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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
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 0-21236
APPLIED SIGNAL TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0015491
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST CALIFORNIA AVE., SUNNYVALE, CA 94086
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(Address of principal executive offices)
(408) 749-1888
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: Not
Applicable.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, without par value.
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by a check mark if disclosure by delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant:
Common Stock, without par value -- $30,950,712 as of January 22, 1997.
Number of shares of registrant's common stock outstanding:
Common Stock, without par value -- 8,028,188 Shares as of January 22, 1997.
Total Number of Pages in this Report 116
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The registrant's Proxy Statement dated January 26, 1997 for the Annual Meeting
of Shareholders to be held on March 6, 1997 is incorporated herein by reference
in Part III to the extent stated herein.
Exhibit index on page 29.
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INDEX
APPLIED SIGNAL TECHNOLOGY, INC.
PART I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Signatures
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PART I
ITEM 1: BUSINESS
This report contains forward-looking statements about future events and
results of operations. These forward-looking statements are subject to a number
of risks discussed below in "Business" and, in particular, in "Business --
Summary of Business Considerations and Certain Factors that may Affect Future
Results of Operations and/or Stock Price." Actual events and results may differ
materially from the Company's current expectation and beliefs.
GENERAL
Applied Signal Technology, Inc. (the Company) designs, develops, and
manufactures signal processing equipment to collect and process a wide range of
telecommunication signals. This equipment is used for reconnaissance of foreign
telecommunications by the United States government and allied foreign
governments, as well as the private sector in a variety of commercial
applications. Signal reconnaissance systems are composed of collection equipment
and processing equipment. Collection equipment consists of sophisticated
receivers that scan the radio frequency (RF) spectrum (cellular telephone,
microwave, ship-to-shore, and military transmissions) to collect certain signals
from, potentially, thousands of signals within the RF spectrum. Signal
processing equipment, using sophisticated software and hardware, evaluates the
characteristics of the collected signals and selects signals that are likely to
contain relevant information. The Company's commercial products include
processing equipment for the information superhighway, as well as chip modem
designs that bring price efficiencies to personal communication systems. Since
inception, the Company has focused its efforts primarily on processing
equipment, but also provides specialized collection equipment, as well as
complete signal reconnaissance systems.
Purchases by intelligence agencies of the United States government have
historically accounted for almost all of the Company's revenues, and most of the
Company's business is conducted under contracts that include United States
government security requirements. While the Company believes its current
customers offer significant additional sales growth opportunities and,
accordingly, directs much of its marketing and research and development (R&D)
resources toward these customers, in recent years the Company has attempted to
broaden its customer base to include new customers in both the military and
commercial markets. The efforts have been successful with revenue contributions
having grown from 0.3% of revenues in fiscal 1993 to 2.8% of revenues in fiscal
1996 for the Company's Commercial Telecommunications Division, and from 2.3% of
revenues in fiscal 1993 to 6.2% of revenues in fiscal 1996 for the Company's
Military Reconnaissance Division. (See Item 7-- Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
In recent years, accurate and comprehensive information regarding foreign
affairs and developments has become increasingly important to the United States
government. The reduction of United States military tactical forces overseas,
coupled with political instability in certain regions such as the Middle East,
Eastern Europe, Africa and South America, has heightened the United States
government's need to be able to
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monitor overseas activities. In order to obtain information about activities
within foreign countries, the United States government gathers and analyzes
telecommunication signals emanating from those countries.
The Company devotes significant resources toward understanding the United
States government's signal reconnaissance goals, capabilities and perceived
future needs. The Company obtains information about these signal reconnaissance
needs through frequent marketing contact between its employees and technical and
contracting officials of the United States government. The Company believes that
it has much more marketing contact with customers and potential customers than
is customary among its competitors. In addition, the Company invests in R&D
which it anticipates will enable it to develop signal reconnaissance equipment
that meets these needs. The Company believes that it invests a greater
percentage of its revenues in R&D than is typical among its competitors. (See
"Research and Development.")
Budgetary constraints and critical time-to-deployment have caused many
United States government agencies to search for more flexible and cost-effective
signal reconnaissance solutions that can be deployed promptly. The Company's
signal reconnaissance products can be used, with or without further
modification, to satisfy requirements of a variety of customers. The Company
believes its products can be readily deployed in a wide variety of circumstances
to meet current United States government signal reconnaissance requirements. The
Company designs its products to use advanced circuitry and highly integrated
components, including Company-designed application specific integrated circuits
(ASICs). This enables the Company to offer products that are smaller, consume
less power, and cost customers less when multiple units are built than equipment
of similar functionality that use fewer advanced designs and materials.
Potential commercial applications of the Company's technology and
equipment include digital video processing for High Definition TV (HDTV or
interactive TV, wireless local loop demodulators and test equipment for the new
technologies in wireless communications. In this new market area, the Company
intends to license its technology to a strategic partner and, to a lesser
degree, the Company may develop the entire commercial product.
The Company believes its employees are its most valuable resource.
DESCRIPTION OF THE BUSINESS
Applied Signal Technology designs, develops, and manufactures equipment
to collect and process telecommunication signals for signal reconnaissance and
commercial applications. The signal reconnaissance equipment is purchased by
both the military as well as the intelligence organizations of the United States
government and is used for foreign signal reconnaissance. The commercial
telecommunications processing equipment has been developed for use in digital
video transmission, wireless local loop systems, and as test equipment for a
variety of wireless communication technologies.
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SIGNAL RECONNAISSANCE
In recent years, accurate and comprehensive information regarding foreign
affairs and developments has become increasingly important to the United States
government. The reduction in United States military tactical forces overseas has
heightened the United States government's need to quickly assess military risks,
particularly in areas of instability as they develop around the world. The
breakup of the Soviet Union and civil unrest in certain nations in Eastern
Europe, Africa, and South America indicate an increase in geographic areas that
might require monitoring. In addition, the United States government requires
information regarding overseas activities to conduct drug interdiction
operations.
As part of its efforts to obtain information, the United States
government gathers and analyzes telecommunication signals emanating from foreign
countries. In recent years, the use of established telecommunication
technologies has increased throughout the world and new telecommunication
technologies, supplementing rather than replacing prior technologies, have been
developed and commercialized. These trends have led to a significant increase in
the overall volume of information communicated and an increase in the density of
signals transmitted throughout the radio frequency spectrum. This increase can
be seen in the proliferation of facsimile, cellular, and digital signal
telecommunications equipment and the global information network (World-Wide Web)
in the last decade, resulting in a significant increase in the amount of
information being communicated. These trends have required the development of
signal reconnaissance equipment capable of collecting and processing an
increased volume of signals as well as new types of signals.
Traditionally, organizations within the United States government have
satisfied their signal reconnaissance needs by first identifying their specific
requirements and then contracting with government contractors to provide
equipment. Contractors typically designed and built custom signal processing
systems optimized to satisfy the particular needs of various agencies.
Development of custom systems usually required many years of effort and involved
great expense. The time required to develop these systems often meant that when
a system was delivered, it did not address new telecommunications technologies
that had evolved during the development process. These factors, combined with
growing budgetary constraints, have caused many agencies to search for more
flexible and cost-effective signal reconnaissance solutions that can be deployed
promptly.
COMMERCIAL TELECOMMUNICATIONS
The concept of an information superhighway involves the use of digital
forms of telecommunications for transmission techniques. Digital
telecommunications are subject to a variety of impairments that must be overcome
by sophisticated, automatic signal processing. The Company continues working to
exploit its existing technology in these new areas of opportunity. The
processing techniques developed by the Company for its signal reconnaissance
products can be applied to commercial digital video processing. The Company's
signal reconnaissance analysis products also serve as a basis for commercial
test equipment that can be used by wireless communications providers for
transmission quality assessments.
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STRATEGY
SIGNAL RECONNAISSANCE
Applied Signal Technology's objective is to anticipate the signal
reconnaissance needs of the United States government and to invest in research
and development in an effort to provide solutions before the Company's
competitors. In some cases, this involves the development of equipment to
address new telecommunications technologies. In other cases, it involves the
development of equipment that offers smaller size, lower power consumption, and
lower cost than potentially competitive products. The Company's strategy to
accomplish its objective includes the following elements:
- Anticipate Government Needs. The Company devotes significant
resources in order to understand the United States
government's signal reconnaissance goals, capabilities, and
perceived future needs. The Company monitors technological and
commercial advances in telecommunications to identify advances
it believes may have an impact on the United States
government's signal reconnaissance programs. The Company
obtains information about the United States government's
signal reconnaissance needs through frequent contact with
employees and technical and contracting officials of the
United Stated government. In contrast, the Company believes
that its competitors often wait until the United States
government requests competitive proposals for equipment to
satisfy specific requirements and then respond to these
requests.
Sole source contracts are let by the United States government
when a single contractor is deemed to have an expertise or
technology that is superior to that of competing contractors.
Since the Company's inception, almost all of its revenues have
been from sole source contracts. The Company believes that the
large number of sole source contracts it obtains demonstrates
that it often anticipates the signal reconnaissance needs of
the United States government correctly. There can be no
assurance, however, that the Company will anticipate correctly
the signal reconnaissance needs of the United States
government in the future.
- Invest in Research and Development. The Company invests in
research and development it believes will enable it to develop
signal reconnaissance equipment that will satisfy the needs of
the United States government. The Company believes that it
invests a greater percentage of its revenues in R&D than is
typical among its competitors. The Company believes its R&D
investments often enable it to offer superior products before
its competitors once the United States government identifies a
need.
- Develop Flexible Products. The Company develops signal
reconnaissance products that can be used, with or without
further modification, to satisfy the needs of a variety of
customers. The Company uses its prior product development
efforts to offer customers cost-effective solutions and to
offer these solutions promptly. The Company believes that
custom equipment developed by many of the Company's
competitors, generally, cannot be as readily deployed in as
wide a variety of circumstances as the Company's products.
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- Develop Highly Integrated Products. The Company designs its
products to use advanced circuitry and highly integrated
components. This enables the Company to offer products that
are smaller, consume less power, and cost customers less when
multiple units are built than equipment of similar
functionality that use fewer advanced designs and materials.
The lower cost of many of the Company's products appeals to
customers with budget constraints, and the smaller size and
low power consumption of many of the Company's products appeal
to customers with physical installation constraints.
- Focus on Signal Processing. Since inception, the Company has
focused much of its attention on developing signal processing
equipment. The Company believes that there have been and will
continue to be more opportunities to develop specialized
signal processing equipment than collection equipment as new
types of signals can often be collected with available
collection equipment but cannot be processed by available
processing equipment.
- Increase Penetration and Broaden Customer Base. The Company
believes that its current customers offer significant
additional opportunities for sales growth both in terms of
additional units of developed products and the development of
new products and, accordingly, directs much of its marketing
efforts toward these customers. The Company attempts to
broaden its customer base through marketing efforts directed
at United States government agencies that are not now
customers (that is, certain military and law enforcement
agencies) as well as at offices within its customer agencies
that have not contracted with the Company previously.
COMMERCIAL TELECOMMUNICATION PRODUCTS
The Company's strategy for commercial marketplace penetration is to take
full advantage of the R&D funded by government contracts in years past. This R&D
is the result of government development contracts and the Company's independent
R&D (IR&D). As a result of these investments, the Company believes it has
developed technology that commercial companies require and the Company attempts
to seek strategic partnering relationships with certain of these commercial
companies to exploit this technology.
PRODUCTS
The Company's products consist of signal collection and processing
equipment that use software and hardware developed over many years by the
Company in the course of performing hundreds of development contracts to provide
signal reconnaissance equipment to the United States government. This software
and hardware enables the Company's processing equipment to evaluate large
numbers of radio frequency signals and to select the relatively small proportion
which contain information likely to be useful in the signal reconnaissance
programs of the United States government. Further, the Company has recently
begun developing a line of products using existing technology for use in the
commercial telecommunications market.
The Company offers a variety of signal reconnaissance products, which can
be categorized as follows:
- Voice Grade Channel Processors. These processors are designed
to process voice grade channels (VGCs) which carry audio and
other signals. The standard telecommunication systems used
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throughout the world put a large number of VGCs on a single
carrier channel to increase the number of signals that can be
transmitted at a particular frequency. VGC processors can scan
thousands of signals in less than one second and use
sophisticated processing technology to detect and record
relevant data which is then analyzed by United States
government personnel. These processors evaluate the
characteristics of collected signals and select signals that
are likely to contain relevant information. The Company's VGC
processors currently range in price from approximately $40,000
to approximately $200,000.
- Wideband Processors. These processors "clean"
telecommunication signals for further processing by VGC
processors by adjusting for signal distortions that commonly
occur during transmission. The two primary types of distortion
these processors correct are multipath interference (caused by
the reception of a signal and its reflections) and cochannel
interference (caused by the reception of multiple interfering
signals). Commercial telecommunications companies overcome
these distortions with careful alignment and tuning which
requires interruption of the telecommunication signals. The
Company's wideband processors perform this alignment
independently and automatically by adjusting processing
parameters using proprietary adaptive algorithms that let the
processors "learn" how to process the incoming signals. One of
the Company's wideband processors processes signals that carry
thousands of VGCs in a digital format which is rapidly being
proliferated through the world and is particularly susceptible
to distortions. The Company's wideband processors currently
range in price from approximately $80,000 to approximately
$150,000.
- Processing Systems. Although the Company has emphasized
subsystem or "product" development since its inception, it has
also developed and delivered signal processing systems in
situations where the capabilities of its products have enabled
it to obtain a system development contract on a sole source
basis from the United States government. The Company's two
largest system installations, for which the Company developed
custom systems software, integrated a number of the Company's
standard VGC processors and were developed to exacting United
States government software and documentation standards.
- Collection Products. The Company offers a limited number of
signal collection products designed to complement certain of
the Company's processing products. The Company's collection
products include a low-cost, small-size receiver that collects
very complex signaling formats and a receiver that overcomes
cochannel interference and certain forms of multipath
interference by optimizing multiple antenna inputs. The
Company's collection products currently range in price from
approximately $20,000 to approximately $60,000.
In addition to its line of signal reconnaissance products, the Company
has recently started development of commercial products. The types of commercial
products that the Company is developing can be categorized as follows:
- Digital Video Processing Equipment. The Company is developing
a key processing function of digital demodulation in one ASIC
to be marketed to television set-top converter manufacturers.
The Company has also developed the QAMalyzer(TM) digital video
analyzer test unit.
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- Wireless Local Loop Equipment. The Company is developing a
QPSK demodulator in the form of an ASIC to integrate into the
Ericsson Corporation Freeset 1900(TM) handset for their
wireless local loop system.
CUSTOMERS, CONTRACTS, AND MARKETING
CUSTOMERS
To date, purchases by the United States government have accounted for
almost all of the Company's revenues. Most of the Company's revenues have come
from contracts directly with the United States government. The Company also has
subcontracts under which it supplies products or services to prime contractors
that have contracts with the United States government. Subcontract revenues
accounted for approximately 5%, 6%, and 27% of the Company's total revenues for
its fiscal years 1994, 1995, and 1996, respectively. In addition, the Company
occasionally sells small quantities of equipment to foreign governments. Foreign
revenues have accounted for approximately 2%, 6%, and 2% of the Company's total
revenues for fiscal years 1994, 1995, and 1996, respectively.
The Company's United States government customers consist of approximately
five military and intelligence agencies with signal reconnaissance needs. Within
these five agencies, the Company has contracts with approximately 20 different
offices, each with separate budgets and contracting authority. Although
concentration of revenue sources is significant for the United States
government, no single contract accounted for more than 5% of the Company's
revenues in fiscal year 1994, 3% in fiscal year 1995, or more than 16% in fiscal
year 1996.
Two intelligence agencies accounted for approximately 78% and 12%,
respectively, of revenues in fiscal year 1994; approximately 69% and 17%,
respectively, of revenues in fiscal year 1995; and approximately 53% and 27%,
respectively, of revenues in fiscal year 1996.
In recent years, the United States defense budget has been reduced,
causing customers and potential customers of the Company's products to
reevaluate their needs. The Company believes that budget reductions have caused
agencies increasingly to favor standard products similar to the Company's
products rather than custom products that generally are more expensive, take
longer to deliver, and provide solutions to a narrower range of signal
reconnaissance problems. Future reductions in United States government spending
on signal reconnaissance equipment or future changes in the kinds of signal
reconnaissance products or services required by United States government
agencies, however, could limit demand for the Company's products, which would
have a material adverse effect on the Company's operating results.
CONTRACTS
Government Contracts. Most of the Company's business is conducted under
contracts that include United States government security requirements. The
Company's contracts with United States government agencies can be categorized in
several ways.
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Sole source contracts are let by the United States government when a
single contractor is deemed to have an expertise or technology that is superior
to that of competing contractors. Potential suppliers compete informally for
sole source contracts through R&D investment and marketing efforts. This
competition requires a contractor to identify the United States government's
requirements early and invest in developing potential solutions so that the
contractor can demonstrate a distinguishing expertise or technology promptly
after the United States government has identified a signal reconnaissance
requirement.
Competitive bid contracts are awarded after a formal bid and proposal
competition among suppliers and sole source contracts are awarded without a
formal competition. During fiscal years 1994, 1995, and 1996, approximately 99%,
95%, and 75%, respectively, of the Company's revenues were from sole source
contracts, and approximately 1%, 5%, and 25%, respectively, were from
competitive bid contracts.
During fiscal 1996, the Company experienced an increase in the percentage
of contracts awarded on a competition basis and an increase in revenues
generated from subcontracts. This change is due to the award of one subcontract
during fiscal 1996. Management does not believe the shift in percentages will
have a material impact on the operating results of the Company.
As a government contractor, the Company is subject to price
redetermination on certain fixed-price contracts if it is determined that the
Company did not price its products and services consistent with the requirements
of the Federal Acquisition Regulations. As of October 31, 1996, the Company has
not had a material claim sustained against it for noncompliance.
In April 1994 the Company was served with a subpoena by the Department of
Defense Office of Inspector General (OIG) in connection with pricing of products
related to approximately six contracts. Shortly thereafter, a second agency
issued a request for information related to nine additional contracts. To date,
the Company has not received any allegation of wrongdoing from the OIG or the
other agency. Through its internal review of the contracts in question, the
Company has provided voluntary disclosure to the government which is expected to
result in a downward price adjustment on certain contracts. In anticipation of a
settlement, the Company recorded a charge of $1.2 million to third quarter
fiscal 1995 operating results.
In April 1996, the Company was served with a second subpoena by the OIG
in connection with all contracts entered into between 1990 and the present
related to three products: the Model 102P Voice Channel Demodulator, the Model
120 Multichannel Processor, and the Model 150 FAX Scanner. While management
believes this charge is adequate to cover all related risks, the government has
not concluded its investigation or agreed to a settlement with the Company. (See
Item 3 -- Legal Proceedings.)
Competitive bid contracts are awarded based on objective proposal
evaluation criteria established by the procuring agency. Interested contractors
prepare a bid and proposal that responds to the agency's request for proposal. A
bid and proposal is usually prepared in a short period of time (for example, 45
days) in response to a deadline and requires the extensive involvement of
numerous technical and administrative personnel.
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Competitive bid or sole source contracts can be either fixed-price
contracts, pursuant to which the Company agrees to deliver equipment for a fixed
price and assumes the risk of cost overruns, or cost-plus contracts, pursuant to
which the Company is reimbursed for its direct and indirect costs and paid a
negotiated profit. During fiscal years 1994 and 1995, approximately 66% of the
Company's revenues were from fixed-price contracts and 34% were from cost-plus
contracts. During fiscal year 1996, approximately 52% of the Company's revenues
were from fixed-price contracts and approximately 48% were from cost-plus
contracts.
Most of the Company's fixed-price contracts are for the manufacture of
multiple units of its products, rather than the development of new products. The
Company believes that the risk of cost overruns is much less in the case of
fixed-price manufacturing contracts, where the product already has been
developed and at least a prototype made, than in the case of fixed-price
development contracts.
Almost all of the Company's contracts contain termination clauses that
permit contract termination upon the Company's default or for the convenience of
the other contracting party. In either case, termination could adversely affect
the Company's operating results. Although the Company has not experienced any
material cancellations in the past, there can be no assurance such cancellations
will not occur in the future.
Commercial Contracts. During fiscal years 1994 and 1995, commercial
contracts have accounted for approximately 1.2% and 2.9% of the Company's
revenue, respectively. In fiscal 1996, commercial contracts accounted for
approximately 2.8% of the Company's revenue. The commercial contracts are
typically fixed-price for development or manufacturing and often require R&D
investments by the Company. Commercial contracting is a maturing business area
for the Company and due to the highly competitive nature of these commercial
endeavors, there is risk that the Company's investments may not produce income
and that the fixed-price contracts may experience cost overruns. Losses on any
individual contracts are provided for at the time they become known.
MARKETING
Signal Reconnaissance. The Company's primary signal reconnaissance
marketing efforts consist of personal contact between government technical
representatives and technical personnel of the Company. The Company involves all
technically qualified staff members in its marketing program. The Company
believes it is extremely important to have technically knowledgeable staff make
marketing contacts since an initial system concept is often developed during the
first such contact. The Company believes that it has much more marketing contact
with customers and potential customers than is customary among its competitors
generally, and that this contact enables the Company to anticipate the United
States government's signal reconnaissance needs, thereby giving the Company a
potential advantage over its competitors.
The Company's signal reconnaissance marketing occurs at three levels. The
top level of marketing involves contact between the Company's senior management
and officials of the United States government responsible for signal
reconnaissance policy. The purpose of these contacts is to understand national
level requirements in future years (five to ten years out), obtain guidance for
direction of the Company's R&D,
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and keep the United States government community informed about the Company, its
technology, and its products.
The intermediate level of marketing is performed by the Company's systems
engineers contacting government officials responsible for allocating budgets.
These engineers seek to identify new requirements that will result in projects
within the next six to 18 months and work with government technical
representatives to develop system concepts. The Company invests in R&D to
address these requirements and to obtain potential projects. To assist with this
level of marketing, the Company's technical staff often constructs a theoretical
model of the problem and tests processing solutions so that the Company and the
customer can determine whether a product can be developed or modified to meet
the customer's requirements. At this stage of marketing, the customer often
awards a sole source contract to the Company.
The final level of marketing involves establishing precise cost estimates
and detailed specifications. This level of marketing is performed by development
engineers who are involved in the actual development or modification of the
product.
In addition to its primary technical marketing, the Company also conducts
marketing activities designed to increase its visibility with existing and
potential customers. Each year the Company conducts two equipment shows in the
Washington, D.C. area demonstrating the operation of many of its products. The
Company uses direct mail and magazine advertising from time to time to inform
potential customers of available products. The Company also produces a product
summary catalog that is updated every six months and included with the quarterly
newsletter mailing. The Company's mailing list includes contacts at private
sector companies that may purchase the Company's products for their own use or
for inclusion in systems they are developing for United States government
customers, as well as contacts at United States government agencies that buy
products but do not contract for development efforts.
Commercial Marketing. The Company's approach to marketing of commercial
products is to form strategic alliances with other companies that have had
experience in a particular commercial marketplace. The Company will rely on the
marketing techniques of these strategic partners to attempt penetration of the
new commercial marketplaces. Further, the Company intends to license its
technology, which the Company believes should minimize the risk of lost
investment in these new marketplaces.
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BACKLOG
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts, was $30.9 million, $29.6 million,
and $82.9 million at October 31, 1994, 1995, and 1996, respectively. Anticipated
revenues included in backlog may be realized over a multi-year period. The
Company includes a contract in backlog when the contract is executed. The
Company believes the backlog figures are firm, subject only to the cancellation
and modification provisions contained in its government contracts.
RESEARCH AND DEVELOPMENT
The Company conducts R&D pursuant to United States government R&D
contracts and as part of its own R&D program. United States government R&D
contracts generated approximately $23.0 million, of revenues in fiscal years
1994 and 1995, and approximately $37.0 million in 1996. The Company's own R&D
program is funded both by the United States government, through reimbursement of
certain of the Company's R&D expenditures, and by the Company's own investment,
which is not reimbursed. The Company's R&D expenditures as a percentage of
revenues in fiscal years 1994, 1995, and 1996 were 13.3%, 14.6%, and 12.1%,
respectively. Research and development conducted by the Company and sponsored by
the United States government (excluding United States government R&D contracts)
was $5.9 million, $6.8 million, and $6.7 million in fiscal years 1994, 1995, and
1996, respectively, while research and development conducted and sponsored by
the Company was $2.7 million, $3.1 million, and $2.7 million in those same
periods, respectively. The Company believes that its investment in R&D provides
it with a significant competitive advantage.
The Company seeks to develop technology capable of addressing new signal
reconnaissance requirements before its competitors. In addition, the Company
focuses its R&D on developing products that can be used, with or without further
modification, to satisfy various needs of a variety of customers, thereby
permitting the Company to offer a solution promptly. The Company attempts to
allocate its R&D funds among projects intended to yield revenues within one to
two years, projects intended to yield revenues in two to five years, and
projects intended to yield revenues in more than five years. Most of the
Company's R&D expenditures are for projects intended to yield revenues within
one to two years.
An important aspect of the Company's R&D efforts is understanding
telecommunication trends to anticipate the future signal reconnaissance needs of
its customers. Not only does this allow the Company to direct its R&D
engineering efforts to produce solutions promptly once a customer expresses a
need, but it often allows the Company to educate the customer about its
potential needs and simultaneously present a conceptual solution to those needs.
Another important aspect of the Company's R&D is the development of
components or products utilizing advanced technology. This enables the Company
to develop products superior to competing products in size, power consumption,
delivery time, and cost. The Company has developed an in-house
14
<PAGE> 15
capability to design very large scale integration (VLSI) circuits. Using its
VLSI capabilities, the Company has designed proprietary application specific
integrated circuits that enhance the processing power of many of its signal
processing products.
The Company's commercial endeavors attempt to apply technology developed
for signal reconnaissance to commercial areas of telecommunications. The Company
intends to identify opportunities where it believes it has technology that
commercial companies have not developed and can form strategic alliances with
other commercial companies in an attempt to exploit these opportunities.
COMPANY DIVISIONS
The Company is organized into four technical divisions and a finance
division. Three of the four technical divisions--Military Reconnaissance,
Commercial Telecommunications, and Strategic Systems--are engineering divisions
which perform all of the Company's development. The engineering divisions are
primarily responsible for conducting R&D and the initial development of
products, while the Operations Division is primarily responsible for
manufacturing multiple units of products. All divisions work together to ensure
that production-related issues, such as manufacturability, reliability, and
maintainability, are addressed from initial product definition through final
product shipment. The Company's technical staff includes personnel with system
development expertise, which the Company applies not only to system development
but also to its product development in order to ensure the compatibility of its
products with a variety of system requirements. As of January 17, 1997, there
were 295 employees in the engineering divisions and 164 employees in the
operations division. (See "Employees".)
Engineering. The engineering divisions are responsible for the Company's
R&D. The Company's R&D activities include both United States government R&D
contracts and the Company's R&D projects. The engineering division activities
are directed toward developing products that will ultimately be produced by the
Operations Division. The engineering divisions work in conjunction with the
Operations Division to assure that the development efforts will culminate in a
product able to be manufactured efficiently in quantity.
The Company has offices which also support the Company's marketing
activities in Herndon, Virginia and Jessup, Maryland. As of January 17, 1997,
there were 21 employees in the Virginia office and 11 employees in the Maryland
office. Most of the personnel staffing these offices are technical personnel
and, in addition to marketing activities, are involved in research and
development and customer support (for example, installation, training, and
troubleshooting).
Operations. The Operations Division is responsible for completing final
product development and manufacturing multiple units of products. By combining
engineering and production expertise within the Operations Division, the Company
believes it is able to maximize manufacturing efficiency and, therefore, reduce
overall production costs. Operations manufactures products using batch
production methods. The division achieves labor efficiency by extensive
cross-training of its personnel, which permits these personnel to participate in
the production of all of the Company's products. The division is also
responsible for
15
<PAGE> 16
managing the Company's purchases of goods and services, including third party
manufacturing and assembly services. (See "Suppliers".)
SUPPLIERS
The Company uses suppliers in order to obtain quality goods and services
without incurring the costs of providing those goods and services in-house. The
Company purchases from suppliers nearly all circuit boards, integrated circuits,
and other components used in its products. In addition, the Company contracts
with suppliers to assemble some of its products. The Company's reliance on
suppliers involves several risks, including the possibility of a shortage of
certain key components and assemblies and reduced control over delivery
schedules, manufacturing yields, quality, and costs. If the Company experiences
significant availability or quality control problems in the future, its revenues
and profitability could be adversely affected.
Although the Company procures most of its parts and components from
multiple sources or believes that these components are readily available from
numerous other sources, certain components are available only from sole sources
or from a limited number of sources. A number of the Company's products contain
critical components like single board computers available solely from Motorola,
Inc. and Force Computers, Inc. and digital signal processing integrated circuits
available solely from Texas Instruments, Inc. While the Company believes that
substitute components or assemblies could be obtained, use of substitutes would
require development of new suppliers or would require the Company to re-engineer
its products, or both, which could delay the Company's shipment of its products
and could have a material adverse effect on the Company's operating results.
Many of the Company's products currently use application specific
integrated circuits (ASICs) designed by the Company but manufactured by third
parties. The Company purchases these ASICs on a purchase order basis and is
required to pay for all ASICs produced, whether or not they perform correctly.
The Company has experienced unanticipated low yields of working ASICs from time
to time, causing the cost of products using these ASICs to be higher than
expected. In addition, as chip manufacturing technology evolves, the Company may
be forced to redesign certain cards as cards produced with older technology may
no longer be manufactured. The Company may be required to bear the cost of
redesign. To date, these have not had a material adverse impact on the Company's
results. The Company is likely to design and use ASICs in new products in the
future. There can be no assurance that the Company will not continue to
experience unanticipated low yields of working ASICs and therefore higher
product costs, which could have a material adverse effect on the Company's
results of operations.
COMPETITION
SIGNAL RECONNAISSANCE
The signal reconnaissance equipment market is highly competitive and the
Company expects that competition will increase in the future. Some of the
Company's current and potential competitors have
16
<PAGE> 17
significantly greater technical, manufacturing, financial, and marketing
resources than the Company. The Company's current competitors include
Adams-Russell, Inc. (a subsidiary of M/A-Com, Inc.); ARGOSystems, Inc. (a
subsidiary of The Boeing Company); E-Systems, Inc. (a subsidiary of Raytheon
Corporation); GTE Government Systems Corporation; Harris Corporation; Lockheed
Martin Corporation; Motorola Government Electronics Group (a subsidiary of
Motorola, Inc.); and TRW, Inc. Substantial competition could have a material
adverse effect on the Company's results of operations.
The competition for competitive bid contracts differs from the
competition for sole source contracts. Companies competing for competitive bid
contracts prepare bids and proposals in response to government request for
proposals. Potential suppliers compete informally for sole source contracts
through R&D investment and marketing efforts. Companies competing for sole
source contracts attempt to identify the United States government's requirements
early and invest in solutions so that they can demonstrate a distinguishing
expertise or technology promptly after the United States government has
identified a signal reconnaissance requirement. The Company competes primarily
for sole source contracts and conducts its operations accordingly. The principal
factors of competition for sole source contracts include investments in R&D; the
ability to respond to government needs promptly; product price relative to
performance, quality, and customer support. The Company believes that it
competes favorably on each of these factors.
COMMERCIAL
The commercial marketplace is relatively new for the Company and highly
competitive. The Company feels that competition can be the highest risk of
commercial ventures. The Company believes that this risk may be minimized by
striving to secure strategic alliances for the majority of commercial
activities, including co-funding of product development and marketing. The
Company continues to employ a cautious, measured approach to commercial
investments which should help minimize the risk and, at the same time, the
Company continues to nurture business relationships which are expected to result
in maturing this segment of the Company's business.
PROPRIETARY RIGHTS
The United States government has rights to most of the technology
developed by the Company under government contracts, including rights to permit
other companies, including the Company's competitors, to use this technology to
develop products for the United States government. The Company is not aware that
the United States government has exercised these rights.
The Company has filed limited patent applications for its technology. As
of October 31, 1996, one patent has been granted to the Company for "Efficient
QAM Equalizer Demodulator with Non-Integer Sampling", and one patent is pending
for the "Digital Cable Test System". The Company believes that given the rapidly
changing nature of signal collection and processing technology, its future
success will depend primarily upon the technical competence and creative skills
of its personnel. The Company attempts to protect its trade secrets and other
proprietary information through agreements with customers, employees,
17
<PAGE> 18
and consultants and other security measures. There can be no assurance that the
measures adopted by the Company for the protection of its intellectual property
will be adequate.
Although the Company does not believe and has not received notice that it
is infringing upon the intellectual property rights of others, there can be no
assurance that such a claim will not be asserted against the Company. In the
event any third party made a valid claim against the Company and a license was
not made available to the Company on commercially reasonable terms, this could
have a material adverse effect on the Company's results of operations.
GOVERNMENT REGULATIONS
Many of the Company's operations are subject to compliance with
regulatory requirements of federal, state and municipal authorities, including
regulations concerning employment obligations and affirmative action, workplace
safety and protection of the environment. 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 particular, the Company must comply with detailed government
procurement and contracting regulations and with United States government
security regulations, certain of which carry substantial penalty provisions for
nonperformance or misrepresentation in the course of negotiations. Failure of
the Company to comply with its government procurement or contracting obligations
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. (See Item 1 -- Business - "Customers,
Contracts, and Marketing" and Item 3 --Legal Proceedings.)
EMPLOYEES
As of January 17, 1997, the Company had approximately 568 full-time
employees, 101 of whom hold advanced technical degrees (master and/or doctoral
degrees), including 14 with doctoral degrees.
The Company's business requires that a large number of its technical
employees obtain security clearances from the United States government which
limits the available pool of eligible candidates for such positions to those who
can satisfy the prerequisites to obtaining these clearances. In particular, the
personnel involved in marketing require the appropriate clearances to meet with
government technical representatives and discuss the government's signal
reconnaissance needs. The Company has a United States government-sanctioned
security program that allows staff members to obtain appropriate clearances.
Approximately 59% of the Company's current technical staff have security
clearances. The success of the Company is dependent on attracting, retaining,
and motivating qualified key management and technical personnel, the loss of
whom, by one or more, could adversely affect the Company's business. Such
personnel are in great demand and limited supply.
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<PAGE> 19
The Company believes its employees are its most valuable resource and
that its workforce possesses a strong feeling of dedication to and pride in the
Company. This dedication is reinforced through incentive compensation
arrangements based on Company performance. The Company's employees are not
represented by any collective bargaining agreements, and the Company has never
experienced a work stoppage.
During fiscal 1995 and into early fiscal 1997, the Company experienced
increased turnover among its staff. The Company believes that this is primarily
due to a much more favorable economic environment in Silicon Valley and to the
explosive growth of the telecommunications industry creating a preponderance of
new opportunities for the staff. In response to the increased turnover,
management initiated certain steps aimed at stabilizing the turnover rate and
attracting new talent during fiscal 1996. The continuing challenge confronting
the Company in fiscal 1997 will be to attract and retain qualified staff to
support the Company's growth objectives. There can be no assurance that the
Company will be successful in this area.
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE
Defense and intelligence agencies have accounted for almost all of the
Company's revenues. Future reductions in United States government spending on
signal reconnaissance equipment or future changes in the kind of signal
reconnaissance products or services required by United States government
agencies could limit demand for the Company's products which would have a
material adverse effect on the Company's operating results and financial
condition.
The signal reconnaissance equipment market is highly competitive and the
Company expects that competition will increase in the future. Some of the
Company's current and potential competitors have significantly greater
technical, manufacturing, financial and marketing resources than the Company.
Substantial competition could have a material adverse effect on the Company's
results of operations and financial condition.
The Company believes its employees are its most valuable resource and,
accordingly, focuses much of its attention on attracting and retaining staff
members. Over the last year, the Company has experienced an increase in its
attrition rate as well as a difficulty in attracting new talent into the Company
due to increased competition for qualified personnel. Management believes these
effects are attributable to the expanding U.S. economy and, in particular, the
local California economy where the Company must compete for new talent in the
rapidly expanding telecommunications sector. The Company has implemented a more
aggressive recruiting program and an employee referral program aimed at
countering this new environment. The Company's ability to execute its business
plan is contingent upon attracting and retaining qualified employees. While the
Company believes progress has been made during the most recent quarters, there
can be no assurances that the Company will be successful at attracting and
retaining sufficient personnel. Failure to do so will have a material adverse
effect on the Company's future operating results.
19
<PAGE> 20
Almost all of the Company's contracts contain termination clauses which
permit contract termination upon the Company's default or for the convenience of
the other contracting party. In either case, termination could adversely affect
the Company's operating results. Although the Company has not experienced any
material cancellations to date, there can be no assurances that such
cancellations will not occur in the future.
A significant portion of the Company's revenues are derived from
fixed-price contracts. Under fixed-price contracts, unexpected increases in the
cost to develop or manufacture a product, whether due to inaccurate estimates in
the bidding process, unanticipated increases in materials costs, inefficiencies
or other factors, are borne by the Company. The Company has experienced cost
overruns in the past that have caused the Company to realize losses on
contracts. There can be no assurance that the Company will not experience cost
overruns in the future or that such overruns will not have a material adverse
effect on the Company's operating results.
The Company has experienced some constraint in earnings resulting from
lower average profitability on its production jobs. This is due, in part, to the
unfavorable adjustments in estimated costs-to-complete on production jobs
recorded during the fiscal year and due, in part, to absorbing unrecoverable
indirect costs at a rate higher than was provided for in the contract prices of
these contracts. The Company has taken several steps aimed at improving its
contract margins. This includes revising prices of its products and services,
review of operational processes for efficiency, and examining its cost
structures. Although the Company believes some improvements were apparent in the
operating results for the third quarter of fiscal year 1996, there can be no
assurances that these steps will result in improved margins on future results of
operations.
The Company has experienced significant fluctuations in operating results
from quarter to quarter and expects that it will continue to experience such
fluctuations in the future. These fluctuations are caused by, among other
factors, factors inherent in government contracting and the Company's business
such as the timing of cost and expense recognition for contracts and the United
States government contracting and budget cycles. Fluctuations in quarterly
results may cause the price of the Company's common stock to fluctuate
substantially.
The market for the Company's products is characterized by rapidly
changing technology. The Company believes that it has been successful to date in
identifying United States government signal reconnaissance needs early,
investing in research and development to meet these needs and delivering
products before the Company's competitors. The Company believes that its future
success will depend upon continuing to develop and introduce, in a timely
manner, products capable of collecting or processing new types of
telecommunications signals. There can be no assurance that the Company will be
able to develop and market new products successfully in the future or respond
effectively to technological changes or that new products introduced by others
will not render the Company's products or technologies noncompetitive or
obsolete.
The Company has had numerous discussions with companies in the commercial
cable TV/video compression and telecommunications marketplaces. The Company's
primary business strategy in this area is to capitalize on its experience as a
technology company and to explore areas where current or newly
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<PAGE> 21
developed technology can be licensed or products can be manufactured and sold
into the commercial marketplace. To date, revenues from the commercial
marketplace have been less than 5% of the Company's revenues and have consisted
primarily of product development fees. There can be no assurance that the
Company's commercial marketplace strategy will be successful or that the company
will maintain or increase revenues from the commercial marketplace.
There can be no assurance that an active trading market will be sustained
for the Company's common stock. Further, the market price of the common stock
could be subject to significant fluctuations in response to quarter-to-quarter
variations in operating results, United States government spending patterns and
other factors. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that have particularly affected the market
prices of many technology companies and that have been unrelated or
disproportionate to the operating performance of such companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the future market price of the Company's common stock.
ITEM 2: PROPERTIES
The Company currently leases five buildings (51,851, 52,464, 34,862,
76,379, and 58,000 square feet, respectively) in Sunnyvale, California pursuant
to a lease which expires in March 2012. Under the terms of the lease, the lessor
will construct a sixth building (58,000 square feet) which the Company will
lease commencing approximately December 1997 through March 2012. These buildings
are used as the Company's headquarters and include development, engineering,
production, marketing, and administrative offices.
The Company leases a 15,250 square foot building in Herndon, Virginia
pursuant to a lease which expires in October 1998. This building houses a small
development facility and marketing and administrative offices.
The Company leases a 6,300 square foot building in Jessup, Maryland
pursuant to a lease which expires in August 1997. This building also houses a
small development facility and marketing and administrative offices. The Company
has made provisions to lease a new 29,121 square foot building in Annapolis
Junction, Maryland commencing April 1997 and terminating April 2004.
In addition, the Company also leases two warehouses (19,835 and 5,900
square feet) in Sunnyvale, California for use as storage facilities. Both leases
expire in 1998.
The Company's business requires that it maintain at each of its offices a
facility clearance sponsored and approved by the United States government. This
approval could be suspended or revoked if the Company is found not to have
complied with security regulations applicable to such facilities. Any revocation
of such approval, and any suspension of such approval that materially delayed
the Company's delivery of its products to customers would materially adversely
affect the Company's results of operations. Although the Company has adopted
policies directed at assuring its compliance with relevant regulations,
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<PAGE> 22
there can be no assurance that the approved status of the Company's facilities
will continue without interruption.
ITEM 3: LEGAL PROCEEDINGS
In April 1994, the Company was served with a subpoena by the Department
of Defense Office of Inspector General (OIG) in connection with approximately
six contracts, several of which had been audited by the Defense Contract Audit
Agency (DCAA) the previous year. As is routine in such matters involving
government contracts, the OIG referred the matter to another government agency
which also had contracts with the Company. Shortly thereafter, this second
agency issued a request for information related to nine additional contracts. To
date, the Company has not received any allegations of wrong-doing from the OIG
or the other agency. At the request of the Board of Directors, the Company
initiated its own review of the contracts in conjunction with its legal counsel.
Further review of the contracts in question and related contracts through
April 1995 indicated the Company was not compliant with Public Law 87-653, Truth
in Negotiations Act, which requires disclosure of all actual costs available on
the date of cost certification on certain contracts performed during the 1989
and 1990 timeframe. These findings have resulted in a voluntary disclosure to
the government which is expected to result in a downward price adjustment on
certain contracts. In June 1995, the Company announced it was taking a charge
against the third quarter operating results in anticipation of a settlement with
the government on the subject contracts. The charge resulted in a reduction of
the fiscal 1995 third quarter's operating income of $1.2 million.
In April 1996, the Company was served with a second subpoena by the OIG
in connection with all contracts entered into between 1990 and the present
related to three products: the Model 102P Voice Channel Demodulator, the Model
120 Multichannel Processor, and the Model 150 FAX Scanner. The Company is
presently in discussions with the OIG to determine the scope of the subpoena and
intends to fully comply with the request.
While management believes the fiscal year 1995 third quarter charge is
adequate to cover all related risks, the government has not concluded its
investigation or agreed to a settlement with the Company. There can be no
assurances the Company will not be required to take additional charges in
connection with this matter in future periods. However, management believes that
any such charges would not have a material effect on the operating results and
financial condition of the Company.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 23
PART II
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to age and background
for each of the remaining officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gary L. Yancey 51 President and Chairman of the Board
E. Keith McNett* 55 Vice President-- Strategic Systems Division
Brian M. Offi 43 Vice President-- Finance and Chief Financial Officer
Mary Rogge 50 Secretary
Bani M. Scribner, Jr. 52 Vice President-- Strategic Systems Division
Ken Snow 56 Vice President-- Operations Division
</TABLE>
* Deceased
Gary L. Yancey, a co-founder of the Company, has served the Company as
President and Chairman of the Board since the Company's incorporation in January
1984. Prior to co-founding the Company, he was employed for 10 years by
ARGOSystems, a manufacturer of electronic reconnaissance systems.
Brian M. Offi joined the Company in October 1990 as Chief Financial
Officer and was elected Vice President-Finance in May 1991. From May 1987 to
October 1990, he served as Chief Financial Officer of S-Tron, Inc., a
manufacturer of life-support equipment worn by military personnel.
Mary Rogge joined the Company in 1986 as an executive secretary reporting
to the President and was elected Secretary of the Company in March 1988.
Bani M. Scribner, Jr. joined the Company in 1992 as senior staff
reporting to the president. In November 1996 he was elected Vice President of
the Strategic Systems Division.
Ken Snow joined the Company in January 1990 as a senior staff engineer.
He was promoted to the position of Deputy Director of Engineering in 1991. In
October of 1994 he became the Director of the Operations Division and in March
1995 he was elected Vice President of Operations.
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated in Exhibit 13.1 from sections captioned "Selected Common
Stock Data:" and "NASDAQ Market Makers:" on page 8 of the Annual Report to
Shareholders for the year ended October 31, 1996.
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<PAGE> 24
ITEM 6: SELECTED FINANCIAL DATA
Incorporated in Exhibit 13.1 from sections captioned "Selected Financial
Data -- Summary Of Operations Fiscal Year Ended:" and "-- Financial Position at
End of Fiscal Year:" on page 8 of the Annual Report to Shareholders for the year
ended October 31, 1996.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated in Exhibit 13.1 from sections captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 9 through 13 of the Annual Report to Shareholders for the year ended
October 31, 1996.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements included on pages 14 through 24 of the Annual
Report to Shareholders for the year ended October 31, 1996 are in Exhibit 13.1.
Quarterly Results included on page 12 of the Annual Report to
Shareholders for the year ended October 31, 1996 are in Exhibit 13.1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
24
<PAGE> 25
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 6 and 7 of Applied Signal Technology,
Inc.'s Proxy Statement dated January 26, 1997, with respect to directors of the
Company, is incorporated herein by reference. Information with respect to
Officers of the Company is contained in Part I of this report.
ITEM 11: EXECUTIVE COMPENSATION
The information contained on pages 15 through 19 of Applied Signal
Technology, Inc.'s Proxy Statement dated January 26, 1997, with respect to
executive compensation and other matters, is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 4 and 5 of Applied Signal Technology,
Inc.'s Proxy Statement dated January 26, 1997, with respect to security
ownership of certain beneficial owners and management, is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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<PAGE> 26
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2) -- The following financial statements of Applied Signal
Technology, Inc., included in the annual report of the registrant to its
shareholders for the year ended October 31, 1996 are included in
Exhibit 13.1:
Balance Sheets -- October 31, 1996 and 1995
Statements of Income -- Years ended October 31, 1996, 1995, and 1994
Statements of Shareholders' Equity -- Years ended October 31, 1996,
1995, and 1994
Statements of Cash Flow -- Years ended October 31, 1996, 1995, and
1994
Notes to Financial Statements -- October 31, 1996
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) -- Listing of Exhibits -- See Exhibit Index on page 29 of this Form
10-K.
(b) Reports on Form 8-K filed in the Company's fiscal year ended October 31,
1996:
Not applicable.
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<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, therewith duly authorized.
APPLIED SIGNAL TECHNOLOGY, INC.
(Registrant)
Dated January 26, 1997 /s/ Gary L. Yancey
------------------------------
Gary L. Yancey, President and
Chairman of the Board
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.
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
--------- ---- -----
<S> <C> <C>
/s/ Gary L. Yancey ____________ President and Chairman of the Board (Principal
- ---------------------------- Executive Officer)
/s/ Brian M. Offi ____________ Vice President of Finance and Chief Financial
- ---------------------------- Officer (Principal Financial and Accounting
Officer)
/s/ James F. Collins ____________ Director
- ----------------------------
/s/ John P. Devine ____________ Director
- ----------------------------
/s/ David D. Elliman ____________ Director
- ----------------------------
/s/ John R. Treichler ____________ Director
- ----------------------------
/s/ Stuart G. Whittelsey, Jr. ____________ Director
- ----------------------------
</TABLE>
27
<PAGE> 28
APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER -----------------------
- -------
<S> <C>
3.1(1) Second Amended and Restated Articles of Incorporation
3.2(1) Amended and Restated Bylaws
4.1(1) Specimen Common Stock Certificate
4.2(1) Rights Agreement dated January 25, 1991
10.1(1) Form of Indemnification Agreement for directors and officers
10. (1) 1984 Stock Purchase Plan and form of agreement thereunder
10.3(1) 1991 Stock Option Plan and forms of agreements thereunder
10.4(1) 1993 Employee Stock Purchase Plan
10.5(1) Profit Sharing Policy
10. (1) Summary Plan Description of 401(k) Retirement Plan
10.7(1) Warrant to Purchase Common Stock dated June 27, 1990 issued to
Owenoake Partners, L.P. ("Owenoake"), Letter Agreement with
Owenoake dated September 20, 1990, and Amendment Number One to
Warrants to Purchase Common Stock with Owenoake and certain
warrant holders dated February 8, 1993
10.8(1) Warrants to Purchase Common Stock dated September 25, 1990 issued
to certain warrant holders
10.9(2) Line of Credit Agreement dated June 10, 1993 with Sanwa Bank
California and related Equipment Purchase Line of Credit
Agreement dated June 10, 1993
10.10(1) Lease Agreement dated August 21, 1985 with Lincoln Mathilda
Associates, Ltd. and Patrician Associates, Inc., and amendments
thereto
10.11(3) Lease agreements dated November 23, 1994 with Lincoln Property
Company Management Services, Inc. for Buildings H and I
10.12(4) Amendment to Commercial Credit Agreement dated March 7, 1995 with
Sanwa Bank California and related Equipment Purchase Line
Agreement dated March 10, 1995
10.13(5) Amendments to Commercial Credit Agreements dated March 1, 1996
with Sanwa Bank California
10.14(5) Certified Corporate Resolution to borrow dated March 6, 1996
with Sanwa Bank California
10.15 Lease agreement dated May 31, 1996 with Constellation Real
Estate, Inc., for 135 National Business Parkway
10.16 Amendments to lease agreements dated November 23, 1994 with
Lincoln Property Company Management Services, Inc.
11.1 Statement regarding computation of net income per share
13.1 Annual Report to Shareholders for fiscal year ended October 31,
1996
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
29
<PAGE> 29
(1) Incorporated by reference to corresponding Exhibit filed as an Exhibit to
Registrant's Registration Statement on Form S-1 filed January 29, 1993
(File No. 33-58168).
(2) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1993 dated January 22, 1994.
(3) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1994 dated January 27, 1995.
(4) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1995 dated January 26, 1996.
(5) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-Q for fiscal year 1996 dated August 2, 1996.
30
<PAGE> 1
Exhibit 10.15
135 NATIONAL BUSINESS PARKWAY
NATIONAL BUSINESS PARK
THIS AGREEMENT OF LEASE, made this 29th day of May, 1996, by and
between CONSTELLATION REAL ESTATE, INC., a Maryland corporation, Agent for Owner
(hereinafter referred to as "Landlord") and APPLIED SIGNAL TECHNOLOGY, INC. , a
California corporation (hereinafter referred to as "Tenant"), witnesseth that
the parties hereby agree as follows:
1. Premises. Landlord is the owner of that certain real property
situated in Anne Arundel County, Maryland and known as Lot 6-BR as shown on that
proposed resubdivision plat entitled, "The National Business Park, Lots 6-AR,
6-BR and 7AR," a copy of which is attached hereto as Exhibit "A-I" and by this
reference made a part hereof (the "Real Property"), on which Landlord intends to
construct a three-story office building containing approximately 88,533 rentable
square feet (hereinafter referred to as the "Building"), the said Building and
Real Property to be commonly known as 135 National Business Parkway, Annapolis
Junction, Maryland. Notwithstanding the foregoing and anything in this Lease
contained to the contrary, Landlord reserves the right prior to the Building
Permit Deadline Date referenced in Section 2.1.2 hereof to reduce the square
footage of the Building to approximately 60,000 rentable square feet by
eliminating the third floor (thus leaving a two-story office building). Landlord
shall keep Tenant advised with its decision whether to reduce the Building by
eliminating the third floor as set forth in the preceding sentence. In the event
Landlord shall elect to reduce the size of the Building to approximately 60,000
square feet by eliminating the third floor, the parties hereto agree to execute
an amendment to this Lease acknowledging such changes to the size of the
Building.
Landlord hereby leases unto Tenant, and Tenant hereby rents from
Landlord, that portion of the Building to be known as "Suite 100" and comprised
of the following: (i) effective on the Phase 1 Commencement Date as hereafter
defined, that certain area situated on the first floor of the Building
containing the agreed upon equivalent of 20,783 square feet rentable area
(hereinafter referred to as the "Phase 1 Premises") designated as the "Phase 1
Premises" on the schedule attached hereto as Exhibit "A-2" and made a part
hereof; and (ii) commencing on the Phase 2 Commencement Date as hereafter
defined, that certain area situated on the first floor of the Building
containing the agreed upon equivalent of 8,338 square feet of rentable area
(hereinafter referred to as the "Phase 2 Premises") and designated as the "Phase
2 Premises" on Exhibit "A-2."
In each instance in this Lease wherein reference is made to the
Premises, the same shall be construed to mean the Phase 1 Premises for that
period commencing from the execution of this lease until the Phase 2
Commencement Date, and from and after the Phase 2 Commencement Date, the term
"Premises" shall be construed to mean the aggregate Phase 1 Premises and Phase 2
Premises.
In addition to the Premises, Tenant shall have the right to use, on a
non-exclusive basis, and in common with the other tenants of the Building the
Common Areas of the Building (as that term is defined in Section 5.2.6 hereof).
2. Term.
2.1 Phase 1 Premises. This Lease shall commence on the "Phase 1
Commencement Date" (as herein defined) and shall be for a term (herein the
"Term" or the "Lease Term") of seven (7) years, plus the portion of a calendar
month, if any, from the Phase 1 Commencement Date to the last day of the
calendar month in which the Phase 1 Commencement Date occurs. As used in this
Lease, the term "Phase 1 Commencement Date", as advanced or postponed pursuant
to the terms hereof, shall be defined as the earlier to occur of (a) the date on
which Tenant takes possession and occupancy of the Phase 1 Premises, or (b) the
date which is fifteen (15) days following that date which is the first on which
all of the following events have occurred, namely (i) the Phase 1 Premises are
"substantially completed", as defined in Section 2.1.1 following, (ii) Landlord
has given Tenant written notice that the Phase 1 Premises are
<PAGE> 2
substantially completed", and (iii) the "Phase 1 Target Date" as defined in
Section 2.1.1 following has arrived.
Tenant, at its sole risk, shall be permitted by Landlord to enter the
Phase 1 Premises prior to the Phase 1 Commencement Date solely for the purpose
of installing Tenant's fixtures and equipment, provided that (a) Tenant shall in
each instance coordinate its entry and installation of equipment in the Phase 1
Premises in advance of Tenant's entry, and (b) Tenants activities shall be
conducted so as not to unreasonably interfere with Landlord's Phase 1 Work (as
hereinafter defined.)
2.1.1 Substantial Completion of Phase 1 Premises. Landlord
shall use its best efforts to "substantially complete" the Phase 1 Premises by
March 1, 1997 ("Phase 1 Target Date"). "Substantially complete" means that: (i)
Landlord has completed construction of the Building as contemplated by Section I
hereof, (ii) the construction of the improvements to the Phase 1 Premises
described in Section 7.1 has been completed so that Tenant can use the Phase 1
Premises for their intended purposes without material interference to Tenant
conducting its ordinary business activities, (iii) the Phase 1 Premises have
been approved for occupancy by governmental authorities having jurisdiction,
(iv) the Tenant has ready access to the Building and Phase 1 Premises through
the lobby, hallways and elevators, and (v) the Phase 1 Premises are ready for
installation of any equipment, furniture, fixtures or decoration that Tenant
will install. Landlord shall keep Tenant advised as to its progress with regard
to "substantially completing" the Phase 1 Premises by the Phase 1 Target Date.
2.1.2 Lease Contingencies.
A. Building Permit Contingency. Promptly upon execution of
this Lease, Landlord covenants and agrees to commence and diligently prosecute
the subdivision of the Property in the configuration shown generally on Exhibit
"A-l" attached hereto and the application for building permit(s) for
construction of the Building pursuant to Landlord's site plan(s) and
construction plan(s) therefore to be submitted by Landlord to applicable
governmental authority for approval (the "Building Permit"). If despite
Landlord's diligent efforts, Landlord is unable to obtain the Building Permit by
September 1, 1996 (the "Building Permit Deadline Date") then Landlord or Tenant,
each in their sole and absolute discretion, may terminate this Lease by written
notice to the other given within ten (10) days of the Building Permit Deadline
Date whereupon the rights and obligations of the parties hereunder shall cease
and terminate without need for the execution of any further or other instrument
and Landlord shall promptly return to Tenant the Advance Rent (hereafter
defined); provided, however, if Landlord shall so request, Tenant shall execute
an instrument, in recordable form, whereby Tenant releases and surrenders all
right, title and interest which it may have in and to the Premises under this
Lease or otherwise. If possession of the Building Permit is not obtained by
Landlord by the Building Permit Deadline Date due to delay(s) caused by Tenant,
then the Building Permit Deadline Date shall be extended on a day-for-day basis
corresponding to the days of delay caused by Tenant. Tenant's option to
terminate this Lease shall be void and inoperable if at the time of exercising
such option, Tenant shall be in default under the terms of this Lease beyond the
expiration of any applicable cure period.
B. The Phase 1 Premises Deadline Date.. Notwithstanding any
provision herein to the contrary, if for any reason other than delay caused by
Tenant, the Landlord is unable to deliver possession of the Phase 1 Premises to
Tenant by July 1, 1997 (the "Phase 1 Premises Deadline Date"), then Landlord or
Tenant each in their sole and absolute discretion, may terminate this Lease by
written notice to the other given within ten (10) days of the Phase 1 Premises
Deadline Date whereupon the rights and obligations of the parties hereunder
shall cease and terminate without need for the execution of any further or other
instrument and Landlord shall promptly return to Tenant the Advance Rent
(hereafter defined); provided, however, if Landlord shall so request, Tenant
shall execute an instrument, in recordable form, whereby Tenant releases and
surrenders all right, title and interest which it may have in and to the
Premises under this Lease or otherwise. If possession of the Phase 1 Premises is
not delivered to Tenant by the Phase 1 Premises Deadline Date due to delay(s)
caused by Tenant,
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<PAGE> 3
then the Phase 1 Premises Deadline Date shall be extended on a day-for-day basis
corresponding to the days of delay caused by Tenant. Tenant's option to
terminate this Lease shall be void and inoperable if at the time of exercising
such option, Tenant shall be in default under the terms of this Lease beyond the
expiration of any applicable cure period.
2.2 Phase 2 Premises. Tenant's rental of the Phase 2 Premises shall
commence on the "Phase 2 Commencement Date" (as herein defined) and shall
continue for the remainder of the Term as defined in Section 2.1 hereof. As used
in this Lease, the term "Phase 2 Commencement Date", as advanced or postponed
pursuant to the terms hereof, shall be defined as the earlier to occur of (a)
the commencement of the nineteenth (19th) calendar month of the Term; (b) the
date on which Tenant takes possession and occupancy of the Phase 2 Premises, or
(c) the date which is fifteen (15) days following that date which is the first
on which all of the following events have occurred, namely (i) the Phase 2
Premises is "substantially completed", as defined in Section 2.2.1 following,
(ii) Landlord has given Tenant written notice that the Premises are
"substantially completed", and (iii) the "Phase 2 Target Date" as defined in
Section 2.2.1 following has arrived.
Tenant, at its sole risk, shall be permitted by Landlord to enter the
Phase 2 Premises prior to the Phase 2 Commencement Date solely for the purpose
of installing Tenant's fixtures and equipment, provided that (a) Tenant shall in
each instance coordinate its entry and installation of equipment in the Phase 2
Premises in advance of Tenant's entry, and (b) Tenant's activities shall be
conducted so as not to unreasonably interfere with Landlord's Phase 2 Work (as
hereinafter defined.)
2.2.1 Substantial Completion of Phase 2 Premises. Landlord
shall use its best efforts to "substantially complete" the Phase 2 Premises by
that date which is one hundred and twenty (120) days after that date on which
Tenant shall approve the Phase 2 Final Plans and Specification as set forth in
Section 7.2.1 hereof (the "Phase 2 Premises Target Date"). "Substantially
Complete" means that: (i) the construction of the improvements to the Phase 2
Premises described in Section 7.2 has been completed by Landlord so that Tenant
can use the Phase 2 Premises for their intended purposes without material
interference to Tenant conducting its ordinary business activities, (ii) the
Phase 2 Premises have been approved for occupancy by governmental authorities
having jurisdiction, (iii) the Tenant has ready access to the Building and Phase
2 Premises through the lobby, hallways and elevators, and (iv) the Phase 2
Premises are ready for installation of any equipment, furniture, fixtures or
decoration that Tenant will install. Landlord shall keep Tenant advised as to
its progress with regard to "substantially completing" the Phase 2 Premises by
the Phase 2 Target Date.
2.3. Confirmation of Term. The Landlord and Tenant shall, within thirty
(30) days after, respectively (i) the Phase I Commencement Date, and (ii) the
Phase 2 Commencement Date, confirm by written instrument the commencement and
expiration dates of the Term, the Base Rent (hereafter defined) payable by
Tenant hereunder, and the agreed upon rentable square footage within the
Premises.
3. Tenant's Option to Extend Term. Tenant shall have the option to
extend the Term of this Lease for one (1) additional period of five (5) years
(the "Renewal Term") to commence immediately upon the expiration of the initial
seven-year Term. Tenant's rental of the Premises during the Renewal Term shall
be upon the same terms, covenants and conditions contained in this Lease, except
that Tenant shall pay to Landlord as Base Rent that amount equal to the
"Prevailing Market Rate" (including annual adjustments). For purposes of this
Section 3, the term "Prevailing Market Rate" shall mean the then prevailing
market rate being charged for comparable space in comparable office buildings
within a five (5) mile radius of the Building as reasonably determined by
Landlord (taking into account annual adjustments and rent abatements, cash
allowances, premiums, commissions, improvement allowances, age of building, and
other concessions commonly in use at the time of the renewal). In order to
exercise its option granted herein, Tenant shall so notify Landlord in writing
of its intent to renew not less than one hundred and twenty (120) days prior to
the expiration of the initial seven-year Term. Within ten (10) business days
following the exercise by Tenant of its option to extend the Lease for the
Renewal
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<PAGE> 4
Term, Landlord shall notify Tenant in writing of its determination of the
Prevailing Market Rate for the Renewal Term as reasonably determined by
Landlord. Within ten (10) days of Tenant's receipt of Landlord's notification of
such rate determined by Landlord, Tenant shall notify Landlord in writing of
Tenant's acceptance or rejection of such rate. If by Tenant's written notice to
Landlord given within the aforesaid ten (10) day period, Tenant shall accept
such Prevailing Market Rate, the Landlord and Tenant shall enter into an
amendment to this Lease acknowledging such renewal and setting forth any terms
at variance with the terms of this Lease. If by Tenant's written notice to
Landlord given within the aforesaid ten (10) day period, Tenant shall reject
such Prevailing Market Rate as determined by Landlord for the Renewal Term, then
within ten (10) business days thereafter, Landlord and Tenant shall meet at a
mutually acceptable time and place and shall use their best good faith efforts
to agree upon the Prevailing Market Rate. If Landlord and Tenant shall fail to
agree upon such Prevailing Market Rate within the aforesaid ten (10) business
day period, then Tenant's option to extend the Lease for the Renewal Term shall
be void and inoperable. If Tenant shall fail to respond to Landlord's initial
notice of such Prevailing Market Rate as provided above, then Tenant shall be
deemed to have accepted Landlord's determination of the Prevailing Market Rate.
Tenant's option to renew the Term of this Lease shall be void and
inoperable if Tenant is not in possession of the Premises under this Lease at
the time of exercising its option to renew, if Tenant does not deliver the
requisite notice exercising its option to renew within the time period specified
above, or if at the time of exercising its option to renew, Tenant shall be in
default under the terms of this Lease. The option granted herein shall not be
severed from this Lease or separately sold, assigned or transferred (other than
to Tenant's permitted successors and assigns under this Lease pursuant to the
terms of Section 21).
4. Advance Rent. Upon execution of this Lease, Tenant shall pay
Landlord the sum of Twenty-Two Thousand Eighty-One Dollars and Ninety-Four Cents
($22,081.94) to be held as Advance Rent and security and which Landlord shall be
entitled to retain, without limitation of other remedies, for any defaults of
this Lease by Tenant occurring prior to the commencement of the Term. If no
such defaults occur, the Advance Rent shall be applied by Landlord against the
first installment of Base Rent payable by Tenant hereunder.
5. Use. Tenant expressly agrees that the Premises shall be used and
occupied solely for general office purposes in accordance with applicable zoning
regulations and for no other purpose. Landlord represents and warrants that as
of the date hereof this use is allowed and permitted under applicable zoning and
subdivision rules and regulations.
6. Rent.
6.1 Base Rent. As rent for the Premises during the Term, Tenant shall
pay to Landlord an annual base rent (herein "Base Rent") in that amount
determined by multiplying the number of rentable square feet in the Premises
(with due adjustment being made in the monthly installment of Base Rent for that
Lease Year [hereafter defined) during which the Phase 2 Commencement Date shall
occur) by the following dollar amounts set forth on the schedule below for each
indicated Lease Year, which annual sum shall be payable in equal monthly
installments on the first day of each and every calendar month within each
indicated Lease Year in advance without deduction, setoff or demand:
<TABLE>
<CAPTION>
Lease Year Per Square Foot Base Rent Rate
---------- ------------------------------
<S> <C> <C>
Lease Year One $12.75
Lease Year Two $13.13
Lease Year Three $13.53
Lease Year Four $13.93
</TABLE>
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<PAGE> 5
<TABLE>
<CAPTION>
Lease Year Per Square Foot Base Rent Rate
---------- ------------------------------
<S> <C> <C>
Lease Year Five $14.35
Lease Year Six $14.78
Lease Year Seven $15.22
</TABLE>
In addition to the Base Rent, if the Term should commence on a day
other than the first day of a calendar month, Tenant shall pay to Landlord upon
the Original Space Commencement Date, a sum equaling that percentage of the
monthly rent installment which equals the percentage of such calendar month
falling within the Term.
Notwithstanding the foregoing, in the event the Actual Phase 1
Construction Costs (defined in Section 7.1.3 hereof) shall be less than the
Phase 1 Tenant Improvement Allowance (defined in Section 7. 1. 1 hereof), then
the Base Rent, on a per rentable square foot basis, allocable to the Phase 1
Premises only shall be reduced by that amount determined by (a) subtracting
the Actual Phase 1 Construction Costs from the Phase 1 Tenant Improvement
Allowance (the "Phase 1 Construction Savings"), (b) dividing Phase 1
Construction Savings by 20,783 square feet (the "Per Square Foot Phase 1
Construction Savings"), and (c) multiplying the Per Square Foot Phase 1
Construction Savings by twelve percent (12%).
Further, and notwithstanding the foregoing, in the event the Actual
Phase 2 Construction Costs (defined in Section 7.2.3 hereof) shall be less than
the Phase 2 Tenant improvement Allowance (defined in Section 7.2.1 hereof), then
the Base Rent, on a per rentable square foot basis, allocable to the Phase 2
Premises only shall be reduced by that amount determined by (a) subtracting the
Actual Phase 2 Construction Costs from the Phase 2 Tenant improvement Allowance
(the "Phase 2 Construction Savings"), (b) dividing Phase 2 Construction Savings
by 8,338 square feet (the "Per Square Foot Phase 2 Construction Savings"), and
(c) multiplying the Per Square Foot Phase 2 Construction Savings by twelve
percent (12%).
6.2 Definitions. For the purposes hereof, the following definitions
shall apply:
6.2.1 "Property" shall mean the Building, the Real Property,
and all fixtures and equipment thereon or therein, all commonly owned or shared
appurtenances, including but not limited to, parking areas, walkways,
landscaping and utilities, whether located on the land upon which the Building
is situated or elsewhere.
6.2.2 "Building Expenses" shall be all those directly related
expenses paid or incurred by Landlord in connection with the owning,
maintaining, operating and repairing of the Property or any part thereof, in a
manner deemed reasonable and appropriate by Landlord and shall include, without
limitation, the following:
1. All costs and expenses of operating, repairing, lighting,
cleaning, and insuring (including liability for personal injury, death and
property damage and workers' compensation insurance covering personnel) the
Property or any part thereof, as well as all costs incurred in removing snow,
ice and debris therefrom and of policing and regulating traffic with respect
thereto, and depreciation of all machinery and equipment used therein or
thereon, replacing or repairing of pavement, roofing, parking areas, curbs,
walkways, drainage, lighting facilities, landscaping (including replanting and
replacing flowers and other planting);
2. Electricity, steam and fuel used in lighting, heating,
ventilating and air conditioning for Common Areas only;
3. Maintenance and repair of Common Area mechanical and
electrical equipment including Common Area heating, ventilating and air
conditioning equipment;
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<PAGE> 6
4. Common Area window cleaning and janitor service, including
equipment, uniforms, and supplies and sundries;
5. Maintenance of stairways, rest rooms, lobbies, hallways and
other Common Areas (and Common Area elevators to the extent Tenant shall
exercise its right of first option as to all or any portion of the Expansion
Space pursuant to the provisions of Section 51 hereof);
6. Repainting and redecoration of all Common Areas;
7. Sales or use taxes on supplies or services;
8. Management fees (not to exceed five percent of annual gross
rents from the Building but in no event less than $36,000.00/annually), as well
as wages, salaries and compensation of all persons engaged in the maintenance,
operation or repair of the Property (including Landlord's share of all payroll
taxes);
9. Legal, accounting and engineering fees and expenses, except
for those related to disputes with tenants or which are a result of and/or are
based on Landlord's negligence or other tortious conduct;
10. Costs and expenses that may result from compliance with
any governmental laws or regulations that were not applicable to the Common
Areas at the time same were originally constructed; and
11. All other expenses which under generally accepted
accounting principles would be considered as an expense of owning, maintaining,
operating, or repairing the Common Areas of the Property. Notwithstanding the
foregoing, all expenses (whether or not such expenses are enumerated in items 1
through 10 above) which would be considered capital in nature under generally
accepted accounting principles shall be excluded from "Building Expenses."
6.2.3. "Taxes" shall mean all real estate taxes, assessments,
sewer rents, ad valorem charges, water rates, rents and charges, front foot
benefit charges, and all other governmental imposition in the nature of any of
the foregoing. If at any time during the Term the method of taxation prevailing
at the commencement of the Term shall be altered so as to cause the whole or any
part of the items listed in the first sentence of this subparagraph 6.2.3 to be
levied, assessed or imposed, wholly or partly as a capital levy, or otherwise,
on the rents received from the Building, wholly or partly in lieu of imposition
of or in addition to the increase of taxes in the nature of real estate taxes
issued against the Property, then the charge to the Landlord resulting from
such altered additional method of taxation shall be deemed to be within the
definition of "Taxes."
6.2.4 "Common Areas" shall mean those areas and facilities of
the Building customarily available in first class suburban office buildings and
as specially designated by Landlord for the non-exclusive general common use of
tenants and other occupants of the Building, their officers, agents, employees,
and invitees, including (without limitation) the hallways, stairs, parking
facilities, washrooms, and elevators. "The Common Areas shall be maintained by
Landlord in a condition comparable to other first class suburban office
buildings in the Baltimore-Washington corridor area.
6.2.5 "Lease Year" shall mean the first twelve (12) month
period following the Phase 1 Commencement Date and each succeeding twelve (12)
month period thereafter up to the end of the Term; provided, however, that if
the Phase 1 Commencement Date shall occur on a day other than the first day of a
calendar month, then the first Lease Year shall include that portion of a
calendar month from the Phase 1 Commencement Date to the last day of the
calendar month in which the Phase 1 Commencement Date occurs, and shall expire
twelve (12) months after the first day of the first full calendar month of the
Term.
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<PAGE> 7
6.3 Rent Adjustments for Taxes.
6.3.1. At the time Landlord shall receive from applicable taxing
authority notice of its tax bill for the Property for the subject Tax Year,
Landlord shall total the Taxes. Tenant shall pay a proportionate share of said
Taxes as additional rent hereunder. Tenants proportionate share of said Taxes
shall be computed by multiplying the amount of such Taxes by a fraction, the
numerator of which shall be the total rentable square feet in the Premises as
defined in Section 1, and the denominator of which shall be the total rentable
square feet within the Building.
6.3.2. Any additional rent due Landlord under this Section 6.3 shall be
due and payable within thirty (30) days after Landlord shall have submitted a
written statement to Tenant showing the amount due. For Tenant's obligation for
Tenant's proportionate share of Taxes for a partial tax year falling within the
first or last Lease Years of the Term, including any renewal or extension
thereof, see Section 6.5. Landlord may, in its discretion, make a reasonable
estimate of such additional rent with respect to Taxes, and require Tenant to
pay each month during such year 1/12 of such amount, at the time of payment of
monthly installments of Base Rent. In such event, Tenant shall pay, or Landlord
shall refund or credit to Tenants account, any underpayment or overpayment of
such additional rent within thirty (30) days of Landlord's annual written
statement of Taxes due. Tenant shall have the right to examine, at Tenant's sole
expense, Landlord's records with respect to any such increases in rent;
provided, however, that unless Tenant shall have given Landlord written notice
of exception to any such statement within one hundred and twenty (120) days
after delivery thereof, the same shall be conclusive and binding on Tenant.
As of the date of this Lease, the Tax Year is a fiscal year commencing
July 1. If the appropriate authorities shall hereafter change the tax year to a
calendar year, or to a fiscal year commencing on a date other than July 1,
appropriate adjustments shall be made in the computation of any additional rent
due hereunder. All reasonable expenses incurred by Landlord (including
attorneys, appraisers' and consultants' fees, and other costs) in contesting any
increase in Taxes or any increase in the assessment of the Property shall be
included as an item of Taxes for the purpose of computing additional rent due
hereunder.
6.4 Rent Adjustments for Operating Expenses.
6.4.1. After the end of each calendar year, Landlord shall
compute the Building Expenses for such year. Tenant shall pay a proportionate
share of said Building Expenses as additional rent hereunder. Tenant's
proportionate share of Building Expenses for the subject period shall be
computed by multiplying the amount of such Building Expenses by a fraction, the
numerator of which shall be the total rentable square feet in the Premises as
set forth in Section 1, and the denominator of which shall be the total rentable
square feet within the Building.
6.4.2. Landlord shall make a reasonable estimate of Tenant's
proportionate share of Building Expenses with respect to each calendar year or
any portion thereof occurring within the Term as renewed or extended, and
require Tenant to pay each month during such year 1/12 of such amount, at the
time of payment of monthly installments of Base Rent. In such event, Tenant
shall pay, or Landlord shall refund or at Tenant's election, credit to Tenant's
account, any underpayment or overpayment of Tenants proportionate share of
Building Expenses within thirty (30) days of Landlords written statement of
actual Building Expenses for the calendar year, provided, however that in the
event of an underpayment in Tenant's proportionate share of Building Expenses,
the amount due and owing from Tenant shall be, at Tenant's election, paid in one
lump sum installment due and payable within thirty (30) days of Landlord's
written statement of actual Building Expenses, or due and payable in six (6)
consecutive equal monthly installments commencing on the first day of the first
calendar month after Tenant shall receive Landlord's written statement of actual
Building Expenses. Tenant shall have the right to examine and copy, at Tenant's
expense, at Landlord's office during Landlord's business hours the Landlord's
records with respect to any such increases in rent; provided, however, that
unless
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<PAGE> 8
Tenant shall have given Landlord written notice of exception to any such
statement within one hundred and twenty (120) days after delivery thereof, the
same shall be conclusive and binding on Tenant. Notwithstanding anything to the
contrary contained herein Landlord shall use diligent efforts to keep Building
Expenses at reasonable amounts, while maintaining the Building as a first class
suburban office building.
6.5 Additional Rent Payments. Tenant's obligation to pay any additional
rent accruing during the Lease Term pursuant to Sections 6.3 and 6.4 hereof
shall apply pro rata to the proportionate part of a Tax Year as to Taxes, and
calendar year, as to Building Expenses, in which this Lease begins or ends, for
the portion of each such year during which this Lease is in effect. Such
obligation to make payments of such additional rent shall survive the expiration
or sooner termination of the Lease Term, whether or not this Lease is superseded
by a subsequent lease of the Premises or of any other space or Tenant leaves the
Building; any such superseding lease shall not serve to supersede Tenant's
obligation for any such additional rent unless it makes express reference
thereto and recites that such additional rent is abated in consideration of the
superseding lease.
6.6 Payments. All payments or installments of any rent hereunder and
all sums whatsoever due under this Lease (including but not limited to court
costs and attorneys fees) shall be deemed rent, shall be paid to Landlord at the
address designated by Landlord, and if not paid within ten (10) days of the date
when due, shall be subject to a late charge of $35.00 for each late payment and
shall bear interest at the rate of 18% per annum. (but not more than the maximum
allowable legal rate applicable to Tenant) until paid. Additionally, if any of
Tenant's checks for payment of rent or additional rent are returned to Landlord
for insufficient funds, Tenant shall pay to Landlord as additional rent $50.00
for each such check returned for insufficient funds, and if two or more of
Tenant's checks in payment of rent or additional rent due hereunder are returned
for insufficient funds in any calendar year, Landlord reserves the right upon
ten (10) days advance written notice to Tenant to thereafter require Tenant to
pay all rent and additional rent and other sums whatsoever due under this Lease
by money order or by certified check or cashier's check. If an attorney is
employed to enforce Landlord's rights under this Lease, Tenant shall pay all
reasonable fees and expenses of such attorney whether or not legal proceedings
are instituted by Landlord. Time is of the essence in this Lease.
7. Improvements to the Premises.
7.1. Improvements to Phase 1 Premises.
7.1.1. Phase 1 Premises Plans and Specifications. Attached
hereto as Exhibit "C" and made a part hereof are preliminary plans and
specifications showing generally the floor plan of the Phase 1 Premises as
agreed upon by Landlord and Tenant. Tenant agrees to furnish Landlord, within
ninety (90) days from the date hereof, such specifications reasonably acceptable
to Landlord as may be required to enable Landlord to prepare final plans and
specifications for the build-out of the interior of the Phase 1 Premises. Upon
receipt of Tenant's specifications as above provided, Landlord agrees to
promptly prepare final plans and specifications and submit the same to Tenant
for approval, which approval by Tenant shall not be unreasonably withheld,
conditioned or delayed. Such final plans and specifications will be deemed
accepted by Tenant unless Tenant shall have given written notice to the
contrary to Landlord within ten (10) days of Tenant's receipt of the same,
stating the respects in which same fail to conform with Tenant's requirements.
When Landlord and Tenant have agreed upon said plans and specifications
(hereafter the "Phase 1 Final Plans and Specifications"), Landlord shall
construct and complete improvements to the Phase 1 Premises as shown on and
pursuant to the Phase 1 Premises Plans and Specifications.
7.1.2 Completion of Landlord's Phase 1 Work. Landlord shall
construct and install improvements to the interior of the Phase 1 Premises in
accordance with the Phase 1 Final Plans and Specifications ("Landlords Phase 1
Work") subject only to those minor changes, modifications or deviations as
hereafter accepted and approved by Landlord and Tenant. Landlord will cause all
work necessary to complete the Phase 1 Premises in accordance with the
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Phase 1 Final Plans and Specifications to be commenced with reasonable
promptness after the acceptance of the Phase 1 Plans and Specifications as
provided in Section 7.1.1 hereof and Landlord's completion of construction of
the Building in accordance with appropriate governmental approvals. All
alterations, modifications or deviations to the Phase 1 Final Plans and
Specifications requested by Tenant (excluding those minor changes, modifications
or deviations accepted by Landlord and Tenant as above-provided) shall be made
in the form of a written change order(s) prepared at Tenant's sole cost and
expense by Landlord and shall be subject to the prior approval of Landlord,
which approval of Landlord shall not be unreasonably withheld. "The costs of
work performed by Landlord pursuant to Tenant's written change orders approved
by Landlord shall include all costs of labor and materials plus ten percent
(10%) for overhead and ten percent (10%) for profit. At Tenant's request,
Landlord shall fully cooperate with Tenant to establish such costs or estimates
thereof in advance of performing the work.
7.1.3 Cost of improvements to the Phase 1 Premises. "The
actual costs (including preparation of plans and specifications, permit costs,
labor, materials, and overhead and profit charges as set forth above) of
Landlord's Phase 1 Work, including but not limited to (i) all costs related to
the preparation of Phase 1 Final Plans and Specifications, and (ii) construction
and installation of all improvements to be constructed or installed by Landlord
pursuant to the Phase 1 Final Plans and Specifications (hereafter the "Actual
Phase 1 Construction Costs") shall be paid by Landlord up to but not exceeding
Four Hundred Twenty-Six Thousand Fifty-One Dollars and Fifty Cents ($426,051.50)
(hereafter the "Phase 1 Tenant Improvement Allowance"). Tenant shall reimburse
Landlord that amount of Actual Phase 1 Construction Costs which exceed the Phase
1 Tenant Improvement Allowance (hereafter "Tenant's Share of Phase 1 Completion
Costs") as additional rent hereunder in the manner set forth below.
Tenant's Share of Phase 1 Completion Costs shall be fully
amortized over the initial Term of the Lease (seven years) and shall be paid by
Tenant to Landlord as additional rent hereunder, together with interest thereon
as below-described, in consecutive monthly installments commencing with the
Phase 1 Commencement Date, and continuing on the first day of each month until
such time as Tenant's Share of Phase 1 Completion Costs, together with interest
accrued thereon, shall be paid in full. The amount of monthly installments shall
be initially calculated on the Phase 1 Commencement Date, and shall be
recalculated on each Phase 1 Payment Calculation Date (as that term is defined
in the succeeding paragraph) until Tenant's Share of Phase 1 Completion Costs,
together with all interest accrued thereon, shall be paid in full.
During the Term of this Lease, interest on Tenant's Share of
Phase 1 Completion Costs shall be charged at a variable rate until Tenant's
Share of Phase 1 Completion Costs are paid in full. The interest rate shall
equal the sum of one (1) whole percentage point plus the fluctuating prime rate
in effect from time to time as established and declared by NationsBank, N.A. as
its prime commercial lending rate of interest, but in no event less than eight
percent (8%) annually (herein the "Completion Costs Interest Rate"). Interest
shall accrue at the applicable interest rate applied to the unpaid portion of
Tenant's Share of Phase 1 Completion Costs. All interest shall be computed on
the premise that a year contains 360 days, and is composed of twelve (12)
months, each of which contains thirty (30) days. The Completion Costs Interest
Rate used for purposes of determining Tenant's monthly installment of Tenant's
Share of Phase 1 Completion Costs shall initially equal that rate of interest
(as determined pursuant to the formula set forth above in effect on the Phase 1
Commencement Date, and thereafter, the Completion Costs Interest Rate used for
purposes of determining Tenant's monthly installment shall be recalculated at
the commencement of each Lease Year (individually referred to as a "Payment
Calculation Date") using the interest rate (as determined pursuant to the
formula set forth above) in effect on each respective Payment Calculation Date.
Tenant's monthly installment of the unpaid portion of Tenant's
Share of Phase 1 Completion Costs together with interest thereon shall be
adjusted on each Payment Calculation Date as follows:
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(a) Any portion of the Actual Phase 1 Construction Costs not
invoiced to Tenant prior to the preceding Payment Calculation Date shall be
added to Tenant's Share of Phase 1 Completion Costs then remaining unpaid.
(b) The unpaid portion of Tenant's Share of Phase 1 Completion
Costs together with interest thereon shall be increased or decreased as follows
on each Payment Calculation Date as applicable: (i) by the excess, if any, of
the amount of interest that has accrued during the preceding twelve-month period
over the amount of the monthly interest payments payable by Tenant during such
preceding twelve-month period, or (ii) by the excess, if any, of the amount of
the monthly interest payments payable during such preceding twelve-month period
over the amount of interest that has accrued during such preceding twelve-month
period.
Tenant shall have the right to prepay in whole or in part
during the Term hereof Tenant's Share of Phase 1 Completion Costs, together with
interest accrued thereon to the date of such prepayment upon ten (10) days prior
written notice to Landlord.
7.2. Improvements to Phase 2 Premises.
7.2.1. Phase 2 Premises Plans and Specifications. Tenant
agrees to furnish Landlord, within one hundred and eighty (180) days prior to
Tenant's anticipated occupancy of the Phase 2 Premises such specifications
reasonably acceptable to Landlord as may be required to enable Landlord to
prepare final plans and specifications for the build-out of the interior of the
Phase 2 Premises. Upon receipt of Tenant's specifications as above provided,
Landlord agrees to promptly prepare final plans and specifications and submit
the same to Tenant for approval, which approval by Tenant shall not be
unreasonably withheld, conditioned or delayed. Such final plans and
specifications will be deemed accepted by Tenant unless Tenant shall have given
written notice to the contrary to Landlord within ten (10) days of Tenant's
receipt of the same, stating the respects in which same fail to conform with
Tenant's requirements. When Landlord and Tenant have agreed upon said plans and
specifications (hereafter the "Phase 2 Final Plans and Specifications"),
Landlord shall construct and complete improvements to the Phase 2 Premises as
shown on and pursuant to the Phase 2 Final Plans and Specifications.
7.2.2 Completion of Landlords Phase 2 Work. Landlord shall
construct and install improvements to the interior of the Phase 2 Premises in
accordance with the Phase 2 Final Plans and Specifications ("Landlord's Phase 2
Work") subject only to those minor changes, modifications or deviations as
hereafter accepted and approved by Landlord and Tenant. Landlord will cause all
work necessary to complete the Phase 2 Premises in accordance with the Phase 2
Final Plans and Specifications to be commenced with reasonable promptness after
the acceptance of the Phase 2 Premises Plans and Specifications as provided in
Section 7.2.1 hereof. All alterations, modifications or deviations to the
Phase 2 Final Plans and Specifications requested by Tenant (excluding those
minor changes, modifications or deviations accepted by Landlord and Tenant as
above-provided) shall be made in the form of a written change order(s) prepared
at Tenant's sole cost and expense by Landlord and shall be subject to the prior
approval of Landlord, which approval of Landlord shall not be unreasonably
withheld. The costs of work performed by Landlord pursuant to Tenant's written
change orders approved by Landlord shall include all costs of labor and
materials plus ten percent (10%) for overhead and ten percent (10%) for profit.
At Tenant's request, Landlord shall fully cooperate with Tenant to establish
such costs or estimates thereof in advance of performing the work.
7.2.3 Cost of Improvements to the Phase 2 Premises. The actual
costs (including preparation of plans and specifications, permit costs, labor,
materials, and overhead and profit charges as set forth above) of Landlord's
Phase 2 Work, including but not limited to (i) all costs related to the
preparation of Phase 2 Final Plans and Specifications, and (ii) construction and
installation of all improvements to be constructed or installed by Landlord
pursuant to the Phase 2 Final Plans and Specifications (hereafter the "Actual
Phase 2 Premises Construction Costs") shall be paid by Landlord up to but not
exceeding One Hundred Seventy Thousand Nine Hundred Twenty-Nine Dollars
($170,929.00) (hereafter the "Phase 2 Tenant
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Improvement Allowance"); provided, however, that in the event that date on which
the Phase 2 Premises shall be Substantially Complete (as defined in Section
2.2.1 hereof) shall occur on a date subsequent to the commencement of the
twenty-fourth (24th) calendar month of the Term, then the aforesaid $170,929.00
Phase 2 Tenant Improvement Allowance shall be reduced on a monthly basis
thereafter for each calendar month beyond the 24th calendar month of the Term
until the calendar month during which the Phase 2 Premises shall be
Substantially Complete by that amount determined by multiplying the $170,929.00
Phase 2 Tenant Improvement Allowance by a fraction of 1/60th. Tenant shall
reimburse Landlord that amount of Actual Phase 2 Premises Construction Costs
which exceed the Phase 2 Tenant Improvement Allowance, as adjusted if required
in accordance with the preceding sentence (hereafter "Tenant's Share of Phase 2
Completion Costs") as additional rent hereunder in the manner set forth below.
Tenant's Share of Phase 2 Completion Costs shall be fully
amortized over that period of the initial Term of this Lease commencing with the
Phase 2 Commencement Date until the expiration of the initial seven-year Term of
the Lease (the "Phase 2 Completion Costs Term"), and shall be paid by Tenant to
Landlord as additional rent hereunder, together with interest thereon as
below-described, in consecutive monthly installments commencing with the Phase 2
Commencement Date, and continuing on the first day of each month until such time
as Tenant's Share of Phase 2 Completion Costs, together with interest accrued
thereon, shall be paid in full. The amount of monthly installments shall be
initially calculated on the Phase 2 Commencement Date, and shall be
recalculated on each Payment Calculation Date (as that term is defined in
Section 7.1.3 hereof) until Tenant's Share of Phase 2 Completion Costs, together
with all interest accrued thereon, shall be paid in full.
During the Phase 2 Completion Costs Term, interest on Tenant's
Share of Phase 2 Completion Costs shall be charged at the Completion Costs
Interest Rate defined in Section 7.1.3 above until Tenant's Share of Phase 2
Completion Costs are paid in full. Interest shall accrue at the applicable
interest rate applied to the unpaid portion of Tenant's Share of Phase 2
Completion Costs. The Completion Costs Interest Rate used for purposes of
determining Tenant's monthly installment of Tenant's Share of Phase 2 Completion
Costs shall initially equal the Completion Costs Interest Rate in effect on the
Phase 2 Commencement Date, and thereafter, the interest rate used for purposes
of determining Tenant's monthly installment shall be recalculated on the Payment
Calculation Date (defined in Section 7.1.3 above) using the Completion Costs
Interest Rate in effect on each respective Payment Calculation Date.
Tenant's monthly installment of the unpaid portion of Tenant's
Share of Phase 2 Completion Costs together with interest thereon shall be
adjusted on each Payment Calculation Date as follows:
(a) Any portion of the Actual Phase I Construction Costs not
invoiced to Tenant prior to the preceding Payment Calculation Date shall be
added to Tenant's Share of Phase 2 Completion Costs then remaining unpaid.
(b) The unpaid portion of Tenant's Share of Phase 2 Completion
Costs together with interest thereon shall be increased or decreased as follows
on each Payment Calculation Date as applicable: (i) by the excess, if any, of
the amount of interest that has accrued during the preceding twelve-month period
over the amount of the monthly interest payments payable by Tenant during such
preceding twelve-month period, or (ii) by the excess, if any, of the amount of
the monthly interest payments payable during such preceding twelve-month period
over the amount of interest that has accrued during such preceding twelve-month
period.
Tenant shall have the right to prepay in whole or in part
during the Term hereof Tenant's Share of Phase 2 Completion Costs, together with
interest accrued thereon to the date of such prepayment upon ten (10) days prior
written notice to Landlord.
8. Tenants Improvements. Tenant may make non-structural alterations,
installations, additions or improvements (excluding alterations, installations,
additions or improvements to the
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mechanical and/or electrical systems serving the Premises) each valued at Five
Thousand Dollars ($5,000.00) without the prior written consent of Landlord which
shall not be unreasonably withheld or delayed. Other than as set forth in the
immediately preceding sentence, Tenant shall not make any alterations,
decorations, installations, additions or improvements to the Premises, including
but not limited to, the installation of any fixtures, amenities, equipment,
appliances, or other apparatus, without Landlord's prior written consent (which
consent shall not be unreasonably withheld, conditioned or delayed), and then
only by contractors or mechanics employed and/or approved by Landlord (which
consent shall not be unreasonably withheld, conditioned or delayed).
Notwithstanding the terms of this Section 8, Tenant shall be permitted to
install its telecommunications equipment within the Premises subject to the
terms of Section 26 hereof. All such work, alterations, decorations,
installations, additions or improvements shall be done at Tenant's sole expense.
Landlord's consent to and/or approval of Tenant's plans and specifications for
the aforesaid improvements shall create no responsibility or liability on the
part of Landlord for their completeness, design sufficiency, or compliance with
all applicable laws. Unless otherwise specifically provided in this Lease, all
alterations, decorations, installations, additions or improvements made by
either of the parties hereto upon or serving the Premises, except movable office
furniture and trade fixtures put in at the expense of Tenant shall at the
expiration or earlier termination of the Term of this Lease (as renewed or
extended) be the property of Landlord and unless otherwise specifically provided
for in this Lease or unless Landlord's consent to such alterations, decorations,
installations, additions or improvements was conditioned on Tenant's removal of
the same at the expiration or earlier termination of the Term, same shall remain
upon and be surrendered with the Premises at the termination of this Lease
without molestation or injury. If Landlord shall require Tenant's removal of
alterations, modifications, decorations, installations or additional
improvements at the time of approving Tenant's plans and specifications
therefor, then such removal, and all restoration of the Premises required due to
the installation and removal of the same, shall be performed promptly upon the
expiration or earlier termination of the Term by Tenant at Tenant's sole cost
and expense.
9. Requirements of Applicable Law. Landlord warrants that on the Phase
1 Commencement Date, the Phase 1 Premises will comply with all applicable laws,
ordinances, rules and regulations of governmental authorities having
jurisdiction over the Property ("Applicable Laws"). Similarly, Landlord warrants
that on the Phase 2 Commencement Date, the Phase 2 Premises will comply with all
Applicable Laws. After delivery of possession of the Premises to Tenant, Tenant
shall at its sole cost and expense, comply promptly with all Applicable Laws now
in force or which may hereafter be in force, which impose any duty upon Landlord
or Tenant with respect to the use, occupancy or alteration of the Premises or
any part thereof and for the prevention of fires; provided, however, that
Landlord and not Tenant shall correct all structural defects in the Building
necessary to comply with Applicable Laws, and make all repairs, changes or
alterations necessary because the Building was not constructed in compliance
with any of said Applicable Laws.
10. Certificate of Occupancy. Tenant will not use or occupy the
Premises in violation of any certificate of occupancy, permit, or other
governmental consent issued for the Building. If any governmental authority,
after the commencement of the Lease Term, shall contend or declare that the
Premises are being used for a purpose which is in violation of such certificate
of occupancy, permit, or consent, then Tenant shall, upon five (5) days' written
notice from Landlord, immediately discontinue such use of the Premises. If
thereafter the governmental authority asserting such violation threatens,
commences or continues criminal or civil proceedings against Landlord for
Tenant's failure to discontinue such use, in addition to any and all rights,
privileges and remedies given to Landlord under this Lease for default therein,
Landlord shall have the right to terminate this Lease forthwith. Tenant shall
indemnify and hold Landlord harmless of and from any and all liability for any
such violation or violations.
11. Contest-Statute, Ordinance, Etc. Tenant may, after notice to
Landlord, by appropriate proceedings conducted promptly at Tenant's own expense
in Tenant's name and whenever necessary in Landlord's name, contest in good
faith the validity or enforcement of any such statute, ordinance, law, order,
regulation or requirement and may similarly contest any assertion of violation
of any certificate of occupancy, permit, or any consent issued for the Building.
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Tenant may, pending such contest, defer compliance therewith if, in the
reasonable opinion of counsel for Landlord, such deferral will not subject
either the Landlord or the Premises or the Property (or any part thereof) to any
penalty, fine or forfeiture, and if Tenant shall post a bond with corporate
surety approved by Landlord sufficient, in Landlord's opinion, fully to
indemnify Landlord from loss.
12. Maintenance and Repairs
12.1. Maintenance and Repairs to be Made by Tenant. During the
Term as renewed or extended, Tenant at its sole cost and expense shall keep the
Premises and the improvements and appurtenances serving the Premises in good
order and condition as is necessary to maintain the Premises in a condition
consistent with other suburban first-class office buildings. In furtherance of
the foregoing, Landlord, at Tenant's expense, will maintain, repair and/or
replace the heating, ventilating and air-conditioning system serving the
Premises (and if requested by Tenant in writing any supplemental HVAC system
serving Tenant's SCIF facility installed within the Premises) and Tenant shall
pay to Landlord within thirty (30) days after Landlord's invoice(s) therefor, as
additional rent, the reasonable cost of such maintenance, repair and/or
replacement. In this regard Landlord agrees that it will have competent HVAC
maintenance firms to perform the necessary work at reasonably commercial prices
and that at Tenant's request the contracts for such work, as well as invoices
and other appropriate documentation will be made available for review by Tenant.
Tenant shall cause the Premises to be cleaned daily using only
those janitorial contractors approved by Landlord, which approval shall not be
unreasonably withheld. Further, Tenant shall cause all trash emanating from the
Premises to be removed from the Premises daily and placed within the Common
Area wash receptacles for the Building. If at any time during the Term and any
extension or renewal thereof, Landlord shall, after reasonable investigation
determine that trash and similar waste generated by Tenant and/or emanating from
the Premises is in excess of that of other standard office tenants within the
Building (as computed on a per rentable square foot basis), Landlord shall bill
Tenant and Tenant shall pay to Landlord as additional rent hereunder within
thirty (30) days of the date of Landlord's invoice for the same, those costs and
expenses of trash removal which are reasonably attributable to such excess trash
and similar waste generated by Tenant and/or emanating from the Premises.
Further, Tenant shall not place a load upon any floor of the Premises exceeding
the floor load per square foot area which such floor was designed to carry and
which may be allowed under Applicable Laws. Landlord reserves the right to
prescribe the weight and position of all heavy equipment brought onto the
Premises and prescribe any reinforcing required under the circumstances, all
such reinforcing to be at Tenant's expense.
All non-structural repairs to the Premises or any
installations, equipment or facilities serving the Premise, including but not
limited to sprinkler systems and HVAC and related electrical systems, shall be
made by Tenant at its expense using only licensed and professional contractors
approved by Landlord (which approval by Landlord shall not be unreasonably
withheld, conditioned or delayed). Without limiting the generality of the
foregoing, Tenant will keep the interior of the Premises, together with all
electrical distribution apparatus and service, plumbing and other mechanical
installations serving the Premises in good order and repair and will make all
replacements from time to time required thereto at its expense; and will
surrender the Premises at the expiration of the Term or at such other time as
it may vacate the Premises in as good condition as when received, excepting
depreciation caused by ordinary wear and tear, damage by casualty (other than
such damage by casualty which is caused by the negligence of Tenant, its agents,
concessionaires officers, employees, contractors, licensees or invitees, and
which is not wholly covered by Landlord's hazard insurance policy), unavoidable
accident or Act of God. Tenant will not overload the electrical wiring or HVAC
system(s) serving the Premises, and will install at its expense, any additional
electrical wiring or HVAC system(s) which may be required in connection with
Tenant's apparatus. Any damage or injury sustained by any person because of
mechanical, electrical, plumbing or any other equipment or whose maintenance and
repair shall be the responsibility of Tenant shall be paid for by Tenant, and
Tenant shall indemnify and hold Landlord harmless from and against all claim,
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actions, damages and liability in connection therewith, including, but not
limited to attorney's and other professional fees, and any other cost which
Landlord might reasonably incur.
12.2 Repairs To Be Made By Landlord. Landlord, at its expense,
will make, or cause to be made structural repairs to roof, foundation, exterior
walls, interior structural walls, and all structural components of the Premises
provided Tenant shall give Landlord notice of the necessity for such repairs.
Landlord shall maintain, and shall make all repairs and replacements to the
Common Areas of the Building and Property (including Building Common Area
fixtures and equipment) as shall be reasonably deemed necessary to maintain the
Building in a condition comparable to other first class suburban office
buildings in the Baltimore-Washington corridor area. The costs associated with
such repairs shall be deemed a part of Building Expenses; provided, however,
that costs of all of such repairs which would be considered capital in nature
under generally accepted accounting principles shall be paid by Landlord.
Notwithstanding the foregoing, if the necessity for such repairs shall have
arisen from or shall have been caused by the negligence or willful acts of
Tenant, its agents, concessionaires, officers, employees, licensees, invitees or
contractors, Landlord may make or cause the same to be made, but shall not be
obligated to do so, and Tenant agrees to pay to Landlord promptly upon
Landlord's demand, as additional rent, the cost of such repairs, if made, until
paid. There shall be no allowance to Tenant for a diminution of rental value, no
abatement of rent, and no liability on the part of Landlord by reason of
inconvenience, annoyance or injury to business arising from Landlord, Tenant or
others making any repairs or performing maintenance as provided for herein
unless caused by Landlord's negligence.
12.3 Time for Repairs. Repairs or replacements required
pursuant to Section 12.1 and 12.2 above shall be made within a reasonable time
(depending on the nature of the repair or replacement needed - generally no more
than fifteen (15) days) after receiving notice or having actual knowledge of the
need for a repair or replacement.
12.4 Surrender of the Premises. Upon the termination of this
Lease, Tenant shall surrender the Premises and all mechanical, plumbing and
electrical systems serving the Premises to Landlord broom clean condition and in
good order, condition and repair except for:
(i) ordinary wear and tear,
(ii) damage by the elements, fire, and other casualty unless
Tenant would be required to repair under the provisions of this Lease;
(iii) damage arising from any cause not required to be
repaired or replaced by Tenant; and
(iv) alterations as permitted by this Lease unless consent was
conditioned on their removal. Any items not removed by Tenant as required above
shall be considered abandoned. Landlord may dispose of abandoned items as
Landlord chooses and bill Tenant for the cost of their disposal.
13. Tenant's Failure to Repair. In the event that Tenant fails after
reasonable prior written notice from Landlord, to keep the Premises in a good
state of condition and repair pursuant to Section 12 above, or to do any act or
make any payment required under this Lease or otherwise fails to comply
herewith, Landlord may, at its option (but without being obliged to do so)
immediately, or at any time thereafter and without notice, perform the same for
the account of Tenant, including the right to enter upon the Premises at all
reasonable hours to make such repairs, or do any act or make any payment or
compliance which Tenant has failed to do, and upon demand, Tenant shall
reimburse Landlord for any such expense incurred by Landlord including but not
limited to any costs, damages and counsel fees. Any moneys expended by Landlord,
as aforesaid, shall be deemed additional rent, collectible as such by Landlord.
AU rights given to Landlord in this section shall be in addition to any other
right or remedy of Landlord herein contained.
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14. Conduct on Premises. Tenant shall not do, or permit anything to be
done in the Premises, or bring or keep anything therein which will, in any way,
increase the rate of fire insurance on the Building, or invalidate or conflict
with the fire insurance policies on the Building, fixtures or on property kept
therein, or obstruct or interfere with the rights of the Landlord or of other
tenants, or in any other way injure or annoy Landlord or the other tenants, or
subject Landlord to any liability for injury to persons or damage to property,
or interfere with the good order of the Building, or conflict with Applicable
Laws, or the Maryland Fire Underwriters Rating Bureau. Tenant agrees that any
increase of fire insurance premiums on the Building or contents directly caused
by the occupancy of Tenant and any expense or cost incurred in consequence of
negligence or carelessness or the willful action of Tenant, Tenants employees,
agents, servants, or invitees shall, as they accrue be added to the rent
heretofore reserved and be paid as a part thereof; and Landlord shall have all
the rights and remedies for the collection of same as are conferred upon the
Landlord for the collection of rent provided to be paid pursuant to the terms of
this Lease.
15. Insurance.
15.1 Tenant's Insurance. Tenant will keep in force at its own expense,
so long as this Lease remains in effect, (a) public liability insurance,
including insurance against assumed or contractual liability under this Lease,
with respect to the Premises, to afford protection with limits, per person and
for each occurrence, of not less than Two Million Dollars ($2,000,000), combined
single limit, with respect to personal injury and death and property damage,
such insurance to provide for only a reasonable deductible, (b) all-risk
property and casualty insurance, including theft, written at replacement cost
value and with replacement cost endorsement, covering all of Tenant's personal
property in the Premises and all improvements and installed in the Premises by
or on behalf of Tenant whether pursuant to the terms of Section 7, Section 8, or
otherwise, such insurance to provide for only a reasonable deductible, (c) if,
and to the extent, required by law, workmen's compensation or similar insurance
offering statutory coverage and containing statutory limits, and (d) shall
insure all plate and other interior glass in the Premises for and in the name of
the Landlord. Such policies will be maintained in companies and in form
reasonably acceptable to Landlord and will be written as primary policy coverage
and not contributing with, or in excess of, any coverage which Landlord shall
carry. Tenant will deposit the policy or policies of such required insurance or
certificates thereof with Landlord prior to the Phase I Commencement Date, which
policies shall name Landlord or its designee and, at the request of Landlord,
its mortgagees, as additional named insured and shall also contain a provision
stating that such policy or policies shall not be canceled except after thirty
(30) day's written notice to Landlord or its designees. All such policies of
insurance shall be effective as of the date Tenant occupies the Premises and
shall be maintained in force at all times during the Term of this Lease and all
other times during which Tenant shall occupy the Premises. In addition to the
foregoing insurance coverage, Tenant shall require any contractor retained by it
to perform work on the Premises to carry and maintain, at no expense to
Landlord, during such times as contractor is working in the Premises, a
non-deductible (i) comprehensive general liability insurance policy, including,
but not limited to, contractor's liability coverage, contractual liability
coverage, completed operations coverage, broad form property damage endorsement
and contractor's protective liability coverage, to afford protection with limits
per person and for each occurrence, of not less than Two Hundred Thousand
Dollars ($200,000.00), combined single limit, with respect to personal injury
and death and property damage, such insurance to provide for no deductible, and
(ii) workmen's compensation insurance or similar insurance in form and amounts
as required by law. In the event of damage to or destruction of the Premises and
the termination of this Lease by Landlord pursuant to Section 17 herein, Tenant
agrees that it will pay Landlord all of its insurance proceeds relating to
improvements made in the Premises by or on behalf of Tenant whether pursuant to
the terms of Section 7, Section 8, or otherwise. If Tenant fails to comply with
its covenants made in this Section, if such insurance would terminate or if
Landlord has reason to believe such insurance is about to be terminated,
Landlord may at its option cause such insurance as it in its sole judgment
deems necessary to be issued, and in such event Tenant agrees to pay promptly
upon Landlord's demand, as additional rent the premiums for such insurance.
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15.2 Landlord's Insurance. Landlord will keep in force at its
own expense (a) contractual and comprehensive general liability insurance,
including public liability and property damage, with a minimum combined single
limit of liability of Two Million Dollars ($2,000,000.00) for personal injuries
or death of persons occurring in or about the Building and Premises, and (b)
all- risk property and casualty insurance written at replacement cost value
covering the Building and all of Landlord's improvements in and about same.
15.3 Waiver of Subrogation. Each party hereto waives claims
arising in any manner in its favor and against the other party and agrees that
neither party hereto shall be liable to the other party or to any insurance
company (by way of subrogation or otherwise) insuring the other party for any
loss or damage to the Building, the Premises or other tangible property, or any
resulting loss of income, or losses under worker's compensation laws and
benefits, or against liability on or about the Building, even though such loss
or damage might have been occasioned by the negligence of such party, its agents
or employees if any such loss or damage is covered by insurance benefiting the
party suffering such loss or damage as was required to be covered by insurance
carried pursuant to this Lease. Landlord shall cause each insurance policy
carried by it insuring against liability on or about the Building or insuring
the Premises and the Building or income resulting therefrom against loss by fire
or any of the casualties covered by the all-risk insurance carried by it
hereunder to be written in such a manner as to provide that the insurer waives
all right of recovery by way of subrogation against Tenant in connection with
any loss or damage covered by such policies. Tenant will cause each insurance
policy carried by it insuring against liability or insuring the Premises
(including the contents thereof and Tenant's Improvements installed therein by
Tenant or on its behalf) against loss by fire or any of the casualties covered
by the all-risk insurance required hereunder to be written in such a manner as
to provide that the insurer waives all right of recovery by way of subrogation
against Landlord in connection with any loss or damage covered by such policies.
16. Rules and Regulations. Tenant agrees to be bound by the miles and
regulations set forth on the schedule attached hereto as Exhibit "B" and made a
part hereof. Landlord shall have the right, from time to time, to issue
additional or amended rules and regulations regarding the use of the Building,
so long as said rules shall be reasonable and non-discriminatory between
tenants. When so issued the same shall be considered a part of this Lease and
Tenant covenants that said additional or amended rules and regulations shall
likewise be faithfully observed by Tenant, the employees of Tenant and all
persons invited by Tenant into the Building, provided, that said additional or
amended rules are made applicable to all office tenants similarly situated as
Tenant. Landlord shall not be liable to Tenant for the violation of any of the
said rules and regulations, or the breach of any covenant or condition in any
lease, by any other tenant in the Building.
17. Mechanics' Liens. Tenant shall not do or suffer to be done any act,
matter or thing whereby Tenant's interest in the Premises, or any part thereof,
may be encumbered by any mechanics' lien. Tenant shall discharge, within ten
(10) days after the date of filing, any mechanics' liens filed against Tenant's
interest in the Premises, or any part thereof, purporting to be for labor or
material furnished or to be furnished to Tenant. Landlord shall not be liable
for any labor or materials furnished or to be furnished to Tenant upon credit,
and no mechanics' or other lien for labor or materials shall attach to or affect
the reversionary or other estate or interest of Landlord in and to the Premises,
or the Property.
18. Property - Loss, Damage. Landlord, its agents and employees shall
not be liable to Tenant for (i) any damage or loss of property of the Tenant
placed in the custody of persons employed to provide services for or stored in
or about the Premises and/or the Building, unless such damage or loss is the
result of the negligence of Landlord, and (ii) interference with the light, air,
or other incorporeal hereditaments of the Premises.
19. Destruction - Fire or Other Casualty. In case of partial damage to
the Premises by fire or other casualty insured against by Landlord, Tenant
shall give immediate notice thereof to Landlord, who shall thereupon cause
damage to all property owned by it to be repaired with
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reasonable speed at expense of Landlord (provided that Landlord shall not be
obligated to perform any work beyond the work included as a part of Landlord's
Phase I Work and Landlord's Phase 2 Work described in Section 7 hereof), due
allowance being made for reasonable delay which may arise by reason of
adjustment of loss under insurance policies on the part of Landlord and/or
Tenant, and for reasonable delay on account of "labor troubles" or any other
cause beyond Landlord's control, and to the extent that the Premises are
rendered untenantable the rent shall proportionately abate from the date of such
casualty, provided the damage above mentioned occurred without the fault or
neglect of Tenant, Tenant's servants, employees, agents or visitors. If such
partial damage is due to the fault or neglect of Tenant, or Tenant's servants,
employees, agents, or invitees, the damage shall be repaired by Landlord to the
extent of Landlord's insurance coverage, but there shall be no apportionment or
abatement of rent. In the event the damage shall be so extensive to the whole
Building as to render it uneconomical, in Landlord's opinion, to restore for its
present uses and Landlord shall decide not to repair or rebuild the Building,
this Lease, at the option of Landlord, shall be terminated upon written notice
to Tenant and the rent, shall, in such event, be paid to or adjusted as of the
date of such damage, and the terms of this Lease shall expire by lapse of time
and conditional limitation upon the third day after such notice is mailed, and
Tenant shall thereupon vacate the Premises and surrender the same to Landlord,
but no such termination shall release Tenant from any liability to Landlord
arising from such damage or from any breach of the obligations imposed on Tenant
hereunder, or from any obligations accrued hereunder prior to such termination.
20. Eminent Domain. If (1) the whole or more than fifty percent (50%)
of the floor area of the Premises shall be taken or condemned by Eminent Domain
for any public or quasi-public use or purpose, and either party shall elect, by
giving written notice to the other, or (2) more than twenty-five percent (25%)
of the floor area of the Building shall be so taken, and Landlord shall elect,
in its sole discretion, by giving written notice to the Tenant, any said written
notice to be given not more than sixty (60) days after the date on which title
shall vest in such condemnation proceeding, to terminate this Lease, then, in
either such event, the Term of this Lease shall cease and terminate as of the
date of title vesting. In case of any taking or condemnation, whether or not the
Term of this Lease shall cease and terminate, the entire award shall be the
property of Landlord, and Tenant hereby assigns to Landlord all its right, title
and interest in and to any such award, except that Tenant shall be entitled to
claim, prove and receive in the proceedings such awards as may be allowed for
moving expenses, loss of profit and fixtures and other equipment installed by it
which shall not, under the terms of this Lease, be or become the property of
Landlord at the termination hereof, but only if such awards shall be made by the
condemnation, court or other authority in addition to, and be stated separately
from, the award made by it for the Property or part thereof so taken.
21. Assignment. So long as Tenant is not in default of any of the terms
and conditions hereof, and further provided that Tenant has fully and faithfully
performed all of the terms and conditions of this Lease, Landlord will not
unreasonably withhold its consent to an assignment of this Lease or sublease of
the Premises for any of the then remaining portion of the unexpired Term
provided: (i) the financial strength and net worth of the proposed subtenant or
assignee must be at least sufficient, in Landlord's reasonable determination
based on certified financial statements prepared and certified in accordance
with generally accepted accounting principles, to meet the financial obligations
of the tenant hereunder; (ii) in the event of an assignment, such assignee shall
assume in writing all of Tenant's obligations under this Lease; (iii) in the
event of a sublease, such sublease shall in all respects be subject to and in
conformance with the terms of this Lease; and (iv) in all events Tenant
continues to remain liable on this Lease for the performance of all terms,
including but not limited to, payment of all rent due hereunder. Landlord and
Tenant acknowledge and agree that it shall not be unreasonable for Landlord to
withhold its consent to an assignment if in Landlord's sole business judgment,
the assignee lacks sufficient business experience or net worth to successfully
operate its business within the Premises in accordance with the terms, covenants
and conditions of this Lease. If this Lease be assigned, or if the Premises or
any part thereof be underlet or occupied by anybody other than Tenant, Landlord
may, after default by Tenant, collect rent from the assignee, undertenant or
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occupant and apply the net amount collected to the rent herein reserved, but no
such collection shall be deemed a waiver of this covenant, or the acceptance of
the assignee, undertenant or occupant as tenant, or a release of Tenant from the
further observance and performance by Tenant of the covenants herein contained.
For purposes of the foregoing, a transfer by operation of law or transfer of a
controlling interest in Tenant as same exists as of the date hereof, shall be
deemed to be an assignment of this Lease. No assignment or sublease, regardless
of whether Landlord's consent has been granted or withheld, shall be deemed to
release Tenant from any of its obligations nor shall the same be deemed to
release any person guaranteeing the obligations of Tenant hereunder from their
obligations as guarantor.
22. Default: Remedies: Bankruptcy of Tenant. Any one or more of the
following events shall constitute an "Event of Default" hereunder, at Landlord's
election: (a) the sale of Tenant's interest in the Premises under attachment,
execution or similar legal process or, the adjudication of Tenant as a bankrupt
or insolvent, unless such adjudication is vacated within thirty (30) days; (b)
the filing of a voluntary petition proposing the adjudication of Tenant (or any
guarantor of Tenant's obligations hereunder) as a bankrupt or insolvent, or the
reorganization of Tenant (or any such guarantor), or an arrangement by Tenant
(or any such guarantor) with its creditors, whether pursuant to the Federal
Bankruptcy Code or any similar federal or state proceeding, unless such petition
is filed by a party other than Tenant (or any such guarantor) and is withdrawn
or dismissed within thirty (30) days after the date of its filing; (c) the
admission, in writing, by Tenant (or any such guarantor) of its inability to pay
its debts when due; (d) the appointment of a receiver or trustee for the
business or property of Tenant (or any such guarantor), unless such appointment
is vacated within thirty (30) days of its entry; (e) the making by Tenant (or
any such guarantor) of an assignment for the benefit of its creditors, or if, in
any other manner, Tenant's interest in this Lease shall pass to another by
operation of law; (f) the failure of Tenant to pay any rent, additional rent or
other sum of money when due and such failure continues for a period of seven (7)
days after receipt of written notice that the same is past due hereunder; (g)
the Tenant shall fail to move into or take possession of the Premises within
thirty (30) days after commencement of the Lease Term or having taken
possession shall thereafter abandon and/or vacate the Premises for a period
longer than 120 days, and (h) the default by Tenant in the performance or
observance of any covenant or agreement of this Lease (other than a default
involving the payment of money), which default is not cured within thirty (30)
days after the giving of notice thereof by Landlord, unless such default is of
such nature that it cannot be cured within such thirty (30) day period, in which
case no Event of Default shall occur so long as Tenant shall commence the curing
of the default within such thirty (30) day period and shall thereafter
diligently prosecute the curing of same.
Upon the occurrence and continuance of an Event of Default, Landlord,
with such notice to Tenant as provided for by law or as expressly provided for
herein, may do any one or more of the following: (a) sell, at public or private
sale, all or any part of the goods, chattels, fixtures and other personal
property belonging to Tenant which are or may be put into the Premises during
the Lease Term, whether or not exempt from sale under execution or attachment
(it being agreed that said property shall at all times be bound with a lien in
favor of Landlord and shall be chargeable for all rent and for the fulfilment of
the other covenants and agreements herein contained), and apply the proceeds of
such sale, first, to the payment of all costs and expenses of conducting the
sale or caring for or storing said property; second, toward the payment of any
indebtedness, including, without limitation, indebtedness for rent, which may be
or may become due from Tenant to Landlord; and third, to pay the Tenant, on
demand in writing, any surplus remaining after all indebtedness of Tenant to
Landlord has been fully paid; (b) perform, on behalf and at the expense of
Tenant, any obligation of Tenant under this Lease which Tenant has failed to
perform and of which Landlord shall have given Tenant notice, the cost of which
performance by Landlord, together, with interest thereon at the rate of eighteen
percent (18%) per annum, from the date of such expenditure, shall be deemed
additional rent and shall be payable by Tenant to Landlord upon demand; (c)
elect to terminate this Lease and the tenancy created hereby by giving notice of
such election to Tenant, in which event Tenant shall be liable for Base Rent
Additional Rent, and other indebtedness that otherwise would have been payable
by Tenant
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during the remainder of the Term had there been no Event of Default, and on
notice reenter the Premises, by summary proceedings or otherwise, and remove
Tenant and all other persons and property from the Premises, and store such
property in a public warehouse or elsewhere at the cost and for the account of
Tenant, without resort to legal process and without Landlord being deemed guilty
of trespass or becoming liable for any loss or damage occasioned thereby; and
also the right, but not the obligation, to re-let the Premises for any unexpired
balance of the Lease Term, and collect the rent therefor. Landlord shall use
reasonable efforts to relet the Premises based on commercially standard terms
and conditions. In the event of such re-letting by Landlord, the re-letting
shall be on such terms, conditions and rental as Landlord may deem proper, and
the proceeds that may be collected from the same, less the expense of re-letting
(including reasonable leasing fees and commissions and reasonable costs of
renovating the Premises), shall be applied upon the Tenant's rental obligation
as set forth in this Lease for the unexpired portion of the Lease Term. Tenant
shall be liable for any balance that may be due under this Lease, although
Tenant shall have no further right of possession of the Premises; and (d)
exercise any other legal or equitable right or remedy which it may have at law
or in equity. Notwithstanding the provisions of clause (b) above and regardless
of whether an Event of Default shall have occurred, Landlord may exercise the
remedy described in clause (b) without any notice to Tenant if Landlord, in its
good faith judgment, believes it would be materially injured by the failure to
take rapid action, or if the unperformed obligation of Tenant constitutes an
emergency.
To the extent permitted by law, Tenant hereby expressly waives any and
all rights of redemption, granted by or under any present or future laws in the
event of Tenant's being evicted or dispossessed for any cause, or in the event
of Landlord's obtaining possession of the Premises, by reason of the violation
by Tenant of any of the covenants and conditions of this Lease, or otherwise.
Landlord and Tenant hereby expressly waive trial by jury in any action or
proceeding or counterclaim brought by either party hereto against the other
party on any and every matter, directly or indirectly arising out of or with
respect to this Lease, including, without limitation, the relationship of
Landlord and Tenant, the use and occupancy by Tenant of the Premises, any
statutory remedy and/or claim of injury or damage regarding this Lease.
Any costs and expenses incurred by Landlord (including, without
limitation, reasonable attorneys' fees) in enforcing any of its rights or
remedies under this Lease shall be deemed to be additional rent and shall be
repaid to Landlord by Tenant upon demand.
Notwithstanding any of the other provisions of this Lease, in the event
Tenant shall voluntarily or involuntarily come under the jurisdiction of the
Federal Bankruptcy Code and thereafter Tenant or its trustee in bankruptcy,
under the authority of and pursuant to applicable provisions thereof, shall have
the power and so using same determine to assign this Lease, Tenant agrees that
(i) Tenant or its trustee will provide to Landlord sufficient information
enabling it to independently determine whether Landlord will incur actual and
substantial detriment by reason of such assignment and (ii) "adequate assurance
of future performance" under this Lease, as that term is generally defined under
the Federal Bankruptcy Code, will be provided to Landlord by Tenant and its
assignee as a condition of said assignment.
23. Damages. If this Lease is terminated by Landlord pursuant to
Section 22, Tenant shall, nevertheless, remain liable for all rent and damages
which may be due or sustained prior to such termination, and all reasonable
costs, fees and expenses including, but not limited to, reasonable attorneys'
fees, costs and expenses incurred by Landlord in pursuit of its remedies
hereunder, or in renting the Premises to others from time to time and additional
damages (the "Liquidated Damages"), which shall be an amount equal to the total
rent which, but for termination of this Lease, would have become due during the
remainder of the Term, less the amount of rent, if any, which Landlord shall
receive during such period from others to whom the Premises my be rented (other
than any additional rent received by Landlord as a result of any failure of such
other person to perform any of its obligations to Landlord), in which case such
Liquidated Damages shall be computed and payable in monthly installments, in
advance on the first day of each calendar month following termination of the
Lease and continuing until the date
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on which the Lease Term would have expired but for such termination, and any
suit or action brought to collect any such Liquidated Damages for any month
shall not in any manner prejudice the right of Landlord to collect any
Liquidated Damages for any subsequent month by a similar proceeding.
If this Lease is terminated pursuant to Section 22, Landlord shall use
reasonable efforts to relet the Premises or any part thereof, alone or together
with other premises, for such term(s) which may be greater or less than the
period which otherwise would have constituted the balance of the Term and on
such commercially standard terms and conditions (which may include concessions,
free rent and/or alterations of the Premises) as Landlord, in its sole
discretion, may determine, but Landlord shall not be liable for, nor shall
Tenant's obligations hereunder be diminished by reason of, any failure by
Landlord to relet the Premises or any failure by Landlord to collect any rent
due upon such reletting.
24. Services and Utilities. Landlord shall provide the following listed
services and utilities, namely:
(a) automatic passenger elevators providing adequate service leading to
the floor on which the Premises are located;
(b) hot and cold water sufficient for drinking, lavatory toilet and
ordinary cleaning purposes from fixtures either within the Premises (if provided
pursuant to this Lease) or on the floor on which the Premises are located; and
(c) maintenance of Common Areas in a manner comparable to other first
class suburban office buildings in the Baltimore-Washington corridor.
Landlord shall have no responsibility or liability for failure to
supply any service listed above or when prevented from so doing by laws, orders,
or regulations of any Federal, State, County or Municipal authority or by
strikes, accidents or by any other cause whatsoever beyond Landlord's control.
25. Electric Power/HVAC For Premises.
25.1. Electric Service And Meters. Landlord has supplied or will supply
the Premises with the necessary lines to provide electric service to the
Premises for normal office operations, as well as separate meters so that
Tenant's consumption of electric power can be separately measured and charged to
Tenant. Tenant shall pay all charges (including meter installation and
adjustment) for electric and similar utilities or services so supplied directly
to the utility company supplying same when due and before penalties or late
charges on same shall accrue. Tenant shall not at any time overburden or exceed
the capacity of the mains, feeders, ducts, conduits, or other facilities by
which electric and similar utilities are supplied to, distributed in or serve
the Premises. If Tenant desires to install any equipment which shall require
additional electric or similar facilities of a greater capacity than as provided
by Landlord, such installation shall be subject to Landlord's prior written
approval of Tenant's plans and specifications therefor. If such installation is
approved by Landlord, all costs for providing such additional electrical and
similar facilities shall be paid by Tenant.
25.2. Heating, Ventilating and Air-Conditioning. Also as a part of
Landlord's Phase 1 Work and Landlord's Phase 2 Work described in Section 7
hereof, Landlord will install within the Premises facilities and equipment for
heating, ventilating and air-conditioning ("HVAC") of the Premises for normal
office operations, which equipment and facilities shall be and remain the
property of Landlord. All electric power service to operate said HVAC equipment
shall be separately metered and charged to Tenant through those meters referred
to in Subsection 25.1 above. Tenant will not overburden or misuse said HVAC
equipment. All repair, maintenance and/or replacement of such HVAC equipment,
whether general prevention or emergency in
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nature, shall be done and performed by and through Tenant at its cost and
expense pursuant to Section 12.1 hereof. Any supplemental HVAC required by
Tenant for its SCIF facility installed within the Premises by or on behalf of
Tenant shall be maintained and repaired by Tenant at Tenant's sole cost and
expense.
25.3 Interruption to Service. Landlord reserves the right to stop
service of, the heating, air conditioning, elevator, plumbing and electric
systems, when necessary, by reason of accident or emergency, or for repairs,
alterations, replacements or improvements which in the judgment of Landlord are
desirable or necessary to be made, until such repairs, alterations, replacements
or improvements shall have been completed. Landlord shall use best efforts to
notify Tenant in advance prior to Landlord's stopping any such service and shall
use best efforts not to interfere with Tenant's permitted use of the Premises
when stopping such service. Landlord shall have no responsibility or liability
for failure to supply heat, air conditioning, elevator, plumbing, cleaning and
electric service, during such period or when prevented from so doing by laws,
orders, or regulations of any federal, state, county or municipal authority or
by strikes, accidents or by any other cause whatsoever beyond Landlord's control
except where such failure is due to the negligence or willful misconduct of
Landlord.
26. Telephone. Landlord has arranged for the installation of
telephone service within the Building. Tenant shall be responsible for
contacting the utility company supplying said telephone service and arranging to
have such telephone facilities as it may desire to be extended and put into
operation in the Premises. Tenant acknowledges and agrees that all telephone and
telecommunications services desired by Tenant shall be ordered and utilized at
the sole expense of Tenant. All costs related to installation and the provision
of such service shall be borne and paid for directly by Tenant.
In the event Tenant wishes to utilize the services of a telephone or
telecommunications provider whose equipment is not servicing the Building at
such time Tenant wishes to install its telecommunications equipment serving the
Premises ("Provider"), no such Provider shall be permitted to install its lines
or other equipment without first securing the prior written consent of Landlord,
which consent shall not be unreasonably withheld. Prior to the commencement of
any work in or about the Building by the Provider, the Provider shall agree to
abide by such rules and regulations, job site rules, and such other requirements
as reasonably determined by Landlord to be necessary to protect the interest of
the Building and Property, the other tenants and occupants of the Building and
the Landlord, including, without limitation, providing security in such form and
amount as reasonable determined by Landlord. Each Provider must be duly
licensed, insured and reputable. Landlord shall incur no expense whatsoever with
respect to any aspect of Provider's provision of its services, including without
limitation, the costs of installation, materials and service.
27. Several Liability. If the Tenant shall be one or more individuals,
corporations or other entities, whether or not operating as a partnership or
joint venture, then each such individual, corporation, entity, joint venturer or
partner shall be deemed to be both jointly and severally liable for the payment
of the entire rent and other payments specified herein.
28. Acceptance of Premises. Tenant shall have reasonable opportunity,
provided it does not thereby interfere with Landlord's work, to examine the
Premises to determine the condition thereof. Upon taking possession of the
Premises, Tenant shall be deemed to have accepted same as being satisfactory and
in the condition called for hereunder, except for latent defects and punch list
items previously noted to Landlord at a joint walk-thru of the Phase 1 Premises
and the Phase 2 Premises, respectively, to be conducted by Landlord and Tenant
within fifteen (15) days prior to Landlord's anticipated completion of
Landlord's Phase 1 Work and Landlord's Phase 2 Work, respectively.
29. Inability to Perform. This Lease and the obligation of Tenant to
pay rent hereunder and perform all of the other covenants and agreements
hereunder on the part of Tenant to be per-
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formed shall in no way be affected, impaired or excused because Landlord is
unable to fulfill any of its obligations under this Lease or to supply, or is
delayed in supplying, any service to be supplied by it under the terms of this
Lease or is unable to make, or is delayed in making any repairs, additions,
alterations, or decorations or is unable to supply, or is delayed in supplying,
any equipment or fixtures if Landlord is prevented or delayed from so doing by
reason of strikes or labor troubles or any outside cause whatsoever including,
but not limited to, governmental pre-emption in connection with a National
Emergency, or by reason of any rule, order or regulation of any department or
subdivision of any government agency or by reason of the conditions of supply
and demand which have been or are affected by war or other emergency, unless due
to Landlord's gross negligence. Similarly, Landlord shall not be liable for any
interference with any services supplied to Tenant by others if such interference
is caused by any of the reasons listed in this Section 29. Nothing contained in
this Section 29 shall be deemed to impose any obligation on Landlord not
expressly imposed by other sections of this Lease.
30. No Waivers. The failure of Landlord to insist, in any one or more
instances, upon a strict performance of any of the covenants of this Lease, or
to exercise any option herein contained, shall not be construed as a waiver, or
a relinquishment for the future, of such covenant or option, but the same shall
continue and remain in full force and effect. The receipt by Landlord of rent,
with knowledge of the breach of any covenant hereof, shall not be deemed a
waiver of such breach, and no waiver by Landlord of any provision hereof shall
be deemed to have been made unless expressed in writing and signed by Landlord.
31. Access to Premises and Change in Services. Subject to Tenant's
applicable security policies (of which Landlord is made aware), Landlord shall
have the right without abatement of rent, to enter the Premises to examine the
same, or to make such repairs and alterations as Landlord shall deem necessary
for the safety and preservation of the Building, and also to exhibit the
Premises to be let; provided, however, that except in the case of emergency such
entry shall only be after 24 hours advance notice first given to Tenant. Nothing
herein contained, however, shall be deemed or construed to impose upon Landlord
any obligation, responsibility or liability whatsoever, for the care,
supervision or repair, of the Building or any part thereof, other than as herein
elsewhere expressly provided. Landlord shall also have the right at any time,
without the same constituting an actual or constructive eviction and without
incurring any liability to Tenant therefor, to change the arrangement and/or
location of entrances or passageways, doors and doorways, and corridors, stairs,
toilets, elevators, or other public parts of the Building provided that Tenant's
permitted use of the Premises is not materially and adversely affected, and to
change the name by which the Building is commonly known and/or its mailing
address.
32. Estoppel Certificates. Tenant agrees at any time and from time to
time upon not less than ten (10) business days' prior notice by Landlord to
execute, acknowledge and deliver to Landlord a statement in writing certifying
that to the best of Tenant's information, knowledge and belief, this Lease is
unmodified and in full force (or if there have been modifications, that the same
is in full force and effect as modified and stating the modifications) and the
dates to which the rent and other charges have been paid in advance, if any, and
stating whether or not to the best knowledge of the signer of such certificate
Landlord is in default in performance of any covenant, agreement or condition
contained in this Lease and, if so, specifying each such default of which the
signer may have knowledge, it being intended that any such statement delivered
hereunder may be relied upon by third parties not a party to this Lease.
Tenant agrees to execute the Estoppel Certificate in the form attached
hereto as Exhibit "D" upon acceptance of the Premises.
33. Subordination. Tenant accepts this Lease, and the tenancy created
hereunder, subject and subordinate to any mortgages, overleases, leasehold
mortgages or other security interests now or hereafter a lien upon or affecting
the Building or the Property or any part thereof. In connection with such
subordination, the parties acknowledge that as of execution of this Lease, the
Property is unencumbered by any mortgage or other security interest; provided,
however, that
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in the event Landlord shall from and after the execution of this Lease enter
into any mortgage or other security interest with respect to the Building and/or
Property, Landlord agrees to use reasonable efforts to secure from any such
mortgagee or overlandlord a Subordination, Attornment and Non-Disturbance
Agreement in the form attached hereto as Exhibit "F". Tenant shall, at any time
hereafter, on request, execute any instruments or leases or other documents that
may be required by any mortgage or mortgagee or overlandlord (herein a
"Mortgagee") for the purpose of subjecting or subordinating this Lease and the
tenancy created hereunder to the lien of any such mortgage or mortgages or
underlying lease, and the failure of Tenant to execute any such instruments,
releases or documents shall constitute a default hereunder.
34. Attornment. Tenant agrees that upon any termination of Landlord's
interest in the Premises, Tenant will, upon request, attorn to the person or
organization then holding title to the reversion of the Premises (the
"Successor") and to all subsequent Successors, and will pay to the Successor all
of the rents and other monies required to be paid by the Tenant hereunder and
perform all of the other terms, covenants, conditions and obligations in this
Lease contained; provided, however, that if in connection with such attornment
Tenant shall so request from such Successor in writing, such Successor will
execute and deliver to Tenant an instrument wherein such Successor agrees that
as long as Tenant performs all of the terms, covenants and conditions of this
Lease, on Tenant's part to be performed, Tenant's possession under the
provisions of this Lease shall not be disturbed by such Successor.
35. Notices. All notices, demands and requests required under this
Lease shall be in writing. All such notices, demands and requests shall be
deemed to have been properly given if either sent by United States registered or
certified mail, or overnight by any nationally recognized overnight delivery
service, postage prepaid, addressed (i) if to the Landlord at 8815 Centre Park
Drive, Suite 400, Columbia, Maryland 21045, Attention John Harris Gurley, Vice
President and General Counsel, with a copy sent to Constellation Realty
Management, LLC, 8815 Centre Park Drive, Columbia, Maryland 21045, Attention
Michael T. Kaiser, President or (ii) if to Tenant at the Premises with a copy to
Applied Signal Technology, Inc., 400 West California Avenue, Sunnyvale,
California 94086, Attention Michael Hahn.
Any party may designate a change of address by written notice to the
above parties, given at least ten (10) days before such change of address is to
become effective.
36. Relocation. Section Intentionally Deleted.
37. Quiet Enjoyment. Tenant, upon the payment of rent and the
performance of all the terms of this Lease, shall at all times during the Lease
Term and during any extension or renewal term peaceably and quietly enjoy the
Premises without any disturbance from the Landlord or any other person claiming
through the Landlord.
38. Vacation of Premises. Tenant shall vacate the Premises at the end
of the Term of this Lease or any extension or renewal thereof. If Tenant fails
to vacate at such time there shall be payable to Landlord an amount equal to one
hundred and fifty (150%) for the first sixty (60) days of such holdover and
thereafter double the monthly rent last due and payable as stated in Section 6.1
for each month or part of a month that Tenant holds over, plus all other
payments provided for herein, and the payment and acceptance of such payments
shall not constitute an extension or renewal of this Lease. In event of any such
holdover, Landlord shall also be entitled to all remedies provided by law for
the speedy eviction of tenants, and to the payment of all attorneys' fees and
expenses incurred in connection therewith.
39. Partners' Liability. It is understood that the Owner of the
Building is a Maryland Limited Partnership. All obligations of said Owner
hereunder are limited to the net assets of the Owner from time to time. No
General or Limited Partner of Owner, or of any successor partnership, whether
now or hereafter a partner, shall have any personal responsibility or liability
for the obligations of Owner hereunder.
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40. Separability. If any term or provision of this Lease or the
application thereof to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Lease or the application of such
term or provision of such term or provision to persons or circumstances other
than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Lease shall be valid and
be enforced to the fullest extent permitted by law.
41. Indemnification. Tenant shall indemnify and hold harmless Landlord
and all of its and their respective partners, directors, officers, agents and
employees from any and all liability, loss, cost or expense arising from all
third-party claims resulting from or in connection with:
(i) the conduct or management of the Premises or of any business
therein, or any work or thing whatsoever done, or any condition created in or
about the Premises during the Term of this Lease or during the period of time,
if any, prior to the Phase 1 Commencement Date that Tenant may have been given
access to the Premises;
(ii) any act, omission or negligence of Tenant or any of its subtenants
or licensees or its or their partners, directors, officers, agents, employees,
invitees or contractors;
(iii) any accident, injury or damage whatever occurring in, at or upon
the Premises; and
(iv) any breach or default by Tenant in the full and prompt payment and
performance of Tenant's obligations under this Lease;
together with all costs and expenses reasonably incurred or paid in connection
with each such claim or action or proceeding brought thereon, including, without
limitation, all reasonable attorney's fees and expenses.
In case any action or proceeding is brought against Landlord and/or any
of its and their respective partners, directors, officers, agents or employees
and such claim is a claim from which Tenant is obligated to indemnify Landlord
pursuant to this Section 41, Tenant, upon notice from Landlord shall resist and
defend such action or proceeding (by counsel reasonably satisfactory to
Landlord). The obligations of Tenant under this Section shall survive
termination of this Lease.
42. Cautions. All headings anywhere contained in this Lease are
intended for convenience or reference only and are not to be deemed or taken as
a summary of the provisions to which they pertain or as a construction thereof.
43. Brokers. Tenant represents that Tenant has dealt directly with,
only with, Colliers Pinkard as broker in connection with this Lease, and Tenant
warrants that no other broker negotiated this Lease or is entitled to any
commissions in connection with this Lease.
44. Recordation. Tenant covenants that it will not, without Landlord's
prior written consent, record this Lease or any memorandum of this Lease or
offer this Lease or any memorandum of this Lease for recordation. If at any time
Landlord or any mortgagee of Landlord's interest in the Premises shall require
the recordation of this Lease or any memorandum of this Lease, such recordation
shall be at Landlord's expense. If at any time Tenant shall require the
recordation of this Lease or any memorandum of this Lease, such recordation
shall be at Tenant's expense. If the recordation of this Lease or any memorandum
of this Lease shall be required by any valid governmental order, or if any
government authority having jurisdiction in the matter shall assess and be
entitled to collect transfer taxes or documentary stamp taxes, or both transfer
taxes and documentary stamp taxes on this Lease or any memorandum of this Lease,
Tenant will execute such acknowledgments as may be necessary to effect such
recordations and pay, upon request of Landlord, one half of all recording fees,
transfer taxes and
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documentary stamp taxes payable on, or in connection with this Lease or any
memorandum of this Lease or such recordation.
45. Successors and Assigns. The covenants, conditions and agreements
contained in this Lease shall bind and inure to the benefit of Landlord and
Tenant, and their respective heirs, personal representatives, successors and
assigns (subject, however, to the terms of Article 19 hereof).
46. Integration of Agreements. This writing is intended by the Parties
as a final expression of their agreement and is a complete and exclusive
statement of its terms, and all negotiations, considerations and representations
between the Parties are incorporated. No course of prior dealings between the
Parties or their affiliates shall be relevant or admissible to supplement,
explain, or vary any of the terms of this Lease. Acceptance of, or acquiescence
to, a course of performance rendered under this Lease or any prior agreement
between the Parties or their affiliates shall not be relevant or admissible to
determine the meaning of any of the terms or covenants of this Lease. Other than
as specifically set forth in this Lease, no representations, understandings, or
agreements have been made or relied upon in the making of this Lease.
47. Hazardous Material: Indemnity. Tenant shall not cause or permit any
Hazardous Material (as hereinafter defined) to be brought upon, kept, or used in
or about the Premises by Tenant, its agents, employees, contractors or invitees,
without the prior written consent of Landlord (which Landlord shall not
unreasonably withhold as long as Tenant demonstrates to Landlord's reasonable
satisfaction that such Hazardous Material is necessary or useful to Tenant's
business and will be used, kept and stored in a manner that complies with all
laws regulating any such Hazardous Material so brought upon or used or kept in
or about the Premises). If Tenant breaches the obligations stated in the
preceding sentence, or if the presence of Hazardous Material on the Premises
caused or permitted by Tenant results in contamination of the Premises, the
Building and/or the Property, or if contamination of the Premises, the Building
and/or the Property by Hazardous Material otherwise occurs, for which Tenant is
legally liable to Landlord for damage resulting therefrom, then Tenant shall
indemnify, defend and hold Landlord and its Mortgagee(s) harmless from any and
all claims, judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Premises, the
Building and/or the Property, damages for the loss or restriction on use of
rentable or usable space or of any amenity of the Premises, the Building and/or
the Property, damages arising from any adverse impact on marketing of space, and
sums paid in settlement of claims, attorneys' fees, consultant fees and expert
fees) which arise during or after the Term as a result of such contamination.
This indemnification of Landlord and its Mortgagee(s) by Tenant includes,
without limitation, costs incurred in connection with any investigation of site
conditions or any cleanup, remedial, removal, or restoration work required by
any federal, state or local governmental agency or political subdivision because
of Hazardous Material present in the soil or ground water on or under the
Building. Without limiting the foregoing, if the presence of any Hazardous
Material on the Premises, the Building and/or the Property caused or permitted
by Tenant results in any contamination of the Premises, the Building and/or the
Property, Tenant shall promptly take all actions as its sole expense as are
necessary to return the Premises, the Building and/or the Property to the
condition existing prior to the introduction of any such Hazardous Material to
the Premises, the Building and/or the Property; provided that Landlord's
approval of such actions shall first be obtained, which approval shall not be
unreasonably withheld so long as such actions would not potentially have any
material adverse long-term or short-term effect on the Premises or the Building.
As used herein, the term "Hazardous Material" means any hazardous or
toxic substance, material or waste which is or becomes regulated by any local
governmental authority, the State of Maryland or the United States Government.
The term "Hazardous Material" includes, without limitation, any material or
substance that is (i) defined as a "hazardous substance" under the laws of the
State of Maryland, (ii) petroleum, (iii) asbestos, (iv) designated as a
"hazardous substance" pursuant to Section 311 of the Federal Water Pollution
Control Act (33 U.S.C. Section 1321),
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(v) defined as a "hazardous waste" pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42
U.S.C. Section 6903), (vi) defined as a "hazardous substance" pursuant to
Section 101 of the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601), or (vii)
defined as a "regulated substance" pursuant to Subchapter IX, Solid Waste
Disposal Act (Regulation of Underground Storage Tanks), 42 U.S.C. Section 6991
et seq.
48. Americans With Disabilities Act. Notwithstanding any other
provisions contained in this Lease and with the purpose of superseding any such
provisions herein that might be construed to the contrary, it is the intent of
the Landlord and Tenant that at all times while this Lease shall be in effect
that the following provisions shall be deemed their specific agreement as to
how the responsibility for compliance (and cost) with the Americans With
Disabilities Act and amendments to same "ADA", both as to the Premises and
the Property, shall be allocated between them, namely:
1 . Landlord and Tenant agree to cooperate together in the initial
design, planning and preparation of specifications for construction of the
Premises so that same shall be in compliance with the ADA. Any costs associated
with assuring that the plans and specifications for the construction of the
Premises are in compliance with the ADA shall be borne by the party whose
responsibility it is hereunder to bear the cost of preparation of the plans and
specifications. Similarly those costs incurred in the initial construction of
the Premises so that same are built in compliance with the ADA shall be included
within Tenants Improvements and handled in the manner as provided for in other
Sections of this Lease.
2. Modifications, alterations and/or other changes required to and
within the Common Areas which are not capital in nature shall be the
responsibility of Landlord to perform and the cost of same shall be considered a
part of the Building Expenses and treated as such.
3. Modifications, alterations and/or other changes required to and
within the Common Areas which are capital in nature shall be the responsibility
of Landlord and at its cost and expense.
4. Modifications, alterations and/or other changes required to and
within the Premises (after the initial construction of same), whether capital in
nature or non-capital in nature, shall be the responsibility of Tenant and at
its cost and expense; unless said changes are structural in nature and result
from the original design of the Building, in which instance they shall be the
responsibility of Landlord and at its cost and expense.
Each party hereto shall indemnify and hold harmless the other party
from any and all liability, loss, cost or expense arising as a result of a party
not fulfilling its obligations as to compliance with the ADA as set forth in
this Section 48.
49. Building Signage. So long as Tenant continues to lease the
aggregate rentable square footage on the first floor of the Building as
contemplated by this Lease, then Tenant shall have the non-exclusive right to,
at Tenant's sole cost and expense, install an exterior Building sign reflecting
Tenant's trade name, provided, however, that the trade name used on such
signage, the location, design, color, size and method and manner of installation
of such signage shall be subject to Landlord's prior approval and shall be based
upon detailed plans and specifications (which shall include color selections)
prepared by Tenant at its cost and expense which shall be subject to Landlord's
prior approval. All governmental or quasi-governmental permits or approvals
required for such exterior Building sign shall be obtained by Tenant at its sole
cost and expense. Upon the earlier to occur of (a) the expiration or earlier
termination of this Lease, or (b) upon a monetary Event of Default by Tenant
under this Lease, or (c) expiration or earlier termination of the Term, and/or
(d) if Tenant shall no longer continue to lease the aggregate square footage
located on the first floor of the Building, then upon the occurrence of any of
such events, Tenant shall cause such signage to be removed from the Building at
its sole cost and
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expense and shall promptly repair all damage caused by the installation and
removal of such exterior Building signage.
Further, to identify tenants of the Building, Landlord at Landlord's
expense shall maintain a directory sign in the Building Lobby (the "Building
Directory") and at the main Tenant suite entrance door. Landlord shall list
Tenant's trade name within the Building Directory and at the main Tenant suite
entrance door at Landlord's cost and expense using Building standard materials
and design.
50. Roof Penetrations. Tenant shall have the non-exclusive right to
install a roof-top telecommunications equipment serving the Premises on the roof
of the Building, provided that: (i) plans and specifications including details
as to visibility and method of roof penetration are prepared at Tenant's expense
and submitted to Landlord for prior approval; (ii) all costs and expense of any
such installations are borne by Tenant; (iii) Tenant releases Landlord from any
and all liability or loss incurred by Tenant, its officers, employees, agents
and contractors, and other tenants within the Building as a result of any leaks
in the roof or loss or damages to the facilities so installed; (iv) Tenant shall
use only those licensed, reputable and insured contractors for the installation
of such telecommunications equipment; (v) Landlord reserves the right to
relocate the Tenant's roof-top equipment, at Landlord's expense, in the event
such relocation is necessary or desirable in connection with alterations,
expansions or renovations of the Building or Property; (vi) the installation and
use of such roof-top equipment shall not unreasonably interfere with the use and
quiet enjoyment of the Building by any other person or entity occupying any
portion of the Building, and if requested by Landlord, Tenant shall install at
its expense sound barriers for its roof-top equipment; (vii) all roof-top
equipment installed by or on behalf of Tenant shall be maintained by Tenant at
its cost and expense in good operating condition; (viii) Tenant's roof-top
equipment shall not be visible above any parapet of the Building; (ix) all roof
penetrations shall be appropriately flashed in a manner satisfactory to Landlord
at Tenant's cost and expense; (x) Tenant's installation of such equipment
shall be subject to all applicable governmental laws, rules and regulations and
Tenant shall obtain and keep in force any required permits or other governmental
authorizations required in connection with such equipment; and (v) Tenant shall,
at its expense, promptly remove such roof-top equipment at its sole cost and
expense at the expiration or earlier termination of the Term and shall promptly
repair and restore all damage to the Building caused by the installation and
removal of such roof-top telecommunications equipment.
51. Tenant's Right of First Option. Landlord agrees that during the
initial seven-year Term of this Lease, Tenant shall have a continuing right of
first offering to lease from Landlord all or any portion of the rentable area
comprised of approximately 30,000 square feet on the second floor of the
Building as shown on Exhibit "E" attached hereto and made a part hereof (the
"Expansion Space") for a term running conterminously with the Term of this
Lease. At such time as Landlord shall enter into meaningful negotiations with a
third party to lease all or any portion of the Expansion Space, Landlord shall
so notify Tenant in writing (herein "Landlords Offer Notice"). Tenant's rental
of the Expansion Space or any portion thereof shall be at a base rent equal to
the "Prevailing Market Rate" hereinafter defined as established by Landlord for
the Expansion Space. Landlord shall notify Tenant of the "Prevailing Market
Rate" in Landlord's Offer Notice.
For purposes of this Section 51, the term "Prevailing Market Rate"
shall mean the then prevailing market rate being charged for comparable space in
comparable office buildings within a five (5) mile radius of the Building as
reasonably determined by Landlord (taking into account annual adjustments and
rent abatements, cash allowances, premiums, commissions, improvement allowances,
age of building, and other concessions commonly in use at the time of the
Landlord's Offer Notice).
Tenant shall exercise the foregoing right of first offering by
delivering written notice thereof to Landlord within ten (10) days of Tenant's
receipt of Landlord's Offer Notice. Tenant's
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election notice shall specify all or which portion of the Expansion Space for
which Tenant is exercising such right of first offering. In the event Tenant
shall exercise its right of first offering granted herein, Landlord and Tenant
shall enter into an amendment to this Lease within forty-five (45) days of
Landlord's Offer Notice, which amendment shall set for the base rent payable by
Tenant for the Expansion Space, and such other agreements, if any, with respect
to the Expansion Space. In the event (i) Tenant is then in default under the
terms of this Lease at the time of exercising such right, or (ii) Tenant fails
to deliver the requisite notice to Landlord exercising such right within the ten
(10) day period specified above, or (iii) Tenant fails to execute an amendment
to this Lease for the Expansion Space within thee aforesaid forty-five (45) day
period, or (iv) Tenant declines to exercise its right as above-provided as to
all or any portion of the Expansion Space, then Landlord shall be free to
proceed to lease that portion of the Expansion Space specified in Landlord's
Offer Notice to such third party, provided that this right of first offering
shall continue in effect pursuant to the terms set forth herein during the
initial Term of this Lease for such space referenced in Landlord's Offer Notice
and any other space within the Expansion Space becoming available for lease as
defined above. The right of first offering herein given shall not be severed
from this Lease, or separately sold, assigned or transferred, but may only be
assigned or transferred as a part of this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have respectively affixed their
hands and seals to this Lease as of the day and year first above written.
WITNESS OR ATTEST: LANDLORD:
CONSTELLATION REAL ESTATE, INC.,
Agent for Owner
/s/ By: /s/ J. Richard Uhlig, (SEAL)
- ------------------------------ -----------------------------
J. Richard Uhlig,
Senior Vice President
WITNESS OR ATTEST: TENANT:
APPLIED SIGNAL TECHNOLOGY, INC.,
a California corporation
- ------------------------------- By: /s/ Gary L. Yancey (SEAL)
----------------------------
Title: President
--------------------------
STATE OF MARYLAND, Baltimore County , TO WIT:
-------------------------------
I HEREBY CERTIFY, that on this 31 day of May, 1996, before me, the
undersigned Notary Public of said State, personally appeared J. RICHARD UHLIG,
who acknowledged himself to be the Senior Vice President of CONSTELLATION REAL
ESTATE, INC., a Maryland corporation, known to me (or satisfactorily proven) to
be the person whose name is subscribed to the within instrument, and
acknowledged that he executed the same on behalf of said corporation for the
purposes therein contained as the duly authorized Senior Vice President of said
corporation by signing the name of the corporation by himself as such Senior
Vice President.
WITNESS my hand and Notarial Seal.
/s/ Theresa L. Moores
---------------------- [NOTARY SEAL]
Notary Public
My Commission Expires: 05/01/98
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<PAGE> 29
STATE OF CALIFORNIA,
County of Santa Clara
I HEREBY CERTIFY, that on this 29th day of May, 1996, before me, the
undersigned Notary Public of said State, personally appeared Gary L. Yancey,
known to me to be the person whose name is subscribed to the within
instrument, and acknowledged himself to be the President of APPLIED
SIGNAL TECHNOLOGY, INC., a California, and that he, as such President,
being authorized so to do, executed the foregoing instrument on behalf of said
Corporation by himself as such President.
WITNESS my hand and Notarial Seal.
/s/ Mary Rogge
-------------------------------------
Notary Public
My Commission Expires: 3-20-2000
[NOTARY SEAL]
29
<PAGE> 30
EXHIBIT "A-2"
DESCRIPTION OF PHASE 1 PREMISES AND PHASE 2 PREMISES
[DIAGRAM]
PHASE 1 PREMISES
SUITE #100
20,783 RSF
PHASE 2 PREMISES
SUITE #110
8,338 RSF
EXHIBIT "A-2" - Page 1
<PAGE> 31
EXHIBIT "B"
RULES AND REGULATIONS
TO THE EXTENT THAT ANY OF THE FOLLOWING RULES AND REGULATIONS, OR ANY
RULES AND REGULATIONS SUBSEQUENTLY ENACTED CONFLICT WITH THE PROVISIONS OF THE
LEASE, THE PROVISIONS OF THE LEASE SHALL CONTROL.
1. Tenant shall not obstruct or permit its agents, clerks or servants
to obstruct, in any way, the sidewalks, entry passages, corridors, halls,
stairways or elevators of the Building, or use the same in any other way than as
a means of passage to and from the offices of Tenant; bring in, store, test or
use any materials in the Building which could cause a fire or an explosion or
produce any fumes or vapor; make or permit any improper noises in the Building;
smoke in the elevators; throw substances of any kind out of the windows or
doors, or down the passages of the Building, in the halls or passageways; sit on
or place anything upon the window sills; or clean the windows.
2. Waterclosets and urinals shall not be used for any purpose other
than those for which they were constructed; and no sweepings, rubbish, ashes,
newspaper or any other substances of any kind shall be thrown into them. Waste
and excessive or unusual use of electricity or water is prohibited.
3. Tenant shall not (i) obstruct the windows, doors, partitions and
lights that reflect or admit light into the halls or other places in the
Building, or (ii) inscribe, paint, affix, or otherwise display signs,
advertisements or notices in, on, upon or behind any windows or on any door,
partition or other part of the interior or exterior of the Building without the
prior written consent of Landlord which shall not be unreasonably withheld. If
such consent be given by Landlord, any such sign, advertisement, or notice shall
be inscribed, painted or affixed by Landlord, or a company approved by Landlord,
but the cost of the same shall be charged to and be paid by Tenant, and Tenant
agrees to pay the same promptly, on demand.
4. Section Intentionally Deleted.
5. When electric wiring of any kind is introduced, it must be connected
as directed by Landlord, and no stringing or cutting of wires will be allowed,
except with the prior written consent of Landlord which shall not be
unreasonably withheld, and shall be done only by contractors approved by
Landlord. The number and location of telephones, telegraph instruments, electric
appliances, call boxes, etc., shall be subject to Landlord's approval. No
tenants shall lay linoleum or other similar floor covering so that the same
shall be in direct contact with the floor of the Premises; and if linoleum or
other similar floor covering is desired to be used, an interlining of builder's
deadening felt shall be first affixed to the floor by a paste or other material,
the use of cement or other similar adhesive material being expressly prohibited.
6. No additional lock or locks shall be placed by Tenant on any door in
the Building, without prior written consent of Landlord. A reasonable amount
(not to exceed twenty) of keys will be furnished Tenant by Landlord with charge;
any additional keys requested by Tenant shall be paid for by Tenant. Tenant,
its agents and employees, shall not have any duplicate keys made and shall not
change any locks. All keys to doors and washrooms shall be returned to Landlord
at the termination of the tenancy, and in the event of any loss of any keys
furnished, Tenant shall pay Landlord the cost thereof. Tenant shall be permitted
at its sole cost and expense to install on the entrance doors to the Premises a
card key access system provided that Tenant shall first secure Landlord's
approval to the contractor installing the same and method of installation, and
provided further that Tenant shall provide Landlord a card key for Landlord's
access to the Premises.
EXHIBIT "B" - Page 1
<PAGE> 32
7. Tenant shall not employ any person or persons other than Landlord's
janitors for the purpose of cleaning the Premises, without prior written consent
of Landlord which shall not be unreasonably withheld. Landlord shall not be
responsible to Tenant for any loss of property from the Premises however
occurring, or for any damage done to the effects of Tenant by such janitors or
any of its employees, or by any other person or any other cause.
8. No bicycles, vehicles or animals (except for guide dogs) of any kind
shall be brought into or kept in or about the Premises.
9. Tenant shall not conduct, or permit any other person to conduct, any
auction upon the Premises; manufacture or store goods, wares or merchandise upon
the Premises, without the prior written approval of Landlord, except the storage
of usual supplies and inventory to be used by Tenant in the conduct of its
business; permit the Premises to be used for gambling; make any unusual noises
in the Building; permit to be played any musical instrument in the Premises;
permit to be played any radio, television, recorded or wired music in such a
loud manner as to disturb or annoy other tenants; or permit any unusual odors to
be produced upon the Premises.
Tenant shall not permit any portion of the Premises to be used for the
manufacture or sale of intoxicating beverages or the storage, manufacture, or
sale of narcotics, tobacco in any form, or as a barber or manicure shop.
10. No awnings or other projections shall be attached to the outside
walls of the Building. No curtains, blinds, shades or screens shall be attached
to or hung in, or used in connection with, any window or door of the Premises,
without the prior written consent of Landlord which consent shall not be
unreasonably withheld. Such curtains, blinds and shades must be of a quality,
type, design, and color, and attached in a manner reasonably approved by
Landlord.
11. Canvassing, soliciting and peddling in the Building are
prohibited, and Tenant shall cooperate to prevent the same.
12. There shall not be used in the Premises or in the Building, either
by Tenant or by others in the delivery or receipt of merchandise, any hand
trucks except those equipped with rubber tires and side guards, and no hand
trucks will be allowed in passenger elevators.
13. Tenant, before closing and leaving its Premises, shall ensure that
all entrance doors to same are locked.
14. Landlord shall have the right to prohibit any advertising by Tenant
from the Premises which in Landlord's opinion tends to impair the reputation of
the Building or its desirability as a building for offices, and upon written
notice from Landlord, Tenant shall refrain from or discontinue such
advertising.
15. Landlord hereby reserves to itself any and all rights not granted
to Tenant hereunder, including, but not limited to, the following rights which
are reserved to Landlord for its purposes in operating the Building:
(a) the exclusive right to the use of the name of the Building
for all purposes, except that Tenant may use the name as its
business address and for no other purpose;
(b) the right to change the name or address of the Building,
without incurring any liability to Tenant for so doing;
(c) the right to install and maintain a sign or signs on the
exterior of the Building;
(d) the exclusive right to use or dispose of the use of the
roof of the Building;
EXHIBIT "B" - Page 2
<PAGE> 33
(e) the right to limit the space on the directory of the
Building to be allotted to Tenant;
(f) the right to grant to anyone the right to conduct any
particular business or undertaking in the Building.
16. As used herein the term "Premises" shall mean and refer to the
"Leased Premises" as defined in Section 1 of the Lease.
17. Tenant shall not operate space heaters or other heating or
ventilating equipment without the express prior written consent of Landlord in
each instance first obtained. Tenant shall not install or operate any electrical
equipment, appliances or lighting fixtures in the Premises which are not listed
and labeled by Underwriter's Laboratories or other testing organization
acceptable to Landlord.
EXHIBIT "B" - Page 3
<PAGE> 34
EXHIBIT "C"
PRELIMINARY PLANS - PHASE 1 PREMISES
[DIAGRAM]
PHASE 1 PREMISES
20,783 RSF
PHASE 2 PREMISES
8,338 RSF
EXHIBIT "C" Page 1
<PAGE> 35
EXHIBIT "D"
ESTOPPEL CERTIFICATE
Premises: 135 National Business Parkway
National Business Park
Annapolis Junction, Maryland 20701
Lease dated: ________________ 199_, between CONSTELLATION REAL
ESTATE, INC., Agent for Owner, Landlord, and APPLIED SIGNAL TECHNOLOGY, INC.,
a California corporation, Tenant.
The undersigned, the Tenant under the above Lease, hereby certifies to
____________________, to induce ____________________ to loan certain funds to
Landlord/____________________ to invest certain funds in the Landlord pursuant
to Landlord's Limited Partnership Agreement, that said Lease is presently in
full force and effect and unmodified; that the term thereof commenced on
____________________ and full rental is now accruing thereunder; in addition
to the minimum rent payable under the Lease, Tenant is paying the additional
rents as required thereby; that the undersigned accepted possession of said
premises on ____________________, and that any improvements required by the
terms of said Lease to be made by the Landlord have been completed to the
satisfaction of the undersigned; that no rent under said Lease has been paid
beyond ____________________, and that the undersigned, as of this date, has no
charge, lien or claim of offset under said Lease or otherwise, against rents
or other charges due or to become due thereunder, except as to the security
deposits, if any, listed below and to the knowledge of the undersigned, there
is no default by the Landlord under the Lease.
Tenant Deposit held by Landlord: $________________.
WITNESS OR ATTEST: APPLIED SIGNAL TECHNOLOGY, INC.,
a California corporation
__________________________________ By______________________________________
EXHIBIT "D" - Page 1
<PAGE> 36
EXHIBIT "E"
DESCRIPTION OF EXPANSION SPACE
THE EXPANSION SPACE
Second Floor, 135 National
Business Parkway
[DIAGRAM]
EXHIBIT "E" - Page 1
<PAGE> 37
EXHIBIT "F"
SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE AGREEMENT
THIS AGREEMENT, made this _____ day of __________, 1996, by and among
CONSTELLATION REAL ESTATE, INC., a Maryland corporation, Agent for Owner
(hereinafter called "Lessor"), ________________________________________
(hereinafter called "Lessee"), and __________________________________________
a national banking association (hereinafter called "Mortgagee").
WHEREAS, by Lease dated ________________, 1996, (hereinafter called
the "Lease") between Lessor and Lessee, Lessee leased certain improvements
constructed or to be constructed on the real property described in
Schedule 1 attached hereto (hereinafter called the "Property"); and
WHEREAS, Mortgagee is, or will be, the holder of a note secured by a
deed of trust recorded or intended to be recorded among the Land Records of the
jurisdiction in which the Property is located, which constitutes a lien against
the Property (which deed of trust, as the same may be modified, supplemented,
extended, or renewed from time to time, is hereinafter called the "Deed of
Trust"); and
WHEREAS, Mortgagee desires that Lessee agree to attorn to the purchaser
at foreclosure of the Deed of Trust in the event of such foreclosure, or to
Mortgagee in the event of collection of the rent by Mortgagee; and Lessee is
willing to agree to attorn if Mortgagee and such purchaser will recognize
Lessee's rights under the Lease as hereinafter indicated.
NOW THEREFORE, for and in consideration of the sum of One Dollar
($1.00) paid in hand by each of the parties hereto to the other, receipt whereof
is acknowledged, and for and in consideration of their respective covenants
herein made, the parties agree as follows:
1. So long as no default has occurred and continued for such period of
time (after notice, if any, required by the Lease) as would entitle the Lessor
to terminate the Lease or would cause, without any further action of the Lessor,
the termination of the Lease, the Lease shall not be terminated, nor shall the
Lessee's use, possession or enjoyment of the leased premises be interfered with,
nor shall the leasehold estate granted by the Lease be affected in any other
manner, in any foreclosure or any action or proceeding instituted under or in
connection with the Deed of Trust or in case the Mortgagee takes possession of
the Property pursuant to the provisions of the Deed of Trust.
2. Subject to the provisions of this Agreement, the estate created by
the Lease shall be subject and subordinate to the lien and terms and conditions
of the Deed of Trust. If the interest of Lessor in the Property shall be
transferred to and owned by Mortgagee by reason of foreclosure or other
proceedings brought by it, or by deed in lieu of foreclosure or any other
manner, Lessee shall be bound to Mortgagee under all of the terms, covenants and
conditions of the Lease for the balance of the term thereof and any extensions
or renewals thereof which may be effected in accordance with any option in the
Lease, with the same force and effect as if Mortgagee were the Lessor under the
Lease. Lessee does hereby attorn to Mortgagee as its landlord, such attornment
to be effective and self-operative without the execution of any further
instruments on the part of any of the parties hereto immediately upon Mortgagee
succeeding to the interest of the Lessor in the Property. Upon request, Lessee
will execute a written attornment agreement in favor of Mortgagee at such time
as Mortgagee succeeds to the Lessor's interest in the Property.
Exhibit "F" - Page 1 of 5
<PAGE> 38
3. If Mortgagee shall succeed to the interest of Lessor under the
Lease, Mortgagee shall not be (a) liable for any act or omission of Lessor, or
(b) subject to any offsets or defenses which Lessee might have against Lessor,
or (c) bound by any rent or additional rent which Lessee might have paid for
more than one month in advance or any security deposit, unless the rent,
additional rent or security deposit is actually in the Mortgagee's possession,
or (d) bound by any amendment or modification of the Lease made without
Mortgagee's consent.
4. At any time after an event of default has occurred under the Deed of
Trust, Lessee shall make payments under the Lease directly to Mortgagee. Receipt
of Mortgagee's written certification that such an event of default has occurred
shall be the only condition to Lessee's making payments directly to Mortgagee,
and Lessee shall not be required to investigate or verify the nature or extent
of any default. Lessor by its execution of this Agreement irrevocably consents
to such direct payment by Lessee and agrees to hold Lessee harmless for the
application of any payments so made.
5. Lessee agrees (a) to give the Mortgagee written notice and a period
of 30 days within which the Mortgagee may, at its option, cure any default by
Lessor under the Lease, (b) to certify to the Mortgagee from time to time as to
whether the Lease is in effect and whether there are any defaults thereunder,
(c) not to surrender, cancel or terminate the Lease, except due to an uncured
default by Lessor, without the Mortgagee's prior written consent, (d) that if
Mortgagee elects to perform Lessor's obligations under the Lease, the Lease
shall not be terminated due to any defaults of Lessor which are not capable of
being cured by Mortgagee, such as, for example, the bankruptcy of Lessor, and
(e) that notwithstanding anything contained in the Lease to the contrary, the
application of hazard insurance and condemnation proceeds shall be determined in
accordance with the Deed of Trust.
6. Lessee certifies to Mortgagee that: (a) the Lease is in full force
and effect, (b) the Lease has not been modified or amended, (c) neither the
Lessor nor the Lessee is in default under the Lease, (d) Lessee has no defense
or offset to the payment of rent, (e) no rent has been paid for more than 30
days in advance, (f) all improvements which the Lessor is required to provide or
construct under the Lease have been furnished and/or completed in an acceptable
manner, (g) the Lessee is not the subject of any bankruptcy or insolvency
proceeding, nor, to the best of Lessee's knowledge is any such proceeding
contemplated by or threatened against Lessee, and (h) the Lessee has no right of
first refusal, option, or other right to purchase the Property or any portion
thereof.
7. All notices under this Agreement shall be given by first class
registered or certified mail, postage prepaid, addressed as follows:
if to the Lessor: Constellation Real Estate, Inc.
8815 Centre Park Drive, Suite 400
Columbia, Maryland 21045
Attention: John Harris Gurley,
Vice President and General Counsel
if to the Lessee:
-----------------------------------
-----------------------------------
-----------------------------------
if to the Mortgagee:
-----------------------------------
-----------------------------------
-----------------------------------
or at such other address as any of the parties have notified the others of in
the manner provided in this paragraph.
Exhibit "F" - Page 2 of 5
<PAGE> 39
8. The word "Lease" as used herein shall mean the Lease executed by
Lessor and Lessee, as amended or modified by written agreements hereafter made,
from time to time, between Lessor and Lessee and consented to by Mortgagee. The
words "foreclosure" and "foreclosure sale" as used herein shall be deemed to
include the acquisition of Lessor's estate in the Property by voluntary deed (or
assignment) in lieu of foreclosure. The word "Mortgagee" shall include the
Mortgagee herein specifically named and any of its nominees, successors, and
assigns, including anyone who shall have succeeded to Lessor's interest in the
Property by, through or under foreclosure of the Deed of Trust, or by voluntary
deed.
9. All of the terms, covenants and conditions hereof shall run with the
land and shall be binding upon and inure to the benefit of the parties hereto
and their respective [heirs, personal representatives] successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
properly executed and sealed the day and year first above written.
WITNESS OR ATTEST: CONSTELLATION REAL ESTATE, INC.,
a Maryland corporation,
Agent for Owner
__________________________________ By:____________________________ (SEAL)
LESSOR
WITNESS OR ATTEST:
__________________________________ By:____________________________ (SEAL)
LESSEE
WITNESS OR ATTEST:
__________________________________ By:____________________________ (SEAL)
MORTGAGEE
STATE OF MARYLAND, COUNTY OF ____________________ TO WIT:
I HEREBY CERTIFY, that on this _____ day of ____________ 1996, before
me, the undersigned Notary Public of said State, personally appeared J. RICHARD
UHLIG, who acknowledged himself to be Senior Vice President of CONSTELLATION
REAL ESTATE, INC., Agent for Owner, a Maryland corporation, known to me (or
satisfactorily proven) to be the person whose name is subscribed to the within
instrument, and acknowledged that he executed
Exhibit "F" - Page 3 of 5
<PAGE> 40
the same for the purposes therein contained as the duly authorized Agent by
signing the name of the corporation by himself as Agent.
WITNESS my hand and Notarial Seal.
___________________________________
Notary Public
My Commission Expires:____________________
STATE OF _______________, CITY/COUNTY OF _______________,TO WIT:
I HEREBY CERTIFY, that on this _____ day of _______________, 1996,
before me, the undersigned Notary Public of said State, personally appeared
____________________ who acknowledged himself/herself to be a ________________
of _________________________________, known to me (or satisfactorily proven)
to be the person whose name is subscribed to the within instrument, and
acknowledged that he/she executed the same for the purposes therein contained
as the duly authorized _____________________________ of said corporation by
signing the name of the corporation by himself/herself as ___________________.
WITNESS my hand and Notarial Seal.
___________________________________
Notary Public
My Commission Expires:__________________
STATE OF MARYLAND,__________________________ TO WIT:
I HEREBY CERTIFY that on this _____ day of __________, 1996, before
me, the undersigned Notary Public of said State, personally appeared
_________________________________, who acknowledged himself to be the
_________________________________ of _____________________________________
a national banking association, known to me (or satisfactorily proven) to be
the person whose name is subscribed to the within instrument, and acknowledged
that he/she executed the same for the purposes therein contained as the duly
authorized ______________________________ of said national banking association
by signing the name of the association by himself/herself as _________________
_______________________.
WITNESS my hand and Notarial Seal.
___________________________________
Notary Public
My Commission Expires: __________________
Exhibit "F" - Page 4 of 5
<PAGE> 41
Schedule 1
BEING KNOWN AND DESIGNATED as Lot 6BR, as shown on that certain
resubdivision plat entitled, "The National Business Park, Lots 6-AR, 6-BR, and
7AR," which Plat is recorded among the Land Records of Anne Arundel County,
Maryland in Plat Book ___________ Page No. ___________, as Plat No. __________.
Exhibit "F" - Page 5 of 5
<PAGE> 42
FIRST AMENDMENT TO LEASE AGREEMENT
This First Amendment to Lease Agreement (the "First Amendment") is made and
entered into to be effective as of February 1, 1995, by and between SUNNYVALE
BUSINESS PARK, A CALIFORNIA LIMITED PARTNERSHIP ("Landlord") and Applied Signal
Technology, Inc., a California corporation ("Tenant"), with reference to the
following facts.
RECITALS
A. Landlord and Tenant have entered into that certain Lease
Agreement dated November 23, 1994 (the "Lease"), wherein Tenant leased from
Landlord those certain premises in the Buildings located at 115, 160, 175 and
190 Sobrante Way, Sunnyvale, California and consisting of approximately 202,587
rentable square feet of office and warehouse space (the "Premises"), as more
particularly described in the Lease.
B. Landlord and Tenant desire to modify the terms and provisions
of the Lease to accurately reflect the parties' intentions with respect to
casualty damage to any portion of the Premises.
C. Landlord and Tenant desire to modify the Lease on the terms and
conditions set forth in this First Amendment.
NOW THEREFORE, in consideration of the mutual promises and covenants
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 28 of the Lease entitled "Casualty Damage" is hereby
deleted in its entirety and the following shall be substituted therefor in its
entirety:
28. Casualty Damage.
28.1 CASUALTY. If the Premises or any part thereof
(including the Tenant Improvements but excluding any other alterations or
improvements installed by or for the benefit of Tenant) shall be damaged or
destroyed by fire or other casualty, Tenant shall give immediate written notice
thereof to Landlord. Within thirty (30) days after receipt by Landlord of such
notice, Landlord shall notify Tenant, in writing, whether the necessary repairs
can reasonably be made: (a) within two hundred forty (240) days; or (b) in more
than two hundred forty (240) days, from the date of such notice.
28.1.1 MINOR INSURED DAMAGE. If any of the
individual premises comprising the Premises are damaged only to such extent
that repairs, rebuilding and/or restoration can be reasonably completed within
two hundred forty (240) days, this Lease shall not terminate and, provided that
insurance proceeds are available to fully repair the damage and Landlord is
able to do so under then applicable governmental codes, ordinances, regulations
and/or laws, Landlord shall repair the damaged portions of the Premises to
substantially the same condition that existed prior to the occurrence of such
casualty, except Landlord shall not be required to rebuild, repair, or replace
any alterations or improvements installed by or for the benefit of Tenant
(other than the Tenant Improvements) or any part of Tenant's furniture,
furnishings or fixtures and equipment removable by Tenant. The Rent payable
hereunder shall be abated proportionately from the date and to the extent such
damage or destruction materially interferes with Tenant's use or occupancy of
the portion of the Premises which are damaged, but only to the extent business
interruption insurance proceeds are not received by Tenant.
28.1.2 MAJOR INSURED DAMAGE. If any of the individual
premises comprising the Premises are damaged to such extent that repairs,
rebuilding and/or restoration cannot be reasonably completed within two hundred
forty (240) days, and if (i) there are not adequate insurance proceeds to enable
Landlord to repair, rebuild and/or restore the damaged portions of the Premises
(and Tenant does not deliver, or agree to deliver, to Landlord sufficient funds
to cover any shortfall in insurance proceeds; or Landlord does not elect to
cover any shortfall in insurance proceeds), or (ii) reparation, rebuilding or
restoration would not be permitted under then applicable governmental codes,
ordinances, regulations and/or laws, then either Landlord or Tenant may
terminate this Lease as it relates to the damaged Building(s) by giving written
notice within twenty (20) days after notice from Landlord regarding the time
period of repair. If either party notifies the other of its intention to so
terminate this Lease as it relates to the damaged Building(s) then this Lease
shall terminate with respect to the portion(s) of the Premises so terminated and
the Rent shall be abated from the date Tenant vacates the damaged individual
premises comprising the Premises of the damaged Building(s). If neither party
elects to
1
<PAGE> 43
terminate this Lease as it relates to the damaged Building(s), Landlord shall
promptly commence and diligently prosecute to completion the repairs to the
damaged portion(s) of the Premises, provided insurance proceeds are available
to fully repair the damage (except that Landlord shall not be required to
rebuild, repair, or replace any alterations or improvements installed by or for
the benefit of Tenant, other than the Tenant Improvements, or any part of
Tenant's furniture, furnishings or fixtures and equipment removable by Tenant).
During the time when Landlord is prosecuting such repairs to completion, the
Rent payable hereunder shall be abated proportionately from the date and to the
extent such damage or destruction materially interferes with Tenant's use or
occupancy of the damaged Portion(s) of the Premises but only to the extent
business interruption insurance proceeds, as related to this Lease, are not
received by Tenant.
28.1.3 DAMAGE NEAR END OF TERM. Notwithstanding anything to the
contrary contained in this Lease except for the provisions of Section 28.2
below, if any of the individual premises comprising the Premises are damaged or
destroyed during the last year of the then applicable term of this Lease,
Landlord may, at its option, cancel and terminate this Lease as it relates to
the damaged Building(s) by giving written notice to Tenant of its election to
do so within thirty (30) days after receipt by Landlord of notice from Tenant of
the occurrence of such casualty. If Landlord so elects to terminate this Lease
as it relates to the damaged Building(s), all rights of Tenant hereunder with
respect to such portion of the Premises shall cease and terminate ten (10) days
after Tenant's receipt of such notice.
28.2 TENANT'S OR TENANT'S REPRESENTATIVE'S FAULT. If any portion of
the Premises is damaged or destroyed due to the fault, negligence (active or
passive) or breach of this Lease by Tenant or any of Tenant's Representatives,
Rent shall not be diminished during the repair of such damage and Tenant shall
be liable to Landlord for the cost of the repair caused thereby to the extent
such cost is not covered by any insurance proceeds. In addition,
notwithstanding any to the contrary contained herein, Tenant shall not have any
rights to terminate this Lease pursuant to the provisions of this Section 28.
28.3 UNINSURED CASUALTY. Tenant shall be responsible for and shall pay
to Landlord, as Additional Rent, any deductible amounts under the property
insurance for the Premises and/or the Buildings; provided, however, with
respect to the deductible for any earthquake, Tenant shall pay such earthquake
deductible amortized over a period equal to the lesser of five (5) years of the
then remaining balance of the term of this Lease. If any portion of the Premises
is damaged and is not fully covered by insurance proceeds received by Landlord
(and Tenant elects not to pay any such difference) or if the holder of any
indebtedness secured by any portion of the Premises requires that the insurance
proceeds by applied to such indebtedness, then Landlord shall have the right to
terminate this Lease as this Lease relates to the damaged Building(s) by
delivering written notice of termination to Tenant within thirty (30) days
after the date of notice to Tenant of any such event, whereupon all rights and
obligations shall cease and terminate hereunder with respect to the portion(s)
of the Premises for which this Lease is so terminated, except for those
obligations expressly provided for in this Lease to survive such termination of
this Lease related to the damaged Building(s).
28.4 TENANT'S WAIVER. Landlord shall not be liable for any
inconvenience or annoyance to Tenant, injury to the business of Tenant, loss of
use of any part of the Premises by Tenant or loss of Tenant's personal
property, resulting in any way from such damage, destruction or the repair
thereof, except that, Landlord shall allow Tenant a fair diminution of Rent
during the time and to the extent the damaged portion(s) of the Premises are
unfit for occupancy as specifically provided above in this Section 28. With
respect to any damage or destruction which Landlord is obligated to repair or
may elect to repair, Tenant hereby waives all rights to terminate this Lease,
except as otherwise expressly permitted hereunder, or offset any amounts
against Rent pursuant to rights accorded Tenant by any law currently existing
or hereafter enacted, including but not limited to, all rights pursuant to the
provisions of Sections 1932(2.), 1933(4.), 1941 and 1942 of the California
Civil Code, as the same may be amended or supplemented from time to time.
Notwithstanding anything in the Lease to the contrary, if the Lease is
terminated as it relates to the damaged portion of the Individual premises
comprising the Premises, the Lease as it relates to the balance of the
individual premises comprising the Premises which are not damaged shall remain
in full force and effect.
2. All capitalized terms used herein and not otherwise defined herein
shall have the same meaning ascribed to such terms as set forth in the Lease.
3. Landlord and Tenant hereby further agree that the Lease is in full
force and effect, and that the terms and provisions of the Lease shall remain
unchanged except as modified by this First Amendment. The terms and provisions
of the Lease are hereby incorporated herein in their entirety.
2
<PAGE> 44
4. In the event of any conflict or inconsistency between the terms and
provisions of the Lease and the terms and provisions of this First Amendment,
the terms and provisions of this First Amendment shall prevail.
IN WITNESS WHEREOF, the parties have executed this First Amendment as of
the date and year first written above in this First Amendment.
TENANT:
Applied Signal Technology, Inc.,
A California Corporation
By: /s/ Gary L. Yancey
---------------------------------
Gary L. Yancey
President
LANDLORD:
SUNNYVALE BUSINESS PARK,
A CALIFORNIA LIMITED PARTNERSHIP
By: LINCOLN MATHILDA ASSOCIATES LIMITED PARTNERSHIP,
A CALIFORNIA LIMITED PARTNERSHIP
By: Lincoln Property Company Management Services, Inc.,
As Manager and Agent for Owner
By: /s/ illegible
---------------------------------
Vice President
By: PATRICIAN ASSOCIATES, INC.,
a California corporation
By: /s/ Michael S. Duffy
---------------------------------
Michael S. Duffy
Vice President
By: /s/ Timothy E. Minton
---------------------------------
Timothy E. Minton
Vice President & Secretary
<PAGE> 1
Exhibit 10.16
First Amendment to Lease Agreement
Change of Commencement Date
Page 1 of 2
Lease dated November 23, 1994, between
Applied Signal Technology, Inc.
a California corporation
("Tenant"),
and
Sunnyvale Business Park,
a California Limited Partnership
("Landlord")
This First Amendment to Lease Agreement (the "Amendment") is made as of
November 20, 1995, by and between Sunnyvale Business Park, a California Limited
Partnership ("Landlord"), and Applied Signal Technology, Inc., a California
corporation ("Tenant"), with reference to the following facts.
RECITALS
WHEREAS, Landlord and Tenant have entered into that certain Lease Agreement
dated November 23, 1994 (the "Lease"), for the leasing of certain premises
located at 460 W. California Avenue, Sunnyvale, California (the "Premises");
and
WHEREAS, Landlord and Tenant wish to amend the Commencement Date of the Lease
and certain other matters with respect to the Lease, all on the terms and
conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals: Landlord and Tenant agree that the above recitals are true
and correct.
2. Premises Address: The premises address has been designated as and shall
be known as 460 W. California Avenue, Sunnyvale, CA 94086.
3. Term: The Commencement Date of the Lease shall be November 13, 1995;
and the last day of the initial term of the Lease (the "Expiration
Date") shall be March 13, 2012.
4. Base Rent: The dates on which the Base Rent will be adjusted and the
amount of monthly Base Rent to be charged are:
for the period 11/13/1995 to 3/13/1998 the monthly Base Rent shall be
$49,300.00;
for the period 3/14/1998 to 3/13/2001 the monthly Base Rent shall be
$50,460.00;
for the period 3/14/2001 to 3/13/2004 the monthly Base Rent shall be
$54,520.00;
for the period 3/14/2004 to 3/13/2007 the monthly Base Rent shall be
$56,840.00;
for the period 3/14/2007 to 9/13/2009 the monthly Base Rent shall be
$58,000.00; and
for the period 9/14/2009 to 3/13/2012 the monthly Base Rent shall be
$59,160.00.
5. Effect of Amendment: Except as modified herein, the terms and conditions
of the Lease shall remain unmodified and continue in full force and
effect. In the event of any conflict between the terms and conditions of
the Lease, the terms and conditions of this Amendment shall prevail. The
terms and provisions of the Lease are hereby incorporated in this
Amendment.
6. Definitions: Unless otherwise defined in this Amendment, all capitalized
terms not defined in this Amendment shall have the meaning set forth in
the Lease.
<PAGE> 2
FIRST AMENDMENT TO LEASE AGREEMENT
CHANGE OF COMMENCEMENT DATE
PAGE 2 OF 2
7. Authority: Subject to the provisions of the Lease, this Amendment shall be
binding upon and inure to the benefit of the parties hereto, their respective
heirs, legal representatives, successors and assigns. Each party hereto and
the persons signing below warrant that the person signing below on such
party's behalf is authorized to do so and to bind such party to the terms of
this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT:
APPLIED SIGNAL TECHNOLOGY, INC.
A CALIFORNIA CORPORATION
By: /s/ GARY L. YANCEY
-------------------
Its: President
-------------------
Date: 1 March 1996
LANDLORD:
SUNNYVALE BUSINESS PARK,
A CALIFORNIA LIMITED PARTNERSHIP
By: LINCOLN MATHILDA ASSOCIATES LIMITED PARTNERSHIP,
a California limited partnership
By: Lincoln Property Company Management Services, Inc.,
As Agent for Owner
By: /s/ [illegible]
------------------------
Vice President
Date:
--------------
By: PATRICIAN ASSOCIATES, INC.,
a California corporation
By: /s/ JOHN N. URBAN
------------------------
John N. Urban
Assistant Director
Commercial Real Estate Equities
By: ------------------------
Date:
------------------------
<PAGE> 3
SECOND AMENDMENT TO LEASE AGREEMENT
CHANGE OF COMMENCEMENT DATE
Page 1 of 2
Lease dated November 23, 1994, between
Applied Signal Technology, Inc.
a California corporation
("Tenant"),
and
Sunnyvale Business Park,
a California Limited Partnership
("Landlord")
This First Amendment to Lease Agreement (the "Amendment") is made as of
November 20, 1995, by and between Sunnyvale Business Park, a California Limited
Partnership ("Landlord"), and Applied Signal Technology, Inc., a California
corporation ("Tenant"), with reference to the following facts.
RECITALS
WHEREAS, Landlord and Tenant have entered into that certain Lease Agreement
dated November 23, 1994 (the "Lease"), for the leasing of certain premises
located at 115, 160, 175, 190 Sobrante Way, Sunnyvale, California (the
"Premises"); and
WHEREAS, Landlord and Tenant wish to amend the Commencement Date of the Lease
and certain other matters with respect to the Lease, all on the terms and
conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Recitals. Landlord and Tenant agree that the above recitals are true and
correct.
2. Premises Address: The premises address has been designated as and shall be
changed to the following:
115 Sobrante Way is now known as 490 W. California Avenue, Sunnyvale, CA.
160 Sobrante Way is now known as 430 W. California Avenue, Sunnyvale, CA.
175 Sobrante Way is now known as 600 W. California Avenue, Sunnyvale, CA.
190 Sobrante Way is now known as 400 W. California Avenue, Sunnyvale, CA.
3. Term: The Commencement Date of the Lease shall be November 2, 1996; and the
last day of the initial term of the Lease (the "Expiration Date") shall be
modified and extended to March 13, 2012.
4. Base Rent: The dates on which the Base Rent will be adjusted and the amount
of monthly Base Rent to be charged for the premises are:
for the period 11/2/1996 to 11/1/1997 the monthly Base Rent shall be
$158,017.86;
for the period 11/2/1997 to 11/1/2000 the monthly Base Rent shall be
$166,121.34;
for the period 11/2/2000 to 11/1/2003 the monthly Base Rent shall be
$168,147.21;
for the period 11/2/2003 to 11/1/2006 the monthly Base Rent shall be
$178,276.56;
for the period 11/2/2006 to 5/1/2009 the monthly Base Rent shall be
$182,328.30; and
for the period 5/2/2009 to 3/13/2012 the monthly Base Rent shall be
$188,405.91.
5. Effect of Amendment: Except as modified herein, the terms and conditions of
the Lease shall remain unmodified and continue in full force and effect. In
the event of any conflict between the terms and conditions of the Lease,
the terms and conditions of this Amendment shall prevail. The terms and
provisions of the Lease are hereby incorporated in this Amendment.
6. Definitions: Unless otherwise defined in this Amendment, all capitalized
terms not defined in this Amendment shall have the meaning set forth in the
Lease.
<PAGE> 4
SECOND AMENDMENT TO LEASE AGREEMENT
CHANGE OF COMMENCEMENT DATE
PAGE 2 OF 2
7. Authority: Subject to the provisions of the Lease, this Amendment shall be
binding upon and inure to the benefit of the parties hereto, their
respective heirs, legal representatives, successors and assigns. Each party
hereto and the persons signing below warrant that the person signing below
on such party's behalf is authorized to do so and to bind such party to the
terms of this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date and
year first above written.
TENANT:
APPLIED SIGNAL TECHNOLOGY, INC.
A CALIFORNIA CORPORATION
By: /s/ GARY L. YANCEY
-------------------
Its: President
-------------------
Date: 1 March 1996
------------
LANDLORD:
SUNNYVALE BUSINESS PARK
A CALIFORNIA LIMITED PARTNERSHIP
By: LINCOLN MATHILDA ASSOCIATES LIMITED PARTNERSHIP,
a California limited partnership
By: Lincoln Property Company Management Services, Inc.,
As Agent for Owner
By: /s/ Illegible
-------------------------------------------
Vice President
Date:
----------------
By: PATRICIAN ASSOCIATES, INC.,
a California corporation
By: /s/ JOHN N. URBAN
-------------------------------------------
John N. Urban
Assistant Director
Commercial Real Estate Equities
Date:
----------------
<PAGE> 1
APPLIED SIGNAL TECHNOLOGY, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(in thousands except per share)
<TABLE>
<CAPTION>
Year Ended October 31,
1996 1995 1994
--------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Number of Shares Outstanding 7,754 7,455 7,442
Net effect of dilutive stock options,
based on the treasury stock method
using the year-end market price, if
higher than average market price 165 180 327
--------------------------------------
Total 7,919 7,635 7,769
====== ====== ======
Net Income $1,815 $ 904 $3,140
====== ====== ======
Net Income per share $ 0.23 $ 0.12 $ 0.40
====== ====== ======
</TABLE>
84
<PAGE> 1
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED: October 31,
(IN THOUSANDS EXCEPT PER SHARE DATA) 1992 1993 1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from contracts $50,930 $57,954 $64,341 $67,664 $77,410
Operating income 5,502 4,773 4,741 1,152 2,743
Net income 3,412 3,263 3,140 904 1,815
Net income per share 0.61 0.47 0.40 0.12 0.23
Working capital 11,224 20,550 21,888 24,269 26,477
Total assets 28,659 40,692 47,316 49,030 52,103
Long-term debt 1,454 -- -- -- --
Retained earnings 10,749 14,013 17,153 18,052 19,866
Shareholders' equity 16,823 32,874 35,809 36,947 39,965
Book value per share $ 3.14 $ 4.44 $ 4.84 $ 4.90 $ 5.08
---------------------------------------------------
</TABLE>
[REVENUES FROM CONTRACTS GRAPH]
[NET INCOME GRAPH]
[SHAREHOLDERS' EQUITY GRAPH]
[BOOK VALUE PER SHARE GRAPH]
Forward-looking statements in this Annual Report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Stockholders are cautioned that all forward-looking statements pertaining to the
Company involve risks and uncertainties, including, without limitation, those
contained under the caption, "Business Considerations and Certain Factors that
May Affect Future Results of Operations and/or Stock Price" and other risks
detailed from time to time in the Company's periodic reports and other
information filed with the Securities and Exchange Commission, including its
latest Form 10-K filed for the fiscal year ended October 31, 1996.
1
<PAGE> 2
LETTER TO SHAREHOLDERS
Dear Shareholders,
Even though we fell short of our 1996 revenue goal of $80 million, I am very
pleased with the year end results. The shortfall from $80 million was entirely
due to staff shortage and our major challenge of hiring in an extremely
competitive job market. The fact that we managed to achieve revenue of $77.4
million represents a very good accomplishment. Our net income of $1.8 million
also represents an accomplishment in that it improved from our fiscal 1995
margin.
To keep the perspective on this 2.3% net income, I remind you that your Company
invests some of its pre-tax earnings into Company-directed R&D, and in fiscal
1996 we invested $2.7 million of pre-tax profits in this R&D. Since we are
primarily a government contractor, we could recover all of the company-directed
R&D in our billing rates; however, to maintain a competitive cost structure, we
invest partially from profits.
Of course, the most consequential item in our fiscal 1996 performance was our
record bookings of $ 130.7 million. This represents a 97% growth over fiscal
1995 ($ 66.4 million) which had been the previous record in bookings. Even
though a multi-year signal reconnaissance program contributed 40% of these
record bookings, our backlog executable in fiscal 1997 is also a record. Our
signal reconnaissance market place accounted for 97% of these bookings and I
believe this demonstrates that signal reconnaissance is a very healthy market
and offers your Company ample growth opportunities.
[GARY L. YANCEY PICTURE]
2
<PAGE> 3
Fiscal 1997
Starting fiscal 1997 with record backlog is obviously a very healthy situation.
We have a number of opportunities in each of our three primary marketplaces
(intelligence, military, and commercial) that offer the possibility of strong
bookings throughout the coming year.
Intelligence Community
Our traditional marketplace is still the strongest and continues to grow. We
experienced a large number of equipment orders in the last month of the
government's fiscal 1996. In addition, as we have indicated in the past, the
increase in geographical areas of political concern to the U.S., coupled with
the rapid advancement in telecommunication technology, has put ever increasing
demands on new developments of signal reconnaissance equipment. Therefore, our
traditional marketplace has been growing in R&D as well as product sales.
We also have opportunities we will be pursuing in fiscal 1997 for unique
developments similar to the Scalpel program. These efforts are competitive and
offer opportunities for major technological developments that can be used in
many of our signal reconnaissance products.
Military
There are three major opportunities in this marketplace. First, our JASA (Joint
Airborne Signal-intelligence Architecture) proposal is in evaluation by the
Joint Airborne Sigint Program Office (JASPO) for the low band portion of JASA.
We are teamed with Lockheed-Sanders on this effort and the JASPO has stated the
source selection will occur by February 1997.
Second, we are teamed with Harris Corporation on a proposal for the Army's High
Capacity Trunk Radio (HCTR) digital communication system. This effort will
provide a prototype of the digital data transfer system as the information
backbone of the digital battlefield.
The third opportunity is upcoming and that is the competitive effort for the
Milstar upgrade. We are teamed with Hughes Corporation on this effort and we
would provide on-board digital signal processing capability.
Commercial
In the commercial marketplace, the major opportunity is the QAMalyzer(TM)
digital video test product. Although the digital video rollout is happening much
more slowly than predicted by most of the "experts," the major cable providers
do appear to be committed to digital video for data services, teleco services
and enhanced TV. As I have stated before, digital video is going to dictate
requirements for test equipment like the QAMalyzer(TM) and we believe we are
first-to-market with such a device.
We also have an opportunity in the area of wireless broadband data access for
the consumer. This endeavor will be one of many data access technologies being
offered by different companies over the next few years.
/s/ GARY L. YANCEY
3
<PAGE> 4
[PICTURE]
STRATEGIC SYSTEMS DIVISION
The Strategic Systems Division (SSD) develops signal processing hardware,
software, and systems for the national intelligence agencies. Products developed
within SSD are produced within the Company's Operations Division. SSD
technologies span the spectrum of modern communications and garner a high level
of respect in our customer community. Product areas include voiceband modems,
facsimile processing, channel selection, digital wireless communications, signal
storage and forwarding, digital radio equalizers and demodulators, and high data
rate communications.
In fiscal 1996, SSD was responsible for generating $36.6 million of the
Company's revenues and contributed to about three-quarters of the Company's IR&D
program. A high degree of diversity continues to exist in SSD's sales base:
$67.4 million of new bookings occurred in the year and the division currently
has in excess of 150 active contracts.
A few of the division's more notable accomplishments during fiscal 1996 were:
Advanced Techniques Department (ATD)
ATD successfully developed a Mobile Radio Collection System (MRCS) capable of
processing one of the newer cellular formats. This contract was completed on
time and within budget and received 100% of the available award fee. On another
effort, ATD developed an MRCS equipped with adaptive beamforming (a "smart
antenna") that can be used to extend the range of coverage and enhance the
quality of reception.
Processing Systems Department (PSD)
PSD successfully developed the key signal processing component of the
government's new dial-up modem signal reconnaissance subsystem. Over twenty
thousand lines of new code were developed, integrated into several existing
products, and tested, all within a nine-month period. PSD is now working with
the government to complete the full system integration.
Wideband Digital Communications Department (WDCD)
Delivery and field tests of the first Model 256LC (a single chassis
RF-to-voice-grade channel reconnaissance system) were successfully completed,
generating significant customer interest. A new development program was launched
as a result of winning a major competitive proposal to develop an advanced
wideband trellis-coding demodulator. In the area of satellite communications,
WDCD was awarded a sole-source, multimillion dollar development contract to
significantly expand the capabilities of the Model 120S, a personal
communication satellite reconnaissance system.
Digital Products Department (DPD)
DPD experienced significant levels of growth (40% in sales) in FY96 due
primarily to the large SCALPEL program focus within this department. Past IR&D
efforts in the Geographic Gateway Analysis area have generated considerable
interest in the customer community, resulting in a significant number of new
contracts during the year. Results of several successful field tests of the
Model 114 signal survey unit are also contributing to additional product
enhancements and sales.
East Coast Operations (ECO)
The East Coast Operations finished the year with strong program performance.
Successful completion of major system development milestones on two programs in
the command, control and communications warfare marketplace solidified our
position in an emerging market segment and led to important follow-on business.
New orders increased to $4.2 million led by Elvira Signal Analysis Workstation
sales which reached record levels during fiscal 1996.
SCALPEL Program
The SCALPEL program, by far the largest program in the history of the Company,
was begun in earnest during fiscal 1996. It represents a long-term relationship
with a new customer in the intelligence community that is expected to last well
into the 21st century. The equipment and systems developed under this program
are significantly more advanced than existing technology. Many of the new
products developed under SCALPEL will be marketed to and used by our existing
customer base. Along with the technology, the program is enhancing the Company's
internal software and manufacturing processes that will benefit other SSD
products.
4
<PAGE> 5
As we look forward to fiscal 1997, staff recruiting and retention will continue
to be a major focus. During the coming year, SSD will also be focusing on
continued improvements in the following areas: 1) performance (cost, technical,
and schedule) on all contracts; 2) additional and more responsive support of the
current product base to our existing customer base; 3) improvements to the
software development process and software configuration management tools; 4)
continued expansion of our customer base into new areas; and 5) support to the
new customer base brought in during fiscal 1996.
[PICTURE]
OPERATIONS DIVISION
From a marketing standpoint, the Operations Division had its most successful
year with total awards of over $56 million, which is $21 million over the
previous record high. We believe this is attributable to our broad range of
signal reconnaissance products, our ability to speed up delivery through
inventory sales, and the existence of our "easy purchase vehicle" Basic Ordering
Agreement (BOA) with our largest customer.
In fiscal 1996, we completed the last major production of 16 COBRA and 16
COPPERHEAD Facsimile Processing Systems. We also received orders for two
additional full systems plus approximately 100 circuit cards to augment the
capacity of previously fielded systems. This additional hardware will be
delivered during fiscal 1997. In total, we will have delivered 43 full
COBRA/COPPERHEAD systems from this highly successful program.
We are nearing the end of the Model 1236 production programs for delivery of our
Mobile Radio Reconnaissance Systems. During the year, 23 systems were shipped.
Even though we are nearing completion of the Model 1236 program, we are building
large quantities of subsystems for the Strategic Systems Division in support of
their mobile radio processing programs. During fiscal 1996, we also delivered
two mobile radio processing systems for the Navy's Cooperative Outboard
Logistics Upgrade (COBLU) programs. We anticipate receiving additional COBLU
production requirements and awards toward the end of fiscal 1997. In fiscal
1996, we shipped a number of individual VME-based digitizer and tuner cards to
foreign government, U.S. Government, and commercial customers.
Orders and deliveries for our broad base of E1/T1 products were also strong this
fiscal year. Notable large orders included 60 Model 208SPs, an analog
multiplexer; 50 Model 208As, a full multiplexer/ demultiplexer for E1 format
signals; and 17 Model 22OAs, a divider that distributes multiple E1 outputs from
a single E1 input. Sales of this E1/T1 product area increased 15% over the
previous fiscal year.
Orders and requests for information for various FDM demultiplexing systems are
still being received. We are currently completing six units with analog format
inputs and one with purely digital inputs. We are currently in discussions with
a foreign government customer who has requirements for twenty-four 2000-channel
systems over the next three years.
The production program for the Model 195 SNAPPER high-speed digitizer and
multi-megabyte memory will start delivering TEMPEST-compliant units in December
1996. Forty units and seven sets of spares are now under contract.
By fiscal 1996 year-end, we had delivered our 100th Model 255AE
Equalizer/Demodulator. The current backlog is 55 units which we expect to
deliver in fiscal 1997. We also expect additional units to be ordered in fiscal
1997. This fiscal year we will start producing a somewhat lower-cost
equalizer/demodulator, the Model 245. The processor card in the Model 245 is
also the same as the Model 256LC.
During the year, we continued our emphasis on winning programs in the
international reconnaissance arena. New customers for the year included Spain,
Israel, and Hungary. International awards and sales were approximately $2
million each. We believe a number of new international awards will occur in
fiscal 1997. Further, we have identified a large program with Great Britain that
we believe will also start in fiscal 1997 and should have continued awards for
at least three years. We have added manufacturing representatives in Spain and
Italy, bringing the total number of countries with representatives to six. With
this expanded representative organization and further emphasis in the
international market, we believe we can increase the number of international
awards in fiscal 1997.
5
<PAGE> 6
[PICTURE]
MILITARY RECONNAISSANCE DIVISION
In fiscal 1996, the Military Reconnaissance Division (MRD) established a
presence within the DoD community as a supplier of signal reconnaissance
products and technologies. Our strong technical capabilities in wideband digital
communication signal processing have opened the door to the high-speed digital
communications market for the Army and Navy.
MRD's major effort in fiscal 1996 was initiating work on a subcontract (to prime
contractor Lockheed Sanders) for the Navy's Cooperative Outboard Logistics
Upgrade (COBLU) program. Applied Signal Technology's role in this program is to
integrate telecommunications signal reconnaissance equipment into surface ship
platforms. The initial phase, projected to be completed in the second quarter of
fiscal 1997, calls for delivery of two engineering development models valued at
over $3 million. If the project proceeds, pre-production would follow, which we
expect to lead to full production over the next five to ten years.
The MRD's significant technical development in fiscal 1996 was the completion of
the Honeybeam system which was funded jointly by the Army and the Air Force.
This system implements techniques for rejecting co-channel interference in
signal reconnaissance of mobile radio signals from airborne platforms. Honeybeam
makes use of several key technologies that Applied Signal Technology developed
and pioneered: digital tuner technology, the constant modulus algorithm for
adaptive antenna beamforming, and signal processing for mobile radio. The
system's capability was demonstrated in January 1996 and showed the performance
gains achievable through antenna beamforming.
Some of MRD's fiscal 1996 programs developed successful products for signal
survey applications. The Anther and Beekeeper programs produced the Model 195A
Signal Analysis Unit, a ruggedized product that operates on airborne platforms
and has enhanced signal analysis capability for rapid characterization of
digital microwave communication signals. The Company was awarded an incentive
bonus for the Beekeeper project for delivering the product a month ahead of the
contractual due date. The Signal Research and Target Development (SRTD) program
uses a core set of Applied Signal Technology products for signal survey aboard a
Navy vessel. These products, the Model 196 Transponder Characterization Unit,
the Model 256LC DMR Link Analyzer, and the Model 120D Channel Survey Unit, will
survey, collect, and characterize many different microwave signals and voice
grade channels.
Two non-SIGINT (signal intelligence) programs were started in MRD this year:
High Capacity Trunk Radio (HCTR) and the Milstar EHF Upgrade. The HCTR channel
characterization study was conducted for the Army Communication Electronic
Command, which is seeking to develop enhanced communications capability for
on-the-move (OTM) and rapid deployment tactical scenarios. The study required
both laboratory experiments and field measurements to collect data to
characterize OTM multipath propagation effects. For the Milstar effort, MRD
provided systems engineering services to Hughes Corporation in support of a
study on upgrading the next generation Milstar digital processing payload.
For much of the past year MRD, teamed with Lockheed Sanders, was involved in a
marketing and proposal effort for the Joint Airborne Sigint Architecture (JASA)
program. JASA will be a significant market area for the future because its goal
is to develop a common architecture that will enable SIGINT systems to be
compatible among the joint services. We believe JASA-like systems will be used
on all future manned and unmanned platforms performing airborne signal
reconnaissance. Applied Signal Technology appears to be well-positioned for this
market since the key elements of the Honeybeam system are directly applicable to
the JASA philosophy: adaptive beamforming processing, reconfigurable software,
and maximum use of commercial off-the-shelf (COTS) hardware.
6
<PAGE> 7
[PICTURE]
COMMERCIAL TELECOMMUNICATIONS DIVISION
The Commercial Telecommunications Division (CTD) continues to explore ways to
leverage the Company's signal reconnaissance processing and analysis technology
into the commercial world.
An example is the use of the Company's blind equalization technology (used to
acquire signals with little to no prior information) to apply to new digital
video broadcast signals so that no extra "training signals" would have to be
transmitted, thus maximizing signal data transfer rates. We believe this blind
equalization technology, suggested to a major set-top vendor several years ago,
will become a key feature in digital broadcast and cable video systems.
We have also provided key technology in the form of one of our rackmount
equalizer demodulators, the Model 242, that has been used to set the performance
standards for digital cable 64 and 256 QAM performance.
FY96 EVENTS
We have continued development of the modem chip, at the heart of the Erricson
Freeset 1900(TM) wireless local loop handset. Final simulations were performed
on this design toward the end of fiscal 1996. The detailed chip design is being
completed in early 1997 and we will receive licensing royalties on these chips
as the Freeset 1900(TM) handsets are deployed.
During fiscal 1996, we also started a development program with a wideband data
access provider to develop the data processing module for their data broadcast
system. This system will broadcast data "under" an existing television broadcast
channel to the consumer's personal computers (our processing module will be the
PC interface module) to transfer user selected data on weather, traffic, sports,
local events, etc., via a local TV station.
In fiscal 1996, we finished development of the Qamalyzer(TM) test set for
digital video signal test and measurement. We delivered the first of the 80
units under contract to Telecommunications Incorporated. The remainder of the
units will be delivered in fiscal 1997 as well as units under contract to
Pacific Telesis.
Lastly, the QED chip (QAM equalizer/demodulator, developed jointly with VLSI
Technology, Inc.) was successfully tested for 64 QAM demodulation. It has now
been adopted by a set-top vendor for inclusion in their system. In fiscal 1997,
we will be developing a 256 QAM version of the QED chip.
FY97 PLANS
CTD's key goals for fiscal 1997 will be to continue building "on-ramps" (modem
ASICs) and "service stations" (digital video test equipment) for the information
highway.
The key to the success of the modem ASIC business will be to combine more and
more set-top box functionality into a single ASIC and thus provide significant
price reduction opportunities to the customers.
The key to the video test equipment business will be to provide the necessary
training and support to the various customers as they use our equipment to
roll-out the new digital video and data services. The timely roll out of the new
services will depend on the timely test and diagnosis of system and home
installation problems for which we believe our unique (and first-to-market)
portable QAMalyzer(TM) will play a significant role.
The key fiscal 1997 development program will be completion of the data
processing module for the data broadcast system. This development is expected to
provide for the production of 5,000 "alpha" units to support the initial system
roll-out.
7
<PAGE> 8
SELECTED FINANCIAL DATA
The following selected financial data for the fiscal years ended October 31,
1992, 1993, 1994, 1995, and 1996 have been derived from the financial statements
of the Company which have been audited by Ernst & Young LLP, the Company's
independent auditors. The selected financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this shareholders' report. All data is in thousands except
per common share data.
<TABLE>
<CAPTION>
Summary of Operations Fiscal Year Ended: October 31,
1992 1993 1994 1995 1996
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from contracts $ 50,930 $ 57,954 $ 64,341 $ 67,664 $ 77,410
Operating expenses:
Contract costs 32,679 37,165 40,830 45,418 53,333
Research and development 6,359 7,834 8,551 9,873 9,380
General and administrative 6,390 8,182 10,219 11,221 11,954
------------------------------------------------------------
Total operating expenses 45,428 53,181 59,600 66,512 74,667
------------------------------------------------------------
Operating income 5,502 4,773 4,741 1,152 2,743
Interest income 148 283 522 320 132
Interest expense (280) (142) (113) (133) (83)
------------------------------------------------------------
Income before provision for income taxes 5,370 4,914 5,150 1,339 2,792
Provision for income taxes 1,958 1,651 2,010 435 977
------------------------------------------------------------
Net income $ 3,412 $ 3,263 $ 3,140 $ 904 $ 1,815
============================================================
Net income per common share $ 0.61 $ 0.47 $ 0.40 $ 0.12 $ 0.23
Weighted average shares outstanding 5,596 6,889 7,769 7,635 7,919
Financial Position at End of Fiscal Year: 1992 1993 1994 1995 1996
Working capital $ 11,224 $ 20,550 $ 21,888 $ 24,269 $ 26,477
Total assets 28,659 40,692 47,316 49,030 52,103
Long-term debt 1,454 0 0 0 0
Retained earnings 10,749 14,013 17,153 18,052 19,866
Shareholders' equity 16,823 32,874 35,809 36,947 39,965
Book value per share $ 3.14 $ 4.44 $ 4.84 $ 4.90 $ 5.08
</TABLE>
Selected Common Stock Data:
Applied Signal Technology, Inc. common stock was first offered to the public on
March 26, 1993. Since the initial public offering, the stock has been traded on
The Nasdaq National Market under the symbol "APSG". The Company currently has
approximately 550 shareholders. The following table sets forth the range of
high, low and closing sale prices for the Common Stock over the last eight (8)
quarters. The "last" price per share in the table represents the closing price
on the last trading day of the quarter. The quotations represent inter-dealer
quotations, without retail markups, markdowns, or commissions and may not
necessarily represent actual transactions.
The Company has not paid any dividends on its stock since its inception and
anticipates that for the foreseeable future, it will retain its earnings for use
in operations.
<TABLE>
<CAPTION>
Share Price: First Quarter Second Quarter Third Quarter Fourth Quarter First Quarter Second Quarter
Fiscal 95 Fiscal 95 Fiscal 95 Fiscal 95 Fiscal 96 Fiscal 96
------------- -------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
High $ 6.38 $ 5.75 $ 4.50 $ 5.75 $ 5.00 $ 7.38
Low $ 3.25 $ 4.00 $ 3.50 $ 3.50 $ 3.50 $ 4.00
Last $ 5.75 $ 4.00 $ 3.75 $ 4.75 $ 4.00 $ 4.38
Quarterly Share
Volume (in thousands) 915.8 571.6 493.4 1,004.0 1,083.7 3,313.3
</TABLE>
<TABLE>
<CAPTION>
Share Price: Third Quarter Fourth Quarter
Fiscal 96 Fiscal 96
------------- --------------
<S> <C> <C>
High $ 6.13 $ 5.88
Low $ 3.75 $ 4.38
Last $ 4.38 $ 4.75
Quarterly Share
Volume (in thousands) 2,077.1 971.4
</TABLE>
Nasdaq Market Makers:
Cowen & Co., Fahnestock & Co., Inc., Mayer & Schweitzer Inc., Sherwood
Securities Corp., Troster Singer Corp., Tucker Anthony Incorporated, G.V.R.
Company, Herzog, Heine, Geduld, Inc., Barber & Bromin, Inc., Knight Securities
L.P., Josephthal, Lyon & Ross, Nash Weiss, Jefferies & Company, Inc.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Applied Signal Technology designs, develops, manufactures and markets signal
processing equipment to collect and process a wide range of telecommunication
signals. This equipment is used for reconnaissance of telecommunication signals
by the United States government, allied foreign governments and in a variety of
commercial applications. Signal reconnaissance systems are composed of
collection equipment and processing equipment. Collection equipment consists of
sophisticated receivers that scan the radio frequency spectrum (cellular
telephone, microwave, ship-to-shore and military transmissions) to collect
certain signals from, potentially, thousands of signals within the RF spectrum.
Signal processing equipment, using sophisticated software and hardware,
evaluates the characteristics of collected signals and selects signals that are
likely to contain relevant information.
Applied Signal Technology commercial products include processing equipment for
the information superhighway and personal communications systems.
The Company has focused its efforts, since inception, primarily on processing
equipment, but the Company also provides specialized collection equipment, as
well as complete signal reconnaissance systems.
The Company's revenues are primarily generated from sales of its products and
services to two agencies of the United States government. The two agencies
accounted for 53% and 27%, respectively, of revenues for fiscal 1996. For fiscal
1995, the two agencies accounted for 64% and 17%, respectively, of revenues and
for fiscal 1994, the percentages of revenues derived from these two agencies
were 78% and 12%, respectively.
The Company's revenues are derived from either fixed price contracts, which
provide that the Company perform a contract for a fixed price and assume the
risk of any cost overruns or cost plus reimbursement contracts, which provide
that the Company receive the direct and indirect costs of performance plus a
negotiated profit. In fiscal 1996, approximately 52% of the Company's revenues
were derived from fixed price contracts, and approximately 48% of the Company's
revenues were derived from cost reimbursement contracts. In fiscal 1995,
approximately 66% of the Company's revenues were derived from fixed price
contracts, and approximately 34% of the Company's revenues were derived from
cost plus reimbursement contracts. In fiscal 1994, approximately 66% of the
Company's revenues were derived from fixed price contracts, and approximately
34% of the Company's revenues were derived from cost plus reimbursement
contracts.
Under fixed price contracts, unexpected increases in the cost-to-develop or
manufacture a product, whether due to inaccurate estimates in the bidding
process, unanticipated increases in material costs, inefficiencies or other
factors, are borne by the Company. Due to significant uncertainties inherent in
the estimation process, it is at least reasonably possible that completion costs
will be revised in the near-term. Such revisions could result in a downward
adjustment of profits.
In accounting for cost plus reimbursement type contracts, all costs are charged
to operations as incurred (including allowable administrative expenses), and
revenues are recognized based on costs plus estimated fee rates at the date of
evaluation. In accounting for fixed price type contracts, revenue is recognized
using the percent completion method which is substantially the same as that used
for cost type contracts described above. All costs are charged to operations
(including allowable administrative expenses) as incurred, and revenues are
recognized based on estimated costs and profits at completion on a contract by
contract basis. Losses on any individual contracts are provided for at the time
they become known. (See Note 1 to Financial Statements.)
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Since fiscal 1993, the Company began efforts to lessen its concentration on the
current customer base through a combination of targeted marketing and the
investment of a portion of the Company's independent research and development
(IR&D) resources to explore new products applicable to non-traditional
marketplaces. This includes possible OEM agreements and partnering or joint
venturing arrangements with commercial companies and/or quasi-commercial
government agencies. Then, in late fiscal 1994, in an effort to further lessen
the concentration of revenues from its customer base, the Company announced the
formation of two new operating divisions. The new divisions became the Military
Reconnaissance Division and the Commercial Telecommunications Division. This
strategy continued through fiscal 1995 and fiscal 1996. As a result of the more
aggressive investment in R&D and the reorganization, revenue contributions from
these new customer bases have grown from 0.3% of revenues in fiscal 1993 to 2.8%
of revenues in fiscal 1996 for the Commercial Telecommunications Division and
from 2.3% of revenues in fiscal 1993 to 6.2% of revenues in fiscal 1996 for the
Military Reconnaissance Division. The Company plans on continuing this strategy
into fiscal 1997 and beyond.
Operating Results-Fiscal Years Comparison
The following table sets forth, for the periods indicated, statements of
operations data as a percentage of revenues from contracts:
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues from contracts 100.0% 100.0% 100.0%
Operating expenses:
Contract costs 63.5 67.1 68.9
Research and development 13.3 14.6 12.1
General and administrative 15.9 16.6 15.4
-------------------------------------
Total operating expenses 92.7 98.3 96.4
-------------------------------------
Operating income 7.3 1.7 3.6
Interest income/(expense) net 0.7 0.3 0.1
Income before provision
for income taxes 8.0 2.0 3.7
Provision for income taxes 3.1 0.6 1.3
-------------------------------------
Net income 4.9% 1.4% 2.3%
=====================================
Backlog (thousands of dollars) $ 30,924 $ 29,644 $ 82,886
</TABLE>
Revenues
Revenues from contracts increased by 14% from $67.7 million in fiscal 1995 to
$77.4 million in fiscal 1996. Revenues increased by 5% from $64.3 million in
fiscal 1994 to $67.7 million in fiscal 1995. Revenue increases over these
periods reflects the continued demand for the Company's products and services,
the introduction of new products and services as well as the increasing economic
cost of doing business (e.g., salaries, health insurance, etc.) which are
typically included in the Company's prices for products and services.
During the fourth quarter of fiscal 1994, the Company announced a reorganization
aimed at increasing the marketing focus in an effort to broaden its customer
base. Management believes this action accelerated the pace toward less reliance
on the intelligence agencies as its primary source of revenues. The following
table identifies the source of the Company's revenues for fiscal years 1994,
1995 and 1996 by major market.
<TABLE>
<CAPTION>
FY94 FY95 FY96
---- ---- ----
<S> <C> <C> <C>
Intelligence Agencies 93.4% 87.7% 89.1%
Military 3.2% 3.9% 6.2%
Foreign 2.2% 5.5% 1.9%
Commercial 1.2% 2.9% 2.8%
</TABLE>
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Backlog
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised options) was
$82,886,000 at the end of fiscal 1996. This represents a 179.6% increase over
the prior year's ending backlog. Fiscal 1995 backlog decreased 4.1% from
$30,924,000 to $29,644,000. Management believes the increase in backlog is
attributable to the continued emphasis on marketing and research and development
activities and the use of inventory to generate off-the-shelf sales.
Contract Costs
Contract costs consist of direct costs on contract, including materials and
labor and manufacturing overhead costs. Contract costs as a percentage of
revenues increased from 67.1% for fiscal 1995 to 68.9% for fiscal 1996. As a
percentage of revenues, contract costs increased to 67.1% during fiscal 1995
from 63.5% in fiscal 1994. The increase in contract costs as a percentage of
revenues from fiscal 1995 and fiscal 1996 is attributable, in part, to an
increase in the percent of development jobs (which have a tendency to require
more labor per revenue dollar) versus production jobs and, in part, due to an
increase in manufacturing overhead costs. The manufacturing overhead increase is
attributable to increased facilities costs resulting from the addition of a
newly constructed 30,000 square foot building completed during fiscal 1996, an
increase in fringe benefit costs specifically related to health insurance and
due to an increase in recruiting costs. As was announced previously, the Company
found it more difficult to attract and retain staff in the first half of fiscal
1996 due to the strong local economy in which it was competing for talent.
Management responded by increasing the investment in recruiting resources in
order to meet the growing demand for staff. The increase in contract costs as a
percentage of revenues from fiscal 1994 to fiscal 1995 is primarily attributable
to an increase in manufacturing overhead costs and the previously announced
charge to earnings recorded in anticipation of a settlement with the government
on certain contract disputes. (See Note 8: "Contingency" - Notes to Financial
Statements.) The manufacturing overhead increase is attributable to increased
management time for middle management personnel necessitated by the continued
growth of the Company and to the continuing inflationary costs of the Company's
fringe benefits.
Research and Development
Company-directed investment in research and development consists of expenditures
recoverable from customers through the Company's billing rates and expenditures
funded by the Company from earnings. Research and development expenses as a
percentage of revenues were 12.1%, 14.6% and 13.3% for fiscal years 1996, 1995
and 1994, respectively. The decrease in research and development spending in
fiscal 1996 as compared to fiscal 1995 is attributable to actions taken by
management to slow the rate of IR&D spending since the Company was experiencing
some constraint on earnings during the fiscal year. The increase in research and
development spending between fiscal years 1995 and 1994 reflects the increased
emphasis of new product development resulting in products being released earlier
to the market. The Company funded investment in R&D for fiscal 1996 was 3.5% of
revenues versus 4.5% during fiscal 1995 and 4.3% during fiscal 1994. The Company
intends to continue to make substantial investments in research and development
in an effort to meet the needs of customers before its competitors.
General and Administrative Expenses
General and administrative expenses include administrative salaries, costs
related to the Company's marketing and proposal activities, and other
administrative costs. General and administrative expenses were $11,954,000 or
15.4% of revenues in fiscal 1996 compared to $11,221,000 or 16.6% of revenues in
fiscal 1995 and $10,219,000 or 15.9% of revenues in fiscal 1994. The decrease in
general and administrative expenses as a percentage of revenues in fiscal 1996
is primarily attributable to the higher profit volume recognized on contracts
during fiscal 1996 compared to fiscal 1995. The higher general and
administrative expenses as a percentage of revenues for fiscal years 1995 and
1994 reflects an increase in bid and proposal activity experienced during the
fiscal years as well as an increase in marketing costs. During the recent fiscal
years, management emphasized the marketing component of G&A in a continued
effort to generate revenues in future periods.
Interest Income/Expense (Net)
Net interest income/expense for fiscal 1996 decreased $0.2 million from $0.2
million interest income in fiscal 1995 to $0.0 million interest income in fiscal
1996. Net interest income in fiscal 1995 decreased $0.2 million from $0.4
million in fiscal 1994 to $0.2 million in fiscal 1995. The decrease in interest
income during fiscal 1996 is primarily the result of lower interest income
received in fiscal 1996 due to the partial sale of the Company's portfolio of
government treasuries during fiscal 1995 offset by interest expense on the
Company's higher average outstanding line of credit balance during fiscal 1996.
The decrease in net interest income during fiscal 1995 is primarily the result
of the need for increased working capital to finance operations. For fiscal
1995,
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
a portion of working capital was derived from the partial sale of the Company's
portfolio of U.S. government treasuries and an increase in the average bank line
of credit outstanding. The sale of the U.S. government treasuries resulted in
lower interest income while the increase in the average bank line of credit
outstanding resulting in increased interest expense. Interest income for fiscal
1996 totaled $0.1 million offset by interest expense of $0.1 million. The
increase in net interest income during fiscal 1994 is primarily the result of
interest income received on the Company's portfolio of U.S. government
treasuries. Interest income for fiscal 1994 was $0.5 million offset by interest
expense of $0.1 million for the same period.
Provision for Income Taxes
Income taxes as a percentage of income before provision for income taxes have
been provided for at a combined federal and state rate of 35.0% for fiscal 1996
versus 32.5% for fiscal 1995 and 39.0% for fiscal 1994. The 1996 effective tax
rate is lower than the combined federal and state statutory tax rates primarily
due to the lower profit margins experienced by the Company during the fiscal
year and the benefit derived from state income tax credits. During fiscal 1995,
the Company received a state income tax credit, net of federal benefit, of $0.1
million which reduced the effective tax rate. During fiscal 1994, less costs
were eligible for the R&D credit which required the Company to provide for
income taxes at a combined federal and state tax rate of 39%. The Company
adopted Statement of Financial Accounting Standard No. 109, "Accounting for
Income Taxes," effective for the fiscal year ended October 31, 1994. This new
standard represented a refinement of the liability method of determining
deferred income taxes previously followed by the Company. There was no material
current or cumulative impact of adoption.
Quarterly Results
The following table sets forth certain unaudited quarterly financial data for
the eight quarters ending October 31, 1996. In the opinion of the Company's
management, the unaudited information set forth below has been prepared on the
same basis as the audited information and includes all adjustments necessary to
present fairly the information set forth herein. The operating results for any
quarter are not indicative of results for any future period.
<TABLE>
<CAPTION>
Fiscal Year 1995 Fiscal Year 1996
----------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from contracts $13,821 $13,030 $ 14,330 $26,483 $15,798 $ 16,970 $19,504 $25,138
Operating expenses
Contract costs 8,459 8,964 11,274 16,720 10,815 12,180 12,624 17,714
Research and development 1,813 1,660 2,399 4,001 1,912 2,155 2,281 3,032
General and administrative 1,983 2,015 2,651 4,573 2,840 2,528 2,877 3,709
----------------------------------------------------------------------------------------
Total operating expenses 12,255 12,639 16,324 25,294 15,567 16,863 17,782 24,455
----------------------------------------------------------------------------------------
Operating income (loss) 1,566 391 (1,994) 1,189 231 107 1,722 683
----------------------------------------------------------------------------------------
Interest income/(expense) net 134 59 (9) 4 19 (4) 23 11
----------------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 1,700 450 (2,003) 1,193 250 103 1,745 694
Provision (benefit)
for income taxes 680 180 (801) 377 100 24 610 243
----------------------------------------------------------------------------------------
Net income (loss) $ 1,020 $ 270 $ (1,202) $ 816 $ 150 $ 79 $ 1,135 $ 451
========================================================================================
Net income (loss)
per common share $ 0.13 $ 0.04 $ (0.16) $ 0.11 $ 0.02 $ 0.01 $ 0.14 $ 0.06
Weighted average shares O/S 7,651 7,577 7,598 7,687 7,782 7,991 8,062 8,035
Net income per common
share for the year $ 0.12 $ 0.23
</TABLE>
The Company has at times experienced fluctuations in its quarterly results due
to both seasonal and nonseasonal factors inherent in its business. These have
included costs associated with uneven flows of incoming material, the level of
research and development spending during any given quarter, fee recognition on
development contracts in the early phases of contract performance where the
financial risk is not entirely known until the contract is further along in the
development cycle, and the timing of contract awards. Management expects these
fluctuations to continue into the future.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Analysis of Liquidity and Capital Resources:
The Company's primary source of liquidity has been the cash flow generated from
operations, short-term bank borrowings, equipment leases and equity, and debt
financings.
The Company has a bank credit agreement to augment cash flow needs and to
provide term financing for capital investments. The Company maintains a
$6,000,000 unsecured, revolving line of credit for short-term cash requirements
and a $1,000,000 line of credit for use in purchasing capital investments. The
unsecured, revolving line of credit bears interest at the bank's reference rate
(8.25% as of October 31, 1996). The line of credit for use in purchasing capital
investments bears interest at the bank's reference rate plus one-half percent,
(8.75% as of October 31, 1996). Outstanding amounts on the unsecured, revolving
line of credit were zero at October 31, 1996 and 1995. Outstanding amounts on
the line of credit for use in purchasing capital investments were zero at
October 31, 1996 and 1995. Both lines expire March 1, 1997. The Company intends
to renew both lines in March, 1997.
Net cash provided by /(used in) operating activities: Net cash provided by
operating activities has varied significantly from year to year. In fiscal 1996,
$5.4 million was provided by operating activities. In fiscal 1995, $1.5 million
was used in operating activities and in fiscal 1994, $5.4 million was provided
by operating activities. These year-to-year variances are primarily the result
of changes in net income, changes in the rate of investment in accounts
receivable, and the change in inventories held by the Company. During fiscal
1996, net income increased to $1.8 million. During fiscal 1995, net income
decreased to $0.9 million. The improvement in the year-to-year change in cash
provided by operating activities for fiscal 1996 is primarily due to the
reduction in the rate of investment in accounts receivable and inventory as
compared to fiscal 1995 (See Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Operating Results - Fiscal Years
Comparison") . The reduction in the rate of investment in accounts receivable
for fiscal 1996 is primarily attributable to a higher percentage of the
Company's billings occurring under cost-type contracts which generally provide
for invoicing twice monthly. The reduction in the rate of investment in
inventory is due to a management initiative to more aggressively manage the
Company's investment in inventory. The increase in cash used in operating
activities during fiscal 1995 was due to the $2.2 million reduction in net
income from fiscal 1994 and due to an increase in the rate of investment in
accounts receivable and inventory as compared to fiscal 1994. The growth in
accounts receivable for fiscal 1995 was due to many factors, including the
growth of the Company's business and timing of eligible billings to be submitted
to the government. The increase in inventory seen in both fiscal 1995 and 1994
is the result of management's anticipation of future contract awards expected
during the following years for the Company's products and services. During
fiscal 1994, the net cash used in accounts receivable and inventories was
partially offset by the growth in accounts payable and accrued expenses. Much of
the growth in accounts payable and accrued expense was due to the preponderance
of activity at the Company's fiscal year end.
Net cash provided by/(used in) investing activities: Net cash used in investing
activities was $5.3 million for fiscal 1996 compared to $0.5 million provided by
investing activities during fiscal 1995 and $4.5 million used in investing
activities during fiscal 1994. Additions to property and equipment were $5.3
million in fiscal 1996 compared to $5.4 million in fiscal 1995 and $4.0 million
in fiscal 1994. The continued heavy investment in capital equipment is driven by
the Company's increased volume of development contracts, the increased number of
new staff hired by the Company, and the continued heavy investment in R&D which
all have a tendency to create demand for test and computer equipment Other cash
provided by investing activities during fiscal 1995 included the sale of $3.4
million of U.S. Government treasuries and the maturity of $2.5 million of the
Company's short-term investments in U.S. Government treasuries. Both of these
amounts were used as working capital to finance the Company's investment in
inventory, accounts receivable and investment in fixed assets. During fiscal
1994, other cash used in investing activities included the purchase of $4.1
million of U.S. Government treasuries offset by $3.6 million of the investments
maturing during fiscal 1994. Nearly all of the investments maturing during
fiscal 1994 were reinvested at staggered maturities over the next thirty-six
months.
Net cash provided by/(used in) financing activities: Net cash provided by
financing activities was $1.1 million during fiscal 1996 compared to $0.2
million provided by financing activities during fiscal 1995 and $0.2 million
used in financing activities during fiscal 1994. The $1.1 million provided by
financing activities during fiscal 1996 was entirely due to the issuance of
common stock under the Company's Employee Stock Purchase Plan. During fiscal
1995, the $0.2 million provided by financing activities is attributable to the
issuance of $1.2 million of common stock under the Employee Stock Purchase Plan
offset by $1.0 million of common stock repurchases authorized under the
Company's buyback program. . During fiscal 1994, the $0.2 million cash used in
financing activities is attributable to the issuance of $1.0 million of common
stock under the Employee Stock Purchase Plan offset by $1.2 million of common
stock repurchases authorized under the Company's buyback program.
The Company believes that the funds generated from operations, existing working
capital, and amounts available under existing lines of credit will be sufficient
to meet its cash needs for at least the next 12 months.
13
<PAGE> 14
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Applied Signal Technology, Inc.
We have audited the accompanying balance sheets of Applied Signal Technology,
Inc. as of October 31, 1996 and 1995, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1996. 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 Applied Signal Technology, Inc.
at October 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1996 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
December 9, 1996
14
<PAGE> 15
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues from contracts $ 77,410,481 $ 67,664,260 $ 64,340,554
Operating expenses:
Contract costs 53,333,328 45,417,725 40,830,647
Research and development 9,380,007 9,873,295 8,550,741
General and administrative 11,953,861 11,221,096 10,218,770
------------ ------------ ------------
Total operating expenses 74,667,196 66,512,116 59,600,158
------------ ------------ ------------
Operating income 2,743,285 1,152,144 4,740,396
Interest income 131,825 320,182 521,824
Interest expense (82,982) (132,441) (112,486)
------------ ------------ ------------
Income before provision
for income taxes 2,792,128 1,339,885 5,149,734
Provision for income taxes 977,245 435,463 2,010,000
------------ ------------ ------------
Net income $ 1,814,883 $ 904,422 $ 3,139,734
============ ============ ============
Net income per common share $ 0.23 $ 0.12 $ 0.40
Number of shares used in
calculating net income per common share 7,918,603 7,634,858 7,769,054
</TABLE>
See accompanying notes.
15
<PAGE> 16
BALANCE SHEETS
<TABLE>
<CAPTION>
Assets October 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,559,212 $ 368,837
Short term investments 767,355 --
Accounts receivable:
Billed 14,491,255 12,768,088
Unbilled 15,527,053 16,796,550
------------ ------------
Total accounts receivable 30,018,308 29,564,638
Refundable income taxes 106,543 106,543
Inventory 3,207,648 3,473,661
Prepaid and other current assets 2,128,819 1,990,188
------------ ------------
Total current assets 37,787,885 35,503,867
Property and equipment, at cost:
Machinery and equipment 23,220,856 19,503,884
Furniture and fixtures 3,300,754 2,903,614
Leasehold improvements 3,356,327 1,588,753
Construction in process 191,551 751,160
------------ ------------
30,069,488 24,747,411
Accumulated depreciation and amortization (17,198,416) (13,492,323)
------------ ------------
Net property and equipment 12,871,072 11,255,088
Long-term investments 1,326,124 2,094,595
Other assets 118,133 176,276
------------ ------------
Total Assets $ 52,103,214 $ 49,029,826
============ ============
Current liabilities:
Accounts payable $ 3,044,801 $ 3,920,570
Accrued payroll and related benefits 4,336,930 3,691,240
Other accrued liabilities 1,900,501 1,546,864
Income taxes payable 2,028,802 2,076,642
------------ ------------
Total current liabilities 11,311,034 11,235,316
Deferred income taxes 827,428 847,342
Commitments
Shareholders' equity:
Preferred stock, no par value: 2,000,000
shares authorized; none issued and outstanding -- --
Common stock, no par value: 20,000,000 shares authorized;
issued and outstanding shares - 7,873,347 at
October 31, 1996 and 7,532,643 at October 31, 1995 20,099,127 18,895,310
Retained earnings 19,865,625 18,051,858
------------ ------------
Total shareholders' equity 39,964,752 36,947,168
------------ ------------
Total Liabilities and Shareholders' Equity $ 52,103,214 $ 49,029,826
============ ============
</TABLE>
See accompanying notes.
16
<PAGE> 17
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 1,814,883 $ 904,422 $ 3,139,734
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 3,706,093 3,137,566 2,837,794
Tax benefit related to stock plans 69,448 25,713 29,000
Changes in:
Accounts receivable (453,670) (4,600,988) (2,934,951)
Inventory, prepaid expenses and other current assets 127,382 (1,546,378) (1,334,991)
Other assets 58,143 (13,776) (5,549)
Accounts payable, taxes payable and accrued expenses 75,718 443,488 3,472,030
Deferred income taxes (19,914) 132,342 217,000
----------- ----------- -----------
Net cash provided by (used in) operating activities 5,378,083 (1,517,611) 5,420,067
Investing activities:
Purchase of available-for-sale securities -- -- (4,100,000)
Sale of available-for-sale securities -- 3,400,000 --
Maturity of available-for-sale securities -- 2,500,000 3,600,000
Additions to property and equipment (5,322,077) (5,419,022) (4,046,965)
----------- ----------- -----------
Net cash provided by (used in) investing activities (5,322,077) 480,978 (4,546,965)
Financing activities:
Payments on bank line of credit -- -- --
Payments on long-term debt -- -- --
Issuance of common stock 1,135,129 1,200,271 958,750
Repurchase of common stock (760) (986,920) (1,192,327)
Payments on employee shareholders' notes receivable -- -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,134,369 213,351 (233,577)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,190,375 (823,282) 639,525
Cash and cash equivalents at beginning of year 368,837 1,192,119 552,594
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,559,212 $ 368,837 $ 1,192,119
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 82,983 $ 118,866 $ 112,487
=========== =========== ===========
</TABLE>
See accompanying notes.
17
<PAGE> 18
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Retained Shareholders'
Stock Earnings Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance at October 31, 1993 $ 18,860,823 $ 14,013,107 $ 32,873,930
Issuance of 227,960 common shares to
employees under stock purchase
agreements and stock option plan 958,750 958,750
Repurchase of 237,665 common shares (1,192,327) -- (1,192,327)
Tax benefit related to stock plans 29,000 -- 29,000
Net Income -- 3,139,734 3,139,734
------------ ------------ ------------
Balance at October 31, 1994 $ 18,656,246 $ 17,152,841 $ 35,809,087
Issuance of 363,178 common shares to
employees under stock purchase
agreements and stock option plan 1,200,271 -- 1,200,271
Repurchase of 229,538 common shares (986,920) -- (986,920)
Tax benefit related to stock plans 25,713 -- 25,713
Net unrealized loss on securities
available for sale -- (5,405) (5,405)
Net Income -- 904,422 904,422
------------ ------------ ------------
Balance at October 31, 1995 $ 18,895,310 $ 18,051,858 $ 36,947,168
Issuance of 240,949 common shares to
employees under stock purchase
agreements and stock option plan 1,135,129 -- 1,135,129
Repurchase of 245 common shares (760) -- (760)
Tax benefit related to stock plans 69,448 -- 69,448
Net unrealized loss on securities
available for sale -- (1,116) (1,116)
Net Income -- 1,814,883 1,814,883
------------ ------------ ------------
Balance at October 31, 1996 $ 20,099,127 $ 19,865,625 $ 39,964,752
============ ============ ============
</TABLE>
See accompanying notes.
18
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1996
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Applied Signal Technology, Inc. (the Company) was incorporated in California on
January 12, 1984. The Company designs, develops, manufactures, and markets
signal processing equipment to collect and process a wide range of
telecommunications signals. At October 31, 1996, and 1995, 97% of the accounts
receivable and substantially all of the revenues were from contracts with the
U.S. government, its agencies, or prime contractors for the U.S. government.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Contracts and Contract Accounting
Approximately 48% of contract revenue in 1996 (34% in both 1995 and 1994) is
represented by cost reimbursement type contracts. In accounting for these
contracts, all costs are charged to operations as incurred (including allowable
administrative expenses) and revenues are recognized based on costs incurred
plus estimated effective fee rates. Estimated fee rates are determined on a
contract-by-contract basis according to the type of fee (e.g. fixed, incentive
or award) and the most recent estimated cost of completion of the individual
contract.
Approximately 52% of contract revenues in 1996 (66% in both 1995 and
1994) is represented by fixed price type contracts. In accounting for these
contracts, the Company uses the percentage-of-completion method which is
substantially the same method as that used for cost reimbursement type contracts
as described above. All contract costs (including administrative expenses) are
charged to operations as incurred and revenues are recognized based on estimates
of costs and profits at completion on a contract-by-contract basis.
Losses on any individual contract are provided for at the time they become
known.
A significant portion of the Company's revenues are derived from fixed price
contracts. Under fixed price contracts, unexpected increases in the cost to
develop or manufacture a product, whether due to inaccurate estimates in the
bidding process, unanticipated increases in material costs, inefficiencies or
other factors, are borne by the Company. Due to significant uncertainties
inherent in the estimation process it is at least reasonably possible that
completion costs will be revised in the near-term. Such revisions could result
in a downward adjustment of profits.
Accounts receivable are segregated between billed and unbilled accounts. The
Company bills incurred costs and ratable portions of fees regularly under its
cost reimbursement type contracts. Under most of its fixed price contracts, the
Company regularly progress bills 90% of incurred costs. Some fixed price
contracts provide for billing under a milestone or unit of delivery basis.
Unbilled amounts result from recognition of contract revenue in advance of
contractual billing or progress billing terms. The Company regards the credit
risk of its business to be minimal.
Price Redetermination
As a government contractor, the Company is subject to price redetermination on
certain fixed price contracts if it is determined that the Company did not price
its products and services consistent with the requirements of the Federal
Acquisition Regulations. As of October 31, 1996, the Company has not had a
material claim sustained against it for non-compliance. (See Note 8:
"Contingency.")
Cash Equivalents, Short and Long Term Investments
The Company considers all highly liquid debt investments purchased with a
maturity of three months or less to be cash equivalents. Short and long term
investments are comprised of U.S. government treasury bills and notes, with
contract maturities staggered through June 30, 1998.
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1996 (CONTINUED)
Note 1: Organization and Summary of Significant Accounting Policies (continued)
Effective November 1, 1994, the Company adopted Statement of Financial
Accounting Standard No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with SFAS 115, the prior period
financial statements have not been restated to reflect the change in accounting
principle. The impact of adoption at November 1, 1994 was immaterial.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
The Company's debt securities, which consist primarily of U.S. treasury
securities, are classified as available-for-sale and are carried at fair market
value in short term investments and long term investments. Unrealized gains and
losses , net of tax, are reported in shareholder's equity as part of retained
earnings and were immaterial as of October 31, 1996. Realized gains and losses
on available-for-sale securities are reported in interest income and interest
expense, respectively, and have not been material. The cost of securities sold
is based on the specific identification method.
Property and Equipment
Machinery and equipment as well as furniture and fixtures are depreciated using
the straight-line method over the estimated useful lives of the assets, ranging
from three to five years. Leasehold improvements are amortized using the
straight-line method over the lesser of the useful life of the assets or the
lease term.
Per Share Data
Net income per share is computed using the weighted average number of shares of
Common Stock outstanding and common equivalent shares from stock options (using
the treasury stock method). Common equivalent shares from the assumed exercise
of warrants are excluded from the computation as their effect is antidilutive.
Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards No.123 (SFAS 123),
"Accounting for Stock-Based Compsensation". SFAS 123 encourages entities to
adopt a fair value based method of accounting for employee stock ocmpensation
plans, however it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value method of accounting. Under the
intrinsic value based method, many companies, including Applied Signal
Technology, Inc., have not recognized compensation cost for many of their stock
compensation plan.
The Company plans to adopt SFAS 123 in the first quarter of fiscal year 1997.
While the Company has not yet determined the total effect of adopting SFAS 123,
it believes that the adoption of the standard will not result in material
charges to operations in 1997 and thereafter.
NOTE 2: INVENTORY
The Company has adopted the practice of manufacturing product subassemblies in
inventory to be able to quickly meet the requirements of future contracts.
Inventories are stated at the lower of average cost or market and consisted of
the following:
<TABLE>
<CAPTION>
October 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Raw materials $ 590,396 $ 548,236
Work-in-process 2,195,125 2,148,473
Finished goods 322,089 386,582
3,107,610 3,083,291
Precontract costs 100,038 390,370
---------------------------
$ 3,207,648 $ 3,473,661
===========================
</TABLE>
Precontract costs represent costs incurred in connection with ongoing
level-of-effort type contracts for which contract modifications have not been
definitized ($78,405 at October 31, 1996 and $158,978 at October 31, 1995) and
production costs incurred in anticipation of specific expected future contract
awards. The production items in the latter group generally would be usable if
the expected contract awards did not occur. Allocable administrative expenses
included in precontract costs have not been material.
20
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1996 (CONTINUED)
NOTE 3: LINES OF CREDIT
As of October 31, 1996, the Company has a $6,000,000 revolving line of credit
available with a bank. The line of credit bears interest at the bank's reference
rate (8.25% at October 31, 1996), payable monthly, and expires on March 1, 1997.
There were no borrowings outstanding at October 31, 1996 and 1995.
The line of credit agreement requires compliance with certain financial
covenants and restricts dividend payments and any loans or advances made to any
third parties without the prior written consent of the lender. The Company was
in compliance with these covenants as of October 31, 1996. The Company has a
$1,000,000 line of credit for use in purchasing capital equipment. Amounts
outstanding under the line of credit bear interest at the bank's reference rate
plus 0.5% (8.75% at October 31, 1996). There were no amounts outstanding as of
October 31, 1996 and 1995.
NOTE 4: COMMITMENTS
Facility Commitment
The Company leases its facilities under noncancelable lease agreements which
expire at the end of fiscal year 2011. Certain of the leases contain escalation
clauses and requirements for the payment of property taxes, insurance and
maintenance expenses. The aggregate minimum annual lease commitments at October
31, 1996 under long-term operating leases are as follows:
<TABLE>
<S> <C>
1997 $ 3,024,643
1998 3,756,811
1999 3,810,781
2000 3,828,914
2001 and thereafter 41,750,441
-----------
$56,171,590
===========
</TABLE>
Rent expense under operating leases was approximately $3,078,000 in 1996
($2,480,000 in 1995; $2,431,000 in 1994).
The Company has outstanding letters of credit at October 31, 1996 of $1,000,000,
$218,250 and $11,755 used as security deposits for its leased operating
facilities.
The Company has no noncancelable purchase commitments for materials as of
October 31, 1996 ($121,335 at October 31, 1995).
NOTE 5: SHAREHOLDERS' EQUITY
Common Stock
At October 31, 1996, 7,873,347 shares of common stock were issued and
outstanding. Of these shares, 4,777,329 were issued to employees under common
stock agreements, prior to the Company's initial public offering, at fair market
value as determined by the Board of Directors and by exercise of options under
the Company's 1991 Stock Option Plan.
Employee Stock Purchase Plan
Under the Company's 1993 Employee Stock Purchase Plan (1993 Plan), a total of
1,000,000 shares of common stock have been reserved for issuance. The 1993 Plan
permits eligible employees to purchase common stock through payroll deductions
(which cannot exceed 10% of any employee's compensation) at 85% of the lower of
its fair market value at the beginning or end of the purchase period. As of
October 31, 1996, 270,204 shares remain eligible for purchase.
21
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1996 (CONTINUED)
Stock Option Plan
The Company's 1991 Stock Option Plan (the 1991 Plan) provides for the granting
of incentive stock options and non-qualified stock options to employees,
directors, and consultants of the Company at prices ranging from 85% to 110%
(depending on the type of grant) of the fair market value of the common stock on
the date of grant. The options generally vest over 4 years at a rate of 25% one
year after the date of grant and monthly thereafter or over 2 years and are
fully vested at the end of this second year. The vesting and exercise provisions
of the option grants are determined by the Board of Directors.
A summary of the option activity under the 1991 Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------
Options Price
Available Aggregate Per
For Grant Shares Price Share
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1993 516,126 970,401 3,998,773 $2.50-$7.25
Granted (570) 570 3,420 $6.00
Exercised -- (31,320) (86,383) $6.75
Canceled 41,671 (41,671) (210,843) $2.50-$7.25
------------------------------------
Balance at October 31, 1994 557,227 897,980 3,704,967 $2.50-$7.25
Granted (250,000) 250,000 1,157,500 $4.63
Exercised -- (88,650) (230,773) $2.50-$5.00
Canceled 68,156 (68,156) (373,869) $2.50-$7.25
------------------------------------
Balance at October 31, 1995 375,383 991,174 4,257,825 $2.50-$7.25
Granted (263,080) 263,080 1,203,860 $4.50-$5.50
Exercised -- (82,321) (220,420) $2.50-$6.75
Canceled 82,434 (82,434) (427,102) $2.50-$7.25
-------------------------------------
Balance at October 31, 1996 194,737 1,089,499 $4,814,163 $2.50-$7.25
=====================================
</TABLE>
As of October 31, 1996, options to purchase 604,522 shares were exercisable.
22
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1996 (CONTINUED)
NOTE 6: INCOME TAXES
The provision for income taxes for the years ended October 31, 1996, 1995 and
1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Federal:
Current $1,164,539 $ 785,846 $1,660,000
Deferred (prepaid) 348,533 (292,087) 84,000
-----------------------------------------
1,513,072 493,759 1,744,000
State:
Current 136,388 212,687 443,000
Deferred (prepaid) (672,215) (270,983) (177,000)
-----------------------------------------
(535,827) (58,296) 266,000
-----------------------------------------
$977,245 $435,463 $2,010,000
=========================================
</TABLE>
The tax benefits associated with disqualifying dispositions of stock options or
employee stock purchase plan shares reduce taxes currently payable as shown by
$69,448, $25,713, and $29,000 for 1996, 1995, and 1994, respectively. Such
benefits are credited to additional paid-in-capital when realized.
The provision for income taxes differs from the amount computed by applying the
federal income tax rate of 34% to income before provision for income taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Computed expected tax provision $949,324 $455,561 $1,751,000
State income tax,
net of federal benefit (17,817) (74,688) 215,000
Other individually immaterial items 45,738 54,590 44,000
------------------------------------------
$977,245 $435,463 $2,010,000
------------------------------------------
Effective Tax Rate 35.0% 32.5% 39.0%
===========================================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses and reserves $1,225,231 $1,076,186
Deferred revenue 16,850 25,557
State taxes and other 486,100 322,669
-------------------------------
1,728,181 1,424,412
===============================
Deferred tax liabilities:
Tax over book depreciation (827,429) (847,342)
-------------------------------
$ 900,752 $ 577,070
===============================
</TABLE>
During fiscal 1996, the Company made total cash payments, net of refunds, of
approximately $1,279,000, ($528,000 during 1995: $1,229,000 during 1994) for
income tax purposes.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective for the fiscal year ended October 31,
1994. This new standard represented a refinement of the liability method of
determining deferred income taxes previously followed by the Company. There was
no material, current, or cumulative impact of adoption.
23
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1996 (CONTINUED)
NOTE 7: RETIREMENT PLAN
All employees who perform at least 1000 hours of service per year are covered
under the Company's retirement plan (the Retirement Plan). Contributions to the
Retirement Plan are discretionary and currently are at the rate of 4% of
qualified compensation up to $150,000. The Company accrues for the accumulated
contributions which are payable to the Retirement Plan's administrator. The
Company has expensed approximately $1,275,000 in 1996 ($1,206,000 in 1995;
$1,040,000 in 1994), which is included in general and administrative expenses.
NOTE 8: CONTINGENCY
In April 1994, the Company was served with a subpoena by the Department of
Defense Office of Inspector General (OIG) in connection with approximately six
contracts, several of which had been audited by the Defense Contract Audit
Agency (DCAA) the previous year. As is routine in such matters involving
government contracts, the OIG referred the matter to another government agency
which also had contracts with the Company. Shortly thereafter, this second
agency issued a request for information related to nine additional contracts. To
date, the Company has not received any allegations of wrong-doing from the OIG
or the other agency. At the request of the Board of Directors, the Company
initiated its own review of the contracts in conjunction with its legal counsel.
Further review of the contracts in question and related contracts through April
1995 indicates the Company was not compliant with Public Law 87-653, Truth in
Negotiations Act, which requires disclosure of all actual costs available on the
date of cost certification on certain contracts performed during the 1989 and
1990 timeframe. These findings have resulted in a voluntary disclosure to the
government which is expected to result in a downward price adjustment on certain
contracts. In June 1995, the Company announced it was taking a charge against
the fiscal 1995 third quarter operating results in anticipation of a settlement
with the government on the subject contracts. The charge resulted in a reduction
of the fiscal 1995 third quarter's operating income of $1.2 million.
In April 1996, the Company was served with a second subpoena by the OIG in
connection with all contracts entered into between 1990 and the present related
to three products: the Model 102P Voice Channel Demodulator, the Model 120
Multichannel Processor, and the Model 150 FAX Scanner. The Company is presently
in discussions with the OIG to determine the scope of the subpoena and intends
to fully comply with the request.
While management believes the fiscal 1995 third quarter charge is adequate to
cover all related risks, the government has not concluded its investigation or
agreed to a settlement with the Company. There can be no assurances the Company
will not be required to take additional charges in connection with this matter
in future periods. However, management believes that any such charge would not
have a material effect on operating results and the financial condition of the
Company.
24
<PAGE> 25
CORPORATE DIRECTORY
Board of Directors
Gary L. Yancey
Chairman, President and Chief Executive Officer
Founder
John P. Devine
Director
Retired (Deputy Director-NSA)
David Elliman
Director
Principal of Elmrock, Inc.-
an investment firm
Stuart G. Whittelsey, Jr.
Director
Principal of Whittelsey Associates-
a financial consulting firm
James F. Collins
Director, Founder
Laboratory Manager
John R. Treichler
Director, Founder
Senior Scientist
Officers
Gary L. Yancey
Chairman, President
and Chief Executive Officer
Founder
Brian M. Offi
Vice President-Finance
Chief Financial Officer
Bani M. Scribner, Jr.
Vice President-Strategic Systems Division
Kenneth D. Snow
Vice President-Operations
Mary Rogge
Corporate Secretary
Board Committees
Compensation
John P. Devine
David Elliman*
Stuart G. Whittelsey, Jr.
Audit
John P. Devine
David Elliman
Stuart G. Whittelsey, Jr.*
* Committee Chairman
Corporate Counsel
Gray Cary Ware & Freidenrich
400 Hamilton Ave.
Palo Alto, CA 94301
Transfer Agent & Registrar
Chase Mellon Shareholder Services
50 California Street, 10th Floor
San Francisco, CA 94111
1-800-356-2017
Independent Auditors
Ernst & Young LLP
1451 California Avenue
Palo Alto, CA 94304
Stock Listing
Nasdaq National Market
Symbol: APSG
Annual Meeting
The Annual Meeting will be held at
4:00 PM on March 6, 1997 at the
Four Points Hotel by Sheraton, 1100
North Mathilda Avenue, Sunnyvale,
CA 94089.
Form 10K
Shareholders may obtain, without
charge, a copy of the Company's 10K
filing with the Securities and
Exchange Commission on written
request to:
Mary Rogge
Investor Relations
Applied Signal Technology, Inc.
400 W. California Ave.
Sunnyvale, CA 94086
25
<PAGE> 26
[APPLIED SIGNAL TECHNOLOGY, INC. LOGO]
CORPORATE OFFICE:
400 West California Avenue
Sunnyvale, CA 94086
Phone: 408-749-1888
EAST COAST OFFICES:
10620 Guilford Road, Suite 209
Jessup, MD 20794
Phone: 301-497-7100
Moving to:
131 National Business Parkway
The National Business Park
Annapolis, MD 20701
470 Spring Park Place, Suite 700
Herndon, VA 20170
Phone: 703-478-3030
TECHNOLOGY IS NOT JUST OUR LAST NAME ... IT'S OUR ADVANTAGE!!
<PAGE> 1
APPLIED SIGNAL TECHNOLOGY, INC.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Applied Signal Technology, Inc. of our report dated December 9, 1996,
included in the 1996 Annual Report to Shareholders of Applied Signal
Technology, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-21236) pertaining to the Applied Signal Technology, Inc.
Non-Incentive Stock Option Plan of our report dated December 9, 1996, with
respect to the financial statements of Applied Signal Technology, Inc.
incorporated by reference in this Annual Report (Form 10-K) for the year ended
October 31, 1996.
/s/ Ernest & Young LLP
Palo Alto, California
January 29, 1997
115
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Consolidated Statement of Income included in the
Company's Form 10-K for the period ended October 31, 1996 and is qualified in
its entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,559
<SECURITIES> 767
<RECEIVABLES> 30,018
<ALLOWANCES> 0
<INVENTORY> 3,208
<CURRENT-ASSETS> 37,788
<PP&E> 30,069
<DEPRECIATION> 17,198
<TOTAL-ASSETS> 52,103
<CURRENT-LIABILITIES> 11,311
<BONDS> 0
0
0
<COMMON> 20,099
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 52,103
<SALES> 77,410
<TOTAL-REVENUES> 77,410
<CGS> 53,333
<TOTAL-COSTS> 74,667
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> 2,792
<INCOME-TAX> 977
<INCOME-CONTINUING> 1,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,815
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
