contracts where the Company may be either the prime contractor
or a subcontractor. The Company's commercial revenues include contract
manufacturing revenues, sales of integrated circuits, circuit boards and
subsystems, and development programs. In addition to the U.S. government, the
principle markets for the Company's products are primarily located in the U.S.
Fiscal Year. The Company's fiscal year is comprised of four 13-week quarters,
each of which ends on the Thursday closest to the corresponding calendar quarter
end. For convenience, the Company has presented its fiscal year as ending on
March 31.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect 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 period.
The Company prepares and evaluates on-going cost to complete estimates in order
to monitor its project costs. These estimates form the basis for calculating
revenues and gross margins for each project under the percentage-of-completion
method of accounting. Due to uncertainties inherent in the estimation process,
estimated total costs are subject to revision on an on-going basis as additional
information becomes available. The estimates are subject to change and actual
results could be materially different from these estimates.
Cash Equivalents. The Company considers all highly liquid securities with
original maturities of 90 days or less to be cash equivalents.
Short-Term lnvestments. Short-term investments are accounted for in accordance
with Statement of Financial Accounting Standard (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." At March 31, 1998, the
Company's short-term investments consisted of U.S. Treasury securities totaling
$19,493,000 at cost with unrealized gains of $270,000. At March 31, 1997 the
Company's short-term investments consisted of U.S. Treasury securities totaling
$25,074,000 at cost with unrealized gains of $246,000. The securities mature at
various dates within one year.
Receivables. The Company provides a reserve for doubtful accounts where
circumstances indicate that one is necessary. As of March 31, 1998 and 1997, the
Company's reserve for doubtful accounts was $711,000 and $1,023,000,
respectively.
Unbilled Receivables. Unbilled receivables represent differences between
billings and revenues recognized. At March 31, 1998, approximately 70% of the
unbilled receivables represent revenues recognized on fixed price contracts
under the percentage-of-completion method of accounting which exceed the amounts
that are billable according to contract terms and are expected to be
significantly collected within one year. In general, the Company is authorized
to bill between 75% to 100% of the costs expended on a contract. The remaining
portion of unbilled receivables at March 31, 1998 represents differences between
actual indirect rates and government approved billing rates which are not
billable until approval of final indirect rates by the respective governmental
agencies. The Company has received final indirect rate approval for charges
through fiscal 1995.
Inventories. Inventories are stated at the lower of cost (first-in, first-out)
or market. Cost includes materials, labor and related indirect expenses. General
and administrative costs are only included in inventory for government
contracts, as such costs are reimbursed by the government. Work-in-process
mainly represents costs incurred on short-term contracts. The components of
inventory are as follows:
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Work-in process $ 11,176 $ 3,721
Finished goods 3,066 2,318
Allocated general and administrative costs 136 118
Less: Progress billings (102) (146)
-------- -------
$ 14,276 $ 6,011
======== =======
The Company purchases certain inventories that have long purchase lead times and
may be single sourced. Although there are a limited number of manufacturers of
these particular inventory items, management believes that other suppliers could
provide similar inventory on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing and a possible loss of sales, which may
affect operating results adversely.
Depreciation and Amortization. Depreciation and amortization are provided over
the estimated useful lives of the assets (3 to 7 years or the term of the lease
if shorter), using the straight-line method.
30
<PAGE>
Accrued Liabilities. Accrued liabilities consist of the following:
Year ended March 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Compensation and employee benefits $ 6,543 $ 8,003
Accrued contract cost 956 2,054
Other 719 544
-------- --------
$ 8,218 $ 10,601
======== ========
Revenue Recognition. The Company principally uses the percentage-of-completion
method of accounting for contract revenues. The percentage-of-completion method
is based on total costs incurred to date compared with estimated total costs
upon completion of contracts. Certain contracts provide for milestone billings
which are recorded as revenues when the defined milestones are met. The Company
recognizes revenues for standard, off-the-shelf products and certain commercial
products upon shipment to the customer. The Company charges all losses on
contracts to cost of sales in the period when the loss is known. The principal
government agencies to which the Company sells are the Department of Defense
(DoD), NASA and the FAA. The DoD accounted for 33%, 33%, and 31% of total
revenues in 1998, 1997, and 1996, respectively.
Earnings Per Share. Effective December 15, 1997, the Company adopted Statement
of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per Share."
SFAS 128 requires companies to compute earnings per share following two
different methods, basic and diluted. Basic earnings per share is computed based
on the weighted average number of common shares outstanding. Diluted earnings
per share is computed based on the weighted average number of common shares
outstanding plus dilutive potential common shares calculated in accordance with
the treasury stock method. The Company's dilutive potential common shares are
stock options. Options to purchase 86,000, 75,000, and 56,000 weighted shares
outstanding during 1998, 1997 and 1996 respectively were excluded from the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the Company's common stock during
those years. Basic and diluted earnings per share for the Company are
substantially the same. Accordingly they have been reported together in the
Statements of Income.
Concentration of Credit Risk. Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash
equivalents, short-term investments, and trade receivables. Concentrations of
credit risk with respect to trade receivables are limited due to a balanced mix
of receivables due from the U.S. government and other customers which are
dispersed across different industries and geographic regions.
Classification. Consistent with industry practice, assets and liabilities
relating to government long-term contracts are classified as current although a
portion of these amounts is not expected to be realized within one year.
NOTE 2: LINE OF CREDIT
On December 12, 1997, the Company amended its bank line agreement extending the
expiration date until December 18, 1998. The Company has $15,000,000 in credit
under this line, all of which is available at March 31, 1998. Under this line of
credit the Company must maintain certain financial covenants. As of March 31,
1998, the Company was in compliance with all such covenants.
NOTE 3: COMMITMENTS
The Company leases its buildings and other equipment under noncancelable
operating lease agreements that expire at various dates through 2008. The
Company also leases certain office equipment under capital leases which expire
during 2003. The terms of several of the Company's leases provide for deferral
of cash rental payments over various periods. Rental expense under these
agreements is recognized on a straight-line basis. As of March 31, 1998 the
Company has accrued approximately $717,000 in related expense which is included
in other long-term liabilities in the accompanying balance sheet. Approximate
future minimum lease payments under these leases are as follows (in thousands):
Year Ended March 31 Operating Leases Capital Leases
- --------------------------------------------------------------------------------
1999 $ 4,617 $ 45
2000 5,021 25
2001 5,006 8
2002 3,471 8
2003 3,380 6
Thereafter 12,619 --
-------- --------
Total minimum lease payments $ 34,114 92
======== --------
Less: Interest (7)
--------
85
--------
Less: Current portion (44)
--------
$ 41
========
Lease payments and other rental expenses charged to operations totaled
approximately $4,676,000, $4,279,000, and $4,272,000 for the years ended March
31, 1998, 1997, and 1996, respectively. During 1998, 1997, and 1996 the Company
acquired equipment under capital in the amounts of $41,000, $30,000, and $8,000,
respectively.
31
<PAGE>
NOTE 4: RETIREMENT PLAN
The Company maintains a defined contribution plan covering substantially all
employees. Amounts contributed are based on a percentage of eligible employees
annual compensation. Percentages contributed equaled 3% in 1998 and 4% in 1997
and 1996 respectively. The Company's contributions totaled approximately
$1,403,000 in 1998, $1,566,000 in 1997, and $1,425,000 in 1996. The Plan also
permits eligible employees to make voluntary before-tax salary deferral
contributions.
NOTE 5: INCOME TAXES
The provision for income taxes charged to operations was comprised of the
following:
Year ended March 31
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Provision for (benefit from) income taxes:
Current
Federal $ 1,570 $ 3,602 $ 4,422
State 176 555 233
Deferred, net
Federal 647 96 (1,470)
State (50) (34) (75)
------- ------- -------
Net tax provision $ 2,343 $ 4,219 $ 3,110
======= ======= =======
The provision for income taxes for the three years ended March 31, 1998 differs
from the U.S. statutory rate principally as follows:
Year ended March 31
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory Federal income tax rate 34.0% 35.0% 34.0%
State income taxes, net of Federal benefit 1.5% 2.8% 1.7%
Research and development credits (7.3)% (3.6)% (1.0)%
Other 2.8% .3% 1.0%
Change in valuation allowance -- -- (2.2)%
---- ---- ----
Effective income tax rate 31.0% 34.5% 33.5%
==== ==== ====
The major components of deferred tax assets and liabilities consisted of the
following:
Year ended March 31
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax asset
Reserves and accruals not currently
deductible for tax purposes $ 3,235 $ 4,644
Tax credits 373 256
Accelerated depreciation 223 --
------- -------
Total deferred tax asset 3,831 4,900
------- -------
Deferred tax liability:
Accelerated depreciation -- (151)
Percentage of completion contract accounting (610) (931)
------- -------
Total deferred tax liability (610) (1,082)
======= ========
Net deferred tax asset $ 3,221 $ 3,818
======= ========
The $3,221,000 net deferred tax asset as of March 31, 1998 was allocated on the
accompanying balance sheet with $223,000 included in other assets, $1,361,000
included in prepaid expenses and other, and the remaining amount of $1,637,000
is netted against accrued income taxes.
32
<PAGE>
NOTE 6: COMMON STOCK
On January 29, 1997, the Company's Board of Directors declared a two-for-one
split of the Company's common stock effected in the form of a 100% stock
dividend distributed on February 28, 1997 to shareholders of record as of
February 10, 1997. Approximately 6.4 million shares of common stock were issued
in connection with the split. The stated par value of each share was not changed
from $.01. A total of $64,000 was reclassified from the Company's paid-in
capital account to the Company's common stock account. All share and per share
amounts included in these financial statements have been restated to
retroactively reflect the stock split.
On June 26, 1996, the Company's stockholders approved an amendment to Article 4
of the Company's Certificate of Incorporation, increasing the number of
authorized shares of common stock with a par value $.01 per share ("common
stock"), from 15,000,000 to 25,000,000. On February 6, 1997, the Company
registered the additional authorized shares.
On May 9, 1995, the Board of Directors adopted a Stockholder's Rights Plan and
declared a dividend of one Common Share Purchase Right (the "Right") for each
share of the Company's common stock outstanding on May 25, 1995. Each Right
entitles the holder thereof to purchase one share of the Company's common stock
for $30. The Rights will be exercisable if a person or group acquires 15% or
more of the Company's common stock. Upon such acquisition, each Right (other
than those held by the acquiring person or group) will be exercisable for the
number of shares of the Company's common stock having a market value at that
time of twice the exercise price of the Right. If the Company subsequently
enters into certain business combinations, each Right (other than those held by
the acquiring person or group) will be exercisable for that number of shares of
common stock of the other party to the business combination having a market
value of two times the exercise price of the Right. The Rights are subject to
redemption at the option of the Board of Directors at a price of $.01 per Right.
The Rights expire on May 9, 2005.
The Company's 1991 Stock Option Plan provides for the issuance of either
incentive or non-qualified options to employees and certain non-employee
directors. Incentive options can be granted at an exercise price not less than
fair market value of the stock on the date of grant. Non-qualified options can
be granted at an exercise price not less than 85% of the fair market value of
the stock on the date of the grant. Options granted under the 1991 Plan
generally vest 25% one year after the date of grant and rateably thereafter over
three years and options generally expire ten years from the date of grant. The
1991 Plan will expire in the year 2001.
Information with respect to this plan is as follows:
1991 Stock Option Plan
-------------------------------------------
Average
Available Option
for Grant Outstanding Prices
- --------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 393,470 549,084 $ 6.66
--------- --------- ---------
Additional authorized 1,000,000 -- --
Granted (365,442) 365,442 7.85
Exercised -- (101,358) 4.53
Terminated 115,802 (115,802) 7.30
--------- --------- ---------
BALANCE, MARCH 31, 1996 1,143,830 697,366 $ 7.49
Granted (375,300) 375,300 16.54
Exercised -- (64,534) 7.65
Terminated 45,711 (45,711) 10.39
--------- --------- ---------
BALANCE, MARCH 31, 1997 814,241 962,421 $ 10.92
Granted (167,900) 167,900 16.57
Exercised -- (49,409) 8.51
Terminated 45,222 (45,222) 13.08
--------- --------- ---------
BALANCE, MARCH 31, 1998 691,563 1,035,690 $ 11.85
========= ========= =========
33
<PAGE>
<TABLE>
Under the 1991 Stock Option Plan the options outstanding are as follows:
<CAPTION>
1991 Stock Options Outstanding 1991 Stock Options Exercisable
-------------------------------------------------- -----------------------------
Weighted Average
Number remaining Weighted Average Number Weighted Average
March 31, 1998 Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Range of exercise prices:
$2.50--$7.25 274,578 6.l3 years $ 6.74 266,078 $ 6.75
$7.38--$18.69 211,652 2.41 years $ 7.93 148,991 $ 8.02
$9.06--$14.88 273,010 7.30 years $13.51 103,860 $12.77
$15.25--$21.00 251,450 8.78 years $17.71 69,000 $20.52
$23.00--$31.50 25,000 8.l3 years $24.22 21,250 $23.36
--------- -------
Total 1,035,690 609,179
========= =======
</TABLE>
Pro Forma Information. The Company applies APB No. 25 "Accounting for Stock
Issued to Employees" and related interpretations in accounting for the stock
compensatory plans (the Plans). Accordingly, no compensation cost has been
recognized for the Plans. If compensation cost for the Plans had been determined
consistent with SFAS No. 123 "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
(In thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------
Net income
As reported $ 5,216 $ 8,011 $ 6,173
Pro forma $ 4,037 $ 6,755 $ 5,615
Earning per share -- basic and diluted
As reported $ 0.40 $ 0.61 $ 0.49
Pro forma $ 0.31 $ 0.52 $ 0.44
Because the method of accounting prescribed by SFAS No.123 has not been applied
to options granted prior to April 1, 1995, and because the Black-Scholes option
valuation model was developed for traded options and requires the input of
subjective assumptions, the resulting pro forma compensation cost may not be
representative of that to be expected in future years
The fair value of each option grant is estimated based on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for 1998, 1997 and 1996: risk-free interest rates of approximately 6.6% for
1998, 6.0% for 1997 and 6.1% for 1996, dividend yields of 0%, volatility factor
of the expected market price of the Company's common stock of 73%, and a
weighted average expected life of an option of approximately three (3) years.
The weighted average fair values of options granted in fiscal years 1998, 1997
and 1996 respectively were $8.33, $7.34 and $3.37.
Under the 1992 Employee Stock Purchase Plan, the Company makes offerings of
common stock to its employees at such time and of such duration as its Board
determines. A total of 400,000 shares of common stock has been reserved for
issuance. In fiscal years 1998, 1997 and 1996, the Company has sold 90,631
shares, 66,512 shares and 70,788 shares. The weighted average fair values of
such shares for fiscal years 1998, 1997 and 1996 were $4.88, $5.27 and $2.41
respectively. As of March 31, 1998, 75,20l shares remained available for
purchase.
NOTE 7: LITIGATION AND CONTINGENCIES
The Company is contingently liable with respect to lawsuits and other matters
which arise in the normal course of business. The Company must comply with
detailed government procurement and contracting regulations. The Company has
prepared and presented documentation and support to a customer addressing its
post-award audit recommendations. Management believes that the outcome of such
contingencies will not have a material adverse effect on the Company's financial
position or results of operations.
34
<PAGE>
<TABLE>
Selected Financial Data
<CAPTION>
Year ended March 31
(In thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Revenues $153,260 $167,002 $145,100 $114,384 $ 98,055
Operating income 5,663 10,894 8,444 1,620 4,498
Income before change in accounting method 5,216 8,011 6,173 131 2,836
Cumulative effect of change in accounting method -- -- -- -- 700
Net income 5,216 8,011 6,173 131 3,536
Earnings per share before change in
accounting method-- diluted 0.40 0.61 0.49 0.01 0.27
Cumulative effect of change in accounting method -- -- -- -- 0.07
Weighted average number of common
and potential common shares outstanding 13,179 13,070 12,702 12,484 10,394
FINANCIAL POSITION
Current assets $ 97,471 $ 89,131 $ 76,152 $ 71,994 $ 60,125
Current liabilities 24,372 22,721 19,657 24,035 11,466
Working capital 73,099 66,410 56,495 47,959 48,659
Current ratio 4.0 3.9 3.9 3.0 5.2
Property and equipment, net 14,135 14,113 14,500 15,608 14,005
Total assets $112,141 $103,518 $ 90,948 $ 88,005 $ 74,503
Long-term debt 41 30 85 161 235
Shareholders' equity 86,873 79,706 69,589 62,097 61,367
Common stock outstanding 12,975 12,833 12,656 12,468 12,362
Book value per share $ 6.70 $ 6.21 $ 5.50 $ 4.98 $ 4.96
</TABLE>
QUARTERLY RESULTS
<TABLE>
Statements of Operations Data. The following table presents summaries of the
Company's financial results by quarter for fiscal year 1998, 1997 and 1996.
These quarterly financial results are unaudited. In the opinion of management,
however, they have been prepared on the same basis as the audited financial
information and include all adjustments necessary for a fair presentation of the
information set forth therein. The operating results for any quarter are not
necessarily indicative of the results that may be expected for any future
period.
<CAPTION>
(In thousands, except per share data) 1998
- ------------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $35,331 $36,838 $40,713 $40,378
Gross profit 8,901 9,373 9,935 8,422
Net income 1,382 928 1,577 1,329
Earnings per share-- diluted $ 0.11 $ 0.07 $ 0.12 $ 0.10
1997
- ------------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $40,843 $41,058 $42,028 $43,073
Gross profit 8,850 10,169 9,723 10,828
Net income 1,888 1,911 1,960 2,252
Earnings per share-- diluted $ 0.14 $ 0.15 $ 0.15 $ 0.17
1996
- ------------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $35,952 $35,597 $36,384 $37,168
Gross profit 6,076 7,382 7,462 8,167
Net income 1,126 1,403 1,613 2,031
Earnings per share-- diluted $ 0.09 $ 0.11 $ 0.13 $ 0.16
</TABLE>
35
<PAGE>
Selected Financial Data
SELECTED COMMON STOCK DATA
Stanford Telecommunications, Inc. Common Stock was offered to the public on
October 6, 1983, and since that date has been traded on the NASDAQ stock market
under the symbol STII. During January 1994, the Company completed a secondary
offering of its common stock. The price per share reflected in the table has
been adjusted for a two-for-one split of the Company's common stock distributed
to shareholders on February 28, 1997 and represents the closing prices in the
NASDAQ National Market System. The quotations represent inter-dealer quotations,
without retail markups, markdowns or commissions, and may not necessarily
represent actual transactions.
The Company has not paid cash dividends on its Common Stock since its
incorporation and anticipates that for the foreseeable future it will continue
to retain its earnings for use in its business. A covenant under the current
Line of Credit would require prior approval of any cash dividend by the bank.
On March 31, 1998, there were approximately 1,609 holders of record of the
Company's Common Stock.
1998 1997
----------------- ------------------
Fiscal year High Low High Low
- --------------------------------------------------------------------------------
First Quarter 20 1/4 14 1/8 32 7/8 13 3/8
Second Quarter 28 15 30 18 5/8
Third Quarter 26 15 26 3/4 11 1/4
Fourth Quarter 20 1/2 14 21 1/16 14 1/2
NASDAQ TRADING VOLUME
Fiscal year 1998 1997
- --------------------------------------------------------------------------------
Shares 20,213,599 13,475,504
<TABLE>
<CAPTION>
NASDAQ MARKET MAKERS
<S> <C> <C>
Oppenheimer & Company, Inc. Sherwood Securities Corporation Herzog, Heine, Geduld, Inc.
Mayer & Schweitzer, Inc. Dain Rauscher, Inc. Troster Singer Corporation
John G. Kinnard & Co., Inc. Knight Securities LP First Albany Corporation
</TABLE>
36
EXHIBIT NUMBER 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in or incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements on Forms S-8 (file nos.
33-45090, 33-68534, and 33-63771).
/s/ Arthur Andersen LLP
San Jose, California
June 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND THE CONSOLIDATED BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 13,914
<SECURITIES> 19,493
<RECEIVABLES> 47,869
<ALLOWANCES> 0
<INVENTORY> 14,276
<CURRENT-ASSETS> 97,471
<PP&E> 54,651
<DEPRECIATION> 40,516
<TOTAL-ASSETS> 112,141
<CURRENT-LIABILITIES> 24,372
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 86,743
<TOTAL-LIABILITY-AND-EQUITY> 112,141
<SALES> 153,260
<TOTAL-REVENUES> 153,260
<CGS> 116,629
<TOTAL-COSTS> 147,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,559
<INCOME-TAX> 2,343
<INCOME-CONTINUING> 5,216
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,216
<EPS-PRIMARY> 0.40<F1>
<EPS-DILUTED> 0.40<F1>
<FN>
Prepared in Accordance with FAS 128. Basic and Diluted EPS have been entered in
place of Primary and Diluted EPS.
</FN>
</TABLE>
