<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1998.
REGISTRATION NO. 333-64373
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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COMPUTER TECHNOLOGY ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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COLORADO 7373 84-0797618
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
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6903 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(301) 581-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MR. GREGORY H. WAGNER
COMPUTER TECHNOLOGY ASSOCIATES, INC.
6903 ROCKLEDGE DRIVE
BETHESDA, MARYLAND 20817
(301) 581-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPY TO:
DEAN M. SCHWARTZ, ESQ.
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PENNSYLVANIA 19103
(215) 564-8000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement and from
time to time thereafter.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH MAXIMUM MAXIMUM
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, par value $0.01 per
share............................ 34,770(2) $5.84 $202,881.60 $56.40(2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) A registration fee of $3,301.46 was previously paid to register a total of
1,916,334 shares of Common Stock upon the original filing of this
Registration Statement. Pursuant to Rule 457(a), a $56.40 fee is paid
herewith to register an additional 34,770 shares.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
COMPUTER TECHNOLOGY ASSOCIATES, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
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FORM S-1 ITEM LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page; Outside Back
of Prospectus Cover Page
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk Factors
of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Determination of
Offering Price
6. Dilution Book Value Dilution
7. Selling Security Holders Plan of Distribution
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Registered Description of Capital Stock
10. Interests of Named Experts and Counsel Plan of Distribution; Management; Security
Ownership of Management and Principal
Stockholders
11. Information with Respect to the Registrant Prospectus Summary; Risk Factors; Dividend
Policy; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Security Ownership of Management and
Principal Stockholders; Certain
Transactions; Description of Capital
Stock
12. Disclosure of Commission Position on Description of Capital Stock
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1998
PROSPECTUS
1,951,074 SHARES OF COMMON STOCK
COMPUTER TECHNOLOGY ASSOCIATES, INC.
This Prospectus covers 1,951,074 shares of common stock, par value $.01 per
share (the "Common Stock"), of Computer Technology Associates, Inc., a Colorado
corporation ("CTA" or the "Company"), 1,335,338 shares of which may be offered
and sold by the Company and 615,736 shares of which may be offered and sold by
certain stockholders of the Company (the "Selling Shareholders"). See "Plan of
Distribution." The Company will not receive any portion of the net proceeds from
the sale of shares by the Selling Shareholders.
The 1,335,338 shares of Common Stock offered by the Company may be offered
for cash as follows: (i) shares may be offered and sold by the Company to
employees, consultants and directors in the limited market (the "Limited
Market") maintained by Capitol Securities Management Incorporated ("Capitol") as
determined from time to time by the Board of Directors; (ii) shares may be
offered and sold to employees, consultants and directors pursuant to the
Company's 1991 Stock Option, Stock Purchase Right and Stock Bonus Plan (the
"1991 Plan"); (iii) shares may be offered and sold to a trustee for the benefit
of employees under the Company's Employee Stock Ownership Plan (the "ESOP") as
determined from time to time by the Board of Directors; (iv) shares may be
issued upon the exercise of options granted and available to be granted under
the Company's stock option plans other than the 1991 Plan and non-plan
individual stock option agreements that may be adopted or granted from time to
time by the Board of Directors and (v) shares may be issued to employees,
consultants and directors pursuant to bonuses granted by the Board of Directors
from time to time outside the 1991 Plan. It has not been determined how many
shares will be employed by the Company for each such purpose. The 615,736 shares
of Common Stock offered by the Selling Shareholders may be offered and sold to
employees, consultants and directors of the Company in the Limited Market. See
"Plan of Distribution." All of the shares of Common Stock offered hereby will be
subject to certain restrictions (including restrictions on their
transferability) pursuant to the terms of stock restriction agreements (the
"Stock Restriction Agreements") and may be subject to certain other
contingencies. See "Plan of Distribution," "Management -- Executive
Compensation," "-- Employee Benefit Plans" and "Description of Capital
Stock -- Restrictions on Common Stock." The Selling Shareholders and all other
stockholders (other than the Company and the Retirement Plans, as defined
herein) will pay a commission to Capitol equal to 1.5 percent of the proceeds
from the sale of shares of Common Stock sold by them in the Limited Market.
Capitol is a registered broker-dealer which has agreed to effect purchases and
sales of the Company's securities. See "Determination of Offering Price -- The
Limited Market."
There is no public market for the Common Stock and there can be no
assurance that such a market will develop. See "Determination of Offering
Price -- The Limited Market."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DESCRIPTION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The purchase price of the shares of Common Stock offered hereby in the
Limited Market or by the Company in any of the transactions described above will
be at the price determined by the Board of Directors (the "Formula Price")
pursuant to a valuation process, which includes the formula set forth below (the
"Formula"). The Board of Directors sets (i) the Discount Factor, which is
intended to reflect a discount for the limited liquidity of the Common Stock,
and (ii) the Market Index, which is a number intended to reflect current
securities market conditions for companies comparable to the Company, in the
Formula annually based upon the recommendation of an independent appraisal firm.
The 11.34 multiplier is a constant representing the factor necessary to equalize
the initial stock price calculated by the Formula to the appraised price for the
Common Stock on the date the Formula was adopted. The Formula Price will be
reviewed at least annually. The Formula used in determining the Formula Price is
as follows: the price per share is equal to the product of (i) a number
representing one minus the Discount Factor ("D") and (ii) a fraction, the
denominator of which is the number of outstanding shares and share equivalents
of the Company ("Wi") and the numerator of which is the sum of (a) a number
which is the product of 2.25 and the book value of the Company at the end of the
applicable period ("BV") and (b) a number which is the product of (1) 11.34
("K") and (2) a number equal to the product of (I) the Market Index ("MI"), (II)
the after-tax profits from operations for the last 12 month period ("P") and
(III) a fraction, the denominator of which is 2 and the numerator of which is
the sum of (A) the change in contract margin ("CM"), which is a number equal to
the contract margin for the last 12 months divided by the contract margin for
the prior 12 month period, which contract margin is the contract fee as a
percentage of contract cost adjusted for program reserves and allowances and (B)
the change in revenue growth ("R"), which is a number equal to a fraction, the
numerator of which is revenue for the last 12 months and the denominator of
which is the revenue for the prior 12 month period multiplied by the change in
the consumer price index for that period. The Formula Price of the Common Stock,
expressed as an equation, is as follows:
CM+2
(____)
2.25BV+K (MI)(P) 2
Formula Price = D [________________________]
W(i)
On June 30, 1998, the Formula Price was $5.84.
The date of this Prospectus is , 1998.
<PAGE> 4
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements appear in
a number of places in this Prospectus and include statements regarding the
intent, belief or current expectations of the Company or its officers with
respect to, among other things, the Company's anticipated financial performance
or condition, business prospects, technological developments, new products, the
impact of competition and similar matters. Prospective investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors. The accompanying information contained in this Prospectus,
including, without limitation, the information set forth under the caption "Risk
Factors," identifies important factors that could cause such differences. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
AVAILABLE INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement on Form S-1 and exhibits thereto, including any
amendments (the "Registration Statement"), of which this Prospectus forms a
part, and which the Company has filed with the Securities and Exchange
Commission (the "SEC" or "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"). For further information with respect to the
Company and the securities offered hereby, reference is made to such
Registration Statement. Statements contained herein as to the provisions of
documents are necessarily summaries of such documents, and each such statement
is qualified in its entirety by reference to the copy of the applicable document
filed with the Commission.
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information which
can be inspected and copied at the offices of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, DC 20549; Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, IL 60661; and World Trade Center, New
York, NY 10048. Copies of such materials can be obtained at prescribed rates
from the Commission's Public Reference Section, Washington, DC 20549. The
Commission maintains a web site at http://www.sec.gov that contains reports,
proxy statements and other information regarding issuers that file
electronically with the Commission.
2
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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Forward-Looking Statements.................................. 2
Available Information....................................... 2
Prospectus Summary.......................................... 4
Risk Factors................................................ 6
Plan of Distribution........................................ 11
Determination of Offering Price............................. 12
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Book Value Dilution......................................... 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 26
Management.................................................. 34
Security Ownership of Management and Principal
Shareholders.............................................. 39
Certain Transactions........................................ 40
Description of Common Stock................................. 41
Shares Eligible for Future Sale............................. 44
Legal Matters............................................... 44
Experts..................................................... 44
Index to Consolidated Financial Statements.................. 45
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3
<PAGE> 6
PROSPECTUS SUMMARY
The following summary should be read in conjunction with and is qualified
in its entirety by the more detailed information and the consolidated financial
statements and notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Computer Technology Associates, Inc. ("CTA" or the "Company," formerly CTA
Incorporated) was established as a Colorado corporation in 1979. The Company is
an information technology services provider headquartered in Bethesda, Maryland
with over 1,000 employees and independent contractors serving clients
nationwide.
CTA designs, develops and integrates complex information systems. The
Company's offerings include application/database development and integration,
system engineering and integration, E-commerce applications development and
legacy system modernization. CTA's objective is to provide rapid, reliable and
responsive information technology solutions through the use of advanced
technology and disciplined methodology combined with an in-depth understanding
of client goals. See "Business."
The principal office and corporate headquarters of the Company are located
at 6903 Rockledge Drive, Bethesda, Maryland 20817. The Company's telephone
number is (301) 581-3200.
THE OFFERING
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Common Stock offered by the Company.......... 1,335,338 shares(1)
Common Stock offered by Selling 615,736 shares
Shareholders...............................
Eligible Purchasers of Common Stock in Employees, Directors and Consultants of the
Offering................................... Company
Limited Market Offering Price per Share...... $5.84(2)
</TABLE>
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(1) The 1,335,338 shares being offered by the Company will be offered in the
manner and for the purposes set forth on the cover page of this Prospectus,
but it has not been determined how many of such shares will be employed for
each purpose listed.
(2) Determined in accordance with the Formula set forth on the cover page of
this Prospectus.
THE LIMITED MARKET
Since its inception, the Company has pursued a policy of remaining
essentially employee-owned and, therefore, there has never been a public market
for the Common Stock. The Company's Common Stock is not listed on any securities
exchange or inter-dealer quotation system and all of the Company's shareholders
except for C.E. Velez, the Company's President and Chief Executive Officer, have
executed Stock Restriction Agreements with the Company which do not permit
transfer of the Company's Common Stock (other than through the Limited Market
described below) without the Company's prior written consent. The Stock
Restriction Agreements also: (i) grant the Company the right to repurchase
Common Stock from shareholders who resign from, are terminated by or otherwise
cease affiliation with the Company and (ii) give the Company a right of first
refusal to purchase Common Stock from shareholders who wish to sell their Common
Stock to a third party other than through the Limited Market. All purchasers of
Common Stock in this offering will be required to execute a Stock Restriction
Agreement with the Company on the same terms as existing shareholders. See
"Description of Capital Stock -- Stock Restriction Agreements."
In order to provide liquidity for its shareholders while remaining
essentially employee-owned, the Company has established a Limited Market for its
Common Stock among its employees, directors and consultants through an agreement
with Capitol Securities Management, Inc. ("Capitol"), whereby Capitol collects
offers to buy and sell Common Stock from current shareholders and authorized
purchasers and, on a
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set "trade date," effects trades among such parties by matching buyers and
sellers at a fixed price determined by the Company's Board of Directors prior to
such trade date. Capitol then forwards payments to sellers, minus a commission
equal to 1.5% of the gross sales price, and issues the shares purchased to the
purchasers in book-entry form. Since the creation of the Limited Market in
September 1992, five trades have been conducted, one each in 1992, 1993 and 1995
and two in 1994. It is anticipated that the Limited Market will continue to
permit shareholders to trade shares of Common Stock on at least one
predetermined date each year. Capitol will not buy and sell Common Stock for its
own account or as an agent for the Company. All of the shares being offered by
the Selling Shareholders and certain of the shares being offered by the Company
in this offering will be offered and sold through the Limited Market.
While the Company established the Limited Market to attempt to provide
liquidity to its shareholders, there can be no assurance that there will be
sufficient liquidity to permit shareholders to resell their shares in the
Limited Market. The Company has no current plans to conduct a public offering of
its Common Stock or to list its Common Stock on any securities exchange.
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<PAGE> 8
RISK FACTORS
An investment in the shares of CTA Common Stock involves a high degree of
risk. In evaluating the Company's business and prior to making a decision to
purchase Common Stock, a purchaser should carefully consider all of the
information contained in this Prospectus, and, in particular, should consider
the following risk factors.
LACK OF MARKET AND RESTRICTIONS ON TRANSFERABILITY
There has never been a public trading market for the Common Stock in the
past and the Company does not believe that such a market is likely to develop.
However, the Company established a Limited Market for the Common Stock and
conducted its first trade in September 1992. A second trade was conducted in
1993, two more trades were conducted in 1994 and the last trade was conducted in
1995. There can be no assurance that such a market will continue or that it will
provide sufficient liquidity to shareholders. In addition, all purchasers of the
Common Stock offered hereby will be required to enter into Stock Restriction
Agreements with the Company which require the Company's prior consent to any
transfer of Common Stock outside the Limited Market. To the extent that the
Limited Market does not provide sufficient liquidity for a shareholder or the
shareholder is unable to locate an authorized buyer for his shares, the
shareholder could effectively be subject to a total loss of investment.
Accordingly, the purchase of Common Stock is suitable only for persons who have
no need for liquidity in this investment and who can afford a loss of their
investment in its entirety. In addition, in the event that a shareholder
terminates his employment or affiliation with the Company, the shareholder may
be required to sell his shares to the Company at the prevailing Formula Price.
See "Plan of Distribution" and "Determination of Offering Price -- The Limited
Market" and "Description of Capital Stock -- Stock Restriction Agreements."
OFFERING PRICE
The offering price for shares being sold in the Limited Market is, and
subsequent prices will be, determined according to the Formula, as set forth on
the cover page of this Prospectus. The current Formula (and resulting Formula
Price), although based in part on objective factors such as the Company's
after-tax profits, revenue and contract margin, as well as the Company's book
value and capitalization, are also based upon an assessment of the market
valuation of comparable companies and the limited liquidity of the Common Stock,
as determined by the Board of Directors after consideration of an independent
appraisal. There can be no assurance that the Formula Price may not be adversely
affected by the various factors considered by the Board of Directors.
In addition, the Formula is subject to redetermination by the Board of
Directors at any time in its sole discretion. The Board of Directors will
redetermine the Formula at any time that the Formula Price does not fall within
the range of fair market values for the Common Stock provided by the independent
appraisal of the Common Stock conducted by Legg Mason Wood Walker, Inc. ("Legg
Mason") prior to each trade date. Legg Mason's appraisal of fair market value of
the Common Stock is based on its assessment of such value after considering a
multitude of factors, none of which necessarily remains constant. The Formula
was redetermined immediately prior to this offering because the Formula Price
calculated with the prior Formula did not fall within the range appraised by
Legg Mason. There can be no assurance that a redetermination of the Formula by
the Board of Directors will not have an adverse effect on the Formula Price and,
consequently, on subsequent offering prices for the Common Stock in the Limited
Market. The Formula Price has been redetermined and equated to the price
established by an appraisal by Legg Mason. See "Determination of Offering Price
- -- Procedures for Determining Formula Price."
FLUCTUATIONS IN FINANCIAL RESULTS; RECENT AND ANTICIPATED NET LOSSES
The Company's revenue and operating results are subject to significant
fluctuations due to a number of factors including the timing of awards and
activities (such as milestone-dependent payments and revisions to cost
estimates) under contracts with the U.S. government and the Company's commercial
customers, delays incurred in connection with projects, the Company's ability to
retain key personnel, the ability of the Company
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to market its services, the growth rate of the market for IT services and
general economic conditions. Unanticipated termination of one or more projects,
including by the U.S. government due to lack of funding, would have an adverse
affect on revenues. Further, because a material part of the company's expenses
do not vary relative to revenues, if revenues in a particular period do not meet
expected levels, operating results will be adversely affected.
The Company has incurred net losses for the years ending December 31, 1997
and 1996. The Company attributes such losses to its discontinued operations and
continued investment in infrastructure and in the initiatives required to
implement the Company's marketing strategies and increased focus on commercial
markets. There can be no assurance that the Company will generate sufficient
revenues or achieve profitability during the calendar year 1998 or thereafter.
CONCENTRATION OF CUSTOMERS
Approximately 52%, 80%, 95% and 100% of the Company's total revenues for
the nine months ended September 30, 1998, and the years 1997, 1996 and 1995,
respectively, were derived from contracts with the U.S. government (or as
subcontractor to companies doing business with the U.S. government). Contracts
funded by the Department of Defense ("DOD") accounted for approximately 32%,
47%, 63% and 64% of the Company's total revenues in such periods, respectively.
Although the Company is attempting to diversify its customer base, the Company
believes that the success of its business will continue to be dependent upon its
ability to participate in U.S. government contract programs. Accordingly, the
Company's financial performance may be directly affected by changes in U.S.
government contracting policies. The loss of a substantial amount of U.S.
government contracting business would have a material adverse affect on the
Company's operating results and financial condition. See "Business -- Types of
Contracts."
BACKLOG
The Company's total backlog was approximately $182 million and $284 million
at September 30, 1998 and December 31, 1997, respectively. The Company's backlog
is comprised of the unrealized portions of the Company's government contracts,
government-related subcontracts and commercial contracts. Backlog for government
and government-related contracts consists of both funded and unfunded backlog.
Much of the Company's future revenue is dependent upon the eventual funding of
its currently unfunded backlog of government and government-related contracts.
Unfunded government backlog comprised approximately 59% of total backlog at
September 30, 1998, as compared to approximately 57% of total backlog at
December 31, 1997. The commercial contracts involving backlog are generally
terminable without penalty to the customer. Commercial and other backlog
comprised approximately 27% of total backlog at September 30, 1998 as compared
to approximately 33% of total backlog at December 31, 1997. Because many of the
Company's contracts are multi-year contracts, total backlog includes revenues
expected to be realized several years into the future. Because there is no
assurance that the unfunded portion of backlog will be funded, or that the
contracts involving backlog will not be terminated before performance, the
Company's total backlog at September 30, 1998 and December 31, 1997 may not be
representative of future revenues. See "Business -- Backlog."
COMPETITION
The IT markets in which the Company operates are highly fragmented with no
single company or small group of companies in a dominant position. In both
markets, the Company's competitors include large, diversified firms with
substantially greater financial resources and larger technical staffs than the
Company. Such competitors include BDM International, Inc. ("BDM"), Cap Gemini
Sogeti SA ("Cap Gemini"), Computer Sciences Corporation ("CSC"), Electronic Data
Services Corporation ("EDS"), Lockheed Martin, PRC, Inc. (a subsidiary of Litton
Industries) ("PRC"), Science Applications International Corporation ("SAIC"), as
well as International Business Machines, Inc. ("IBM"), Computer Associates,
Inc., Keane, Inc. and Andersen Consulting. There can be no assurance that the
Company can maintain its competitive position against current and potential
competitors or that competitive pressures will not have a
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material adverse affect on the Company's business, operating results and
financial conditions. See "Business -- Information Technology
Services -- Competition."
The Company generally obtains its contracts through the process of
competitive bidding. There can be no assurance the Company will continue to be
successful in having its bids accepted or, if accepted, that awarded contracts
will generate sufficient revenues to result in profitability. In addition, the
Company has occasionally in the past submitted bids which would result in
minimal or no profitability with the expectation of more profitable follow-on
contracts. The minimum profitability of these contracts and the failure of the
Company to obtain more profitable follow-on contracts may have a material
adverse effect on the Company's results of operations.
CONTRACTS WITH FEDERAL, STATE AND LOCAL GOVERNMENTS
U.S. government contracts, by their terms, generally can be terminated at
any time by the U.S. government, without cause, for the convenience of the U.S.
government. If a U.S. government contract is so terminated, the Company is
entitled to receive compensation for the services provided or costs incurred
through the time of termination and may under certain circumstances be entitled
to a negotiated amount of profit on the contract. U.S. government contractors
who fail to comply with applicable government procurement-related statutes and
regulations may also be subject to potential contract termination, suspension or
debarment from contracting with the U.S. government. Most U.S. government
contracts are also subject to modification in the event of changes in funding,
and the Company's contractual costs and revenues are subject to adjustment as a
result of audits by the Defense Contract Audit Agency ("DCAA") and other U.S.
government auditors. Audits have been completed on incurred contract costs of
the Company through 1995 and are continuing for subsequent periods. While the
Company has included an allowance in its financial statements for excess
billings and contract losses which it believes is adequate based on its
interpretation of contracting regulations and past experience, there can be no
assurance that this allowance will be adequate. See "Business -- Types of
Contracts." U.S. government contract awards may also be protested by
competitors.
The Company has various claims pending against the U.S. government
primarily relating to equitable adjustments under certain government contracts,
including claims for $1.5 million related to the Eastern Zone contract with the
General Services Administration ("GSA"). The Company typically records the
amounts it is seeking under these claims as unbilled receivables on its
financial statements. Adverse determinations of these claims in excess of the
Company's general operating reserves could have a material adverse effect on the
Company's results of operations in the quarter recorded.
Many of the types of provisions governing U.S. government contracts
described above also apply to the Company's contracts with state and local
governments and their agencies. In addition, with respect to state and local
government customers, budgeting pressures and other financial constraints may
result in reductions in funding of various programs, which may affect the
ability of the Company to obtain new contracts, may cause state and local
governments to terminate existing contracts for convenience or not to renew
thereunder and may result in the extension of the procurement and contract
funding process.
CONTRACT PROFIT EXPOSURE AND DEPENDENCE ON LONG-TERM FIXED-PRICE CONTRACTS
The Company's services are provided primarily through three types of
contracts: fixed-price, time-and-material and cost-reimbursable contracts.
Approximately 14% of the Company's total revenues in 1997 were attributable to
fixed-price contracts, which require the Company to perform services under a
contract at a stipulated price. The Company derived approximately 54% of its
total revenues during the same period from time-and-material contracts, which
reimburse the Company for the number of labor hours expended at established
hourly rates negotiated in the contract, plus the cost of materials incurred.
The balance of the Company's contracts (approximately 31%) are cost-reimbursable
contracts under which the Company is reimbursed for all actual costs incurred in
performing the contract to the extent that such costs are within the contract
ceiling and allowable under the terms of the contract, plus a fee or profit.
8
<PAGE> 11
The Company assumes greater financial risk on fixed-price contracts than on
either time-and-material or cost-reimbursable contracts. The financial results
of long-term fixed-price contracts are recognized using the
percentage-of-completion method. As a result, revisions in revenues and profit
estimates are reflected in the period in which the conditions that require such
revisions become known and are estimable. Adjustments for profits or losses may
therefore have a material effect on results for the quarter in question. The
risks inherent in long-term fixed-price contracts include the difficulty of
forecasting costs and schedules, contract revenues that are related to
performance in accordance with contract specifications and potential for
component obsolescence in connection with long-term procurements. Failure to
anticipate technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract may reduce the Company's profitability or
cause a loss.
Greater risks are involved under time-and-material contracts than under
cost-reimbursable contracts because the Company assumes the responsibility for
the delivery of specified skills at a fixed hourly rate. The failure by the
Company to adequately estimate its costs in bidding for such contracts could
have a material adverse effect on the Company's business.
Although the Company believes that adequate provision for its fixed-price
and time-and-material contracts is reflected in its financial statements, no
assurance can be given that this provision is adequate or that losses on
fixed-price and time-and-material contracts will not occur in the future. See
"Business-Types of Contracts."
PROPRIETARY INFORMATION
The Company relies upon trade secrets, know-how and continuing
technological innovation and licensing to develop and maintain its competitive
position and believes that its business is dependent on its technical and
organizational knowledge, practices and procedures. The Company claims a
proprietary interest in certain of its work products, software programs,
methodologies and know-how and some of its proprietary information is protected
by confidentiality agreements and other means. There can be no assurance,
however, that these measures will prevent the unauthorized disclosure or use of
the Company's technical knowledge, practices and procedures or that others may
not independently develop similar knowledge, practices or procedures.
The U.S. government has certain proprietary rights to software programs and
other products that result from the Company's services under U.S. government
contracts or subcontracts. The U.S. government may disclose such information to
third parties, including competitors of the Company. In the case of
subcontracts, the prime contractors may also have certain rights to such
programs and products.
While the Company to date has not received any claims that its proprietary
rights infringe on the proprietary rights of third parties, the Company may be
the subject of future claims of third parties which assert that the Company's
use of certain software programs, methodologies, procedures and know-how
infringes on the patent, copyright or other proprietary rights of such third
parties. There can be no assurance that the adverse resolution of one or more of
these claims would not have a material adverse effect on the Company's business,
operating results and financial condition.
RISKS RELATING TO ACQUISITIONS
While the Company has no present commitments or agreements as to any
specific acquisition transactions, as part of the Company's strategy, the
Company regularly evaluates potential acquisition candidates. There is
significant competition for acquisition opportunities in the IT services area
which may make the completion of acquisitions more difficult and expensive. No
assurance can be given as to whether the Company will make acquisitions in the
future, such acquisitions will prove to be successful or that the Company will
successfully manage the growth attributable to such acquisitions. Moreover, the
Company may incur substantial debt and intangible amortization expenses in
making acquisitions.
9
<PAGE> 12
INFLUENCE BY EXISTING STOCKHOLDER
Upon completion of the offering, Dr. C.E. Velez, President and Chief
Executive Officer of the Company, will beneficially own 46.4% of the outstanding
shares (exclusive of shares beneficially owned by the ESOP) of the Company's
voting stock and other executive officers, directors and the ESOP as a group
will beneficially own 20.3% of the outstanding shares of the Company's voting
stock. See "Principal Stockholders." Consequently, Dr. Velez and such executive
officers, directors and the ESOP as a group will continue to exercise
significant influence on the election of the directors of the Company and on the
outcome of all matters submitted to a vote of the Company's stockholders, as
well as on the Company's management, operations and policies. This degree of
ownership and control by Dr. Velez could have an effect in delaying, deferring
or preventing a change in control of the Company and discouraging a future
acquisition of the Company in which stockholders might otherwise receive a
higher value for their shares.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company's future success depends to a significant extent on the efforts
and abilities of its executive officers. Although the Company's senior
management has extensive experience, the loss of Dr. Velez or one or more of the
Company's other senior executives could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
currently maintains life insurance on Dr. Velez. See "Management -- Directors
and Executive Officers."
The Company believes that its future success also will depend significantly
upon its ability to attract, motivate and retain additional highly skilled
managerial, operational, and sales and marketing personnel. Competition for such
personnel is intense in the IT market and there can be no assurance that the
Company will be successful in attracting, assimilating and retaining the
personnel it requires to grow and operate profitably. See
"Business -- Employees."
RISKS ASSOCIATED WITH YEAR 2000 BUSINESS
The Company expects to derive a significant percentage of its revenues from
Year 2000 services through at least 1999. There can be no assurance that the
Company will be successful in increasing its Year 2000 business or, to the
extent that such business increases, that the Company will be able to meet the
demand for such services on a timely basis. Any failure of the Company to
increase such business or meet such demand could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company expects this demand to begin to decrease as the implementation and
testing of many Year 2000 conversion projects is completed. Any such decrease,
to the extent it is not offset by an increase in the Company's other businesses,
could have a material adverse effect on the Company's business, operating
results and financial condition.
POTENTIAL LIABILITY TO CLIENTS
Much of the Company's business involves projects that are critical to the
operations of its clients' businesses. Any failure in a client's system could
result in a claim for substantial damages against the Company, regardless of the
Company's responsibility for such failure. While the Company attempts to
contractually limit its liability for damages arising from its IT services,
there can be no assurance the limitations of liability set forth in its
contractual relationships will be enforceable in all instances or would
otherwise protect the Company from liability for damages. While the Company
currently maintains general liability insurance including coverage for errors
and omissions, there can be no assurance that the Company will avoid significant
claims and attendant publicity. Furthermore, there can be no assurance that the
Company's insurance coverage will be adequate or that such coverage will remain
available at acceptable costs. Successful claims brought against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company's business, operating results and financial condition.
10
<PAGE> 13
PLAN OF DISTRIBUTION
SECURITIES OFFERED BY THE COMPANY
The 1,303,568 shares of Common Stock offered by the Company may be offered
for cash as follows: (i) shares may be offered and sold by the Company to
employees, consultants and directors in the limited market (the "Limited
Market") maintained by Capitol Securities Management Incorporated ("Capitol");
(ii) shares may be offered and sold to employees, consultants and directors
pursuant to the Company's 1991 Stock Option, Stock Purchase Right and Stock
Bonus Plan (the "1991 Plan"); (iii) shares may be offered and sold to a trustee
for the benefit of employees under the Company's Employee Stock Ownership Plan
(the "ESOP"); (iv) shares may be issued upon the exercise of options granted and
available to be granted under the Company's stock option plans other than the
1991 Plan and non-plan individual stock option agreements and (v) shares may be
issued to employees, consultants and directors pursuant to bonuses granted by
the Board of Directors from time to time outside the 1991 Plan. It has not yet
been determined how many shares will be employed by the Company for each such
purpose. Sales to the ESOP are funded through Company contributions to the ESOP.
Such funds are derived from the Company's operations.
SALES TO EMPLOYEES, CONSULTANTS AND DIRECTORS
The Company believes that its success is principally dependent upon the
abilities of its employees, consultants and directors. Therefore, since its
inception, the Company has pursued a policy of offering such persons, as an
inducement to enter into and remain in the employ of the Company, an opportunity
to make an equity investment in the Company. At the discretion of the Board of
Directors or the Compensation Committee of the Board of Directors, pursuant to
the 1991 Plan, employees, consultants and directors may be granted purchase
rights authorizing individuals to purchase in the Limited Market a specified
number of shares of Common Stock offered hereby. Additionally, the Company may,
pursuant to the 1991 Plan, offer its employees or consultants options to
purchase a specified number of shares of Common Stock. Such purchase rights or
options may be offered contingently upon obtaining a certain level of contract
awards for the Company within a specified period or upon other performance
criteria. The Company may also issue employees, consultants and directors stock
bonuses.
All of the Company's shareholders except for C. E. Velez, the Company's
President and Chief Executive Officer, have executed Stock Restriction
Agreements with the Company. All purchasers or recipients of shares of Common
Stock offered by the Company as described above will also be required to enter
into such Stock Restriction Agreements with the Company. Such agreements provide
that, to the extent the purchaser is an employee, consultant or director of the
Company, upon the purchaser's termination of employment or affiliation with the
Company, the Company will have the right to repurchase all Common Stock owned by
such shareholder, generally at the prevailing Formula Price at the time of
termination except that the consent of the shareholder must be obtained when
such repurchase would result in a loss to the shareholders. The Stock
Restriction Agreements also afford the Company a right of first refusal with
respect to purchase of a shareholder's Common Stock in the event that such
shareholder desires to sell or transfer his shares outside the Limited Market.
Further, no shareholder may sell or otherwise transfer his or her Common Stock
outside the Limited Market without the prior written consent of the Company,
which consent may be withheld for any reason or for no reason. The Company has
the option of waiving the restrictions contained in the Stock Restriction
Agreements for one or more shareholders, but has no present intention of doing
so. If the Company were to waive the restrictions contained in the Stock
Restriction Agreements for certain shareholders, the remaining shareholders
would not have appraisal or similar rights as a result of such action. See
"Determination of Offering Price -- Limited Market" and "Description of Capital
Stock."
SECURITIES OFFERED BY THE SELLING SHAREHOLDERS
The Selling Shareholders may sell up to an aggregate of 615,736 shares of
Common Stock being offered hereby in the Limited Market. The Selling
Shareholders will pay to Capitol a commission generally equal to 1.5 percent of
the proceeds from such sales. See "Determination of Offering Price -- The
Limited Market."
11
<PAGE> 14
The following table sets forth information as of September 30, 1998 with
respect to the number of shares of Common Stock owned by each Selling
Shareholder who is a director or officer of the Company or who owns greater than
10 percent of the outstanding Common Stock and by all Selling Shareholders as a
group (excluding shares allocated to such person's accounts as of such date
under the Company's employee benefit plans), and as adjusted to reflect the sale
of all shares of Common Stock being offered by the Selling Shareholders. The
table does not give effect to the sale of any shares of Common Stock being
offered by the Company. All of the shares are owned of record. In addition, it
should be noted that non-affiliate shareholders of the Company will be offering
up to 1,791,528 additional shares of Common Stock for sale in the Limited Market
on the same trading date as the 615,736 shares offered by the Selling
Shareholders listed below pursuant to exemptions from registration under the
Securities Act.
<TABLE>
<CAPTION>
OWNERSHIP PRIOR TO OWNERSHIP AFTER
OFFERING OFFERING**
----------------------- NUMBER -----------------------
NUMBER OF SHARES NUMBER
NAME/POSITION OF SHARES PERCENT (1) OFFERED OF SHARES PERCENT (1)
------------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Terry J. Piddington, President, Systems
Engineering Group (2)..................... 422,127 4.9 422,127 0 0
Gregory H. Wagner, Executive Vice President,
Chief Financial Officer and Treasurer
(2)....................................... 118,328 1.4 118,328 0 0
Raymond V. McMillan, Director (2)........... 29,759 * 29,759 0 0
George W. Morganthaler, Director (2)........ 19,752 * 19,752 0 0
Harvey D. Kushner, Director (2)............. 11,950 * 11,950 0 0
James M. Papada, Director (2)............... 6,526 * 6,526 0 0
Arturo Silvestrini, Director (2)............ 4,520 * 4,520 0 0
David R. Mackie, Director (2)............... 2,774 * 2,774 0 0
All Selling Shareholders as a Group......... 615,736 7.1 615,736 0 0
</TABLE>
- ---------------
* Represents less than 1 percent of the outstanding shares of Common Stock.
** Assumes all shares offered by Selling Shareholders are sold.
(1) Based upon 8,664,662 outstanding shares of Common Stock at September 30,
1998.
(2) See "Management -- Directors and Executive Officers" for additional
information regarding this Selling Shareholder's affiliation with the
Company and previous activity.
The 615,736 shares of Common Stock registered for sale by the Selling
Shareholders listed above represent the maximum number of shares that may be
sold by such persons pursuant to this Prospectus. The Selling Shareholders may
sell less than this maximum number of shares.
DETERMINATION OF OFFERING PRICE
There is no established public trading market for the Common Stock. The
Company has maintained a limited market ("Limited Market") as described below to
provide liquidity for its Common Stock.
THE LIMITED MARKET
Since its inception, the Company has pursued a policy of remaining
essentially employee owned and, therefore, there has never been a public market
for the Common Stock. Prior to September 1992, the Company offered to repurchase
shares from shareholders on several occasions primarily for contribution to the
Company's Employee Stock Ownership Plan ("ESOP"). In order to provide liquidity
for its shareholders, however, the Company established a Limited Market through
an agreement with Capitol Securities Management, Inc. ("Capitol") whereby
Capitol maintains the Limited Market. From September 1992 through December 1997,
five trades have been conducted in the Limited Market, one each in 1992, 1993
and 1995 and two in 1994. There were no trades conducted in 1996 or 1997.
12
<PAGE> 15
It is anticipated that the Limited Market will continue to permit existing
shareholders to sell shares of Common Stock on at least one predetermined date
each year (the "Trade Date"). Such sales will be made at the prevailing Formula
Price, or such other price as may be determined by the Board of Directors with
the advice of an independent appraiser, to employees, consultants and directors
of the Company. In addition, the Company will be authorized, but not obligated,
to purchase shares of Common Stock in the Limited Market to satisfy its
requirements (including for sale to the trustees of the Company's ESOP), but
only if and to the extent that the number of shares offered for sale by
shareholders exceeds the number of shares sought to be purchased by authorized
buyers.
In the event that the aggregate number of shares offered for sale by the
sellers is greater than the aggregate number of shares sought to be purchased by
authorized buyers and the Company, offers to sell will be treated in the
following manner: Offers to sell 1,000 shares or less of Common Stock or up to
the first 1,000 shares if more than 1,000 shares of Common Stock are offered by
any seller will be accepted first. Offers to sell shares in excess of 1,000
shares of Common Stock will be accepted on a pro-rata basis based on the number
of shares owned by those shareholders wanting to sell shares. If, however, there
are insufficient purchase orders to support the primary allocation of 1,000
shares of Common Stock or less per seller, then the purchase orders will be
allocated equally among each of the proposed sellers up to each seller's total
number of shares offered for sale. Subject to applicable legal or contractual
restrictions and the availability of funds, the Company currently intends to
purchase sufficient shares on each Trade Date so that each shareholder wishing
to sell shares will be able to sell at least 1,000 shares. Such restrictions
include those contained in the Colorado Business Corporation Act, which prohibit
a corporation from purchasing its outstanding shares if, as a result of such
purchase, (i) the corporation would not be able to pay its debts as they become
due in the usual course of business or (ii) the corporation's total assets would
be less than its total liabilities plus any amount necessary, if the corporation
were to be dissolved at the time of the distribution, to satisfy any
preferential payments upon dissolution of shareholders holding a class of stock
senior to the class of stock being repurchased by the corporation. The Company's
current credit agreement also restricts the Company from purchasing Common Stock
if doing so would cause it to violate one of the financial covenants in the
credit agreement. These financial covenants include requirements to preserve a
certain fixed charge coverage ratio, earnings before interest and taxes to
interest expense ratio and total outstanding debt to accounts receivable ratio.
In addition, the Company may enter into other contracts in the future which
restrict its ability to repurchase its outstanding Common Stock. The Company
currently has available funds to purchase up to 50,000 shares in the Limited
Market which it believes are adequate to meet its requirements and is not
currently restricted from making such purchases.
To the extent that the aggregate number of shares sought to be purchased
exceeds the aggregate number of shares offered for sale, the Company may, but is
not obligated to, sell authorized but unissued shares of Common Stock in the
Limited Market. If the number of purchase orders exceeds the number of sell
orders plus any shares sold by the Company, the aggregate number of shares
offered for sale will be allocated, pro rata, among the purchasers based upon
the total number of shares each has subscribed for.
All sellers in the Limited Market, other than the Company, pay Capitol a
commission generally equal to 1.5 percent of the proceeds from such sales. No
commission is paid by purchasers in the Limited Market. Prior to each Trade
Date, Capitol will receive sell orders from shareholders and buy orders from
authorized purchasers and the Company. On each Trade Date, Capitol will match
sellers and buyers of the Company's Common Stock (including, to the extent
applicable, the Company) according to the proration rules described above.
Capitol will then forward payments to sellers, minus the commission, and will
issue in book-entry form, the shares of Common Stock to the purchasers. Capitol
will not buy or sell shares of Common Stock for its own account or as an agent
for the Company.
Each shareholder of the Company who elects to purchase or sell Common Stock
has an account established with Capitol. On the day after each Trade Date, a
confirmation of purchases or sales is generated for each shareholder showing
price per share, number of shares, commission paid, net dollars transacted and
settlement date. The purchase price for Common Stock purchased on a Trade Date
must generally be received by Capitol within three business days following such
date.
13
<PAGE> 16
While the Company established the Limited Market to attempt to provide
liquidity to shareholders, there can be no assurance that there will be
sufficient liquidity to permit shareholders to resell their shares in the
Limited Market.
THE FORMULA
The purchase price of the shares of Common Stock in the Limited Market will
be at the formula price described below (the "Formula Price"). The Formula Price
is established by the Board of Directors of the Company based on the performance
of the Company as measured by certain factors listed below as well as certain
other factors also listed below which are determined based on the recommendation
of an independent appraiser. The Formula Price will be redetermined at least
annually. The price is determined according to the following formula (the
"Formula"): the price per share is equal to the product of (i) a number
representing one minus the discount for the limited liquidity of the stock ("D")
and (ii) a fraction, the denominator of which is the number of outstanding
shares and share equivalents ("Wi") and the numerator of which is the sum of (A)
a number which is the product of 2.25 and the book value of the Company at the
end of the applicable period ("BV") and (B) a number which is the product of (a)
11.34 ("K") and (b) a number equal to the product of (I) a market index ("MI")
based on certain comparable companies, (II) the after tax profits from
operations for the last 12 month period ("P") and (III) a fraction, the
denominator of which is 2 and the numerator of which is the sum of (A) the
change in contract margin ("CM"), which is a number equal to the contract margin
for the last 12 months divided by the contract margin for the prior 12 month
period, where contract margin is the contract fee as a percentage of contract
cost adjusted for program reserves and allowances and (B) the change in revenue
growth ("R"), which is a number equal to a fraction, the numerator of which is
revenue for the last 12 months and the denominator of which is the revenue for
the prior 12 month period times the change in the consumer price index for that
period. The Formula Price of the Common Stock expressed as an equation, is as
follows:
CM+R
2.25BV+K(MI)(P)(----)
2
Formula Price=D[ -------------------------]
W(i)
math formula
The "discount factor" is a number which is intended to reflect the discount
for the limited liquidity of the Common Stock and the "market index" is a number
which is intended to reflect existing securities market conditions. Both of
these factors are established annually by the Board of Directors based upon the
recommendation of an independent appraisal firm. The 11.34 multiplier is a
constant representing the factor necessary to equalize the initial stock price
calculated by the Formula to the appraised price for the Common Stock on the
date the Formula was adopted. The remainder of the factors will be based on the
Company's historical financial data.
PROCEDURES FOR DETERMINING FORMULA PRICE
The Formula is used to determine the offering price at which the Common
Stock will be sold and will trade in the Limited Market, except in the
circumstances set forth below. The present Formula was adopted by the Board of
Directors on September 14, 1998, following a determination by the Board of
Directors that the prior formula was not resulting in a fair market value for
the Common Stock. The Board of Directors believes the current Formula results in
a fair market value for the Common Stock within a broad range of financial
criteria.
In redetermining the current Formula, net income for the trailing twelve
months was adjusted for all factors associated with the sale of the Company's
Space and Telecommunications business having a financial impact on continuing
operations in 1997. The adjusted net income for use in the Formula at June 30,
1998 was $2,482,000.
Annually, the Company provides audited financial statements and other data
as requested by the independent appraiser. The independent appraiser analyzes
that data and recommends two factors of the
14
<PAGE> 17
Formula: the Market Index ("MI") and the Discount Factor ("D"). Based on this
recommendation, the Board of Directors determines the Formula Price. The Board
of Directors also obtains an appraisal of the current fair market value of the
Common Stock from the independent appraiser in order to confirm that the Formula
has resulted in a price which falls within an acceptable range of values for the
fair market value of the Common Stock.
In those circumstances when the Board of Directors determines the Formula
has not resulted in a fair market value for the Common Stock, the Company
establishes a price for the Common Stock within the range established by the
independent appraisal. The price of $5.05 per share at June 30, 1997 and at
December 31, 1997 was based solely on an independent appraisal as were all share
prices prior to the adoption of the Formula. Such appraisal is required on an
annual basis for purposes of valuing the assets contained in the Company's ESOP
and for determining the price at which the ESOP may purchase shares of Common
Stock.
PRICE RANGE OF COMMON STOCK
The following table sets forth the price per share (after giving effect for
all years presented for a 2 for 1 split of the Company's common stock in
February 1998) at which the Common Stock was valued by the Board of Directors
based on an appraisal performed by the Company's independent appraiser, Legg
Mason Wood Walker, Inc., for the last twelve years. The 1992, 1993, both 1994
and 1995 appraisal prices were also the prices at which shares were sold in the
Limited Market for each of the following periods ending on the dates set forth
below.
<TABLE>
<CAPTION>
EFFECTIVE DATE OF APPRAISAL PRICE PER SHARE
--------------------------- ---------------
<S> <C>
June 30, 1998............................................... $5.840
December 31, 1997........................................... $5.050
June 30, 1997............................................... $5.050
December 31, 1995........................................... $4.745
December 31, 1994........................................... $4.695
June 30, 1994............................................... $4.485
December 31, 1993........................................... $4.364
December 31, 1992........................................... $3.583
December 31, 1991........................................... $3.002
December 31, 1990........................................... $2.088
December 31, 1989........................................... $2.050
December 31, 1988........................................... $2.015
December 31, 1987........................................... $1.400
December 31, 1986........................................... $0.888
</TABLE>
REPORT OF INDEPENDENT APPRAISER
Since 1986, Legg Mason Wood Walker, Inc. ("Legg Mason") has been engaged by
the Company to act as the independent appraiser for the Company with respect to
the Common Stock. Legg Mason was selected because it is a nationally recognized
investment banking firm that has extensive experience in the valuation of
securities of all types, including closely-held and seldom traded securities.
In connection with the Board's determination of the Formula Price, Legg
Mason recommends to the Board of Directors (i) the discount factor ("D") to
reflect the limited liquidity of the Company's Common Stock and (ii) the market
index ("MI") to reflect existing securities market conditions. Legg Mason also
provides to the Board of Directors an assessment as to whether the Formula Price
calculated is within a range which Legg Mason considers reasonable. Legg Mason
makes these determinations based on its own analysis after reviewing and
analyzing numerous factors including, without limitation, (i) the Company's
annual and quarterly reports, (ii) interviews with management regarding the
Company's business, earnings, cash flow, assets and prospects, (iii) contract
backlog data and contract profiles prepared by Company management,
15
<PAGE> 18
(iv) data regarding the financial performance and market valuation of selected
public companies deemed by Legg Mason to be comparable to the Company and (v)
data relating to recent merger and acquisition activity of selected public
companies deemed by Legg Mason to be comparable to the Company.
DIVISION OF MARKET REGULATION
The Company has had discussions with the staff of the Division of Market
Regulation concerning the operation of the Limited Market in compliance with the
Exchange Act. While the Commission has not formally indicated to the Company any
specific concerns regarding the operation of the Limited Market it may do so in
the future. If the Commission raises such concerns, there can be no assurance
that the Company will be able to continue operation of the Limited Market.
USE OF PROCEEDS
The shares of Common Stock which are offered hereby are being offered to
permit the continued acquisition of Common Stock by the Company's employee
benefit plans as described herein and to permit the Company to offer shares of
Common Stock to employees, consultants and directors. The main purpose of this
offering is to broaden the participation of employees, consultants and directors
in the performance of the Company. See "Plan of Distribution" and "Determination
of Offering Price."
The Company does not intend or expect this offering to raise significant
capital. Any net proceeds received by the Company from the sale of shares of
Common Stock offered by the Company after deducting expenses will used for
working capital and general corporate purposes. Currently, the Company has no
specific plans for the use of such proceeds.
The Company will not receive any portion of the net proceeds from the sale
of shares by the Selling Shareholders.
DIVIDEND POLICY
It is the current policy of the Company to retain all earnings to provide
funds for the Company's growth. Therefore, the Company has no current intention
of paying cash dividends on the Common Stock. The Company has not made any
distributions to its shareholders since 1988. The Company's bank credit
agreement requires advance approval by the bank for the Company to pay any
dividends.
16
<PAGE> 19
BOOK VALUE DILUTION
At September 30, 1998, the Company had a net tangible book value per share
of Common Stock of $1.82. "Net tangible book value per share" represents the
amount of the Company's tangible net worth (total tangible assets less total
liabilities) divided by the total number of shares of Common Stock outstanding
at September 30, 1998. Assuming that all of the 1,335,338 shares offered by the
Company hereby had been sold at the current Formula Price of $5.84 per share, or
an aggregate of $7,743,374 net of expenses, the pro forma net tangible book
value of the Common Stock at September 30, 1998 would have been $2.35 per share.
That amount represents an immediate book value dilution of $3.49 per share (the
difference between the offering price and the net tangible book value per share
after the offering) to persons purchasing Common Stock in the offering. The
Company may not in fact sell all of the shares offered by it pursuant to this
Prospectus, but it has been assumed that this is the case in order to
demonstrate the maximum dilutive effect sales by the Company could have. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Offering price to new investors............................. $5.84
Net tangible book value per share before offering........... $1.82
Maximum net increase in net tangible book value per share
attributable to purchase of shares offered................ .53
-----
Maximum pro forma net tangible book value per share after
giving effect to the offering............................. 2.35
-----
Maximum dilution in net tangible book value per share to
purchasers of shares in the offering...................... $3.49
=====
</TABLE>
The following table sets forth the number of shares which may be purchased
from the Company in the offering, the total consideration paid and the average
price per share paid by existing shareholders since the Company's inception and
to be paid by the new investors in the offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders............ 8,664,662 87.0 $ 7,958,000 50.7 $0.92
New Investors.................... 1,335,338 13.0 7,743,374 49.3 5.84
---------- ----- ----------- ----- -----
Total....................... 10,000,000 100.0 $15,701,374 100.0 $1.57
========== ===== =========== ===== =====
</TABLE>
The above computations do not give effect to the exercise of outstanding
non-qualified stock options to purchase 1,194,165 shares of Common Stock at a
weighted average price of $4.05 per share. To the extent all these options were
exercised contemporaneously with the offering, purchasers of shares in the
offering would experience dilution of $3.67 per share. See
"Management -- Employee Benefit Plans -- Non-Qualified Stock Options" and
"-- 1991 Plan." For purposes of these calculations, the Company has assumed that
(i) all options are exercised at their respective option prices, (ii) the
Company has repurchased from shareholders the number of shares necessary for
issuance to all those exercising at the current Formula Price of $5.84, and
(iii) all shares offered pursuant to this Prospectus have been sold at the
current Formula Price of $5.84.
17
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected consolidated financial data for each of the years in
the five year period ended December 31, 1997 and as of December 31, 1993, 1994,
1995, 1996 and 1997 have been derived from the consolidated financial statements
of the Company. The consolidated financial statements for each of the five years
ended December 31, 1993 through 1997 have been audited by Ernst & Young LLP,
independent auditors. The selected consolidated financial data for the nine
months ended September 30, 1997 and 1998 and as of September 30, 1997 and 1998
are derived from unaudited financial statements. The unaudited financial
statements include all adjustments which the Company considers necessary for a
fair presentation of the financial position and the results of operations for
these periods and as of such dates. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1998. The data (in thousands,
except for per share data) should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
elsewhere in this document.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- -------- -------- -------- ------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Contract revenues............................ $92,072 $107,471 $105,224 $ 96,246 $92,239 $69,650 $83,105
Cost of contract revenues.................... 77,394 90,102 96,633 87,644 78,530 58,793 65,412
Selling, general and administrative
expenses................................... 5,277 6,723 4,117 5,431 9,622 6,591 10,891
Other expenses............................... 1,492 833 (292) 2,447 3,668 541 1,258
------- -------- -------- -------- ------- ------- -------
Operating profit............................. 7,909 9,813 4,766 724 419 3,725 5,544
Interest expense............................. 248 907 850 969 1,589 1,329 854
------- -------- -------- -------- ------- ------- -------
Income (loss) before income taxes............ 7,661 8,906 3,916 (245) (1,170) 2,396 4,690
Provision (benefit) for income taxes......... 3,370 3,830 1,567 (80) (500) 899 1,760
------- -------- -------- -------- ------- ------- -------
Income (loss) from continuing operations..... 4,291 5,076 2,349 (165) (670) 1,497 2,930
Income (loss) from discontinued operations,
net of income taxes(1)(2).................. 259 (617) (403) (10,872) 648 1,526 (2,482)
------- -------- -------- -------- ------- ------- -------
Net income (loss)............................ $ 4,550 $ 4,459 $ 1,946 $(11,037) $ (22) $ 3,023 $ 448
======= ======== ======== ======== ======= ======= =======
Basic earnings (loss) per share:
Continuing operations.................... $ 0.48 $ 0.53 $ 0.27 $ (0.02) $ (0.07) $ 0.16 $ 0.34
Discontinued operations.................. 0.03 (0.06) (0.05) (1.22) 0.07 0.16 (0.29)
------- -------- -------- -------- ------- ------- -------
Earnings (loss) per share.................... $ 0.51 $ 0.47 $ 0.22 $ (1.24) $ 0.00 $ 0.32 $ 0.05
======= ======== ======== ======== ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations.................... $ 0.46 $ 0.50 $ 0.25 $ (0.02) $ (0.07) $ 0.16 $ 0.32
Discontinued operations.................. 0.03 (0.06) (0.04) (1.22) 0.07 0.16 (0.27)
------- -------- -------- -------- ------- ------- -------
Earnings (loss) per share-diluted............ $ 0.49 $ 0.44 $ 0.21 $ (1.24) $ 0.00 $ 0.32 $ 0.05
======= ======== ======== ======== ======= ======= =======
Weighted average number of shares
outstanding................................ 8,853 9,567 8,863 8,875 9,092 9,092 8,706
------- -------- -------- -------- ------- ------- -------
Diluted average number of shares
outstanding................................ 9,378 10,092 9,418 8,875 9,092 9,307 9,152
------- -------- -------- -------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 1,390 $ 3,902 $ 235 $ 16 $ -- $ -- $ --
Working capital................................. 24,987 20,638 19,713 23,238 12,588 15,227 12,586
Total assets................................ 74,346 89,816 91,530 83,457 45,288 48,376 47,111
Short-term debt................................. 5,524 15,750 17,074 28,335 9,112 13,106 10,963
Long-term debt.................................. 15,000 15,000 15,000 15,000 3,333 -- 2,083
Total stockholders' equity.................. 24,417 27,950 28,773 17,793 15,810 20,729 15,763
</TABLE>
- ---------------
(1) During 1997, the Company sold its Space and Telecommunications Systems and
its Mobile Information and Communications Services businesses to Orbital
Sciences Corporation. Results of operations have been restated to exclude
revenues and expenses of discontinued operations from captions applicable to
continuing operations. See Note 2 to the Consolidated Financial Statements.
(2) During 1995, the Company discontinued the operations of its Simulation
Systems Division, which manufactured aircraft flight simulators for sale or
lease, and sold its assets to a company substantially owned by one of the
Company's principal stockholders. Results of operations have been restated
to exclude revenues and expenses of discontinued operations from captions
applicable to continuing operations. See "Certain Transactions" and Note 2
to the Consolidated Financial Statements.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and notes thereto included elsewhere in
this Prospectus.
OVERVIEW
Computer Technology Associates, Inc. (the "Company," formerly CTA
INCORPORATED) provides information technology services to Federal, State and
commercial markets including Year 2000 services, network design and
implementation, mainframe to client-server conversions, software language
upgrades, database development and maintenance, electronic data interchange and
automated enterprise management technologies. During 1995, the Company disposed
of its aircraft simulation systems business. During 1996, the Company completed
a five year prime contract with the U.S. Navy and, although it was ineligible to
rebid this contract as the prime contractor, is now a major subcontractor
receiving approximately 45% of the total contract revenues. During 1997, the
Company sold the Advanced Information Systems division and several systems
engineering contracts ended. As a result, the Company's revenues from systems
engineering services, principally to the Federal government, have declined.
Since 1997 the Company has focused its marketing efforts on software engineering
services, primarily Year 2000 services, for State and local governments and
commercial entities in order to increase such revenues. Also during 1997, the
Company disposed of its Space and Telecommunications Systems and its Mobile
Information and Communications Services businesses. In 1998, the Company
realigned its corporate organization to further refine its focus on the rapidly
growing market for commercial and governmental IT services creating the CTA
Systems Engineering Group and the CTA Software Engineering Group.
RESULTS OF OPERATIONS
The following tables set forth certain items in the Company's Statements of
Operations as a percentage of contract revenues:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1995 1996 1997 1997 1998
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Contract revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of contract revenues....................... 91.9 91.1 85.2 84.4 78.7
Selling, general and administrative expenses.... 3.9 5.6 10.4 9.5 13.1
Supplemental ESOP contribution.................. 0.0 0.0 3.2 0.0 0.0
Other expenses.................................. (0.3) 2.5 0.8 0.8 1.5
----- ----- ----- ----- -----
Operating profit (loss)......................... 4.5 0.8 0.4 5.3 6.7
Interest expense................................ 0.8 1.0 1.7 1.9 1.0
----- ----- ----- ----- -----
Income (loss) before income taxes............... 3.7 (0.2) (1.3) 3.4 5.7
Provision (benefit) for income taxes............ 1.5 (0.0) (0.6) 1.3 2.1
----- ----- ----- ----- -----
Income (loss) from continuing operations........ 2.2 (0.2) (0.7) 2.1 3.6
Income (loss) from discontinued operations, net
of income taxes............................... (0.4) (11.3) 0.7 2.2 (3.1)
----- ----- ----- ----- -----
Net income (loss)............................... 1.8 (11.5) 0.0 4.3 0.5
===== ===== ===== ===== =====
</TABLE>
19
<PAGE> 22
The following tables set forth certain items in the Company's Statements of
Operations by operating segment:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------ -------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Contract revenues:
Systems Engineering.............. $105,224 $ 91,953 $ 73,464 $ 57,501 $ 53,306
Software Engineering............. -- 4,293 18,775 12,149 29,799
-------- -------- -------- -------- --------
$105,224 $ 96,246 $ 92,239 $ 69,650 $ 83,105
======== ======== ======== ======== ========
Operating profit (loss):
Systems Engineering.............. $ 4,474 $ 2,442 $ 2,933 $ 3,643 $ 3,491
Software Engineering............. -- 729 1,154 623 3,311
Other expenses................... 292 (2,447) (3,668) (541) (1,258)
-------- -------- -------- -------- --------
$ 4,766 $ 724 $ 419 $ 3,725 $ 5,544
======== ======== ======== ======== ========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1997
Contract Revenues. Contract revenues increased 19% to $83.1 million for
the nine months ended September 30, 1998 from $69.7 million for the nine months
ended September 30, 1997, as a result of a 277% increase in commercial contract
revenues.
Systems engineering contract revenues decreased 7% for the nine months
ended September 30, 1998 from the comparable period in 1997. Decreases in
revenues on the General Services Administration ("GSA") Eastern Zone contract,
which ended in the third quarter of 1997, on the Range Instrumentation
Development ("RID") program, which ended on September 30, 1998 and on the
Technical Engineering and Management Support IV ("TEMS IV") program at Hanscom
Air Force Base, which is winding down, and smaller decreases in other Federal
programs, were partially offset by increases in contract revenues on GSA
Schedule contracts.
Software engineering contract revenues increased 145% for the nine months
ended September 30, 1998 from the comparable period in 1997. The increase is
primarily attributable to new Year 2000 conversion contracts with the States of
Iowa, Kansas, Michigan, Texas and commercial companies such as Cessna Aircraft
and Norrell.
Commercial contract revenues from both systems engineering and software
engineering services increased to $33.6 million, or 40% of total contract
revenues, for the nine months ended September 30, 1998 from $12.1 million, or
17% of total contract revenues, for the nine months ended September 30, 1997.
Cost of Contract Revenues. Cost of contract revenues increased to $65.4
million, or 78.7% of contract revenues, for the nine months ended September 30,
1998, from $58.8 million, or 84.4% of contract revenues, for the comparable
period in 1997. This decrease in cost of contract revenues as a percentage of
contract revenues resulted primarily from the increase of higher margin
commercial contracts as a percentage of overall contract revenues.
SG&A. Selling, general and administrative expenses ("SG&A") increased to
$10.9 million, or 13.1% of contract revenues, for the nine months ended
September 30, 1998, from $6.6 million, or 9.5% of contract revenues, for the
comparable period in 1997. The increase in SG&A reflects the Company's continued
investment in infrastructure and in the initiatives required to implement the
Company's marketing strategies and increased focus on commercial markets.
Other Expenses. Other expenses increased to $1.3 million in 1998 from $0.5
million in 1997 due to additional reserves and write-downs of certain contract
receivables.
20
<PAGE> 23
Operating Profit. As a result of the foregoing, the Company had an
operating profit of $5.5 million for the nine months ended September 30, 1998
and an operating profit of $3.7 million for the comparable period in 1997.
Loss from Discontinued Operations. The loss from discontinued operations
for 1998 reflects an adjustment of $2.1 million for the final settlement of the
sales price of the Company's Space and Telecommunications business, which was
sold in the third quarter of 1997, and a binding arbitration award of $2.0
million to a former employee of that business. The amounts are presented net of
income tax benefit in the Consolidated Statements of Operations.
1997 COMPARED WITH 1996
Contract Revenues. Contract revenues decreased 4.2% to $92.2 million in
1997 from $96.2 million in 1996. Software engineering contract revenues
increased 365% to $15.8 million in 1997 from $3.4 million in 1996. Such increase
resulted primarily from the Company's Year 2000 Century Date Change conversion
contracts. The Company performed such services in 1997 for the States of
Nebraska, Kansas, Iowa and others as well as Cessna Aircraft and Virginia Tech.
A new Systems engineering contract in 1997, providing program management
and integration for the Assistant Secretary of Defense for Health Affairs,
generated revenues of $7.1 million. Another new program, the Defense Enterprise
Integration Services ("DEIS") subcontract to Computer Sciences Corporation
("CSC") generated revenues of $4.1 million in 1997. Contract revenues on the
Company's contact with the GSA's Federal Supply Service increased 65% from $6.5
million in 1996 to $10.8 million in 1997.
These increases in contract revenues were offset by decreases in revenues
from the TEMS IV program at Hanscom Air Force Base of $10.4 million in 1997
compared to 1996 as the program winds down. Revenues on the Naval Air Weapons
Center ("NAWC") contract at China Lake, California decreased in 1997 by $5.2
million compared to 1996. In the first quarter of 1996, the Company completed
its five-year contract with the NAWC, the last of the Company's significant
contracts awarded during its period of eligibility for small business awards
which ended in 1992. Although it was ineligible to rebid for this contract as
the prime contractor, the Company is a major subcontractor to the small business
prime contractor who was awarded the NAWC follow-on contract, from which the
Company receives approximately 45% of the contract revenues. Contract revenues
on the NAWC subcontract increased by $0.3 million in 1997 compared to 1996.
Contract revenues in 1997 decreased by $2.0 million on the Range
Instrumentation Development contract and by $1.3 million on the AUA technical
assistance contract. Contracts which ended in 1997, such as the Systems
Engineering Analysis contract with NASA and the GSA Eastern Zone contract
contributed to the decline in revenues, as did the sale of the Advanced
Information Systems division. Contracts which ended in 1996, such as the Air
Force Warning System integration contract, also contributed to the overall
decline in contract revenues in 1997.
The Company revised its estimates of the full contract value and
profitability of its Eastern Zone contract with the GSA, resulting in a
reduction in revenues and operating profit in 1996 of $2.6 million, reflecting
the Company's then current estimate of the contract's profit at completion. The
Eastern Zone contract incurred significant start-up costs related to the
establishment of nine new facilities required for contract performance and to
difficulties encountered in cost-effective staffing of the personnel required
under the contract. The use of subcontract personnel to fill critical positions
resulted in cost overruns.
The Company initially expected that future contract performance over the
full contract term at originally anticipated staffing levels would result in
profit sufficient to offset early program losses. However, revenues on the
contract were not sufficient to offset these losses. The Company has submitted
claims against the U.S. government seeking recovery of $1.5 million of the
overrun. The Company has recorded these claims as an unbilled receivable,
against which it has certain reserves which it deems adequate.
Cost of Contract Revenues. Cost of contract revenues decreased 10.4% to
$78.5 million, or 85.2% of contract revenues, in 1997 from $87.6 million, or
91.1% of contract revenues, in 1996. The decrease in cost of contract revenues
as a percentage of contract revenues resulted primarily from the effect of
changes in the
21
<PAGE> 24
estimated contract value and profitability of the Eastern Zone contract in 1996.
Without giving effect to the reduction in revenues due to the Eastern Zone
contract, the cost of contract revenues as a percentage of contract revenues for
1996 was 88.7%. The decrease in cost of contract revenues in 1997 would have
been even more significant were it not for the indirect cost impact of $0.9
million related to the sale of the Space and Telecommunications business and
one-time start-up costs of $1.0 million related to certain software engineering
contracts.
SG&A. SG&A for 1997 increased 77.2% to $9.6 million, or 10.4% of contract
revenues, from $5.4 million, or 5.6% of contract revenues, in 1996. Higher costs
and reduced revenues accounted for the increase in SG&A as a percentage of
contract revenues in 1997. The increase in SG&A reflects the Company's continued
investment in infrastructure and in the initiatives required to implement the
Company's marketing strategies and increased focus on commercial markets as well
as the indirect cost impact of $0.3 million related to the sale of the Space and
Telecommunications business.
Supplemental ESOP Contribution. During 1997, the Board of Directors
elected to make a one-time supplemental contribution of approximately $3.0
million to the Company's employee stock ownership plan ("ESOP") out of the
proceeds from the sale of the Space and Telecommunications business to allow the
employees to share in the Company's success. The Board authorized the
supplemental contribution after the sale had closed and the Company's new bank
credit facility was in place.
Other Expenses. Other expenses decreased to $0.7 million in 1997 from $2.4
million in 1996. The decrease is due primarily to the write-off in the fourth
quarter of 1996 of capitalized software costs of $0.8 million and $0.9 million
related to the Company's unsuccessful initial public offering.
Operating Profit (Loss). As a result of the foregoing, the Company had an
operating profit of $0.4 million in 1997 compared to an operating profit of $0.7
million in 1996.
Interest Expense. Interest expense increased to $1.6 million in 1997 from
$1.0 million in 1996 due to the increase in the interest rate on the Company's
subordinated debt which was triggered by the sale of the Space and
Telecommunications Systems business to Orbital Sciences Corporation ("Orbital").
The Company's subordinated debt was repaid with the proceeds from such sale.
Interest expense allocated to discontinued operations was $2.1 million in 1997
and $3.3 million in 1996.
Income (Loss) from Discontinued Operations. The income from discontinued
operations in 1997 was $0.6 million, net of tax benefits of $1.4 million,
compared to a loss from discontinued operations of $10.9 million, net of tax
benefits of $5.6 million in 1996. The income in 1997 includes a gain on the sale
of the segments to Orbital of $3.9 million. The loss in 1996 includes a charge
of $6.4 million from the write-off of the Company's investment in GEMnet and a
charge of $2.8 million for additional reserves due to schedule delays on the
Indostar program. During 1996, the Company had been in discussions with certain
international companies to continue the GEMnet program after the 1995 launch
failure. These discussions did not produce a viable solution and as a result the
Company decided to terminate the program and write-off its remaining investment.
1996 COMPARED WITH 1995
Contract Revenues. Contract revenues decreased 8.5% to $96.2 million in
1996 from $105.2 million in 1995. An increase in revenue of $3.6 million on the
RID contract, $3.4 million on the Nebraska contract and $1.3 million on the
Maritech contract was more than offset by the decrease of $11.2 million on the
NAWC and NAWC follow-on contracts and $6.5 million on the Eastern Zone contract.
In the first quarter of 1996, the Company completed its five-year prime
contract with the NAWC at China Lake, California. This represented the last of
the Company's significant contracts awarded during its period of eligibility for
small business awards, which ended in 1992. This contract represented $20.4
million in revenues in 1995. Although it was ineligible to rebid for this
contract as the prime contractor, the Company is a major subcontractor to the
small business prime contractor who was awarded the NAWC follow-on contract in
April 1996, from which the Company receives approximately 45% of the contract
revenues. In 1996, the
22
<PAGE> 25
Company received revenues of $5.1 million from the original NAWC contract and
$4.1 million in revenues from the follow-on contract.
The Company revised its estimates of the full contract value and
profitability of its Eastern Zone contract with the GSA, resulting in a
reduction in revenues and operating profit in 1996 of $2.6 million, reflecting
the Company's then current estimate of the contract's profit at completion. The
Eastern Zone contract incurred significant start-up costs related to the
establishment of nine new facilities required for contract performance and to
difficulties encountered in cost-effective staffing of the personnel required
under the contract. The use of subcontract personnel to fill critical positions
resulted in cost overruns.
The Company initially expected that future contract performance over the
full contract term at originally anticipated staffing levels would result in
profit sufficient to offset early program losses. However, revenues on the
contract were not sufficient to offset these losses. The Company has submitted
claims against the U.S. government seeking recovery of $1.5 million of the
overrun. The Company has recorded these claims as an unbilled receivable,
against which it has certain reserves.
Cost of Contract Revenues. Cost of contract revenues decreased 9.3% to
$87.6 million, or 91.1% of contract revenues, in 1996 from $96.6 million, or
91.9% of contract revenues, in 1995. Without giving effect to the reduction in
revenues due to the Eastern Zone contract, the cost of contract revenues as a
percentage of contract revenues for 1996 was 88.7%.
SG&A. SG&A for 1996 increased 31.7% to $5.4 million, or 5.6% of contract
revenues, from $4.1 million, or 3.9% of contract revenues, in 1995. Higher costs
and reduced revenues accounted for the increase in SG&A as a percentage of
contract revenues in 1996. The increase in SG&A reflects the Company's continued
investment in infrastructure and in the initiatives required to implement the
Company's marketing strategies and increased focus on commercial markets.
Other Expenses. Other expenses increased to $2.4 million in 1996 from
$(0.3) million in 1995. The increase is due primarily to the write-off in the
fourth quarter of 1996 of capitalized software costs of $0.8 million and $0.9
million related to the Company's unsuccessful initial public offering. Lower
expenses in 1995 resulted from a reversal of certain amounts in reserves in 1995
set aside in 1994.
Operating Profit (Loss). As a result of the foregoing, the Company had an
operating profit of $0.7 million in 1996 compared to an operating profit of $4.8
million in 1995.
Interest Expense. Interest expense increased to $1.0 million in 1996 from
$0.8 million in 1995 due to higher average balances on the bank credit facility
due to increased capital expenditures. Interest expense allocated to
discontinued operations was $3.3 million in 1996 and $3.2 million in 1995.
Income (Loss) from Discontinued Operations. The loss from discontinued
operations in 1996 was $10.9 million, net of tax benefits of $5.6 million,
compared to a loss from discontinued operations of $0.4 million, net of tax
benefits of $0.3 million in 1995. The loss in 1996 includes charges totaling
$9.2 million related to lower profitability on a contract and the write-off of
the investment in GEMnet. The loss in 1995 includes a loss of $0.5 million from
the disposal of the Simulation Systems Division.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net income (loss) was $0.5 million for the nine months ended
September 30, 1998 and ($0.02) million, ($11.0) million, and $1.9 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Its cash flow
provided by (used in) operating activities was $4.1 million for the nine months
ended September 30, 1998 and ($10.2) million, ($5.6) million, and $2.4 million
in 1997, 1996 and 1995, respectively. The principal factors accounting for the
provision (use) of cash in operating activities in the first nine months of 1998
were a $4.3 million decrease in recoverable income taxes and changes in working
capital accounts providing $3.8 million of cash offset by an increase in
accounts receivable of $6.5 million. The principal factors accounting for the
provision (use) of cash in operating activities in 1997 were ($3.9) million
non-cash gain on disposal of segments, $2.8 million of depreciation and
amortization expense, ($3.6) million payment of previously accrued interest, and
changes in working capital accounts using $5.6 million of cash.
23
<PAGE> 26
The principal factors accounting for the provision (use) of cash in operating
activities in 1996 were the net loss of $11.0 million and an increase in
accounts receivable and other net assets of $6.6 million, offset by $5.6 million
of depreciation and amortization expense and the $6.4 million write-off of the
investment in GEMnet. The principal factors accounting for the provision (use)
of cash in operating activities in 1995 were a $0.7 million loss on the disposal
of the Simulation Systems Division, $3.2 million of depreciation and
amortization expense, $1.0 million provision for receivable allowances, $1.1
million of accrued interest and changes in working capital accounts using $4.0
million of cash.
Cash provided by (used in) investing activities totaled ($1.6) million for
the nine months ended September 30, 1998 and $14.4 million, ($6.2) million, and
($5.2) million for the years ended December 31, 1997, 1996 and 1995,
respectively. Proceeds from the sale of segments provided $18 million in 1997.
Additions to furniture and equipment were $1.6 million for the nine months ended
September 30, 1998 and $3.6 million, $6.5 million and $4.3 million in 1998,
1997, 1996 and 1995, respectively. Software development expenditures were $0.1
million in 1996 and $0.8 million in 1995.
Cash provided by (used in) financing activities was $(2.5) million for the
nine months ended September 30, 1998 and ($4.2) million, $11.5 million, and
($0.9) million for the years ended December 31, 1997, 1996 and 1995,
respectively. Financing was primarily provided by borrowings under the Credit
Facility and offset by the repayment of long-term debt and acquisition notes and
the purchase of treasury stock for the ESOP. The Company's net borrowings
(payments) under the Credit Facility were $1.9 million for the nine months ended
September 30, 1998 and ($3.7) million, $12.0 million and $1.3 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The 1997 amount is
net of $5 million proceeds from a new three-year term loan. In connection with
the sale of the segments to Orbital, $27 million in debt was assumed by the
purchaser. Net purchases of treasury stock were $2.6 million for the nine months
ended September 30, 1998 and $0.1 million, $0.5 million, and $2.0 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
In November 1997, the Company entered into a new three-year agreement with
a bank for a credit facility providing the availability to borrow up to $20
million, including a revolving facility of $15 million, which includes a
facility for letters of credit up to $4 million, and a new $5 million term
facility. At September 30, 1998, there was $9.3 million outstanding under the
revolving credit facility and $3.8 million outstanding under the term facility,
to be repaid in equal quarterly payments.
Borrowings under the credit facility are secured by substantially all of
the Company's assets and bear interest at either the lender's prime rate or
LIBOR plus 1.5% to 2.25% (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization) at the Company's
discretion. The weighted average rate in effect for short-term borrowings at
December 31, 1997 was approximately 7.7%. Under the agreement, the Company pays
an annual commitment fee on the unused credit line and an annual administration
fee on the total revolving credit line. The credit facility requires advance
approval by the bank for the Company to pay cash dividends. The agreement also
includes financial covenants which require the Company to maintain certain
financial ratios such as a fixed charge coverage ratio, earnings before interest
and taxes to interest expense ratio and total outstanding debt to accounts
receivable ratio. The agreement also requires the Company to obtain the consent
of the bank prior to making aggregate capital expenditures for itself and its
subsidiaries of greater than $2.5 million per year. The Company believes it is
in compliance with all of the financial covenants.
In January 1998, the Company completed the $2.0 million tender offer
accrued for as of December 31, 1997. The Company believes that cash flow from
operations and available bank borrowings will provide adequate funds for
continued operations for the next twelve months.
OTHER MATTERS
The "Year 2000" issue concerns the potential exposures related to existing
computer programs that use only two digits to identify a year in the date field.
These programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000. The Company has
evaluated, and continues to
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<PAGE> 27
evaluate, whether the consequences of the Year 2000 issues would have a material
effect on the Company's business, results of operations or financial condition.
The Company believes that its principal payroll and human resources related
systems, which are licensed from and maintained by third party software
development companies, are Year 2000 compliant. The Company is in the process of
implementing a new financial accounting system, which is licensed from and
maintained by a third party software development company and is Year 2000
compliant. Management expects the new financial accounting system to be
operational by the end of 1998 at cost of less than $0.5 million. Management
does not anticipate that the remaining costs associated with assuring that its
other internal IT and non-IT systems will be Year 2000 compliant will be
material to its business, operations or financial condition.
The Company expects to derive a significant percentage of its revenues from
Year 2000 services through at least 1999. There can be no assurance that the
Company will be successful in increasing its Year 2000 business or, to the
extent that such business increases, that the Company will be able to meet the
demand for such services on a timely basis. Any failure of the Company to
increase such business or meet such demand could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company expects this demand to begin to decrease as the implementation and
testing of many Year 2000 conversion projects is completed. Any such decrease,
to the extent it is not offset by an increase in the Company's other businesses,
could have a material adverse effect on the Company's business, operating
results and financial condition.
Much of the Company's Year 2000 business involves projects that are
critical to the operations of its clients' businesses. Any failure in a client's
system could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. The Company
believes it has instituted reasonable contract management practices to control
the financial risk of performance on these contracts. While the Company attempts
to contractually limit its liability for damages arising from its IT services,
there can be no assurance the limitations of liability set forth in its
contractual relationships will be enforceable in all instances or would
otherwise protect the Company from liability for damages. While the Company
currently maintains general liability insurance including coverage for errors
and omissions, there can be no assurance that the Company will avoid significant
claims and attendant publicity. Furthermore, there can be no assurance that the
Company's insurance coverage will be adequate or that such coverage will remain
available at acceptable costs. Successful claims brought against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company's business, operating results and financial condition.
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<PAGE> 28
BUSINESS
CTA provides rapid development and deployment of advanced information
technology ("IT") to complex enterprise applications. The Company's offerings
include government systems, engineering support, network development and
integration, embedded IT systems engineering, object oriented applications
development, Enterprise Resource Planning ("ERP") installation and integration,
data warehousing and data base migrations, electronic commerce and other web
based applications development and legacy system modernization. CTA's mission is
to provide for the rapid, on budget, low risk installation and integration of
complex information technology through the use of a disciplined incremental
implementation approach. In addition to its strong technical and program
management capabilities, the Company has established a reputation for
consistently high levels of customer satisfaction based on a combination of
service, quality and value. The Company's current business strategy includes
developing an international client base which is balanced across both government
and commercial sectors of the IT services market.
COMPANY HISTORY
The Company was founded in 1979 as Computer Technology Associates Inc.,
specializing in consulting services related to the evaluation of computer
systems embedded in larger systems such as spacecraft, missiles and aircraft. In
the mid-1980's, the Company's consulting business expanded into systems
integration of avionics, command and control, and other decision support
systems. Originally qualified to receive small business related support from the
federal government, the Company established major relationships with U.S.
military operations at the Defense Department's Cheyenne Mountain Complex, the
Naval Air Warfare Center, Weapons Division, NASA's Goddard Space Flight Center
and the Air Force's Consolidated Space Operations Center. In 1992, the Company
ended its eligibility for government programs that assist small businesses, with
the last significant contract awarded under these programs completed in early
1996. Since 1992, the Company has replaced contracts awarded under these
assistance programs with contracts awarded under full and open competition. The
share of IT revenues derived from competitive awards grew from 19% in 1992 to
100% in 1997.
In the 1990's, the Company targeted U.S. government IT contracts that have
allowed it to broaden the Company's base of skills to include a number of
business oriented IT disciplines equally applicable to the federal civil agency
and state government IT markets. The Company then established strategic
alliances with certain specialized software companies that enabled it to enter
the commercial IT market and win contracts with commercial customers such as
Cessna, Reynolds Metals and Allied-Signal.
In 1992, the Company acquired a 79% interest in CTA Space Systems ("CTASS")
to expand its business from providing IT services related to space systems to
providing full turn-key space systems. In 1994, CTA acquired the remaining
minority interest in CTASS. CTASS pioneered small satellite-based store-and-
forward technology, which it originally developed to interrogate dispersed buoys
equipped with acoustic sensors. In 1994, the Company entered the commercial GEO
communications satellite market with CTASS' award of the contract for the
Indostar turn-key direct-to-home ("DTH") system from PT MediaCitra Indostar. The
contract provided for the Company to build a small, three-axis stabilized
commercial communications satellite, which was launched in 1997, and a complete
facility in Jakarta, Indonesia including broadcast and subscriber management
software, communications uplinking systems and hardware/software systems for
spacecraft telemetry, tracking and control. In late 1997, the Company sold CTASS
and certain related businesses to Orbital Sciences Corporation in order to focus
on its core IT business. See Note 2 of Notes to Consolidated Financial
Statements.
CORPORATE ORGANIZATION
Following the sale of the Space and Telecommunications business, the
Company organized into Federal and Commercial segments. These business groups
focused on specific client groups, namely, federal, state and commercial
entities. Subsequently, management determined that to better focus the provision
of services to clients, an organization consisting of Software Engineering and
Systems Engineering groups would be more appropriate. Accordingly, the Company's
Software Engineering Group focuses on such areas as Year 2000
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<PAGE> 29
services and the installation and integration of ERP software and the Company's
Systems Engineering Group focuses on information security and complex embedded
computer systems.
INFORMATION TECHNOLOGY SERVICES
The Company believes that it possesses a level of IT technical and project
management experience and expertise that allows it to offer rapid, high value,
solutions to a range of client IT requirements. The Company's principal business
focus is in the areas of 1) legacy information system modernization, including
Year 2000 compliance and European Currency ("Euro") conversion upgrades, 2)
electronic commerce implementations and other web based applications including
the engineering and implementation of secure and highly reliable computer and
network systems, 3) the development, migration and maintenance of large scale
databases, 4) the installation and integration of ERP software, and 5) a range
of IT services associated with complex embedded computer systems. The Company is
currently planning to focus the provision of these services to the financial
services, health care, transportation and government vertical markets.
The Company believes that it is one of the industry leaders in the rapidly
growing market for federal, state and commercial Year 2000 compliance upgrades
based on its combination of direct Year 2000 conversion experience, use of
automated tools and its ability to offer its customers solutions to both their
embedded and non-embedded Year 2000 compliance requirements. The Company expects
that it will continue to receive increased revenues from additional Year 2000
engagements during the next 18 months. However, these engagements and related
revenues are expected to peak prior to calendar year 2000 as customers address
their needs. Thereafter, the Company expects that revenues derived from year
2000 engagements will steadily decline. The Company believes that current Year
2000 related business will be replaced with similar conversion business (e.g.
Euro conversion beginning in 1999) and legacy system modernization projects
including web based applications and client-server conversions.
INFORMATION TECHNOLOGY SERVICES -- BUSINESS STRATEGY
The principal strategies that the Company is pursuing to expand its IT
services business include:
Increasing Penetration of Existing Customer Base. The Company focuses
heavily on achieving consistently high levels of customer satisfaction and
technical excellence. Due to its long-term incumbent position as a key systems
integrator for some of the nation's largest and most complex information
systems, the Company has gained a unique and profound understanding of those
systems. The Company believes this knowledge provides it with a substantial
advantage in terms of cost, technical expertise and demonstrated past
performance in competing for future work related to these systems. The Company
believes that its Year 2000 conversion initiative will result in a similar
competitive advantages with respect to a wide range of new customers.
Penetrating New Markets by Leveraging Core Competencies. The Company seeks
out and exploits opportunities to market to new customers the expertise it has
gained in past IT assignments. The Company's experience in federal government,
state government and commercial Year 2000 compliance projects has proven to be a
key factor differentiating the Company in competitive bidding situations with
new customers. The Company plans to use such engagements to establish
relationships with an expanded base of customers that can be used for marketing
the Company's expertise in additional areas such as legacy system modernization,
data base migrations, and web enabled applications development. Also, the
methodology and tools required to accomplish Year 2000 compliance are directly
applicable to that required to upgrade computer software to properly handle the
upcoming common European Currency conversion. It is estimated by some industry
experts that the market for such Euro currency upgrades may exceed the European
Year 2000 market in total cost.
Establishing Marketing Alliances to Offer Complete Solutions. The Company
has established, and needs to continue to establish, marketing alliances with a
number of software product and tool providers which allow the Company to offer
turn-key solutions for such applications as Enterprise Resource Planning and
electronic commerce.
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Acquiring Strategic IT Services Businesses. The Company intends to pursue
acquisitions that will expand the Company's commercial IT services customer base
and provide specialized capabilities and skills that enhance the Company's
penetration of the commercial IT services market.
INFORMATION TECHNOLOGY SERVICES -- CONTRACTS AND PROGRAMS
Certain of the Company's significant IT contracts and programs are
described below. Total contract values include both realized (earned and
recorded) and unrealized (to be earned and recorded in future periods) revenues.
These contracts are typically funded annually and there are no assurances that
funding will continue beyond the current fiscal year or, if they are funded
beyond the current fiscal year, for how many additional years.
U.S. GOVERNMENT -- DOD
Range Systems Management. In 1993, the Company was awarded the Range
Instrumentation Development ("RID") contract, pursuant to which the Company
supports a wide variety of aircraft range system activities for the Naval Air
Warfare Center ("NAWC") located at China Lake, California, including software
development, test and evaluation, system integration and fabrication of
electronic threat simulators. The RID contract is a cost-plus-award-fee
contract, has a total value of $88 million and is scheduled for completion in
October 1998.
Avionics Systems Integration. The Company participates in the design,
development, fabrication, modification and testing of hardware for the NAWC,
performing a wide range of support activities. These activities include systems
engineering, systems analysis, software development, configuration management,
verification and validation, maintenance and operation services for various
naval aircraft and the development and maintenance of large-scale hybrid
simulators (which integrate computer simulations with actual aircraft avionics).
The Company has performed this work since its first NAWC contract, awarded in
1985. In 1995, this contract was recompeted under a program reserved for small
businesses and the Company successfully teamed with a small business contractor,
which was awarded the prime contract. The current NAWC contract is a
cost-plus-award-fee contract, has a total value to CTA of $33 million and is
scheduled for completion in March 2000.
Information Systems Security. The Company, as a subcontractor to SAIC, is
a member of the team awarded the Center for Information Systems Security
contract in 1995 by the Defense Information Systems Agency. Under this five-year
omnibus security engineering contract, the Company will continue to provide
technical support to information systems security activities within the DOD and
other U.S. government departments and agencies. Activities under this contract
include designing and implementing the measures necessary to detect, document
and counter a wide range of threats to on-line and stored information. The
Information Systems Security contract is a time-and-materials contract, has a
total value to CTA of $8 million and is scheduled for completion in July 2000.
In addition, the Company's clients for information system security services
include the Department of Treasury, General Services Administration, Defense
Finance and Accounting Service as well as several commercial companies.
Medical Information Systems. The Company is providing medical information
systems expertise to the DOD Department of Health Affairs Consolidated Health
Care System. This second generation medical information system implements the
most advanced technology available in the industry today. Its goal is a
paperless, globally accessible electronic patient record system that provides
authorized medical professionals with vital patient medical histories in near
real time, regardless of where the patient data may have been collected or
stored, or where the patient may be physically located when medical attention is
required. This technology not only enables more accurate record keeping but also
reduces the response time required to obtain medical information from days or
weeks to literally seconds. This contract is a cost-plus-fixed-fee contract, has
a total value of $30 million and is scheduled for completion in March 2001.
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<PAGE> 31
U.S. GOVERNMENT -- CIVILIAN AGENCIES
Federal Aviation Administration ("FAA"). For the FAA, the Company provides
services related to the design, development, integration and test of the U.S.
air traffic control ("ATC") system and has been supporting the FAA automation
programs since 1982. Currently, the Company is performing on the following
programs for the FAA:
(i) providing engineering support to the FAA as a subcontractor to TRW
under the AUA Technical Assistance contract in implementing its programs to
replace the ATC system. This contract is a time-and-materials contract, has
a total value to CTA of $40 million and is scheduled for completion in
December 2002.
(ii) providing support to the FAA as a subcontractor to TRW under the
ASD SETA contract for the overall architectural design and evolution of the
National Airspace System. This contract is a time-and-materials contract,
has a total value to CTA of $17 million and is scheduled for completion in
September 2001.
(iii) assisting the FAA, as a subcontractor to TRW under the Weather
Technical Assistance contract in the areas of program engineering, hardware
and software engineering, program and project management, system test and
evaluation, system implementation and human factors. This contract is a
cost-plus-fixed-fee contract, has a total value to CTA of $3 million and is
scheduled for completion in March 2000.
(iv) providing engineering and management support services to the FAA
as a subcontractor to SRC under the ANN Technical Assistance contract. This
contract is a cost-plus-award-fee contract, has a total value to CTA of $5
million and is scheduled for completion in September 2000.
Department of Justice. In February 1994, the Department of Justice ("DOJ")
awarded the Company a contract to assist the FBI in its program to streamline,
consolidate and automate its Criminal Justice Information System, which serves
over 80,000 law enforcement users. Under this seven-year contract, the Company
is assisting the FBI in virtually every aspect of the engineering process, from
procurement of new information systems to the re-engineering of the processes
that this system supports. The DOJ contract is a combined fixed-price and
cost-plus contract, has a total value of $40 million and is scheduled for
completion in September 2001.
Treasury Department. Under a contract awarded in 1995, the Company
provides system engineering and technical analysis support to the Treasury
Department, primarily for the Internal Revenue Service's computer-based
information processing system modernization effort. The Company's support
functions include engineering services and telecommunication and security
services. In the longer term, the Company will be developing and assessing
advanced user interface concepts, technologies and prototypes (such as hypertext
and speech recognition) and assessing and recommending tools and environments to
support future software development. This contract is a time-and-materials
contract, has a total value of $40 million and is scheduled for completion in
June 2000.
General Services Administration. The Company provides support for the
Federal Supply Service's central offices, its eleven regional offices and its
various commodity centers and depots. The Company provides applications software
and database maintenance and upgrades, network administration, mainframe to
client-server conversions and implementation of electronic commerce
applications. The Company's current Federal Supply Service contract is a
follow-on contract to the original Federal Supply Service contract that was
awarded to the Company in 1992. The current contract has a total value of $31
million and is scheduled for completion in September 2001.
STATE GOVERNMENT AND COMMERCIAL
Year 2000 Conversion. The Company is a leading provider of Year 2000
compliance services to both commercial clients and state and local governments.
The Company currently has contracts to provide such services to 14 commercial
clients centered in the Financial Services and Process Manufacturing vertical
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<PAGE> 32
markets and 12 state and local governments. These contracts incorporate a wide
range of services including IT inventory assessment, code remediation, testing,
auditing of third party-vendor remediated systems and embedded systems
compliance evaluations. The Company's historical, positive performance track
record has fostered significant financial confidence within the customer base
that has resulted in multi-year contractual awards that range from $1 - $5
million for its commercial customers to $1 - $25 million for its state and local
government customers.
IT Systems Engineering. In June of 1996, the company was awarded a
contract by USAA, a San Antonio, Texas-based, provider of insurance, banking and
investment services to provide technical and engineering support to the USAA
Information Technology Division. The Company's functions include (i) project
management support, including resource forecasting and tracking and scheduling,
(ii) systems engineering, including configuration management, systems
requirements management and test planning and execution, (iii) procurement
support, including the development of procurement strategies, evaluation
criteria and requests for proposals and (iv) development of cost estimates for
USAA procurement. The USAA contract is a time-and-materials contract, and is
scheduled for completion in March 2000.
Emerging Commercial Offerings & Programs. In keeping with its stated
strategy to leverage Year 2000 contracts, the Company has staffed its Year 2000
projects with senior business and systems professionals whose experience
profiles go far beyond those required to perform general Year 2000 assessments
and remediation. By incorporating a high-level skill set with a proven
methodology, customers have yielded an experience-enhanced view of their current
IT portfolios that not only accelerates Year 2000 remediation, but also provides
for cost-effective alternatives for contingency planning, platform
consolidation, systems maintenance and ERP integration. As a result, nearly all
the Company's commercial clients and a third of the state and local government
clients have requested assistance with non-Year 2000 IT systems efforts.
In order to better leverage this opportunity, the Company has combined its
service capabilities into three primary offerings: Platform Conversions and
Migrations, Application Integration and ERP enhancement. Platform Conversions
and Migrations focus on the transformation of code and data. Projects of this
type may be driven by customer requirements for system consolidation, by
"orphaned" (vendor abandoned) systems that are still considered to be mission
critical or by clients who need to modify their systems to handle Euro-Currency
transactions. Application Integration is directed toward the linkage of legacy
mainframe and client/server platforms. ERP enhancement consists of a combined
product and service offering that facilitates the integration of disparate ERP
systems within the corporate enterprise.
The Company is utilizing these offerings to enhance its competitive
positioning within its installed base and to create a compelling rationale for
new clients to consider working with CTA. For its Financial clients, the company
has targeted these offerings at this market's high demand for data mining and
customer portfolio management systems. These systems provide a comprehensive
view of customer product and service purchases, customer portfolio profitability
and customer activity trends. This offering is currently in the planning stages
at USAA, a San Antonio, Texas-based provider of insurance, as a natural
extension to the current contract with USAA for IT engineering services.
For the Company's process manufacturing clients, these offerings allow for
the successful implementation of a hybrid ERP system; where new investments in
packaged ERP systems (i.e. manufacturing, financial, inventory) and existing
investments in viable legacy systems (i.e. order processing, sales management,
distribution) provide for the framework of a unified system structure. The
Company is currently initiating these offerings at Dannon Foods and Centocor
Pharmaceuticals.
For its State and local clients, the Company's offerings provide a pathway
for migration from maintenance-intensive, sunset (obsolete) systems to advanced
open-systems technology. State and local government also have the need for
ERP-type systems, particularly in the areas of human resources services and
financial management. These initiatives are often hampered by the government's
ability to sustain expertise in aging legacy environments and hire and maintain
technical staff in a highly competitive marketplace. With the addition of
selective systems outsourcing as an adjunct to the standard IT Systems
Engineering offering, the Company has created a comprehensive program consisting
of Year 2000 compliance, sunset system maintenance support, phased platform
migration and ERP system support. Selective state
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agencies in California, Connecticut, Kansas and Texas are reviewing these
options as a natural extension to their current Year 2000 contracts with CTA.
INFORMATION TECHNOLOGY SERVICES -- COMPETITION
The IT services industry in which the Company operates is highly fragmented
with no single company or small group of companies in a dominant position. The
Company's competitors include large, diversified firms with substantially
greater financial resources and larger technical staffs than the Company, such
as BDM, Cap Gemini, CSC, EDS, IBM, Lockheed Martin, PRC, SAIC, as well as firms
that receive preferences under government programs for small businesses. The
firms that compete with the Company include consulting firms, computer services
firms, applications software companies and accounting firms, as well as the
computer service arms of computer manufacturing companies and defense and
aerospace firms. In addition, the internal staffs of client organizations,
non-profit federal contract research centers and universities are, in effect,
competitors of the Company.
The primary competitive factors in the information technology industry
include technical, management and marketing competence, as well as price. The
Company competes for commercial work by identification of unique market niches
in which the Company believes it has superior technical service capability.
TYPES OF CONTRACTS
General. The Company's services are provided primarily through three types
of contracts: fixed-price, time-and-material and cost-reimbursable contracts.
Fixed-price contracts require the Company to perform services under the contract
at a stipulated price. Time-and-material contracts reimburse the Company for the
number of labor hours expended at established hourly rates negotiated in the
contract and the cost of materials incurred. Cost-reimbursable contracts
reimburse the Company for all actual costs incurred in performing the contract,
to the extent that such costs are within a specified maximum and allowable under
the terms of the contract, plus a fee or profit.
The following table shows the approximate percentage of revenue by contract
type recognized by the Company's continuing operations during the indicated
periods:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
TYPE OF CONTRACT 1995 1996 1997
---------------- ---- ---- ----
<S> <C> <C> <C>
Fixed-price................................................. 8% 11% 14%
Time-and-materials.......................................... 52% 53% 54%
Cost-reimbursable........................................... 40% 36% 32%
--- --- ---
Total.................................................. 100% 100% 100%
=== === ===
</TABLE>
Government Contract Requirements. Many of the government programs in which
the Company participates as a contractor or subcontractor may extend for several
years, but they are normally funded on an annual basis. The Company's U.S.
government contracts and subcontracts are subject to modification, curtailment
and termination in the event of changes in government funding. Accordingly, all
of the Company's contracts and subcontracts involving the U.S. government may be
terminated at any time by the U.S. government, without cause, for the
convenience of the U.S. government. If a U.S. government contract is terminated
for convenience, the Company would be entitled to receive compensation for the
services provided or costs incurred at the time of termination and a negotiated
amount of the profit on the contract.
Among the factors that could materially adversely affect the Company's U.S.
government contracting business are budgetary constraints, changes in fiscal
policies or available funding, reduction of defense or aerospace spending,
changes in U.S. government programs or requirements, curtailment of the U.S.
government's use of technology services firms, the adoption of new laws or
regulations, technological developments and general economic conditions. In
addition, increased competition and U.S. government
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budget constraints in the defense area, and in areas not related to defense, may
limit future growth in Company revenues from U.S. government agencies and
contractors.
The Company's costs and revenues under government contracts are subject to
adjustment as a result of annual audits performed by the DCAA on behalf of the
DOD. Audits of the Company by the DCAA and other agencies have been completed
for all years through 1995 without material adjustment. See "Risk
Factors -- Contracts with Federal, State and Local Governments."
BACKLOG
The Company's total backlog was approximately $182 million at September 30,
1998 and $284 million at December 31, 1997. The Company's backlog is comprised
of the unrealized portions of the Company's Federal government contracts,
Federal government-related contracts and commercial contracts. Backlog for
government and government-related contracts consists of either funded or
unfunded backlog. Funded backlog consists of the dollar portion of contracts
that is currently appropriated by the government client or other clients and
allocated to the contract by the purchasing government agency or otherwise
authorized for payment by the client upon completion of a specified portion of
work, less amounts realized to date. Unfunded backlog consists of the total
unrealized award value of the contract less the contract value funded by the
customer, and includes multi-year incrementally funded contracts, delivery
orders, and task orders which remain at the customers' discretion to fund.
Unfunded government backlog comprised approximately 59% and 57% of total backlog
at September 30, 1998 and December 31, 1997, respectively. Commercial and other
backlog comprised approximately 27% and 33% of total backlog at September 30,
1998 and December 31, 1997, respectively.
No individual contract or program represents more than 10% of total backlog
at September 30, 1998. The Company expects that approximately 18% of the
Company's total backlog as of September 30, 1998 will result in revenues in the
year ending December 31, 1998.
Although unfunded backlog can include up to the stated award value of the
contract including renewals or extensions that have been priced but still remain
at the discretion of the customer whether to fund, the Company, to be
conservative, often recognizes only a portion of stated award values on
multi-year contracts into its backlog records. Because many of the Company's
contracts are multi-year contracts, total backlog may include revenues expected
to be realized several years into the future. The unfunded backlog may not be an
indicator of future contract revenues or earnings because there is no assurance
that the unfunded portion of the Company's backlog will be funded. In addition,
many of the contracts included in backlog are subject to termination for the
convenience of the government customer.
EMPLOYEES
At September 30, 1998, the Company had 764 employees, approximately 80
percent of whom are IT professionals and 20 percent in management and support
positions. The Company also utilizes the services of independent contractors and
as of September 30, 1998 had approximately 175 independent contractors working
on client engagements. None of the Company's employees are represented by a
labor union and the Company believes its relations with its employees to be
good.
The Company must compete against other employers for the acquisition of
high quality, professional staff members. The Company cannot assure the
retention of current staff or that replacement staff will be available at equal
cost. Competitors of the Company may be able to attract or retain employees more
successfully than the Company based on levels of benefits, demographics and
other factors.
The Company also regularly utilizes the services of consultants as an
integral part of its work on specific projects. The Company is not materially
dependent upon the services of any individual consultant or consulting firm.
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PROPERTIES
The Company leases approximately 23,000 square feet at its corporate
headquarters in Bethesda, Maryland under a lease expiring in 2005. In addition,
the Company has principal leased facilities in Ridgecrest, California and
Colorado Springs, Colorado. The Company believes that these properties are
adequate to serve the Company's present business operations.
LEGAL PROCEEDINGS
The Company is currently involved in certain legal proceedings incidental
to the ordinary course of its business. The Company does not believe that any
liabilities relating to the legal proceedings to which it is a party are likely
to be, individually or in the aggregate, material to its consolidated financial
position or results of operations.
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MANAGEMENT
The following table sets forth certain information regarding current
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
C.E. Velez............................ 58 President, Chief Executive Officer and
Chairman of the Board
Gregory H. Wagner..................... 50 Executive Vice President, Chief
Financial Officer and Treasurer
Terry J. Piddington................... 55 President, Systems Engineering Group
Sy Inwentarz.......................... 47 President, Software Engineering Group
Harvey D. Kushner(1).................. 67 Director
David R. Mackie(1).................... 59 Director
Raymond V. McMillan(1)................ 65 Director
George W. Morgenthaler(1)............. 71 Director
James M. Papada, III(1)............... 50 Director
Arturo Silvestrini(1)................. 68 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee and the Audit Committee of the Board of
Directors.
Dr. C.E. "Tom" Velez, a founder of the Company, has been President and
Chairman of the Board since the Company's organization in 1979. Prior to
founding the Company, Dr. Velez was employed by Martin Marietta Aerospace for
three years as Director, Software Engineering Research and Development, and was
previously employed at the NASA Goddard Space Flight Center for 12 years in
various positions including Chief of the Systems Development and Analysis
Branch.
Gregory H. Wagner has been Executive Vice President and Chief Financial
Officer and Treasurer of the Company since November 1992. From 1988 to 1992, he
was Vice President of Finance of the Company. Mr. Wagner was previously employed
with Martin Marietta Aerospace for ten years in various positions, most recently
as Director of Business Management.
Terry J. Piddington has been President of the Company's Systems Engineering
Group since October 1997 and before that had been Executive Vice President of
the Company since February 1987. From 1985 to 1987, he was a Vice President of
the Company's Systems Engineering Services Division.
Sy Inwentarz has been President of the Company's Software Engineering Group
since March 1998. From 1996 until he joined the Company, he was a Managing
Principal with IBM Global Services. From 1992 to 1996 he was a Vice President of
Computer Horizons Corp., a business solutions software supplier. Prior to 1992,
he held various positions with Hewlett Packard and American Hoechst.
Harvey D. Kushner has been a Director of the Company since July 1989. Mr.
Kushner formed Kushner Management Planning Corporation in 1988 which is a
professional services firm advising in management, business and technology
development. From 1987 to 1988, he was an officer of Atlantic Research
Corporation. Prior to 1987, Mr. Kushner had been employed by the ORI Group for
33 years, having served as Chairman of the Board of Directors, Chief Executive
Officer, and President for 20 years.
David R. Mackie has been a Director of the Company since 1997. Since 1985
he has been an independent consultant and is currently a Partner in Diplomatic
Resolutions, Inc. Prior to 1985, he held various positions with Hewlett-Packard
and Tandem Computers, where he was one of the co-founders.
Raymond V. McMillan has been a Director of the Company since August 1996
and President of Information Technology Services from April 1996 to his
retirement in October 1997. Before that had been Executive Vice President of the
Company since February 1991. From 1988 to 1991, he was a Vice President of the
Company. From 1984 to 1987, he was a Brigadier General in the Air Force
responsible for management of the integration and test of the DOD's Integrated
Tactical Warning and Attack Assessment System.
34
<PAGE> 37
George W. Morgenthaler has been a Director of the Company since August
1991. From 1986 to the present, he has served on the faculty of the University
of Colorado at Boulder as Professor, Aerospace Engineering Sciences. He
previously served four years as Department Chairman and Associate Dean of the
College of Engineering and Applied Science. From 1960 to 1986, he was with
Martin Marietta; his last position was as Vice President of Energy, Technology
and Special Products. He is on the Board of Directors of Dynamic Materials
Corp., a NASDAQ company.
James M. Papada, III has been a Director of the Company since August 1996.
Since prior to 1991, he has been a senior partner in the corporate department of
the law firm of Stradley, Ronon, Stevens & Young, LLP in Philadelphia,
Pennsylvania, specializing in merger and acquisition transactions. He is also
the Chairman of the Board of Technitrol, Inc., a multi-national, diversified
manufacturing company listed on the New York Stock Exchange. He is also a
Director of ParaChem Southern, Inc., a manufacturer of specialty chemical
products and GlassTech, Inc., a manufacturer of glass tempering and bending
systems. From February 1983 until December 1987, Mr. Papada was President and
Chief Operating Officer of Hordis Brothers, Inc., a privately held glass
fabricator.
Arturo Silvestrini has been a Director of the Company since August 1991.
Since November 1991 he has been President and CEO of Earth Observation Satellite
Corporation. From 1965 to 1991, he was with Computer Sciences Corporation, most
recently as Senior Vice President for European operations.
Executive officers are reviewed annually by the Board of Directors and
serve at the pleasure of the Board.
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation for
1997, 1996 and 1995 of (i) the Company's Chief Executive Officer, (ii) the two
other most highly compensated executive officers of the Company serving in
office at December 31, 1997 and (iii) two former executive officers of the
Company who resigned during 1997 (the "Executive Officer Group") for services
rendered in all capacities to the Company. The Company has no other executive
officers.
35
<PAGE> 38
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ----------------------
OTHER RESTRICTED
ANNUAL STOCK OPTION ALL OTHER
SALARY BONUS COMPENSATION AWARDS AWARDS COMPENSATION
NAME AND PRINCIPAL POSITION(S) YEAR ($) ($) ($)(1) ($) (#) ($)(2)
- ------------------------------ ---- ---------- --------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
C.E. Velez, President, 1997 280,000 -- 2,090 -- -- 14,480
Chief.......................
Executive Officer and 1996 276,743 -- 1,870 -- 59,010 5,700
Chairman of the Board 1995 253,454 -- 1,691 -- -- 6,300
Gregory H. Wagner............. 1997 167,900 85,000 927 -- -- 32,461
Executive Vice President, 1996 167,900 -- 856 -- 85,828 5,700
Chief Financial Officer and 1995 150,007 -- 768 -- -- 27,085
Treasurer
Terry J. Piddington........... 1997 155,000 -- 1,396 -- -- 14,028
Executive Vice President 1996 153,350 -- 1,221 -- 32,666 5,700
1995 139,412 38,453 1,107 -- -- 4,800
Ricardo de Bastos(3).......... 1997 175,108 -- 1,540 44,339 -- 11,835
President-Space and 1996 134,616 -- 1,441 125,000 102,684 338,960(4)
Telecommunications Systems and 1995 -- -- -- -- -- --
Director
Raymond V. McMillan........... 1997 142,308 90,000 2,346 -- -- 50,759
President-Information 1996 182,779 -- 2,815 -- 178,988 12,180
Technology
Services(5) 1995 166,385 -- 2,616 -- -- 16,915
</TABLE>
- ---------------
(1) Represents long term disability premiums and group life insurance premiums
for amounts in excess of $50,000.
(2) Includes amounts of the Company's contributions allocated to participants'
accounts pursuant to the Company's 401(k) plan and ESOP, other relocation
reimbursements and miscellaneous cash payments pursuant to the Company's
cafeteria plan.
(3) Mr. de Bastos joined the Company in April 1996 at an annual salary of
$200,000 and resigned effective August 15, 1997.
(4) Includes $125,000 (after tax) and relocation expense of $131,003 paid in
connection with hiring.
(5) Mr. McMillan retired in October 1997.
OPTION GRANTS DURING 1997
There were no options granted in fiscal 1997 to any member of the Executive
Officer Group.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of stock
options during fiscal 1997 and the number and value of unexercised stock options
held at year end by each member of the Executive Officer Group.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END(#) AT FY-END($)(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
C.E. Velez................... -- -- 19,670/39,340 21,538/43,077
Gregory H. Wagner............ -- -- 11,942/73,886 13,076/84,190
Terry J. Piddington.......... -- -- 10,888/21,778 11,922/23,847
Ricardo de Bastos............ -- -- -- --
Raymond V. McMillan.......... -- -- 106,994/115,994 163,734/127,013
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock on December 31,
1997. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of the proposed offering price of
$5.84 per share, less the aggregate exercise price of the options.
36
<PAGE> 39
DIRECTOR COMPENSATION
All directors are reimbursed for their expenses associated with attending
Board and Board committee meetings. Outside directors receive an annual retainer
fee of $10,000, payable in quarterly installments in shares of Common Stock, a
fee of $1,000 for each directors' meeting attended and a fee of $500 for each
committee meeting attended. Directors' fees for board and committee meetings are
payable at a director's election in cash or shares of Common Stock and, if paid
in Common Stock, the director is granted options to purchase an equal number of
shares of Common Stock. Directors may receive additional compensation for
consulting services provided to the Company. Directors who are also officers of
the Company received no separate compensation for their service as directors.
CONSULTING ARRANGEMENTS WITH DIRECTORS
The Company paid Mr. McMillan $36,442 in 1998 to date for consulting
services with respect to business development under a consulting agreement. The
agreement commenced in February 1998.
The Company paid Mr. Silvestrini $32,515 in 1998 to date for consulting
services with respect to business development under a consulting agreement. The
agreement commenced in February 1998.
The Company paid Mr. Kushner $14,404 in 1997 for consulting services with
respect to business development under a consulting agreement. The agreement
ended in 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is currently composed
of Messrs. Kushner, Mackie, McMillan, Morgenthaler, Papada and Silvestrini. Mr.
McMillan was appointed to the Compensation Committee upon his retirement as
President of Information Technology Services of the Company in October 1997. The
Company is not aware of any compensation committee interlocks.
EMPLOYEE BENEFIT PLANS
NON-QUALIFIED STOCK OPTIONS
Non-qualified stock options have been granted to directors and certain key
employees pursuant to individual agreements. As of August 31, 1998,
non-qualified stock options to purchase 1,144,184 shares of Common Stock having
a weighted average exercise price of $4.20 per share were outstanding.
1991 PLAN
In 1991, the Company established the 1991 Plan in which directors, officers
and other employees of, and consultants to, the Company may participate. Options
granted under the 1991 Plan can be qualified or non-qualified stock options. An
aggregate of 2,600,000 shares of the Common Stock is authorized for issuance
under the 1991 Plan, of which 1,455,816 shares remain available for grant. The
1991 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee determines, among other things, to whom
options or stock bonuses will be granted and the times at which grants will be
made, as well as the terms of each option or bonus.
BONUS PLAN
The Company has individual incentive plans for its executive officers which
provide for cash bonuses to be awarded based upon financial performance in
relation to criteria set forth in the incentive plans. Payment of these bonuses
is usually made after year-end. The Company also provides two levels of awards
for specific achievements by all levels of Company employees. Spot bonus awards
and major contribution awards may be made based upon the written recommendation
and approval of the appropriate levels of management. Bonus expense is recorded
each year to match the incentive plans pertaining to that year. Any unpaid bonus
amounts are recorded as a liability and subsequent payments reduce the liability
balance when made.
37
<PAGE> 40
THE 401(K) PLAN
The Company sponsors a qualified 401(k) plan (the "401(k) Plan") which
allows participants to make before-tax salary deferral contributions. Employees
may contribute to the 401(k) Plan up to 15% of their 401(k) Plan eligible
compensation with a maximum in 1998 of $10,000. The Company will match employee
contributions for an amount up to 4% of each employee's 401(k) Plan eligible
compensation. The Company may contribute additional amounts not based upon the
employee's elective contributions at the discretion of the Board of Directors,
which are allocated on the basis of each participant's compensation. The
Company's contributions to the 401(k) Plan generally vest over four years.
The Company added its Common Stock as an investment alternative in the
401(k) Plan in December 1993. Participants are restricted to not more than 20%
of their balances as an investment in Common Stock.
DESCRIPTION OF THE ESOP PLAN
The Company sponsors an employee stock ownership plan ("ESOP"), which was
adopted in 1988. The ESOP is a qualified stock bonus plan under Section 401(a)
of the Code and an employee stock ownership plan under Section 4975(e)(7) of the
Code. The ESOP is designed to enable participating employees to share in the
growth and prosperity of the Company while providing them with the opportunity
to accumulate capital for their future. All contributions to the ESOP are made
by the Company. Contributions are proportionately allocated on the basis of each
eligible participant's compensation. ESOP shares vest over four years. Upon
distribution of ESOP shares to participants and their beneficiaries, the Company
may be required to purchase such shares at fair market value if such shares are
not readily tradable on an established market. The ESOP presently holds
1,615,318 shares of Common Stock. See "Principal Stockholders."
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
In August 1998, the Company adopted a Supplemental Executive Retirement
Plan ("SERP"). Eligibility for participation is determined by the Compensation
Committee of the Board of Directors and the Board may terminate or suspend the
SERP at any time. The SERP will provide normal benefits of sixty percent of
average final compensation upon retirement at age sixty-two and will be funded
with Corporate Owned Life Insurance ("COLI") in a Rabbi Trust.
38
<PAGE> 41
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
At September 30, 1998, the Common Stock was held of record by 286 holders.
The following table sets forth certain information with regard to the beneficial
ownership of the Common Stock as of September 30, 1998, as adjusted to reflect
the sale of the shares of Common Stock offered hereby, by (i) each person known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director, each executive officer and each member of the
Executive Officer Group and (iii) all current directors and executive officers
of the Company as a group. Except as otherwise indicated, all persons listed
below have sole voting and investment power with respect to all shares
beneficially owned, except to the extent shared with spouses under applicable
law.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED(3)
-------------------------
SHARES BENEFICIALLY PRIOR TO
NAME AND ADDRESS OF BENEFICIAL OWNER(1)(2) OWNED(1) OFFERING AFTER OFFERING
------------------------------------------ ------------------- -------- --------------
<S> <C> <C> <C>
C.E. Velez.............................................. 4,681,420(4) 53.6% 46.8%
ESOP.................................................... 1,615,318 18.6 16.2
B.A. Claussen........................................... 919,634(5) 10.3 9.2
Terry J. Piddington..................................... 443,903(6) 5.1 4.4
Raymond V. McMillan..................................... 229,747(7) 2.6 2.3
Gregory H. Wagner....................................... 192,212(8) 2.2 1.9
George W. Morgenthaler.................................. 20,698(9) * *
Harvey D. Kushner....................................... 17,188(10) * *
James M. Papada, III.................................... 6,946(11) * *
Arturo Silvestrini...................................... 4,025 * *
David R. Mackie......................................... 2,774 * *
Sy Inwentarz............................................ -- * *
Ricardo de Bastos....................................... 4,270 * *
All current directors and executive officers as a group
(10 persons as of September 30, 1998)................. 5,603,183(12) 64.7% 56.0%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership as of September 30, 1998 for each person includes
shares subject to options held by such persons (but not held by any other
person) which are exercisable within 60 days after such date. All share
amounts are exclusive of shares beneficially owned through the ESOP.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities.
(2) The address for each beneficial owner except for Mr. Claussen is c/o
Computer Technology Associates, Inc., 6903 Rockledge Drive, Bethesda,
Maryland 20817. Mr. Claussen's address is c/o SymSystems, LLC, 12508 E.
Briarwood Avenue, Englewood, Colorado 80112.
(3) Assumes all 1,335,338 shares of Common Stock offered by the Company in this
offering are sold, 8,664,662 shares of Common Stock are outstanding before
this offering, 10,000,000 shares of Common Stock are outstanding after this
offering, and outstanding options to purchase 1,194,165 shares of Common
Stock have not been exercised.
(4) Includes non-qualified options to purchase 39,340 shares of Common Stock.
(5) Includes non-qualified options to purchase 200,000 shares of Common Stock.
(6) Includes non-qualified options to purchase 21,776 shares of Common Stock.
(7) Includes non-qualified options to purchase 199,988 shares of Common Stock.
(8) Includes non-qualified options to purchase 73,884 shares of Common Stock.
(9) Includes non-qualified options to purchase 946 shares of Common Stock.
(10) Includes non-qualified options to purchase 5,238 shares of Common Stock.
(11) Includes non-qualified options to purchase 420 shares of Common Stock.
(12) Includes non-qualified options to purchase 341,592 shares of Common Stock.
39
<PAGE> 42
CERTAIN TRANSACTIONS
During 1995, the Company discontinued the operations of its Simulation
Systems Division, which manufactured aircraft flight simulators for sale or
lease. The assets of the division consisted primarily of a cockpit flight
simulator and various fixed assets, which had an aggregate value of $3.1
million, net of accumulated depreciation. These assets were sold on September 1,
1995 to a company principally owned by B.A. Claussen, one of the Company's
principal stockholders, for two notes secured by the assets sold with an
aggregate principal amount of $2.2 million, bearing interest at the Company's
borrowing rate which has ranged between 6.00% and 7.75% per annum, and a 15%
minority interest in the entity purchasing the division, which has been assigned
a value of $0.2 million. In August 1998, the Company received $0.2 million in
cash on the $1.8 million note and forgave the balance (which was charged against
the Company's allowance for doubtful accounts). The other note will be repaid
from the Company's common stock held by Mr. Claussen and the Company's minority
interest reduced to 10.6%.
In March 1991, the Company made a loan to Mr. Claussen of $368,623 for the
purchase of his new residence. The interest rate on this loan varied from 4.69%
to 7.75% per annum and equaled the interest rate on the Company's revolving line
of credit under the Credit Facility. Mr. Claussen paid all outstanding principal
and accrued interest on the loan in January 1996. During 1997, the Company and
Mr. Claussen entered into an employee separation and non-competition agreement
under which he will be paid $175,000 per year for a period of five years.
In connection with Mr. Claussen's resignation as an officer and director of
the Company, during December 1996 he entered into an Employee Separation and
Non-Competition Agreement (the "Separation Agreement") with the Company whereby,
in consideration for Mr. Claussen's agreement to not compete with the Company
for a five (5) year period, the Company agreed: (i) to allow Mr. Claussen to
retain his outstanding stock options in the Company until November 28, 2003 and
(ii) to pay Mr. Claussen $175,000 per year for a period of five years. At the
same time, Mr. Claussen and Mr. Velez agreed to terminate the Buy-Sell Agreement
which had formerly restricted the transfer of their shares in the Company. Mr.
Claussen then executed a Stock Restriction Agreement with respect to his Common
Stock on the same terms as the Stock Restriction Agreements signed by all other
shareholders of the Company.
The Company also entered into a Consulting Agreement with Mr. Claussen
during December 1996 for a five (5) year term, whereby Mr. Claussen agreed to
provide consulting services to the Company, including with respect to the
procurement for the Company of commercial and international business. During the
term of the Consulting Agreement, the Company is required to pay Mr. Claussen a
fee equal to one percent (1%) of the net revenues derived by the Company from
contracts secured primarily through Mr. Claussen's efforts and which will
generate greater than $5 million of aggregate revenue for the Company. The
Company has not paid any fees to Mr. Claussen under the Consulting Agreement.
Between May 1993 and July 1995, the Company made loans aggregating $500,000
to Dr. Velez for the purchase and construction of a new residence, evidenced by
a revolving promissory note due August 2000 bearing interest at the same rates
applicable to the Company under its Credit Facility. Dr. Velez paid all
outstanding principal and accrued interest on the loan in November 1997.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company currently consists of (i)
20,000,000 shares of Common Stock, par value $.01 per share and (ii) 1,000,000
shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock").
COMMON STOCK
As of September 30, 1998, there were outstanding 8,664,662 shares of Common
Stock held of record by 284 persons. Upon the consummation of this offering,
there will be 10,000,000 shares of Common Stock
40
<PAGE> 43
outstanding assuming no exercise of outstanding options to purchase an aggregate
of 1,194,165 shares of Common Stock. Holders of Common Stock are entitled to one
vote per share in all matters to be voted on by the stockholders of the Company
and do not have cumulative voting rights. Subject to preferences that may be
applicable to any Preferred Stock outstanding at the time, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of the Company's liabilities and the
liquidation preference, if any, of any outstanding Preferred Stock. Holders of
shares of Common Stock have no preemptive, subscription, redemption or
conversion rights. There are no redemption or sinking fund provisions applicable
to the Common Stock. All of the outstanding shares of Common Stock are, and the
shares offered by the Company in this offering will be, when issued and paid
for, fully paid and non-assessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or
action by the stockholders, to provide for the issuance of up to 1,000,000
shares of Preferred Stock from time to time in one or more series with such
designations, rights, preferences and limitations as the Board of Directors may
determine, including the consideration received therefor. The Board also has the
authority to determine the number of shares comprising each series, dividend
rates, redemption provisions, liquidation preferences, sinking fund provisions,
conversion rights and voting rights without approval by the holders of Common
Stock. Although it is not possible to state the effect that any issuance of
Preferred Stock might have on the rights of holders of Common Stock, the
issuance of Preferred Stock may have one or more of the following effects: (i)
to restrict Common Stock dividends if Preferred Stock dividends have not been
paid, (ii) to dilute the voting power and equity interest of holders of Common
Stock to the extent that any Preferred Stock series has voting rights or is
convertible into Common Stock or (iii) to prevent current holders of Common
Stock from participating in the Company's assets upon liquidation until any
liquidation preferences granted to holders of Preferred Stock are satisfied. In
addition, the issuance of Preferred Stock may, under certain circumstances, have
the effect of discouraging a change in control of the Company by, for example,
granting voting rights to holders of Preferred Stock that require approval by
the separate vote of the holders of Preferred Stock for any amendment to the
Articles of Incorporation or any reorganization, consolidation, merger or other
similar transaction involving the Company. As a result, the issuance of such
Preferred Stock may discourage bids for the Common Stock at a premium over the
market price therefor, and could have a materially adverse effect on the market
value of the Common Stock.
STOCK RESTRICTION AGREEMENTS
The shares of Common Stock offered hereby will be subject to certain
restrictions on their transferability set forth in the Stock Restriction
Agreements which will be required to be entered into by the original purchasers
thereof and all subsequent transferees. The material terms of such Stock
Restriction Agreements are as follows:
Right of Repurchase upon Termination of Employment or Affiliation. All
shares of Common Stock owned by any employee, director or consultant of the
Company will be subject to the Company's right to repurchase such shares upon
the death or termination of such holder's employment or affiliation with the
Company at the Formula Price per share on the date of such termination of
employment or affiliation. The Company's right of repurchase will be exercisable
by mailing written notice to such holder within one year following his or her
termination of employment or affiliation provided, however, that in the event
that the Formula Price to be paid by the Company is less than the price paid by
such holder for any such shares, the Company will not exercise its right to
repurchase any such shares without the shareholder's consent. The Company will
pay for any shares repurchased in cash as soon as practicable after receipt by
the Company of the certificate or certificates representing such shares.
41
<PAGE> 44
Right of First Refusal. In the event that a holder of Common Stock desires
to sell any of his or her shares to a third party other than in the Limited
Market, such person must first give notice to the Secretary of the Company
consisting of: (a) a signed statement setting forth such holder's desire to sell
his or her shares of Common Stock and that he or she has received a bona fide
offer to purchase such shares; (b) a statement signed by the intended purchaser
containing (i) the intended purchaser's full name, address and taxpayer
identification number, (ii) the number of shares to be purchased, (iii) the
price per share to be paid, (iv) the other terms upon which the purchase is
intended to be made, (v) a representation that the offer, under the terms
specified, is bona fide and (vi) a representation that such purchaser will enter
into an agreement with the Company on substantially the same terms as set forth
in the Stock Restriction Agreement; and (c) if the purchase price is payable in
cash, in whole or in part, a copy of a certified check, cashier's check or money
order payable to such holder from the purchaser in the amount of the purchase
price which is to be paid in cash.
Upon receiving such notice, the Company will have the option, exercisable
within 30 days, to purchase all of the shares specified in the notice at the
offer price and upon the same terms as set forth in the notice. In the event the
Company does not exercise such option and consents to a sale, the holder may
sell the shares specified in the notice within 30 days thereafter to the person
specified in the notice at the price and upon the terms and conditions set forth
therein. The holder may not sell such shares to any other person or at any
different price or on any different terms without first re-offering the shares
to the Company.
All Transfers. Except for sales in the Limited Market, no holder of Common
Stock may sell, assign, pledge, transfer or otherwise dispose of or encumber any
shares of Common Stock without abiding by the terms of the Stock Restriction
Agreement, and any attempt to do so will be null and void. In addition, no such
transfer may be made unless the transferee enters into an agreement with the
Company on substantially the same terms as set forth in the Stock Restriction
Agreement. See "Risk Factors -- No Public Market; Lack of Liquidity."
Lapse or Waiver of Restrictions. All transfer restrictions imposed on the
Common Stock by the Stock Restriction Agreement will automatically terminate (i)
if the Company makes an underwritten offering of any class of its Common Stock,
or securities convertible into any class of Common Stock, to the general public
or (ii) if the Company applies to have any class of its Common Stock, or
securities convertible into any class of its Common Stock, listed on a national
securities exchange. In addition, the Board of Directors may waive any or all of
the restrictions on the shares of Common Stock imposed by the Stock Restriction
Agreement where the Board deems it appropriate.
The foregoing summary is qualified in its entirety by the provisions of the
form of Stock Restriction Agreement, a copy of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION
Right to Restrict Capital Stock. The Company's Articles of Incorporation
give the Company the right to impose restrictions on transferability of its
capital stock and to become a party to agreements entered into with any of its
shareholders restricting transfer or encumbrance of any of its shares, or
subjecting any of its shares to repurchase or resale obligations. In order to
remain predominantly employee-owned, the Company has no present intention to
amend its Articles to alter this right.
Anti-Takeover Provisions. With certain exceptions, the Company's Articles
also generally prohibit the Company from engaging in any business combination
with any "interested shareholder" for a period of three years following the time
such shareholder became an interested stockholder unless:
(i) prior to such time the Board of Directors approved either the
business combination or the transaction which resulted in the shareholder
becoming an interested shareholder;
(ii) upon consummation of the transaction which resulted in the
shareholder becoming an interested shareholder, the interested shareholder
owned at least 85% of the outstanding voting stock of the Company,
excluding for purposes of calculating the shares outstanding shares owned
by (a) persons
42
<PAGE> 45
who are both directors and officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
(iii) at or subsequent to such time the business combination is
approved by the Board of Directors and authorized at an annual or special
meeting of shareholders by the affirmative vote of at least two thirds of
the outstanding voting stock not owned by the interested stockholder.
As used in the Articles, "interested stockholder" means any person (other
than the Company or any direct or indirect majority-owned subsidiary thereof)
that (i) is the owner of 15% or more of the outstanding voting stock of the
Company or (ii) is an affiliate or associate of the Company and was the owner of
15% or more of the outstanding voting stock of the Company at any time within
the past three years; provided, however, that the term "interested stockholder"
shall not include:
(a) any person who (x) owned shares in excess of the 15% limitation as
of September 18, 1996 and either (1) continued to own shares in excess of
such 15% limitation or would have but for action by the Company or (2) is
an affiliate or associate of the Company and so continued (or would have so
continued but for action of the Company) to be the owner of 15% or more of
the outstanding voting stock at any time within the past three years or (y)
acquired said shares from a person described in clause (x) of this
paragraph by gift, inheritance or in a transaction in which no
consideration was exchanged; or
(b) any person whose ownership of shares in excess of the 15%
limitation is the result of action taken solely by the Company; provided
that such person will be an interested stockholder if thereafter such
person acquires additional shares of voting stock of the Company other than
through additional corporate action not caused, directly or indirectly, by
such person or pursuant to any stock option, stock purchase or similar plan
or arrangement for the benefit of employees of the Company or its
subsidiaries in effect on September 18, 1996, or thereafter adopted by the
Board of Directors of the Company.
The foregoing summary is qualified in its entirety by the provisions of the
Company's Amended and Restated Articles of Incorporation, as further amended to
date, a copy of which has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
LIMITATIONS ON DIRECTORS' LIABILITY
The Articles of Incorporation provide that no director of the Company shall
be liable to the Company or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) in respect of certain acts set forth in the Colorado
Business Corporation Act or (iv) for any transaction from which the director
derived an improper personal benefit. The effect of these provisions will be to
eliminate the rights of the Company and its shareholders (through shareholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of fiduciary duty as a director (including breaches
resulting from gross negligence), except in the situations described above. The
limitations on liability do not limit the ability of shareholders to obtain
equitable or injunctive relief. The effectiveness of shareholders' other,
non-monetary alternatives to enforcing directors' fiduciary duties, such as
equitable or injunctive relief, may be limited as a practical matter by such
factors as the ability of shareholders to seek non-monetary relief in a timely
fashion and procedural considerations. The limitation of liability under state
law does not affect any liability under federal securities laws.
In addition, the Articles of Incorporation provide that the Company must
indemnify its directors and executive officers to the fullest extent provided by
law and may indemnify its other officers, employees and agents to the fullest
extent provided by law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
43
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding up to
10,000,000 shares of Common Stock. Of these shares, the maximum of 1,951,074
shares sold in the offering will, not withstanding contractual restrictions on
transferability, be freely tradable in the Limited Market without restriction or
further registration under the Securities Act except for any shares purchased by
an "affiliate" of the Company, as defined in Rule 144 under the Securities Act.
The Company believes that up to an additional 1,791,528 shares held by
non-affiliate shareholders of the Company will be freely tradable in the Limited
Market without restriction pursuant to exemptions from registration under the
Securities Act.
Shares held by Dr. Velez and the ESOP are not being registered and will be
eligible for sale only if they are registered pursuant to Section 5 of the
Securities Act or an exemption from registration is relied upon.
As of September 30, 1998, options to purchase 1,194,165 shares of Common
Stock were outstanding. Of the outstanding options, 707,948 shares are vested
and exercisable or will become exercisable within sixty (60) days of such date.
A total of 1,405,835 shares of Common Stock are currently available for future
grants of options.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Sherman & Howard, L.L.C., Denver, Colorado.
EXPERTS
The consolidated financial statements of Computer Technology Associates,
Inc. at December 31, 1997 and December 31, 1996, and for each of the three years
in the period ended December 31, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
44
<PAGE> 47
COMPUTER TECHNOLOGY ASSOCIATES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1998
AND AS OF DECEMBER 31, 1997 AND 1996 AND FOR EACH OF THE THREE YEARS IN
THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Index to Consolidated Financial Statements.................. F-1
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Computer Technology Associates, Inc.
We have audited the accompanying consolidated balance sheets of Computer
Technology Associates, Inc. (formerly CTA INCORPORATED) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Computer Technology Associates, Inc. and subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, D.C.
February 28, 1998
F-2
<PAGE> 49
COMPUTER TECHNOLOGY ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE
DATA)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. $ 16 $ -- $ --
Accounts receivable (Notes 1 and 3)................... 30,665 33,300 41,116
Net assets of discontinued operations (Note 2)........ 34,484 -- --
Other current assets (Note 4)......................... 1,690 1,222 735
Recoverable income taxes (Note 8)..................... 3,537 3,576 --
------- ------- -------
Total current assets............................. 70,392 38,098 41,851
Furniture and equipment (Notes 1 and 4).................... 11,795 11,110 8,422
Accumulated depreciation and amortization............. (8,888) (8,066) (4,831)
------- ------- -------
2,907 3,044 3,591
Costs in excess of net assets acquired..................... 5,048 -- --
Other assets (Notes 1, 4, and 8)........................... 5,110 4,146 1,669
------- ------- -------
Total assets..................................... $83,457 $45,288 $47,111
======= ======= =======
Liabilities and stockholders' equity
Current liabilities:
Notes payable -- line of credit (Note 5).............. $28,335 $ 7,445 $ 9,296
Current portion of long-term debt..................... -- 1,667 1,667
Accounts payable...................................... 10,266 5,788 6,621
Accrued expenses (Note 4)............................. 3,686 3,156 4,321
Excess of billings over costs and contract
prepayments......................................... 2,733 2,738 3,795
Other current liabilities............................. 757 270 175
Accrued tender offer (Note 7)......................... -- 2,019 --
Income taxes payable.................................. -- -- 590
Deferred income taxes (Note 8)........................ 1,377 2,427 2,800
------- ------- -------
Total current liabilities........................ 47,154 25,510 29,265
Long-term debt, less current portion (Note 5).............. 15,000 3,333 2,083
Other long-term liabilities................................ 3,510 635 --
Commitments and contingencies (Note 11).................... -- -- --
Stockholders' equity (Note 7):
Preferred stock, $.01 par value, 1,000,000 shares
authorized and note issued.......................... -- -- --
Common stock, $.01 par value, 20,000,000 shares
authorized and 10,000,000 issued.................... 100 100 100
Capital in excess of par value........................ 7,943 7,869 7,858
Retained earnings..................................... 14,550 14,528 14,976
------- ------- -------
22,593 22,497 22,934
Notes receivable from employees (Note 10).................. (698) (698) (698)
Treasury stock, at cost (894,704 shares in 1996, 1,248,980
shares in 1997 and 1,335,338 shares in 1998)............. (4,102) (5,989) (6,473)
------- ------- -------
Total stockholders' equity....................... 17,793 15,810 15,763
------- ------- -------
Total liabilities and stockholders' equity....... $83,457 $45,288 $47,111
======= ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 50
COMPUTER TECHNOLOGY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C>
Contract revenues............................ $105,224 $ 96,246 $92,239 $69,650 $83,105
Cost of contract revenues.................... 96,633 87,644 78,530 58,793 65,412
Selling, general and administrative
expenses................................... 4,117 5,431 9,622 6,591 10,891
Supplemental ESOP contribution (Note 6)...... -- -- 2,958 -- --
Other expenses............................... (292) 2,447 710 541 1,258
-------- -------- ------- ------- -------
Operating profit............................. 4,766 724 419 3,725 5,544
Interest expense............................. 850 969 1,589 1,329 854
-------- -------- ------- ------- -------
Income (loss) before income taxes............ 3,916 (245) (1,170) 2,396 4,690
Income taxes (benefit) (Note 8).............. 1,567 (80) (500) 899 1,760
-------- -------- ------- ------- -------
Income (loss) from continuing operations..... 2,349 (165) (670) 1,497 2,930
-------- -------- ------- ------- -------
Discontinued operations(Note 2):
Income (loss) from discontinued operations,
net of income taxes........................ 62 (10,872) (3,272) (1,490) (1,094)
Gain (loss) on disposal of segments, net of
income taxes............................... (465) -- 3,920 3,016 (1,388)
-------- -------- ------- ------- -------
Income (loss) from discontinued operations... (403) (10,872) 648 1,526 (2,482)
-------- -------- ------- ------- -------
Net income (loss)............................ $ 1,946 $(11,037) $ (22) $ 3,023 $ 448
======== ======== ======= ======= =======
Earnings (loss) per share (Note 9):
Continuing operations................... $ .27 $ (.02) $ (.07) $ .16 $ .34
Discontinued operations................. (.05) (1.22) .07 .16 (.29)
-------- -------- ------- ------- -------
Earnings (loss) per share.................... $ .22 $ (1.24) $ .00 $ .32 $ .05
======== ======== ======= ======= =======
Earnings (loss) per share -- assuming
dilution (Note 9):
Continuing operations................... $ .25 $ (.02) $ (.07) $ .16 $ .32
Discontinued operations................. (.04) (1.22) .07 .16 (.27)
-------- -------- ------- ------- -------
Earnings (loss) per share -- assuming
dilution................................... $ .21 $ (1.24) $ .00 $ .32 $ .05
======== ======== ======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 51
COMPUTER TECHNOLOGY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
STOCK CAPITAL IN RECEIVABLE TREASURY STOCK
COMMON PAR EXCESS OF RETAINED FROM -------------------
SHARES VALUE PAR VALUE EARNINGS EMPLOYEES SHARES COST
---------- ----- ---------- --------- ---------- --------- -------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995......... 10,000,000 $100 $ 8,872 $ 23,641 $ -- 1,108,370 $ 4,663
Purchase of treasury stock.... -- -- -- -- -- 147,684 684
Exercise of stock options..... -- -- (46) -- -- (79,000) (283)
Compensatory issuance of
common stock to
employees/directors......... -- -- 58 -- -- (52,274) (187)
Issuance of stock for
acquisition notes payable... -- -- 89 -- -- (79,872) (286)
Purchase of treasury stock
from ESOP................... -- -- -- -- -- 276,200 1,296
Net income.................... -- -- -- 1,946 -- -- --
---------- ---- ------- -------- ---- --------- -------
Balance at December 31, 1995....... 10,000,000 100 8,973 25,587 -- 1,321,108 5,887
Purchase of treasury stock.... -- -- -- -- -- 125,368 590
Sale of treasury stock........ -- -- 8 -- -- (7,826) (28)
Exercise of stock options..... -- -- (1,452) -- -- (449,340) (1,935)
Compensatory issuance of
common stock to
employees/directors......... -- -- 7 -- -- (15,576) (67)
Issuance of stock for
acquisition notes payable... -- -- 30 -- -- (79,030) (345)
Tax benefit of non-qualified
stock options exercised..... -- -- 377 -- -- -- --
Issuance of stock to employees
for notes receivable........ -- -- -- -- 698 -- --
Net loss...................... -- -- -- (11,037) -- -- --
---------- ---- ------- -------- ---- --------- -------
Balance at December 31, 1996....... 10,000,000 100 7,943 14,550 698 894,704 4,102
Purchase of treasury stock
(Note 7).................... -- -- -- -- -- 466,500 2,381
Exercise of stock options..... -- -- (191) -- -- (89,870) (392)
Compensatory issuance of
common stock to
employees/directors......... -- -- 12 -- (22,354) (102)
Tax benefit of non-qualified
stock options exercised..... -- -- 105 -- -- -- --
Net loss...................... -- -- -- (22) -- -- --
---------- ---- ------- -------- ---- --------- -------
Balance at December 31, 1997....... 10,000,000 100 7,869 14,528 698 1,248,980 5,989
Purchase of treasury stock
(Note 7).................... -- -- -- -- -- 109,729 582
Exercise of stock options..... -- -- (21) (10,000) (44)
Compensatory issuance of
common stock to
employees/directors......... -- -- 10 -- -- (13,371) (54)
Net income.................... -- -- -- 448 -- -- --
---------- ---- ------- -------- ---- --------- -------
Balance at September 30, 1998
(unaudited)................. 10,000,000 $100 $ 7,858 $ 14,976 $698 1,335,338 $ 6,473
========== ==== ======= ======== ==== ========= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 52
COMPUTER TECHNOLOGY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------- ------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss)......................................... $ 1,946 $(11,037) $ (22) $ 3,023 $ 448
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on disposal of SIM............................... 718 -- -- -- --
Gain on disposal of segments.......................... -- -- (3,920) (3,016) --
Depreciation and amortization:
Furniture and equipment............................. 2,877 3,734 2,612 2,083 1,331
Capitalized software development costs.............. 131 1,108 76 76 --
Other noncurrent assets............................. 610 1,018 390 293 --
Deferred lease incentives........................... (382) (292) (271) (203) (405)
Provision for receivable allowances................... (990) 300 360 310 453
Accrued interest on debt.............................. 1,063 1,034 (3,590) 2,404 482
Other noncash expenses................................ 432 (8) (224) 209 229
Changes in assets and liabilities:
Accounts receivable................................. (233) (4,106) 901 4,303 (6,539)
Recoverable income taxes............................ (2,707) (639) (906) 3,304 4,338
Other assets........................................ 933 (2,353) 463 (61) 567
GEMnet investment................................... (1,011) 6,437 -- -- --
Accounts payable and accrued expenses............... 5,089 1,595 (5,017) (10,383) 1,760
Excess of billings over costs and contract
prepayments....................................... (4,816) 1,556 (3,180) (3,329) 1,057
Deferred income taxes, net.......................... (1,299) (3,900) 2,100 -- 373
------- -------- -------- -------- -------
Net cash provided by (used in) operating activities....... 2,361 (5,553) (10,228) (987) 4,094
------- -------- -------- -------- -------
Investing activities
Investments in furniture and equipment.................... (4,327) (6,469) (3,584) (2,076) (1,577)
Proceeds from sale of segments............................ -- -- 18,000 12,127 --
Capitalized computer software............................. (832) (87) -- -- --
Other..................................................... -- 351 -- -- --
------- -------- -------- -------- -------
Net cash provided by (used in) investing activities....... (5,159) (6,205) 14,416 10,051 (1,577)
------- -------- -------- -------- -------
Financing activities
Net borrowings (payments) under bank line of credit
agreement............................................... 1,324 12,011 (8,684) (8,979) 1,851
Proceeds from term loan................................... -- -- 5,000 -- --
Repayment of long-term debt............................... -- -- (450) -- (1,750)
Repayment of acquisition notes............................ (375) (375) -- -- --
Proceeds from deferred lease incentives................... 150 315 -- -- --
Purchase of treasury stock................................ (1,980) (458) (104) (94) (2,639)
Proceeds from exercise of stock options................... 12 10 34 -- 21
Other..................................................... -- 36 -- -- --
------- -------- -------- -------- -------
Net cash provided by (used in) financing activities....... (869) 11,539 (4,204) (9,073) (2,517)
------- -------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents...... (3,667) (219) (16) (9) --
Cash and cash equivalents at beginning of period.......... 3,902 235 16 16 --
------- -------- -------- -------- -------
Cash and cash equivalents at end of period................ $ 235 $ 16 $ -- $ 7 $ --
======= ======== ======== ======== =======
Supplemental Information
Cash paid during the year for:
Income taxes.......................................... $ 5,115 $ 226 $ 117 $ 7 $ 309
======= ======== ======== ======== =======
Interest.............................................. $ 2,863 $ 2,836 $ 8,807 $ 1,658 $ 369
======= ======== ======== ======== =======
Noncash investing and financing activities:
Debt assumed by purchaser (Note 2).................... $ -- $ -- $ 27,000 $ -- $ --
======= ======== ======== ======== =======
Purchase of treasury stock (Note 7)................... $ -- $ -- $ 2,019 $ -- $ --
======= ======== ======== ======== =======
Investment in EarthWatch.............................. $ -- $ 2,038 $ -- $ -- $ --
======= ======== ======== ======== =======
Conversion of note to common stock.................... $ 375 $ 375 $ -- $ -- $ --
======= ======== ======== ======== =======
Common stock issued for notes......................... $ 225 $ 473 $ -- $ -- $ --
======= ======== ======== ======== =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 53
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Computer Technology Associates, Inc. (the Company, formerly CTA
INCORPORATED) provides information technology services to Federal, State and
commercial markets including Year 2000 services, network design and
implementation, mainframe to client-server conversions, software language
upgrades, database development and maintenance, electronic data interchange and
automated enterprise management technologies. During 1995, the Company disposed
of its aircraft simulation systems business. During 1997, the Company disposed
of its Space and Telecommunications Systems and its Mobile Information and
Communications Services businesses.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
UNAUDITED INFORMATION
Financial information for the nine months ended September 30, 1997 and 1998
are unaudited but have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, contain all
adjustments necessary for the fair presentation of the financial position,
results of operations and cash flows for those periods. The consolidated results
of operations for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for any future period.
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, in particular, estimates of contract cost and revenues used
in the earnings recognition process. Actual results could differ from those
estimates.
An important focus of the Company's efforts to pursue commercial markets is
to assist state and local governments and commercial companies address the Year
2000 Issue with their information systems. The Year 2000 Issue arises because
many electronic data processing systems will be unable to process year-date data
accurately beyond the year 1999. The Company believes it has instituted
reasonable contract management practices to control the financial risk of
performance on these contracts.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
FURNITURE AND EQUIPMENT
Furniture and equipment are carried at cost. Depreciation is computed based
upon accelerated methods using estimated useful lives of three to seven years.
Leasehold improvements are amortized on a straight-line basis over the terms of
the leases, which range from one to ten years. Purchased computer software used
by the Company is amortized on a straight-line basis over a three-year period.
F-7
<PAGE> 54
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
CONTRACTS REVENUES AND RELATED CONTRACT COSTS
Revenues result from services performed for the U.S. government and
commercial customers under a variety of long-term contracts and subcontracts,
some of which provide for reimbursement of costs plus fixed fees and/or award
fees, and others which are fixed-price type. Revenues on cost-type contracts are
recognized as costs are incurred on the basis of direct costs plus allowable
indirect expenses and an allocable portion of a fixed fee. Award fees on
cost-type contracts are recognized as earned. Revenues on fixed-price type
contracts are recognized using the percentage-of-completion method of
accounting, based on contract costs incurred to date compared with total
estimated costs at completion or other measures of progress on the contract.
Estimated contract revenue at completion includes contract incentive fees at
estimated realizable amounts. Revenues from time and materials contracts are
recognized based on hours worked at amounts represented by the agreed-upon
billing amounts.
When adjustments in contract value or estimated costs are determined, any
changes from prior estimates are reflected in earnings in the current period.
The effect of these adjustments could be material to interim or annual operating
results. The Company provides for anticipated losses, if any, on contracts and
allowances for receivables during the period in which they are first identified.
Contract costs, including indirect costs for cost-type contracts, are
subject to audit by government representatives. Such audits have been completed
through 1995. Management believes that any adjustments resulting from
determinations for subsequent periods and contract close-outs will not have a
significant impact on the Company's consolidated financial position or results
of operations.
STOCK-BASED COMPENSATION
Compensation expense is recognized for stock options and other stock grants
to the extent the exercise price is less than the fair market value of the
Company's common stock at the date of grant.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No. 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods presented have been restated to conform to the SFAS No.
128 requirements (see Note 9).
The Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in 1997. SFAS No. 131 supercedes SFAS No.
14, replacing the "industry segment approach" with the "management approach,"
whereby companies report financial and descriptive information about their
operating segments. Operating segments are revenue-producing components of the
enterprise for which separate financial information is produced internally and
are subject to evaluation by the chief operating decision maker in deciding how
to allocate resources to segments (see Note 13).
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current period presentation.
2. DISPOSAL OF SEGMENTS
In August 1997, the Company sold its Space and Telecommunications Systems
and its Mobile Information and Communications Services businesses to Orbital
Sciences Corporation ("Orbital") in
F-8
<PAGE> 55
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. DISPOSAL OF SEGMENTS -- (CONTINUED)
exchange for $18 million in cash and assumption by Orbital of certain
liabilities of the Company. In addition, Orbital paid to certain lenders of the
Company an aggregate of $27 million in partial satisfaction of the Company's
obligations to such lenders. The final purchase price was subject to certain
adjustments and was subsequently reduced by $2.1 million in 1998 The Company
also is entitled to receive certain deferred consideration for future sales of
STARBus satellites and satellite busses and 3% of all cumulative revenues
attributable to the GEMtrak monitoring system in excess of a threshold amount of
$50 million.
The consolidated statements of operations exclude sales and expenses of
discontinued operations from captions applicable to continuing operations. The
discontinued operations include an allocation of interest expense based on the
proportion of debt paid by Orbital to the Company's total debt outstanding at
the time of the sale. Interest expense allocated to discontinued operations was
$2.1 million in 1997, $3.3 million in 1996 and $3.2 million in 1995. Net sales
of the Space and Telecommunications Systems business prior to its disposition
were $66.8 million in 1997, $83.5 million in 1996 and $111.8 million in 1995.
There were no sales for the Mobile Information and Communications Services
business prior to its disposition. The income (loss) from operations of the
disposed businesses was $(3.3) million in 1997, $(10.9) million in 1996 and $1.3
million in 1995, net of income tax. The operating loss in 1996 includes charges
totaling $9.2 million related to lower profitability on a contract and the
write-off of the investment in GEMnet. The 1997 gain from disposal of the
businesses was $3.9 million, net of income tax. The income tax provision
(benefit) related to these discontinued segments was $(1.4) million in 1997,
$(5.6) million in 1996 and $0.9 million in 1995.
The loss from discontinued operations for 1998 reflects an adjustment of
$2.1 million on the disposal of segments for the final settlement of the sales
price to Orbital and a binding arbitration award of $2.0 million to a former
employee of that business. The amounts are presented net of income tax benefit
in the Condensed Statements of Operations. Net revenues of the Space and
Telecommunications business for the six months ended June 30, 1997 were $36.4
million.
During 1997, the Company also sold its Advanced Information Systems (AIS)
division for approximately $0.4 million. The net contract revenues of AIS prior
to its disposition were $0.9 million in 1997, $2.9 million in 1996 and $3.7
million in 1995 and are included in continuing operations.
In September 1995, the Company sold its Simulation Systems Division (SIM)
to a former director and a principal stockholder of the Company and other
investors in exchange for two notes secured by the assets of the division with
an aggregate principal amount of $2.2 million, bearing interest at the Company's
borrowing rate and a 15% minority interest in the purchasing entity, valued at
$0.2 million. The notes were paid in 1998 and the Company's minority interest
reduced to 10.6%.
Net sales of SIM prior to its disposition were $0.5 million in 1995. The
loss from operations of the SIM business, which is reported in discontinued
operations, was $1.3 million in 1995, net of income tax. The 1995 loss from
disposal of the business was $0.5 million, net of income tax. The income tax
benefit related to this discontinued business was $1.2 million in 1995.
F-9
<PAGE> 56
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Accounts receivable:
U.S. Government:
Billed............................................ $21,969 $17,556 $16,744
Unbilled:
Contracts in progress........................ 6,106 4,659 2,602
Amounts awaiting contractual coverage........ 4,338 4,192 5,847
Revenue awaiting government approval of final
indirect rates or contract close-out....... 1,360 242 382
Commercial Customers:
Billed................................................. -- 5,646 8,435
Unbilled:
Contracts in progress................................ -- 4,473 9,297
------- ------- -------
33,773 36,768 43,307
Less allowances............................................. (3,108) (3,468) (2,191)
------- ------- -------
$30,665 $33,300 $41,116
======= ======= =======
</TABLE>
Contracts in progress consist primarily of revenues on long-term contracts
that have been recognized under the percentage-of-completion method for
accounting purposes but not billed to customers. These amounts generally will be
billable upon product delivery or satisfaction of other contract requirements.
Amounts awaiting contractual coverage include amounts for which the Company
expects to obtain the necessary contract modifications in the normal course of
business. At December 31, 1996 and 1997, approximately $2.9 million and $2.2
million respectively, is related to situations where disputes regarding the
extent of contractual coverage have resulted in legal actions or formal claims.
The Company has provided allowances that it believes adequately provide for the
resolution of these and other matters. The Company expects to realize
substantially all billed and unbilled receivables within one year.
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT BALANCES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Other current assets:
Receivables from employees and stockholders (Note
10).................................................. $ 1,175 $ 76 $ 226
Prepaid expenses....................................... 253 495 509
Other.................................................. 262 651 --
------- ------- -------
$ 1,690 $ 1,222 $ 735
======= ======= =======
Furniture and equipment:
Data processing equipment.............................. $ 8,353 $ 7,513 $ 3,777
Office furniture and equipment......................... 2,425 2,805 1,588
Other equipment........................................ 351 115 2,575
Leasehold improvements................................. 666 677 482
------- ------- -------
11,795 11,110 8,422
Accumulated depreciation and amortization................... (8,888) (8,066) (4,831)
------- ------- -------
$ 2,907 $ 3,044 $ 3,591
======= ======= =======
</TABLE>
F-10
<PAGE> 57
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. COMPOSITION OF CERTAIN FINANCIAL STATEMENT BALANCES -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Other assets:
Investment in and notes receivable from SIM (Note 2)... $ 2,138 $ 2,218 $ 200
Capitalized software costs, net........................ 525 -- --
Deferred tax asset (Note 8)............................ 1,385 935 868
Other.................................................. 1,062 993 601
------- ------- -------
$ 5,110 $ 4,146 $ 1,669
======= ======= =======
Accrued expenses:
Salaries and incentives................................ $ 3,253 $ 3,106 $ 4,030
Employee benefit plans................................. 147 -- 250
Other.................................................. 286 50 41
------- ------- -------
$ 3,686 $ 3,156 $ 4,321
======= ======= =======
</TABLE>
5. NOTES PAYABLE AND SUBORDINATED DEBT
BANK DEBT
In November 1997, the Company entered into a new three-year agreement with
a bank for a revolving credit facility providing the availability to borrow up
to $15 million, which includes a facility for letters of credit up to $4 million
and which also provides a new $5 million term facility. At September 30, 1998
and December 31, 1997, there was $9.3 million and $7.4 million, respectively,
outstanding under the revolving credit facility and $3.8 million and $5 million,
respectively, outstanding under the term facility, to be repaid in equal
quarterly payments.
Borrowings under the credit facility are secured by substantially all of
the Company's assets and bear interest at either the lender's prime rate or
LIBOR plus 1.5% to 2.25% (based on the Company's ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization) at the Company's
discretion. The weighted average rate in effect for short-term borrowings at
December 31, 1997 was approximately 7.7%. Under the agreement, the Company pays
an annual commitment fee on the unused credit line and an annual administration
fee on the total revolving credit line. The credit facility requires advance
approval by the bank for the Company to pay dividends. The agreement also
includes financial covenants which require the Company to maintain certain
financial ratios and restricts capital expenditures.
The balance outstanding at December 31, 1996 under the previous credit
facility was $28.3 million. The weighted average interest rate in effect for
short-term borrowings at that date was approximately 7.6%.
SUBORDINATED DEBT
In December 1993, the Company entered into a note purchase agreement (the
"Notes Agreement") providing for $15 million aggregate principal amount of
unsecured, senior subordinated notes (the "Notes"). The Notes bore interest at
12.0% per annum (13.0% effective April 1, 1996), payable quarterly. The Company
was required at the election of the holder to repurchase the Notes at the unpaid
principal amount, plus accrued interest, at the occurrence of a transaction
which resulted in a change in control of ownership of the Company or a
"Qualifying Sale" of the Company's common stock as defined by the Notes
Agreement. The Notes also provided for payment of contingent interest over and
above the 13.0% fixed rate upon the occurrence of a "Qualifying Sale." The sale
of the Space and Telecommunications Systems business as
F-11
<PAGE> 58
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE AND SUBORDINATED DEBT -- (CONTINUED)
described in Note 2 was a "Qualifying Sale." As a result, the subordinated debt
was repaid along with accrued interest and contingent interest of $5.8 million.
6. EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are eligible to participate in
the Company's employee stock ownership plan (ESOP). The ESOP is designed to
enable participating employees to share in the growth and prosperity of the
Company while providing them with the opportunity to accumulate capital for
their future. The ESOP allows only Company contributions, in cash or in common
stock, as determined by the Board of Directors, which are recorded as
compensation expense. During 1997, the Board elected to make a one-time
supplemental contribution of approximately $2.9 million. Contributions are
proportionately allocated on the basis of each eligible participant's
compensation. Employee vesting in benefits ranges from 40% at the end of two
years to 100% at the end of four years. Shares of the Company's common stock
which may ultimately be distributed by the ESOP to participants carry certain
limited provisions for repurchase by the Company. Through September 30, 1998, no
shares of the Company's common stock have been distributed by the ESOP. At
December 31, 1996 and 1997 and September 30, 1998, the ESOP owned 1,029,440,
1,615,318 and 1,615,318 shares, respectively, of the Company's common stock, all
of which have been allocated to plan participants.
The Company and its subsidiaries maintain 401(k) savings plans which allow
for Company and employee contributions based upon a percentage of the
participating employee's salary. Employee vesting in Company contributions
ranges from one to four years. The Company's 401(k) plan owned 140,000 shares of
the Company's common stock at December 31, 1996 and 1997 and September 30, 1998.
Amounts charged to expense under the above plans were approximately $2.1
million, $2.0 million and $4.2 million (including the supplemental contribution)
for the years ended December 31, 1995, 1996 and 1997, respectively. The Company
currently provides no significant other post retirement benefits.
7. COMMON STOCK AND STOCK OPTIONS
All of the Company's outstanding shares, except for those held by C.E.
Velez, the Company's President and Chief Executive Officer, contain restrictions
on transferability. Shares of common stock held by Dr. Velez were subject to a
buy-sell arrangement with B.A. Claussen, a significant shareholder of the
Company, which ended in December 1996.
The Company completed a tender offer for 399,946 shares at $5.05 per share
on December 31, 1997 which resulted in a corresponding increase of treasury
stock. The Board of Directors declared a two-for-one stock split for all shares
outstanding on January 15, 1998 which is reflected for all periods presented in
these financial statements.
In December 1991, the Company adopted the 1991 Stock Option and Purchase
Plan which reserves 2,600,000 common shares for the granting of incentive or
non-qualified stock options or stock purchase rights through 2001. The
Compensation Committee of the Board of Directors is authorized to grant options
and purchase rights and to establish the respective terms, subject to certain
restrictions. Options generally are for terms of five to ten years and provide
for vesting periods of three years. As of December 31, 1997, options for
1,504,750 shares are available for grant under this plan. The weighted average
grant date fair value of an option granted during the years ended December 31,
1995, 1996 and 1997 was $2.03, $1.91 and $1.60, respectively. The Company uses
the Black-Scholes model to estimate the fair values of options, assuming a
risk-free interest rate equal to the ninety-day U.S. Treasury Bill rate,
expected lives of five to ten years, an
F-12
<PAGE> 59
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK AND STOCK OPTIONS -- (CONTINUED)
expected volatility factor of .236 and no expected dividends. The Company
recognized no compensation expense for stock option grants during the three
years in the period ended December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SHARES NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED
--------------------------------- SEPTEMBER 30
1995 1996 1997 1998
--------- --------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Options outstanding at beginning of period
(weighted average exercise price of $2.08 in
1995, $1.90 in 1996, $3.96 in 1997 and $4.08 in
1998).......................................... 1,175,950 934,450 1,282,126 847,880
Granted (weighted average exercise price of $4.68
in 1995, $4.74 in 1996 and $5.05 in 1997 and
1998).......................................... 30,500 799,016 13,574 402,671
Canceled (weighted average exercise price of
$3.04 in 1995, $2.09 in 1996, $4.61 in 1997 and
$4.63 in 1998)................................. (193,000) (2,000) (357,950) (46,386)
Exercised (weighted average exercise price of
$3.00 in 1995, $1.07 in 1996, $2.24 in 1997 and
$2.09 in 1998)................................. (79,000) (449,340) (89,870) (10,000)
--------- --------- --------- ---------
Options outstanding at end of period (weighted
average exercise price of $1.90 in 1995, $3.96
in 1996, $4.08 in 1997 and $4.05 in 1998)...... 934,450 1,282,126 847,880 1,194,165
========= ========= ========= =========
Options exercisable at end of period (weighted
average exercise price of $1.66 in 1995, $2.48
in 1996, $3.16 in 1997 and $3.75 in 1998)...... 824,244 391,022 462,648 707,940
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
Range of Exercise Prices 1997
-------
<S> <C>
$2.01-$3.00:
Options outstanding:
Number of shares..................................... 266,000
Weighted average exercise price...................... $2.17
Weighted average remaining contractual life (in
years).............................................. 1.7
Options exercisable:
Number of shares..................................... 266,000
Weighted average exercise price...................... $2.17
$3.58-$5.05:
Options outstanding:
Number of shares..................................... 581,880
Weighted average exercise price...................... $4.95
Weighted average remaining contractual life (in
years).............................................. 3.2
Options exercisable:
Number of shares..................................... 196,648
Weighted average exercise price...................... $4.49
</TABLE>
Pro forma compensation expense associated with options granted subsequent
to December 31, 1994 generally is recognized over a three year vesting period;
therefore, the initial impact of applying SFAS No. 123
F-13
<PAGE> 60
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMON STOCK AND STOCK OPTIONS -- (CONTINUED)
on pro forma net income (loss) for 1995 and 1996 is not representative of the
impact on pro forma net income in 1997 and future years, when the pro forma
effect is fully reflected. The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
------- ------ ------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
Pro forma income (loss) from continuing operations.... $2,325 $(327) $(964)
====== ===== =====
Pro forma earnings (loss) per share
Basic............................................ $ .26 $(.04) $(.10)
====== ===== =====
Diluted.......................................... $ .24 $(.04) $(.10)
====== ===== =====
</TABLE>
8. INCOME TAXES
The provision (benefit) for income taxes attributable to continuing
operations consisted of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 NINE MONTHS
----------------------- ENDED SEPTEMBER 30
1995 1996 1997 1998
------ ---- ------- ------------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal................................ $2,140 $(20) $(2,400) $ 855
State.................................. 410 -- (200) 180
------ ---- ------- ------
2,550 (20) (2,600) 1,035
------ ---- ------- ------
Deferred:
Federal................................ (875) (50) 2,000 625
State.................................. (108) (10) 100 100
------ ---- ------- ------
(983) (60) 2,100 725
------ ---- ------- ------
$1,567 $(80) $ (500) $1,760
====== ==== ======= ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------- SEPTEMBER 30
1996 1997 1998
------ ------ ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Current deferred tax liabilities:
Unbilled receivables............................... $5,820 $5,425 $6,077
Other.............................................. 185 135 121
------ ------ ------
6,005 5,560 6,198
------ ------ ------
</TABLE>
F-14
<PAGE> 61
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
--------------- SEPTEMBER 30
1996 1997 1998
------ ------ ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Current deferred tax assets:
Contract provisions and allowances................. 3,707 2,482 2,448
Accrued vacation................................... 704 510 813
Other accruals..................................... 217 141 137
------ ------ ------
4,628 3,133 3,398
------ ------ ------
Net current deferred tax liabilities.................... $1,377 $2,427 $2,800
====== ====== ======
Long-term deferred tax assets:
Accrued interest on subordinated debt.............. $1,240 $ -- $--
Net operating loss carryforward.................... 504 350 350
Other.............................................. 145 935 868
------ ------ ------
1,889 1,285 1,218
Less: valuation allowance.......................... (504) (350) (350)
------ ------ ------
Net long-term deferred tax assets....................... $1,385 $ 935 $ 868
====== ====== ======
</TABLE>
A reconciliation of income tax expense at the statutory Federal rate to
income tax expense related to continuing operations at the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------ SEPTEMBER 30
1995 1996 1997 1998
------- ----- ------ ------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Federal income taxes at statutory rate............ $1,331 $(83) $(398) $1,600
State income taxes, net of Federal tax benefit.... 181 (31) (60) 165
Other............................................. 55 34 (42) (5)
------ ---- ----- ------
$1,567 $(80) $(500) $1,760
====== ==== ===== ======
</TABLE>
F-15
<PAGE> 62
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing
operations.................. $ 2,349 $ (165) $ (670) $ 1,497 $ 2,930
Income (loss) from
discontinued operations..... (403) (10,872) 648 1,526 (2,482)
---------- ---------- ---------- ---------- ----------
Net income (loss) for both basic
and diluted earnings per share... $ 1,946 $ (11,037) $ (22) $ 3,023 $ 448
========== ========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share -- Weighted
average shares
outstanding................. 8,862,530 8,875,086 9,092,214 9,091,614 8,706,064
Dilutive potential common
shares:
Employee stock options...... 556,006 -- -- 214,963 446,602
---------- ---------- ---------- ---------- ----------
Denominator for diluted earnings
per share -- Adjusted weighted
average shares and assumed
conversions...................... 9,418,536 8,875,086 9,092,214 9,306,577 9,152,666
========== ========== ========== ========== ==========
</TABLE>
Due to a loss from continuing operations in the years ended December 31,
1996 and 1997, employee stock options are considered anti-dilutive and not
included in the denominator for diluted earnings per share.
10. TRANSACTIONS WITH RELATED PARTIES
The Company made loans in prior years to two of its principal stockholders
for relocation costs that include the purchase of new residences. The loans were
made in exchange for promissory notes and were secured by deeds of trust on
residential property. The loans bore interest at the same rates applicable to
the Company's revolving line of credit. The remaining indebtedness of
approximately $111,000 on one of these loans was paid in 1996. The remaining
outstanding loan of approximately $600,000 was repaid in 1997.
The Company made loans in prior years totaling $884,000 to certain officers
and employees related to the exercise of options to acquire common stock.
Amounts related to the stock exercise price are presented as a reduction of
stockholders' equity. The notes are for five years and bear interest at the same
rates paid by the Company.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has operating leases for all of its office space and various
computer and office equipment. Most of the office space leases require the
Company to pay maintenance and operating expenses such as taxes, insurance and
utilities and also include provisions for renewal.
Certain of the leases contain provisions for periodic rate escalations to
reflect changes in the consumer price index. Total rent expense from continuing
operations for the nine months ended September 30, 1998 and
F-16
<PAGE> 63
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
the years ended December 31, 1995, 1996 and 1997 was $1.4 million, $3.1 million,
$2.7 million and $2.4 million, respectively.
At December 31, 1997, total future minimum rental commitments under
non-cancelable leases are summarized as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $2,650
1999........................................................ 1,743
2000........................................................ 794
2001........................................................ 544
2002........................................................ 354
2003 and after.............................................. 321
------
$6,406
======
</TABLE>
LITIGATION
In October 1996, a former employee of the Company filed suit against the
Company alleging, among other things, breach of contract in connection with a
profit sharing agreement. Subsequently, the litigation was stayed by agreement
of the parties because the profit sharing agreement called for mandatory and
binding arbitration. The arbitration was settled in June 1998 with an award of
$2.0 million which is included in the loss from discontinued operations.
The Company is involved in certain other litigation incidental to its
business. Management of the Company, after reviewing developments with legal
counsel, is of the opinion that the outcome of such matters will not have a
material adverse effect on the financial position or future operations of the
Company.
12. OTHER INFORMATION
MAJOR CUSTOMERS
The percentage of contract revenues from U.S. Government customers that
comprise 10% or more of total revenues were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
------------------ --------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Department of Defense................................. 64% 63% 47% 44% 32%
General Services Administration....................... 17% 14% 16% 19% 18%
</TABLE>
13. OPERATING SEGMENTS
The Company has two principal operating segments: the Systems Engineering
Group and the Software Engineering Group. Segment data has been adjusted from
previously reported amounts to reflect treatment of the Space and
Telecommunications Systems and the Mobile Information and Communications
Services
F-17
<PAGE> 64
COMPUTER TECHNOLOGY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. OPERATING SEGMENTS -- (CONTINUED)
businesses and Simulation Systems Division as discontinued operations. The
following table provides certain financial information for each operating
segment:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------- -------------
1995 1996 1997 1997 1998
------ ----- ----- ----- -----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Contract revenues:
Systems Engineering................................ $105.2 $91.9 $73.4 $57.5 $53.3
Software Engineering............................... -- 4.3 18.8 12.1 29.8
------ ----- ----- ----- -----
$105.2 $96.2 $92.2 $69.6 $83.1
====== ===== ===== ===== =====
Operating profit (loss):
Systems Engineering................................ $ 4.5 $ 2.4 $ 3.0 $ 3.6 $ 3.5
Software Engineering............................... -- 0.7 1.1 0.6 3.3
Other expense...................................... 0.3 (2.4) (3.7) (0.5) (1.3)
------ ----- ----- ----- -----
$ 4.8 $ 0.7 $ 0.4 $ 3.7 $ 5.5
====== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------ -------------
1995 1996 1997 1997 1998
------ ------ ------ ----- -----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Depreciation and amortization expense:
Systems Engineering................................. $ 1.6 $ 2.4 $ 0.8 $ 0.6 $ 0.6
Software Engineering................................ -- -- 0.4 0.3 0.3
Discontinued operations............................. 1.6 3.2 1.6 1.3 --
Capital expenditures:
Systems Engineering................................. $ 1.4 $ 1.0 $ 0.4 $ 0.2 $ 0.7
Software Engineering................................ -- -- 1.4 0.3 0.9
Discontinued operations............................. 3.8 5.5 1.8 1.6 --
Identifiable assets:
Systems Engineering................................. $42.4 $29.8 $27.4 $33.0 $23.3
Software Engineering................................ -- 3.0 12.0 8.9 18.7
Discontinued operations............................. 39.5 42.8 -- -- --
General corporate assets............................ 9.7 7.8 5.9 6.5 5.1
----- ----- ----- ----- -----
$91.6 $83.4 $45.3 $48.4 $47.1
===== ===== ===== ===== =====
</TABLE>
The operating profit in 1996 for the Systems operating segment was
adversely impacted by a $2.6 million adjustment to the profitability of the
General Services Administration -- Eastern Zone contract. Other expenses in 1996
include $0.9 million related to an unsuccessful initial public offering. Other
expenses for the year ended December 31, 1997 include $2.9 million for a
supplemental ESOP contribution.
F-18
<PAGE> 65
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER
THAN AS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
OR THE SELLING SHAREHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY BY ANY PERSON ANY SECURITIES COVERED
BY THIS PROSPECTUS IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON
TO MAKE SUCH AN OFFERING OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
- ------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 6
Plan of Distribution................. 11
Determination of Offering Price...... 12
Use of Proceeds...................... 16
Dividend Policy...................... 16
Book Value Dilution.................. 17
Selected Financial Data.............. 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 19
Business............................. 26
Management........................... 34
Security Ownership of Management and
Principal Shareholders............. 39
Certain Transactions................. 40
Description of Capital Stock......... 40
Shares Eligible for Future Sale...... 44
Legal Matters........................ 44
Experts.............................. 44
Index to Consolidated Financial
Statements......................... 45
- -------------------------------------
- -------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
1,951,074 SHARES
COMPUTER
TECHNOLOGY
ASSOCIATES, INC.
COMMON STOCK
PROSPECTUS
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following expenses (other than the SEC filing fee) are estimated. All
such expenses will or have been paid by the Company.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 3,301
Printing and engraving expenses............................. 10,000
Legal fees and expenses..................................... 25,000
Blue Sky fees and expenses.................................. 6,000
Accounting fees and expenses................................ 10,000
Miscellaneous............................................... 699
-------
TOTAL.................................................. $55,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As authorized by Section 7-109-101 et. seq. of the Colorado Business
Corporation Act, each director and officer of the Company may be indemnified by
the Company against expenses (including attorneys' fees, judgments, fines and
amounts paid in settlement) actually and reasonably incurred in connection with
the defense or settlement of any threatened, pending or completed legal
proceedings in which he is involved by reason of the fact that he is or was a
director or officer of the Company if (i) he acted in good faith, (ii) he
reasonably believed (a) in the case of conduct in an official capacity with the
Company, that his conduct was in the Company's best interests, or (b) in all
other cases, that his conduct was at least not opposed to the Company's best
interests, and, (iii) with respect to any criminal proceeding, he had no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of the Company, a director or officer
may not be indemnified in respect of any claim, issue or matter as to which he
shall have been adjudged to be liable to the Company. In addition, a director or
officer may not be indemnified in connection with any proceeding charging that
the director derived an improper personal benefit, whether or not involving
action in an official capacity, if the director or officer is adjudged liable on
the basis that he derived an improper personal benefit.
Article XI of the Articles of Incorporation of the Company provides that no
director of the Company shall be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain acts set forth in the Colorado Business Corporation Act or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, Article XII of the Articles of Incorporation provides that the Company
must indemnify directors and executive officers to the fullest extent permitted
by law and may indemnify other officers or employee, agents or fiduciaries to
the fullest extent permitted by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None
II-1
<PAGE> 67
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
The Exhibits listed in the following Exhibit Index are filed as part of the
Registration Statement:
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<C> <S>
3.1 Restated Articles of Incorporation of the Company+
3.2 By-laws of the Company, as amended+
4.1 Form of Stock Purchase Rights Agreement between the Company
and each person purchasing the Common Stock (1)
4.2 Form of Stock Option Agreement between the Company and each
person granted an option to purchase shares of Common Stock
(1)
4.3 Form of Stock Restriction Agreement between the Company and
each person receiving shares of Common Stock+
5.1 Opinion of Sherman & Howard, L.L.C.+
10.1 Lease Agreement dated May 22, 1998 between Democracy
Associates Limited Partnership and the Company concerning
the Company's Bethesda, Maryland corporate headquarters+
10.2 Financing and Security Agreement dated November 6, 1997
between the Company and First Union Commercial Corporation
(3)
10.2.1 First Amendment to Financing and Security Agreement dated
March 25, 1998 between the Company and First Union
Commercial Corporation+
10.3 Asset Acquisition Agreement dated July 11, 1997 between the
Company, as Seller, and Orbital Sciences Corporation, as
Buyer+
10.4 1984 Stock Option Plan (1)
10.5 1991 Stock Option, Purchase Right and Bonus Plan (1)
10.5.1 Amendment to 1991 Stock Option, Purchase Right and Bonus
Plan (1)
10.6 401(k) Plan (1)
10.7 Employee Stock Ownership Plan (1)
10.8 Supplemental Executive Retirement Plan+
10.9 Memorandum of Agreement dated November 17, 1997 between the
Company and Capitol Securities Management, Incorporated+
10.10 Employee Separation and Non-Competition Agreement dated
December 11, 1996 between the Company and Bonnie A.
Claussen, II.+
23.1 Consent of Sherman & Howard, L.L.C. (included in Exhibit
5.1)+
23.2 Consent of Ernst & Young LLP+
23.3 Consent of Legg Mason Wood Walker, Inc.+
28.1 Share Purchase Policy of the Company adopted by the Board of
Directors on November 15, 1991. (1)
28.2 Letter dated November 15, 1991 to the Company from Legg
Mason Wood
Walker, Inc. (1)
28.3 Letter and Report dated September 14, 1998 to the Company
from Legg Mason Wood Walker, Inc. regarding the appraisal of
the Common Stock.(4)
</TABLE>
- ---------------
+ Filed herewith
(1) Previously filed with Registration Statement on Form S-1 (File No. 33-44510)
(the "Registration Statement") on December 12, 1991 and incorporated herein
by reference.
(2) Previously filed with Amendment No. 3 to the Registration Statement on March
23, 1992 and incorporated herein by reference.
(3) Previously filed with Form SC 13E4 on November 26, 1997 and incorporated
herein by reference.
(4) Previously filed with the Registration Statement on Form S-1 (File No.
333-64373) on September 25, 1998 and incorporated herein by reference.
II-2
<PAGE> 68
B. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule listed below is filed as part of this
Registration Statement.
Schedule II Valuation and Qualifying Accounts and Reserves
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and, therefore, is unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
2. That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-3
<PAGE> 69
SIGNATURES
Pursuant to the requirements the Securities Act of 1933, the Registrant has
duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized in Bethesda,
Maryland on November 6, 1998.
COMPUTER TECHNOLOGY ASSOCIATES, INC.
By: /s/ C.E. VELEZ
------------------------------------
C.E. VELEZ
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ C.E. VELEZ Chairman of the Board, November 6, 1998
- --------------------------------------------------- President, Chief Executive
C.E. VELEZ Officer and Director
/s/ GREGORY H. WAGNER Executive Vice President, November 6, 1998
- --------------------------------------------------- Chief Financial Officer,
GREGORY H. WAGNER Principal Accounting Officer
and Treasurer
/s/ HARVEY D. KUSHNER Director November 6, 1998
- ---------------------------------------------------
HARVEY D. KUSHNER
/s/ DAVID R. MACKIE Director November 6, 1998
- ---------------------------------------------------
DAVID R. MACKIE
/s/ RAYMOND V. MCMILLAN Director November 6, 1998
- ---------------------------------------------------
RAYMOND V. MCMILLAN
/s/ GEORGE W. MORGANTHALER Director November 6, 1998
- ---------------------------------------------------
GEORGE W. MORGANTHALER
/s/ JAMES M. PAPADA, III Director November 6, 1998
- ---------------------------------------------------
JAMES M. PAPADA, III
/s/ ARTURO SILVESTRINI Director November 6, 1998
- ---------------------------------------------------
ARTURO SILVESTRINI
</TABLE>
II-4
<PAGE> 70
REPORT OF INDEPENDENT AUDITORS ON A SCHEDULE
The Board of Directors and Shareholders
Computer Technology Associates, Inc.
We have audited the consolidated financial statements of Computer
Technology Associates, Inc. (formerly CTA INCORPORATED) and subsidiaries as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated February 28, 1998
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Washington, D.C.
February 28, 1998
S-1
<PAGE> 71
SCHEDULE II
COMPUTER TECHNOLOGY ASSOCIATES, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
($000)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE, CHARGED TO CHARGED TO BALANCE,
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1995........ $3,690 $200 $292 $1,482 $2,700
For the year ended December 31, 1996........ $2,700 $300 $108 $ 0 $3,108
For the year ended December 31, 1997........ $3,108 $600 $ 94 $ 334 $3,468
</TABLE>
S-2
<PAGE> 72
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<C> <S>
3.1 Restated Articles of Incorporation of the Company+
3.2 By-laws of the Company, as amended+
4.1 Form of Stock Purchase Rights Agreement between the Company
and each person purchasing the Common Stock (1)
4.2 Form of Stock Option Agreement between the Company and each
person granted an option to purchase shares of Common Stock
(1)
4.3 Form of Stock Restriction Agreement between the Company and
each person receiving shares of Common Stock+
5.1 Opinion of Sherman & Howard, L.L.C.+
10.1 Lease Agreement dated May 22, 1998 between Democracy
Associates Limited Partnership and the Company concerning
the Company's Bethesda, Maryland corporate headquarters+
10.2 Financing and Security Agreement dated November 6, 1997
between the Company and First Union Commercial
Corporation(3)
10.2.1 First Amendment to Financing and Security Agreement dated
March 25, 1998 between the Company and First Union
Commercial Corporation+
10.3 Asset Acquisition Agreement dated July 11, 1997 between the
Company, as Seller, and Orbital Sciences Corporation, as
Buyer+
10.4 1984 Stock Option Plan (1)
10.5 1991 Stock Option, Purchase Right and Bonus Plan (1)
10.5.1 Amendment to 1991 Stock Option, Purchase Right and Bonus
Plan (1)
10.6 401(k) Plan (1)
10.7 Employee Stock Ownership Plan (1)
10.8 Supplemental Executive Retirement Plan+
10.9 Memorandum of Agreement dated November 17, 1997 between the
Company and Capitol Securities Management, Incorporated+
10.10 Employee Separation and Non-Competition Agreement dated
December 11, 1996 between the Company and Bonnie A.
Claussen, II.+
23.1 Consent of Sherman & Howard, L.L.C. (included in Exhibit
5.1)+
23.2 Consent of Ernst & Young LLP+
23.3 Consent of Legg Mason Wood Walker, Inc.+
28.1 Share Purchase Policy of the Company adopted by the Board of
Directors on November 15, 1991. (1)
28.2 Letter dated November 15, 1991 to the Company from Legg
Mason Wood
Walker, Inc. (1)
28.3 Letter and Report dated September 14, 1998 to the Company
from Legg Mason Wood Walker, Inc. regarding the appraisal of
the Common Stock.(4)
</TABLE>
- ---------------
+ Filed herewith
(1) Previously filed with Registration Statement on Form S-1 (File No. 33-44510)
(the "Registration Statement") on December 12, 1991 and incorporated herein
by reference.
(2) Previously filed with Amendment No. 3 to the Registration Statement on March
23, 1992 and incorporated herein by reference.
(3) Previously filed with Form SC 13E4 on November 26, 1997 and incorporated
herein by reference.
(4) Previously filed with Registration Statement on Form S-1 (File No.
333-64373) on September 25, 1998 and incorporated herein by reference.
S-3
<PAGE> 1
EXHIBIT 3.1
SECRETARY OF STATE
CORPORATIONS SECTION
1860 BROADWAY, SUITE 200
DENVER, CO 80202
(303) 894-2251
FAX (303) 894-2242
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is CTA Incorporated
SECOND: The following amendment to the Articles of Incorporation was adopted on
July 10, 1998 as prescribed by the Colorado Business Corporation Act, in the
- -------------
manner marked with an X below.
No shares have been issued or Directors Elected - Action by Incorporators
- ---
No shares have been issued but Directors Elected - Action by Directors
- ---
Such amendment was adopted by the board of directors where shares have
- --- been issued and shareholder action was not required.
x Such amendment was adopted by a vote of the shareholders. The number of
- --- shares voted for the amendment was sufficient for approval.
THIRD: If changing corporate name, the new name of the corporation is Computer
--------
Technology Associates, Inc.
- ------------------------------------------------------------------------------
FOURTH: The manner, if not set forth in such amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the amendment
shall be effected, is as follows:
N/A
<TABLE>
<S> <C>
If these amendments are to have a delayed effective date, please list that data: ____________________
(Not to exceed ninety (90) days from the date of filing)
</TABLE>
CTA Incorporated
--------------------------------------
Signature /s/ JOHN WAGNER
-----------------------------
John Wagner
Title Asst. Secretary
-----------------------------
<PAGE> 2
ARTICLES OF AMENDMENT
to the
AMENDED AND RESTATED ARTICLES OF INCORPORATION
of
CTA INCORPORATED
First: The name of the corporation is CTA INCORPORATED.
Second: The following amendments to the Amended and Restated Articles of
Incorporation of CTA INCORPORATED (the "Articles") were adopted as prescribed by
the Colorado Business Corporation Act, by a vote of the shareholders at a
Special Meeting of Shareholders on September 18, 1996. The number of shares
voted for the amendments was sufficient for approval.
(1) Article VI of the Articles is amended to read in its entirety as
follows:
*ARTICLE VI
The total authorized capital stock of the Corporation shall
be twenty-one million (21,000,000) shares consisting of: (i) twenty
million (20,000,000) shares of Common Stock with a par value of $.01
per share; and (ii) one million (1,000,000) shares of Preferred Stock
with a par value of $.01 per share.
(a) Common Stock.
All shares of common stock shall be fully paid and
non-assessable upon issue. Except as otherwise provided by law, each
holder of Common Stock shall be entitled to one vote in respect of
each share of Common Stock held of record on all matters submitted to
a vote of shareholders.
(b) Preferred Stock.
The Preferred Stock may be issued from time to time as herein
provided in one or more series. The designations, relative rights,
preferences and limitations of the Preferred Stock, and particularly
of the shares of each series thereof, may, to the extent permitted by
law, be similar to or differ from those of any other series. The Board
of Directors of the Corporation is hereby expressly granted authority,
subject to the provisions of this Article VI, to fix, from time to
time before issuance thereof, the number of
-2-
<PAGE> 3
shares in each series and all designations, relative rights, preferences and
limitations of the shares in each such series, including, but without limiting
the generality of the foregoing, the following;
(i) the designation of the series and the number of shares to constitute
each series;
(ii) the dividend rate on the shares of each series, any conditions on
which and times at which dividends are payable, whether dividends shall be
cumulative, and the preference or relation (if any) with respect to such
dividends (including preferences over dividends on the Common Stock or any other
class or classes);
(iii) whether the series will be redeemable (at the option of the
Corporation or the holders of such shares or both, or upon the happening of a
specified event) and, if so, the redemption prices and the conditions and times
upon which redemption may take place and whether for cash, property or rights,
including securities of the Corporation or another corporation;
(iv) the terms and amount of any sinking, retirement or purchase fund;
(v) the conversion or exchange rights (at the option of the Corporation or
the holders of such shares or both, or upon the happening of a specified
event), if any, including the conversion or exchange price and other terms of
conversion or exchange;
(vi) the voting rights, if any (other than any voting rights that the
Preferred Stock may have as a matter of law);
(vii) any restrictions on the issue or reissue or sale of additional
Preferred Stock;
(viii) the rights of the holders upon voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation (including
preferences over the Common Stock or any other class or classes or series of
stock); and
(ix) such other special rights and privileges, if any, for the benefit of
the holders of the Preferred Stock, as shall not be inconsistent with provisions
of these Second Restated Articles of Incorporation.
All shares of Preferred Stock of the same series shall be identical in all
respects, except that shares of any one series issued at different times may
-3-
<PAGE> 4
differ as to dates, if any, from which dividends thereon may accumulate. All
shares of Preferred Stock of all series shall be of equal rank and shall be
identical in all respects except that any series may differ from any other
series with respect to any one or more of the designations, relative rights,
preferences and limitations described or referred to in subparagraphs (i) to
(ix) inclusive above."
(2) Article VII of the Articles is amended to read in its entirety as follows:
"ARTICLE VII
(a) The Board of Directors shall consist of no fewer than three
persons and such number shall be fixed by, or in the manner provided in, the
By-Laws.
(b) Effective upon consummation of the Company's initial underwritten
public offering of Common Stock (the "IPO"), the Board of Directors shall be
divided into three classes to be designated as Class I, Class II and Class III.
The Board of Directors, by resolution, shall designate the class in which each
of the directors then in office shall serve upon such classification. The terms
of office of the classes of directors so designated by the Board of Directors
shall expire at the times of the annual meetings of the shareholders as follows:
Class I on the first annual meeting of shareholders following the IPO, Class II
on the second annual meeting following the IPO and Class III on the third annual
meeting following the IPO, or thereafter in each case when their respective
successors are elected and qualified. At each subsequent annual election, the
directors chosen to succeed those whose terms are expiring shall be identified
as being of the same class as the directors whom they succeed, and shall be
elected for a term expiring at the time of the third succeeding annual meeting
of shareholders, or thereafter in each case when their respective successors are
elected and qualified. The number of directorships shall be apportioned among
the classes so as to maintain the classes as nearly equal in number as
possible."
(3) Article X of the Articles is amended to read in its entirety as follows:
"ARTICLE X
(a) The Corporation shall not engage in any business combination with any
interested shareholder for a period
-4-
<PAGE> 5
of three years following the time that such shareholder became an interested
shareholder, unless:
(i) Prior to such time the Board of Directors of the Corporation approved
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder;
(ii) Upon consummation of the transaction which resulted in the shareholder
becoming an interested shareholder, the interested shareholder owned at least
85% of the voting stock of the Corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (A) by persons who are directors and also
officers and (B) employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
(iii) At or subsequent to such time the business combination is approved by
the Board of Directors and authorized at an annual or special meeting of
shareholders, and not by written consent, by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by the interested
shareholder.
(b) The restrictions contained in this Article shall not apply if:
(i) A shareholder becomes an interested shareholder inadvertently and (A)
as soon as practicable divests itself of ownership of sufficient shares so that
the shareholder ceases to be an interested shareholder; and (B) would not, at
any time within the three-year period immediately prior to a business
combination between the Corporation and such shareholder, have been an
interested shareholder but for the inadvertent acquisition of ownership; or
(ii) The business combination is proposed prior to the consummation or
abandonment of and subsequent to the earlier of the public announcement or the
notice required hereunder of a proposed transaction which (A) constitutes one of
the transactions described in the second sentence of this paragraph; (B) is with
or by a person who either was not an interested shareholder during the previous
three years or who became an interested shareholder with the approval of the
Corporation's Board of Directors; and (C) is approved or not opposed by a
majority of the Continuing Directors. The proposed transactions referred to in
the preceding sentence are limited to (X) a merger or consolidation of the
Corporation; (Y) a sale, lease,
-5-
<PAGE> 6
exchange, mortgage, pledge, transfer or other disposition (in one transaction or
a series of transactions), whether as part of a dissolution or otherwise, of
assets of the Corporation or of any direct or indirect majority-owned subsidiary
of the Corporation (other than to any direct or indirect wholly-owned subsidiary
or to the Corporation) having an aggregate market value equal to 50% or more of
either that aggregate market value of all of the assets of the Corporation
determined on a consolidated basis or the aggregate market value of all the
outstanding stock of the Corporation; or (Z) a proposed tender or exchange offer
for 50% or more of the outstanding voting stock of the Corporation. The
Corporation shall give not less than 20 days' notice to all interested
shareholders prior to the consummation of any of the transactions described in
clause (X) or (Y) of the second sentence of this paragraph.
(c) As used in this Article, the term:
(i) "Affiliate" means a person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with, another person.
(ii) "Associate," when used to indicate a relationship with any
person, means: (A) Any corporation, partnership, unincorporated association or
other entity of which such person is a director, officer or partner or is,
directly or indirectly, the owner of 20% or more of any class of voting stock;
(B) any trust or other estate in which such person has at least a 20% beneficial
interest or as to which such person serves as trustee or in a similar fiduciary
capacity; and (C) any relative or spouse of such person, or any relative of such
spouse, who has the same residence as such person.
(iii) "Business combination," means:
(A) Any merger or consolidation of the Corporation or any direct
or indirect majority-owned subsidiary of the Corporation with (I) an interested
shareholder, or (II) with any other corporation, partnership, unincorporated
association or other entity if the merger or consolidation is caused by such
interested shareholder and as a result of such merger or consolidation paragraph
(a) of this Article is not applicable to the surviving entity;
(B) Any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions), except
proportionately as a shareholder of the Corporation, to or with an interested
shareholder, whether as part of a dissolution or
-6-
<PAGE> 7
otherwise, of assets of the Corporation or of any direct or indirect
majority-owned subsidiary of the Corporation which assets have an aggregate
market value equal to 10% or more of either the aggregate market value of all
the assets of the Corporation determined on a consolidated basis or the
aggregate market value of all the outstanding stock of the Corporation;
(C) Any transaction which results in the issuance or transfer by the
Corporation or by any direct or indirect majority-owned subsidiary of the
Corporation of any stock of the Corporation or of such subsidiary to an
interested shareholder, except; (I) pursuant to the exercise, exchange or
conversion of securities exercisable for, exchangeable for or convertible into
stock of the Corporation or any such subsidiary which securities were
outstanding prior to the time that the interested shareholder became such; (II)
pursuant to a dividend or distribution paid or made, or the exercise, exchange
or conversion of securities exercisable for, exchangeable for or convertible
into stock of the Corporation or any such subsidiary which security is
distributed, pro rata to all holders of a class or series of stock of the
Corporation subsequent to the time the interested shareholder became such; (III)
pursuant to an exchange offer by the Corporation to purchase stock made on the
same terms to all holders of said stock; or (IV) any issuance or transfer of
stock by the Corporation; provided however, that in no case under items
(II)-(IV) of this subparagraph shall there be an increase in the interested
shareholder's proportionate share of the stock of any class or series of the
Corporation or of the voting stock of the Corporation;
(D) Any transaction involving the Corporation or any direct or indirect
majority-owned subsidiary of the Corporation which has the effect, directly or
indirectly, of increasing the proportionate share of the stock of any class or
series, or securities convertible into the stock of any class or series, of the
Corporation or of any such subsidiary which is owned by an interested
shareholder, except as a result of immaterial changes due to fractional share
adjustments or as a result of any purchase or redemption of any shares of stock
not caused, directly or indirectly, by such interested shareholder; or
(E) Any receipt by an interested shareholder of the benefit, directly or
indirectly (except proportionately as a shareholder of the Corporation), of any
loans, advances, guarantees, pledges or other financial benefits (other than
those expressly permitted in subparagraphs (A)-(D) of this paragraph) provided
by
-7-
<PAGE> 8
or through the Corporation or any direct or indirect majority-owned subsidiary.
(iv) A "Continuing Director" is a member of the Board of Directors then in
office (but not less than one) who was a director prior to any person becoming
an interested shareholder during the previous three years or was recommended
for election or elected to succeed such directors by a majority of such
directors.
(v) "Control," including the terms "controlling," "controlled by" and
"under common control with," means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting stock, by contract or
otherwise. A person who is the owner of 20% or more of the outstanding voting
stock of any corporation, partnership, unincorporated association or other
entity shall be presumed to have control of such entity, in the absence of proof
by a preponderance of the evidence to the contrary; provided, however, a
presumption of control shall not apply where such person holds voting stock, in
good faith and not for the purpose of circumventing this paragraph, as an
agent, bank, broker, nominee, custodian or trustee for one or more owners who
do not individually or as a group have control of such entity.
(vi) "Interested shareholder" means any person (other than the Corporation
and any direct or indirect majority-owned subsidiary of the Corporation) that
(A) is the owner of 15% or more of the outstanding voting stock of the
Corporation, or (B) is an affiliate or associate of the Corporation and was the
owner of 15% or more of the outstanding voting stock of the Corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested shareholder;
provided, however, that the term "interested shareholder" shall not include (X)
any person who (I) owned shares in excess of the 15% limitation set forth
herein as of September 18, 1996 and either (1) continued to own shares in
excess of such 15% limitation or would have but for action by the Corporation
or (2) is an affiliate or associate of the Corporation and so continued (or so
would have continued but for action by the Corporation) to be the owner of 15%
or more of the outstanding voting stock of the Corporation at any time within
the three-year period immediately prior to the date on which it is sought to
be determined whether such a person is an interested shareholder or (II)
acquired said shares from a person described in item (I) of this paragraph by
gift, inheritance or in a transaction in which no consideration was exchanged;
or (Y) any person whose ownership of
-8-
<PAGE> 9
shares in excess of the 15% limitation set forth herein is the result of action
taken solely by the Corporation, provided that such person shall be an
interested shareholder if thereafter such person acquires additional shares of
voting stock of the Corporation, except as a result of further corporate action
not caused, directly or indirectly, by such person or pursuant to any stock
option, stock purchase or similar plan or arrangement for the benefit of
employees of the Corporation or its subsidiaries in effect on September 18,
1996, or thereafter adopted by the Board of Directors of the Corporation. For
the purpose of determining whether a person is an interested shareholder, the
voting stock of the Corporation deemed to be outstanding shall include stock
deemed to be owned by the person through application of paragraph (x) of this
subparagraph but shall not include any other unissued stock of the Corporation
which may be issuable pursuant to any agreement, arrangement or understanding,
or upon exercise of conversion rights, warrants or options, or otherwise.
(vii) "Person" means any individual, corporation, partnership,
unincorporated association or other entity.
(viii) "Stock" means, with respect to any corporation, capital stock and,
with respect to any other entity, any equity interest.
(ix) "Voting stock" means, with respect to any corporation, stock of any
class or series entitled to vote generally in the election of directors and,
with respect to any entity that is not a corporation, any equity interest
entitled to vote generally in the election of the governing body of such entity.
(x) "Owner," including the terms "own" and "owned," when used with respect
to any stock, means a person that individually or with or through any of its
affiliates or associates:
(A) Beneficially owns such stock, directly or indirectly; or
(B) Has (I) the right to acquire such stock (whether such right is
exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding, or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise; provided, however,
that a person shall not be deemed the owner of stock tendered pursuant to a
tender or exchange offer made by such person or any of such person's affiliates
or associates until such tendered stock is accepted for purchase or exchange;
or (II) the right to vote such stock pursuant to any
-9-
<PAGE> 10
0175217.01
agreement, arrangement or understanding, provided, however, that a person
shall not be deemed the owner of any stock because of such person's right
to vote such stock if the agreement, arrangement or understanding to vote
such stock arises solely from a revocable proxy or consent given in
response to a proxy or consent solicitation made to ten or more persons; or
(C) Has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting (except voting pursuant to a
revocable proxy or consent as described in item (II) of subparagraph (B) of
this paragraph), or disposing of such stock with any other person that
beneficially owns, or whose affiliates or associates beneficially own,
directly or indirectly, such stock."
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be signed by an Executive Vice President of the Corporation, this 23rd day
of September, 1996.
CTA INCORPORATED
By /s/ Gregory H. Wagner
--------------------------
Gregory H. Wagner
Executive Vice
President
-10-
<PAGE> 11
ARTICLES OF AMENDMENT
to the
AMENDED AND RESTATED ARTICLES OF INCORPORATION
of
CTA INCORPORATED
First: The name of the corporation is CTA INCORPORATED.
Second: The following amendments to the Amended and Restated Articles of
Incorporation were adopted as prescribed by the Colorado Corporation Code, by a
vote of the shareholders at the Special Meeting of Shareholders on April 27,
1994. The number of shares voted for the amendments was sufficient for approval.
(1) Article VI of the Amended and Restated Articles of Incorporation
is amended to read in its entirety as follows:
"The aggregate number of shares which the corporation has authority to
issue is twenty million (20,000,000) shares, with a par value of $.01
per share. All of such shares are one class and are shares of common
stock, all of which shall be fully paid and non-assessable upon issue."
(2) Each share of common stock, $.01 par value, outstanding on April
27, 1994 shall be split into 10 shares of common stock, $.01 par value.
Third: The corporation shall mail each holder of record of common stock on
April 27, 1994 a certificate or certificates representing the additional shares
resulting from the split of outstanding shares described above.
Fourth: The stated capital is increased as a result of this amendment by the
par value of the additional shares issued in the split effected hereby. The
stated capital after such increase is $48,000.
CTA INCORPORATED
[SEAL] by /s/ C.E. Velez
----------------------------
President
/s/ Shirley A. Hewitt
Dated: May 10, 1994 ----------------------------
Secretary
<PAGE> 12
Secretary of State
Corporate Office
1580 Broadway, Suite 208
Denver, Colorado 80202
(303) 894-2200
STATEMENT OF CHANGE OF
REGISTERED OFFICE OR
REGISTERED AGENT, OR BOTH
Pursuant to the provisions of the Colorado Corporation Code, the Colorado
Nonprofit Corporation Act, the Colorado Uniform Limited Partnership Act of 1981
and the Limited Liability Company Act, the undersigned organized under the
laws of COLORADO submits the following statement for the purpose of changing
its registered office or its registered agent, or both, in the state of
Colorado:
First: The name of the corporation, limited partnership or limited
liability company is: CTA INCORPORATED
Second: The address of its REGISTERED OFFICE is 1675 Broadway, Denver,
Colorado 80202
Third: The name of its REGISTERED AGENT is THE CORPORATION COMPANY
Fourth: The address of its registered office and the address of the
business office of its registered agent, as changed, will be identical.
Fifth: The address of its place of business in Colorado is
----------------------------------------------------------------
The Corporation Company (Note 1)
-------------------------------
By [ILLEGIBLE] (Note 2)
-------------------------------
Vice President
its president
---------------
its authorized agents
---------------
its X registered agent (Note 3)
---------------
its general partner
---------------
its manager
---------------
Notes: 1. Exact name of corporation, limited partnership or limited liability
company making the statement.
2. Signature and title of officer signing for the corporation must be
president or vice president; for a foreign corporation without such
officers, the authorized agent; for a limited partnership, must be a
general partner; for a limited liability company, must be a manager.
3. Regarding corporations: This statement may be executed by the
registered agent when it involves only a registrant address change. A
copy of the statement has been forwarded to the corporation by the
registered agent.
<PAGE> 13
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CTA INCORPORATED
- -------------------------------------------------------------------------------
Pursuant to Section 7-2-112
of the Colorado Corporation Code
- -------------------------------------------------------------------------------
CTA INCORPORATED, a Colorado corporation (the "Corporation") organized
on September 4, 1979, under the name Computer Technology Associates, Inc., does
hereby amend and restate its Articles of Incorporation to read in their entirety
as set forth in Exhibit A attached hereto.
The Corporation hereby states that these Amended and Restated Articles
of Incorporation correctly set forth the Articles of Incorporation, as amended,
and have been duly adopted by a two-thirds vote of its shareholders (a number
sufficient for approval) pursuant to Sections 7-2-112 and 7-2-107 of the
Colorado Corporation Code. These Amended and Restated Articles of Incorporation
supersede the original Articles of Incorporation and all amendments thereto.
<PAGE> 14
IN WITNESS WHEREOF, the Corporation has caused these Amended and
Restated Articles of Incorporation to be executed in its corporate name this 5th
day of December, 1991.
CTA INCORPORATED
By /s/ Paula S. Rubineff
--------------------------------
Name: Paula S. Rubineff
Title: Executive Vice President
& Chief Financial Officer
By /s/ Shirley A. Hewitt
--------------------------------
Name: Shirley A. Hewitt
Title: Secretary
2
<PAGE> 15
EXHIBIT A
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
CTA INCORPORATED
ARTICLE I
The name of the Corporation is CTA INCORPORATED.
ARTICLE II
The address of the registered office of the Corporation in the State of
Colorado is 1600 Broadway, Denver, Colorado 80202; and the name of the
registered agent for the Corporation in the State of Colorado is The
Corporation Company.
ARTICLE III
The nature of the business and purpose of the Corporation is the
transaction of all lawful business for which corporations may be incorporated
pursuant to the Colorado Corporation Code, as the same may be amended from time
to time (the "CCC").
ARTICLE IV
The provisions for the organization of the internal affairs of the
Corporation are:
<PAGE> 16
(a) Cumulative Voting.
Cumulative voting shall not be allowed in the election of directors.
(b) Compensation.
The Board of Directors is empowered to authorize the payment of
compensation to the officers and directors for services to the Corporation and
to determine the amount of such compensation.
(c) No Preemptive Rights.
No holder of any stock of this Corporation shall be entitled, as a matter
of right, to purchase or subscribe for any part of the unissued or treasury
stock of the Corporation authorized herein or any additional unissued or
treasury stock issued by reason of any increase of the authorized capital stock
of the Corporation, or of any bonds, certificates of indebtedness, debentures
or other securities convertible into stock. Any such unissued or treasury stock
or additional authorized issue of any unissued or treasury stock or securities
convertible into stock may be issued by and disposed of by the Board of
Directors to such persons, firms, corporations, associations or other entities,
and upon such terms and conditions, as the Board of Directors may determine, in
its discretion, without offering such stock
2
<PAGE> 17
or securities on the same terms to the shareholders of record.
(d) Transfer Restrictions.
The Corporation shall have the right to impose restrictions on the
transfer of all, or any part of, its shares and may become a party to
agreements entered into by any of its shareholders restricting transfer or
encumbrance of any of its shares, or subjecting any of its shares to repurchase
or resale obligations.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
The aggregate number of shares which the Corporation has authority to issue
is five hundred thousand (500,000) shares with a par value of $.01 per share.
All of such shares are of one class and are shares of common stock, all of
which shall be fully paid and non-assessable upon issue.
ARTICLE VII
The Board of Directors shall consist of no fewer than three persons and
such number shall be fixed by, or in the manner provided in, the By-Laws.
3
<PAGE> 18
ARTICLE VIII
(a) No contract or transaction between the Corporation and one or more of
its directors, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers or have a financial interest,
shall be void or voidable solely for that reason or solely because the director
or officer is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes, approves, or ratifies the
contract or transaction or solely because his or their votes are counted for
such purpose if:
(i) The material facts as to his relationship or interest as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board of Directors or committee in good faith
authorizes, approves, or ratifies the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even though the
disinterested directors are less than a quorum; or
(ii) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders enti-
4
<PAGE> 19
tled to vote thereon, and the contract or transaction is specifically
authorized, approved, or ratified in good faith by vote of the shareholders; or
(iii) The contract or transaction was fair to the Corporation.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes, approves, or ratifies the contract or transaction.
(c) No director or officer, nor any corporation, partnership, association
or other organization with which he is connected as aforesaid shall be liable
to account to this Corporation or its shareholders for any profit realized by
him from or through any such contract or transaction, it being the express
intent and purpose of this Article VIII to permit this Corporation to buy or
lease from, sell to or otherwise deal with corporations, partnerships,
associations and other organizations of which the directors and officers of
this Corporation, or any one or more of them, may be members, directors,
officers or in which they or any of them have a financial interest.
5
<PAGE> 20
ARTICLE IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in, or to add any provision to, its Amended and Restated
Articles of Incorporation from time to time, in any manner now or hereafter
prescribed or permitted by the CCC; and all rights and powers conferred upon
directors and shareholders hereby are granted subject to this reservation.
ARTICLE X
(a) Until (1) the Corporation is no longer subject to the provisions
of Section 8(a)4(A)(ii) of the Small Business Act (15 U.S.C. Section
637(a)(4)(A)(ii)) or (2) the Board of Directors, in its sole discretion,
determines, whichever first occurs, (i) the management and daily business
operations of the Corporation shall be controlled by C.E. Velez; (ii) no
resolution of the Board of Directors of the Corporation which purports to affect
the Corporation's management or daily business operations shall be valid if C.E.
Velez votes against, or is present at the meeting and expressly abstains from
voting for, such resolution; and (iii) the Corporation shall not have the
authority to issue or to agree to issue any shares of Common Stock if such
issuance would reduce the ownership
6
<PAGE> 21
of C.E. Valez to less than fifty-one percent (51%) thereof.
(b) For purposes of this Article X, reference to "management" shall be
construed as, but no more broadly than, that term is construed under Section
8(a) of the Small Business Act (15 U.S.C. Section 637(a)) and the regulations
promulgated thereunder.
ARTICLE XI
No director shall be liable to the Corporation or to its shareholders for
monetary damages for breach of fiduciary duty as a director, except this
provision shall not eliminate or limit any liability a director may have in the
following instances:
(a) Any breach of the director's duty of loyalty to the Corporation
or to its shareholders; or
(b) Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; or
(c) Acts specified in CCC Section 7-5-114; or
(d) Any action from which the director derived an improper personal
benefit.
Any repeal or modification of the foregoing provisions shall not adversely
affect any right or pro-
7
<PAGE> 22
tection of a director in respect of any act or omission occurring prior to such
repeal or modification.
ARTICLE XII
(a) Indemnification.
In the event that any director or executive officer of the Corporation (an
"Indemnitee") was, is or becomes a party to, or is threatened to be made a
party to, any threatened, pending or completed action, suit or proceeding,
whether or not in the right of the Corporation, and whether civil, criminal,
administrative, investigative or otherwise (a "Claim") by reason of (or arising,
in part, out of) the fact that such Indemnitee is or was a director, officer,
employee, agent or fiduciary of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee, trustee, agent,
fiduciary or partner of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (an "Indemnifiable Event"), the
Corporation shall fully indemnify the Indemnitee against any and all expenses
(including attorneys' fees and all other costs, expenses and obligations paid or
incurred in connection with investigating, preparing for and defending any Claim
relating to an Indemnifiable Event), judgments, fines and amounts paid in
settlement of such action, suit
8
<PAGE> 23
or proceeding and, if so requested by the Indemnitee promptly advance any and
all such expenses to the Indemnitee, all to the fullest extent permitted by
law; provided, however, that, except for proceedings to enforce rights to
indemnification, the Corporation shall not be obligated to indemnify any
Indemnitee in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to officers, employees, agents and fiduciaries of the Corporation who
are not directors or executive officers similar to those conferred in this
paragraph (a) to directors and executive officers of the Corporation.
(b) Non-Exclusive.
The indemnification and advancement of expenses provided by or granted
pursuant to this Article XII shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of shareholders or
disinterested directors or pursu-
9
<PAGE> 24
ant to the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office. The provisions of this
Article XII shall not be deemed to preclude the indemnification of any person
who is not specified in paragraph (a) of this Article XII but whom the
Corporation has the power or obligation to indemnify under the provisions of
the CCC, or otherwise.
(c) Insurance.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, agent or fiduciary of the
Corporation, or is or was a director, officer, employee, agent or fiduciary of
the Corporation serving at the request of the Corporation as a director,
officer, employee, agent, fiduciary or partner of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
against any liability asserted against him or incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power or the obligation to indemnify him against such liability
under the provisions of this Article XII, or otherwise.
10
<PAGE> 25
(d) Certain Definitions.
For purposes of this Article XII, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries so that any person who is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was a director,
officer, employee, agent or fiduciary of such constituent corporation serving
at the request of such constituent corporation as a director, officer,
employee, agent, fiduciary or partner of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article XII with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For purposes
of this Article XII, references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefits plan; and references
to "serving at the request of the Corporation"
11
<PAGE> 26
shall include any service as a director, officer, employee, agent or fiduciary
of the Corporation which imposes duties on, or involves services by, such
director, officer, employee, agent or fiduciary with respect to an employee
benefit plan, its participants or beneficiaries.
(e) Survival.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article XII shall continue as to a person who has ceased to
be a director, officer, employee, agent or fiduciary and shall inure to the
benefit of the heirs, executors and administrators of such a person.
12
<PAGE> 1
EXHIBIT 3.2
RE-STATED
BY-LAWS OF
CTA INCORPORATED
ARTICLE I
Offices
Section 1. Principal Office. The principal place of business of the
corporation shall be 7572 South Rosemary Circle, Englewood, Colorado 80110.
Section 2. Other Offices. Other offices may be established from time to
time by the Board of Directors at such place or places where the corporation is
qualified to do business.
ARTICLE II
Capital Stock
Section 1. Stock Certificates. The certificates for shares of the capital
stock of the corporation shall be in such form, not inconsistent with the
Articles of Incorporation or Colorado law as shall be approved by the Board of
Directors. Each certificate shall be signed by the President or a Vice
President and also by the Secretary or an Assistant Secretary and shall be
sealed with the corporate seal of the corporation. In case any officer or
officers who shall have signed shall have ceased to be such officer or officers
of the corporation, whether because of death, resignation, or otherwise, before
such certificate or certificates shall have been delivered by the corporation,
such certificate or certificates may, nevertheless, be adopted by the
corporation and be used and delivered as though the officer or officers who
signed the said certificate had not ceased to be such officer or officers of
the corporation.
All certificates shall be consecutively numbered and the names of the
persons owning shares represented thereby, with the number of such shares and
the date of issue, shall be entered on the corporation's books.
Section 2. Transfers of Stock. Except as otherwise provided by law, stock
of the corporation shall be transferrable or assignable on the books of the
corporation only by the holder thereof, in person or by duly authorized
attorney, upon surrender of the certificate or certificates for such shares
duly endorsed for transfer.
Section 3. Record Date and Closing Stock Books. The Board of Directors may
fix a time in the future as a record date for the determination of the
shareholders entitled to notice of, and to vote at, any meeting of stockholders
or entitled to receive any dividend or distribution, or any change, conversion
or exchange of shares. The record date so fixed shall be not more than fifty
(50) days prior to the date of the meeting or event for the purpose of which it
is fixed. If the record date is fixed for the purpose of determining
shareholders entitled to notice of, or to vote at, a meeting of stockholders,
such date shall not be less than ten (10) days prior to the date of such
meeting. When a record date is so fixed, only stockholders who are such of
record on that date are entitled to notice of, and to vote at, the meeting or
to receive the dividend, distribution, or allotment of rights, or to exercise
the rights, as the case may be, notwithstanding any transfer of any share on
the books of the corporation after the record date. If no record date
1
<PAGE> 2
is set, the determination of shareholders shall be made on the first date that
a notice for a stockholders' meeting is delivered or mailed to a shareholder or
on the date that the Board of Directors passes a resolution entitling
shareholders to receive any dividend, distribution or allotment of rights.
The Board of Directors may close the books of the corporation against
transfers of shares during the whole or any part of a period not more than
fifty (50) days prior to the date of a stockholders' meeting, the date when the
right to any dividend, distribution, or allotment of rights vests, or the
effective date of any change, conversion or exchange of shares. If the stock
transfer books are closed for the purpose of determining shareholders entitled
to notice of or vote at a meeting of shareholders, such books shall be closed
for at least ten (10) days preceding such meeting.
Section 4. Lost Certificates. The corporation shall issue a new
certificate or certificates in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed; and the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representatives, to advertise the same in such
manner as it shall require and/or give the corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
corporation, provided that the corporation shall not be required to issue a new
certificate or certificates if:
(a) The owner fails to notify the corporation that the old certificate or
certificates have been lost, stolen or destroyed within a reasonable
time after he has notice of it and the corporation registers a transfer
of such old certificate(s) before receiving such a notification, or
(b) The owner does not request a new certificate(s) before the corporation
has notice that the old certificate(s) has been acquired by a bona fide
purchaser as such term is defined in the Colorado Uniform Commercial
Code - Investment Securities.
Except as hereinabove in this section provided or as otherwise required by
Colorado law, no new certificate evidencing shares of stock shall be issued
unless and until the old certificate or certificates in lieu of which the new
certificate is issued shall be surrendered for cancellation.
Section 5. Dividends. The Board of Directors may, from time to time,
declare and the corporation may pay dividends on its shares in cash, property,
or its own shares, except when the corporation is insolvent or when the payment
thereof would render the corporation insolvent or when the declaration or
payment thereof would be contrary to any restrictions contained in the Articles
of Incorporation or the laws of the State of Colorado.
Before payment of any dividend, there may be set aside out of any funds of
the corporation available for dividends such sum or sums as the directors from
time to time, in their absolute discretion, think proper as a reserve fund to
meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interest of the corporation, and the
directors may abolish any such reserve in the manner in which it was created.
2
<PAGE> 3
ARTICLE III
Stockholders and Meetings
Section 1. Annual Meeting. The annual meeting of the stockholders of the
corporation for the election of directors and for the transaction of such other
business which may properly come before the meeting shall be held on such date
as the Board of Directors, by resolution, may direct, at the principal office
of the corporation or at such other place within or without the State of
Colorado as the Board of Directors, by resolution, may direct.
Section 2. Special Meetings. Special meetings of the stockholders may be
called by (a) the President, or (b) resolution of the Board of Directors, or
(c) the holders of not less than one-tenth (1/10) of all the shares entitled to
vote at the meeting. Such meetings may be held at such place within or without
the State of Colorado as is stated in the notice thereof. Said notice shall
further specify the purpose for which the meeting is called.
Section 3. Stockholders Entitled to Vote. Registered stockholders only
shall be entitled to be treated by the corporation as holders in fact of the
stock standing in their respective names; and the corporation shall not be
bound to recognize any equitable or other claim to or interest in any share on
the part of any other person, firm, or corporation, whether or not it shall
have express or other notice thereof, except as expressly provided by the laws
of the State of Colorado.
Section 4. Notice. Written notice of every meeting of stockholders stating
the time, place and purpose thereof, shall be either personally delivered or
mailed not less than ten (10) nor more then fifty (50) days prior thereto
(except, at least thirty (30) days' notice shall be given for a meeting called
for the purpose of increasing the authorized capital stock of the corporation
and at least twenty (20) days' notice shall be given for a meeting called for
the purpose considering a sale, lease, exchange or other disposition of all or
substantially all of the assets of the corporation not in the usual and regular
course of its business) to each stockholder of record at his last known post
office address, as the same appears on the books of the corporation. If a
stockholder shall have furnished a written address to the Secretary of the
corporation different from that appearing on the books of the corporation,
then such notice shall be mailed or delivered personally to the stockholder at
such later address. The notice shall be mailed or delivered personally to the
stockholders by (a) the President, (b) the Secretary, (c) the stockholders
calling the meeting or (d) the transfer agent or registrar of the corporation.
If three successive letters mailed to the last known address of any shareholder
are returned as undeliverable, no further notices to such shareholders shall be
necessary until another address for such shareholder is made known to the
corporation.
Section 5. Adjourned Meetings and Notice Thereof. Any stockholders'
meeting, annual or special, whether or not a quorum is present, may be
adjourned from time to time by the vote of a majority of the shares, the
holders of which are either present in person or represented by proxy thereat,
but in the absence of a quorum no other business may be transacted at such
meeting; provided, however, that any one adjournment may be for a period not to
exceed sixty (60) days.
When any stockholders' meeting, either annual or special, is adjourned for
thirty (30) days or more, notice of the adjourned meeting shall be given as in
the case of an original meeting. Save as aforesaid, it shall not be necessary
to give any notice of any adjournment or of the business to be transacted at an
adjourned meeting other than by announcement at the meeting at which such
adjournment is taken.
3
<PAGE> 4
Section 6. LIST OF STOCKHOLDERS. A complete record of the stockholders
entitled to vote at any meeting or adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
shall be prepared by the officer of agent having charge of the stock transfer
books at least ten (10) days before each meeting of stockholders. Such
stockholder record, for a period of ten (10) days prior to such meeting, shall
be kept on file at the principal office of the corporation, whether within or
without Colorado, and shall be subject to inspection by any stockholder for any
purpose germane to the meeting at any time during usual business hours. Such
record shall also be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any stockholder for any purpose
germane to the meeting during the whole time of the meeting. The original stock
transfer books shall be prima facie evidence as to the stockholders who are
entitled to examine such record or transfer books or to vote at any meeting of
stockholders.
Section 7. VOTING. Voting at a stockholders' meeting may be VIVA VOCE
or by ballot; provided, however, that all elections for directors shall be by
ballot upon demand made by a stockholder at any election and before the voting
begins. Every stockholder entitled to vote at any election shall have one (1)
vote for each share of stock registered in his name on the record date. Voting
for directors shall NOT be cumulative.
Section 8. PROXIES. Every shareholder entitled to vote or execute
consents shall have the right to do so either in person or by one or more
agents authorized by a written proxy executed by such person or his duly
authorized agent and filed with the Secretary of the corporation; provided that
no such proxy shall be valid after the expiration of eleven (11) months from
the date of its execution, unless the person executing it specified therein the
length of time for which such proxy is to continue in force.
Section 9. CHAIRMAN OF MEETING. The President of the corporation or
such person as is designated by him shall preside at all meetings of
stockholders.
Section 10. ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS. Only persons who
are nominated in accordance with the following procedures shall be eligible for
election as directors of the corporation. Nominations of persons for election
to the Board of Directors may be made at any annual meeting of stockholders, or
at any special meeting of stockholders called for the purpose of electing
directors, (a) by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (b) by any stockholder of the corporation (i)
who is a stockholder of record on the date of the giving of the notice provided
for in this Section 10 and on the record date for the determination of
stockholders entitled to vote at such meeting and (ii) who complies with the
notice procedures set forth in this Section 10.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the corporation
(a) in the case of an annual meeting, not less than sixty (60) days nor more
than ninety (90) days prior to the date of the annual meeting; PROVIDED,
HOWEVER, that in the event that less than seventy (70) days' notice or prior
public disclosure of the date of the annual meeting is given or made to
stockholders, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs; and (b) in the case of a special meeting of stockholders called
for the purpose of electing directors, not later than the close of business on
the tenth (10th) day following the day on which
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notice of the date of the special meeting was mailed or public disclosure of
the date of the special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person, (iii)
the class or series and number of shares of capital stock of the corporation
which are owned beneficially or of record by the person and (iv) any other
information relating to the person that would be required to be disclosed in a
proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the stockholder giving the
notice (i) the name and record address of such stockholder, (ii) the class or
series and number of shares of capital stock of the corporation which are owned
beneficially or of record by such stockholder, (iii) a description of all
arrangements or understandings between such stockholder and each proposed
nominee and any other person or persons (including their names) pursuant to
which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the corporation
unless nominated in accordance with the procedures set forth in this Section 10.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 11. Advance Notice of Stockholder Proposals. No business may be
transacted at an annual meeting of stockholders, other than business that is
either (a) specified in the notice of meeting, (or any supplement thereto) given
by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the Board of Directors (or any duly authorized committee
thereof) or (c) otherwise properly brought before the annual meeting by any
stockholder of the corporation (i) who is a stockholder of record on the date of
the giving of the notice provided for in this Section 11 and on the record date
for the determination of stockholders entitled to vote at such annual meeting
and (ii) who complies with the notice procedures set forth in this Section 11.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the corporation not
less than sixty (60) days nor more than ninety (90) days prior to the date of
the annual meeting; provided, however, that in the event that less than seventy
(70) days' notice or prior public disclosure of the date of the annual meeting
is given or made to stockholders, notice by the stockholder in order to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.
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To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 11, provided, however, that, once business has been
properly brought before the annual meeting in accordance which such procedures,
nothing in this Section 11 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
ARTICLE IV
Directors
Section 1. Number of Directors. The number of Directors shall be as
determined by the Board of Directors from time to time pursuant to Section 2 of
this Article but shall not consist of fewer than three persons.
Directors, who need not be either Shareholders or residents of the State of
Colorado, shall be elected at the annual meeting of Shareholders, or any
adjournment thereof, and shall hold office for one year and until their
respective successors shall be duly elected and qualified.
Section 2. Increase or Decrease in Number of Directors. The number of
directors may be increased or decreased from time to time by amendment to the
By-Laws, but no decrease shall have the effect of shortening the term of any
incumbent director.
Section 3. Vacancies. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors,
though less than a quorum of the Board of Directors. A director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of an increase in the number of
directors shall be filled by the affirmative vote of a majority of the directors
then in office, or by an election at an annual meeting, or at a special meeting
of the stockholders called for that purpose. A director chosen to fill a
position resulting from an increase in the number of directors shall hold office
until the next annual meeting of stockholders and until his successor has been
elected and qualified.
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Section 4. Removals. At any meeting of the stockholders called
expressly for that purpose, the entire Board of Directors, or any lesser number,
may be removed, with or without cause, by vote of the holders of the majority of
the shares entitled to vote at an election of directors. If the holders of the
shares of any class are entitled to elect one or more directors by the
provisions of the Articles of Incorporation, the provisions of this section
shall apply, in respect to such directors, to the vote of the holders of the
outstanding shares of that class only.
Section 5. Resignation. Any director may resign at any time by mailing
or delivering or by transmitting by telegraph or cable written notice of his
resignation to the President or the Secretary of the corporation. Any such
resignation shall be effective at the time specified therein, or if not stated
in such resignation, the effective date shall be the date said resignation is
received.
Section 6. Powers. Subject to limitations of the Articles of
Incorporation, of the By-Laws, and of the laws of the State of Colorado as to
action which shall be authorized or approved by the stockholders, all corporate
powers shall be exercised by or under the authority of, and the business and
affairs of the corporation shall be controlled by, the Board of Directors.
Without prejudice to such general powers, but subject to the same limitation,
it is hereby expressly declared that the directors shall have the following
powers, to-wit:
(a) To select and remove all the officers, agents, and employees of the
corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the Articles of Incorporation, or the
By-Laws, and fix their compensation.
(b) To conduct, manage, and control the affairs and business of the
corporation, and to make such rules and regulations therefor not
inconsistent with law, or with the Articles of Incorporation, or the
By-Laws, as they may deem best.
(c) To change the principal office for the transaction of the business of
the corporation and to fix and locate, from time to time, one or more
subsidiary offices of the corporation within or without the State of
Colorado.
(d) To adopt, make, and use a corporate seal, and to prescribe the form of
certificates of stock, and to alter the form of such seal and of such
certificates, from time to time, as in their judgement they may deem
best, provided such seal and such certificate shall at all times
comply with the provisions of the law.
(e) To authorize the issuance of shares of stock of the corporation, from
time to time, upon such terms and for such considerations as may be
lawful.
(f) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in
the corporate name, promissory notes, bonds, debentures, deeds of
trust, mortgages, pledges, hypothecations, or other evidences of debt
and securities therefor.
(g) To declare dividends pursuant to the provisions of the laws of the
State of Colorado.
(h) A majority of the full Board of Directors may, by resolution,
designate two or more directors to constitute an executive committee
and one or more other committees each of which to the extent provided
in such resolution shall have and may exercise all of the authority of
the Board of Directors in the management of the corporation, except
the power to declare dividends and those powers which may not be
delegated to such committees under the Colorado Corporation Code.
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(i) Anything hereinabove to the contrary notwithstanding, the Board of
Directors may, except as may otherwise be required by law, authorize
any officer or officers, agent or agents, in the name of and on behalf
of the corporation, to sign checks, drafts, or other orders for the
payment of money or notes or other evidences of indebtedness, to
endorse for deposit, deposit to the credit of the corporation at any
bank or trust company or banking institution in which the corporation
may maintain an account, cash, checks, notes, drafts, or other bankable
securities or instruments, and such authority may be general or
confined to specific instances as the Board of Directors may elect; but
unless so authorized by the Board of Directors no officer, or agent, or
employee shall have the power or authority to bind the corporation by
any contract or engagement, or to pledge its credit, or to render it
pecuniarily liable for any purpose or for any amount.
Section 7. Annual Meeting. A meeting of each newly elected Board of
Directors may be held without notice in each year immediately following the
annual meeting of stockholders.
Section 8. Regular Meetings. Regular meetings of the Board of Directors or
any committee designated by the Board may be held at such time and place as the
Board of Directors or such committee determine. Notice of a regular meeting
shall be delivered, mailed, telegraphed or telephoned to each director or
committee member at least (20) days prior thereto. Notice of a particular
meeting may be waived by the unanimous consent of the Board of Directors or the
members of such committee.
Section 9. Special Meetings. Special meetings of the Board of Directors or
any committee designated by the Board may be called at any time and at any
place within or without the State of Colorado. Notice of a special meeting
shall be delivered, mailed, telegraphed or telephoned to each director or
committee member at least twenty (20) days prior thereto. Neither the business
to be transacted at, nor the purpose of such meeting need be specified in said
notice. Notice of a particular meeting may be waived by the unanimous consent
of the Board of Directors or the members of such committee.
Section 10. Quorum. At all meetings of the Board of Directors a quorum
shall consist of a majority of the members and a majority vote of those present
shall be necessary and sufficient to constitute the act of the directors,
except as otherwise provided herein, in the Articles of Incorporation or by the
laws of the State of Colorado. A majority of those directors present at any
directors' meeting, whether or not a quorum is present, may adjourn the meeting
from time to time but in the absence of a quorum no other business may be
conducted.
Section 11. Telephone Meetings. Members of the Board of Directors or any
committee designated by such board may participate in a meeting of the board or
committee by means of conference telephone or other similar communications
equipment by which all persons participating in the meeting can hear each other
at the same time. Such participation shall constitute presence in person at the
meeting. If notice of a directors' meeting or committee meeting is given such
notice need not specify that one or more directors may participate in such
meeting by means of conference telephone or similar communications equipment.
Section 12. Fees and Compensation. Directors shall not receive any stated
salary for their services as directors, but, by resolution of the Board of
Directors, a fixed fee, with or without expenses of attendance, may be allowed
one or more of the directors for attendance at each meeting. Nothing herein
contained shall be construed to preclude any director from serving the
corporation in any other capacity as an officer, agent, employee, or otherwise,
and receiving compensation therefor.
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Section 13. Chairman of the Board. The Board of Directors may elect one of
their number to fill the office of the Chairman of the Board of Directors. In
the event the President of the corporation is also on the Board of Directors
and no Chairman of the Board of Directors is elected, the President will act as
ex officio Chairman of the Board of Directors.
The Chairman of the Board of Directors, if such officer shall be chosen by
the Board of Directors, shall preside at all meetings of the Board of Directors
at which he is present. He shall, subject to the direction of the Board of
Directors, have general oversight over the affairs of the corporation and
shall, from time to time, consult and advise with the President in the
direction and management of the corporation's business and affairs. He shall
also do and perform such other duties as may, from time to time, be assigned to
him by the Board of Directors.
ARTICLE V
Officers
Section 1. Officers. The officers of the corporation shall be a President,
a Secretary and a Treasurer. The corporation may also have, at the discretion
of the Board of Directors, one or more Vice Presidents, one or more Assistant
Secretaries, and one or more Assistant Treasurers, and such other officers
and/or agents as may be appointed and as the business of the corporation may
require and the Board of Directors may deem proper. The officers need not be
members of the Board of Directors or shareholders.
Section 2. Election. The Board of Directors, at its first meeting after
each annual meeting of stockholders, shall choose the officers, and may, not
inconsistent with the By-Laws, fix the powers and duties of any officer. Each
officer so chosen shall hold office until his successor shall be chosen and
shall qualify, unless he shall sooner resign or be removed as herein in these
By-Laws provided.
Section 3. Salaries. The salaries of the President, each Vice President,
the Secretary, and the Treasurer shall be fixed by the Board of Directors. The
salaries and wages of all other officers, agents, and employees of the
corporation shall be fixed in regular course by the active management of the
corporation, subject to approval of the Board of Directors.
Section 4. Removals, Resignations, and Vacancies. Any officers or agents
may be removed, with or without cause, at any time by the affirmative vote of a
majority of the Board of Directors then in office.
Any officer may resign at any time by giving written notice to the Board
of Directors or to the President, or to the Secretary of the corporation. Any
such resignation shall take effect at the date of the receipt of such notice by
the Board of Directors, the President, or the Secretary of the corporation,
unless a later time is specified in such notice of resignation; and, unless
otherwise specified in such notice, the acceptance of such resignation shall
not be necessary to make it effective.
A vacancy in any office because of death, resignation, removal,
disqualification, or any other cause shall be filled in the manner prescribed
in these By-Laws for regular appointments to such office.
Section 5. President. Subject to such supervisory powers, if any, as may
be given by the Board of Directors to the Chairman of the Board, if there be
such an officer, the President shall be the chief executive officer of the
corporation and shall, subject to the control of the
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Board of Directors, have general supervision, direction, and control of the
business and officers of the corporation. He shall have the general powers and
duties of management usually vested in the office of a President of a
corporation, and shall have such other powers and duties as may be prescribed
by the Board of Directors or these By-Laws.
Until (i) the corporation is no longer subject to the provisions of
Section 8(a) of the Small Business Act (15 U.S.C. - 636(j) and 637(a)) (the
"Act") or (ii) the Board of Directors, in its sole discretion, so determines,
whichever first occurs, the office of President must be filled by a person
determined to be eligible under the Act and such person shall control the
management and day-to-day operations of the corporation.
Section 6. Vice Presidents. In the absence or disability of the President,
the Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon the
President. The Vice Presidents shall have such other powers and perform such
other duties as, from time to time, may be prescribed for them respectively by
the Board of Directors or these By-Laws.
Section 7. Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for the standing committees when required. He shall keep,
or cause to be kept, a stock register showing the names of the stockholders,
number and date of certificates issued, and the number and date of cancellation
of every certificate surrendered for cancellation. He shall give, or cause to
be given, notice of all meetings of the stockholders and meetings of the Board
of Directors as required. He shall perform such other duties as may be
prescribed by the Board of Directors. He shall keep in safe custody the seal of
the corporation, and when authorized by the Board of Directors shall affix the
same to any instrument requiring it, and when so affixed the seal shall be
attested by his signature or by the signature of the Assistant Secretary, the
Treasurer, or a Vice President.
Section 8. Treasurer. The Treasurer shall keep and maintain, or cause to
be kept and maintained, adequate and correct accounting records affecting the
corporation. The books of account shall at all reasonable times be open to
inspection by any director.
The Treasurer shall deposit all moneys and other valuables in the name and
to the credit of the corporation with such depositories as may be designated by
the Board of Directors. He shall disburse the funds of the corporation as may
be ordered by the Board of Directors, shall render to the President and
directors, whenever they request it, an account of all of his transactions as
Treasurer and of the financial condition of the corporation. He shall have such
other powers and perform such other duties as may be prescribed by the Board of
Directors or these By-Laws.
If required by the Board of Directors, the Treasurer shall give the
corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement, or removal from office, of all books, papers,
vouchers, money, and other property of whatsoever kind in his possession or
under his control belonging to the corporation.
Section 9. Assistants. Any assistant officer shall, in the order of their
seniority, unless otherwise designated by the Board of Directors, and in the
absence or disability of the officer to whom they are an assistant, perform the
duties of such officer, and when so acting they shall have all the powers of,
and be subject to all the restrictions upon, such officer. They shall
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have such other powers and perform such other duties as, from time to time, may
be prescribed for them respectively by the Board of Directors, the officers of
the corporation, or these By-Laws.
ARTICLE VI
Miscellaneous
Section 1. Accounting Period. The corporation shall keep its books
and file its tax returns on a calendar year basis, unless otherwise determined
by the Board of Directors.
Section 2. Action without Meeting. Any action which under any
provision of the Colorado Corporation Code may be taken at a meeting of the
stockholders, the directors or a committee of the Board of Directors may be
taken without a meeting if the action is evidenced by one or more written
consents, setting forth the action taken and filed with the corporate records,
signed by all of (i) the shareholders who would be entitled to vote upon such
action, (ii) the directors or (iii) the members of such committee.
Section 3. Waiver of Notices. Whenever any notice is required to be
given to any stockholder or director under the provisions of the By-Laws, the
Articles of Incorporation, or the laws of the State of Colorado, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before, at, or after the time stated therein, shall be equivalent to the
giving of such notice.
Section 4. Indemnification. The corporation shall have the
following powers with respect to indemnification:
(a) To indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation), by reason of the fact
that he is or was a director, officer, employee, or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust,
or other enterprise, against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit, or proceeding if he acted in good faith
and in a manner he reasonably believed to be in the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, or conviction or
upon a plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in the best interests of the corporation and, with
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
(b) To indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in
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connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in the
best interests of the corporation; but no indemnification shall be made in
respect of any claim, issue, or matter as to which such person has been
adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless and only to the extent that the court in
which such action or suit was brought determines upon application that,
despite the adjudication of liability, but in view of all circumstances of
the case, such person is fairly and reasonably entitled to indemnification
for such expenses which such court deems proper.
(c) To the extent that a director, officer, employee, or agent of a corporation
has been successful on the merits in defense of any action, suit, or
proceeding referred to in subparagraphs (a) or (b) or in defense of any
claims, issue, or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(d) Any indemnification under subparagraph (a) or (b) (unless ordered by a
court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee, or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in said subparagraph (a) or (b).
Such determination shall be made by the board of directors by a majority
vote of a quorum consisting of directors who were not parties to such
action, suit, or proceeding, or if such a quorum is not obtainable or even
if obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or by the shareholders.
(e) Expenses (including attorneys' fees) incurred in defending a civil or
criminal action, suit, or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit, or proceeding as
authorized in subparagraph (d), upon receipt of an undertaking by or on
behalf of the director, officer, employee, or agent to repay such amount
unless it is ultimately determined that he is entitled to be indemnified
by the corporation as authorized in this section.
(f) The indemnification provided by this section shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under the
Articles of Incorporation, any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise, and any procedures provided for by
any of the foregoing, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as
to a person who has ceased to be a director, officer, employee, or agent
and shall inure to the benefit of heirs, executors, and administrators of
such a person.
(g) The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, or agent of the corporation or
who is or was serving at the request of the corporation as a director,
officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status
as such, whether or not the corporation would have the power to indemnify
him against such liability under the provisions of this section.
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SECTION 5. AMENDMENTS. These By-Laws may be altered, amended, or repealed,
and new By-Laws may be adopted from time to time, by action of the Board of
Directors, unless reserved to the stockholders in the Articles of
Incorporation, provided that any such action by the Board of Directors shall be
subject to repeal or change by action of the shareholders.
I, Shirley A. Hewitt, Secretary of the corporation above named, do hereby
certify the By-Laws stated herein to be a true and complete copy of the
Restated By-Laws as adopted by its Board of Directors.
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MEMORANDUM OF UNDERSTANDING
This Agreement, effective as of November 17, 1997 is entered into by and
between CTA INCORPORATED, a Colorado corporation having a principal place of
business at 6116 Executive Boulevard, Suite 800, Rockville, Maryland 20852
(hereinafter referred to as "CTA" or "Company") and Capitol Securities
Management Incorporated, a Virginia corporation having a principal place of
business at 8301 Greensboro Drive, McLean, Virginia 22102 (hereinafter referred
to as "Capitol").
WHEREAS, CTA has filed a Registration Statement on Form S-1 under the
Securities Act of 1933 with the Securities and Exchange Commission and;
WHEREAS, CTA is trading the common stock of CTA among the shareholder universe
defined as current or former employees, consultants, and directors of CTA and;
WHEREAS, Capitol continues to provide its services as a broker/dealer for all
of CTA's stock transactions and in order to facilitate a "limited" market for
CTA common stock in the most economical fashion;
Now, therefore, in consideration of the mutual covenants and promises set forth
herein, the parties do hereby agree as follows:
ARTICLE I: RELATIONSHIP AND OBLIGATION OF THE PARTIES
1.1 CTA intends to effect a tender offer (the "Tender Offer") to repurchase up
to 200,000 shares of its common stock on November 26, 1997. This Tender Offer
will terminate on December 31, 1997, unless extended by CTA.
1.2 Capitol, as the exclusive broker and dealer for the limited market of CTA
common stock, agrees to the use of its name, Capitol Securities, by CTA in the
S-1 Registration Statement and the Schedule 13E-4 to be filed in connection
with the Tender Offer.
1.3 As broker/dealer for CTA, Capitol will provide the following services:
(a) Each employee or shareholder who elects to buy or sell CTA common stock
will have an account established by Capitol;
(b) On the trade day +1, a confirmation of purchases or sales will be
generated giving the price per share, number of shares, commission paid,
net dollars transacted, and settlement date. Standard industry practice is
for settlement to occur three (3) business days after the trade date. Cash
to purchase stock or shares to be delivered for sale must be received at
Capitol by settlement day. Extensions of settlement can be arranged,
however, margin interest will be charged for late payment. Money market
interest will be paid on cash
<PAGE> 15
balances in excess of $1000 in accounts. A regular account will be
insured up to $500,000 by the SIPC. Additional insurance to
Correspondent Services Corporation limits.
(c) During the internal market operation and during the period of the
Tender Offer (including any extensions thereof) Capitol will supply
CTA with special reports of activity as will be specified later.
(d) In addition, Capitol agrees to provide at CTA's request, guidance and
consulting services relating to the regulations governing control,
restricted and shelf-registered stock and the filing of required
reports and forms.
(e) Commissions and fees will be paid in accordance with the provisions of
Article II and will cover all costs associated with the accounts,
producing the confirmations, timely collection and disbursement of
funds, generating monthly statements and other reports to be
specified. For the one time repurchase transaction in connection with
the Tender Offer, CTA has agreed to pay all commissions; the seller
shall incur no costs/commissions.
1.4 Capitol will act as CTA's broker/dealer for all stock transactions
including the issuance of stock pursuant to the Company's existing and future
stock option programs and the replacement of lost or stolen certificates in
accordance with the by-laws of the Company. Stock issued will be in the same
form as all other CTA transactions.
1.5 CTA will close buyers indications of interest two (2) weeks following the
effective date of the S-1 Registration. In the event the effective date of the
S-1 Registration Statement changes, the above subsequent events will be
adjusted accordingly.
1.6 CTA will govern the extent to which Company employees have access to
financial advice from Capitol. In no case will CTA employees be solicited by
Capitol without prior written CTA approval for Capitol financial advice or
financial services or any other matter.
ARTICLE II: COSTS AND FEE PAYMENTS
2.1 Except as specifically identified below, each party will bear all costs,
risks and liabilities incurred by it arising out of its obligations and efforts
pursuant to this agreement.
2.2. CTA agrees to pay Capitol an annual fee of four thousand dollars ($4000)
to cover the costs of the initial set-up of the administrative functions,
guidance and consulting advice, and special reports or filings in accordance
with paragraph 1.4. CTA agrees to pay Capitol Securities Management a one time
administrative fee of five thousand dollars ($5000) plus postage fees for
handling the Tender Offer transaction.
<PAGE> 16
2.3 Capitol is authorized to charge broker commissions of 1.5% of the value of
the transactions, to be paid by the seller except in connection with the Tender
Offer when commissions will be paid by CTA.
2.4 There will be no additional costs associated with the function of the
limited market beyond those specified in this Agreement.
ARTICLE III: PROPRIETARY INFORMATION
3.1 During the term of this Agreement, the parties, to the extent of their
right to do so, and as is required for each to perform its obligations
hereunder, may exchange proprietary and confidential information.
3.2 Only that information disclosed in written form and identified by a mark
thereon as proprietary, or oral information which is identified as proprietary
at the time of disclosure and confirmed in writing within ten (10) days of its
disclosure, shall be considered proprietary and subject to this Agreement.
3.3 The exclusive points of contact with respect to the delivery and control
of proprietary information disclosed hereunder are designated by the parties as
follows:
Capitol Securities Management, Inc. CTA INCORPORATED
Attn: Joseph Jianos Attn: John Wagner
8301 Greensboro Drive, Suite 150 6116 Executive Blvd., Suite 800
McLean, Virginia 22102 Rockville, Maryland 20852
Either party may change its point of contact by written notice to the other.
3.4 Information identified and disclosed as provided in this Agreement shall
be held in confidence for a period of five (5) years from the date of receipt.
During such period, such information shall be used only for the purpose of this
Agreement and shall not be disclosed to any third party.
3.5 The parties shall have no obligation under this Agreement to hold
information in confidence which, although identified and disclosed as stated
herein, has been or is:
a. developed by the receiving party independently and without the
benefit of information disclosed hereunder by the disclosing party;
b. lawfully obtained by the receiving party from a third party without
restriction;
c. publicly available without breach of this Agreement;
d. disclosed without restriction by the disclosing party to a third
party; or
<PAGE> 17
e. known to the receiving party prior to its receipt from the disclosing
party.
3.6 Each party shall use not less than the degree of care used to prevent
disclosure of its own proprietary information to prevent disclosure of
information received in accordance with this Agreement.
3.7 All information received and identified in accordance with this Agreement
shall remain the property of the disclosing party and shall be returned upon
request.
ARTICLE IV: TERMINATION OF AGREEMENT
4.1 Except as otherwise expressly provided in Article III, "Proprietary
Information," of this agreement, and unless extended by mutual written
agreement of the parties, this Agreement shall automatically expire December
31, 1998.
ARTICLE V: COMMITMENTS
5.1 Nothing in the Agreement shall grant to either party the right to make
commitments of any kind for or on behalf of the other party without prior
written consent of that party.
ARTICLE VI: PUBLICITY
6.1 Either party desiring to issue a news release, public announcement,
advertisement, or other form of publicity concerning its efforts in connection
with this Agreement shall obtain the prior written approval of the other party
before issuing any such publicity.
ARTICLE VII: WAIVER AND INVALIDITY
7.1 In the event that one party breaches this Agreement, the failure of the
other party to enforce any right under this Agreement shall not be deemed as a
waiver of any right hereunder. The rights and remedies of the parties as set
forth in this Agreement are not exclusive and are in addition to any other
rights and remedies provided by law; additionally, the invalidity in whole or
in part of any condition of this Agreement shall not affect the validity of any
other condition hereof.
ARTICLE VIII: FORCE MAJEURE
8.1 If either party is unable to perform any of its obligations under this
Agreement because of an event of Force Majeure, the party which is unable to
perform shall be excused from such performance only during the time of the
existence of such event.
<PAGE> 18
ARTICLE IX: ASSIGNMENT
9.1 Neither party shall sub-license, transfer, assign, hold in trust for
another, or otherwise dispose of any or all of its rights, obligations, or
interest under this Agreement without prior written consent of the other party.
ARTICLE X: GOVERNING LAW
10.1 This Agreement shall be construed and governed by the laws of the State
of Colorado except for its conflict of interest laws and shall be deemed
executed in said state.
ARTICLE XI: ATTORNEY'S FEES AND COSTS
11.1 Each party to this Agreement shall be responsible for its own attorney's
fees and costs should either party be required to employ the services of an
attorney to enforce any rights granted to it hereunder, or to seek damages for
the breach of any covenant contained in this Agreement.
ARTICLE XII: CAPTIONS
12.1 The captions for any Article herein are for identification purposes only
and are not a part of the substantive provisions of their respective Articles.
ARTICLE XIII: CHANGES
13.1 Changes to this Agreement shall be binding only after agreed to in writing
signed by both parties.
ARTICLE XIV: NOTICE
14.1 Should any notice be required to be given to the other party pursuant to
the terms of this Agreement, it shall be in writing and shall be given either
by personal delivery or by registered or certified mail to the parties entitled
to notice at its address identified in Paragraph 3.3 hereof, or as changed
pursuant to the provisions of Article III. Such notice shall be deemed to be
given upon personal delivery or three (3) days after posting in the United
States mail.
<PAGE> 19
ARTICLE XV: ENTIRE AGREEMENT
15.1 The foregoing Articles contain the entire Agreement between the parties
which supersedes any prior oral or written agreements, commitments,
understandings, or communications with respect to the subject matter of this
Agreement.
In consideration of the mutual promises contained herein, the parties have
caused this Agreement to be executed by its duly authorized representative.
CTA INCORPORATED CAPITOL SECURITIES MGMT., INC.
/S/ John D. Wagner /S/ J. Nanayakkara
- ------------------------------------- --------------------------------------
By: John Wagner By: J. NANAYAKKARA
- ------------------------------------- --------------------------------------
Title: Director Date 11/26/97 Title: CHAIRMAN Date 11/26/97
Treasury, Mgmt.
<PAGE> 1
EXHIBIT 4.3
STOCK RESTRICTION AGREEMENT
THIS AGREEMENT, made on the 15th day of April 1992, by and between CTA
INCORPORATED, a Colorado corporation (the "Company"), and each of the employees,
consultants or directors and other persons who wish to buy stock of CTA and
agrees to be bound by the terms hereof (each, a "Shareholder").
WHEREAS, the Company or another Shareholder wishes to sell to the
Shareholder, and the Shareholder wishes to purchase from the Company or such
other Shareholder, shares (the "Shares") of common stock, par value $.01 per
Share, of the Company (the "Common Stock"); and
WHEREAS, the Shareholder and the Company agree that it is in the best
interest of both parties for the Company to remain predominantly employee owned
and that, therefore, the Shares should be subject to certain restrictions set
forth herein.
NOW, THEREFORE, in consideration of the premises and for the benefit of
the Company, it is agreed by and between the parties as follows:
1. Restriction on Shares.
(a) The Company's Right to Repurchase on Termination of
Employment. To the extent that the Shareholder is an employee,
consultant or director of the Company (each, an "Employee"), if the
Employee's employment by the Company is terminated (whether by reason of
death, retirement, disability, resignation, discharge or any other
reason), then all Shares owned by the Employee shall be subject to the
Company's right of repurchase. The Company's right to repurchase shall
be exercised by mailing written notice to the Employee at his address of
record on the Company's stock record books within one year following the
termination of employment (such one year period shall commence on such
date of termination of employment and shall not be extended by accrued
vacation, sick days, or similar accruals). Such notice shall request
delivery of certificates representing the Shares owned by the Employee,
duly endorsed in blank or to the Company, free and clear of all liens,
claims, charges and encumbrances of any kind whatsoever. The price per
share for the repurchase shall be the then prevailing formula price
established by the Company for the Common Stock on the date of such
termination; provided, however, that in the event that such formula
price is less than the price paid by the Employee for any of his Shares,
the Company shall not repurchase such Shares without the Employee's
consent. The Company shall, in the event it exercises its right to
repurchase such Shares as provided in this Subparagraph 1(a), pay for
such Shares in cash as soon as practicable after receipt by the Company
of the certificate or certificates representing such Shares. If the
Company is unable to make such payment directly to the Employee, then
the Company may satisfy its obligation to make such payment by
depositing the purchase price within such one year period in an interest
bearing account for the benefit of the Employee and such Shares shall
thereby be deemed to have been transferred to the Company and no longer
outstanding, with all rights of the Employee with regard to such Shares
terminated. A determination by the Company not to repurchase any of the
Employee's shares shall in no event affect the validity of Subparagraph
1(b) or any other provisions hereof which shall remain binding on the
Shareholder.
(b) Other Rights of the Company to Repurchase. If at any time
the Shareholder desires to sell any Shares other than through the
limited market (the "Limited Market") maintained on behalf of the
Company by a registered broker-dealer, the Shareholder shall first give
notice to the Secretary of the Company containing:
1
<PAGE> 2
(i) A statement signed by the Shareholder notifying the Company
that the Shareholder desires to sell Shares of Common Stock and has
received a bona fide offer to purchase Shares.
(ii) A statement signed by the intended purchaser containing:
(A) the intended purchaser's full name, address and
taxpayer identification number;
(B) the number of Shares to be purchased;
(C) the price per Share to be paid;
(D) other terms under which the purchase is intended
to be made;
(E) a representation that the offer, under the terms
specified, is bona fide, and
(F) a representation that the intended purchaser
will enter into an agreement with the Company on
substantially the same terms as set forth
herein.
(iii) If the purchase price is payable in cash, in whole or in
part, a copy of a certified check, cashier's check or money order
payable to the Employee from the purchaser in the amount of the purchase
price which is to be paid in cash.
The Company shall thereupon have an option exercisable within thirty
(30) days of receipt of such notice by the Secretary to purchase all, but not
less than all, of the Shares specified in the notice at the offer price and upon
the same terms as set forth in the notice. Such option shall be exercised by the
Company by mailing written notice to the Shareholder at his address of record on
the Company's stock record books. In the event the Company does not exercise
such option, then the Shareholder may sell the shares specified in the notice
within thirty (30) days thereafter to the person specified in the notice, at the
price and upon the terms and conditions set forth therein. The Shareholder may
not sell such Shares to any other person, or at any different price, or on any
different terms without first reoffering such Shares to the Company.
(c) Election of Rights by the Company. In the event circumstances shall
occur which would ordinarily permit the company to exercise its rights under
either Subparagraph 1(a) or 1(b) at a time when the Company's rights under the
other Subparagraph have become and remain exercisable, the Company in its sole
discretion may elect which of such rights it shall exercise. The Company may
designate one or more nominees to purchase any Shares which it has the right to
purchase pursuant to Subparagraph 1(a) or 1(b), in lieu of purchasing such
Shares itself.
(d) Transfers. The Shareholder agrees not to sell, transfer, pledge,
hypothecate, assign, or otherwise, in any manner, dispose of any of the Shares
(other than through the Limited Market), or any right or interest therein,
without abiding with the provisions of Section 1(a) or 1(b) or the other
provisions hereof and any purported attempt to sell, transfer, pledge,
hypothecate, assign, or otherwise dispose of the Shares by the Employee shall be
null and void and without effect. No such transfer shall be made unless the
purchaser enters into an agreement with the Company on substantially the same
terms as set forth herein.
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO TRANSFER, SALE
OR OTHER DISPOSITION OF ANY OF THE SHARES MAY BE EFFECTED UNLESS (I)
SUCH SALE, TRANSFER, OR OTHER
2
<PAGE> 3
DISPOSITION COMPLIES WITH THE FEDERAL SECURITIES LAWS AND ANY APPLICABLE
STATE SECURITIES OR BLUE SKY LAWS AND (II) THE TRANSFEREE OF SUCH SHARES
(INCLUDING ANY TRANSFEREE WHO IS AN EMPLOYEE OF THE COMPANY) AGREES IN
WRITING TO BE BOUND BY THE PROVISIONS OF THIS AGREEMENT.
(e) Lapse or Waiver of Restrictions.
(i) Lapse. All restrictions upon the Shares set forth in this
Paragraph 1(a) shall automatically lapse and be of no further force and effect
if:
(A) the Company makes an underwritten offering of its Common
Stock (or any class of securities convertible into any class of its
Common Stock) on a firm commitment basis to the general public (which
for purposes hereof shall not include an offering in which substantially
all of the Shares are intended for sale to officers, directors, and
employees of the Company); or
(B) the Company applies to have its Common Stock (or any class
of securities convertible into any class of its Common Stock) listed on
a national securities exchange.
(ii) The Company, acting in its sole discretion, may waive any or all of
the restrictions upon the Shares of Common Stock set forth in this Paragraph 1
in such circumstances as the Company deems appropriate, and such waiver may be
effective as to any or all of the Shares of Common Stock held by the
Shareholder.
(f) The Shareholder and the Company understand and agree that the
provisions of this Agreement shall only be applicable to the Shares of Common
Stock subject to this Agreement and all shares of capital stock that are issued
or paid to the Shareholder as a dividend, distribution, or otherwise with
respect to such Shares.
2. Legend. All stock certificates issued by the Company and all stock
certificates issued by or on behalf of the Company held by the Shareholder shall
have the following legend marked upon the face thereof:
"SALE, TRANSFER, ASSIGNMENT, PLEDGE, HYPOTHECATION, OR OTHER DISPOSITION
OF THESE SHARES IS RESTRICTED BY THE TERMS OF A STOCK RESTRICTION
AGREEMENT WHICH MAY BE EXAMINED AT THE OFFICE OF THE COMPANY."
3. Entire Agreement. This Agreement represents the entire Agreement
between the Company and the Shareholder with respect to the subject matter
hereof and supersedes any prior agreements, correspondence, or understandings
between them with respect to the subject matter hereof.
4. Advisors. The Shareholder has been advised by counsel of the
Employee's own choice with regard to the legal, tax, and other consequences of
this Agreement to the Shareholder and has not relied upon the Company or its
counsel with regard thereto.
5. Binding Effect. This Agreement shall be binding upon the personal
representatives, distributees, successors, and assigns of the Company and the
Shareholder.
6. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
be considered one and the same instrument.
3
<PAGE> 4
7. Governing Law. This Agreement shall be governed by the laws of the
State of Colorado without regard to the conflict of laws provisions thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
CTA INCORPORATED
C.E. Velez
President
4
<PAGE> 1
EXHIBIT 5.1
November 5, l998
Board of Directors
Computer Technology Associates, Inc.
6903 Rockledge Drive
Bethesda, Maryland 20817
Re: Validity of up to 1,951,074 Shares of Common Stock to Be
Offered and Sold Pursuant to Registration Statement on
Form S-1 (Registration No. 333-64373)
Ladies and Gentlemen:
We have acted as special Colorado counsel to Computer Technology
Associates, Inc., a Colorado corporation (the "Company"), in connection with
certain matters of Colorado corporate law relating to (1) the proposed issuance
and sale by the Company of up to 1,335,338 shares (the "Primary Shares") of its
common stock, $.01 par value ("Common Stock"), pursuant to a Registration
Statement on Form S-l (Registration No. 333-64373) (the "Registration
Statement") and (2) the proposed sale by certain shareholders of the Company of
up to 615,736 issued and outstanding shares (the "Secondary Shares") of Common
Stock pursuant to the Registration Statement. In the course of that
representation, we have examined the Articles of Incorporation and Bylaws of
the Company and certified resolutions adopted by its Board of Directors
authorizing the issuance of the Primary Shares, ratifying the issuance of the
shares of the Company's Common Stock outstanding on November 5, 1998, ratifying
all options to purchase Common Stock outstanding on that date and authorizing
the issuance of the shares underlying those options upon the exercise thereof.
We have been informed by the Company that it has received payment of the full
consideration for all outstanding shares of Common Stock.
Based on that examination and information, we are of the opinion
that, (a) the Primary Shares and the Secondary Shares have been duly authorized,
(b) when the Primary Shares are issued and sold as contemplated by the
Registration Statement, they will be validly issued, fully paid and
nonassessable, and (c) the Secondary Shares have been validly issued and are
fully paid and nonassessable.
<PAGE> 2
SHERMAN & HOWARD L.L.C.
Page 2
November 5, 1998
- -------------------
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm therein under the
caption "Legal Matters," but such consent does not constitute an agreement on
our part that we are experts with respect to any portion of the Registration
Statement
Yours truly,
/s/ SHERMAN & HOWARD L.L.C.
<PAGE> 1
EXHIBIT 10.1
LEASE AGREEMENT
By and Between
DEMOCRACY ASSOCIATES LIMITED PARTNERSHIP
and
CTA INCORPORATED
DEMOCRACY CENTER
BETHESDA, MARYLAND
TABLE OF CONTENTS
Page
----
ARTICLE I
The Premises . . . . . . . . . . . . 1
ARTICLE II
Term . . . . . . . . . . . . . . . . 2
ARTICLE III
Base Rent . . . . . . . . . . . . . 3
ARTICLE IV
Additional Rent . . . . . . . . . . 3
ARTICLE V
Security Deposit . . . . . . . . . . 12
ARTICLE VI
Use of Premises . . . . . . . . . . 12
ARTICLE VII
Assignment and Subletting . . . . . . 13
ARTICLE VIII
Maintenance and Repairs . . . . . . . 18
ARTICLE IX
Tenant Alterations . . . . . . . . . 19
ARTICLE X
Signs and Furnishings . . . . . . . 24
ARTICLE XI
Tenant's Equipment . . . . . . . . . 25
ARTICLE XII
Inspection by Landlord . . . . . . . 27
ARTICLE XIII
Insurance . . . . . . . . . . . . . 27
ARTICLE XIV
Services and Utilities . . . . . . . 28
<PAGE> 2
Page
----
ARTICLE XV
Liability of Landlord . . . . . . . . 30
ARTICLE XVI
Rules and Regulations . . . . . . . . 31
ARTICLE XVII
Damage or Destruction . . . . . . . . 32
ARTICLE XVIII
Condemnation . . . . . . . . . . . . 33
ARTICLE XIX
Default by Tenant . . . . . . . . . . 34
ARTICLE XX
Bankruptcy . . . . . . . . . . . . . 37
ARTICLE XXI
Subordination . . . . . . . . . . . . 39
ARTICLE XXII
Holding Over . . . . . . . . . . . . 41
ARTICLE XXIII
Covenants of Landlord . . . . . . . . 41
ARTICLE XXIV
Parking . . . . . . . . . . . . . . . 42
ARTICLE XXV
General Provisions . . . . . . . . . 43
Rider No. 1
EXHIBIT A -- Diagram of Premises
EXHIBIT A-1 -- Title Report
EXHIBIT B -- Space Plan
EXHIBIT C -- Rules and Regulations
EXHIBIT D -- Method of Measuring Net Rentable Area
EXHIBIT E -- Form of Estoppel Certificate
-ii-
<PAGE> 3
LEASE AGREEMENT
DEMOCRACY CENTER
BETHESDA, MARYLAND
THIS LEASE AGREEMENT (the "Lease") is made as of the 22nd day of May,
1998, by and between DEMOCRACY ASSOCIATES LIMITED PARTNERSHIP, a Maryland
limited partnership (hereinafter referred to as "Landlord"), and CTA
INCORPORATED, a Colorado corporation (hereinafter referred to as "Tenant").
RECITALS:
A. Landlord is the developer and owner of an office complex known
as Democracy Center, located at 6901-6905 Rockledge Drive, West Bethesda,
Maryland, situated on certain real property owned by Landlord (all such real
property is referred to herein as the "Land"). Said office complex consists of
one 15-story office building, two 9-story office buildings, three surface
parking areas, a recreation area, a plaza area and a 2-level below grade
parking structure serving all of the office buildings. Said office complex is
referred to herein as the "Office Complex."
B. Tenant desires to lease space in the Office Complex and
Landlord is willing to rent space in the Office Complex to Tenant, upon the
terms, conditions, covenants and agreements set forth herein.
NOW, THEREFORE, the parties hereto, intending legally to be bound,
hereby covenant and agree as set forth below.
ARTICLE I
THE PREMISES
1.1 Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, for the term and upon the terms, conditions, covenants and agreements
herein provided, 23,538 square feet of rentable area comprising all of the
eighth (8th) floor of the fifteen (15) story office building having a street
address of 6903 Rockledge Drive, Bethesda, Maryland, included as part of the
Office Complex which office building is known and referred to herein
interchangeably either as "Two Democracy Center" or as the "Building." The
space which is the subject of this Lease Agreement is hereinafter referred to
as the "Premises." The location and configuration of the Premises is outlined
in red on Exhibit A attached hereto and made a part hereof.
1.2 The lease of the Premises includes the right, together with
other tenants of the Office Complex and members of the public, to use the
common and public areas of the Office Complex subject to the rules and
regulations promulgated by Landlord hereunder, but includes no other rights not
specifically set forth herein. The lease of the Premises also is subject to any
covenants, conditions and restrictions of record. A list of the covenants,
conditions and restrictions of record as of May 19, 1993, the date of the last
title update performed with respect to the Office Complex is attached hereto as
Exhibit A-1 and made a part hereof.
<PAGE> 4
ARTICLE II
TERM
2.1 The term of this Lease (hereinafter referred to as the "Lease
Term") shall commence on the date this Lease is fully executed by Landlord and
Tenant (the "Lease Commencement Date") and shall continue for a period of seven
(7) years and approximately one (1) month thereafter, through May 31, 2005,
unless such Lease Term shall be renewed or terminated earlier in accordance
with the provisions hereof. The term "Lease Term" shall include any and all
renewals and extensions of the term of the Lease.
2.2 (a) It is understood and agreed that Tenant shall construct
or cause to be constructed the Tenant Improvements to the Premises described in
Section 9.1 below. Tenant shall be responsible for the design and construction
of the interior Tenant Improvements to the Premises and Tenant shall obtain all
necessary permits to construct such Tenant Improvements and legally occupy the
Premises. The timing of Tenant's completion of such work and the receipt or
issuance of any required building, special exception, occupancy or other
permits or approvals shall have no bearing on the Lease Commencement Date, the
Rent Commencement Date, as defined in Section 3.1 below or Tenant's obligation
to pay base rent and additional rent as provided in Article III and Article IV
below. Any and all construction, installation and other related activity by
Tenant or its contractors prior to the Rent Commencement Date shall be
coordinated with Landlord in accordance with the terms of Section 9.1 hereof.
All terms and conditions of this Lease, including, without limitation, the
insurance, release and waiver of liability provisions of Article XII and XIV
hereof, shall apply to and be effective during such period of occupancy by
Tenant, except for Tenant's obligation to pay any base rent or additional rent
attributable to Operating Expenses.
(b) Landlord and Tenant shall cooperate with each other and
shall work together in good faith to effect the timely completion of the
Tenant's Work. Where required all approval, consents or disapprovals or denials
of consent shall be delivered promptly after a request therefor. All
disapprovals or denials of consent shall include a statement of the reason for
such disapproval or denial of consent. Landlord and Tenant shall each use its
commercially reasonable efforts to comply with all construction schedules
created in connection with the performance of the work described in this Lease.
2.3 Promptly after the Lease Commencement Date is ascertained,
Landlord and Tenant shall execute, in recordable form, a written declaration
setting forth the Lease Commencement Date, the date upon which the Lease Term
will expire and the other information set forth therein. The form of such
declaration is attached hereto as Exhibit E, and is made a part hereof.
2.4 In the event that construction and installation of the tenant
improvements in the Premises is delayed, regardless of the reasons or causes of
such delay, this Lease shall not be rendered void or voidable as a result of
such delay, and the term of this Lease shall commence on the Lease Commencement
Date as determined pursuant to Section 2.2 hereof. Furthermore, Landlord shall
not have any liability whatsoever to Tenant on account of any such delay.
-2-
<PAGE> 5
2.5 For purposes of this Lease, the term "Lease Year" shall mean a
period of twelve (12) consecutive calendar months, commencing on the first day
of the month in which the Rent Commencement Date, as defined in Section 3.1
below, occurs and each successive twelve (12) month period, provided, however,
that the first Lease Year shall include the period from the Lease Commencement
Date through the Rent Commencement Date.
ARTICLE III
BASE RENT
3.1 Commencing on June 1, 1998 (the "Rent Commencement Date") and
continuing throughout the remainder of the Lease Term, Tenant shall pay to
Landlord as annual base rent for the Premises, without set off, deduction or
demand, an amount equal to the sum of Twenty-Six Dollars ($26.00) multiplied by
the total number of square feet of Net Rentable Area in the Premises, which
amount shall be subject to adjustment as provided in Section 3.2 hereof. The
annual base rent payable hereunder during each Lease Year shall be divided into
equal monthly installments and such monthly installments shall be due and
payable in advance on the first day of each month during such Lease Year.
Concurrently with the signing of this Lease, Tenant shall pay to Landlord the
sum of Fifty Thousand Nine Hundred Ninety-Nine Dollars ($50,999.00), which sum
shall be credited by Landlord toward the monthly installment of base rent due
for the first full calendar month falling within the Lease Term. If the Lease
Term begins on a date other than on the first day of a month, rent from such
date until the first day of the following month shall be prorated on a per diem
basis at the base rate payable during the first Lease Year, and such prorated
rent shall be payable in advance on the Lease Commencement Date.
3.2 Commencing on the first (1st) day of the second (2nd) Lease Year
and on the first (1st) day of each and every Lease Year thereafter during the
Lease Term, the annual base rent shall be increased by two and one-half percent
(2.5%) of the amount of annual base rent payable for the immediately preceding
Lease Year.
3.3 All rent shall be paid to Landlord in legal tender of the United
States at the address to which notices to Landlord are to be given or to such
other party or to such other address as Landlord may designate from time to
time by written notice to Tenant. If Landlord shall at any time accept rent
after it shall become due and payable, such acceptance shall not excuse a delay
upon subsequent occasions, or constitute or be construed as a waiver of any of
Landlord's rights hereunder.
ARTICLE IV
ADDITIONAL RENT
4.1 Operating Expenses.
(a) Commencing in the calendar year 1999 and continuing with
each calendar year thereafter during the Lease Term, Tenant shall pay Landlord,
as additional rent for the Premises,
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Tenant's proportionate share of the amount by which actual Operating Expenses
(as hereinafter defined) incurred by Landlord in connection with the management
and operation of the Office Complex during any calendar year falling entirely
or partly within the Lease Term exceed the actual Operating Expenses incurred
by Landlord in connection with the management and operation of the Office
Complex during the twelve month period (the "Base Year") commencing January 1,
1998, and ending December 31, 1998. For the purposes of this Lease, the actual
Operating Expenses incurred by Landlord during the Base Year are referred to as
the "Base Year Operating Expenses." For purposes of this Article IV Tenant's
proportionate share of such increases in Operating Expenses shall be that
percentage which is equal to a fraction, the numerator of which is the number
of square feet of rentable area in the Premises and the denominator of which is
the total number of square feet of rentable area in the Office Complex,
excluding the number of square feet devoted to storage space and parking. The
preceding sentence notwithstanding, Tenant's proportionate share shall increase
in the event Tenant expands the Premises. For the purposes of determining the
Operating Expense described in Section 4.1(b)(1)(ix) below, the numerator
shall be the number of parking permits allocated at no charge to Tenant
pursuant to Section 24.1 below and the denominator shall be the aggregate
number of all of the parking spaces in the Garage and all of the surface
parking areas of the Office Complex. By execution of this Lease, Tenant accepts
the basic obligation to pay its proportionate share of increases in Operating
Expenses incurred by Landlord above those amounts actually incurred by Landlord
in the Base Year. Tenant acknowledges and understands that with respect to
certain of the Operating Expenses set forth herein (e.g., insurance and Real
Estate Taxes) Tenant will be paying its proportionate share of increases in
Operating Expenses which are attributable to the Building's proportionate share
of such expenses relative to the Office Complex, with appropriate adjustments
to the extent such increases are not attributable to circumstances or
conditions present in the Building or otherwise applicable to the Office
Complex as a whole. Landlord agrees that no item of maintenance or repair will
be deferred in the Base Year solely for the purposes of reducing Base Year
Operating Expenses. The specific obligations of Tenant with respect to such
increases shall be governed by the remaining sections of this Article IV.
(b) The Operating Expenses shall include the costs and
expenses described in subsection (1) below, but shall not include the costs and
expenses described in subsection (2) below:
(1) Included costs and expenses:
(i) Gas, water, sewer, electricity and other
utility charges (including surcharges) of every type
and nature.
(ii) Insurance premiums paid by Landlord.
(iii) Personnel costs of the Office Complex,
including, but not limited to, salaries, wages,
fringe benefits and other direct and indirect costs
of engineers, superintendents, watchmen, porters and
any other personnel related to the management,
maintenance, repair and operation of the
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Office Complex.
(iv) Costs of service and maintenance contracts,
including, but not limited to, chillers, boilers,
controls, elevators, mail chute, window, security
service, snow and ice removal and management fees.
(v) Except to the extent excluded by subsection
(2) below, all other ordinary and customary
maintenance, supply and repair expenses incurred in
connection with the Office Complex which are
deductible by Landlord in computing its Federal
income tax liability under the tax laws and
regulations in effect from time to time when such
expenses are incurred.
(vi) Depreciation (on a straight-line basis) for
capital expenditures made by Landlord (A) to reduce
operating expenses to the extent that the annual
reduction in operating expenses which results from
such capital expenditure shall exceed the actual
charge for depreciation therefor or (B) to comply
with applicable laws, rules, regulations,
requirements, statutes, ordinances, by-laws and court
decisions of all public and quasi-public authorities
which are now or hereafter in force ("Legal
Requirements"); provided, however, that such capital
expenditures shall be depreciated over the longer of
(I) the useful life of the item, improvement or
product resulting from the capital expenditure or
(II) the lifetime permitted by the Internal Revenue
Code of 1986, as amended, for such item, improvement
or product.
(vii) Any other reasonable costs and expenses
incurred by Landlord in maintaining or operating the
Office Complex.
(viii) The reasonable costs of any additional
services not provided to the Office Complex at the
Lease Commencement Date but thereafter provided by
Landlord in the prudent management of the Office
Complex.
(ix) For the first two (2) Lease Years of the
Lease Term, costs and expenses associated with the
operation and maintenance of the garage and parking
facilities servicing the Office Complex which shall
be calculated in accordance
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with the formula set forth in the fifth (5th) sentence
of the introduction to this Section 4.1.
(x) Real Estate Taxes (as hereinafter defined).
(xi) Common Area Electricity Charges (as
hereinafter defined).
(xii) Common Area Janitorial Charges (as hereinafter
defined).
(2) Excluded costs and expenses:
(i) Principal or interest payments on and any
other charges paid by Landlord in connection with any
mortgages, deeds of trust or other financing
encumbrances.
(ii) Rental payments (including percentage rent and
any increases in base rent) made under any ground
lease, except to the extent such rental payments
represent payment of Real Estate Taxes (as hereinafter
defined).
(iii) Leasing commissions payable by Landlord and
advertising and promotional expenditures associated
with marketing vacant space in the Office Complex.
(iv) Deductions for depreciation for the Office
Complex, except to the extent included in subsection
(1)(vi) above.
(v) Capital improvements that are not deducted by
Landlord in computing its federal income tax
liability, except to the extent included in subsection
(1)(vi) above.
(vi) The costs of insurance premiums, special
services, tenant improvements and concessions,
repairs, maintenance items or utilities separately
chargeable to, or specifically provided for,
individual tenants of the Office Complex, including,
without limitation, the cost of preparing any space in
the Office Complex for occupancy by any tenant and/or
for altering, renovating, repainting, decorating,
planning and designing spaces for any tenant in the
Office Complex in connection with the renewal of its
lease and/or costs of preparing or renovating any
vacant space for lease
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in the Office Complex.
(vii) Salaries and all other compensation (including
fringe benefits and other direct and indirect
personnel costs) of partners, officers and executives
above the grade of superintendent or building manager
of Landlord or the managing agent.
(viii) Costs and expenses incurred by Landlord in
connection with damage, casualty or condemnation of
all or a portion of the Office Complex; provided,
however, that with respect to the cost to repair
damage, Landlord may include in Operating Expenses (i)
the amount of a commercially reasonable deductible
applied to each such occurrence and (2) if Landlord
determines, in its reasonable judgment, that the
effect of making a claim under Landlord's insurance
policy or policies would be to increase, in the
aggregate, the future cost of insurance premiums and
repair and maintenance expenses relating to the Office
Complex, Landlord may include in Operating Expenses
the cost to repair such damage to the extent such cost
does not exceed two hundred percent (200%) of the
deductible amount applicable under Landlord's
insurance policy or policies to such occurrence;
provided, however, that Landlord may only include such
cost in Operating Expenses, if Landlord actually makes
such repair and does not submit an insurance claim in
connection therewith.
(ix) Costs and expenses of administration and
management of partnership activities of Landlord and
corporate activities of the managing agent of the
Office Complex.
(x) Costs and expenses incurred by Landlord in
curing, repairing or replacing any structural portion
of the Office Complex made necessary as a result of
defects in design, workmanship or materials.
(xi) Any costs and expenses incurred by Landlord in
connection with causing the common and public areas of
the Office Complex which are within Landlord's sole
and exclusive control to comply with applicable Legal
Requirements, including, without limitation, the
Americans
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with Disabilities Act of 1990.
(xii) Reserves established by Landlord for bad debts
or rent losses attributable to tenants of the Office
Complex and/or for repairs, maintenance and
replacements.
(xiii) Costs and expenses attributable to ordinary
and customary management fees in excess of five percent
(5%) of the gross revenues received by Landlord during
the applicable calendar year.
(xiv) Costs and expenses attributable to the
operation and maintenance of the health club servicing
the Office Complex.
(xv) Costs and expenses incurred by Landlord to
abate, to encapsulate, to investigate, to remove and
to respond to any hazardous materials contamination,
exposure or release or to comply with any hazardous
materials or environmental laws, ordinances or
regulations.
(xvi) Costs and expenses incurred by Landlord for
services which are duplicative of or are normally
included in any management fees paid by Landlord.
(xvii) That portion of any Operating Expenses which
is paid to any entity affiliated with Landlord which
is in excess of the amount which would otherwise be
paid to an entity which is not affiliated with
Landlord for the provision of the same service.
(xviii) Sums paid by Landlord for any indemnity,
damages, fines, late charges, penalties or interest
for any late payment of Real Estate Taxes or any
Operating Expenses or to correct violations of Legal
Requirements applicable to the Office Complex, except
for expenditures for repairs, maintenance and
replacement or other items that would otherwise
reasonably constitute Operating Expenses.
(xix) Attorney's fees and disbursements, brokerage
commissions, transfer taxes, recording costs and
taxes, title insurance premiums, title closer's fees
and gratuities and other similar costs incurred in
connection with the sale or
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transfer of an interest in Landlord or the
Office Complex.
(xx) Costs and expenses directly resulting from the
gross negligence or willful misconduct of Landlord or
its employees.
(xxi) Rental for personal property leased to
Landlord except for rent for personal property leased
to Landlord the purchase price for which, if
purchased, would be fully included in Operating
Expenses in the year of purchase.
(xxii) Commencing on the first (1st) day of the third
(3rd) Lease Year, costs associated with the operation
and maintenance of the garage and parking facilities
servicing the Office Complex.
(c) As used above, the term "Real Estate Taxes" shall mean
(i) all real estate taxes, including general and special assessments, if any,
which are imposed upon Landlord or assessed against the Office Complex or the
Land upon which the Office Complex is situated; (ii) any other present or
future taxes or governmental charges that are imposed upon Landlord or assessed
against the Office Complex and/or the land upon which the Office Complex is
situated, including, but not limited to, any tax levied on or measured by the
rents payable by tenants of the Office Complex, which are in the nature of, or
in substitution for, real estate taxes; and (iii) all taxes which are imposed
upon Landlord, and which are assessed against the value of any improvements to
the Premises made by Tenant or any machinery, equipment, fixtures or other
personal property of Tenant used therein. Real Estate Taxes shall not include
any income taxes, excess profits taxes, excise taxes, franchise taxes, estate
taxes, succession taxes and transfer taxes, except to the extent any of such
taxes are in the nature of or are in substitution for or recharacterization or
replacement of Real Estate Taxes.
(d) As used above, the term "Common Area Electricity
Charges" shall consist of the charges for electrical power consumed in the
operation of the public and common areas of the Office Complex, as determined
by Landlord in its reasonable discretion.
(e) As used above, the term "Common Area Janitorial
Charges" shall mean the charges for janitorial and cleaning services and
supplies furnished for all public and common areas in the Office Complex.
(f) Notwithstanding anything to the contrary in this
Article IV, Tenant shall not be obligated to pay to Landlord its proportionate
share of increases of Operating Expenses for any calendar year after the first
Lease Year attributable to Controllable Operating Expenses (as defined in the
next sentence) which exceed eight percent (8%), in the aggregate, of the amount
of Controllable Operating Expenses for the immediately preceding calendar year.
For the purposes of
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this Section 4.1(f), Controllable Operating Expenses are all Operating
Expenses other than Operating Expenses incurred by Landlord which are
attributable to (i) Real Estate Taxes, (ii) Utilities, (iii) snow removal and
(iv) Insurance.
4.2 In the event the average occupancy rate for the entire Office
Complex shall be less than ninety-five percent (95%) for any calendar year,
including the Base Year, for purposes of calculating the additional rent
payable by Tenant pursuant to this Article IV for each calendar year, the
Operating Expenses for the Base Year and such calendar year shall each be
increased by the amount of additional costs and expenses that Landlord
reasonably estimates would have been incurred if the average occupancy rate for
the entire Office Complex had been ninety-five percent (95%) for the Base Year
and such calendar year. When making the foregoing calculation, Landlord shall
be governed by the following:
(1) It is the intent of this provision to permit Landlord
to recover for increases in Operating Expenses
attributable to occupied space in the Office Complex
even though the aggregate of such expenses shall have
been reduced below the actual Operating Expenses
incurred by Landlord for the preceding calendar year
or for the Base Year as a result of vacancies in the
Office Complex.
(2) It is not the intent of this provision to permit
Landlord to recover from Tenant additional rent
pursuant to Article IV for any calendar year which,
when added to the total amount of additional rent
payable by all tenants of the Office Complex on
account of Operating Expenses for such year, will
exceed (i) the actual amount of Operating Expenses
incurred by Landlord for such year, less (ii) the Base
Year Operating Expenses.
4.3 At the beginning of calendar year 1999 and each calendar year
thereafter during the Lease Term, Landlord shall submit to Tenant a statement
setting forth Landlord's reasonable estimate of the amount by which the
Operating Expenses that are expected to be incurred during such calendar year
will exceed the Base Year Operating Expenses, and the computation of Tenant's
proportionate share of such anticipated increase. Except as otherwise provided
herein, Tenant shall pay to Landlord on the first day of each month following
receipt of such statement during such calendar year an amount equal to Tenant's
proportionate share of the anticipated increase in such expenses multiplied by
a fraction, the numerator of which is 1, and the denominator of which is the
number of months during such calendar year which fall within the Lease Term and
follow the date of the foregoing statement. Within ninety (90) days after the
expiration of each calendar year falling entirely or partly within the Lease
Term, Landlord shall submit to Tenant a statement showing (i) the actual amount
of Base Year Operating Expenses, (ii) the actual Operating Expenses paid or
incurred by Landlord during the immediately preceding calendar year, (iii) a
computation of Tenant's proportionate share of the amount by which the
Operating Expenses actually incurred during the preceding calendar year
exceeded the Base Year Operating Expenses, and (iv) the aggregate amount
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of the estimated payments made by Tenant on account thereof. If the aggregate
amount of such estimated payments exceeds Tenant's actual liability for such
increases, Tenant shall deduct the net overpayment from its next estimated
payment or payments on account of increases in Operating Expenses for the then
current year. If Tenant's actual liability for such increases exceeds the
estimated payments made by Tenant on account thereof, then Tenant shall
promptly pay to Landlord the total amount of such deficiency as additional rent
due hereunder.
4.4 In the event the Lease Term commences or expires on a day
other than the first day or the last day of a calendar year, the increases in
the Operating Expenses to be paid by Tenant for such calendar year shall be
apportioned by multiplying the amount of Tenant's proportionate share thereof
for the full calendar year by a fraction, the numerator of which is the number
of days during such calendar year falling within the Lease Term, and the
denominator of which is 365.
4.5 All payments required to be made by Tenant pursuant to this
Article IV shall be paid to Landlord, without setoff or deduction, in the same
manner as base rent is payable pursuant to Article III hereof.
4.6 The obligation imposed upon Tenant by Section 4.3 hereof to
pay for its proportionate share of the increases in Operating Expenses
described in Section 4.1 hereof for the last calendar year falling entirely or
partly within the Lease Term shall survive the expiration or earlier
termination of the Lease Term. Similarly, Landlord's obligation to refund to
Tenant the excess, if any, of the amount of Tenant's estimated payments on
account of such increases for such last calendar year over Tenant's actual
liability therefor shall survive the expiration of the Lease Term.
4.7 In the event that Tenant, in good faith, believes that the
amounts paid by Tenant to Landlord relating to increases in Operating Expenses
during any calendar year falling within the Lease Term exceeded the amounts to
which Landlord was entitled to hereunder, Tenant or an independent, certified
public accountant designated by Tenant shall have the right, during regular
business hours and after giving ten (10) days' advance written notice to
Landlord, to inspect and audit Landlord's books and records relating to such
charges for a period of one (1) year following the receipt by Tenant of the
statement required of Landlord pursuant to Section 4.3 hereof for such calendar
year. If such audit shows that the amounts paid by Tenant to Landlord on
account of increases in such charges exceeded the amounts to which Landlord was
entitled hereunder, or that Tenant is entitled to a credit with respect to any
such charges, Landlord shall promptly refund to Tenant the amount of such
excess or the amount of such credit, as the case may be. All costs and expenses
of any such audit shall be paid by Tenant, except that if such audit shows that
the aggregate amount of such categories of charges was overstated by Landlord
by more than five percent (5%), Landlord shall reimburse Tenant for the
reasonable costs and expenses incurred in such audit, up to but not exceeding
Five Thousand Dollars ($5,000.000) but in no event shall Landlord's
reimbursement obligation for audit costs exceed the actual amount of the refund
to Tenant resulting from such audit.
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ARTICLE V
SECURITY DEPOSIT
[INTENTIONALLY DELETED]
ARTICLE VI
USE OF PREMISES
6.1 (a) Tenant shall use and occupy the Premises solely for
general office purposes and for no other use or purpose without the prior
written consent of Landlord, which consent Landlord may grant or withhold in
its sole and absolute subjective discretion. Tenant shall not use or occupy the
Premises for any unlawful purpose or in any manner that will constitute waste,
nuisance or unreasonable annoyance to Landlord or other tenants of the Office
Complex. Tenant shall comply with all present and future laws, ordinances
(including zoning ordinances and land use requirements), regulations, and
orders of the United States of America, the State of Maryland, the County of
Montgomery and any other public or quasi-public authority having jurisdiction
over the Premises, concerning the use, occupancy and condition of the Premises
and all machinery, equipment and furnishings therein. Tenant shall obtain at
its expense the initial occupancy permit required for Tenant to lawfully occupy
the Premises. It is expressly understood that if any change in the use of the
Premises by Tenant, or any alterations to the Premises by Tenant, or any future
law, ordinance, regulation or order requires a new or additional permit from,
or approval by, any governmental agency having jurisdiction over the Office
Complex, such permit or approval shall be obtained by Tenant on its behalf and
at its sole expense. Further, Tenant shall comply with all Legal Requirements
which shall impose a duty on Landlord or Tenant relating to or as a result of
the use or occupancy of the Premises. Tenant shall pay all fines, penalties and
damages that may arise out of or be imposed because of Tenant's failure to
comply with the provisions of this Lease.
(b) Landlord shall comply with all present and future
laws, ordinances, regulations and orders that are applicable to the operation
of the common and public areas in the Building which are within Landlord's sole
and exclusive control and to the machinery and equipment provided by Landlord
in the operation of the Building. Notwithstanding anything to the contrary in
this Section 6.1, all additions, replacements or alterations to the Premises
which are required due to the enactment of any future building code, law or
regulation of the State of Maryland, Montgomery County or the federal
government shall be performed by Landlord and the cost thereof shall be borne
equally by Landlord and Tenant unless such addition, replacement or alteration
is necessitated by Tenant's particular use, design or layout of the Premises or
caused by Tenant or any of its employees, agents, contractors or subtenants in
which case Tenant shall bear the entire cost of performing such addition,
replacement or alteration.
6.2 Tenant shall pay any business rent or other taxes that are now
or hereafter levied upon Tenant's use or occupancy of the Premises, the conduct
of Tenant's business at the Premises, or Tenant's equipment, fixtures or
personal property. In the event that any such taxes are enacted, changed or
altered so that any of such taxes are levied against Landlord, or the mode of
collection
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of such taxes is changed so that Landlord is responsible for collection or
payment of such taxes, Tenant shall pay any and all such taxes to Landlord upon
written demand from Landlord.
6.3 Tenant shall not generate, dispose of or maintain any toxic
or hazardous substances in the Premises other than cleaning agents and other
substances normally and customarily used by office tenants and which are not
prohibited by applicable law and which Tenant shall store and shall use in
accordance with applicable law.
ARTICLE VII
ASSIGNMENT AND SUBLETTING
7.1 (a) Except as provided in subsection (b) and Section 7.5
below, Tenant shall not have the right to assign, transfer mortgage or otherwise
encumber this Lease or its interest herein without first obtaining the prior
written consent of Landlord, which consent may be granted or withheld by
Landlord in its sole discretion. No assignment or transfer of this Lease or the
right of occupancy hereunder may be effectuated by operation of law or
otherwise without the prior written consent of Landlord, which consent may be
granted or withheld by Landlord in its sole and absolute subjective discretion.
If Tenant is a partnership or limited liability company, a withdrawal or
change, whether voluntary, involuntary or by operation of law, of partners or
members owning, individually or collectively, a controlling interest in Tenant
shall be deemed a voluntary assignment of this Lease and shall be subject to
the foregoing provisions. If Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale or transfer of a
controlling interest of the capital stock of Tenant, shall be deemed a
voluntary assignment of this Lease and subject to the foregoing provisions.
However, the preceding sentence shall not apply to corporations the stock of
which is traded through a national or regional stock exchange. Any attempted
assignment or transfer by Tenant of this Lease or its interest herein without
Landlord's consent shall, at the option of Landlord, terminate this Lease.
However, in the event of such termination, Tenant shall remain liable for all
rent and other sums due under this Lease and all damages suffered by Landlord
on account of such breach by Tenant.
(b) Notwithstanding the restrictions on assignment set
forth in Section 7.1(a) above, Landlord's prior consent shall not be
unreasonably withheld with respect to any assignment of this Lease resulting
from the merger, consolidation, or other corporate reorganization of Tenant, or
the sale or transfer of the capital stock of Tenant, provided that (i) Tenant
after such merger, consolidation, reorganization or sale of stock has a
creditworthiness (e.g. assets and capitalization) and net worth (which shall be
determined on a pro forma basis using generally accepted accounting principles
consistently applied and using the most recent financial statements) at least
equal to that of Tenant at the time of such assignment, (ii) Tenant after such
merger, consolidation, reorganization or sale of stock agrees in writing to be
bound by the terms and conditions of this Lease and to assume all of the
obligations and liabilities of Tenant under this Lease, (iii) Tenant after such
merger, consolidation, reorganization or sale of stock shall conduct
substantially the same business on the Premises as that conducted by Tenant
prior thereto or a related business which is a permitted use pursuant to
Article VI of the Lease, (iv) Tenant provides Landlord with prior written
notice of its
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intent to assign all or a portion of the Premises not more than ninety (90) nor
less than thirty (30) days prior to the date such assignment is to be
effective, (v) the character of Tenant after the merger, consolidation,
reorganization or sale of stock, as the case may be, and the nature of Tenant's
activities on the Premises and in the Office Complex will not adversely affect
other tenants in the Office Complex or impair the reputation of the Office
Complex as a first-class office building, (vi) the assignment is not a
so-called "sham" transaction intended by Tenant to circumvent the provisions of
Article VII of the Lease, (vii) Tenant is not in default under any of the terms
and provisions of this Lease and (viii) the assignment (A) will not result in
an increase in Operating Expenses for the Office Complex beyond that which
Landlord now incurs for use by Tenant or (B) will not increase the burden on
elevators or other Building systems or equipment over the burden prior to such
assignment.
(c) In the event of any such assignment pursuant to
Section 7.1(b) above, Tenant shall remain fully liable as a primary obligor and
principal for Tenant's obligations and responsibilities under this Lease,
including without limitation, the payment of all rent and other charges
required hereunder and the performance of all conditions and obligations to be
performed under this Lease.
7.2 Tenant shall not have the right to sublease (which term, as
used herein shall include any type of subrental arrangement and any type of
license to occupy) all or any part of the Premises without first obtaining the
prior written consent of Landlord, which consent shall not be unreasonably
withheld; provided, however, that it shall not be unreasonable for Landlord to
withhold its consent if Tenant is in default hereunder, or if Landlord
determines, in its sole, but not arbitrary or capricious, discretion, that the
character of the proposed subtenant or the nature of the activities to be
conducted by such proposed subtenant would adversely affect the other tenants
of the Office Complex or would impair the reputation of the Office Complex as a
first-class office building, or that the financial history or credit rating of
the proposed subtenant is unacceptable to Landlord or that the character of the
business to be conducted or the proposed use of the Premises by the proposed
subtenant or assignee (i) is likely to increase Operating Expenses for the
Building or the Office Complex beyond that which Landlord now incurs for use of
by Tenant; (ii) is likely to increase the burden on elevators or other Building
systems or equipment over the burden prior to such proposed subletting or
assignment; or (iii) violates or is likely to violate any provisions or
restrictions contained herein relating to the use or occupancy of the Premises.
Furthermore, Tenant shall not have the right to sublease all or any portion of
the Premises without first complying with the provisions of subsections (a)
through (e) below:
(a) Tenant shall give Landlord written notice of its
desire to Sublease all or a portion of the Premises. Such notice shall specify
the portion of the Premises proposed to be sublet and the date such portion is
to be made available for subleasing. Landlord shall notify Tenant in writing,
within ten (10) days after Landlord's receipt of the notice provided for in
subsection (a) above, whether Landlord will retake possession of the portion of
the Premises proposed to be sublet and thereby delete such portion of the
Premises from the Premises being leased to Tenant hereunder. If Landlord
notifies Tenant of its election to retake such portion of the Premises, Tenant
shall have
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the right to rescind its notice of its intent to sublease all or a portion of
the Premises by notifying Landlord of such recision not more than five (5)
business days after receipt of Landlord's notice of its intent to retake the
portion of the Premises proposed to by sublet by Tenant. In the event Tenant
fails to notify Landlord within such five (5) business day period of its
recision of its notice of intent to sublet all or a portion of the Premises,
(i) Landlord shall retake possession of such portion on the date specified in
Tenant's notice, (ii) Tenant's obligation to pay rent for such portion shall
cease on such date and (iii) Landlord and Tenant shall promptly execute an
amendment to the Lease stating the new square footage of the reduced premises
to be occupied by Tenant. Thereafter, Tenant shall not have any further rights
of any kind, including any rights of renewal, in or to the portion of the
Premises so retaken. If Landlord does not elect to retake such portion of the
Premises within the aforesaid ten (10) day period, Tenant shall comply with the
provisions of subsections (b) and (c) below with respect to any proposed
sublease of such portion of the Premises.
(b) Tenant shall have the right to sublease any portion
of the Premises that Landlord has not elected to retake pursuant to subsection
(a) above, provided that Tenant obtains the prior written consent of Landlord
to such proposed sublease. Landlord agrees not to unreasonably withhold its
consent to any such proposed sublease; provided, however, that it shall not be
unreasonable for Landlord to withhold its consent for any of the reasons set
forth in the introduction to this Section 7.2. Notwithstanding the foregoing,
Tenant shall in no event have the right to sublease the Premises, or any
portion thereof, to more than one subtenant at any one time.
(c) Tenant agrees to give Landlord at least fifteen (15)
days advance written notice of Tenant's intention to sublease a portion of the
Premises, along with sufficient information about the proposed subtenant to
enable Landlord to make the determination called for by subsections (a) and (b)
above.
(d) Tenant's right to sublease any portion of the Premises
that Landlord has not elected to retake pursuant to subsection (a) above shall
expire one hundred twenty (120) days after the giving of the notice required by
subsections (a) and (c). Thereafter, Tenant shall have no right to sublease the
portion of the Premises described in the notice furnished pursuant to
subsections (a) and (d), unless Tenant shall have again complied with the
procedures set forth in this Section 7.2. Notwithstanding anything to the
contrary in this Section 7.2(d), in the event Tenant's ongoing and continuing
negotiations with one (1) prospective subtenant shall extend beyond such one
hundred twenty (120) day period, Tenant shall not be obligated to repeat the
procedures set forth in this Section 7.2, provided that Tenant shall provide
Landlord with written notice that its negotiations with such prospective
subtenant are continuing. In the event Tenant's negotiations with such
prospective subtenant fail after the expiration of such one hundred twenty
(120) day period, Tenant shall have no right to sublease the portion of the
Premises described in the notice furnished pursuant to subsection (a) and
subsection (c) above, to another prospective subtenant, unless Tenant shall
have again complied with the procedures set forth in this Section 7.2.
(e) Provided Tenant is not in default under any terms and
provisions of this Lease, beyond any applicable notice and cure period, Tenant
shall be entitled to retain any profit derived
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from subletting the Premises or any part thereof.
7.3 Notwithstanding the provisions of Section 7.1 or 7.2 hereof to
the contrary, if consent to any assignment or subletting is required by the
holder of any mortgage encumbering all or any portion of the Building or the
Office Complex, no assignment of this Lease or sublease of all or any portions
of the Premises shall be permitted without the prior written consent of such
holder. Landlord agrees to use its reasonable efforts to obtain promptly such
required consent to any proposed subletting. Landlord shall use its reasonable
efforts to ensure that the grounds for any future holder of a mortgage secured
by the Office Complex to withhold its consent to a proposed assignment of this
Lease or sublease of all or any portion of the Premises shall be limited to
those bases specifically enumerated in this Article VII. If any future holder
of a mortgage secured by the Office Complex fails to respond within fifteen
(15) days to a request for its consent to any assignment or subletting
hereunder, such future mortgage holder's consent to such assignment or sublease
in that particular instance shall be deemed to have been granted.
7.4 The consent by Landlord to any assignment or subletting shall
not be construed as a waiver or release of Tenant from any and all liability
for the performance of all covenants and obligations to be performed by Tenant
under this Lease, nor shall the collection or acceptance of rent from any
assignee, transferee or subtenant constitute a waiver or release of Tenant from
any of its liabilities or obligations under this Lease. Landlord's consent to
any assignment or subletting shall not be construed as relieving Tenant from
the obligation of complying with the provisions of Sections 7.1 or 7.2 hereof,
as applicable, with respect to any subsequent assignment or subletting. For any
period during which Tenant is in default hereunder, Tenant hereby assigns to
Landlord the rent due from any subtenant of Tenant and hereby authorizes each
subtenant to pay said rent directly to Landlord. If Landlord consents to an
assignment or subleasing in any instance, Tenant further agrees to submit any
and all instruments of assignment and sublease to Landlord for Landlord's prior
written approval as to form and substance, which approval shall not be
unreasonably withheld, but which instruments shall provide, as an express
condition precedent to Landlord's prior approval, that any sublessee or
assignee agree to remain jointly and severally liable to Landlord for all
obligations imposed by any such agreement of assignment or sublease.
7.5 (a) Notwithstanding the above restrictions on subletting
and assignments, Landlord's prior consent shall not be required with respect to
any assignment or subletting to an "Affiliate of Tenant" (as hereinafter
defined) or a "Parent of Tenant" (as hereinafter defined), provided (i) that
such assignee has a creditworthiness (e.g. assets and capitalization) and net
worth (which shall be determined on a pro forma basis using generally accepted
accounting principles consistently applied and using the most recent financial
statements) at least equal to that of Tenant at the time of such assignment,
(ii) that such assignee or sublessee agrees in writing to be bound by the terms
and conditions of this Lease and to assume all of the obligations and
liabilities of Tenant under this Lease, (iii) that such assignee or sublessee
shall conduct substantially the same business on the Premises as that conducted
by Tenant or a related business which is a permitted use pursuant to Article VI
of this Lease, (iv) that Tenant provides Landlord with prior written notice of
its intent to assign or sublease all or a portion of the Premises not more than
ninety (90) nor less than twenty
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(20) days prior to the date such assignee or sublessee is to occupy the
Premises, (v) that the character of such person or entity and the nature of its
activities on the Premises and in the Office Building will not adversely affect
other tenants in the Office Building or impair the reputation of the Office
Building as a first-class office building, and (vi) that the sublease with such
person or entity is not a so-called "sham" transaction intended by Tenant to
circumvent the provisions of this Article VII, and provided further that if
such Affiliate of Tenant or Parent of Tenant ceases to be an Affiliate of
Tenant or Parent of Tenant, as the case may be, such cessation, at Landlord's
sole option, for all purposes hereunder, shall be a default under this Lease,
unless otherwise agreed to in writing by Landlord and Tenant, for which
Landlord shall have all of the remedies available to it pursuant to Article XIX
hereof, subject to the notice and cure rights provided in Section 19.1(b)
below.
(b) In the event of any such assignment or subletting
pursuant to this Section 7.5, Tenant shall remain fully liable as a primary
obligor and principal for Tenant's obligations and responsibilities under this
Lease, including without limitation, the payment of all rent and other charges
required hereunder and the performance of all conditions and obligations to be
performed under this Lease.
(c) For purposes of this Section 7.5, an "Affiliate of
Tenant" shall mean any corporation, limited liability company, association,
trust or partnership (i) which Controls (as herein defined) Tenant or (ii)
which is under the Control of Tenant through stock ownership or otherwise or
(iii) which is under common Control with Tenant. For the purposes hereof, a
"Parent of Tenant" shall mean any corporation, limited liability company,
association, trust or partnership (i) which Controls Tenant or (ii) which owns
more than fifty percent (50%) of the issued and outstanding voting securities
of Tenant. The terms "Control" or "Controls" as used in this Section 7.5 shall
mean the power to directly or indirectly influence the direction, management or
policies of Tenant or such other entity.
7.6 Notwithstanding anything to the contrary in this Article VII,
in those cases in which the layout of the subleased premises or the nature of
the activities to be conducted therein will be changed by the proposed
subtenant in any manner, Landlord's consent to any proposed sublease shall be
conditioned on receipt of the certificate of a licensed mechanical engineer
employed by the proposed subtenant, as follow:
a. describing the changes which the proposed subtenant
wishes to make to the layout of the subleased premises or the activities
conducted therein;
b. stating whether or not such changes will affect the
load requirements or operating efficiency of any of the Building systems or
utilities serving the subleased premises (such as, for example, the HVAC or
electrical systems);
c. if the changes are substantial enough to affect the
load requirements or operating efficiency of any of the Building systems or
utilities serving the subleased premises, describing the modifications to the
affected Building system or utility necessary to satisfy the load
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capacity and operating efficiency thereof and stating that such modifications
fully comply with the requirements of all applicable building codes and
insurance rating bureaus as well as the standards to which the base building
systems were designed.
Further, the proposed subtenant, by its execution of the sublease agreement,
shall agree to be fully responsible, at its sole cost and expense, to assure
that the modifications, if any, described in its engineer's certificate are
installed in accordance with the requirements of all applicable building codes
and insurance rating bureaus and, further, at the expiration or earlier
termination of the sublease, to restore the subleased premises to the condition
and configuration in which it existed prior to the inception of the sublease.
ARTICLE VIII
MAINTENANCE AND REPAIRS
8.1 Tenant will keep and maintain the Premises and all fixtures
and equipment located therein in clean, safe and sanitary condition, will take
good care thereof and make all required repairs thereto, and will suffer no
waste or injury thereto. At the expiration or earlier termination of the Lease
Term, Tenant shall surrender the Premises, broom clean, in the same order and
condition in which they are in on the Lease Commencement Date, ordinary wear
and tear and unavoidable damage by the elements excepted. Landlord, at its
cost, shall install all replacement tubes for all fluorescent light fixtures in
the Premises on the Lease Commencement Date. All other bulbs, tubes and
lighting fixtures for the Premises shall be provided and installed by Landlord
at Tenant's cost and expense and as additional rent.
8.2 Except as otherwise provided in Article XVII hereof, all
injury, breakage and damage to the Premises and to any other part of the Office
Complex caused by any act or omission of Tenant, or of any agent, employee,
subtenant, contractor, customer or invitee of Tenant, shall be repaired by and
at the sole expense of Tenant, except that Landlord shall have the right, at
its option, to make such repairs and to charge Tenant as additional rent for
all costs and expenses reasonably incurred by Landlord in light of the urgency,
as determined by Landlord in its sole judgment, of the repairs, solely in
connection therewith as additional rent hereunder. The liability of Tenant for
such costs and expenses shall be reduced by the amount of any insurance
proceeds received by Landlord on account of such injury, breakage or damage.
8.3 Landlord shall keep and maintain the exterior and demising
walls, foundations, roof and common areas that form a part of the Building, and
the mechanical, electrical, HVAC and plumbing systems, pipes and conduits that
are provided by Landlord in the operation of the Building or, on a
non-exclusive basis, the Premises in clean, safe, sanitary and operating
condition in accordance with standards customarily maintained by first-class
office buildings in the Bethesda, Maryland area, and will make all required
repairs thereto. All common or public areas of the Office Complex and the land
upon which it is situated (including without limitation the first floor lobby
area and the exterior landscaping) shall be maintained by Landlord in
accordance with standards customarily maintained by first-class office
buildings in the Bethesda, Maryland area. Tenant shall
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promptly provide Landlord with written notice of any defect or need for repairs
in or about the Office Complex or the Building of which Tenant is aware;
provided, however, Landlord's obligation to repair hereunder shall not be
limited to matters of which it has been given notice by Tenant.
ARTICLE IX
TENANT ALTERATIONS
9.1 (a) The Premises shall be delivered to and accepted by
Tenant in their present "AS-IS, WHEREIS WITH ALL FAULTS" condition. Tenant
during the initial sixty (60) days of the Lease Term shall cause certain
alterations, renovations and modifications to be made to the tenant
improvements in the Premises in accordance with (i) the space plan for the
Premises dated May 22, 1998 prepared by Simmons & Associates (the
"Architect") which has been approved by Landlord, (the "Space Plan") a copy
which is attached hereto as Exhibit B and made a part hereof and (ii) the
construction drawings and specifications for the Premises (collectively the
"Construction Drawings) which shall be prepared by the Architect based upon the
Space Plan and shall be subject to the prior written approval of Landlord and
Tenant (the Space Plan and the Construction Drawings are referred to
collectively herein as the "Space Plan and Construction Drawings").
(b) All alterations, renovations, modifications and
improvements which are made to the Premises pursuant to this Section 9.1(i)
shall be done in accordance with the Space Plan and Construction Drawings, (ii)
shall be subject to the provisions of this Article IX and Article XIII hereof
and (iii) shall be made at Tenant's sole cost; provided, however, that Landlord
agrees to provide Tenant with an improvement allowance (the "Tenant Improvement
Allowance") in an amount equal to the product of Ten Dollars ($10.00)
multiplied by the number of square feet of Net Rentable Area in the Premises.
The Tenant Improvement Allowance shall be applied, as hereinafter set forth, to
all "hard" and "soft" costs incurred in connection with the design,
modification, alteration, renovation, construction and installation of the
tenant improvements in the Premises, including, without limitation, any and all
architectural, engineering and consulting fees and cabling and wiring fees in
connection therewith. In the event the entire Tenant Improvement Allowance is
not utilized by Tenant in connection with designing, renovating, altering and
upgrading the tenant improvements in the Premises, such unused portion of the
Tenant Improvement Allowance shall be applied against the initial
installment(s) of base rent due with respect to the Premises pursuant to
Article III hereof
(c) (i) Tenant and the Architect shall cause the Space
Plan and Construction Drawings to conform to all rules and regulations of the
Underwriter's Association of the State of Maryland in effect at the time this
Lease is executed and with all applicable laws, statutes, rules, regulations
and requirements of the Federal, Montgomery County and State of Maryland
governments, including, without limitation, the Americans with Disabilities Act
of 1990 and with all Insurance Requirements, as defined in Section 9.2 below.
The work shown on Space Plan and Construction Drawings is referred to
throughout this Lease as the "tenant improvements." Tenant and the Architect
shall consult with Landlord's engineers and consultants, without charge
therefor,
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in connection with the preparation of all architectural, structural,
mechanical, plumbing and electrical working drawings for the tenant
improvements.
(ii) Any material changes or modifications that
Tenant desires to make to such plans or working drawings shall also be subject
to Landlord's prior written approval. Landlord agrees that it will not
unreasonably withhold, delay or condition its approval of any changes or
modifications of the Space Plan and Construction Drawings; provided, however,
that Landlord shall have sole and absolute discretion to approve or disapprove
any tenant improvements (I) that will be visible to the exterior of the
Premises, (II) which affect the structural integrity of the Building or the
mechanical, HVAC, sprinkler, life safety and other operating systems therein,
or (III) which would cause the overloading of the Building's electrical system
or would require any material modifications thereto.
(iii) Tenant shall employ a general contractor to
serve as its general contractor to make the tenant improvements to the
Premises. The contractor selected by Tenant shall be subject to the prior
written approval of Landlord, which approval shall not be unreasonably
withheld, conditioned or delayed. Landlord agrees to pay Tenant's general
contractor, promptly upon Landlord's receipt of (I) monthly invoices for work
performed and materials supplied and (II) lien releases for the amount of the
applicable invoice, up to the amount of the Tenant Improvement Allowance. Upon
completion of the installation of the tenant improvements in the Premises,
Tenant shall deliver to Landlord (A) a verification of the costs of the
installation of the tenant improvements in the Premises from Tenant's
contractor in the form of an AIA form of requisition or other form reasonably
approved by Landlord, (B) final lien waivers furnished by Tenant's general
contractor and its major subcontractors and material suppliers (that is,
subcontractors and suppliers furnishing labor or materials in excess of $5,000)
with respect to the tenant improvements and (C) the certification by the
Architect that the tenant improvements have been performed or supplied, which
certifications (and any inspections required therefor) shall be made promptly
by the Architect.
(iv) Landlord, Tenant and Tenant's general
contractor shall establish a mutually agreeable construction schedule (the
"Construction Schedule"). The Construction Schedule shall incorporate review
submission procedures and such other controls as are necessary for the timely
and efficient completion of the tenant improvements in the Premises. Landlord
shall have no liability or responsibility for the Construction Schedule for the
tenant improvements to be constructed in the Premises by Tenant.
(v) Prior to the commencement of the construction
and installation of any tenant improvements in the Premises, Tenant shall
provide Landlord with a certificate issued by Tenant's liability and property
damage insurance carrier or carriers which shall certify that Tenant's
insurance will be available to cover any loss, damage or injury to persons or
property caused or occasioned by Tenant's contractor or the work to be done by
Tenant's contractor in the Premises up to Five Million Dollars ($5,000,000.00)
and subject to any insurance coverage provided by Tenant's general contractor.
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(vi) Tenant shall be responsible for obtaining all
governmental permits, licenses or approvals necessary to construct and install
the tenant improvements in the Premises. Tenant agrees to comply with all terms
and conditions of all such governmental permits, licenses and approvals. Copies
of all permits and final inspection certificates shall be provided to Landlord
as Tenant receives them from the issuing governmental authority.
(vii) All work done and materials furnished in
connection with the construction and installation of the tenant improvements in
the Premises shall be of good quality, shall be performed in a good and
workmanlike manner, free from faults and defects and in accordance with the
Space Plan and Construction Drawings as approved by Landlord, and shall be in
compliance with all applicable laws and regulations. Tenant agrees to proceed,
and to cause the Architect and its contractor to proceed, diligently to
complete the tenant improvements in the Premises as soon as practicable.
(viii) Landlord's architect or other representative
designated by Landlord shall have the right to inspect Tenant's work in the
Premises prior to any disbursement of the Tenant Improvement Allowance or at
any other time reasonably requested by Landlord.
(ix) Tenant shall be solely responsible to correct
and repair any work or materials installed in the Premises by Tenant or
Tenant's contractor that prove defective as a result of faulty workmanship or
materials. Further, Tenant agrees that Landlord shall have no liability to
Tenant whatsoever on account of any work performed or materials provided by
Tenant or Tenant's contractor. Tenant agrees to indemnify and hold Landlord
harmless from and against any and all costs, expenses, liens, claims,
liabilities or damages based on or arising, directly or indirectly, by reason
of any work performed or materials provided by Tenant or Tenant's contractor.
(x) Tenant and Tenant's contractor shall conduct
their work pursuant to this Lease in a manner which shall minimize disruption
and inconvenience to other tenants in the Building and the Office Complex.
Public areas shall be kept clean at all times; debris shall be removed at the
end of each work day; reasonable steps shall be taken to minimize dust and
noise; and work shall be conducted only during normal working hours unless
Landlord otherwise agrees in advance. Tenant shall promptly repair, at its sole
expense, any damage done to the Building or the Office Complex, to other
premises in the Building or the Office Complex, to any electrical, mechanical,
HVAC, sprinkler, life safety and other operating systems within the Office
Complex or to the Garage or surface parking areas or other common areas
appurtenant to the Office Complex which are caused by or arise out of the work
to be performed by Tenant under this Section 9.1(d).
(xii) Tenant shall provide Landlord with one (1) set
of as-built construction drawings on CAD computer disc, upon completion of the
tenant improvements in the Premises.
(xiii) Tenant, Tenant's general contractor and its
subcontractor shall observe all reasonable rules and regulations of Landlord
relating to the construction of tenant improvements in the Premises, including,
without limitation, (1) that the requirements of Industrial Risk Insurers,
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Bethesda, Montgomery County, Maryland, concerning fire protection be met and
(2) other reasonable requirements of Landlord or its insurance carrier or
consultant be satisfied. Such rules and regulations shall be communicated to
Tenant in writing prior to commencement of Tenant's work in the Premises.
(d) Except as otherwise provided in this Lease, it is
understood and agreed that Landlord will not make, and is under no obligation
to make, any structural or other alterations, decorations, additions or
improvements in or to the Premises.
(e) Tenant shall cause or shall be responsible for the
preparation of the Space Plan and Construction Drawings at Tenant's sole cost
and expense, subject to the Tenant Improvement Allowance. The Space Plan and
Construction Drawings must conform to all rules and regulations of the
Underwriter's Association of the State of Maryland in effect at the time this
Lease is executed and with all applicable laws, statutes, rules, regulations
and requirements of the Federal, Montgomery County and the State of Maryland
governments, including, without limitation, the Americans with Disabilities Act
of 1990 and with all Insurance Requirements, as defined in Section 9.2 below.
Tenant, if required to do so by Landlord, shall consult with Landlord's
engineers and consultants, without charge therefor, in connection wit the
preparation of all architectural, structural, mechanical, plumbing and
electrical working drawings for the construction and installation of the tenant
improvements in the Premises. Landlord's written approval or disapproval of the
Space Plan and Construction Drawings or any material modification or change
thereto shall be provided by Landlord to Tenant not more than five (5) business
days after Landlord receives Tenant's submission of the Space Plan or the
Construction Drawings or any material change or modification thereto. The Space
Plan, the Construction Drawings or any material change or modification thereto
which is not disapproved (with a reasonably detailed justification therefor) by
Landlord in writing within such five (5) business day period shall be deemed
approved. The provisions of Section 28.6 below to the contrary notwithstanding,
Landlord's notice to Tenant of Landlord's approval or disapproval of the Space
Plan, the Construction Drawings or any material change or modification thereto
may be provided by Landlord to Tenant by facsimile transmission.
9.2 Tenant will not make or permit anyone to make any alterations,
decorations (visible to the exterior of the Building or the Office Complex or
to the common or public areas of the Building or the Office Complex), additions
or improvements (hereinafter referred to collectively as "improvements"),
structural or otherwise, in or to the Premises or the Office Complex, without
the prior written consent of Landlord. The preceding sentence notwithstanding,
improvements to the interior of the Premises which (i) are not readily visible
to the exterior of the Building or the Office Complex or the common and public
areas thereof, (ii) are not structural, (iii) do not affect the electrical or
mechanical systems within the Building and (iv) are otherwise in conformance
with all applicable building, zoning and other codes or regulations affecting
the Building and the Office Complex, shall be subject to the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed. When granting its consent, Landlord may impose any conditions it deems
appropriate, including, without limitation, the approval of plans and
specifications, approval of the contractor or other persons who will perform
the work, and the obtaining of required permits
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and specified insurance. All improvements permitted by Landlord must conform to
and comply with all rules and regulations established from time to time by the
Underwriters' Association of the State of Maryland and to all laws, regulations
and requirements of the Federal, State and local governments. Landlord's review
and approval of any such plans and specifications and consent to perform work
described therein shall not be deemed an agreement by Landlord that such plans,
specifications and work conform with all applicable Legal Requirements and
requirements of the insurers of the Office Complex ("Insurance Requirements")
nor deemed a waiver of Tenant's obligations under this Lease with respect to
Legal Requirements and Insurance Requirements nor impose any liability or
obligation upon Landlord with respect to the completeness, design sufficiency
or compliance with Legal Requirements or Insurance Requirements of such plans,
specifications and work. As a condition precedent to such written consent of
Landlord, Tenant agrees to obtain and deliver to Landlord written,
unconditional waivers of mechanic's and materialmen's liens against the Office
Complex and the land upon which it is situated from all proposed contractors,
subcontractors, laborers and material suppliers for all work, labor and
services to be performed and materials to be furnished in connection with
improvements to the Premises. If, notwithstanding the foregoing, any mechanic's
or materialmen's lien is filed against the Premises, the Office Complex and/or
the land upon which it is situated, for work claimed to have been done for, or
materials claimed to have been furnished to, the Premises, such lien shall be
discharged or bonded off by Tenant within twenty (20) days thereafter, at
Tenant's sole cost and expense, by the payment thereof or by the filing of a
surety bond in form and substance acceptable to Landlord. If Tenant shall fail
to discharge any such mechanic's or materialmen's lien, Landlord may, at its
option, discharge such lien and treat the cost thereof (including attorneys'
fees incurred in connection therewith) as additional rent payable with the next
monthly installment of base rent falling due; it being expressly agreed that
such discharge by Landlord shall not be deemed to waive or release the default
of Tenant in not discharging such lien. It is understood and agreed that any
improvements to the Premises, other than those made by Landlord pursuant to
Section 9.1 above, shall be conducted on behalf of Tenant, and that Tenant
shall be fully responsible therefor. It is further understood and agreed that
in the event Landlord shall give its written consent to the making of any
improvements to the Premises, such written consent shall not be deemed to be an
agreement or consent by Landlord to subject its interest in the Premises, the
Office Complex or the land upon which it is situated to any mechanic's or
materialmen's liens which may be filed in connection therewith.
9.3 Tenant shall indemnify and hold Landlord harmless from and
against any and all expenses, liens, claims, liabilities and damages based on
or arising, directly or indirectly, by reason of the making of any improvements
to the Premises by Tenant, or its contractors, agents or employees. If any
improvements are made without the prior written consent of Landlord, Landlord
shall have the right to remove and correct such improvements and restore the
Premises to their condition immediately prior thereto, and Tenant shall be
liable for all expenses incurred by Landlord in connection therewith. All
improvements to the Premises or the Office Complex made by either party shall
remain upon and be surrendered with the Premises as a part thereof at the end
of the Lease Term, except that if Tenant is not in default, beyond any
applicable notice and cure period, under this Lease, Tenant shall have the
right to remove, prior to the expiration of the Lease Term, all movable
furniture, furnishings and equipment installed in the Premises solely at the
expense of
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Tenant. All damage and injury to the Premises or the Office Complex caused by
such removal shall be repaired by Tenant at Tenant's sole expense. If such
property of Tenant is not removed by Tenant prior to the expiration or
termination of this Lease, the same shall become the property of Landlord and
shall be surrendered with the Premises as a part thereof.
ARTICLE X
SIGNS AND FURNISHINGS
10.1 No sign, advertisement or notice referring to Tenant shall be
inscribed, painted, affixed or otherwise displayed on any part of the exterior
or the interior of the Office Complex, except on the directories and doors of
offices and such other areas as are designated by Landlord, and then only in
such place, number, size, color and style as are approved by Landlord and are
in accordance with any applicable Montgomery County building code or zoning
regulation. The preceding sentence notwithstanding, Landlord agrees to install
at Landlord's cost and expense, Tenant's name and suite number, using building
standard graphic design and building standard materials, on one (1) suite entry
door or adjacent side light to the Premises. In addition, Tenant shall be
provided, at Landlord's expense, eight (8) lines on the Building directory. All
of Tenant's signs that are approved by Landlord shall be installed by Landlord
at Tenant's cost and expense. If any sign, advertisement or notice that has not
been approved by Landlord is exhibited or installed by Tenant, Landlord shall
have the right to remove the same at Tenant's expense. Landlord's acceptance of
any name for listing on the Building directory will not be deemed, nor will it
substitute for, Landlord's consent, as required by this Lease, to any sublease,
assignment or other occupancy of the Premises. Landlord shall have the right to
prohibit any advertisement of or by Tenant which in its opinion tends to impair
the reputation of the Office Complex or its desirability as a first class
office building and, upon written notice from Landlord, Tenant shall
immediately refrain from and discontinue any such advertisement. Landlord
reserves the right to affix, install and display signs, advertisements and
notices on any part of the exterior or interior of the Office Complex.
10.2 Landlord shall have the right to prescribe the weight and
position of safes and other heavy equipment and fixtures, which, if considered
necessary by the Landlord, shall be installed in such manner as Landlord
directs in order to distribute their weight adequately. Any and all damage or
injury to the Premises or the Office Complex caused by moving the property of
Tenant into or out of the Premises, or due to the same being in or upon the
Premises, shall be repaired at the sole cost of Tenant. No furniture, equipment
or other bulky matter of any description will be received into the Office
Complex or carried in the elevators except as approved by Landlord, and all
such furniture, equipment and other bulky matter shall be delivered only
through the designated delivery entrance of the Office Complex and the
designated freight elevator. All moving of furniture, equipment and other
materials shall be under the supervision of Landlord, who shall not, however,
be responsible for any damage to or charges for moving the same. Tenant agrees
to remove promptly from the sidewalks adjacent to the Office Complex any of
Tenant's furniture, equipment or other material there delivered or deposited.
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ARTICLE XI
TENANT'S EQUIPMENT
11.1 After the Premises have been substantially completed and
Tenant's equipment has been installed in the Premises in accordance with the
Space Plan and Construction Drawings, Tenant will not install or operate in the
Premises any electrically operated equipment or machinery that operates on
greater than 110 volt power without first obtaining the prior written consent
of Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed, provided, however, it shall not be unreasonable for Landlord to
condition such consent upon the payment by Tenant of additional rent in
compensation for the excess consumption of electricity or other utilities and
for the cost of any additional wiring or apparatus that may be occasioned by
the operation of such equipment or machinery and/or for the cost of obtaining
and installing a separate meter or other apparatus necessary to measure the
electrical or other utility consumption of additional equipment or machinery
and/or (b) the non-interruption or non-disturbance of any other tenant in the
Office Complex that may be occasioned by the operation of such equipment or
machinery. Tenant shall not install any equipment of any type or nature that
will or may necessitate any changes, replacements or additions to, or in the
use of, the water system, heating system, plumbing system, air conditioning
system or electrical system of the Premises or the Office Complex, without
first obtaining the prior written consent of Landlord. Business machines and
mechanical equipment belonging to Tenant which cause noise or vibration that
may be transmitted to the structure of the Office Complex or to any space
therein to such a degree as to be objectionable to Landlord or to any tenant in
the Office Complex shall be installed and maintained by Tenant, at Tenant's
expense, on vibration eliminators or other devices sufficient to reduce such
noise and vibration to a level satisfactory to Landlord.
11.2 (a) Tenant acknowledges that the previous occupant of the
Premises (the "Previous Occupant") installed a supplemental HVAC unit (the
"HVAC Unit") in a portion of the Premises. Tenant shall operate, properly
maintain and pay the cost of all electric and other utilities incurred in
connection with the operation of the HVAC Unit. The HVAC Unit and the electric
meter measuring the electric consumption of the HVAC Unit shall be properly
maintained by Tenant, at Tenant's sole expense. At the expiration or earlier
termination of the Lease Term, the HVAC Unit shall be removed from the Premises
at Tenant's sole cost and expense. Tenant shall pay all subscription fees,
usage charges and hook-up and disconnection fees associated with Tenant's use
of the HVAC Unit and Landlord shall have no liability therefor. All of the
provisions of this Lease, including, without limitation, the insurance
provisions set forth in Article XIII and the release and indemnification
provisions in respect of Tenant's improvements set forth in Sections 8.2, 9.3,
15.1 and 15.2 hereof, shall apply and be applicable to Tenant's operation,
maintenance and removal of the HVAC Unit.
(b) Tenant acknowledges and agrees that at the expiration
or earlier termination of the Lease Term, Tenant, at Tenant's sole cost and
expense, (i) shall cause a licensed contractor, approved in advance by
Landlord, to remove from the Premises and the Building, as applicable, the
following equipment: (A) one (1) four (4) ton HVAC unit, (B) One (1) five (5)
ton HVAC unit, (C)
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one (1) pump in the penthouse area of the Building and (D) one (1) dry cooler
which is located on the roof of the Building (A, B and C are referred to
collectively herein as the "HVAC Equipment") and (ii) shall cause a licensed
contractor, approved in advance by Landlord, to return the Premises and the
heating, ventilation, air conditioning and all other systems servicing the
Premises and the Building to the condition that they were in immediately prior
to the installation or modification of equipment or such systems, reasonable
wear and tear excepted. Tenant, at its sole cost and expense shall secure all
necessary permits and approvals from all applicable governmental agencies with
respect to the removal of the HVAC Equipment. During the Lease Term, Tenant
shall comply with all Legal Requirements which relate to the HVAC Equipment or
the use, maintenance, operation, or removal thereof, including those relating
to or which necessitate structural changes or improvements or alteration,
repair or removal of the HVAC Equipment, the Building or the Office Complex
(collectively, the "Requirements"). If Tenant fails to comply with any
Requirement or breaches the obligations stated in this Lease or if the presence
of any Hazardous Material, as defined below, in the Building caused or
permitted by Tenant results in contamination of the Building or if
contamination by Hazardous Material otherwise occurs for which Tenant is
legally liable to Landlord for damage therefrom, then Tenant shall indemnify,
defend and hold Landlord, its partners and its partners' partners and their
employees, shareholders, officers and directors and the holder of any deed or
trust secured by the Office Complex or the Building harmless from any and all
claims, judgments, damages, penalties, fines, costs, liabilities or losses
(including, without limitation, diminution in value of the Building or the
Office Complex, damages for the loss or restriction on use of the Building or
the Office Complex and sums paid in settlement of claims, attorneys' fees,
consultant fees and expert fees) which arise during or after the Lease Term as
a result of Tenant's failure to comply with any Requirement or as a result of
such contamination. This indemnification of Landlord 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 such failure to comply or because of Hazardous Material arising
from, caused by or in any way related to the HVAC Equipment being present in
the Building. For the purpose of this letter "Hazardous Material" means any
hazardous or toxic substance, material or waste which is or becomes regulated
by the United States Government, the State of Maryland, Montgomery County or
any other local or municipal governmental or quasi-governmental authority.
Hazardous Material includes, without limitation, petroleum and all fractions
thereof. Without limiting any of the foregoing, if the presence of any
Hazardous Material in the Building caused or permitted by Tenant results in any
contamination, Landlord, at Tenant's sole cost and expense, shall take all
actions as are necessary to return the Office Complex and the Building to the
condition existing prior to the introduction of any such Hazardous Material.
Not more than three (3) business days after its receipt of any such notice,
Tenant shall provide Landlord with a copy of any notice or other communication
which Tenant receives from the United States Government, the State of Maryland,
Montgomery County or any other local or municipal governmental or
quasi-governmental authority regarding the HVAC Equipment or the violation of
any Requirement.
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ARTICLE XII
INSPECTION BY LANDLORD
12.1 Tenant will permit Landlord, or its agents or representatives,
to enter the Premises, without charge therefor to Landlord and without
diminution of the rent payable by Tenant, to examine, inspect and protect the
Premises and the Office Complex, to make such alterations or repairs as in the
sole judgment of Landlord may be deemed necessary, or to exhibit the same to
prospective tenants during the last one hundred eighty (180) days of the Lease
Term. In connection with any such entry, Landlord shall endeavor to provide
twenty-four (24) hours prior to notice to Tenant (except in the case of an
emergency) and to minimize the disruption to Tenant's use of the Premises.
ARTICLE XIII
INSURANCE
13.1 Tenant shall not conduct or permit to be conducted any
activity, or place any equipment in or about the Premises or the Building,
which will in any way increase the rate of fire insurance or other insurance on
the Building. If any increase in the rate of fire insurance or other insurance
is stated by any insurance company or by the applicable Insurance Rating Bureau
to be due to any activity or equipment of Tenant in or about the Premises or
the Building, such statement shall be conclusive evidence that the increase in
such rate is due to such activity or equipment and, as a result thereof, Tenant
shall be liable for the amount of such increase. Tenant shall reimburse
Landlord for such amount upon written demand from Landlord and such sum shall
be considered additional rent payable hereunder.
13.2 Throughout the Lease Term, Landlord shall insure the Building
of which the Premises are a part against loss due to fire and other casualties
included in standard extended coverage insurance policies in an amount equal to
at least 90% of the replacement cost thereof, exclusive of architectural and
engineering fees, excavation, footings and foundations. Such insurance shall
also cover the initial tenant improvements installed in the Premises by
Landlord in accordance with Section 9.1 hereof, but shall not cover Tenant's
furniture, fixtures, equipment or other personal property of Tenant on the
Premises.
13.3 Throughout the Lease Term, Tenant shall insure the contents of
the Premises, including its furnishings, fixtures and equipment used or
installed in the Premises by Tenant, and any other personal property of Tenant
in the Premises, against loss due to fire and other casualties included in
standard extended coverage insurance policies, in minimum amounts reasonably
approved by Landlord from time to time, provided, however, that Tenant shall
not be obligated to insure the contents of the Premises for more than the full
replacement cost thereof. Throughout the Lease Term, Tenant shall obtain and
maintain comprehensive public liability insurance in a company or companies
licensed to do business in the State of Maryland and reasonably approved by
Landlord. Such insurance shall be for coverage equivalent to a comprehensive
single limited policy of not less than Two Million Dollars ($2,000,000.) and
shall be issued for a minimum term of one (1) year. In
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addition, said policies of insurance shall name Landlord, including the
constituent partners of Landlord, Boston Properties, Inc. as managing agent of
the Office Complex, and, if requested, the holder of any mortgage or deed of
trust secured by the Office Complex as additional insureds. If requested by
Landlord, receipts or certificates evidencing payment of the premiums for such
insurance shall be delivered by Tenant at least annually. Each such policy
shall contain an endorsement prohibiting cancellation or reduction of coverage
without first giving Landlord and the holder of any mortgage or deed of trust
on the Building at least thirty (30) days' prior written notice of such
proposed action.
13.4 Tenant hereby waives its right of recovery against Landlord
and releases Landlord from any claim arising out of losses, claims, casualties
or other damages for which Landlord may otherwise be liable to the extent
Tenant is either required to maintain insurance pursuant to this Article XIII
or receives insurance proceeds on account thereof. Landlord hereby waives its
right of recovery against Tenant and releases Tenant from any claim arising out
of losses, claims, casualties or other damages for which Tenant may otherwise
be liable to the extent Landlord is either required to maintain insurance
pursuant to this Article XIII or receives insurance proceeds on account
thereof. Each policy obtained by the either party pursuant to the provisions of
this Article XIII shall include a waiver of the insurer's right of subrogation
against the other party, and shall contain an endorsement to the effect that
any loss payable under such policy shall be payable notwithstanding any act or
negligence of such other party, or its agents, contractors or employees, which
might, absent such agreement, result in the forfeiture of payment for such
loss.
ARTICLE XIV
SERVICES AND UTILITIES
14.1 Landlord shall furnish to the Premises year-round ventilation
and air conditioning and heat during the seasons when they are required, as
determined in Landlord's reasonable judgment. Landlord shall also provide
reasonably adequate electricity, water, exterior window-cleaning service, and
char and janitorial service after 6:00 p.m. on Monday through Friday only
(excluding legal holidays), as determined in Landlord's reasonable judgment,
and in accordance with standards customarily provided in first class office
buildings in the Bethesda, Maryland area. Landlord will also provide elevator
service; provided, however, that Landlord shall have the right to remove
elevators from service as may be required for moving freight, or for servicing
and maintaining the elevators or the Office Complex. At least one elevator cab
shall be available for use by Tenant at all times. The normal hours of
operation of the Office Complex will be 7:30 a.m. to 7:00 p.m. on Monday
through Friday (except legal holidays), and 8:00 a.m. to 2:00 p.m. on Saturday
(except legal holidays). There will be no normal hours of operation of the
Office Complex on Sundays or legal holidays and Landlord shall not be obligated
to maintain or operate the Office Complex at such times unless special
arrangements are made by Tenant. The services and utilities required to be
furnished by Landlord, other than electricity and water, will be provided only
during the normal hours of operation of the Office Complex, except as otherwise
specified herein. It is agreed that if Tenant requires air conditioning or heat
beyond the normal hours of operation set forth herein, Landlord will furnish
such air conditioning or heat, provided Tenant gives Landlord's agent
sufficient advance
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notice of such requirement and Tenant agrees to pay for the cost of such extra
service as additional rent in accordance with Landlord's then current schedule
of costs and assessments for such extra service. Landlord agrees to provide an
access system in the Office Complex comparable to access systems in first class
office buildings in the Bethesda, Maryland area, which shall permit Tenant to
have access to the Premises on a 24-hour, seven-days-a-week basis.
14.2 It is understood and agreed that Landlord shall not have any
liability to Tenant whatsoever as a result of Landlord's failure or inability
to furnish any of the utilities or services required to be furnished by
Landlord hereunder, whether resulting from breakdown, removal from service for
maintenance or repairs, strikes, scarcity of labor or materials, acts of God,
governmental requirements or from any other cause whatsoever. Any such failure
or inability to furnish the utilities or services required hereunder shall not
be considered an eviction, actual or constructive, of Tenant from the Premises,
or a violation of the covenant of quiet enjoyment and shall not entitle Tenant
to terminate this Lease or to an abatement of any rent payable hereunder.
14.3 (a) Notwithstanding provisions of Section 14.2 to the
contrary, if (i) the services described in Section 14.1 hereof are interrupted
for a period of more than ten (10) consecutive business days, (ii) Landlord has
not commenced or is not diligently pursuing curing such interruption, (iii)
such interruption is not the result of strikes, unavailability of parts or
other materials, or any other cause beyond Landlord's control, and (iv) such
interruption renders all or a substantial portion of the Premises unusable by
Tenant, then Tenant shall be entitled to a pro rata abatement of rent beginning
on the eleventh (11th) consecutive business day that the Premises are unusable
and continuing until the use of all or a substantial portion of the Premises is
restored to Tenant.
(b) Landlord will use its reasonable and good faith
efforts (including, in Landlord's sole discretion, reasonable expenditures of
money) to cause the restoration of any interrupted utility services; further,
should any equipment or machinery in the Building break down so as to render
the Premises unusable by Tenant, Landlord shall promptly repair or replace it
(subject to delays which result from strikes, unavailability of parts or other
materials, or other matters beyond Landlord's control).
14.4 The parties hereto agree to comply with all mandatory and
voluntary energy conservation controls and requirements applicable to office
buildings that are imposed or instituted by any public authority, including but
not limited to, controls on the permitted range of temperature settings in
office buildings, and requirements necessitating curtailment of the volume of
energy consumption or the hours of operation of the Office Complex. Any terms
or conditions of this Lease that conflict or interfere with compliance with
such controls or requirements shall be suspended for the duration of such
controls or requirements. Compliance with such controls or requirements shall
not be considered an eviction, actual or constructive, of Tenant from the
Premises or a violation of the covenant of quiet enjoyment and shall not
entitle Tenant to terminate this Lease or to an abatement of any rent payable
hereunder.
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14.5 Tenant shall reimburse Landlord as additional rent for any
excess water usage in the Premises. "Excess water usage" shall mean the excess
of Tenant's water usage during any billing period for water services over the
estimated average water usage during the same period for other tenants of the
Office Complex, as computed by Landlord. Landlord agrees that normal office use
of the existing improvements in the Premises and any improvements to the
Premises shown on the Space Plan which utilize water, shall be considered
standard water usage.
ARTICLE XV
LIABILITY OF LANDLORD
15.1 Landlord shall not be liable to Tenant, its employees, agents,
business invitees, licensees, customers, clients, family members or guests for
any damage, injury, loss, compensation or claim, including, but not limited to,
claims for the interruption of or loss to Tenant's business, based on, arising
out of or resulting from any cause whatsoever, including but not limited to the
following: repairs, or lack thereof, to any portion of the Premises or the
Office Complex; interruption in the use of all or any part of the Premises; any
accident or damage resulting from the use or operation (by Landlord, Tenant or
any other person or persons) of elevators, or of the heating, cooling,
commuinications, electrical or plumbing equipment or apparatus; the termination
of this Lease by reason of the destruction of the Premises, the Building or the
Office Complex; any fire, robbery, theft, mysterious disappearance or any other
casualty; the actions of any other tenants of the Office Complex or of any
other person or persons; and any leakage in any part or portion of the Premises
or the Office Complex, or from water, rain or snow that may leak into, or flow
from, any part of the Premises or the Office Complex, or from drains, pipes or
plumbing fixtures in the Office Complex. Any goods, property or personal
effects stored or placed by Tenant or its employees in or about the Premises or
Office Complex shall be at the sole risk of Tenant, and Landlord shall not in
any manner be held responsible therefor. It is understood that the employees of
Landlord are prohibited from receiving any packages or other articles delivered
to the Office Complex for Tenant, and if any such employee receives any such
package or articles, such employee shall be acting as the agent of Tenant for
such purposes and not as the agent of Landlord. Notwithstanding the foregoing
provisions of this Section 15.1, Landlord shall not be released from liability
to Tenant for damage or injury caused by the wilful misconduct or negligence of
Landlord, its employees or agents; provided, however, in no event shall
Landlord have any liability to Tenant for any claims based on the interruption
of or loss to Tenant's business or for any indirect losses or any consequential
damages whatsoever.
15.2 To the extent permitted by law, Tenant hereby agrees to
indemnify and hold Landlord harmless from and against all costs, damages,
claims, liabilities and expenses (including, but not limited to, attorneys'
fees and any costs of litigation) suffered by or claimed against Landlord,
directly or indirectly, based on, arising out of or resulting from (i) Tenant's
use and occupancy of the Premises or the business conducted by Tenant therein,
(ii) any accident, injury or damage whatsoever caused to any person, or the
property of any person, occurring on or about the Premises during the Lease
Term, except for the gross negligence or wilful misconduct of Landlord, its
employees and agents, (iii) any act or omission to act by Tenant or its
employees, contractors,
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agents, licensees, or invitees, (iv) any breach or default by Tenant in the
performance or observance of its covenants or obligations under this Lease or
(v) the towing of any car or other vehicle as provided in Section 24.4 hereof.
15.3 In the event that at any time Landlord shall sell or transfer
title to the Building or the Office Complex, provided the purchaser or
transferee assumes the obligations of Landlord hereunder, Landlord named herein
shall not be liable to Tenant for any obligations or liabilities based on or
arising out of events or conditions occurring on or after the date of such sale
or transfer. Furthermore, Tenant agrees to attorn to any such purchaser or
transferee upon all the terms and conditions of this Lease.
15.4 In the event that at any time during the Lease Term Tenant
shall have a claim against Landlord, Tenant shall not have the right to deduct
the amount allegedly owed to Tenant from any rent or other sums payable to
Landlord hereunder, it being understood that Tenant's sole remedy for
recovering upon such claim shall be to institute an independent action against
Landlord.
15.5 Tenant agrees that in the event Tenant is awarded a money
judgment against Landlord, Tenant's sole recourse for satisfaction of such
judgment shall be limited to execution against the estate and interest of
Landlord in the Office Complex. In no event shall any other assets of Landlord,
any partner of Landlord, or any other person or entity be available to satisfy,
or be subject to, such judgment nor shall any partner of Landlord or any other
person or entity be held to have any personal liability for satisfaction of any
claims or judgments that Tenant may have against Landlord or any constituent
partner of Landlord in such partner's capacity as a partner of Landlord.
ARTICLE XVI
RULES AND REGULATIONS
16.1 Tenant and its agents, employees, invitees, licensees,
customers, clients, family members, guests and permitted subtenants shall at
all times abide by and observe the rules and regulations attached hereto as
Exhibit C. In addition, Tenant and its agents, employees, invitees, licensees,
customers, clients, family members, guests and permitted subtenants shall abide
by and observe all other rules or regulations that Landlord may promulgate from
time to time for the operation and maintenance of the Office Complex, provided
that notice thereof is given to Tenant and such rules and regulations are not
inconsistent with the provisions of this Lease. Nothing contained in this Lease
shall be construed as imposing upon Landlord any duty or obligation to enforce
such rules and regulations, or the terms, conditions or covenants contained in
any other lease, as against any other tenant, and Landlord shall not be liable
to Tenant for the violation of such rules or regulations by any other tenant or
its employees, agents, business invitees, licensees, customers, clients, family
members or guests. Landlord shall use its best efforts to enforce all such
rules and regulations, including any exceptions thereto, uniformly and in a
manner which does not discriminate against Tenant, or increase Tenant's
monetary obligations under this Lease, although it is understood that Landlord
may grant exceptions to such rules and regulations in circumstances in which it
reasonably determines such exceptions are warranted. If there is any
inconsistency
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between this Lease and the Rules and Regulations set forth in Exhibit C, this
Lease shall govern.
ARTICLE XVII
DAMAGE OR DESTRUCTION
17.1 If, during the Lease Term, the Premises or the Building are
totally or partially damaged or destroyed from any cause, thereby rendering the
Premises totally or partially inaccessible or unusable, Landlord shall
diligently (taking into account the time necessary to effectuate a satisfactory
settlement with any insurance company involved) restore and repair the Premises
and the Building to substantially the same condition they were in prior to such
damage; provided, however, if in the sole and reasonable judgment of Landlord
the repairs and restoration cannot be completed within one hundred twenty (120)
days after the occurrence of such damage, including the time needed for removal
of debris, preparation of plans and issuance of all required governmental
permits, Landlord shall have the right, at its sole option, to terminate this
Lease by giving written notice of termination to Tenant within forty-five (45)
days after the occurrence of such damage. Landlord shall use reasonable efforts
not to discriminate against Tenant in determining whether to exercise its right
to terminate this Lease in accordance with the provisions of this Section 17.1.
Landlord agrees that it will make its determination regarding the time needed
to make such repairs and restoration and whether it intends to repair such
damage promptly after the occurrence of such damage. If Landlord determines (a)
that the repairs and restoration can be substantially completed within one
hundred twenty (120) days of such damage or destruction or (b) that such repair
or restoration cannot be substantially completed within such one hundred twenty
(120) day period but Landlord does not elect to terminate the Lease pursuant to
this Section 17.1, then, in either such event, Landlord shall notify Tenant,
within ten (10) days of the date it makes its determination, of the date by
which Landlord estimates it will substantially complete the repairs and
restoration.
17.2 If Landlord determines, in its sole but reasonable judgment,
that the repairs and restoration cannot be substantially completed within one
hundred fifty (150) days after the date of such damage or destruction, and
provided Landlord does not elect to terminate this Lease pursuant to Section
17.1 above, Landlord shall promptly notify Tenant of such determination. For a
period of thirty (30) days after receipt of such determination, Tenant shall
have the right to terminate this Lease by providing written notice to Landlord.
If Tenant does not elect to terminate this Lease within such thirty (30) day
period, and provided that Landlord has not elected to terminate this Lease,
Landlord shall proceed to repair and restore the Premises (including the means
of access thereto) and the Building. Notwithstanding the foregoing, Tenant
shall not have the right to terminate this Lease if the act or omission of
Tenant, or any of its employees, agents, licensees, subtenants, customers,
clients, family members or guests, shall have caused the damage or destruction.
17.3 If this Lease is terminated pursuant to Section 17.1 or
Section 17.2 above, all rent payable hereunder shall be apportioned and paid to
the effective date of the occurrence of such damage or destruction, and Tenant
shall have no further rights or remedies as against Landlord pursuant to this
Lease, or otherwise. If this Lease is not terminated as a result of such
damage, and
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provided that such damage was not caused by the act or omission to act of
Tenant, or any of its employees, agents, licensees, subtenants, invitees,
customers, clients, family members or guests, until the repair and restoration
of the Premises is completed Tenant shall be required to pay base rent and
additional rent only for that part of the Premises that Tenant is reasonably
able to use for its business purpose while repairs are being made, based on the
ratio that the amount of usable Net Rentable Area bears to the total Net
Rentable Area in the Premises. Landlord shall bear the costs and expenses of
repairing and restoring the Premises, except that if such damage or destruction
was caused by the act or omission to act of Tenant, or any of its employees,
agents, licensees, subtenants, invitees, customers, clients, family members or
guests, upon written demand from Landlord, Tenant shall pay to Landlord as
additional rent the amount by which such costs and expenses exceed the
insurance proceeds, if any, received by Landlord on account of such damage or
destruction. Provided, however, that Landlord shall not be obligated to restore
the Premises if the estimated cost of such restoration, as prepared by
Landlord's architect, exceeds the amount of insurance proceeds available to
Landlord for such restoration by more than 10% of such amount.
17.4 If Landlord repairs and restores the Premises as provided in
Section 17.1, Landlord shall not be required to repair or restore any
decorations, alterations or improvements to the Premises previously made by or
at the expense of Tenant or any trade fixtures, furnishings, equipment or
personal property belonging to Tenant. It shall be Tenant's sole responsibility
to repair and restore all such items.
17.5 Notwithstanding anything to the contrary contained herein, if
the Building is damaged or destroyed from any cause to such an extent that the
costs of repairing and restoring the Building would exceed fifty percent (50%)
of the replacement value of the Building, whether or not the Premises are
damaged or destroyed, Landlord shall have the right to terminate this Lease by
written notice to Tenant, provided the leases of all other tenants in the
Building are similarly terminated. This right of termination shall be in
addition to any other right of termination provided in this Lease.
ARTICLE XVIII
CONDEMNATION
18.1 If the whole or a substantial part (as hereinafter defined) of
the Premises, or the use or occupancy of the Premises, shall be taken or
condemned by any governmental or quasi-governmental authority for any public or
quasi-public use or purpose including a sale thereof under threat of such a
taking), then this Lease shall terminate on the date title thereto vests in
such governmental or quasi-governmental authority, and all rent payable
hereunder shall be apportioned as of such date. If less than a substantial part
of the Premises, or the use or occupancy thereof, is taken or condemned by any
governmental or quasi-governmental authority for any public or quasi-public use
or purpose (including a sale thereof under threat of such a taking), this Lease
shall continue in full force and effect, but the base rent and additional rent
thereafter payable hereunder shall be equitably adjusted (on the basis of the
ratio of the number of square feet of Net Rentable Area taken to the total Net
Rentable Area in the Premises prior to such taking) as of the date title vests
in the governmental or quasi-governmental authority. For purposes of this
Section 18.1, a
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substantial part of the Premises shall be considered to have been taken if more
than one-third (1/3) of the Premises is rendered unusable as a result of such
taking.
18.2 All awards, damages and other compensation paid by the
condemning authority on account of such taking or condemnation (or sale under
threat of such a taking) shall belong to Landlord, and Tenant hereby assigns to
Landlord all rights to such awards, damages and compensation. Tenant agrees not
to make any claim against Landlord or the condemning authority for any portion
of such award or compensation attributable to damages to the Premises, the
value of the unexpired term of this Lease, the loss of profits or goodwill,
leasehold improvements or severance damages. Nothing contained herein, however,
shall prevent Tenant from pursuing a separate claim against the condemning
authority for the value of furnishings, equipment and trade fixtures installed
in the Premises at Tenant's expense and for relocation expenses, provided that
such claim does not in any way diminish the award or compensation payable to or
recoverable by Landlord in connection with such taking or condemnation.
ARTICLE XIX
DEFAULT BY TENANT
19.1 The occurrence of any of the following shall constitute a
default by Tenant under this Lease:
(a) If Tenant shall fail to pay any installment of base
rent or additional rent when due, or shall fail to pay when due any other
payment required by this Lease and such failure shall remain uncured for a
period of five (5) days after Landlord notifies Tenant, in writing, of such
failure; provided, however, that Landlord shall not be required to give Tenant
more than two (2) such written notices in any twelve (12) month period.
(b) If Tenant shall violate or fail to perform any other
term, condition, covenant or agreement to be performed or observed by Tenant
under this Lease and such violation or failure shall continue uncured for a
period of twenty (20) days after Landlord notifies Tenant in writing
specifying, in reasonable detail, the nature of such violation or failure. If
such violation or failure is not capable of being cured within such twenty (20)
day period, Tenant shall not be deemed to be in default hereunder if Tenant
commences curative action within such twenty (20) day period and proceeds
diligently and in good faith thereafter to cure such violation or failure until
completion.
(c) If Tenant shall abandon the Premises.
(d) If an Event of Bankruptcy, as defined in Section 20.1
of this Lease, shall occur.
(e) The occurrence of the event described in the last
clause of Section 7.5(a) hereof.
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(f) The failure to maintain any insurance required to be
maintained by Tenant under the terms and conditions of this Lease.
19.2 If Tenant shall be in default under this Lease, Landlord shall
have the right, at its sole option, to terminate this Lease. With or without
terminating this Lease, Landlord may re-enter and take possession of the
Premises and the provisions of this Article XIX shall operate as a notice to
quit, any other notice to quit or of Landlord's intention to re-enter the
Premises being hereby expressly waived. If necessary, Landlord may proceed to
recover possession of the Premises under and by virtue of the laws of the State
of Maryland, or by such other proceedings, including re-entry and possession,
as may be applicable. If Landlord elects to terminate this Lease, everything
contained in this Lease on the part of Landlord to be done and performed shall
cease without prejudice, however, to the right of Landlord to recover from
Tenant all rent and other sums due under this Lease. Whether or not this Lease
is terminated by reason of Tenant's default, Landlord shall use reasonable
efforts to relet the Premises for such rent and upon such terms as are not
unreasonable under the circumstances, and if the full rental provided herein
plus the costs, expenses and damages hereafter described shall not be realized
by Landlord, Tenant shall be liable for all damages sustained by Landlord,
including, without limitation, deficiency in base rent and additional rent,
reasonable attorneys' fees, brokerage fees, and the expenses of placing the
Premises in first class rentable condition. Provided Landlord shall have made
reasonable efforts to relet the Premises as required by the preceding sentence,
Landlord shall in no way be responsible or liable for any failure to relet the
Premises or any part thereof, or any failure to collect any rent due or accrued
upon such reletting (provided, however, that Landlord shall endeavor to act
diligently in collecting any rent due or accrued upon such reletting), to the
end and intent that Landlord may elect to hold Tenant liable for the base rent,
additional rent, and any and all other items of cost and expense which Tenant
shall have been obligated to pay throughout the remainder of the Lease Term.
Notwithstanding anything to the contrary in this Section 19.2, Tenant expressly
acknowledges that Landlord's agreement to use reasonable efforts to relet the
Premises shall in no event limit, restrict or prejudice Landlord's right to
lease all other vacant space in the Office Complex prior to reletting the
Premises. Any damages or loss of rent sustained by Landlord may be recovered by
Landlord, at Landlord's option, at the time of the reletting, or in separate
actions, from time to time, as said damage shall have been made more easily
ascertainable by successive reletting, or, at Landlord's option, may be
deferred until the expiration of the Lease Term, in which event Tenant hereby
agrees that the cause of action shall not be deemed to have accrued until the
date of expiration of the Lease Term. The provisions contained in this Section
19.2 shall be in addition to, and shall not prevent the enforcement of, any
claim Landlord may have against Tenant for anticipatory breach of this Lease.
19.3 All rights and remedies of Landlord set forth herein are in
addition to all other rights and remedies available to Landlord at law or in
equity. All rights and remedies available to Landlord hereunder or at law or in
equity are expressly declared to be cumulative. The exercise by Landlord of any
such right or remedy shall not prevent the concurrent or subsequent exercise of
any other right or remedy. No delay in the enforcement or exercise of any such
right or remedy shall constitute a waiver of any default by Tenant hereunder or
of any of Landlord's rights or remedies in connection therewith. Landlord shall
not be deemed to have waived any default by Tenant hereunder unless
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such waiver is set forth in a written instrument signed by Landlord. If
Landlord waives in writing any default by Tenant, such waiver shall not be
construed as a waiver of any covenant, condition or agreement set forth in this
Lease except as to specific circumstances described in such written waiver.
19.4 If Landlord shall institute proceedings against Tenant and a
compromise or settlement thereof shall be made, neither shall the same
constitute a waiver of default or of any other covenant, condition or agreement
set forth herein, nor of any of Landlord's rights hereunder, except as
otherwise provided in such compromise or settlement. Neither the payment by
Tenant of a lesser amount than the installments of base rent, additional rent
or of any sums due hereunder nor any endorsement or statement on any check or
letter accompanying a check for payment of rent or other sums payable hereunder
shall be deemed an accord and satisfaction, and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance of such
rent or other sums or to pursue any other remedy available to Landlord. No
re-entry by Landlord, and no acceptance by Landlord of keys from Tenant, shall
be considered an acceptance of a surrender of this Lease.
19.5 If Tenant defaults in the making of any payment or in the
doing of any act herein required to be made or done by Tenant, then Landlord
may, but shall not be required to, make such payment or do such act. If
Landlord elects to make such payment or do such act, all costs and expenses
incurred by Landlord, plus interest thereon at the rate per annum which is two
percent (2%) higher than the "prime rate" then being charged by Riggs National
Bank of Washington, D.C., from the date paid by Landlord to the date of payment
thereof by Tenant, shall be immediately paid by Tenant to Landlord; provided
however, that nothing contained herein shall be construed as permitting
Landlord to charge or receive interest in excess of the maximum legal rate then
allowed by law. The taking of such action by Landlord shall not be considered
as a cure of such default by Tenant or prevent Landlord from pursuing any
remedy it is otherwise entitled to in connection with such default.
19.6 If Tenant fails to make any payment of base rent or of
additional rent on or before the date such payment is due and payable, Tenant
shall pay to Landlord a late charge of five percent (5%) of the amount of such
payment. In addition, such payment shall bear interest at the rate per annum
which is two percent (2%) higher than the "prime rate" then being charged by
Riggs National Bank of Washington, D.C. from the date such payment became due
to the date of payment thereof by Tenant; provided, however, that nothing
contained herein shall be construed as permitting Landlord to charge or receive
interest in excess of the maximum legal rate then allowed by law. Such late
charge and interest shall constitute additional rent due and payable hereunder
with the next installment of base rent due hereunder. Landlord will not
exercise its right to impose the sums described in this Section 19.6 if such
late payments are no later than five (5) days past due and such late payments
occur no more than two (2) times in any twelve (12) month period.
19.7 Landlord shall have a lien upon, and Tenant hereby grants to
Landlord a security interest in all personal property which may be found in and
upon the Premises (except that Landlord
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shall have no and hereby expressly waives any lien against Tenant's files,
workpapers, business records or confidential client-related business papers and
Tenant's telephone system) and equipment of Tenant located in the Premises, as
security for the payment of all rent and the performance of all other
obligations of Tenant required by this Lease; provided, however, that Landlord
agrees that it shall not exercise its right to collect under the lien granted
hereby unless and until Tenant is in default, beyond any applicable notice and
cure provision, under any of the terms and provisions of this Lease. Landlord
agrees to subordinate such lien and security interest in Tenant's personal
property and equipment to any lien or security interest granted by Tenant to
any lender as security for any indebtedness incurred for the sole purpose of
financing the purchase of any such equipment or personal property; provided,
however, that the secured party shall agree to promptly repair any and all
damages to the Premises and/or the Office Complex that occurs if the secured
party removes its collateral from the Premises. In order to perfect and enforce
said lien and security interest, Tenant agrees to execute all required
financing statements. At any time after a default by Tenant hereunder, beyond
any applicable notice and cure period and the termination of this Lease by
Lender as a result thereof, Landlord may seize and take possession of any and
all personal property and equipment belonging to Tenant which may be found in
and upon the Premises (except that Landlord shall have no and hereby expressly
waives any lien against Tenant's files, workpapers, business records or
confidential client-related business papers and Tenant's telephone system). If
Tenant fails to redeem the personal property and equipment so seized by payment
of all sums due Landlord under and by virtue of this Lease, Landlord shall have
the right, after twenty (20) days' written notice to Tenant, to sell such
personal property and equipment so seized at public or private sale and upon
such terms and conditions as to Landlord may appear advantageous. After the
payment of all proper charges incident to such sale, the proceeds thereof shall
be applied to the payment of any and all sums due to Landlord pursuant to this
Lease. In the event there shall be any surplus remaining after the payment of
all sums due to Landlord, such surplus shall be paid over to Tenant.
ARTICLE XX
BANKRUPTCY
20.1 The following shall be Events of Bankruptcy under this Lease:
(a) Tenant's becoming insolvent, as that term is defined
in Title 11 of the United States Code (the "Bankruptcy Code"), or under the
insolvency laws of any state, district, commonwealth or territory of the United
States (the "Insolvency Laws");
(b) The appointment of a receiver or custodian for any or
all of Tenant's property or assets, or the institution of a foreclosure action
upon any of Tenant's real or personal property;
(c) The filing of a voluntary petition under the
provisions of the Bankruptcy Code or Insolvency Laws;
(d) The filing of an involuntary petition against Tenant
as the subject debtor under the Bankruptcy Code or Insolvency Laws, which
either (i) is not dismissed within thirty (30) days
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of filing, or (ii) results in the issuance of an order for relief against the
debtor; or
(e) Tenant's making or consenting to an assignment for
the benefit of creditors or a common law composition of creditors.
20.2 (a) Upon occurrence of an Event of Bankruptcy, Landlord shall
have all rights and remedies available to Landlord pursuant to Article XIX,
provided that while a case in which Tenant is the subject debtor under the
Bankruptcy Code is pending and only for so long as Tenant or its Trustee in
Bankruptcy (hereafter referred to as "Trustee") is in compliance with the
provisions of Sections 20.2(b), (c) and (d) below, Landlord shall not exercise
its rights and remedies pursuant to Article XIX.
(b) In the event Tenant becomes the subject debtor in a
case pending under the Bankruptcy Code, Landlord's right to terminate this
Lease pursuant to Section 20.2(a) shall be subject to the rights of the Trustee
to assume or assign this Lease. Trustee shall not have the right to assume or
assign this Lease unless Trustee promptly (i) cures all defaults under this
Lease, (ii) compensates Landlord for monetary damages incurred as a result of
such defaults, and (iii) provides adequate assurance of future performance on
the part of Tenant as debtor in possession or on the part of the assignee
tenant.
(c) Landlord and Tenant hereby agree in advance that
adequate assurance of future performance, as used in Section 20.2(b) above,
shall mean that all of the following minimum criteria must be met: (i) Tenant's
gross receipts in the ordinary course of business during the thirty (30) day
period immediately preceding the initiation of the case under the Bankruptcy
Code must be at least two (2) times greater than the next monthly installment
of annual base rent and additional rent due under this Lease; (ii) both the
average and median of Tenant's gross receipts in the ordinary course of
business during the six (6) month period immediately preceding the initiation
of the case under the Bankruptcy Code must be at least (2) times greater than
the next monthly installment of annual base rent and additional rent due under
this Lease; (iii) Tenant must pay its estimated pro rata share of the cost of
all services provided by Landlord (whether directly or through agents or
contractors and whether or not previously included as part of the annual base
rent), in advance of the performance or provision of such services; (iv)
Trustee must agree that Tenant's business shall be conducted in a first class
manner, and that no liquidating sales, auctions, or other non-first class
business operations shall be conducted on the Premises; (v) Trustee must agree
that the use of the Premises as stated in this Lease will remain unchanged and
that no prohibited use shall be permitted; (vi) Trustee must agree that the
assumption or assignment of this Lease will not violate or affect the rights of
other tenants in the Office Complex; (vii) Trustee must pay to Landlord at the
time the next monthly installment of annual base rent is due under this Lease,
in addition to such installment of annual base rent, an amount equal to the
monthly installments of annual base rent and additional rent due under this
Lease for the next six (6) months under this Lease, said amount to be held by
Landlord in escrow until either Trustee or Tenant defaults in its payment of
rent or other obligations under this Lease (whereupon Landlord shall have the
right to draw on such escrowed funds) or until the expiration of this Lease
(whereupon the funds shall be returned to Trustee or Tenant); and (viii)
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Tenant or Trustee must agree to pay to Landlord at any time Landlord is
authorized to and does draw on the escrow account the amount necessary to
restore such escrow account to the original level required by Section
20.2(c)(vii).
(d) In the event Tenant is unable to (i) cure its
defaults, (ii) reimburse the Landlord for its monetary damages, (iii) pay the
rent due under this Lease and all other payments required of Tenant under this
Lease on time (or within five (5) days of the due date) or (iv) meet the
criteria and obligations imposed by Section 20.2(c) above, Tenant agrees in
advance that it has not met its burden to provide adequate assurance of future
performance, and this Lease may be terminated by Landlord in accordance with
Section 20.2(a) above.
ARTICLE XXI
SUBORDINATION
21.1 This Lease is subject and subordinate to the lien of any and
all mortgages (which term "mortgages" shall include both construction and
permanent financing and shall include deeds of trust and similar security
instruments) which may now encumber the Building or the Office Complex, and to
any and all renewals, extensions, modifications, recastings or refinancings
thereof. This Lease shall also be subject and subordinate to the lien of (i)
any new first mortgage that hereafter may encumber the Building or the Office
Complex, and (ii) any second or junior mortgages that may hereafter encumber
the Building or the Office Complex, provided the holder of the first mortgage
consents to such subordination. At any time after the execution of this Lease,
the holder of any mortgage to which this Lease is subordinate shall have the
right to declare this Lease to be superior to the lien of such mortgage and
Tenant agrees to execute all documents reasonably required by such holder in
confirmation thereof; provided, however, that such declaration shall not void
any non-disturbance agreement entered into between such holder and Tenant,
unless otherwise agreed to in writing by holder and such Tenant.
21.2 In confirmation of the foregoing subordination, Tenant shall,
at Landlord's request, promptly execute any requisite or appropriate
certificate or other document. In the event Tenant does not execute and deliver
any requisite or appropriate certificate or other document within ten (10) days
of Landlord's written request therefor, Tenant hereby constitutes and appoints
Landlord as Tenant's attorney-in-fact to execute any such certificate or other
document for or on behalf of Tenant. Tenant agrees that in the event any
proceedings are brought for the foreclosure of any mortgage encumbering the
Building or the Office Complex, Tenant shall attorn to the purchaser at such
foreclosure sale, if requested to do so by such purchaser, and shall recognize
such purchaser as the landlord under this Lease, and Tenant waives the
provisions of any statute or rule of law, now or hereafter in effect, which may
give or purport to give Tenant any right to terminate or otherwise adversely
affect this Lease and the obligations of Tenant hereunder in the event any such
foreclosure proceeding is prosecuted or completed. Tenant agrees that upon such
attornment, such purchaser shall not (a) be bound by any payment of annual base
rent or additional rent for more than one (1) month in advance, except
prepayments in the nature of security for the performance by Tenant of its
obligations under this Lease but only to the extent such prepayments have been
delivered to such
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purchaser, (b) be bound by any amendment of this Lease made without the consent
of any lender providing construction or permanent financing for the Office
Complex, (c) be liable for damages for any act or omission of any prior
landlord or (d) be subject to any offsets or defenses which Tenant might have
against any prior landlord, provided, however, that after succeeding to
Landlord's interest under this Lease, such purchaser shall perform in
accordance with the terms of this Lease all obligations of Landlord arising
after the date such purchaser acquires title to the Office Complex. Landlord
agrees to use reasonable efforts to obtain the required consent of any Lender
providing financing for the Office Complex to any amendment to this Lease,
where such consent is required. Upon request by such purchaser, Tenant shall
execute and deliver an instrument or instruments confirming its attornment.
21.3 (a) After receiving notice from any person, firm or other
entity that it holds a mortgage, deed of trust or a ground lease on the
Building, or the land on which the Building is situated or the Office Complex,
no notice from Tenant to Landlord alleging any default by Landlord shall be
effective unless and until a copy of the same is given to such holder, trustee,
or ground lessor; provided, however, that Tenant shall have been furnished with
the name and address of such holder, trustee or ground lessor. The curing of
any of Landlord's defaults by such holder, trustee or ground lessor shall be
treated as performance by Landlord, but nothing herein contained in this
Article XXI shall obligate or be deemed to obligate such holder, trustee or
groundlessor to cure any of Landlord's defaults.
(b) In addition to the time afforded Landlord for the
curing of any default, any such holder, trustee, or ground lessor shall have an
additional thirty (30) days after the expiration of the period allowed to
Landlord for the cure of any such default within which to commence a cure.
(c) In the event that any lender providing construction
or permanent financing or any refinancing for the Building or the Office
Complex requires, as a condition of such financing, that modifications to this
Lease be obtained, and provided that such modifications (i) are reasonable,
(ii) do not adversely affect in a material manner Tenant's use and occupancy of
the Premises as herein permitted, (iii) do not increase the rent and other sums
to be paid by Tenant hereunder, (iv) do not reduce the services provided to
Tenant under this Lease, (v) do not materially decrease Landlord's obligations
under this Lease, (vi) do not materially affect the rights and obligations of
Tenant under this Lease, (vii) do not impose additional obligations on Tenant,
monetary or otherwise, (viii) do not discriminate against Tenant vis-a-vis any
other tenant in the Building, (ix) do not affect the rentable area of the
Premises, including Tenant's expansion rights hereunder or the method of
calculating the rentable area of the Premises and (x) do not affect the Lease
Term, including the right of renewal set forth in Rider No. 1 to this Lease.
Landlord may submit to Tenant a written amendment to this Lease incorporating
such required changes, and Tenant hereby covenants and agrees to execute,
acknowledge and deliver such amendment to Landlord within twenty (20) days of
Tenant's receipt thereof. Landlord may submit to Tenant a written amendment to
this Lease incorporating such required changes, and Tenant hereby covenants and
agrees to execute, acknowledge and deliver such amendment to Landlord within
ten (10) days of Tenant's receipt thereof.
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(d) Landlord hereby advises Tenant that Landlord shall
use its reasonable efforts to obtain from any future holder of any mortgage or
deed of trust secured by the Office Complex, on such holder's standard form, a
non-disturbance agreement in favor of Tenant to the end and intent that as long
as Tenant pays all rent when due and punctually observes all other covenants
and obligations on its part to be observed under the Lease, the terms and
conditions of this Lease shall continue in full force and effect and Tenant's
possession, use and occupancy of the Premises shall not be disturbed during the
term of this Lease by the holder of such mortgage or deed of trust or by any
purchaser upon foreclosure of such mortgage or deed of trust.
ARTICLE XXII
HOLDING OVER
22.1 In the event that Tenant shall not immediately surrender the
Premises on the date of the expiration of the Lease Term, Tenant shall become a
tenant by the month at a base rent and additional rent equal to one hundred
fifty percent (150%) of the base rent and all additional rent in effect during
the last month of the Lease Term. Said monthly tenancy shall commence on the
first day following the expiration of the Lease Term. As a monthly tenant,
Tenant shall be subject to all the terms, conditions, covenants and agreements
of this Lease. Tenant shall give to Landlord at least thirty (30) days' written
notice of any intention to quit the Premises, and Tenant shall be entitled to
thirty (30) days' written notice to quit the Premises, unless Tenant is in
default hereunder, in which event Tenant shall not be entitled to any notice to
quit, the usual thirty (30) days' notice to quit being hereby expressly waived.
Notwithstanding the foregoing provisions of this Section 22.1, in the event
that Tenant shall hold over after the expiration of the Lease Term, and if
Landlord shall desire to regain possession of the Premises promptly at the
expiration of the Lease Term, then at any time prior to Landlord's acceptance
of rent from Tenant as a monthly tenant hereunder, Landlord, at its option, may
forthwith re-enter and take possession of the Premises by any legal process in
force in the State of Maryland.
ARTICLE XXIII
COVENANTS OF LANDLORD
23.1 Landlord covenants that it has the right to make this Lease
for the term aforesaid, and that if Tenant shall pay all rent when due and
punctually perform all the covenants, terms, conditions and agreements of this
Lease to be performed by Tenant, Tenant shall, during the term hereby created,
freely, peaceably and quietly occupy and enjoy the full possession of the
Premises without molestation or hindrance by Landlord or any party claiming
through or under Landlord, subject to the provisions of Section 23.2 hereof.
Tenant acknowledges and agrees that its leasehold estate in and to the Premises
vests on the date this Lease is executed, notwithstanding that the term of this
Lease will not commence until a future date.
23.2 Landlord hereby reserves to itself and its successors and
assigns the following rights (all of which are hereby consented to by Tenant):
(i) to change the street address and/or name of the Building or the Office
Complex and/or the arrangement and/or location of entrances, passageways,
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doors, doorways, corridors, elevators, stairs, toilets, or other public parts
of the Office Complex, provided such changes to not materially and adversely
interfere with Tenant's use or occupancy of the Premises; (ii) to erect, use
and maintain pipes and conduits in and through the Premises, provided that
Landlord shall use its reasonable efforts to minimize the disruption to
Tenant's use and occupancy of the Premises and provided such changes do not
materially or adversely interfere with Tenant's use or occupancy of the
Premises; and (iii) to grant to anyone the exclusive right to conduct any
particular business or undertaking in the Office Complex; provided, however,
that such right shall not preclude Tenant from using the Premises for the
conduct of its business. Landlord may exercise any or all of the foregoing
rights without being deemed to be guilty of an eviction, actual or
constructive, a violation of the covenant of quiet enjoyment or a disturbance
or interruption of the business of Tenant or of Tenant's use or occupancy of
the Premises.
23.3 Landlord represents that as of the date of this Lease, to the
best of its actual knowledge, the common and public areas of the Office Complex
within Landlord's exclusive control are not in violation of any Legal
Requirement, including, without limitation, the Americans with Disabilities Act
of 1990.
ARTICLE XXIV
PARKING
24.1 (a) During the Lease Term, upon the request of Tenant,
Landlord agrees to make available to Tenant and its employees and to Tenant's
permitted subtenants monthly parking permits in an amount not to exceed three
(3) parking permits for each 1,000 square feet of Net Rentable Area in the
Premises for the parking of standard-sized passenger automobiles in the garage
beneath the Office Complex (the "Garage") or in the surface parking areas of
the Office Complex not designated for the exclusive use of particular tenants
in the Office Complex, such permits to be used for surface or Garage parking at
Landlord's sole discretion.
(b) During the first (1st) two (2) Lease Years of the
Lease Term, the parking permits referred to in Section 24.1(a) above shall be
provided to Tenant at no charge except that Tenant shall pay, as additional
rent, its proportionate share of Operating Expenses attributable to the
operation, management and maintenance of the Garage and surface parking areas
as more specifically provided in Article IV above.
(c) Commencing on the first (1st) day of the third (3rd)
Lease Year, the charge for permits in the surface lot and the charge for
permits in the Garage shall be the prevailing rate charged from time to time by
Landlord or the operator of the Garage.
(d) If Tenant desires additional parking permits in
excess of three (3) parking permits for each 1,000 square feet of Net Rentable
Area in the Premises, the charge for such additional permits shall be the
prevailing rate charged from time to time by Landlord or the operator of the
Garage. Notwithstanding the foregoing, Landlord does not guarantee the
availability of such monthly parking permits to Tenant following the first
(1st) Lease Year if and to the extent that
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Tenant does not notify Landlord of its desire to use or to purchase, as
applicable, such monthly parking permits during the first (1st) Lease Year.
24.2 It is understood and agreed that the Garage and the surface
parking areas of the Office Complex will be operated on a self-parking basis
and no specific parking spaces will be allocated for use by Tenant. Each user
of the Garage and the surface parking areas not designated for the exclusive
use of particular tenants of the Office Complex will have the right to park in
any available stall in accordance with regulations of uniform applicability
promulgated for all users of the Garage and the surface parking areas by
Landlord or the Garage operator.
24.3 Tenant agrees that it and its employees shall observe
reasonable safety precautions in the use of the Garage and the surface parking
areas and shall at all times abide by all rules and regulations promulgated by
Landlord or the Garage operator governing the use of the Garage and the surface
parking areas, including the requirement that an identification or parking
sticker shall be displayed at all times in all cars parked in the Garage or the
surface parking areas. Any car not displaying such a sticker may be towed away
at the car owner's expense.
24.4 The Garage and the surface parking areas will remain open on
Monday through Friday (excluding legal holidays) during the normal hours of
operation of the Office Complex on such days. Landlord reserves the right to
close the Garage or the surface parking areas during periods of unusually
inclement weather. At all times when the Garage or the surface parking areas
are closed, monthly permit holders shall be afforded access to the Garage or
the surface parking areas by means of a magnetic card or other procedure
provided by Landlord or the Garage operator.
24.5 It is understood and agreed that the Landlord does not assume
any responsibility for, and shall not be held liable for, any damage or loss to
any automobiles parked in the Garage or the surface parking areas or to any
personal property located therein, or for any injury sustained by any person in
or about the Garage or the surface parking areas.
ARTICLE XXV
GENERAL PROVISIONS
25.1 Tenant acknowledges that neither Landlord nor any broker,
agent or employee of Landlord has made any representations or promises with
respect to the Premises or the Office Complex except as herein expressly set
forth, and no rights, privileges, easements or licenses are being acquired by
Tenant except as herein expressly set forth.
25.2 Nothing contained in this Lease shall be construed as creating
a partnership or joint venture of or between Landlord and Tenant, or to create
any other relationship between the parties hereto other than that of landlord
and tenant.
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25.3 Landlord recognizes Grubb & Ellis as the broker procuring this
Lease and shall pay said broker a commission pursuant to a separate agreement
between said broker and Landlord. Landlord and Tenant each represents and
warrants to the other that, except as provided in the preceding sentence
neither of them has employed or dealt with any broker, agent or finder in
carrying on the negotiations relating to this Lease. Tenant shall indemnify and
hold Landlord harmless from and against any claim or claims for brokerage or
other commissions asserted by any broker, agent or finder engaged by Tenant or
with whom Tenant has dealt in connection with this Lease other than the broker
named in the first sentence of this Section 25.3.
25.4 Tenant agrees, at any time and from time to time, upon not
less than ten (10) days' prior written notice by Landlord, to execute,
acknowledge and deliver to Landlord a statement in writing (i) certifying that
this Lease is unmodified and in full force and effect (or if there have been
any modifications, that the Lease is in full force and effect as modified and
stating the modifications), (ii) stating the dates to which the rent and any
other charges hereunder have been paid by Tenant, (iii) stating whether or not,
to the best knowledge of Tenant, Landlord is in default in the performance of
any covenant, agreement or condition contained in this Lease, and if so,
specifying the nature of such default, (iv) stating the address to which
notices to Tenant are to be sent, and (v) stating such other information as may
be reasonably requested by Landlord. Any such statement delivered by Tenant may
be relied upon by any owner of the Building or the Office Complex or the land
upon which they are situated, any prospective purchaser of the Building or the
Office Complex or such land, any mortgagee or prospective mortgagee of the
Building or the Office Complex or such land or of Landlord's interest therein,
or any prospective assignee of any such mortgagee.
25.5 This Lease is subject to and conditioned upon the execution by
Landlord and U.S. Assist, Inc. ("USAI"), on or before May 30, 1998, of an
agreement (the "USAI Agreement") terminating the Lease Agreement between
Landlord and USAI with respect to the Premises on terms and conditions
acceptable to Landlord in its sole discretion. In the event Landlord and USAI
fail to execute the USAI Agreement on or before May 30, 1998, this Lease shall
terminate, shall be null and void, shall be of no force or effect and the
parties shall be released and discharged from further liabilities, obligations
or responsibilities hereunder and Landlord will return to Tenant all sums paid
to Landlord in accordance with Section 3.1 above.
25.6 All notices or other communications required hereunder shall
be in writing and shall be deemed duly given if delivered in person (with
receipt therefor), or if sent by a nationally recognized overnight delivery
service (with return receipt therefor) or if sent by certified or registered
mail, return receipt requested, postage prepaid, to the following addresses:
(i) if to Landlord at c/o Boston Properties, Inc., 500 E Street, S.W.,
Washington, D.C. 20024, with a copy to Boston Properties, Inc., 8 Arlington
Street, Boston, Massachusetts 02116; (ii) if to Tenant, to the Premises, except
that prior to the Lease Commencement Date, notices to Tenant shall be sent to
such address as Tenant shall designate and inform Landlord. Either party may
change its address for the giving of notices by notice given in accordance with
this Section.
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25.7 If any 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 provision to persons or
circumstances other than those as to which it is invalid or unenforceable,
shall not be affected thereby, and each provision of this Lease shall be valid
and enforced to the fullest extent permitted by law.
25.8 Feminine or neuter pronouns shall be substituted for those of
the masculine form, and the plural shall be substituted for the singular
number, in any place or places herein in which the context may require such
substitution.
25.9 The provisions of this Lease shall be binding upon, and shall
inure to the benefit of, the parties hereto and each of their respective
representatives, successors and assigns, subject to the provisions hereof
restricting assignment or subletting by Tenant.
25.10 This Lease contains and embodies the entire agreements of the
parties hereto and supersedes all prior agreements, negotiations and
discussions between the parties hereto. Any representation, inducement or
agreement that is not contained in this Lease shall not be of any force or
effect. This Lease may not be modified or changed in whole or in part in any
manner other than by an instrument in writing duly signed by both parties
hereto.
25.11 This Lease shall be governed by and construed in accordance
with the laws of the State of Maryland.
25.12 Article and section headings are used herein for the
convenience of reference and shall not be considered when construing or
interpreting this Lease.
25.13 The submission of an unsigned copy of this document to Tenant
for Tenant's consideration does not constitute an offer to lease the Premises
or an option to or for the premises. This document shall become effective and
binding only upon the execution and delivery of this Lease by both Landlord and
Tenant.
25.14 Time is of the essence of each provision of this Lease.
25.15 This Lease shall not be recorded, except that upon the request
of either party, the parties agree to execute, in recordable form, a short-form
memorandum of this Lease, provided that such memorandum shall not contain any
of the specific rental terms set forth herein. Such memorandum may be recorded
in the land records of Montgomery County, Maryland and the party desiring such
recordation shall pay all recordation costs.
25.16 The Net Rentable Area in the Office Complex and in the
Premises shall be determined in accordance with Exhibit D hereto.
25.17 Tenant hereby represents and warrants to Landlord that all
necessary corporate action
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has been taken to enter this Lease and that the person signing this Lease on
behalf of Tenant has been duly authorized to do so.
25.18 Except as otherwise provided in Section 4.3 of this Lease, any
additional rent owed by Tenant to Landlord, and any cost, expense, damage, or
liability shall be paid by Tenant to Landlord no later than the later of (i)
twenty (20) days after the date Landlord notifies Tenant of the amount of such
additional rent or such cost, expense, damage or liability, or (ii) the day the
next monthly installment of base rent is due. If any payment hereunder is due
after the end of the Lease Term, such additional rent or such cost, expense,
damage or liability shall be paid by Tenant to Landlord not later than twenty
(20) days after Landlord notifies Tenant of the amount of such additional rent
or such cost, expense, damage or liability.
25.19 All of Tenant's duties and obligations hereunder, including
but not limited to Tenant's duties and obligations to pay base rent, additional
rent and the costs, expenses, damages and liabilities incurred by Landlord for
which Tenant is liable, shall survive the expiration or earlier termination of
this Lease for any reason whatsoever.
25.20 In the event either Landlord or Tenant is in any way delayed,
interrupted or prevented from performing any of its obligations under this
Lease, except for Tenant's obligations to pay rent, additional rent or to make
any other payments required under the terms of this Lease (including, without
limitation, payment of insurance premiums required to maintain Tenant's
required insurance coverage in effect at all times) and such delay,
interruption or prevention is due to fire, act of God, governmental act, action
or inaction (including, without limitation, governmental delays in issuing any
required building, construction, use, occupancy or other permit or performing
any inspection or review in connection therewith) strike, labor dispute,
inability to procure materials, or any other cause beyond Landlord's or
Tenant's reasonable control (whether similar or dissimilar), then Landlord or
Tenant, as applicable, shall be excused from performing the affected
obligations for the period of such delay, interruption or prevention.
25.21 Landlord and Tenant each hereby covenant and agree that each
and every provision of this Lease has been jointly and mutually authorized by
both Landlord and Tenant; and, in the event of any dispute arising out of any
provision of this Lease, Landlord and Tenant do hereby waive any claim of
authorship against the other party.
25.22 LANDLORD AND TENANT EACH HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM TO WHICH THEY OR ANY OF THEM MAY BE A PARTY
ARISING OUT OF OR IN ANY WAY RELATED TO THIS LEASE, THE RELATIONSHIP OF
LANDLORD AND TENANT UNDER THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE
PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. IT IS UNDERSTOOD THAT THIS
WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES
TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER IS KNOWINGLY, WILLINGLY AND
VOLUNTARILY MADE BY LANDLORD AND TENANT AND EACH PARTY REPRESENTS THAT NO
REPRESENTATIONS OF FACT OR
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OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY
OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. LANDLORD AND TENANT ACKNOWLEDGE
AND AGREE THAT THIS PROVISION IS A SPECIFIC and MATERIAL ASPECT OF THIS LEASE.
LANDLORD AND TENANT EACH REPRESENT THAT IT HAS BEEN REPRESENTED (OR HAS HAD TO
OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS LEASE AND IN THE MAKING
OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL AND THAT IT HAS HAD THE OPPORTUNITY
TO DISCUSS THIS WAIVER WITH COUNSEL.
25.23 This Lease includes and incorporates Rider No. 1 and Exhibits
A, B, C, D and E attached hereto.
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IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease with
the specific intention of creating a document under seal on or as of the day
and year first above written.
<TABLE>
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LANDLORD:
DEMOCRACY ASSOCIATES LIMITED
PARTNERSHIP, a Maryland limited partnership
By: Boston Properties, L.L.C., a Delaware
limited liability company, its General Partner
By: Boston Properties, Inc., a Delaware
corporation, its managing member
WITNESS:
[SIG] By: /s/ Raymond A. Ritchey
- ---------------------------- ------------------------------------------
Raymond A. Ritchey, Senior Vice President
TENANT:
CTA INCORPORATED
a Colorado corporation
By: /s/ Kevin J. Karton By: /s/ Gregory H. Wagner
-------------------------- --------------------------------------
Title: Corporate Secretary Title: Executive Vice President & CFO
----------------------- ----------------------------------
[CORPORATE SEAL]
</TABLE>
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EXHIBIT 10.2.1
FIRST AMENDMENT TO
FINANCING AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO FINANCING AND SECURITY AGREEMENT (this
"Agreement") made as of the 25th day of March 1998 by and among CTA
INCORPORATED, a Colorado corporation (the "Borrower") and FIRST UNION COMMERCIAL
CORPORATION, a North Carolina corporation, its successors and assigns (the
"Lender").
RECITALS
A. The Borrower and the Lender have entered into that certain
Financing and Security Agreement dated November 7, 1997 ( as thereafter amended
from time to time, is hereinafter called the "Financing Agreement"), pursuant to
which the Lender has agreed to establish a secured line of credit (the
"Revolving Loan") in favor of the Borrower in the original maximum principal
amount not to exceed Fifteen Million Dollars ($15,000,000).
B. The Borrower has requested that the Lender amend certain
provisions of the Financing Agreement and the Lender has agreed on the
condition, among others, that this Agreement be executed and delivered by the
Borrower to the Lender.
C. Unless otherwise defined herein, capitalized terms used herein
shall have the respective meanings set forth in the Financing Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Borrower and the Lender do hereby agree as follows:
<PAGE> 2
1. Recitals. The parties hereto acknowledge and agree that the
above Recitals are true and correct in all material respects and that the same
are incorporated herein and made a part hereof by reference.
2. Definitions. The Definitions of "EBIT" and "EBITDA" in Section
1.1 of the Financing Agreement are hereby amended and restated in their entirety
as follows:
"EBIT" means as to the Borrower and its Subsidiaries for the
period commencing January 1, 1998 through December 31, 1998, earnings
before interest and Taxes, as calculated on an annualized basis based on
the fiscal quarter then ending, determined in accordance with GAAP
consistently applied. Notwithstanding the preceding, for the fiscal
quarter ending September 30, 1997, the Borrower's EBIT shall be
calculated using an annualized EBIT based on the EBIT for the three (3)
fiscal quarters ending September 30, 1997. For all periods after
December 31, 1998, "EBIT" means as to the Borrower and its Subsidiaries
for any period of determination thereof, earnings before interest and
Taxes, determined in accordance with GAAP consistently applied over the
last twelve (12) month period. For the fiscal quarter ending December
31, 1997 and thereafter, EBIT shall exclude up to Three Million Two
Hundred Thousand Dollars ($3,200,000) of Employee Stock Ownership Plan
expense.
"EBITDA" means as to the Borrower and its Subsidiaries for the
fiscal year beginning January 1, 1998 thru December 31, 1998, the sum of
(a)earnings before interest and Taxes, determined in accordance with
GAAP, plus (b) depreciation and amortization of assets for such period,
all as calculated on an annualized basis based on the fiscal quarter
then ending. For all periods after December 31, 1998,"EBITDA"means as
to the Borrower and its Subsidiaries, the sum of (a) earnings before
interest and Taxes, determined in accordance with GAAP consistently
applied over the last twelve (12) month period, plus (b) depreciation
and amortization of assets for such period. For the fiscal quarter
ending December 31, 1997 and thereafter, EBITDA shall exclude up to
Three Million Two Hundred Thousand Dollars ($3,200,000) of Employee
Stock Ownership Plan expense.
3. EBIT Ratio. Effective as of the date hereof, Section 6.1.17 of
the Financing Agreement is amended and restated in its entirety as follows:
6.1.17 EBIT Ratio. The Borrower will maintain a ratio of EBIT to
interest expense, tested as of the end of fiscal year 1997 of not less
than 2.10 to 1.0. Commencing as of the end of each fiscal quarter
thereafter, the Borrower will maintain a ratio of EBIT to interest
expense, tested as of the last day of each of the Borrower's fiscal
quarters of not less than 2.25 to 1.0
2
<PAGE> 3
4. Representations. The Borrower hereby warrants and represents to
the Lender that no Event of Default has occurred or is continuing upon the
execution of this Agreement.
5. Conditions Precedent. This Agreement shall become effective on
the date the Lender receives the following, each of which shall be satisfactory
in form and substance to the Lender:
(a) Proof that the Borrower has paid all costs and expenses
(invoiced as of the date of this Agreement), to the Lender and its counsel in
connection with this Agreement, including but not limited to the Lender's
reasonable attorneys fees invoiced as of such date; and
(b) Such other information, instruments, opinions,
documents, certificates and reports as the Lender may in its reasonable
discretion deem necessary.
6. Counterparts. This Agreement may be executed in any number of
duplicate originals or counterparts, each of which duplicate original or
counterpart shall be deemed to be an original and all taken together shall
constitute one and the same instrument.
7. Financing Documents; Governing Law; Etc. This Agreement is one
of the Financing Documents defined in the Financing Agreement and shall be
governed and construed in accordance with the laws of the State of Maryland. The
headings and captions in this Agreement are for the convenience of the parties
only and are not a part of this Agreement.
8. Acknowledgments. The Borrower hereby confirms to the Lender the
enforceability and validity of each of the Financing Documents. In addition,
the Borrower hereby agrees to the execution and delivery of this Agreement and
the terms and provisions, covenants or agreements contained in this Agreement
shall not in any manner release, impair, lessen, modify, waive or otherwise
limit the liability and obligations of the Borrower under the terms of any of
the Financing Documents, except as otherwise specifically set forth in this
Agreement. The Borrower issues,
3
<PAGE> 4
ratifies and confirms the representations, warranties and covenants contained in
the Financing Documents, as amended from time to time.
9. Release. The Borrower represents and warrants that it has no
claims, actions, causes of action, defenses, counterclaims or setoffs of any
kind or nature which the Borrower can or could assert against the Lender in
connection with the making, closing, administration, collection or enforcement
by the Lender of this Agreement any Financing Document or the Revolving Loan. IN
THE EVENT THE BORROWER HAS ANY CLAIMS, ACTIONS, CAUSES OF ACTION, DEFENSES,
COUNTERCLAIMS OR SETOFFS OF ANY KIND OR NATURE WHICH THE BORROWER NOW OR
HEREAFTER MAY ASSERT AGAINST THE LENDER IN CONNECTION WITH THE MAKING, CLOSING,
ADMINISTRATION, COLLECTION OR ENFORCEMENT BY THE LENDER OF THIS AGREEMENT THE
FINANCING DOCUMENTS OR THE REVOLVING LOAN FOR ALL PERIODS THROUGH AND INCLUDING
THE DATE OF THIS AGREEMENT, THEN BY EXECUTING THIS AMENDMENT, THE BORROWER
FOREVER WAIVES AND RELEASES THE LENDER, AND ITS OFFICERS, ATTORNEYS, AGENTS,
REPRESENTATIVES, EMPLOYEES, SHAREHOLDERS, PARENT CORPORATIONS, SUBSIDIARIES,
AFFILIATES, SUCCESSORS AND ASSIGNS FROM ANY LIABILITY, SUIT, DAMAGE, CLAIM, LOSS
OR EXPENSE OF ANY KIND OR NATURE WHATSOEVER AND HOWSOEVER ARISING THAT THE
BORROWER EVER HAD, NOW HAS OR MAY HAVE AGAINST THE LENDER OR ANY OF THEM ARISING
OUT OF OR RELATING TO THE FOREGOING OBLIGATIONS. IN ADDITION, THE BORROWER
REPRESENTS AND WARRANTS THAT IT WILL NOT COMMENCE, JOIN IN, PROSECUTE OR
PARTICIPATE IN ANY SUIT OR OTHER PROCEEDING IN A POSITION THAT IS
4
<PAGE> 5
ADVERSE TO THE LENDER IN CONNECTION WITH THE MAKING, CLOSING, ADMINISTRATION,
COLLECTION OR ENFORCEMENT BY THE LENDER OF THIS AGREEMENT, ANY FINANCING
DOCUMENT OR THE REVOLVING LOAN FOR ALL PERIODS THROUGH AND INCLUDING THE DATE OF
THIS AGREEMENT. THE BORROWER HEREBY AGREES TO INDEMNIFY AND HOLD THE LENDER AND
ITS OFFICERS, ATTORNEYS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS
(COLLECTIVELY, THE "INDEMNIFIED PARTIES") HARMLESS FROM ANY LOSS, DAMAGE,
JUDGMENT, LIABILITY OR EXPENSE (INCLUDING ATTORNEY'S FEES) SUFFERED BY OR
RENDERED AGAINST THE INDEMNIFIED PARTIES ON ACCOUNT OF ANYTHING ARISING OUT OF
THIS AGREEMENT, ANY FINANCING DOCUMENT OR THE REVOLVING LOAN FOR ALL PERIODS
THROUGH AND INCLUDING THE DATE OF THIS AGREEMENT. THIS AGREEMENT AND COVENANT ON
THE PART OF THE BORROWER IS CONTRACTUAL, AND NOT A MERE RECITAL, AND THE
BORROWER ACKNOWLEDGES AND AGREES THAT NO LIABILITY WHATSOEVER IS ADMITTED ON THE
PART OF ANY PARTY, EXCEPT THE BORROWER'S INDEBTEDNESS UNDER THIS AGREEMENT, THE
FINANCING DOCUMENTS THE REVOLVING CREDIT NOTE, AND THAT ALL AGREEMENTS AND
UNDERSTANDINGS BETWEEN THE PARTIES HERETO ARE EMBODIED IN THE FINANCING
DOCUMENTS AND THIS AGREEMENT AND THE RELEASE AND ALL SECURITY INSTRUMENTS
EXECUTED IN CONNECTION THEREWITH.
10. No Implied Waivers by Lender. Except as expressly set forth
herein, the Borrower acknowledges and agree that the execution of this Agreement
by the Lender is not intended nor shall
5
<PAGE> 6
it be construed as (a) an actual or implied waiver of any default under any note
previously delivered to the Lender in connection with Revolving Loan, the
Financing Agreement or any other Financing Document, or (b) at actual or implied
waiver of any condition or obligation imposed upon the Borrower pursuant to any
note previously delivered to the Lender in connection with the Revolving Loan,
the Revolving Credit Note, the Financing Agreement or any other Financing
Document, except to the extent specified herein.
11. Third Parties. All of the understandings, agreements,
representations and warranties contained herein are solely for the benefit of
the parties hereto and there are no other parties who are intended to be
benefitted, or who may be benefitted in any way from this Agreement.
12. Miscellaneous. To the extent of any conflict between the
Revolving Credit Note, the Financing Agreement or any other Financing Document
and this Agreement, this Agreement shall control. Except as hereby expressly
modified, all terms of the Revolving Credit Note, the Financing Agreement and
all other Financing Documents (as any of them may have been previously modified
by any written agreement) remain in full force and effect. This Agreement
embodies the entire agreement and understanding between the parties with respect
to modifications of documents provided for herein and supersedes all prior
conflicting or inconsistent agreements, consents and understandings relating to
such subject matter. The duties, covenants, conditions, obligations and
warranties of the Borrower in this Agreement shall be obligations of the
Borrower and its successors and assigns. The Borrower represents and warrants to
the Lender that this Agreement is duly executed, acknowledged and delivered by
the Borrower's duly authorized representatives.
13. Modifications. This Agreement may not be supplemented, changed,
waived, discharged, terminated, modified or amended, except by written
instrument executed by the parties.
6
<PAGE> 7
IN WITNESS WHEREOF the parties hereto have signed and sealed this
Agreement on the day and year first above written.
WITNESS/ATTEST: CTA INCORPORATED
/s/ JOHN WAGNER By: /s/ GREGORY H. WAGNER (SEAL)
- ------------------------ --------------------------------------
Gregory H. Wagner
Executive Vice President and Chief Financial
Officer
FIRST UNION COMMERCIAL CORPORATION
By: /s/ BARBARA BOEHM (SEAL)
--------------------------------------
Barbara Boehm
Vice President
7
<PAGE> 1
EXHIBIT 10.3
================================================================================
ASSET ACQUISITION AGREEMENT
dated as of July 11, 1997
between
CTA INCORPORATED,
as Seller
and
ORBITAL SCIENCES CORPORATION,
as Buyer
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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SECTION 1
DEFINITIONS ..............................................................2
1.1. Cross Reference Table of Certain Defined Terms ................2
1.2. Definitions of Certain Additional Terms .......................3
1.2.1. "Affiliate" ...................................3
1.2.2. "Business Assets" .............................3
1.2.3. "Business Intellectual Property Rights" .......3
1.2.4. "CBCA" ........................................3
1.2.5. "Code" ........................................3
1.2.6. "Contract" ....................................3
1.2.7. "Exchange Act" ................................4
1.2.8. "FAR" .........................................4
1.2.9. "GEMtrak Revenues" ............................4
1.2.10. "HSR Act".................................4
1.2.11. "Income Tax"..............................4
1.2.12. "Income Tax Return".......................4
1.2.13. "Intellectual Property Rights"............4
1.2.14. "Loss"....................................5
1.2.15. "Material Adverse Effect".................5
1.2.16. "Securities Act"..........................5
1.2.17. "SEC".....................................5
1.2.18. "Seller's knowledge"......................5
1.2.19. "STARBus Bus".............................5
1.2.20. "STARBus Bus Contract"....................5
1.2.21. "STARBus Contract"........................6
1.2.22. "STARBus Satellite".......................6
1.2.23. "STARBus Satellite Contract"..............6
1.2.24. "STARBus Threshold Amount"................6
1.2.25. "Subsidiary"..............................6
1.2.26. "Tax".....................................6
1.2.27. "Tax Return"..............................7
1.2.28. "Transaction Agreements"..................7
1.3. Other Definitional Provisions .................................7
SECTION 2
PURCHASE AND SALE OF THE PURCHASED ASSETS ................................7
2.1. Purchased Assets ..............................................7
2.2. Excluded Assets ...............................................9
2.3. Assumption of Liabilities ....................................10
</TABLE>
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<TABLE>
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2.4. Excluded Liabilities .........................................10
2.5. Purchase Price ...............................................12
2.6. Closing Statement and Indostar Adjustment ....................13
2.7. Deferred Consideration .......................................14
2.8. Allocation of Purchase Price .................................18
2.9. Closing ......................................................18
SECTION 3
REPRESENTATIONS AND WARRANTIES OF SELLER ................................18
3.1. Due Organization, Authorization and Good Standing of Seller ..18
3.2. No Violation or Approval .....................................19
3.3. Business Assets ..............................................20
3.4. All Assets Necessary to Conduct Business .....................20
3.5. Subsidiaries .................................................20
3.6. Intellectual Property Rights .................................20
3.6.1. General ......................................20
3.6.2. Adequacy .....................................21
3.6.3. Royalties and Licenses .......................21
3.6.4. Ownership ....................................21
3.6.5. Absence of Claims ............................21
3.6.6. Protection of Intellectual Property ..........22
3.7. Indebtedness; Guarantees .....................................22
3.8. Financial Statements, etc ....................................22
3.9. Absence of Changes; Operations in the Ordinary Course ........23
3.10. Absence of Undisclosed Liabilities ...........................23
3.11. Taxes ........................................................23
3.12. Title to Tangible Assets .....................................25
3.13. Suppliers ....................................................26
3.14. Inventory ....................................................26
3.15. Operations in Conformity With Law, etc .......................26
3.16. Litigation ...................................................27
3.17. Employee Matters; Benefit Plans ..............................27
3.18. Labor Relations ..............................................28
3.19. Government Contracts and Subcontracts ........................29
3.20. Licenses, etc ................................................29
3.21. Environmental Matters ........................................29
3.22. Contracts ....................................................30
3.23. Affiliated Transactions ......................................32
3.24. Insurance ....................................................32
3.25. Customer Warranty Coverage ...................................32
3.26. Certain Agreements ...........................................32
</TABLE>
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<TABLE>
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3.27. Brokers, Finders, etc ........................................33
3.28. Books and Records ............................................33
3.29. Bank Accounts ................................................33
3.30. Accountants ..................................................33
3.31. Lender Consents ..............................................33
SECTION 4
REPRESENTATIONS AND WARRANTIES OF ORBITAL ...............................33
4.1. Due Organization, Authorization and Good Standing ............33
4.2. No Violation or Approval .....................................34
4.3. SEC Reports ..................................................34
4.4. Financial Statements, etc ....................................35
4.5. Absence of Changes ...........................................35
4.6. Litigation ...................................................35
4.7. Brokers, Finders, etc ........................................36
4.8. Accountants ..................................................36
4.9. Bank Approvals ...............................................36
SECTION 5
CERTAIN COVENANTS .......................................................36
5.1. Post Closing Financials ......................................36
5.2. Exclusivity; Acquisition Proposals ...........................36
5.3. HSR Act; Etc .................................................37
5.4. Notices and Consents .........................................37
5.5. Preparation for Closing ......................................37
5.6. Public Announcements .........................................37
5.7. Confidential Information .....................................38
5.8. Noncompetition, Etc ..........................................38
5.9. Notification of Certain Matters ..............................39
5.10. Other Limitations on Conduct of Business Prior to the Closing
Date ...............................................................39
5.11. Access to Information ........................................41
5.12. Transfer Taxes ...............................................41
5.13. Employee Matters .............................................41
5.14. Accounting and Financial Records .............................43
5.15. Income Tax Matters ...........................................43
5.15.1. Tax Sharing Agreements .......................43
5.15.2. Tax Periods Ending On or Before the
Closing Date .................................................43
5.15.3. Tax Periods Beginning On or Before and
Ending After the Closing Date ................................44
</TABLE>
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<TABLE>
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5.15.4. Tax Periods Beginning After the Closing
Date .........................................................45
5.15.5. Contests ....................................45
5.15.6. Interperiod Tax Attribute Adjustments .......46
5.15.7. Amended Returns and Refunds .................47
5.15.8. Retention of Carryovers .....................47
5.15.9. Section 338(h)(10) Elections ................47
5.15.10. Indemnification for Post-Closing
Transactions .................................................47
5.15.11. Notices .....................................47
5.15.12. Cooperation .................................48
5.15.13. Valuation and Allocation ....................48
5.15.14. Purchase Price Adjustment ...................48
5.16. Government Contracts .........................................49
5.17. Limitation of Certain Types of Transactions by Seller After
Closing ............................................................49
5.18. Intercompany Accounts ........................................49
5.20. Stockholders' Meeting ........................................49
5.21. Liquidated Damages ...........................................50
5.22. Further Assurances ...........................................50
SECTION 6
CONDITIONS PRECEDENT ....................................................51
6.1. Conditions Precedent to Obligations of Seller ................51
6.1.1. Purchase Price ...............................51
6.1.2. Payment to Lenders ...........................51
6.1.3. Representations; Covenants; Certificate ......51
6.1.4. Opinion of Counsel for Orbital ...............52
6.1.5. Charter Documents, Etc .......................52
6.1.6. General ......................................52
6.2. Conditions Precedent to Obligations of Orbital ...............52
6.2.1. Representations; Covenants; Certificate ......52
6.2.2. Opinions of Counsel for Seller ...............53
6.2.3. Assignment of Seller Intellectual Property ...53
6.2.4. Charter Documents, Etc .......................53
6.2.6. Credit Agreements ............................53
6.2.7. Required Consents ............................54
6.2.8. Release of Liens .............................54
6.2.9. EarthWatch Modifications .....................54
6.2.10. General ......................................54
6.3. Conditions Precedent to the Obligations of Each Party ........54
</TABLE>
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<TABLE>
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6.3.1. Stockholder Approval .........................54
6.3.2. HSR Act ......................................55
6.3.3. Bill of Sale and Assignment and Assumption
Agreement ....................................................55
6.3.4. Governmental and Court Approvals .............55
6.3.5. Injunctions ..................................55
SECTION 7
INDEMNIFICATION .........................................................55
7.1. Orbital's Indemnification ....................................55
7.2. Seller's Indemnification .....................................56
7.3. Time Limits on Indemnification ...............................58
7.4. Monetary Limitations on Indemnification ......................59
7.5. Notice of Claims .............................................59
7.6. Defense of Claims ............................................60
7.7. Exclusive Remedy .............................................61
7.8. Setoff .......................................................61
7.9. Calculation of Losses ........................................62
SECTION 8
MISCELLANEOUS ...........................................................62
8.1. Termination ..................................................62
8.2. Amendments and Supplements ...................................63
8.3. Expenses .....................................................63
8.4. No Adequate Remedy ...........................................63
8.5. Governing Law ................................................64
8.6. Notice .......................................................64
8.7. Entire Agreement, Assignability, Etc .........................65
8.8. Exclusivity of Representations ...............................65
8.9. Counterparts .................................................65
</TABLE>
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EXHIBITS
Exhibit 2.6 Most Recent Statement
Exhibit 6.1.4 Form of Ropes & Gray Opinion
Exhibit 6.2.2 Opinions to be given by Seller's Counsel
Exhibit 6.3.3 Bill of Sale and Assignment and Assumption Agreement
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SCHEDULES
<TABLE>
<S> <C>
Schedule 1.2.18 Knowledge Persons
Schedule 1.2.20 Existing Orbital Satellite Customers
Schedule 2.2.11 Corporate names, etc.
Schedule 2.7.1 Customers
Schedule 2.8 Allocation of Purchase Price
Schedule 3.1 Due Organization, etc.
Schedule 3.2 No Violation or Approval
Schedule 3.3 Business Assets
Schedule 3.5 Acquired Subsidiaries and Equity Investments
Schedule 3.6.1 Business Intellectual Property Rights
Schedule 3.6.2 Retained Intellectual Property Rights
Schedule 3.7 Acquired Subsidiary Guarantees
Schedule 3.9 Absence of Changes; Operations in the Ordinary Course
Schedule 3.10 Undisclosed Liabilities
Schedule 3.11 Taxes
Schedule 3.12 Liens
Schedule 3.13 Suppliers
Schedule 3.16 Litigation
Schedule 3.17 Employee Matters; Benefit Plans
Schedule 3.19 Govermnent Contracts and Subcontracts
Schedule 3.20 Licenses
Schedule 3.21 Environmental Matters
Schedule 3.22 Contracts
Schedule 3.24 Insurance
Schedule 3.25 Customer Warranty Coverage
Schedule 3.26 Certain Agreements
Schedule 3.29 Bank Accounts
Schedule 4.2 No Violation or Approval
Schedule 5.13 Employee Matters
</TABLE>
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ASSET ACQUISITION AGREEMENT
THIS ASSET ACQUISITION AGREEMENT (the "Agreement"), dated as of July 11,
1997, is entered into by and between Orbital Sciences Corporation, a corporation
incorporated under the laws of the State of Delaware ("Orbital"), and CTA
Incorporated, a corporation incorporated under the laws of the State of Colorado
("Seller").
WHEREAS, Seller is engaged in the business of developing, designing and
manufacturing low Earth orbit and geosynchronous orbit satellite systems and
related support systems, providing aerospace hardware, software and engineering
services for space systems and related ground systems, and marketing and selling
such systems, hardware, software and services to commercial and government
customers (the "Space Business");
WHEREAS, Seller is engaged in the business of developing, designing and
manufacturing automated tracking and cargo status data systems of unpowered
mobile assets such as truck trailers, railcars and containers, including without
limitation Seller's GEMtrak tracking system ("GEMtrak"), and marketing and
selling such systems to commercial customers (the "Mobile Information Business"
and, together with the Space Business, the "Business"); and
WHEREAS, Orbital desires to purchase from Seller substantially all the
assets (including the stock of certain subsidiaries) pertaining to the Business
and to assume certain specified liabilities of Seller related thereto, in each
case on the terms and subject to the conditions set forth in this Agreement (it
being understood that Orbital is not acquiring the business of, or product lines
sold by, business segments of Seller other than the Business except to the
extent specifically provided herein).
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants, representations, warranties and agreements set forth herein, and
intending to be legally bound hereby, Orbital and Seller hereby agree as
follows:
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SECTION 1
DEFINITIONS
1.1. Cross Reference Table of Certain Defined Terms. The following terms
are defined in the Sections set forth below, and shall have the respective
meanings therein defined:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
"Acquisition Transaction" Section 5.2
"Accounts Receivable" Section 2.1.3
"Acquired Subsidiaries" Section 2.1.11
"Agreement" Preamble
"Business" Recitals
"Cash Consideration" Section 2.5
"Charter Documents" Section 3.1
"Claim" Section 7.5
"Closing" Section 2.9
"Closing Date" Section 2.9
"Computer Software" Section 1.2.13
"Closing Statement" Section 2.6.1
"Deferred Consideration Period" Section 1.2.20
"Employees" Section 3.17(f)
"ERISA" Section 3.17
"Excluded Assets" Section 2.2
"Excluded Liabilities" Section 2.4
"Financial Statements" Section 3.8
"FSAs" Section 5.13
"GAAP" Section 3.8
"GEMtrak" Recitals
"Government Contract" Section 3.19
"Government Subcontract" Section 3.19
"Hazardous Substance" Section 3.21
"Indebtedness" Section 3.7
"Indemnifying Party" Section 7.1
"Indemnitee" Section 7.1
"Inventory" Section 2.1.1
"Liens" Section 3.5
"Mobile Information Business" Recitals
"Most Recent Statement" Section 3.8
"Most Recent Statement Date" Section 3.8
</TABLE>
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<TABLE>
<S> <C>
"Net Tangible Assets" Section 2.6.1
"Orbital" Preamble
"Orbital Financial Statements" Section 4.4
"Overlap Period" Section 5.15.3
"PCBs" Section 3.21
"Plans" Section 3.17
"Post-Closing Periods" Section 5.15.4
"Purchase Price" Section 2.5.1
"Purchased Assets" Section 2.1
"Retained Receivables" Section 2.5.2
"SEC Reports" Section 4.3
"Section 338(h)(10) Election" Section 5.15.9
"Seller" Preamble
"Space Business" Recitals
"Stockholder Meeting" Section 5.20
"Tax Benefits" Section 5.15.6
"Tax Detriments" Section 5.15.6
</TABLE>
1.2. Definitions of Certain Additional Terms. The following terms shall
have the meanings set forth below:
1.2.1. "Affiliate" has the meaning set forth in Rule 12b-2 under
the Exchange Act.
1.2.2. "Business Assets" means the Purchased Assets (other than
the capital stock of the Acquired Subsidiaries) and all assets,
properties and rights, tangible or intangible, of any Acquired
Subsidiary.
1.2.3. "Business Intellectual Property Rights" means all
Intellectual Property Rights of Seller used principally in the Business
and all Intellectual Property Rights of each Acquired Subsidiary.
1.2.4. "CBCA" means the Colorado Business Corporation Act, as
amended.
1.2.5. "Code" means the United States Internal Revenue Code of
1986, as amended.
1.2.6. "Contract" means all contracts, agreements, deeds,
mortgages, leases (whether or not capitalized), licenses, instruments,
commitments, sales
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orders, purchase orders, quotations, bids, undertakings, arrangements or
understandings, written or oral, (i) to which or by which any Acquired
Subsidiary is a party or otherwise bound, or (ii) principally relating
to the Business or the Business Assets to which or by which Seller is a
party or otherwise bound.
1.2.7. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
1.2.8. "FAR" means the Federal Acquisition Regulations, 48
C.F.R. 1, et seq. as in effect from time to time.
1.2.9. "GEMtrak Revenues" means all revenues, determined in
accordance with GAAP applied in a manner consistent with the preparation
of Orbital's financial statements, that would constitute revenues
attributable to the terrestrial-based tracking of unpowered assets using
Seller's asset-monitoring system described in its United States patent
application Serial No. 08/674,577, including without limitation any such
revenues attributable to sales of related hardware.
1.2.10. "HSR Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
1.2.11. "Income Tax" means any Tax (including any interest,
addition to Tax or penalty) based upon or computed by reference to
income or profits, and any corporate franchise Tax.
1.2.12. "Income Tax Return" means any Tax Return relating to an
Income Tax.
1.2.13. "Intellectual Property Rights" means, collectively: (a)
all U.S. and foreign registered, unregistered and pending (i) trade
names, trade dress, trademarks, service marks, assumed names, business
names and logos, and all registrations and applications therefor, (ii)
all computer software, data files, source and object codes, user
interfaces, manuals and other specifications and documentation and all
know-how related thereto (collectively, the "Computer Software"),
copyrights (including, without limitation, those in Computer Software,
and all registrations and applications therefor), (iii) technical
information, data, process technology, technical papers, plans, drawings
and blue prints, (iv) all patents, patent applications, and inventions
and discoveries that may be patentable, registered designs and invention
disclosures (including, without limitation, those in Computer Software),
(v) all know-how, trade secrets,
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proprietary inventions, proprietary processes, proprietary formulae,
proprietary know-how, proprietary concepts, proprietary ideas,
proprietary research and development, and proprietary designs, and (vi)
all other intellectual property, and (b) all licenses, sublicenses,
assignments in respect thereto and rights thereunder, remedies against
infringements thereof and rights to protection of interest therein
relating to the items set forth in clause (a) above.
1.2.14. "Loss" means all liabilities, obligations, judgments,
liens, injunctions, charges, orders, decrees, rulings, damages, demands,
claims, losses, dues, assessments, Taxes, losses, fines, penalties,
expenses, fees, costs, and amounts paid in settlement (including
reasonable attorneys' and expert witness fees and disbursements in
connection with investigating, defending or settling any action or
threatened action).
1.2.15. "Material Adverse Effect" means any effect or change
that does have, or would reasonably be expected to have, a material
adverse effect on the business, financial condition, operating results
or prospects of the Business or the Business Assets taken as a whole.
1.2.16. "Securities Act" means the Securities Act of 1933, as
amended.
1.2.17. "SEC" means the Securities and Exchange Commission.
1.2.18. "Seller's knowledge" or "known to Seller" means the
actual knowledge of each person listed on Schedule 1.2.18.
1.2.19. "STARBus Bus" means the "STARBus" satellite bus
currently marketed by Seller or any modifications or derivatives thereof
that do not exceed 4,300 watts in total spacecraft power, do not exceed
4,000 pounds in launch mass and are SPELDA-compatible.
1.2.20. "STARBus Bus Contract" means a definitive written
agreement entered into subsequent to the Closing and prior to the fifth
anniversary of the Closing (the "Deferred Consideration Period")
providing for the binding purchase by a third party (excluding (i)
Orbital, ORBCOMM Global, L.P., ORBCOMM USA L.P., ORBCOMM
International, L.P. and Orbital Imaging Corporation, (ii) any satellite
customer specified on Schedule 1.2.20, and (iii) any entity that
currently is a Subsidiary of any Person described in the foregoing
clauses (i) and (ii)) of a STARBus Bus (but not the associated payload)
from Orbital or any of its Subsidiaries. A customer option for a STARBus
Bus shall not be considered a
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<PAGE> 14
STARBus Bus Contract until the written exercise of such option by the
customer and at such time shall be deemed to be a separate STARBus Bus
Contract.
1.2.21. "STARBus Contract" means a STARBus Bus Contract or a
STARBus Satellite Contract.
1.2.22. "STARBus Satellite" means a geosynchronous satellite
including payload that uses the STARBUS Bus.
1.2.23. "STARBus Satellite Contract" means a definitive written
agreement entered into during the Deferred Consideration Period
providing for the binding purchase by a third party (excluding (i)
Orbital, ORBCOMM Global, L.P. , ORBCOMM USA L.P., ORBCOMM International,
L.P. and Orbital Imaging Corporation, (ii) any satellite customer
specified on Schedule 1.2.20, and (iii) any entity that currently is a
Subsidiary of any Person described in the foregoing clauses (i) and
(ii)) of a STARBus Satellite from Orbital or any of its Subsidiaries. A
customer option for a STARBus Satellite shall not be considered a
STARBus Satellite Contract until the written exercise of such option by
the customer and at such time shall be deemed to be a separate STARBus
Satellite Contract. A STARBus Satellite Contract shall, for purposes of
Section 2.7.1, be considered to provide for a STARBus Satellite but not
a STARBus Bus.
1.2.24. "STARBus Threshold Amount" means a number of STARBus
Buses subject to STARBus Bus Contracts and STARBus Satellites subject to
STARBus Satellite Contracts for which the sum of (a) the number of such
STARBus Buses plus (b) two times the number of such STARBus Satellites,
exceeds 10.
1.2.25. "Subsidiary" shall mean, with respect to any
corporation, any other corporation, association or other business entity
a majority (by number of votes) of the shares of capital stock (or other
voting interests) of which is owned directly or indirectly by such
corporation.
1.2.26. "Tax" means any federal, state or local tax or any
foreign tax (including, without limitation, any net income, gross
income, profits, premium, estimated, excise, sales, value added,
services, use, occupancy, gross receipts, franchise, license, ad
valorem, severance, capital levy, production, stamp, transfer,
withholding, employment, unemployment, social security (including FICA),
payroll or property tax, customs duty, or any other governmental charge
or assessment), together with any interest, addition to tax, or penalty.
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1.2.27. "Tax Return" means any return, declaration, report,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
1.2.28. "Transaction Agreements" means this Agreement, the bill
of sale and assignment and assumption agreement referred to in Section
6.3.3 and the general assignment of the Business Intellectual Property
Rights referred to in Section 6.2.3.
1.3. Other Definitional Provisions. The words "hereof" and
"hereunder" and words of similar import, when used in this Agreement, shall
refer to this Agreement as a whole and not to any particular provisions of this
Agreement. The terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
SECTION 2
PURCHASE AND SALE OF THE PURCHASED ASSETS
2.1. Purchased Assets. Seller agrees to sell, assign and transfer to
Orbital, and Orbital agrees to purchase from Seller at the Closing, all Seller's
right, title and interest as of the Closing Date in and to all assets,
properties and rights of Seller, tangible and intangible, owned or used by
Seller that are principally used in or principally relate to the Business,
including without limitation the specific assets set forth below, as such assets
exist on the Closing Date (the "Purchased Assets"). Notwithstanding the
foregoing, the Purchased Assets shall not include the Excluded Assets.
2.1.1. All inventory held by or for Seller (the "Inventory")
for use in the conduct of the Business (including without limitation raw
material, work in process, finished goods, service parts and supplies),
including without limitation the inventory set forth on Schedule 3.3 to
the extent not sold in the ordinary course of business prior to the
Closing Date.
2.1.2. All furniture, fixtures, equipment, machinery, computer
hardware, parts, tools, dies, jigs, automobiles, trucks, tractors,
trailers, chemicals and other tangible personal property held by or for
Seller and principally used in the conduct of the Business, including
without limitation the items set forth on Schedule 3.3 to the extent not
consumed or disposed of in the ordinary course of business prior to the
Closing Date.
2.1.3. Accounts receivable of Seller arising from the conduct
of the Business (other than the Retained Receivables), including without
limitation the
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accounts receivable of Seller set forth on the Closing Statement (the
"Accounts Receivable").
2.1.4. All claims and similar rights (and benefits arising
therefrom) of Seller, including without limitation all warranty rights
against suppliers, principally related to or principally arising out of
the Business or the Purchased Assets.
2.1.5. All governmental permits, authorizations, licenses,
orders, registrations, certificates, variances, approvals, consents,
franchises and directives set forth on Schedule 3.20(a).
2.1.6. All Seller's rights under the Contracts, including
without limitation all Seller's rights under those Contracts listed on
Schedule 3.22.
2.1.7. All Business Intellectual Property Rights of Seller,
including without limitation those set forth on Schedule 3.6.1.
2.1.8. All books and records of Seller that pertain principally
to the Business or the Purchased Assets, including without limitation
customer lists, customer records, Tax Returns and other information,
distributor lists, supplier lists, mailing lists, business and marketing
plans, product brochures and other advertising and marketing material,
studies, reports, payroll, inventory, maintenance and asset history
records, ledgers, books of original entry and all historical source data
and other information electronically stored or otherwise recorded.
2.1.9. All claims, deposits, prepayments, refunds, causes of
action, choses in action, rights of recovery, rights of set off and
rights of recoupment of Seller that relate principally to the Business
or Purchased Assets.
2.1.10. All rights of Seller to or in connection with prepaid
expenses principally relating to the Business or Purchased Assets,
including without limitation the prepaid expenses of Seller set forth on
the Closing Statement.
2.1.11. All the outstanding capital stock of the following
Subsidiaries of Seller: Engineering Technologies, Inc., a Virginia
corporation, and CTA Commercial Systems, a Virginia corporation
(together with their direct and indirect Subsidiaries, the "Acquired
Subsidiaries").
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2.1.12. All equity or other interests held directly by Seller in
each of (i) EarthWatch Incorporated, a Colorado corporation, and (ii)
Constellation Communications Incorporated, a Delaware corporation.
2.1.13. To the extent not otherwise included in this Section
2.1, all assets set forth on the Closing Statement.
2.2. Excluded Assets. Notwithstanding anything to the contrary in
Section 2.1, the Purchased Assets shall not include any of the following assets
of Seller as the same exist on the Closing Date (collectively, the "Excluded
Assets"):
2.2.1. Claims and litigation against third parties, including
without limitation claims for refunds, to the extent such claims or
litigation are related to Taxes or are not related to the Purchased
Assets or Assumed Liabilities.
2.2.2. Insurance policies of Seller and rights in connection
therewith, including without limitation any rights to claims, premium
adjustments, refunds or other prepaid expenses thereunder or related
thereto.
2.2.3. All Plans of Seller (including without limitation Plans
under which the Acquired Subsidiaries are participating employers), and
all assets of such Plans.
2.2.4. Checkbooks, canceled checks and Tax Returns of Seller.
2.2.5. The outstanding capital stock of the following
Subsidiaries of Seller: CTA International Ltd., HITEC Telespace, S.A.,
CTA Launch Services, Inc. and CTA Simulation Systems, LLC.
2.2.6. The Retained Receivables.
2.2.7. Intercompany accounts receivable except to the extent
set forth on the Closing Statement.
2.2.8. All assets principally related to the information
technology business currently conducted by Seller and its Subsidiaries
(other than the Acquired Subsidiaries).
2.2.9. Except to the extent set forth on the Closing Statement,
cash (including without limitation cash generated by accounts receivable
payments), bank deposits, marketable securities or other cash
equivalents.
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2.2.10. Rights under license agreements with respect to Deltek
software, Microframe Project Management software and Lotus ccMail
software.
2.2.11. All rights to the corporation names, business names,
logos, trade names and trademarks listed in Schedule 3.6.2.
2.3. Assumption of Liabilities. Upon the terms and subject to the
conditions herein, at the Closing, Orbital shall assume and agree to discharge
and perform when due, only the following liabilities and obligations of Seller
(the "Assumed Liabilities"):
2.3.1. All liabilities of Seller to the extent reflected on, or
in respect of liabilities of Acquired Subsidiaries to the extent
reflected on, the Closing Statement.
2.3.2. Liabilities and obligations of Seller under the
Contracts (including without limitation, Government Contracts and
Government Subcontracts) assigned, novated or to be novated pursuant to
this Agreement.
2.3.3. Without limiting Section 2.3.1, liabilities of Seller to
Employees in respect of accrued but unpaid wages, accrued vacation time
and accrued personal time, in each case solely to the extent such
liabilities are reflected on the Closing Statement.
The agreement by Orbital to assume the foregoing liabilities shall not create
any third party beneficiary rights. Orbital acknowledges that after the Closing
each of the Acquired Subsidiaries shall remain obligated for its liabilities
incurred prior to Closing (subject to Sections 5.15 and 7.2).
2.4. Excluded Liabilities. Notwithstanding any other provision of
this Agreement, except for the Assumed Liabilities expressly specified in
Section 2.3, Orbital shall not assume or be responsible for any liability or
obligation, whether fixed or contingent, known or unknown, matured or unmatured,
of Seller (the "Excluded Liabilities"), including without limitation:
2.4.1. Any intercompany liabilities of Seller.
2.4.2. Any liabilities of Seller for any Tax (including any
such Tax payable in connection with the transfer of the Purchased Assets
from Seller to Orbital), whether or not incurred prior to the Closing
Date, except to the extent
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such liability is reflected on the Closing Statement, and any obligation
of Seller to file any Tax Returns in respect of such Taxes.
2.4.3. Any liability or obligation of Seller with respect to
indebtedness for borrowed money.
2.4.4. Any liability or obligation of Seller arising out of any
Plan established or maintained by Seller or any of its Subsidiaries or
to which Seller or any of its Subsidiaries contributes, or any liability
of Seller relating to the participation of the Employees in any such
Plan.
2.4.5. Except as specifically set forth in Section 2.3.3, any
liability or obligation to or in respect of any employee or former
employee of Seller, including without limitation (i) any obligation or
liability to make payments for accrued sick days, (ii) any obligation or
liability to pay any retention bonus, (iii) any obligation or liability
to make severance or similar payments, (iv) any employment agreement,
whether or not written, between Seller and any employee, including
without limitation any agreement with Ricardo de Bastos or Bonnie A.
Clausen, II or the Consulting Agreement dated September 6, 1996 between
Seller and Martin N. Titland and (v) any claim of an unfair labor
practice, or any claim under any state unemployment compensation or any
federal or state workers' compensation law or regulation or any claim of
harassment or discrimination, which shall have been asserted on or prior
to the Closing Date or is based on acts or omissions which occurred on
or prior to the Closing Date.
2.4.6. Any liability or obligation arising from the matters
that are the subject of (i) the lawsuit captioned Thomas van der Heyden
v. CTA Incorporated, et al., Case No. 156956, filed on October 10, 1996
in the Circuit Court of Maryland for Montgomery County, and the related
arbitration proceeding, (ii) the arbitration proceeding captioned
Volunteers in Technical Assistance v. CTA, Incorporated before
party-appointed arbitrators in Washington, D.C., (iii) the proceeding
captioned DBSIndustries, Inc. v. CTA, Inc., Opposition No. 97,765, filed
on June 21, 1995 in the United States Patent and Trademark Office,
Trademark Trial and Appeals Board, and (iv) the administrative
proceeding captioned In the Matter of Sylvia Jackson, filed in February
1997 in the Fairfax County Office of Human Rights.
2.4.7. Any liability or obligation of Seller arising out of or
in connection with storage, release or disposal of any hazardous or
toxic substance, including without limitation a "hazardous substance" as
defined in 42 U.S.C. Section 9601(14) and oil, gasoline and other
petroleum-based substances.
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2.4.8. Any liability or obligation of Seller (except to the
extent reflected on the Closing Statement) arising out of or related to
any Government Contract or Government Subcontract to the extent such
liability or obligation results from (i) any violation or noncompliance
prior to Closing of or with any Cost Accounting Standard, Disclosure
Statement, FAR provision (including without limitation Cost Principles),
or agency FAR supplemental provisions, (ii) any false claims or
defective pricing occurring prior to Closing, or (iii) any cost
disallowance relating to costs incurred prior to Closing.
2.4.9. Any liability or obligation to indemnify any person by
reason of the fact that such person was a director, officer, employee or
agent of Seller or was serving at the request of Seller as a partner,
trustee, director, officer, employee or agent of another entity.
2.4.10. Except for liabilities under the Contracts assigned,
novated or to be novated pursuant to this Agreement, any liability or
obligation for products manufactured or sold or services rendered by
Seller prior to the Closing Date, including without limitation any
liability arising from any injury to or death of any person or damage to
or destruction of any property, and regardless of whether based on
negligence, breach of warranty, strict liability, enterprise liability
or any other legal or equitable theory.
2.4.11. Any liability or obligation principally relating to or
arising out of Seller's Information Technology Services business.
2.5. Purchase Price.
2.5.1. Subject to adjustments as provided in Section 2.6, the
purchase price (the "Purchase Price") to be paid by Orbital to Seller
for the Purchased Assets and the covenant not to compete of Seller and
its Affiliates set forth in Section 5.8, in addition to the assumption
of the Assumed Liabilities and the payments to certain of Seller's
lenders to be made pursuant to Section 6.1.2, shall be
(a) $18,000,000 (subject to adjustment pursuant to Section 2.5.3),
minus the face amount of the Retained Receivables, in cash or
immediately available funds (the "Cash Consideration") to be
paid subject to the holdback of $3,000,000 reflected in Section
2.6.3 and Section 6.1.1, plus
(b) the right to receive the additional payments specified in
Section 2.7.
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2.5.2. Seller shall specifically identify in writing to Orbital
accounts receivable of Seller and the Acquired Subsidiaries of not less
than $6,000,000 as receivables to be retained by Seller at least two
business days prior to Closing (such accounts receivable, the "Retained
Receivables"), the selection of such receivables to be in Seller's sole
discretion.
2.5.3. The amount of $18,000,000 set forth in Section 2.5.1(a)
and the amount of $29,555,849 set forth in Section 2.6.3 shall be
reduced by the book value of the EarthWatch Incorporated securities
described in Section 2.1.12, in the amount of $2,037,500 (as such amount
may be adjusted to reflect receipt of additional securities), if such
securities are not delivered at Closing.
2.6. Closing Statement and Indostar Adjustment.
2.6.1. As promptly as practicable, and in any event within 45
days of Closing, Orbital and Seller shall jointly prepare or cause to be
prepared a consolidated balance sheet for the Business as of the Closing
Date (as initially prepared, and as subsequently determined in
accordance with this Section 2.6, the "Closing Statement"). The Closing
Statement shall be in the form of, and shall be prepared in accordance
with GAAP on a basis consistent with, the Most Recent Statement (which
is attached hereto as Exhibit 2.6), but in any event shall not include
any assets other than Business Assets or any liabilities other than
Assumed Liabilities and liabilities of the Acquired Subsidiaries.
Orbital and Seller shall jointly also prepare or cause to be prepared a
written statement calculating the total tangible assets of the Business
minus the total liabilities of the Business as of the Closing Date, as
reflected on the Closing Statement (the "Net Tangible Assets"). (By way
of example, the total tangible assets are $37,793,707, the total
liabilities are $8,237,857, and the Net Tangible Assets are $29,555,849,
all as reflected on the Most Recent Statement.)
2.6.2. If Orbital and Seller cannot agree on the final Closing
Statement or the calculation of Net Tangible Assets within 45 days of
the Closing either party may submit the dispute to the Washington, D.C.
office of Coopers & Lybrand LLP, or if such firm declines to serve, then
to the Washington, D.C. office of Price Waterhouse LLP, for resolution
within 30 days or as soon thereafter as reasonably practicable. Such
firm of accountants shall determine on the basis of the standards set
forth in Section 2.6.1, and only with respect to the remaining
differences so submitted, whether and to what extent, if any, the
Closing Statement and the calculation of Net Tangible Assets require
adjustment. The decision by such firm of accountants shall be final and
binding on the parties. The costs and expenses of such accountants shall
be paid equally by Orbital and
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Seller. Orbital and Seller shall make available to such firm of
accountants all relevant books and records and work papers (including,
if available, work papers of their respective accountants) relating to
the Most Recent Statement or the Closing Statement, and all other
information reasonably requested by such firm of accountants.
2.6.3. Upon final determination of the Net Tangible Assets,
either by agreement between Seller and Orbital or determination in
accordance with Section 2.6.2, (a) if the Net Tangible Assets exceed
$29,555,849 minus the face amount of the Retained Receivables, the
Purchase Price shall be increased by the amount of such excess up to a
maximum increase of $3,000,000, and (b) if the Net Tangible Assets are
less than $29,555,849 minus the face amount of the Retained Receivables,
the Purchase Price shall be decreased by the amount of such shortfall up
to a maximum decrease of $3,000,000. Orbital shall, within ten business
days after the final determination of the Net Tangible Assets, pay to
Seller in cash or immediately available funds the remaining Cash
Consideration due under Section 2.5.1(a) of $3,000,000 plus or minus the
increase or decrease, as the case may be, in the Purchase Price. Any
payment by Orbital after the applicable due date shall bear simple
interest at the annual rate of 12.0%.
2.6.4. If within 45 days of Closing, Seller shall not (i) have
delivered to Orbital a correct and complete, fully executed copy of the
Pt. Media Citra Indostar contract modification with respect to the media
gateway facility in form and substance reasonably acceptable to Orbital,
and (ii) resolved, in a manner and form reasonably acceptable to
Orbital, credits associated with change orders 3 and 7, then the
Purchase Price shall be automatically reduced by $700,000 or such lower
amount upon which the parties agree within 50 days of Closing. Within 55
days of Closing, Seller shall pay to Orbital the amount of the
reduction, if any, in Purchase Price determined pursuant to this Section
2.6.4 in cash or immediately available funds. Any payment by Seller
after the applicable due date shall bear simple interest at the annual
rate of 12.0%. Any reduction to Purchase Price pursuant to this Section
2.6.4 shall be in addition to, and shall in no way reduce or be reduced
by, any adjustment to Purchase Price that may be made pursuant to
Sections 2.6.1, 2.6.2 and 2.6.3.
2.7. Deferred Consideration.
2.7.1. If Orbital or any of its Subsidiaries enters into one or
more STARBus Contracts providing for an aggregate number of STARBus
Buses and STARBus Satellites in excess of the STARBus Threshold Amount,
then Seller
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shall be entitled in respect of each such STARBus Bus or STARBus
Satellite in excess of the STARBus Threshold Amount (determined
chronologically by the date of the relevant STARBus Contract) up to an
aggregate amount determined as follows (the maximum amount payable in
respect of each such STARBus Bus under a STARBus Bus Contract or STARBus
Satellite under a STARBus Satellite Contract is referred to as the
"Seller Payment" for such STARBus Bus or STARBus Satellite):
(a) $3,000,000 for each STARBus Satellite that is to be built pursuant to
the first STARBus Contract entered into by such customer (other than a
customer listed on Schedule 2.7.1),
(b) $2,000,000 for each STARBus Satellite that is to be built for a
customer (other than a customer listed on Schedule 2.7.1) that has
entered into a prior.STARBus Contract,
(c) $2,000,000 for each STARBus Satellite that is to be built pursuant to
the first STARBus Contract entered into by a customer listed on Schedule
2.7.1,
(d) $1,000,000 for each STARBus Satellite that is to be built for a customer
listed on Schedule 2.7.1 that has entered into a prior STARBus Contract,
(e) $1,500,000 for each STARBus Bus that is to be built pursuant to the
first STARBus Contract entered into by such customer (other than a
customer listed on Schedule 2.7.1),
(f) $1,000,000 for each STARBus Bus that is to be built for a customer
(other than a customer listed on Schedule 2.7.1) that has entered into a
prior STARBus Contract,
(g) $1,000,000 for each STARBus Bus that is to be built pursuant to the
first STARBus Contract entered into by a customer listed on Schedule
2.7.1, and
(h) $500,000 for each STARBus Bus that is to be built for a customer listed
on Schedule 2.7.1 that has entered into a prior STARBus Contract.
For each such STARBus Bus or STARBus Satellite for which the customer is
not in breach of its payment obligations under the relevant STARBus
Contract (it being understood that any payments made prior to such
breach shall be retained by Seller and upon the cure of any such breach
Seller shall be entitled to all
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<PAGE> 24
payments to which Seller would have been entitled had the breach not
occurred), Seller shall be entitled to the Seller Payment as follows:
(a) one-third of the total Seller Payment on contract signing, (b)
one-third of the total Seller Payment on Orbital's (or its Subsidiary's)
receipt of cumulative payments for such STARBus BUS or STARBus Satellite
equal to fifty percent of the then total expected payments due therefor
under the relevant STARBus Contract, and (c) one-third of the total
Seller Payment on delivery of the STARBus Bus or STARBus Satellite
under the terms of the relevant STARBus Contract; provided, however,
that in no event shall Seller be entitled to any portion of a Seller
Payment that exceeds the cumulative payments received by Orbital for
such STARBus Satellite under the relevant STARBus Contract. All such
amounts shall be paid within 30 days of the relevant event, and any
payment after the applicable due date shall bear simple interest at the
annual rate of 12%. For purposes of the foregoing, in the event of any
termination of a STARBus Contract prior to delivery of the relevant
STARBus Bus or STARBus Satellite, such STARBus Bus or STARBus Satellite
shall not be considered in determining whether the STARBus Threshold
Amount has been exceeded. If such change in the number of STARBus Buses
or STARBus Satellites would have resulted in a change in the amount of
payments made pursuant to this Section 2.7.1, all amounts to which
Seller had become or would become entitled to under this Section 2.7.1
shall be recomputed, and any overpayments resulting from such
recomputation shall be applied as credits against any future amount
otherwise owed by Orbital under this Section 2.7.1. (E.g., if after
Seller Payments have been made for the first STARBus Satellite in excess
of the STARBus Threshold Amount, the STARBus Contract for an earlier
STARBus Satellite were terminated, such subsequent STARBus Satellite
would then not exceed the STARBus Threshold Amount, Seller would not be
entitled to Seller Payments in respect thereof, and any resulting
overpayment would be applied as a credit against any future amount
otherwise owed under this Section 2.7.1. If, however, the STARBus
Contract for a STARBus Satellite in excess of the STARBus Threshold
Amount were terminated prior to delivery, no recomputation would be
necessary and Seller would be entitled in respect of such STARBus
Satellite to the portion of the Seller Payment determined in accordance
with the second sentence of this Section 2.7.1.) Notwithstanding the
foregoing, any Seller Payment otherwise due shall be reduced by the
amount of any payments owed by Orbital or its Subsidiaries (including
the Acquired Subsidiaries) under the van der Heyden Profit Sharing
Agreement (up to a total reduction of $750,000 for the STARBus Contract
for which such Seller Payment is due).
2.7.2. Seller shall also be entitled to an amount equal to 3%
of all cumulative GEMtrak Revenues in excess of $50,000,000 accrued
during the
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Deferred Consideration Period. Payments shall be calculated as of June
30 and December 31 of each year and shall be payable in arrears within
45 days thereafter. Any payments after the applicable due date shall
bear simple interest at an annual rate of 12.0%.
2.7.3. Each payment pursuant to this Section 2.7 shall be
accompanied by a reasonably detailed schedule setting forth the
computation of the payment and any relevant documentation supporting the
payment calculation. If Seller disputes any calculations shown in the
schedule accompanying a payment, Seller shall give written notice
thereof to Orbital no later than 30 days after receipt thereof. Such
notice of dispute shall include a reasonably detailed description of the
disputed items. Any additional payment determined to be owing upon final
resolution of such dispute shall be paid by Orbital within ten business
days after such resolution. Any payment after such date shall bear
simple interest at the annual rate of 12.0%.
2.7.4. During the Deferred Consideration Period, Orbital (i)
shall maintain adequate books of account and records, in which complete
entries will be made accurately and fairly reflecting all financial
transactions relevant to this Section 2.7 relating to the STARBus
Contracts and GEMtrak, and (ii) shall maintain such books of account and
records in a manner that allows determination of the revenues and
payments made in respect thereof to be made separately from the revenues
and payments made in respect of the balance of its businesses. Orbital
shall, upon reasonable notice, provide Seller and its accountants access
during normal business hours to the books and records referred to above
and to any other information reasonably requested by Seller in order to
verify Orbital's calculation of any payments due under this Section 2.7.
2.7.5. Subject to Section 2.7.7, during the Deferred
Consideration Period, Orbital shall not sell or otherwise transfer all
or substantially all of its STARBus Satellite business or its GEMtrak
business unless Orbital's obligations under this Section 2.7 (including
this Section 2.7.5) are expressly assumed by the acquiring person
pursuant to an assumption agreement that expressly states that Seller is
a third party beneficiary thereof.
2.7.6. Each payment pursuant to this Section 2.7 shall be
deemed to include an interest component and a principal component, each
such interest component to be calculated at the lowest rate so as to
avoid the imputation of interest under Sections 483 and 1274 of the
Code.
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2.7.7. Seller acknowledges that following the Closing,
notwithstanding anything herein to the contrary, Orbital will operate
its business, including without limitation its business in respect of
STARBus Satellites and GEMtrak, in its sole discretion and in accordance
with the best interest of Orbital, under the direction and in accordance
with the business judgment of Orbital's board of directors as
constituted subsequent to the Closing, and that Orbital will have no
liability to Seller under this Section 2.7 or otherwise for any failure
to attain or realize any Contract for a STARBus Bus or Satellite or the
payment or other terms thereof or any termination thereof or any failure
to attain or realize any GEMtrak revenues.
2.8. Allocation of Purchase Price. The aggregate purchase price
(including any deferred consideration payable pursuant to Section 2.7) as
determined for federal Income Tax purposes will be allocated to the Purchased
Assets by Orbital and Seller for Tax and financial reporting purposes in
accordance with the allocations set forth on Schedule 2.8. Each of Orbital and
Seller shall execute and timely file Forms 8594 under the Code consistent with
Schedule 2.8 and upon either party's reasonable request the other party shall
execute and file such other documents as may be necessary to document such
allocation.
2.9. Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall be held at the offices of Ropes & Gray, One
Franklin Square, 1301 K Street NW, Suite 800 East, Washington, D.C. at 9:00 a.m.
on the second business day following the later to occur of (i) the Stockholder
Meeting and (ii) the expiration or termination of the HSR Act waiting period, or
on such other date as Orbital and Seller may agree upon in writing (the "Closing
Date").
SECTION 3
REPRESENTATIONS AND WARRANTIES OF SELLER
In order to induce Orbital to enter into this Agreement, Seller hereby
represents and warrants as follows:
3.1. Due Organization. Authorization and Good Standing of Seller.
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the State of Colorado, and each Acquired Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation as listed in Schedule 3.1. Each of
Seller and each Acquired Subsidiary is duly qualified to do business and is in
good standing as a foreign corporation and licensed or qualified to transact
business in the jurisdictions set forth in Schedule 3.1. The jurisdictions
listed on Schedule 3.1 for each Acquired Subsidiary are the only jurisdictions
where such
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Acquired Subsidiary is required to be qualified by reason of the nature of the
business conducted by it or the properties or assets owned, operated or leased
by it, other than such failures to be so licensed or qualified that do not have
a Material Adverse Effect. Seller has the requisite corporate power and
authority to execute, deliver and perform its obligations under each of the
Transaction Agreements and all transactions contemplated thereby. The execution,
delivery and performance by Seller of this Agreement and the other Transaction
Agreements to which Seller will be a party, and the consummation by Seller of
the transactions contemplated hereby and thereby, have been duly and validly
authorized and approved by all necessary corporate action in respect thereof on
the part of Seller, other than approval by the stockholders of Seller at the
Stockholder Meeting. This Agreement has been duly executed and delivered by
Seller and constitutes, and each of the other Transaction Agreements to which
Seller will be a party will be duly executed and delivered at Closing and will
constitute, the legal, valid and binding obligation of Seller, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, moratorium,
reorganization and similar laws of general applicability affecting the rights
and remedies of creditors and to general principles of equity, regardless of
whether enforcement is sought in proceedings in equity or at law. Each of the
Acquired Subsidiaries has full corporate power and authority to carry on its
business as now conducted and to own or lease and to operate its properties and
assets. True, complete and correct copies of the charter and by-laws (the
"Charter Documents") of Seller and each of Acquired Subsidiaries as in effect on
the date hereof have heretofore been delivered to Orbital.
3.2. No Violation or Approval. Except as described in clause (x)
below, the execution, delivery and performance by Seller of the Transaction
Agreements to which it is a party and the consummation of the transactions
contemplated under the Transaction Agreements does not and will not result in
(i) a violation of any order, judgment or decree of any court or any
governmental agency or body having jurisdiction over Seller or the Acquired
Subsidiaries or the Business Assets, or (ii) except as set forth on Schedule
3.2, a breach or a default or the acceleration of any payment obligation under
(whether immediately, upon the passage of time or after the giving of notice),
or otherwise require a consent or waiver under, (a) any Contract required to be
listed on Schedule 3.22, or (b) any other material agreement, instrument, lease,
contract, mortgage, deed or license to which Seller or any of its Acquired
Subsidiaries is a party or by which any of them or any of their assets are bound
or (iii) a violation of or a conflict with any of their Charter Documents.
Except as set forth on Schedule 3.2, no consent, approval, order or
authorization of, or declaration or filing with, any governmental authority or
entity or other party is required to be obtained or made by Seller or the
Acquired Subsidiaries in connection with the execution, delivery and performance
of or the consummation by Seller of the transactions contemplated by the
Transaction Agreements other than (x) required consents or approvals of the
United
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States government to the assignment or novation of those Contracts on Schedule
3.22 that are identified therein as Government Contracts or Government
Subcontracts and to which Seller is a party, (y) the expirations of the waiting
period and any extensions thereof as prescribed by the regulations promulgated
under the HSR Act, and (z) such consents, approvals, orders or authorizations
of, or declarations or filings with, any governmental authority or entity or
other party the failure of which to make or obtain do not have a Material
Adverse Effect.
3.3. Business Assets. Schedule 3.3 sets forth a true and complete
list of all tangible Business Assets, in each case indicating the owner of such
Business Assets, a description of such Business Assets, the in-service dates of
such Business Assets, the depreciation methods and periods of such Business
Assets and the net book value of such Business Assets.
3.4. All Assets Necessary to Conduct Business. Except for Deltek
software, Lotus ccMail software and Microframe Project Manager software and such
other assets that can be obtained at a cost in the aggregate of less than
$250,000, the Business Assets constitute all the assets, properties and rights
necessary to conduct the Business as currently conducted.
3.5. Subsidiaries. Schedule 3.5 sets forth the name, jurisdiction of
incorporation, authorized capitalization and record ownership of all issued and
outstanding shares of capital stock of each Acquired Subsidiary. Except for the
equity investments set forth in Schedule 3.5, no Acquired Subsidiary owns,
directly or indirectly, any capital stock, any partnership or equity or other
ownership interest in, or any security issued by, any other corporation,
organization, association, entity or business enterprise. The sole business of
each Acquired Subsidiary is the Business. Except as set forth in Schedule 3.5,
Seller or an Acquired Subsidiary owns, directly or indirectly, all of the
outstanding shares of capital stock of each of the Acquired Subsidiaries free
and clear of all liens, pledges, security interests, mortgages, claims, charges
and encumbrances ("Liens"). There is no warrant, right, option, conversion
privilege, stock purchase plan, puts, call arrangements, understandings or other
agreements or commitments providing for or obligating any of the Acquired
Subsidiaries to offer, issue, purchase or redeem any shares of capital stock or
debt or other securities convertible into or exchangeable for capital stock
(now, in the future or upon the occurrence of any contingency) or which provides
for any stock appreciation or similar right. All issued and outstanding shares
of capital stock of the Acquired Subsidiaries are duly authorized, validly
issued, fully paid and nonassessable.
3.6. Intellectual Property Rights
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3.6.1. General. Schedule 3.6.1 lists all trademarks (including
common law marks), service marks, registrations and applications, patent
applications and trade names, relating to the Business. Schedule 3.6.1
also sets forth all licenses, sublicenses, agreements or standard forms
thereof which Seller and the Acquired Subsidiaries have entered into
with any third party with respect to any of the Business Intellectual
Property. Neither Seller nor any of its Subsidiaries owns any patents
relating to the Business. True and correct copies of all patent
applications have been provided or made available to Orbital.
3.6.2. Adequacy. Except as set forth in Schedule 3.6.2, there
are no Intellectual Property Rights of Seller or any Subsidiary (other
than the Acquired Subsidiaries) used or useful in connection with the
Business Assets or the Business as presently conducted or currently
contemplated by Seller to be conducted. Except for the Intellectual
Property Rights set forth on Schedule 3.6.2, the Business Intellectual
Property Rights are all Intellectual Property Rights currently used by
Seller or any Acquired Subsidiary in connection with the Business or the
Business Assets and are all those necessary for the conduct of the
Business as presently conducted, including the manufacture and sale of
all products currently under development or in production.
3.6.3. Royalties and Licenses. Except as disclosed on Schedule
3.6.3, neither Seller nor any Acquired Subsidiary has any obligation to
compensate any Person for the use of any Business Intellectual Property
Rights nor has Seller or any Acquired Subsidiary granted to any Person
any license, option or other rights to use in any manner any of the
Business Intellectual Property Rights, whether requiring the payment of
royalties or not.
3.6.4. Ownership. Except as set forth on Schedule 3.6.4, each
of Seller and the Acquired Subsidiaries owns, free and clear of all
Liens, or has all necessary rights to use, its respective Business
Intellectual Property Rights and, in the case of the Seller, to transfer
such Business Intellectual Property Rights to Orbital at the Closing,
and the Business Intellectual Property Rights will not cease to be
rights of either Seller or any Acquired Subsidiary (or upon the Closing,
of Orbital) or be impaired by reason of the performance of this
Agreement or the consummation of the transactions contemplated hereby or
thereby. Upon the Closing, Orbital will succeed to all Seller's rights,
title and interest in the Business Intellectual Property Rights,
including all rights, claims and damages regarding past infringements of
the Business Intellectual Property Rights, and will be able to enforce
all such rights to prevent the infringement or misappropriation thereof.
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<PAGE> 30
3.6.5. Absence of Claims. Except as set forth in Schedule
3.6.5, no other Person (i) has any ownership of or right to use any
Business Intellectual Property Rights (except such right to use such
Business Intellectual Property as would not have a Material Adverse
Effect) or has notified either Seller or any Acquired Subsidiary in
writing that it is claiming any ownership of or right to use any
Business Intellectual Property Rights or (ii) to the knowledge of
Seller, is infringing upon any such Business Intellectual Property
Rights. Seller and any Acquired Subsidiary's use of the Business
Intellectual Property Rights do not conflict with, infringe upon or
otherwise violate the valid rights of any third party anywhere in the
world where the Business is currently conducted or is currently proposed
to be conducted by Seller, no written notice has been received and, to
the Seller's knowledge, no action has been instituted against or written
notices received by either Seller or any Acquired Subsidiary that are
presently outstanding alleging that either Seller or any Acquired
Subsidiary's use of the Business Intellectual Property Rights infringe
upon or otherwise violate any rights of a third party, except as set
forth on Schedule 3.6.5.
3.6.6. Protection of Intellectual Property. Each of Seller and
the Acquired Subsidiaries has taken all steps necessary or appropriate
to safeguard and maintain the secrecy and confidentiality of, and the
proprietary rights in, all Business Intellectual Property Rights, except
to the extent that the failure to take any such actions do not in the
aggregate have a Material Adverse Effect.
3.7. Indebtedness: Guarantees. Except as set forth in the Financial
Statements, none of the Acquired Subsidiaries has indebtedness for borrowed
money or for the deferred purchase price of property or services (other than
trade payables and other accrued current liabilities incurred in the ordinary
course of business), or capital lease obligations, or conditional sale or other
title retention agreements (collectively, "Indebtedness"). Expect as set forth
on Schedule 3.7, no Acquired Subsidiary is a guarantor or otherwise liable for
any liability or obligation of any other person.
3.8. Financial Statements. etc. Seller has previously furnished Orbital
with true and complete copies of the following financial statements (such
financial statements, collectively, the "Financial Statements"): (i) unaudited
statement of income of the Business for the fiscal year ended December 31, 1996
and the accompanying statement of net tangible assets of the Business as of
December 31, 1996, and (ii) unaudited statement of income of the Business for
the five fiscal months ended May 25, 1997 and the accompanying statement of net
tangible assets (the "Most Recent Statement") as of May 25, 1997 (the "Most
Recent Statement Date") each prepared from the books and records of Seller and
its consolidated Subsidiaries, which books and records are correct and complete
in all material respects. The Financial Statements present fairly, in all
material
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respects, the net tangible assets of the Business and the results of its
operations as of the respective dates and for the periods presented therein in
conformity with generally accepted accounting principles in the United States as
in effect on the applicable dates of such financial statements ("GAAP") and
applied on a consistent basis, except as noted therein and except that (i) no
notes are included with the Financial Statements, and (ii) such unaudited
financial statements may be subject to normal, recurring adjustments that would
be made in the course of an audit and that would not be material.
3.9. Absence of Changes: Operations in the Ordinary Course. Except as
set forth in Schedule 3.9, since December 31, 1996 none of the Purchased Assets
(considered as a whole) or the Business has undergone any adverse change in its
business, condition (financial or otherwise) or prospects (whether as a result
of any change as to accounts receivable, inventory or other assets, any loss of
competitive position, any natural disaster, accident, strike, sabotage or
confiscation of property, or any other event or condition directly affecting or
relating to the Business or the Purchased Assets, whether or not related to any
of the foregoing), or suffered any damage, destruction or loss (whether or not
covered by insurance), other than such changes or damage, destruction or loss as
in the aggregate do not have a Material Adverse Effect or changes in general
economic conditions. Since December 31, 1996, with the exception of actions
taken at the request of Orbital or otherwise necessary to the consummation of
the transactions contemplated by the Transaction Agreements, and except as set
forth in Schedule 3.9, Seller and each of the Acquired Subsidiaries has operated
the Business in the ordinary course, consistent in all material respects with
past practice. Without limiting the generality of the foregoing, since December
31, 1996, except as set forth on Schedule 3.9, (i) neither Seller nor any
Acquired Subsidiary has experienced any actual termination of any material
customer Contract or received any written threat of termination of any material
customer Contract, in each case relating to the Business, and (ii) there has
been no material adverse change in the prospects of either the Mobile
Information Business, taken as a whole, or the Space Business, taken as a whole.
3.10. Absence of Undisclosed Liabilities. Except as set forth on
Schedule 3.10, none of Seller or any Acquired Subsidiary has any liability
(whether absolute or contingent) except for (i) liabilities set forth on the
Most Recent Statement, (ii) liabilities which have arisen after the Most Recent
Statement in the ordinary course of business (none of which liabilities results
from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement or violation of law),
and (iii) liabilities that do not have a Material Adverse Effect.
3.11. Taxes.
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<PAGE> 32
(a) Each of the Acquired Subsidiaries has filed all material Tax
Returns that it was required to file, and Seller has filed all material Tax
Returns that it was required to file with respect to the Business. All such Tax
Returns were correct and complete in all material respects. All material Taxes
owed by Seller with respect to the Business and all material Taxes owed by any
of the Acquired Subsidiaries (in each case, whether or not shown on any Tax
Return) have been paid. The Acquired Subsidiaries currently are not the
beneficiaries of any extension of time within which to file any Tax Return, and
Seller currently is not the beneficiary of any extension of time within which to
file any Tax Return with respect to the Business. None of the Acquired
Subsidiaries has received notice from an authority in a jurisdiction where it
does not file Tax Returns that it may be subject to taxation by that
jurisdiction, and Seller has not received notice from an authority in a
jurisdiction where it does not file Tax Returns that it may be subject to
taxation by that jurisdiction with respect to the Business. There are no liens
or other encumbrances on any of the assets of the Acquired Subsidiaries or any
other Business Assets that arose in connection with any failure (or alleged
failure) to pay any Tax.
(b) Each of the Acquired Subsidiaries has withheld and paid all
Taxes required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or other
third party, and Seller has withheld and paid all Taxes with respect to the
Business required to have been withheld and paid in connection with amounts paid
or owing to any employee, independent contractor, creditor, stockholder or other
third party.
(c) There is no dispute, audit, investigation, proceeding or claim
concerning any liability with respect to Taxes of the Acquired Subsidiaries
either (i) claimed or raised by any authority in writing or (ii) as to which
Seller has knowledge based upon contact with any agent of such authority, and
there is no dispute, audit, investigation, proceeding or claim concerning any
material liability with respect to Taxes of Seller relating to the Business
either (i) claimed or raised by any authority in writing or (ii) as to which
Seller has knowledge based upon contact with any agent of such authority.
(d) None of the Acquired Subsidiaries has waived any statute of
limitations in respect of Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency, and Seller has not waived any statute of
limitations in respect of Taxes relating to the Business or agreed to any
extension of time with respect to a Tax assessment or deficiency relating to the
Business.
(e) None of Seller and the Acquired Subsidiaries has any liability
for the Taxes of any person other than Seller and the Acquired Subsidiaries
under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or
foreign law), as a transferee or successor, by contract, or otherwise. Except as
set forth on Schedule 3.11, none of
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Seller and the Acquired Subsidiaries has been a member of an affiliated group
filing a consolidated federal Income Tax Return (or any other consolidated,
combined or unitary Income Tax Return), other than a group the common parent of
which was Seller.
(f) None of the Acquired Subsidiaries has filed a consent under Code
section 341(f) concerning collapsible corporations. None of the Acquired
Subsidiaries has made any payments, is obligated to make any payments, or is a
party to any agreement that under certain circumstances could obligate it to
make any payments that will be non-deductible under Code sections 162, 280G or
404. None of the Acquired Subsidiaries has been a United States real property
holding corporation within the meaning of Code section 897(c)(2) during the
applicable period specified in Code section 897(c)(1)(A)(ii).
(g) The unpaid Taxes of Seller relating to the Business and the unpaid
Taxes of the Acquired Subsidiaries (i) did not, as of the date of the Most
Recent Statement, exceed by any material amount the reserve for Tax liability
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) set forth on the face of the Most
Recent Statement (rather than in any notes thereto) and (ii) will not exceed by
any material amount that reserve as set forth on the Closing Statement.
(h) Schedule 3.11 sets forth the states in which Income or corporate
franchise Tax Returns have been filed with respect to each of the Acquired
Subsidiaries as of December 31, 1996.
3.12. Title to Tangible Assets. Each of Seller and the Acquired
Subsidiaries has good and marketable title to all real and tangible personal
Business Assets reflected in the Most Recent Statement or acquired since the
date thereof (except for property disposed of since such date in the ordinary
course of business consistent with past practice), and valid leasehold interests
in all real and tangible personal properties leased by them and used principally
in or principally related to the Business, in each case free and clear of Liens,
easements or title imperfections except (a) Liens for current Taxes not yet due
and payable, (b) encumbrances and easements that do not materially detract from
the value or interfere with the use by Seller or any of the Acquired
Subsidiaries, as the case may be, of the properties affected thereby, (c) Liens
securing Indebtedness reflected in the Financial Statements, (d) Liens of
customers on property purchased by Seller or an Acquired Subsidiary in
connection with its performance of Contracts to provide products or services to
such customers and which in the aggregate do not have a Material Adverse Effect
and (e) Liens set forth in Schedule 3.12. Seller or an Acquired Subsidiary
enjoys peaceful and undisturbed possession of all real and tangible personal
property that is the subject of the leases included within the Contracts. All
tangible personal Business Assets are in satisfactory operating condition and
repair, subject to ordinary wear and tear.
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3.13. Suppliers. Except as set forth on Schedule 3.13, neither Seller nor
any of its Subsidiaries believes, or has received any written threat that any
person or entity (including any subcontractors) with which it has an existing
binding agreement, oral or written, for the procurement of, or from which it
purchases an aggregate amount of at least $50,000 in any year, of equipment,
inventory or other supplies or services used by the Business intends to reduce
significantly delivery of any such supplies or services or default under or
terminate such agreement, whether as a result of the transactions contemplated
hereby or otherwise, other than such reductions or terminations as in the
aggregate do not have a Material Adverse Effect.
3.14. Inventory. Schedule 3.3 includes a true and complete list of the
Inventory as of the date specified therein. The Inventory is carried on a
weighted average cost inventory costing method, and except as set forth on
Schedule 3.3 is in good repair, is not obsolete, is usable and saleable in the
ordinary course of the Business as currently conducted, and to Seller's
knowledge consists of a quantity which is not excessive in kind or amount in
light of the Business. Since the Most Recent Statement Date, no Inventory has
been sold or disposed of except in the ordinary course of business consistent
with past practice.
3.15. Operations in Conformity With Law. etc. Neither Seller nor any of
the Acquired Subsidiaries has been or is in violation of, or in default under,
any law, rule, regulation, order, judgment or decree relating in any manner or
applicable to the Business or the Business Assets or any of the Employees, and
no action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand or notice has been filed against any of them alleging any such violation
or default, except for such violations or defaults that do not in the aggregate
have a Material Adverse Effect. Neither Seller nor any of the Acquired
Subsidiaries, nor, to the knowledge of Seller, any of their respective officers,
employees or agents, has directly or indirectly given or agreed to give any
gift, contribution, payment or similar benefit to any supplier, customer,
governmental official or employee or other person who was, is or may be in a
position to help or hinder the Business or any of the Acquired Subsidiaries (or
assist in connection with any actual or proposed transaction) or made or agreed
to make any contribution, or reimbursed any political gift or contribution made
by any other person, to any candidate for United States federal, state, local,
or foreign public office, which would subject Orbital or any of the Acquired
Subsidiaries to any damage or penalty in any civil, criminal or governmental
litigation or proceeding other than such damages or penalties as would not have
an Orbital Material Adverse Effect.
3.16. Litigation. Except as set forth in Schedule 3.16 or Schedule 3.19,
there are no actions, claims, suits, investigations or proceedings pending or to
Seller's
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knowledge threatened against Seller or any of the Acquired Subsidiaries
pertaining to the Business or the Business Assets or that question the validity
of this Agreement or any of the other Transaction Agreements or any action taken
or to be taken pursuant to or in connection with the provisions of this
Agreement or any other Transaction Agreement, nor to the knowledge of Seller is
there any reasonable basis for any such action, claim, suit, proceeding or
investigation that, if adversely determined, would in the aggregate have a
Material Adverse Effect. There are no judgments, orders, decrees, citations,
fines or penalties heretofore assessed (and not discharged or otherwise
satisfied) against Seller or any of the Acquired Subsidiaries under any United
States federal, state, local or foreign law except for such judgments, orders,
decrees, citations, fines or penalties that in the aggregate do not have a
Material Adverse Effect. There are no unsatisfied judgments against Seller or
the Acquired Subsidiaries with respect to the Business or Business Assets.
3.17. Employee Matters: Benefit Plans.
(a) All plans, agreements, policies and arrangements, whether or not
reduced to writing and whether or not legally binding, to which Seller or any of
the Acquired Subsidiaries contributes or is obligated to contribute, or under
which Seller or any of the Acquired Subsidiaries has or may have any liability
for premiums or benefits, and which benefits any active, former or retired
employee, outside director, consultant or other independent contractor who
provides or provided services to or for the benefit of the Business, are listed
in Schedule 3.17 (the "Plans"). Seller has made available to Orbital, a true,
correct and complete copy of the most recent plan document for the Plans listed
in Items 1, 2, 3 and 4 of Schedule 3.17 (excluding the Agreements referred to in
Section 8 of the Plan listed on Item 3 of Schedule 3.17); the most recent
determination letters issued by the Internal Revenue Service with respect to the
Plans listed in Items 1 and 2 of Schedule 3.17; the 1995 Form 5500s for the
Plans listed in Items 1 and 2 of Schedule 3.17; and the CTA INCORPORATED 1997
Benefits Summary. The CTA INCORPORATED 1997 Benefits Summary accurately
describes the material terms of the plans, agreements, policies and arrangements
described therein, including without limitation those described in Items 5-13 of
Schedule 3.17.
(b) No circumstance exists and no event (including any action or the
failure to do any act) has occurred with respect to any Plan maintained or
formerly maintained or contributed to by Seller or any Subsidiary, or to which
Seller or any Subsidiary is or has been required to contribute, that would
subject Orbital to liability, or the assets of the Business to any Lien, under
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or the
Code, nor will the transactions contemplated by this Agreement give rise to any
such liability or Lien.
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(c) Each Plan that is required or intended to be qualified under Section
401(a) of the Code is so qualified.
(d) No Plan currently or previously maintained or contributed to by
Seller is covered by Title IV of ERISA.
(e) Except as required by the Consolidated Omnibus Budget Reconciliation
Act of 1985, neither Seller nor any Acquired Subsidiary has any obligations for
retiree health or life insurance benefits under any Plan.
(f) Schedule 5.13 lists all employees employed by Seller or any Acquired
Subsidiary in the Business (collectively, the "Employees"), including for each
such Employee: (i) his or her position and title; (ii) his or her salary; (iii)
his or her accrued vacation time; and (iv) any bonuses paid to him or her with
respect to fiscal 1996 or earned by him or her with respect to fiscal 1997.
(g) Seller shall prior to Closing supply Orbital with the following
information as of June 30, 1997 with respect to each Employee listed on Schedule
5.13:
(i) the Employee's date of hire by Seller or Acquired
Subsidiary,
(ii) the Employee's account balances in the flexible spending
component of the plan listed on Item 4 of Schedule 3.17,
and
(iii) the Employee's payroll deduction amount per pay period in
1997 for the flexible spending component of the Plan
listed on Item 4 of Schedule 3.17.
Seller shall as soon as reasonably practicable, but in any event within forty
days after the Closing, provide to Orbital the information listed in paragraph
(iii) of Section 3.17(f) and paragraphs (i) and (ii) of this Section 3.17(g) as
of the date of the Closing.
3.18. Labor Relations. There is no existing dispute or controversy
between Seller or any of the Acquired Subsidiaries and any of the Employees that
has a Material Adverse Effect. Neither Seller nor any of the Acquired
Subsidiaries is a party to any collective bargaining agreement with respect to
any of the Employees, none of such Employees is represented by a labor union
and, to Seller's knowledge, there is no labor union organizing activity by or
among such Employees.
3.19. Government Contracts and Subcontracts. Except as set forth on
Schedule 3.19, Seller has received no written claims, penalties, or causes of
action against Seller
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or any of the Acquired Subsidiaries the basis of which is an actual or alleged
violation of, or noncompliance with, any applicable law, regulation or order (a)
related to a Contract between Seller or any of the Acquired Subsidiaries and the
United States federal government or any other state, local or foreign government
or any division or agency of any of the foregoing (a "Government Contract"),
which contract relates or related to the Business, or (b) related to a Contract
between Seller or any of its Subsidiaries and any other party, which Contract
relates or related to the Business and renders or rendered Seller or any of the
Acquired Subsidiaries a subcontractor at any tier to a prime Contract with the
United States federal government or any other state, local or foreign government
or any division or agency of any of the foregoing (a "Government Subcontract").
Except as set forth on Schedule 3.19, to Seller's knowledge, there is no
reasonable basis for any claim, penalty or cause of action against Seller or any
of its Subsidiaries alleging a violation of, or noncompliance with, any
applicable law, regulation or order related to any Government Contract or
Government Subcontract to which Seller or any of the Acquired Subsidiaries is a
party and that relates or related to the Business, except for such claims,
penalties or causes of action as do not, in the aggregate, have a Material
Adverse Effect. For purposes of this Section 3.19, claims, penalties and causes
of action alleging a violation of, or noncompliance with, any applicable law,
regulation or order include, but are not limited to, those purporting to be
based on failure to comply with cost accounting standards, allowable costs,
allocation of costs, omissions or errors in disclosure statements, or defective
pricing.
3.20. Seller and each of the Acquired Subsidiaries has all governmental
and regulatory licenses and permits necessary for the conduct of the Business as
presently conducted, except where the failure to maintain such licenses and
permits do not, in the aggregate, have a Material Adverse Effect. All such
licenses and permits used principally in the Business or with respect to the
Business Assets are set forth on Schedule 3.20(a), are in full force and effect,
and except as set forth on Schedule 3.20(b), no written notice of any violations
has been received by Seller or any Acquired Subsidiary relating to such licenses
or permits. Neither Seller nor any of the Acquired Subsidiaries is in violation
of any such license or permit other than such violations as in the aggregate do
not have a Material Adverse Effect, and no proceeding or investigation is
pending or, to Seller's knowledge, threatened that would have the effect,
directly or indirectly, of revoking or limiting in any way any such licenses or
permits.
3.21. Environmental Matters. Seller and each of the Acquired Subsidiaries
is and has at all times been in compliance with all applicable United States,
federal, state, local, and foreign laws and regulations relating to
environmental, natural resources, health and safety matters relating to the
Business or the Business Assets, other than such noncompliance as does not have
a Material Adverse Effect. There is no suit, claim,
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action or proceeding pending or threatened against Seller or any of the Acquired
Subsidiaries or, to Seller's knowledge, any reasonable basis therefor, in
respect of (i) noncompliance by Seller or any of the Acquired Subsidiaries with
any such laws or regulations, (ii) personal injury, wrongful death or other
tortious conduct arising out of or resulting from materials, commodities or
products held, used, sold, transferred, manufactured or disposed of by or on
behalf of Seller or any of the Acquired Subsidiaries in the course of the
Business, containing or incorporating any hazardous or toxic materials,
commodities or substances, or (iii) the presence or release or threatened
release into the environment of any pollutant, contaminant or toxic or hazardous
material, substance or waste, whether solid, liquid or gas (each a "Hazardous
Substance"), arising out of or related to the Business or the Business Assets,
whether generated by Seller or any of the Acquired Subsidiaries or located at or
about (x) a site currently owned, leased or otherwise used by Seller or any of
the Acquired Subsidiaries in connection with the Business or (y) heretofore
owned, leased or otherwise used by Seller or any of the Acquired Subsidiaries or
any predecessor entity in connection with the Business and for which Seller or
an Acquired Subsidiary would have liability. To Seller's knowledge, there have
been no Hazardous Substances generated by Seller in connection with the Business
or by any Acquired Subsidiary that have been disposed of or come to rest at any
site that has been included in any published United States federal, state or
local "superfund" site list or any other list of hazardous or toxic waste sites
published by any governmental authority in the United States. Except as set
forth on Schedule 3.21, to Seller's knowledge, there are and have been no
underground storage tanks located on, no polychlorinated biphenyls ("PCBs") or
PCB-containing equipment used or stored on, and no hazardous waste, as defined
by the Resource Conservation and Recovery Act, as amended, stored on, any site
owned or operated by Seller in connection with the Business or by any Acquired
Subsidiary. To Seller's knowledge, there has been no release or threatened
release of Hazardous Substances on, upon, into or from (x) any site currently
owned, leased or otherwise used by Seller in connection with the Business or by
any Acquired Subsidiary or (y) any site heretofore owned, leased or otherwise
used by Seller in connection with the Business or by any Acquired Subsidiary or
any predecessor entity, other than such releases or threatened releases for
which Seller or any Acquired Subsidiary would not have liability or that do not
have a Material Adverse Effect.
3.22. Contracts. Schedule 3.22 contains a true and complete list of all
Contracts of the types described below and in effect on the date hereof.
(a) Contracts relating to confidentiality or noncompetition;
(b) Contracts concerning a partnership or joint venture;
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(c) Contracts to which any director, officer or employee of the Business
is a party, other than (i) option agreements relating to options to purchase
shares of common stock of Seller, (ii) standard form confidentiality or
assignment of inventions or similar agreements or (iii) employment offer letters
that are terminable by Seller at will (subject only to reasonable notice);
(d) Contracts relating to the provision of consulting services that
involve liabilities or obligations of Seller or any of its Subsidiaries in
excess of $100,000 or that have a term extending more than one year after the
Closing Date;
(e) Contracts (including without limitation options) to sell (other than
sales of products) or lease (as lessor) any property or asset owned or leased by
Seller or any Acquired Subsidiary, other than property or assets having
individual values less than $50,000 and an aggregate value less than $300,000;
(f) Contracts pursuant to which Seller or any Acquired Subsidiary
possesses or uses (including as lessee) any properties or assets in the
Business;
(g) Contracts for the sale of products or provision of services by Seller
or any Acquired Subsidiary that (i) individually involve products or services
having a value of at least $100,000, (ii) have a term extending more than one
year after the Closing Date, (iii) to which the United States federal government
or any state, local or foreign government or any agency or department of any of
the foregoing is a party, or (iv) that renders Seller or any Acquired Subsidiary
a subcontractor at any tier to any prime Contract to which the United States
federal government or any state, local or foreign government or any agency or
department of any of the foregoing is a party;
(h) Contracts with suppliers or providers of goods or services (other
than cleaning, trash removal, facilities maintenance or repair, or similar
services and other than agent or representation agreements terminable upon no
more than one year's notice) to Seller or any Acquired Subsidiary, including
without limitation purchase orders, that individually involve liabilities in
excess of $100,000;
(i) Contracts under which the consequences of a default or termination
would have a Material Adverse Effect; and
(j) Each other Contract (other than Contracts of the type described in
(a) through (i) of this Section 3.22) that involves liabilities or obligations
of Seller or any Acquired Subsidiary in excess of $150,000 or that has a term
extending more than one year after the Closing Date.
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Seller has made available to Orbital upon request a true and complete copy of
each such Contract. Except as set forth on Schedule 3.22, neither Seller nor any
Acquired Subsidiary nor, to the knowledge of Seller, any other party is in
default under or in breach or violation of, nor has an event occurred that (with
or without notice, lapse of time or both) would constitute a default by Seller
or any Acquired Subsidiary, or to Seller's knowledge by any other party, under
any such Contract, other than such defaults, breaches and violations as in the
aggregate do not have a Material Adverse Effect. Each such Contract is legal,
valid, binding, enforceable and in full force and effect, and, except as the
result of failing to obtain required novations of Government Contracts, will
continue to be legal, valid, binding, enforceable and in full force and effect
following the consummation of the transactions contemplated hereby and except
for such failures to be legal, valid, binding and enforceable as do not have a
Material Adverse Effect.
3.23. Affiliated Transactions. Except for Contracts described in Schedule
3.22(c), none of the directors, officers, stockholders or employees of Seller or
any of its Subsidiaries, or any relative by blood or marriage or any "affiliate"
or "associate" (as such terms are defined in Rule 405 promulgated under the
Securities Act) of any of the foregoing, is currently a party to any Contract.
3.24. Insurance. Schedule 3.24 contains a list of all insurance policies
(including self-insurance arrangements) maintained by Seller or any Acquired
Subsidiary principally related to the Business, the Employees or the Business
Assets (including coverage limits, deductibles, named insureds and policy
periods, all of which policies are in full force and effect. True and complete
copies of all such insurance policies have been provided to Orbital.
3.25. Customer Warranty Coverage. Schedule 3.25 contains a complete list
and description of all express warranty coverages (including terms of such
coverages, expiration dates, and estimated amounts of liability) extended by
Seller or any Acquired Subsidiary for repair or replacement of defective
products or service related to the Business, as of the date indicated thereon,
other than those contained in Contracts listed on Schedule 3.22. Neither Seller
nor any Acquired Subsidiary has received written notice of any outstanding,
pending or threatened claims based on such warranty coverage, except as set
forth in Schedule 3.25.
3.26. Certain Agreements. Except as set forth in Schedule 3.26 and except
for benefits given generally to employees of the Seller and the Acquired
Subsidiaries pursuant to any written Plan as in effect at December 31, 1996 as
disclosed in Schedule 3.17, neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will (i) result in
any payment (including, without
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limitation, severance, unemployment compensation, parachute payment, bonus or
otherwise) becoming due to any Employee from Seller or any of its Subsidiaries
under any Plan, agreement or otherwise, (ii) increase any benefits otherwise
payable to any Employee under any Plan or agreement, or (iii) result in the
acceleration of the time of payment or vesting of any such benefits.
3.27. Brokers, Finders. etc. All negotiations relating to this Agreement
and the transactions contemplated hereby have been carried on without the
intervention of any person acting on behalf of Seller in such manner as to give
rise to any valid claim against Seller or Orbital for any brokerage or finder's
commission, fee or similar compensation, except for fees payable to Legg Mason
Wood Walker, Incorporated, which fees will be paid by Seller.
3.28. Books and Records. Seller has made available to Orbital true and
correct copies of the books and all corporate (including minute books and stock
record books) and financial records of Seller that relate to the Business or the
Purchased Assets or of any Acquired Subsidiary.
3.29. Bank Accounts. Schedule 3.29 sets forth a list of all bank accounts
maintained by any Acquired Subsidiary, together with list of all authorized
signatories for such bank accounts.
3.30. Accountants. None of Seller or its Subsidiaries has retained either
Coopers & Lybrand LLC or Price Waterhouse LLC to examine or review its financial
statements after June 30, 1995.
3.31. Lender Consents. Seller has no reasonable basis for believing that
the Liens and guarantees described in Section 6.2.8 will not be released on a
timely basis.
SECTION 4
REPRESENTATIONS AND WARRANTIES OF ORBITAL
In order to induce Seller to enter into this Agreement, Orbital
represents and warrants as follows:
4.1. Due Organization, Authorization and Good Standing. Orbital is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with the corporate power and authority to own its
properties and assets, to carry on its business as now being conducted, and to
execute and deliver each of the Transaction Agreements to which it is a party
and to perform its obligations thereunder and to consummate all transactions
contemplated thereby. Orbital is duly
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qualified to do business and is in good standing as a foreign corporation in
each jurisdiction where the conduct of its business or the ownership or property
requires such qualification, except for such failures to be so qualified and in
good standing as in the aggregate do not have an Orbital Material Adverse
Effect. The execution, delivery and performance by Orbital of this Agreement and
the other Transaction Agreements to which Orbital will be a party, and the
consummation by Orbital of the transactions contemplated hereby and thereby, has
been duly and validly authorized and approved by all necessary corporate action
in respect thereof on the part of Orbital. This Agreement has been duly executed
and delivered by Orbital and constitutes, and each of the other Transaction
Agreements to which Orbital will be a party will be duly executed and delivered
at Closing and will constitute, the legal, valid and binding obligation of
Orbital, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, moratorium, reorganization and similar laws of general applicability
affecting the rights and remedies of creditors and to general principles of
equity, regardless of whether enforcement is sought in proceedings in equity or
at law. True, complete and correct copies of the Charter Documents of Orbital as
in effect on the date hereof have heretofore been delivered to Seller.
4.2. No Violation or Approval. The execution, delivery and performance by
Orbital of each of the Transaction Agreements to which it is a party and the
consummation of the transactions contemplated thereby does not and will not
result in (i) a violation of any law, rule or regulation, order, judgment or
decree applicable to Orbital or any order, judgment or decree of any court or
any governmental agency or body having jurisdiction over Orbital or its
properties or assets, (ii) except as disclosed on Schedule 4.2, a breach or a
default under (whether immediately, upon the passage of time or after giving
notice), or the acceleration of any payment under any material agreement,
instrument, lease, contract, mortgage, or license to which Orbital is a party or
by which it or any of its properties or assets is bound, or (iii) a violation of
or a conflict with its Charter Documents. No consent, approval, order or
authorization of, or declaration or filing with, any governmental authority or,
except as disclosed in Schedule 4.2, entity or other party is required to be,
and has not been, obtained or made by Orbital in connection with the execution,
delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby other than required filings under the HSR Act.
4.3. SEC Reports. Orbital has filed all proxy statements, reports and
other documents required to be filed by it under the Exchange Act after January
1, 1996, and Orbital has made available to Seller copies of Orbital's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, and all final
proxy statements, reports and other documents filed by Orbital with the SEC
under the Exchange Act after such date (collectively, the "SEC Reports"). Each
SEC Report was, as of the date of filing of such
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report, in compliance in all material respects with the applicable requirements
of the Exchange Act and none of the SEC Reports, as of their respective dates,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
4.4. Financial Statements. etc. Orbital has previously furnished Seller
with true, correct and complete copies of the following financial statements
(collectively, the "Orbital Financial Statements"): (i) consolidated financial
statements for the fiscal years ended December 31, 1994, 1995 and 1996 audited
by KPMG Peat Marwick LLP, and (ii) unaudited consolidated statements of income
and cash flows for the fiscal quarter ended March 31, 1997 and the accompanying
consolidated balance sheets as of such dates. The Orbital Financial Statements
present fairly, in all material respects, the consolidated financial position of
Orbital and the results of its operations and its cash flows as of the
respective dates and periods thereof in conformity with GAAP and applied on a
consistent basis, except as noted therein and except that in the case of the
unaudited financial statements, no notes are included and such unaudited
financial statements may be subject to normal, recurring adjustments that would
be made in the course of an audit and that would not be material.
4.5. Absence of Changes. Except as set forth in the SEC Reports (copies
of which have all been provided by Orbital to Seller), since March 31, 1997 none
or Orbital or its Subsidiaries (considered as a whole) has undergone any adverse
change in its business, condition (financial or otherwise) or prospects (whether
as a result of any change as to accounts receivable, inventory or other assets,
any loss of competitive position, any natural disaster, accident, strike,
sabotage or confiscation of property, or any other event or condition directly
affecting or relating to Orbital or any of its Subsidiaries, whether or not
related to any of the foregoing), or suffered any damage, destruction or loss
(whether or not covered by insurance), other than such changes or damage,
destruction or loss as do not have an Orbital Material Adverse Effect or that
are the result of changes in general economic conditions.
4.6. Litigation. Except as described in the SEC Reports, there are no
actions, claims, suits, investigations or proceedings pending or to Orbital's
knowledge threatened against Orbital or any of its Subsidiaries the resolution
of which is reasonably likely to have an Orbital Material Adverse Effect or that
question the validity of this Agreement or any of the other Transaction
Agreements or any action taken or to be taken pursuant to or in connection with
the provisions of this Agreement or any other Transaction Agreement, nor to the
knowledge of Orbital is there any basis for any such action, claim, suit,
proceeding or investigation. There are no judgments, orders, decrees, citations,
fines or penalties heretofore assessed (and not discharged or otherwise
satisfied) against
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Orbital or any of its Subsidiaries under any United States federal, state, local
or foreign law except for such judgments, orders, decrees, citations, fines or
penalties that in the aggregate do not have an Orbital Material Adverse Effect.
4.7. Brokers. Finders. etc. All negotiations relating to this Agreement
and the transactions contemplated hereby have been carried on without the
intervention of any person acting on behalf of Orbital in such manner as to give
rise to any valid claim against Seller or Orbital for any brokerage or finder's
commission, fee or similar compensation.
4.8. Accountants. None of Orbital or its Subsidiaries has retained either
Coopers & Lybrand LLC or Price Waterhouse LLC to examine or review its financial
statements after June 30, 1995.
4.9. Bank Approvals. Orbital has no reasonable basis for believing that
the approvals described in Section 6.2.6 will not be obtained on a timely basis.
SECTION 5
CERTAIN COVENANTS
5.1. Post Closing Financials. As soon as reasonably practicable but in
any event within 40 days after the Closing, Seller shall provide to Orbital
unaudited financial statements of the Business consisting of statements of
income and cash flows for the six months ended June 30, 1997 and June 30, 1996,
and a balance sheet as of June 30, 1997. Within 40 days after the Closing,
Seller shall provide Orbital with audited financial statements of the Business
for the fiscal years ended December 31, 1994, 1995 and 1996 consisting of
statements of income and statements of cash flows for the year ended December
31, 1994, 1995 and 1996 and balance sheets as of December 31, 1995 and December
31, 1996.
5.2. Exclusivity: Acquisition Proposals. Unless and until this Agreement
shall have been terminated by either party pursuant to Section 8.1 hereof,
except as required by law, Seller shall not (and it shall instruct its officers,
directors, agents, representatives or Affiliates not to) take or cause or permit
any Subsidiary to take, directly or indirectly, any of the following actions
with any party other than Orbital and its designees or agents: (i) solicit,
encourage, initiate or participate in any negotiations, inquiries or discussions
with respect to any offer or proposal to acquire all or any substantial part of
the Business or the Business Assets or the capital stock of Seller or any
Acquired Subsidiary whether by merger, consolidation, other business
combination, purchase of assets, tender or exchange offer or otherwise (each of
the foregoing an "Acquisition Transaction"); (ii) disclose any information not
customarily disclosed to any person concerning the Business
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or Business Assets except in the ordinary course of business consistent
with past practice and as required pursuant to a governmental request for
information; (iii) enter into or execute any agreement relating to an
Acquisition Transaction, or other agreement calling for the sale of all or any
significant part of the Business or the Business Assets; or (iv) make or
authorize any public statement, recommendation or solicitation with respect to
any Acquisition Transaction or any offer or proposal relating to an Acquisition
Transaction other than with respect to the transactions contemplated hereby;
provided, however, that notwithstanding anything to the contrary in this Section
5.2, if the board of directors of Seller determines in good faith, after
consultation with outside counsel, that it is necessary to do so in order to
comply with its fiduciary duties to its stockholders under applicable law,
Seller may, in response to the presentation subsequent to the date hereof of a
proposed Acquisition Transaction concerning the Business that was not solicited
or encouraged by Seller, furnish information to any person presenting such
Acquisition Transaction pursuant to a customary confidentiality agreement and
participate in discussions or negotiations regarding such Acquisition
Transaction. Seller shall notify Orbital promptly in writing of the receipt of
any proposal in respect of an Acquisition Transaction.
5.3. HSR Act; Etc. As promptly as practicable after the date of the
execution of this Agreement, Orbital and Seller shall file notifications under
and in accordance with the HSR Act. Orbital and Seller shall respond as promptly
as practicable to any inquiries received from the Federal Trade Commission and
the Antitrust Division of the Department of Justice for additional information
or documentation and shall respond as promptly as practicable to all inquiries
and requests received from any state attorney general or other governmental
authority in connection with antitrust matters.
5.4. Notices and Consents. Seller has given or will timely give any
notices to third parties, and Seller will use commercially reasonable efforts to
obtain any third party consents, that are required to transfer the Purchased
Assets to Orbital, including without limitation any novation agreements in
connection with any Government Contract for which novation is required.
5.5. Preparation for Closing. Each of the parties hereto agrees to use
all commercially reasonable efforts to bring about the fulfillment of the
conditions precedent contained in this Agreement.
5.6. Public Announcements. Neither Orbital nor Seller shall, nor shall
either permit any of its Subsidiaries to (and each such party shall use all
commercially reasonable efforts to cause its Affiliates, directors, officers,
employees, agents and representatives not to) issue any press release, make any
public announcement or public filing or furnish any written statement to its
employees or stockholders generally
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concerning the transactions contemplated by this Agreement without the consent
of the other party (which consent shall not be unreasonably withheld), except to
the extent required by applicable law, rule or regulation or the applicable
requirements of the National Association of Securities Dealers, Inc. with
respect to issuers whose securities are quoted on the NASDAQ National Market
System (and in any such case such party shall, to the extent consistent with
timely compliance with such requirement, consult with the other party prior to
making the required release, announcement, filing or statement).
5.7. Confidential Information. Each of Orbital and Seller covenants and
agrees that it will continue to abide by the terms and conditions of the letter
agreements dated February 27, 1997 and May 1, 1997; provided, however that
effective as of Closing, Orbital's obligations under Sections 1, 3 and 4 of the
letter agreement dated February 27, 1997 shall terminate with respect to
Confidential Information (as defined therein) principally related to the
Business or the Purchased Assets. Seller also hereby covenants and agrees that
on and after the Closing it shall maintain the confidentiality of any
confidential or proprietary information relating to the Business or the Business
Assets on the same basis as it treats its own confidential and proprietary
information.
5.8. Noncompetition. Etc. Seller agrees that, in consideration of the
payments made by Orbital hereunder, during the period from the Closing Date
through the third anniversary of the Closing Date it shall not, directly or
indirectly, own, manage, operate, control, participate in, invest in or be
connected in any manner with the management, financing, ownership, operation or
control of any business, venture or activity engaged anywhere in the world in
the business of developing, designing, manufacturing or marketing (i)
satellites, satellite systems, related support systems or related hardware,
software or services, (ii) aerospace hardware, software and engineering services
for space systems and related ground systems (other than continuing its business
with United Space Command, Air Force Space Command and Air Force Material
Command), or (iii) automated tracking and cargo status data systems of mobile
assets, or related hardware, software or services, provided, however, that
Seller shall not be prohibited by this Section 5.8 from owning beneficially or
of record up to 5% of the equity interests in a public company. Seller further
agrees that, in consideration of the payments by Orbital hereunder, without the
prior written consent of Orbital neither Seller nor any of its Affiliates shall
during the period from the Closing Date through the third anniversary of the
Closing Date, directly or indirectly, recruit, offer employment, employ
(including employment as a consultant), lure or entice away any Employee who
then is, or within the then prior three months has been, an employee of Orbital
or any Subsidiary, group or division of Orbital or any Affiliate thereof, unless
such person has been terminated by Orbital or an Affiliate of Orbital. Orbital
agrees, in consideration of Seller's sale of the Purchased Assets and other
obligations hereunder, that without the prior written consent of Seller Orbital
shall, during the period from the Closing Date through the third
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anniversary of the Closing Date, not knowingly initiate any contact or
discussions with any current employee of Seller who is then an employee of
Seller in an effort to recruit, offer employment, or employ (including
employment as a consultant), lure or entice away any such employee; provided,
however, the foregoing shall not prohibit (i) any employee of Orbital (other
than an Employee (acting directly or indirectly) whose position with Seller or
any Acquired Subsidiary was that of a program manager or higher) from initiating
any such contact of his or her own volition and without any direction or
suggestion by any executive officer of Orbital or by any Employee whose position
with Seller or any Acquired Subsidiary was that of a program manager or higher
that such contact be made, (ii) any general solicitation or advertising, or
(iii) the hiring by Orbital of any employee of Seller with whom contact or
discussions were initiated not in violation of this Section 5.8.
5.9. Notification of Certain Matters. Between the date hereof and the
Closing Date, each party shall give prompt notice in writing to the other party
of: (i) any information that indicates that any of its representations or
warranties contained herein was not true and correct in all material respects as
of the date hereof or will not be true and correct in all material respects at
and as of the Closing Date with the same force and effect as if made at and as
of the Closing Date (except for changes permitted or contemplated by this
Agreement), (ii) the occurrence of any event that will result, or has a
reasonable prospect of resulting, in the failure of any condition specified in
Section 6 hereof to be satisfied, and (iii) any notice or other written
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement or that such transactions otherwise may violate the rights of or
confer remedies upon such third party.
5.10. Other Limitations on Conduct of Business Prior to the Closing Date.
Seller hereby covenants and agrees with Orbital that, prior to the Closing Date,
unless the prior written consent of Orbital shall have been obtained and except
as otherwise contemplated herein, it shall operate the Business, and it shall
cause each of the Acquired Subsidiaries to operate the Business, only in the
usual, regular and ordinary course of business consistent with past practice,
incurring only ordinary and necessary business expenses consistent with past
practice; provided, however, that the Acquired Subsidiaries may pay cash
dividends to other Acquired Subsidiaries. Without limiting the foregoing, unless
the prior written consent of Orbital shall have been obtained (which such
consent shall not be unreasonably withheld in the case of (iii), (iv), (v) or
(x) below, it being understood that in the case of a Contract with a customer it
shall not be unreasonable to withhold consent if the expected profit margin is
less than 10%) and except as otherwise contemplated herein, prior to the Closing
Date Seller shall: (i) use commercially reasonable efforts to preserve intact
the Business and the Business Assets and maintain their rights and franchises;
(ii) not materially alter its methods, practices or terms with
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respect to the billing or collection of accounts receivable that relate to the
Business or the payment of accounts payable that relate to the Business; (iii)
not declare, set aside or pay any dividend or make any distribution with respect
to its capital stock or redeem, purchase, or otherwise acquire any of its
capital stock; (iv) not submit any material bids or proposals to any third party
with respect to the Business; (v) not enter into any material contracts,
commitments or agreements (including without limitation any material
modification or amendment to any such contract, commitment or agreement
(including without limitation Seller's Contract with EarthWatch Incorporated
dated May 17, 1994 and Seller's Contract with Pt. Media Citra Indostar dated
December 7, 1994)) with respect to the Business; (vi) use commercially
reasonable efforts to keep the Business and the Business Assets substantially
intact, including its present operations, physical facilities, working
conditions and relationships with lessors, licensors, suppliers, customers and
employees; (vii) not sell, dispose of or otherwise transfer or encumber any of
the Business Assets, except in the usual, regular and ordinary course of
business consistent with past practices; (viii) use commercially reasonable
efforts to conduct the Business in compliance with all applicable laws, rules
and regulations; (ix) not increase the compensation, benefits or any other form
of remuneration to officers or employees of the Business; (x) not modify, alter
or amend the terms or provisions of any Plan (excluding stock based Plans) for
officers or employees of the Business, other than to decrease benefits under the
severance Plan; (xi) use commercially reasonable efforts (other than providing
additional financial incentives) to keep available to Orbital the services of
Seller's present officers, employees, agents and independent contractors
presently engaged in the Business; (xii) not sell or permit the sale of products
or services or enter into other transactions related to the Business at rates or
prices lower than the rates and prices in effect for such transactions on the
date hereof other than in the usual, regular and ordinary course of business
consistent with past practice; (xiii) maintain in full force and effect all
insurance policies listed on Schedule 3.24; (xiv) not authorize for issuance,
issue or obligate itself to issue any shares of its capital stock or any
options, warrants or rights, or enter into any other agreements or commitments
obligating it to issue or sell shares of its capital stock or any securities or
obligations convertible into, or exchangeable for, any shares of its capital
stock, other than (a) the issuance of Seller Common Stock pursuant to options
outstanding on June 1, 1997 or granted in the ordinary course of business to
recruit or retain employees other than the Employees, or (b) the issuance of
such securities of Seller if the purchaser has agreed to vote such securities
having the right to vote for this Agreement and the transactions contemplated
hereby (as applicable); and (xv) take no action that would (a) materially
adversely affect the ability of Orbital or Seller to obtain any necessary
approvals of any third parties or any governmental authorities required for the
transactions contemplated hereby or materially increase the period of time
necessary to obtain such approvals, or (b) materially adversely affect its
ability to perform its covenants and agreements under this Agreement.
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5.11. Access to Information. Seller shall, subject to applicable law,
afford Orbital and its accountants, counsel and other representatives reasonable
access during reasonable business hours prior to the Closing Date to (a) all of
Seller's and the Acquired Subsidiaries' financial statements, properties, books,
contracts, commitments and records to the extent they relate to the Business or
the Business Assets, and (b) all other information concerning the Business or
the Business Assets as Orbital may reasonably request. No information or
knowledge obtained after the date hereof in any investigation pursuant to this
Section 5.11 shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties to
consummate the transactions contemplated hereby.
5.12. Transfer Taxes. Seller agrees to pay all applicable sales and use
Taxes on the transfer of the Purchased Assets hereunder, including any such
Taxes that may be imposed in the event Seller does not obtain a clearance
certificate from any applicable taxing authority. Seller shall apply prior to
Closing for a clearance certificate and shall use commercially reasonable
efforts to obtain such certificate.
5.13. Employee Matters.
(a) Orbital shall make offers to and use good faith efforts to
continue the employment in the Business immediately after the Closing (or in the
case of Employees receiving short or long term disability payments under the
plans listed in Items 7 and 8 of Schedule 3.17 as of the Closing, such later
date as the Employee is able to work full time) each Employee listed on Schedule
5.13 as employed by Seller, and shall cause each Acquired Subsidiary to use good
faith efforts to continue immediately following the Closing to employ each
Employee employed by it, in each case at a salary or annualized hourly wage
equal to the annual salary or annualized hourly wage set forth with respect to
each Employee on Schedule 3.17 and fringe benefits comparable to those generally
available to Orbital's employees. In furtherance of the foregoing, Seller will
(i) terminate the employment by it of all Employees employed by it concurrently
with the Closing and will pay (or will use commercially reasonable efforts to
cause the applicable Plan to pay) any and all liabilities (other than accrued
liabilities for accrued vacation and personal time to the extent such
liabilities are reflected on the Closing Statement) relating to such termination
or the termination of participation by the Employees in or under any Plan or
policy of Seller or the Acquired Subsidiary applicable prior to the Closing,
including without limitation cash payments in respect of all accumulated sick
leave in excess of 240 hours per Employee and any payments and benefits due such
Employees pursuant to accrued pension, retirement, savings, health, welfare and
other benefits and severance payments or similar payments of the Employees to
the extent any such payments are required to be made by Seller or the applicable
Plan and (ii) provide to all
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Employees any notice (which notice shall be reasonably acceptable to Orbital)
required under any law or regulations in respect of such termination, including
without limitation COBRA. Each Employee shall commence employment with Orbital
or continue employment with an Acquired Subsidiary, as the case may be, having
accrued but unused leave time in an amount equal to the aggregate of such
Employee's accrued but unused vacation time and personal time as an employee of
Seller as of the Closing Date. Orbital shall for purposes of its severance
policy and the participation and vesting provisions of its Deferred Salary and
Profit Sharing Plan and its 1995 Deferred Compensation Plan and the allocation
provisions of such Plans for the plan year ending in 1997 treat the term of
employment of each Employee with Orbital after the Closing as including any
period of employment with Seller or an Acquired Subsidiary prior to Closing. For
a period of at least three months after the Closing Date, Orbital shall maintain
its severance policy that provides a benefit of one week of severance pay per
one year of service, up to a maximum of ten weeks, in the event of a layoff or
reduction in work force. Seller shall pay in a manner consistent with its normal
payroll cycles all amounts due Employees in respect of employment by Seller or
the Acquired Subsidiaries through the Closing Date, and shall pay in accordance
with law to the appropriate authorities all withholding, FICA FUTA and similar
amounts due in respect of such employment. Orbital will reimburse Seller
promptly upon notification thereof (accompanied by reasonable support thereof)
for all amounts paid or to be paid by Seller pursuant to the preceding sentence
to the extent such amounts are reflected on the Closing Statement. Each Acquired
Subsidiary shall terminate its participation in Seller's Defined Contribution
401(k) Retirement Plan, Seller's Employee Stock Ownership Plan and all other
plans, agreements, policies and arrangements listed in Schedule 3.17 (except
for the flexible spending account component of the plan listed on Item 4 of
Schedule 3.17), effective as of or prior to the Closing. Orbital's Deferred
Salary and Profit Sharing Plan (or another comparable qualified plan
established by Orbital) shall accept direct and indirect rollovers of eligible
rollover distributions that consist of cash or outstanding loan balances from
Seller's Defined Contribution 401(k) Retirement Plan and Seller's Employee
Stock Ownership Plan. Nothing in this Section 5.13 shall be construed as
creating any right of Seller or any Employee to the continued employment of any
Employee or to any particular terms of employment, and nothing in this Section
5.13 shall limit in any way Orbital's or any Acquired Subsidiary's right at any
time to terminate or modify the terms of employment of any Employee or any of
Orbital's or any Acquired Subsidiary's employment or severance benefits or
policies.
(b) Except as set forth below, Employees employed by Orbital or the
Acquired Subsidiaries pursuant to this Section 5.13 shall, immediately upon
commencement of their employment by Orbital, commence participation in and
coverage under any and all employee benefit plans maintained by Orbital that
provide medical, dental, vision, or other similar benefits and, provided that
Seller delivers to Orbital prior
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to Closing a medical claims history of such Employees for the period January 1,
1996 through June 30, 1997, shall not be subject to any preexisting condition
limitation included in any such plan. For purposes of this Section 5.13(b), a
preexisting condition limitation means a limitation or exclusion of benefits
relating to a condition based on the fact that the condition was present before
the date the Employee was employed by Orbital, whether or not any medical
advice, diagnosis, care or treatment was recommended or received before such
date. The first sentence of this Section 5.13(b) shall not apply to: (i)
Employees who as of the Closing are receiving short- or long-term disability
payments under the Plans listed in Items 7 and 8 of Schedule 3.17; or (ii)
Employees who have reached $100,000 in claims with respect to 1997 as of the
Closing, or are reasonably expected by Seller in its good faith judgment to
reach $100,000 in claims with respect to 1997 by December 31, 1997.
(c) Seller shall separate into a different plan the portion of its
Cafeteria-Style Section 125 Plan that provides flexible spending accounts for
health care and dependent care to Employees of the Seller or of an Acquired
Subsidiary who become employees of Orbital ("FSAs"), and such portion shall be
adopted by Orbital and maintained through December 31, 1997. Within 40 days
after Closing (or such earlier time as payment may occur under Section 2.6.3)
(i) Seller shall pay to Orbital in cash the amount, if any, by which aggregate
contributions made by such Employees to their FSAs for 1997 exceed the aggregate
benefits paid to such Employees from their FSAs as of the Closing; or (ii)
Orbital shall pay to the Seller in cash the amount, if any, by which the
aggregate benefits paid to such Employees from their FSAs exceed the aggregate
contributions made by such Employees to their FSAs as of the Closing.
5.14. Accounting and Financial Records. Seller shall provide to Orbital
such assistance in the transfer of the financial and accounting records related
to the Business as is reasonably requested by Orbital to facilitate the transfer
of the accounting function of the Business to Orbital.
5.15. Income Tax Matters.
5.15.1. Tax Sharing Agreements. Any Tax sharing agreement between
Seller and any of the Acquired Subsidiaries shall be terminated as of the
Closing Date and shall have no further effect for any taxable year
(whether the current year, a future year, or a past year).
5.15.2. Tax Periods Ending On or Before the Closing Date. Seller
shall include the income of the Acquired Subsidiaries on Seller's
consolidated federal Income Tax Returns and any other consolidated,
combined or unitary Income Tax Returns including Seller and any of the
Acquired Subsidiaries ("Seller
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Consolidated Returns") for all Tax periods ending on or prior to the
Closing Date (the "Pre-Closing Periods"), and shall file or cause to be
filed all other Income Tax Returns that are required to be filed by or
with respect to the income, assets or operations of the Acquired
Subsidiaries for Pre-Closing Periods ("Pre-Closing Separate Returns"),
except that Seller shall not be required to file or cause to be filed
information Tax Returns prepared on Internal Revenue Forms 1098 and 1099
(and any variants of each), and summary Tax Returns related thereto
("Information Tax Returns") for the Acquired Subsidiaries. All other Tax
Returns shall be filed by the entity to which the Taxes are
attributable. Seller shall pay any Income Taxes required to be paid by
or with respect to the income, assets or operations of Seller and its
Subsidiaries, including the Acquired Subsidiaries, for Pre-Closing
Periods except to the extent set forth on the Closing Statement. Orbital
shall, or shall cause the Acquired Subsidiaries to, furnish Income Tax
information to Seller for inclusion in Seller Consolidated Returns and
Pre-Closing Separate Returns (collectively, "Pre-Closing Returns") in
accordance with Seller's past custom and practice. Seller shall allow
Orbital an opportunity to review and comment upon such Pre-Closing
Returns to the extent that (i) they relate to an Acquired Subsidiary for
which a Section 338(h)(10) Election will not be made, or (ii) they
relate to an Acquired Subsidiary and are filed with a taxing authority
in a jurisdiction in which no Section 338(h)(10) Election is available.
Seller shall take no position inconsistent with past custom and practice
on such returns that would adversely affect the Acquired Subsidiaries
after the Closing Date without the prior written consent of Orbital,
which shall not be unreasonably withheld.
5.15.3. Tax Periods Beginning On or Before and Ending After the
Closing Date. Orbital shall file or cause to be filed all Income Tax
Returns that are required to be filed by or with respect to the income,
assets or operations of the Acquired Subsidiaries for Tax periods which
begin on or before the Closing Date and end after the Closing Date (the
"Overlap Period"). Seller shall reimburse Orbital for any Income Taxes
(that have not previously been paid by Seller as estimated Income Tax
payments) required to be paid by or with respect to the income, assets or
operations of the Acquired Subsidiaries with respect to an Overlap Period
within fifteen days after Seller's receipt of notice from Orbital of the
amount of such Income Taxes, to the extent such Income Taxes relate to
Taxes for the portion of the Overlap Period that includes Pre-Closing
Periods. Orbital shall pay or cause to be paid all other Income Taxes
required to be paid by or with respect to the income, assets or
operations of the Acquired Subsidiaries for Overlap Periods. For purposes
of this Section 5.15.3, in the case of any Income Taxes that are imposed
on a period basis and are payable for an Overlap Period, the portion of
such Income Taxes that relates to the portion of
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such period ending on the Closing Date shall be based upon a closing of
the books as of the end of the Closing Date. Any credits relating to an
Overlap Period shall be apportioned based on the apportionment of Income
Taxes set forth in the preceding sentence. All determinations necessary
to give effect to the foregoing allocations shall be made in a manner
consistent with prior practice of Seller.
5.15.4. Tax Periods Beginning After the Closing Date. Orbital
shall file or cause to be filed all Income Tax Returns that are required
to be filed, and pay or cause to be paid, all Income Taxes that are
required to be paid by or with respect to the income, assets or
operations of the Acquired Subsidiaries for any Tax period beginning
after the Closing Date (the "Post-Closing Periods").
5.15.5. Contests. Seller and its duly appointed representatives
shall have the exclusive authority to control any audit or examination
by any taxing authority, initiate any claim for refund, amend any Income
Tax Return and contest, resolve and defend against any assessment for
Income Taxes, notice of Income Tax deficiency or other adjustment of
Income Taxes of or relating to any liability of the Acquired
Subsidiaries for Income Taxes for any Pre-Closing Period. Subject to the
foregoing, Seller shall allow Orbital and its counsel to participate at
Orbital's expense in (i) any audits or examinations of any Seller
Consolidated Return to the extent that such returns relate to any
Acquired Subsidiary for which a Section 338(h)(10) Election will not be
made or a Seller Consolidated Return filed with a taxing authority in a
jurisdiction in which no Section 338(h)(10) Election is available, and
(ii) any audits or examinations of Pre-Closing Separate Returns that
relate to an Acquired Subsidiary for which a Section 338(h)(10) Election
will not be made or Pre-Closing Returns that are filed with a taxing
authority in a jurisdiction in which no Section 338(h)(10) Election is
available. Seller shall not settle any such audit or examination in a
manner which would materially adversely affect the Acquired Subsidiaries
after the Closing Date without the prior written consent of Orbital,
which shall not unreasonably be withheld. Orbital and its duly appointed
representatives shall have the exclusive authority to control any audit
or examination by any taxing authority, initiate any claim for refund,
amend any Income Tax Return and contest, resolve and defend against any
assessment for Income Taxes, notice of Income Tax deficiency or other
adjustment of Income Taxes of or relating to any liability of the
Acquired Subsidiaries or any successor thereto for Income Taxes for any
Tax period ending after the Closing Date. Subject to the foregoing,
Orbital shall allow Seller and its counsel to participate at Seller's
expense in any audits or examinations of Income Tax Returns including
any of the Acquired Subsidiaries to the extent that such audits or
examinations could require Seller to make a payment hereunder. Orbital
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shall not settle any such audit or examination in a manner which would
adversely affect Seller without the prior written consent of Seller,
which shall not unreasonably be withheld.
5.15.6. Interperiod Tax Attribute Adjustments.
(a) If, as a result of the examination of a Seller Consolidated
Return, there shall result any adjustment which increases deductions, decreases
income or increases credits against Income Tax ("Tax Benefits") or which
increases income, decreases deductions or credits, or results in a recapture of
credits against Income Tax ("Tax Detriments") for any Tax period and which will
permit Orbital or the Acquired Subsidiaries (or any corporation in an affiliated
group of which Orbital or any of the Acquired Subsidiaries is a member) to
increase the Income Tax Benefits or decrease the Income Tax Detriments to which
they would otherwise have been entitled for any Tax period beginning on or after
the Closing Date, Seller shall notify Orbital of such adjustment and provide
Orbital with such information as may be necessary for Orbital to take account of
such increases or decreases through filing of a claim for refund or otherwise.
Orbital shall use commercially reasonable efforts to secure the benefit of such
increases or decreases and shall pay Seller the amount of any refund (together
with interest, if any, received) or reduction of Income Tax liability resulting
from such adjustment, such amount to be paid when, as and if such refund or
reduction in Income Tax liability is actually realized.
(b) If, with respect to an Overlap Period or a Post-Closing Period,
Seller (or its Affiliates excluding the Acquired Subsidiaries) reports a net
operating loss or otherwise has available Tax benefits (e.g. Tax credits) that
may be carried back to a Pre-Closing Period, Seller shall be permitted to carry
back such losses or benefits into the Seller Consolidated Returns or other
Income Tax Returns filed by Seller or its Affiliates. Seller shall be entitled
to keep all such refunds obtained as a result of any such carryback. Subject to
the first sentence of this paragraph (b), Seller shall permit Orbital to carry
back post-acquisition net operating losses or Tax benefits of any of the
Acquired Subsidiaries into the Pre-Closing Returns to the extent permitted by
law. Seller shall use commercially reasonable efforts to obtain such refunds,
and shall promptly pay to Orbital the amount of any refund (together with
interest, if any, received), such amount to be paid when, as and if such refund
is actually realized. Orbital (i) shall indemnify Seller for any Income Taxes
resulting from the disallowance of any such carryback of post-acquisition net
operating losses or Tax benefits on audit or otherwise, and (ii) shall return
any amount paid by Seller (together with interest to the extent interest would
have been available on a refund claim that could have been filed by Seller)
pursuant to this Section 5.15.6 to the extent that net operating losses or Tax
benefits of Seller subsequently arise that would have enabled Seller to obtain
such refund in the absence of a carryback of Tax attributes from the Acquired
Subsidiaries hereunder.
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5.15.7. Amended Returns and Refunds. Seller shall have the
authority to file amended returns and claims for refund relating to
Pre-Closing Returns, provided that Seller shall allow Orbital an
opportunity to review and comment upon such amended returns or claims for
refund to the extent that they relate to any Acquired Subsidiary. Except
as otherwise provided in Section 5.15.6, Seller shall be entitled to any
refund received by Orbital or the Acquired Subsidiaries relating to
Pre-Closing Returns. Orbital shall pay over (and cause the Acquired
Subsidiaries to pay over) to Seller in immediately available funds such
refund (including refunds of interest or penalties paid by Seller)
together with any interest thereon within fifteen days after the receipt
of such refund.
5.15.8. Retention of Carryovers. Seller shall not elect to retain
any net operating loss carryovers or capital loss carryovers of the
Acquired Subsidiaries.
5.15.9. Section 338(h)(10) Elections. Seller shall join with
Orbital in making an election under section 338(h)(10) of the Code (and
any corresponding elections under state, local, or foreign tax law)
(collectively a "Section 338(h)(10) Election") with respect to the
purchase and sale of the stock of each Acquired Subsidiaries other than
Engineering Technologies, Inc. and CTA Space Systems, Inc. Seller shall
pay any Tax attributable to the making of the Section 338(h)(10)
Election. The deemed sales price paid in connection with the Section
338(h)(10) Election shall be allocated as set forth in Section 2.8.
5.15.10. Indemnification for Post-Closing Transactions. Orbital
agrees to indemnify Seller for any additional Tax owed by Seller and
agrees to hold Seller harmless from any additional Tax of the Acquired
Subsidiaries for a Pre-Closing Period (including Income Tax owed by
Seller due to this indemnification payment) resulting from any
transaction undertaken by Orbital without the consent of Seller and not
in the ordinary course of business occurring on the Closing Date after
Orbital's purchase of the Acquired Subsidiaries' stock.
5.15.11. Notices. If any party to this Agreement receives any
written notice or other communication from any governmental authority
relating to any Tax audit or other proceeding relating to any Tax for
which any other party thereto may be obligated to indemnify or pay under
this Agreement, such party shall promptly forward such notice or
communication to the other party. The failure to forward such written
notice or other communication promptly pursuant to this Section 5.15.11
shall excuse the indemnity or payment obligations of such other party
except to the extent (and only to the extent) that the party that so
failed to forward can show that such failure did not materially
prejudice the rights of the other party to contest such Tax.
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5.15.12. Cooperation. Orbital and Seller shall cooperate (and
Orbital shall cause the Acquired Subsidiaries to cooperate) fully, as and
to the extent reasonably requested by the other party, in connection with
the calculation of any Taxes and with the preparation and filing of Tax
Returns pursuant to this Agreement, and in connection with any proceeding
with respect to Taxes affecting or relating to the Acquired Subsidiaries.
Such cooperation shall include the retention and (upon the other party's
written request) the provision of records and information that are
reasonably relevant to such preparation and filing and to any Tax
proceeding relating thereto and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material so provided. Orbital and Seller agree to retain (and Orbital
agrees to cause the Acquired Subsidiaries to retain) all books and
records with respect to Tax matters pertinent to the Acquired
Subsidiaries relating to any Tax period beginning prior to the Closing
Date until the expiration of the statute of limitations for assessment of
the applicable Taxes (and, to the extent notified by Orbital or Seller,
any extensions thereof), and shall not destroy or otherwise dispose of
any such books and records until such expiration without first providing
the other party or parties with a reasonable opportunity to review and
copy the same. Orbital and Seller acknowledge that any and all
information obtained in connection with the preparation of any Tax
Return, audit or judicial or administrative proceeding or determination
pursuant to this Section 5.15.12 is of a confidential nature and that all
such information shall be used only for the purposes set forth in this
Section 5.15.12.
5.15.13. Valuation and Allocation. Seller and Orbital agree to
act reasonably and in good faith in preparing all valuations,
allocations, Income Tax Returns, and calculations of indemnity amounts
under this Section 5.15.13. If Seller and Orbital are unable to reach
mutual agreement on any such item within thirty (30) days from the
arising of the need for agreement on any such item, such disagreement
shall be resolved in the manner provided in Section 2.6 and such
resolution shall be final and binding on the parties. The fees and
expenses of such resolution shall be borne equally by Seller and Orbital.
The valuations and allocations determined pursuant to this Section
5.15.13 shall be used for purposes of all relevant Income Tax Returns.
5.15.14. Purchase Price Adjustment. Seller and Orbital agree to
treat all payments made by either of them to or for the benefit of the
other (including any payments to or from the Acquired Subsidiaries under
this Section 5.15, under other indemnity provisions of this Agreement and
for any misrepresentations or breaches of warranties or covenants) as
adjustments to the
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Purchase Price for Tax purposes and that such treatment shall govern for
purposes hereof.
5.16. Government Contracts. After the Closing Date, as applicable, the
parties will use commercially reasonable efforts to obtain novation agreements
in connection with any Government Contract for which novation is required and
any consents to assignments or name changes for any other Government Contracts
required and not obtained prior to the Closing. Upon request by Orbital, Seller
shall direct the parties to such Government Contracts to make payments to a
lockbox account to which Orbital has access and the right to withdraw monies
from, or to make payments otherwise in accordance with instructions to be
provided by Orbital.
5.17. Limitation of Certain Types of Transactions by Seller After
Closing. Following the Closing, Seller shall not in any one transaction or any
series of related transactions sell all or a majority of Seller's assets unless
each Person acquiring any of such assets shall execute an agreement by which
such Person shall agree to be bound by, and perform the obligations of Seller
under, this Agreement (including this Section 5.17) and in which agreement
Orbital shall be expressly stated to be a third party beneficiary.
5.18. Intercompany Accounts. The Seller shall cause to be discharged
prior to Closing all intercompany accounts (i) between the Acquired Subsidiaries
and Seller, (ii) between the Acquired Subsidiaries and any of Seller's other
Subsidiaries and (iii) between Seller and any Subsidiary of Seller other than an
Acquired Subsidiary to the extent such account relates to or arises from the
Business or the Business Assets.
5.19. Change of Names. Orbital shall not use any name listed on
Schedule 2.2.11 or any name incorporating or confusingly similar to "CTA";
provided that for a period of 30 days following the Closing, Orbital shall be
permitted to continue to use any preprinted forms and other similar existing
materials that are part of the Purchased Assets. Simultaneously with the
Closing, the Acquired Subsidiaries' Articles of Incorporation shall be amended
to change their corporate names to comply with Orbital's obligations under this
Section 5.19.
5.20. Stockholders' Meeting. Seller shall, in accordance with the CBCA,
duly call, give notice of, convene and hold a meeting of its stockholders as
promptly as practicable for the purpose of voting upon this Agreement and any
other related matters requiring approval of Seller's stockholders (the
"Stockholder Meeting"). Seller shall, through its board of directors, recommend
to its stockholders approval of the transactions contemplated hereby and shall
use all commercially reasonable efforts to hold such meeting as soon as
practicable after the date hereof, and shall use all commercially
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reasonable efforts to secure the approval by its stockholders of the
transactions contemplated hereby.
5.21. Liquidated Damages. If Seller terminates this Agreement pursuant
to Section 8.1(b)(ii) or Section 8.1(f) or if Orbital terminates this Agreement
pursuant to Section 8.1(b) or Section 8.1(c) and within 180 days of such
termination Seller executes a definitive agreement with respect to an
Acquisition Transaction or files a registration statement registering the shares
of Seller for an initial public offering, then in either such case Seller shall
within five business days pay to Orbital, as liquidated damages and not as a
penalty, $2,500,000.
5.22. Further Assurances. Each of the parties hereto, before, at and
after the Closing Date, upon the reasonable request from time to time of the
other party hereto and without further consideration (other than the
reimbursement of reasonable out-of-pocket expenses), shall do each and every
act and thing as may be necessary or reasonably desirable to consummate the
transactions contemplated hereby and to effect an orderly transfer to Orbital of
the Purchased Assets and the Business, including without limitation: (i)
executing, acknowledging and delivering assurances, assignments, powers of
attorney and other documents and instruments (including without limitation (a)
the execution by Orbital of the Stockholders Agreement dated as of March 29,
1995 by and among EarthWatch Incorporated and the other parties thereto to the
extent required to transfer the shares of EarthWatch Incorporated common stock
included in the Purchased Assets and (b)the execution by Orbital of the
Investors' Rights Agreement dated August 28, 1995 by and among Constellation
Communications, Inc. and the other parties thereto to the extent required to
transfer the Constellation Communications, Inc. securities included in the
Purchased Assets); (ii) furnishing information and copies of documents, books
and records (including without limitation Forms W-9, Forms I-9 and other
personnel records); (iii) filing reports, returns, applications, filings and
other documents and instruments with governmental authorities; (iv) assisting in
responding to any inquiry of any customer, including any governmental agency, of
the Business Assets with respect to the sale of products or provision of
services prior to the Closing, including, without limitation, DCAA, Department
of Labor and other government audits and inquiries, (v) assisting in good faith
in any litigation, threatened litigation or claim and cooperate therein with
other party hereto and its advisors and representatives, including without
limitation providing relevant documents and evidence and maintaining
confidentiality, other than litigation or threatened litigation or claims
against the party from whom such cooperation is requested, (vi) assisting in the
efforts to secure the facility security clearances, personal security clearances
and non-discloseable clearances from the Defense Investigative Service of the
U.S. Department of Defense or any other agency of the U.S. government and any
export licenses or technology assistance agreements required for Orbital to
conduct the Business subsequent to Closing, and (vii) cooperating
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with the other party hereto (at such other party's expense) in exercising any
right or pursuing any claim, whether by litigation or otherwise, other than
rights and claims running against the party from which such cooperation is
requested. Without limiting the foregoing and except as provided for in Section
5.16 with respect to the novation of Government Contracts and except in the case
of Retained Receivables, Seller shall promptly after the Closing notify each
other party to each Contract assumed by Orbital hereunder that such Contract has
been assumed and will be performed by Orbital and that all payments thereunder
are to be made to Orbital in accordance with wire instructions to be provided by
Orbital. Upon receipt by Seller of any payments to which Orbital is entitled as
a result of the assignment of such Contracts or for which novation may be
pending, Seller shall immediately pay such amounts to Orbital in accordance with
the foregoing instructions. Further, and without limiting the foregoing, to the
extent Contracts intended to be assigned hereunder cannot be assigned to
Orbital, Seller shall endeavor to provide Orbital the benefits of Seller's
rights under such Contracts and to the extent all such rights are provided to
Orbital, Orbital shall assume the obligations of Seller thereunder.
SECTION 6
CONDITIONS PRECEDENT
6.1. Conditions Precedent to Obligations of Seller. The obligations of
Seller to consummate the transactions contemplated by this Agreement shall be
subject to the satisfaction, prior to or contemporaneously with the Closing, of
the following conditions, compliance with which, or the occurrence of which, may
be waived in whole or in part by Seller in writing:
6.1.1. Purchase Price. Orbital shall have paid to Seller the
Cash Consideration minus $3,000,000 by wire transfer in accordance with
written instructions given by Seller to Orbital at least two business
days prior to the Closing Date.
6.1.2. Payment to Lenders. Orbital shall have paid to lenders
designated by Seller an aggregate of $27,000,000 in partial or full
satisfaction of Seller's obligations to such lenders, pursuant to written
instructions provided to Orbital by Seller no fewer than two business
days prior to the Closing Date.
6.1.3. Representations; Covenants; Certificate. The
representations and warranties of Orbital contained in Section 4 hereof
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date with the same effect as though made
as of the Closing Date (except that representations and warranties that
are made as of a specific date shall be true in all material
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respects only as of such date); Orbital shall in all material respects
have performed all obligations and complied with all covenants required
by this Agreement to be performed or complied with by it prior to the
Closing Date; and Orbital shall have delivered to Seller a certificate,
dated the Closing Date and signed by its President or a Vice President,
to each such effect.
6.1.4. Opinion of Counsel for Orbital. Seller shall have
received from Ropes & Gray, counsel for Orbital, a legal opinion, dated
the Closing Date in substantially the form attached as Exhibit 6.1.4.
6.1.5. Charter Documents, Etc. Orbital shall have delivered such
certificates or other documents as may be reasonably requested by Seller
or its counsel, including without limitation certificates of legal
existence, good standing and certified charter documents on file with the
Secretary of State of the State of Delaware, and certificates of the
Secretary or Assistant Secretary of Orbital with respect to directors'
resolutions, bylaws and any other relevant matters.
6.1.6. General. All instruments and legal and corporate
proceedings in connection with the transactions contemplated by this
Agreement and the other Transaction Agreements shall be reasonably
satisfactory in form and substance to Seller, and Seller shall have
received counterpart original, or certified or other copies, of all
documents that it may reasonably request in connection therewith.
6.2. Conditions Precedent to Obligations of Orbital. The obligations
of Orbital to purchase the Purchased Assets and to consummate the other
transactions contemplated by this Agreement shall be subject to the
satisfaction, prior to or substantially contemporaneously with the Closing Date,
of the following conditions, compliance with which, or the occurrence of which,
may be waived in whole or in part by Orbital in writing:
6.2.1. Representations; Covenants; Certificate. The
representations and warranties of Seller contained in Section 3 hereof
shall be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date with the same effect as though made
as of the Closing Date (except that representations and warranties that
are made as of a specific date shall be true in all material respects
only as of such date); Seller shall in all material respects have
performed all obligations and complied with all covenants required by
this Agreement to be performed or complied with by it prior to the
Closing Date; and Seller shall have delivered to Orbital a certificate,
dated the Closing Date and signed by its President or a Vice President,
to each such effect.
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6.2.2. Opinions of Counsel for Seller. Orbital shall have
received from (i) Fried, Frank, Harris, Shriver & Jacobson, counsel for
Seller, a legal opinion, dated the Closing Date, in both form and
substance reasonably acceptable to Orbital as to the matters addressed in
Item 3, clauses (ii), (iii) and (iv) (other than as applied to Colorado
law) of Item 5, and Item 6 (as it applies to federal and New York law) of
Exhibit 6.2.2, (ii) Sherman & Howard L.L.C., counsel for Seller, a legal
opinion, dated the Closing Date, in both form and substance reasonably
acceptable to Orbital as to the matters addressed in Item 1, Item 2,
clauses (i) and (iv) (as to Colorado law) of Item 5 and Item 6 (as it
applies to Colorado law) of Exhibit 6.2.2, and (iii) Michael J. Ladino,
General Counsel of Seller, a legal opinion, dated the Closing Date, in
both form and substance reasonably acceptable to Orbital as to the
matters addressed in Items 1, 4, 7 and 8 of Exhibit 6.2.2.
6.2.3. Assignment of Seller Intellectual Property. Seller shall
have executed and delivered to Orbital a general assignment to Orbital of
the Seller Intellectual Property in both form and substance reasonably
acceptable to Orbital, and where applicable, specific assignments in the
form required by any applicable government agency for recordation of such
assignment.
6.2.4. Charter Documents, Etc. Seller shall have delivered such
certificates or other documents as may be reasonably requested by Orbital
or its counsel, including without limitation (i) certificates of legal
existence, good standing and certified charter documents of Seller on
file with the Secretary of State of the State of Colorado, (ii)
certificates of legal existence, good standing and certified charter
documents of the Acquired Subsidiaries on file with the Secretary of
State of each such entity's jurisdiction of incorporation, and (iii)
certificates of the Secretary or Assistant Secretary of Seller with
respect to directors' resolutions, bylaws and any other relevant matters.
6.2.5. Resignation of Directors and Officers of Acquired
Subsidiaries. Each director and officer of each Acquired Subsidiary shall
have tendered his or her resignation effective as of the Closing.
6.2.6. Credit Agreements. Orbital shall have received the
written consent to this Agreement and the transactions contemplated
hereby of the necessary banks under the Amended and Restated Credit
Agreement and Reimbursement Agreement dated as of September 27, 1994 (as
amended from time to time) among Orbital, the banks listed therein and
the bank acting as agent thereunder, to the extent required under the
terms of such agreement.
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6.2.7. Required Consents. Seller shall have received all
necessary consents, waivers or amendments listed by Seller on Schedule
3.2 as being required (other than the facility security clearances,
personal security clearances and non-discloseable clearances from the
Defense Investigative Service of the U.S. Department of Defense or any
other agency of the U.S. government), and the representation made by
Seller in the first sentence of Section 3.2 hereof construed without
reference to any exceptions noted on Schedule 3.2 shall be true and
correct.
6.2.8. Release of Liens, Guarantees, etc. All lenders of Seller
and the Acquired Subsidiaries shall have released all Liens on the
Business Assets (including but not limited to Liens of lenders set forth
on Schedule 3.12) and the Acquired Subsidiaries shall be released from
the guarantees reflected on Schedule 3.7.
6.2.9. EarthWatch Modifications. EarthWatch Incorporated shall
have executed Modification 8 (a draft copy of which has previously been
delivered to Orbital) to Contract dated May 17, 1994 between EarthWatch
Incorporated and Seller in form and substance acceptable to Orbital.
6.2.10. General. All instruments and legal and corporate
proceedings in connection with the transactions contemplated by this
Agreement and the other Transaction Agreements shall be reasonably
satisfactory in form and substance to Orbital, and Orbital shall have
received counterpart original, or certified or other copies, of all
documents that it may reasonably request in connection therewith.
6.3. Conditions Precedent to the Obligations of Each Party. The
obligations of each of the parties to consummate the transactions contemplated
by this Agreement shall be subject to the satisfaction prior to or substantially
contemporaneously with the Closing Date of the following additional conditions,
compliance with which, or the occurrence of which, may be waived in whole or in
part by a writing executed by each of Seller and Orbital:
6.3.1. Stockholder Approval. The holders of the requisite number
of outstanding shares of Seller's capital stock shall have duly approved
this Agreement and the transactions contemplated hereby, all in
accordance with the requirements of the CBCA.
6.3.2. HSR Act. All applicable waiting periods (and any
extensions thereof) under the HSR Act shall have expired or otherwise
been terminated.
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6.3.3. Bill of Sale and Assignment and Assumption Agreement.
Each of Orbital and Seller shall have executed and delivered to Orbital a
bill of sale and assignment and assumption agreement in the form attached
hereto as Exhibit 6.3.3.
6.3.4. Governmental and Court Approvals. Consents legally
required for the consummation of the transactions contemplated by this
Agreement (other than novations, consents and approvals of Government
Contracts or Government Subcontracts or the transfer of facility security
clearances, personal security clearances and non-discloseable clearances
from the Defense Investigative Service of the U.S. Department of Defense
or any other agency of the U.S. government) shall have been filed,
occurred or been obtained, other than such consents with respect to which
the failure to obtain such consents does not have a Material Adverse
Effect or a Orbital Material Adverse Effect or any material adverse
effect on the consummation of the transactions contemplated hereby.
6.3.5. Injunctions. No temporary restraining order, preliminary
or permanent injunction or other order by any United States federal or
state court or governmental body prohibiting, preventing or materially
restraining the consummation of the transactions contemplated by this
Agreement shall have been issued and shall not have expired or been
withdrawn or reversed and there shall be no pendent or threatened
litigation or other proceeding seeking to prohibit, prevent or materially
restrict or impose any material limitations on the consummation of such
transactions; it being understood that the parties hereto hereby agree to
use their commercially reasonable efforts to cause any such temporary
restraining order, preliminary or permanent injunction or other order to
be vacated or lifted as promptly as possible.
SECTION 7
INDEMNIFICATION
7.1. Orbital's Indemnification. Subject to the limitations set forth
in this Section 7, Orbital hereby agrees to indemnify and hold harmless (in such
capacity, an "Indemnifying Party"), to the fullest extent permitted by law,
Seller and each of its officers, directors, employees and Affiliates (each, in
its capacity as an indemnified party, an "Indemnitee") from, against and in
respect of any Losses arising from, or otherwise related to, directly or
indirectly, any of the following:
7.1.1. Any breach of any representation or warranty made by or
on behalf of Orbital in Section 4 of this Agreement (as each such
representation or
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warranty would be read if all qualifications as to materiality (including
without limitation in the definition of Orbital Material Adverse Effect)
were deleted therefrom).
7.1.2. Any breach or default in performance by Orbital of any
covenant or other agreement in this Agreement.
7.1.3. Any Assumed Liability, including without limitation any
failure to fully pay or satisfy or cause to be paid or satisfied any
Assumed Liability when due and payable.
7.1.4. Any liability or obligation to or in respect of any
Employee hired by Orbital relating to periods after the Closing,
including without limitation any obligation or liability to make
severance or similar payments to any such Employee as a result of the
termination of the employment of such Employee by Orbital after the
Closing.
7.1.5. Subject to Section 7.2, any liability or obligation in
respect of Seller's guarantee of the obligations of any Acquired
Subsidiary under the Indostar-l Direct Broadcast Satellite Program
Contract between PT. Media Citra Indostar and International Technologies,
Inc. dated as of December 8, 1993.
7.1.6. Except for Losses that are referred to in clause (i) of
Section 7.2.6, any liability to Thomas van der Heyden arising under the
Profit Sharing Agreement dated July 12, 1990, as amended from time to
time, to the extent such liability arises from or relates to a customer
Contract and exceeds $750,000 in respect of such Contract.
7.2. Seller's Indemnification. Subject to the limitations set forth in
this Section 7, Seller hereby agrees to indemnify and hold harmless (in such
capacity, an "Indemnifying Party"), to the fullest extent permitted by law,
Orbital, its subsidiaries, Orbital's Deferred Salary and Profit Sharing Plan (or
any other qualified plan established by Orbital to accept direct and indirect
rollovers of eligible rollover distributions from Seller's Plans), and each of
their respective officers, directors, employees and Affiliates (each, in its
capacity as an indemnified party, an "Indemnitee") from, against and in respect
of any Losses arising from, or otherwise related to, directly or indirectly, any
of the following:
7.2.1. Any breach of any representation or warranty made by or
on behalf of Seller in Section 3 of this Agreement (as each such
representation or
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warranty would be read if all qualifications as to materiality (including
without limitation in the definition of Material Adverse Effect) were
deleted therefrom).
7.2.2. Any breach or default in performance by Seller of any
covenant or other agreement in this Agreement.
7.2.3. All Excluded Liabilities, including without limitation,
any failure to fully pay or satisfy or cause to be paid or satisfied any
Excluded Liability when due and payable.
7.2.4. Any Plan established or maintained by Seller or any of
its Subsidiaries or to which Seller or any of its Subsidiaries
contributes, any act or omission prior to Closing of any such Plan or of
Seller or any of its Subsidiaries with respect to any such Plan, or any
failure of any such Plan required or intended to be qualified under
applicable laws to be so qualified.
7.2.5. Except to the extent reflected on the Closing Statement,
any liability or obligation to or in respect of any Employee, or any
other current or former employee of Seller or its Subsidiaries, relating
to periods prior to the Closing or the termination of the employment of
such Employee by Seller, including without limitation any obligation or
liability to make severance or similar payments as a result of, or in
connection with, such termination, any claim of an unfair labor practice,
any claim under any state unemployment compensation or any federal or
state workers' compensation law or regulation, or any claim of harassment
or discrimination.
7.2.6. Any matters that are the subject of (i) the lawsuit
captioned Thomas van der Heyden v. CTA Incorporated, et al., Case No.
156956, filed on October 10, 1996 in the Circuit Court of Maryland for
Montgomery County, and the related arbitration proceeding, (ii) the
arbitration proceeding captioned Volunteers in Technical Assistance v.
CTA, Incorporated before party-appointed arbitrators in Washington, D.C.,
(iii) the proceeding captioned DBSIndustries, Inc. v. CTA, Inc.,
Opposition No. 97,765, filed on June 21, 1995 in the United States Patent
and Trademark Office, Trademark Trial and Appeals Board, and (iv) the
administrative proceeding captioned In the Matter of Sylvia Jackson,
filed in February 1997 in the Fairfax County Office of Human Rights.
7.2.7. Except for matters for which indemnification is provided
in Section 7.2.6, any agreement (written or oral) entered into prior to
Closing between Seller, any Acquired Subsidiaries and Thomas van der
Heyden, including but not
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limited to, that certain Profit Sharing Agreement dated July 12, 1990, as
amended from time to time.
7.2.8. Any violation prior to the Closing by Seller or any
Acquired Subsidiary of any federal, state or local governmental statute
or rule, regulation or directive.
7.2.9. Any storage, release or disposal prior to the Closing by
Seller or any Acquired Subsidiary or from or on any real property
currently or formerly owned or operated by Seller or any Acquired
Subsidiary of any hazardous or toxic substance, including without
limitation a "hazardous substance" as defined in 42 U.S.C. Section
9601(14) and oil, gasoline and other petroleum-based substances.
7.2.10. Except to the extent of specific liabilities or reserves
reflected on the Closing Statement, any Government Contract or Government
Subcontract to the extent such Loss results from (i) any violation or
noncompliance by Seller or any Acquired Subsidiary prior to Closing of or
with any Cost Accounting Standard, Disclosure Statement, FAR provision
(including without limitation Cost Principles), or agency FAR
supplemental provision, (ii) any false claims or defective pricing
occurring prior to Closing, or (iii) any cost disallowance relating to
costs incurred prior to Closing.
7.2.11. Any liability or obligation for products manufactured or
sold or services rendered by Seller or any Acquired Subsidiary prior to
the Closing Date, including without limitation any liability arising from
any injury to or death of any person or damage to or destruction of any
property, and regardless of whether based on negligence, breach of
warranty, strict liability, enterprise liability or any other legal or
equitable theory.
7.2.12. Any liability of Seller or any Acquired Subsidiary for
legal, accounting, brokerage or finder's fees, audit and other
professional fees, or any other costs or expenses, incurred with respect
to the preparation of this Agreement, the transactions contemplated
hereby and the sale of the Purchased Assets to Orbital.
7.3. Time Limits on Indemnification. No claim may be made or suit
instituted by an Indemnitee under Section 7.1.1 or 7.2.1 hereof (other than for
breach of the fourth, fifth, sixth, and seventh sentences of Section 3.1, the
first, fourth, fifth and sixth sentences of Section 3.5, Section 3.11, Section
3.12 or Section 3.15), unless notice of such claim or suit is given to the
Indemnifying Party against whom such claim is made or suit instituted on or
prior to the earlier of March 31, 1999 or 30 days after the delivery to
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Orbital of the audit report on its financial statements for the fiscal year
ended December 31, 1998. No claim may be made or suit instituted by an
Indemnitee for breach of representations and warranties made in the fourth,
fifth, sixth, and seventh sentences of Section 3.1, the first, fourth, fifth and
sixth sentences of Section 3.5, Section 3.11, Section 3.12 or Section 3.15 after
the thirtieth day after the expiration of the applicable statute of limitations
(if any).
7.4. Monetary Limitations on Indemnification. No Indemnifying Party
shall have any obligation under Section 7.1.1, 7.2.1 (other than for a breach of
Section 3.3, 3.5, 3.11, 3.12 or 3.15), 7.2.3 (other than in respect of Excluded
Liabilities referred to in Section 2.4.1, 2.4.2, 2.4.3, 2.4.4, clause (iv) of
Section 2.4.5, Section 2.4.6, 2.4.9 or 2.4.11), 7.2.5, 7.2.8, 7.2.9, 7.2.10 or
7.2.11 in respect of any Loss incurred by an Indemnitee until the aggregate
cumulative total of all such Losses (excluding any portion of such Losses for
which Seller has indemnified Orbital under another subsection of Section 7.2)
incurred by the Indemnitee exceeds $500,000, whereupon the Indemnitee shall be
entitled to indemnification under such Sections for the entire aggregate
cumulative amount of such Losses in excess of $500,000. No Indemnifying Party
shall have any obligation under Section 7.1.1 or 7.2.1 hereof, other than for a
breach of Section 3.5, 3.11, 3.12 or 3.15, in excess of an aggregate of
$10,000,000. Seller's obligations under Section 7.2.7 (i) shall not exceed
$750,000 per customer Contract in respect of amounts paid to Thomas van der
Heyden, (ii) shall not apply to any Contract for which Seller would have been
entitled to a Seller Payment, and (iii) shall not exceed $250,000 in respect of
aggregate attorney's fees and other defense costs incurred by Orbital in the
investigation or defense of any and all claims threatened, asserted or brought
by Thomas van der Heyden at any time after the Closing (other than attorney's
fees and other defense costs incurred by Seller in connection with the
proceeding referred to in clause (i) of Section 7.2.6.).
7.5. Notice of Claims. Within 30 days after the receipt by an
Indemnitee of notice of any claim against such Indemnitee or the commencement of
any action or proceeding against such Indemnitee (any such claim, action or
proceeding, a "Claim"), such Indemnitee shall, if a claim with respect thereto
is or may be made against an Indemnifying Party pursuant to this Section 7, give
such Indemnifying Party written notice thereof. In addition, promptly upon the
discovery by an Indemnitee of any other event, occurrence, fact, circumstance or
other matter that, in its reasonable judgment, gives rise, or may give rise, to
a Claim for indemnity pursuant to this Section 7, the Indemnitee will give
notice thereof in writing to the Indemnifying Party together with a statement
setting forth the basis of the Claim. The failure to give any notice required by
this Section 7 shall not relieve any Indemnifying Party of any obligations
contained in
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this Section 7 except to the extent that the failure to give such notice
actually and materially prejudices the rights of such Indemnifying Party.
7.6. Defense of Claims. Except to the extent otherwise provided in
Section 5.15.5, the procedures to be followed with respect to indemnification
regarding a Claim shall be as follows:
7.6.1. Subject to the provisions of Section 7.6.5, unless in the
reasonable judgment of Indemnitee (i) there is a conflict between the
positions of the Indemnifying Party and the Indemnitee in conducting the
defense of such claim or (ii) legitimate business considerations would
require the Indemnitee to defend or respond in a manner different from
that recommended by the Indemnifying Party, the Indemnifying Party shall,
by giving notice thereof to the Indemnitee confirming the Indemnifying
Party's obligation under this Section 7 to indemnify the Indemnitee in
respect of such Claim, be entitled to assume and control such defense
with counsel chosen by it. The Indemnitee shall be entitled to
participate therein after such assumption and the costs of such
participation following such assumption shall be at the expense of the
Indemnitee. Upon assuming such defense as aforesaid, the Indemnifying
Party shall have full right to enter into any compromise or settlement
which is dispositive of the matter involved; provided, however, that
except for the settlement of a Claim that involves no obligation of the
Indemnitee other than the payment of money for which indemnification is
provided hereunder (in which case the Indemnifying Party shall give the
Indemnitee the opportunity to discuss with it such payment, which
opportunity shall not affect the right of the Indemnifying Party to
effect such settlement in its discretion), the Indemnifying Party shall
not settle or compromise any Claim without the prior written consent of
the Indemnitee, which consent will not be unreasonably withheld; and
provided, further, the Indemnifying Party may not consent to entry of
any judgment or enter into any settlement in respect of a Claim which
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to the Indemnitee of a release from all liability
in respect of such Claim.
7.6.2. With respect to a Claim as to which (i) the Indemnifying
Party does not have the right to assume the defense under Section 7.6.1
or (ii) shall not have exercised its right to assume the defense, the
Indemnitee shall assume and control the defense of and contest such Claim
with counsel chosen by it (which defense shall be reasonably calculated
to minimize the liability of the Indemnifying Party under this Section 7
to the extent consistent with the legitimate business interests of the
Indemnitee) and the Indemnifying Party shall be obligated to pay all
reasonable attorneys' fees and expenses of the Indemnitee. The
Indemnifying Party shall be
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<PAGE> 69
entitled to participate in the defense of such Claim, the cost of such
participation to be at its own expense.
7.6.3. The Indemnitee may compromise or settle any Claim against
it at any time; provided, however, that the Indemnitee shall not settle
or compromise any Claim without the prior written consent of the
Indemnifying Party, which consent will not be unreasonably withheld;
provided, further, that if in the reasonable judgment of the Indemnitee
it would be materially harmed or otherwise prejudiced by not entering
into a proposed settlement or compromise and the Indemnifying Party
withholds consent to such settlement or compromise, the Indemnitee may
enter into such settlement or compromise and such settlement or
compromise shall not be conclusive as to, or otherwise be used to
establish, the liability of the Indemnifying Party to the Indemnitee or
any third party. The Indemnitee may not consent to entry of any judgment
or enter into any settlement or compromise with respect to a Claim which
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to the Indemnifying Party of a release from all
liability in respect of such Claim.
7.6.4. Both the Indemnifying Party and the Indemnitee shall
cooperate fully with one another in connection with the defense,
compromise or settlement of any Claim, including without limitation
making available to the other all pertinent information and witnesses
within its control at reasonable intervals during normal business hours.
7.6.5. Each of the matters described in Section 7.2.6 shall be
treated for all purposes as Claims for which notice has been given
pursuant to Section 7.6.1 to Orbital as Indemnitee that Seller as
Indemnifying Party has assumed and shall control the defense of such
Claims and the remaining subsections of this Section 7.6 shall be
applicable to such Claims. Any other Claim brought by or on behalf of
Thomas van der Heyden shall be defended by Orbital unless Orbital waives
its right to do so.
7.7. Exclusive Remedy. Absent fraud, the remedies provided in this
Section 7 shall be the sole and exclusive remedy for the matters that are the
subject of Section 7.1.1 and 7.2.1, and each of Orbital and Seller agrees not to
seek any remedy for any such matter other than in accordance with this Section
7.
7.8. Setoff. Any amount owing under this Section 7 may be set off
against any other amount owing under the Agreement, including without
limitation Section 2.7.
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<PAGE> 70
7.9. Calculation of Losses. For purposes of this Section 7, (a) the
amount of any Loss shall be calculated net of insurance proceeds received by the
Indemnitee in connection with such Loss, (b) the amount of Loss shall be
calculated taking into account any Tax benefit or detriment actually realized by
the Indemnitee as a result of or in connection with the matter, event or
condition giving rise to such Loss and as a result of or in connection with the
receipt of the indemnification payment in respect of such Loss and (c) the
amount of Loss shall be reduced to the extent such Loss was specifically
identified and reserved against (as to type of Loss and amount) on the Closing
Statement. For purposes of the foregoing, a Tax benefit or detriment will be
considered actually realized in a taxable year if and to the extent that the
Indemnitee's Tax liability for such year, taking into account such Tax benefit
or detriment, is less than or exceeds such liability calculated without regard
to such Tax benefit or detriment.
SECTION 8
MISCELLANEOUS
8.1. Termination. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and abandoned at any time
before the Closing, whether before or after approval of the Agreement by the
stockholders of Seller as herein provided:
(a) By the mutual consent of Orbital and Seller.
(b) By either Seller or Orbital, if (i) there has been a material breach
on the part of the other party of any representation, warranty or agreement
contained herein that cannot be or has not been cured within ten days after
written notice of such breach to the breaching party or (ii) Seller's
stockholders fail to approve the transactions contemplated hereby; provided,
however, such failure is not due to Seller's breach of its covenants contained
in Section 5;
(c) By Orbital, if the board of directors of Seller shall have withdrawn
or modified in a manner adverse to Orbital its support of the transactions
contemplated hereby or shall fail to affirm such support upon the request of
Orbital;
(d) By Seller, if the Closing shall not have occurred by August 29, 1997
(which date shall be extended to October 31, 1997 if all conditions precedent to
the obligations of the parties hereto, other than expiration of the waiting
period under the HSR Act, have been satisfied by August 29, 1997) other than as
a result of the failure of Seller to satisfy its obligations hereunder.
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<PAGE> 71
(e) By Orbital, if the Closing shall not have occurred by August 29, 1997
(which date shall be extended to October 31, 1997 if all conditions precedent to
the obligations of the parties hereto, other than expiration of the waiting
period under the HSR Act, have been satisfied by August 29, 1997) other than as
a result of the failure of Orbital to satisfy its obligations hereunder.
(f) By Seller if in the good faith reasonable judgment of its board of
directors, after consultation with outside counsel as to its fiduciary duties to
its stockholders, such termination is required by reason of any Acquisition
Transaction.
In the event of termination and abandonment under this Section 8.1, this
Agreement shall forthwith become null and void and there shall be no liability
on the part of any of Seller or Orbital or any of their respective officers and
directors; provided, however, that Sections 5.21 and 8.3 hereof shall survive
any termination of this Agreement and in the event of a termination pursuant to
Section 8.1(b)(i) the breaching party shall be liable for such breach.
8.2. Amendments and Supplements. At any time before or after approval
of this Agreement by the stockholders of Seller and prior to the Closing Date,
this Agreement may be amended or supplemented by a written instrument signed by
the parties hereto and approved by their respective Boards of Directors, except
that, after the stockholders of Seller shall have approved the transactions
contemplated hereby, there shall be no amendment that would require the approval
of the stockholders of Seller in accordance with the CBCA without such approval.
8.3. Expenses. Subject to the proviso at the end of the last sentence
of Section 8.1, whether or not the transactions contemplated by this Agreement
are consummated, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
8.4. No Adequate Remedy. Each of the parties acknowledges and agrees
that the other party would be damaged irreparably in the event any of the
provisions of Sections 5.2, 5.7 and 5.8 of this Agreement are not performed in
accordance with their specific terms or otherwise are breached. Accordingly,
each of the parties agrees that the other party shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of Sections 5.2,
5.7 and 5.8 of this Agreement and to enforce specifically Sections 5.2, 5.7 and
5.8 of this Agreement and the terms and provisions hereof in any action
instituted in any court having jurisdiction over the parties and the matter, in
addition to any other remedy to which it may be entitled, at law or in equity.
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<PAGE> 72
8.5. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without giving effect to
any choice or conflict of laws rule or provision that would cause the
application of the domestic substantive laws of any other jurisdiction.
8.6. Notice. All notices and other communications required or
permitted hereunder shall be in writing (including any facsimile transmission
or similar writing), and shall be sent either by telecopy, hand delivery, or
reputable overnight courier, addressed as follows or to such other address or
addresses of which the respective party shall have notified the other party.
Each such notice or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted and the appropriate answerback is
received, (ii) if given by reputable overnight courier, one business day after
being delivered to such courier or (iii) if given by any other means, when
received at the address specified in this Section.
To Orbital:
21700 Atlantic Boulevard
Dulles, Virginia 20166
Telecopier: (703) 406-5572
Attention: General Counsel
With a copy to:
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Telecopier: (617) 951-7050
Attention: Daniel S. Evans, Esq.
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<PAGE> 73
To Seller:
6116 Executive Boulevard
Suite 800
Rockville, MD 20852
Telecopier: (301) 816-1460
Attention: General Counsel
With a copy to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue, N.W.
Suite 800
Washington, DC 20004
Telecopier: (202) 859-7008
Attention: Richard A. Steinwurtzel
8.7. Entire Agreement, Assignability, Etc. This Agreement (including
the Schedules and Exhibits attached hereto) and together with the letter
agreements dated February 27, 1997 and May 1, 1997 of Orbital and Seller, (i)
constitutes the entire agreement, and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the transactions and matters contemplated hereby, (ii) is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder and (iii) shall not be assignable other than by (A) operation
of law or (B) a party that sells or otherwise transfers all or substantially all
of its assets to a third party and such third party expressly agrees to assume
the assigning party's obligations hereunder and to make the non-assigning party
hereto a third party beneficiary to such assumption.
8.8. Exclusivity of Representations. Seller shall not be deemed to
have made to Orbital any representation or warranty other than as expressly made
by Seller in Section 3 of this Agreement. Orbital shall not be deemed to have
made to Seller any representation or warranty other than as expressly made by
Orbital in Section 4 of this Agreement.
8.9. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute but one and the same instrument.
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<PAGE> 74
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
ORBITAL SCIENCES CORPORATION
By /s/ David W. Thompson
----------------------
Title: President & CEO
CTA INCORPORATED
By
---------------------
Title:
<PAGE> 75
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
ORBITAL SCIENCES CORPORATION
By
---------------------
Title:
CTA INCORPORATED
By /s/ C.E. Velez
---------------------
Title: Chairman and
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.8
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
PREPARED FOR
COMPUTER TECHNOLOGIES ASSOCIATES, INC.
(FORMERLY, CTA INCORPORATED)
AUGUST 11, 1998
[EFFECTIVE AUGUST 1, 1998]
<PAGE> 2
COMPUTER TECHNOLOGIES ASSOCIATES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE I - PURPOSE: EFFECTIVE DATE
1.1. PURPOSE. The purpose of this Supplemental Executive Retirement Plan
(hereinafter, the "Plan") is to provide supplemental benefits, payable
primarily upon retirement for certain key employees of Computer
Technologies Associates, Inc. (formerly, CTA INCORPORATED), and its
affiliated or subsidiary companies. It is intended that the Plan will
aid in retaining and attracting individuals of exceptional ability by
providing them with these benefits.
1.2. EFFECTIVE DATE. This Plan shall be effective as of August 1, 1998.
ARTICLE II - DEFINITIONS
For the purposes of this Plan, the following terms shall have the meanings
indicated unless the context clearly indicates otherwise:
2.1. ACTUARIAL EQUIVALENT. "Actuarial Equivalent" means an equivalence in
value between two (2) or more forms and/or times of payment based on a
determination by an actuary chosen by the Employer, using sound
actuarial assumptions at the time of such determination. The initial
assumptions shall be set forth in the attached Exhibit I to this
Agreement, and may be modified from time to time consistent with sound
actuarial assumptions at that time.
2.2. BENEFICIARY. "Beneficiary" means the person, persons or entity as
designated by the Participant, entitled under Article V to receive any
Plan benefits that may be payable after the Participant's death.
2.3. BOARD. "Board" means the Board of Directors of the Employer.
2.4. CHANGE OF CONTROL. A "Change of Control" shall occur:
a) upon the Employer's knowledge that any person (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 of the Exchange
Act) directly or indirectly, of securities of the Employer
representing ten percent (10%) or more of the combined voting
power of the then outstanding securities; or
<PAGE> 3
b) upon the first purchase of the Common Stock of the Employer
pursuant to a tender or exchange offer (other than a tender or
exchange offer made by the Employer); or
c) upon the approval by the stockholders of the Employer of a
merger or consolidation (other than a merger or consolidation
in which the Employer is the surviving corporation and which
does not result in any reclassification or reorganization of
the Employer's then outstanding securities), a sale or
disposition of all or substantially all of the Employer's
assets or a plan of liquidation or dissolution of the
Employer; or
d) if, during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of
Directors of the Employer cease for any reason to constitute
at least a majority thereof, unless the election or nomination
for the election by the stockholders of the Employer of each
new director was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the
beginning of the period.
2.5. COMMITTEE. "Committee" means committee appointed by the Board to
administer the Plan pursuant to Article VI. The initial Committee so
designated by the Board shall consist of John Wagner, Director of
Treasury Management of the Employer, Gregory H. Wagner, Chief
Financial Officer of the Employer and Terry J. Piddington, President
of CTA Federal Systems Company.
2.6. DISABILITY. "Disability" means a physical or mental condition that
prevents the Participant from satisfactorily performing the
Participant's usual duties for Employer as defined under the Long Term
Disability Program sponsored by the Employer. The final determination
of what constitutes a Disability under this Plan shall be determined
in the sole discretion of the Committee.
2.7. EARLY RETIREMENT DATE. "Early Retirement Date" means the date on
which a Participant terminates employment with Employer, if such
termination date occurs on or after such Participant's attainment age
of fifty-five (55) and completion of ten (10) Years of Service, but
prior to the Participant's Normal Retirement Date.
2.8. EMPLOYER. "Employer" means COMPUTER TECHNOLOGIES ASSOCIATES, INC.
(formerly, CTA INCORPORATED), a Colorado corporation and directly or
indirectly affiliated subsidiary corporations, any other affiliate
designated by the Board, or any successor to the business thereof.
2.9. FINAL AVERAGE COMPENSATION. "Final Average Compensation" means the
average of the Participant's annual cash compensation over the three
(3) year period of employment with the Employer immediately preceding
termination of such employment. For purposes of this Agreement, a
Participant's annual cash compensation shall include base salary,
incentive bonuses, and any amounts deferred by the Participant
pursuant to the 401(k) Plan. The Final Average Compensation shall be
derived by adding the compensation received (or which
<PAGE> 4
would have been received if not for the deferral of compensation
pursuant to the 401(k) Plan) during the 36 full calendar months of
employment with the Employer immediately preceding termination of such
employment, divided by 36, and then multiplying that figure by twelve
to arrive at an annual figure. If the Participant terminates
employment prior to achieving 36 full months of employment, this
calculation shall use the Participant's Compensation during the actual
number of full calendar months of employment, divided by the actual
number of full months of employment.
2.l0. NORMAL RETIREMENT DATE. "Normal Retirement Date" means the date on
which a Participant terminates employment with Employer on or after
attaining age sixty-two (62).
2.11. PARTICIPANT. "Participant" means any employee who is eligible,
pursuant to section 3.1, to participate in this Plan, and who has not
yet received full benefits hereunder.
2.12. PARTICIPATION AGREEMENT. "Participation Agreement" means the
agreement filed by a Participant and approved by the Committee
pursuant to Article III.
2.13. RETIREMENT. "Retirement" means a Participant's termination from
employment with Employer at the participant's Early Retirement Date or
Normal Retirement Date, as applicable.
2.14. RETIREMENT PLANS. "Retirement Plans" means any qualified retirement
plan maintained by Employer that qualifies under Section 401(a) of the
Internal Revenue Code. As of the effective date of this Plan, the
Retirement plans include the following:
a) CTA INCORPORATED DEFINED CONTRIBUTION 401k RETIREMENT PLAN
(401(k) Plan) ; and,
b) CTA INCORPORATED EMPLOYEE STOCK OWNERSHIP PLAN (ESOP).
2.15. SUPPLEMENTAL RETIREMENT BENEFIT. "Supplemental Retirement Benefit"
means the benefit determined under Article IV of this Plan, and shall
consist of the Target Benefit reduced by the amount of the Offsets.
2.16. YEARS OF SERVICE. "Years of Service" means the number of years of
service determined in accordance with the provisions of the ESOP,
whether or not the Participant is a participant in such plan, except
that in the event of the Participant's termination of service with the
Employer for any reason within three (3) years following a Change of
Control, Years of Service shall be calculated as if the Participant
had remained employed until the Participant's Normal Retirement Date.
<PAGE> 5
ARTICLE III - PARTICIPATION
3.1. ELIGIBILITY AND PARTICIPATION. The Compensation Committee of the
Board shall have the sole right to set eligibility requirements and
offer participation into the Plan according to the following
guidelines:
a) Eligibility. Eligibility to participate in the Plan shall be
limited to those select key employees of Employer who hold the
title of Executive Vice President and above and are designated
by the Compensation Committee of the Board.
b) Participation. An employee's participation in the Plan shall
be effective upon notification to the employee by the
Committee of eligibility to participate, completion of a
Participation Agreement and acceptance of each by the
Committee. Subject to Section 3.2, participation in the Plan
shall continue until such time as the Participant terminates
employment with Employer and as long thereafter as the
Participant is eligible to receive benefits under this Plan.
3.2. CHANGE IN EMPLOYMENT STATUS. If the Committee determines that a
Participant's employment performance is no longer at a level that
deserves reward through participation in this Plan, but does not
terminate the Participant's employment with Employer, participation
herein and eligibility to receive benefits hereunder shall be limited
to the Supplemental Retirement Benefit determined as if the
Participant were to have terminated service as of the date designated
by the Board ("Participation Termination Date"). Eligibility for such
benefits shall be based solely on the Participant's Years of Service
as of the Participation Termination Date.
ARTICLE IV - SUPPLEMENTAL BENEFITS
4.1. NORMAL RETIREMENT BENEFIT. If a Participant terminates services at or
after the Normal Retirement Date, within three (3) years following a
Change of Control, or as a result of death, Employer shall pay to the
Participant an annual Supplemental Retirement Benefit equal to the
amount described below as the Target Benefit minus the Offsets:
a) Target Benefit shall be equal to the Participant's Final
Average Compensation multiplied by the product of the
Participant's Years of Service as of the Normal Retirement
Date up to a maximum of 15, multiplied by 4%.
b) Offsets shall be equal to the sum of the following benefits
paid or due to the Participant attributable to contributions
made to the Retirement Plans by the Employer and shall not
include any amounts attributable to contributions made by the
Participant or which were deferred by the Participant under
the 401(k) Plan, with each benefit calculated as a Single Life
Annuity with payments commencing at the time Supplemental
Benefits under this Plan:
i) the annual benefit payable under the 401(k) Plan
determined by annuitizing the account balance under
the 401(k) Plan using the assumptions provided for
<PAGE> 6
under this Plan;
ii) the annual benefit payable under the ESOP determined
by annuitizing the account balance under the ESOP
using the assumptions provided for under this Plan;
and,
iii) 100% of the annual Primary Insurance Amount payable
to the Participant under Title II of the Social
Security Act as of the time of commencement of
benefits under this Plan, but in no event shall such
amount be reduced below that of the reduced annual
Primary Insurance Amount payable at the Participant's
age 62 nor increased above the amount payable at the
Participant's Social Security Normal Retirement Age
as defined under the Social Security Act.
4.2. EARLY RETIREMENT BENEFIT. If a Participant terminates services at an
Early Retirement Date, Employer shall pay to the Participant an annual
Supplemental Retirement Benefit equal to the amount of the Normal
Retirement Benefit calculated at the time of Early Retirement and if
payments are to commence prior to the Participant's Normal Retirement
Age, the payment shall be reduced by 6% for each year less than the
Participant's age 62 that payments commence.
4.3. DISABILITY BENEFIT. If a Participant suffers a Disability, the
Participant shall continue to be considered a Participant in this Plan
and shall continue to accumulate Years of Service during the period of
Disability up to the Participant's Normal Retirement Date, at which
time the Participant shall be paid a Supplemental Benefit as provided
in paragraph 4.1.
4.4. DEATH BENEFITS. In the event of death of a Participant, a benefit
shall be paid in lieu of any other benefit under this Plan in the
following manner:
a) In the event of the death of a Participant prior to
commencement of benefit payments under this Plan, the
Participant's Beneficiaries shall receive a benefit equal to
the Normal Retirement Benefit calculated under paragraph 4.1
above, calculated as if the Participant had continued to be
employed by the Employer until his or her Normal Retirement
Date, and had elected to receive benefits hereunder in the form
of a Joint and 100% annuity. The benefit shall then be paid as
a lifetime benefit to the beneficiary commencing at the time
that the Participant would have attained age 62. However, in
the sole discretion of the Committee, the Beneficiary may
request that the benefit be paid in an Actuarial Equivalent
form, including but not limited to a lump sum payment.
b) In the event of the death of a Participant after the
commencement of benefit payments under this Plan, the
Participant's Beneficiaries shall receive a benefit payment,
if any, consistent with the Form of Benefit chosen by the
Participant.
4.5. TERMINATION BENEFITS. If a Participant terminates employment with
Employer for reasons other than those specified under paragraphs 4.1,
4.2, 4.3, or 4.4 above, no benefit shall be due and payable under this
Plan.
<PAGE> 7
4.6. NON-COMPETITION. As a condition of continuing to receive benefits
under this Plan as set forth in this Article, the Participant must
refrain from competing or interfering with the Employer while they are
a Participant under this Plan or are eligible to receive benefit
payments pursuant to this Plan. For purposes of this Plan, competing
with the Employer shall include but not be limited to being employed
by, owning or otherwise associating with known competitors of the
Employer, soliciting existing or prospective clients of the Employer
to provide goods or services which are or can be supplied by the
Employer, soliciting employees of the Employer to leave the employ of
the Employer, or any other practice which is viewed by the Committee
as interfering with the lawful pursuit of business by the Employer.
4.7. FORM OF PAYMENT. The Supplemental Retirement Benefit shall be
calculated initially as a Single Life Annuity and then converted to an
Actuarial Equivalent benefit in the form of a Joint and 100% Survivor
Benefit payable in monthly installments, and shall continue to be paid
to the designated Beneficiary of the Participant in the event of the
death of the Participant. The Participant shall have the right to
petition the Committee to have the Supplemental Retirement Benefit
paid in an Actuarial Equivalent form, which the Committee may, in its
sole discretion, grant or deny.
4.8. COMMENCEMENT OF BENEFIT PAYMENTS. Unless otherwise specified above,
benefit payments under this Plan shall ordinarily commence as soon as
practicable after the Participant's Normal Retirement Date, but not
later than sixty (60) days after all information necessary to
calculate the benefit amount has been received by Employer. All
payments shall be made as of first day of the month. If the
Supplemental Retirement Benefit becomes due as a result of the death
of the Participant as set forth in paragraph 4.4, above, payments
shall commence to the Beneficiary as soon as practicable after death
but not later than sixty (60) days after all information necessary to
calculate the benefit amount has been received by Employer.
4.9. WITHHOLDING; PAYROLL TAXES. Employer shall withhold from payments
hereunder any taxes required to be withheld from such payments under
local, state or federal law. A Beneficiary, however, may elect not to
have withholding of federal income tax pursuant to Section 3405 (a)(2)
of the Code, or any successor provision thereto.
4. 10 PAYMENT TO GUARDIAN. If a Plan benefit is payable to a minor or a
person declared incompetent or to a person incapable of handling the
disposition of property, the Committee may direct payment to the
guardian, legal representative or person having the care and custody
of such minor, or incompetent person. The Committee may require proof
of incompetency, minority, incapacity or guardianship as it may deem
appropriate prior to distribution. Such distribution shall completely
discharge the Committee and Employer from all liability with respect
to such benefit.
<PAGE> 8
ARTICLE V - BENEFICIARY DESIGNATION
5.1. BENEFICIARY DESIGNATION. Each Participant shall have the right, at
any time, to designate one (1) or more persons or entity as
Beneficiary (both primary as well as secondary) to whom benefits under
this Plan shall be paid in the event of a Participant's death, however
if the Participant is married at the time of the Participant's death,
the Beneficiary shall be the Participant's surviving spouse unless
such spouse has consented in writing to the designation of some other
Beneficiary. Each Beneficiary designation shall be in a written form
prescribed by the Committee and shall be effective only when filed
with the Committee during the a Participant's lifetime.
5.2. CHANGING BENEFICIARY. Any Beneficiary designation may be changed by
an unmarried Participant without the consent of the previously named
Beneficiary by the filing of a new Beneficiary designation with the
Committee. A Beneficiary Designation may be changed by a married
Participant only with the written consent of the Participant's spouse
unless the Participant's spouse had previously consented in express,
written form to permit such change of Beneficiary without any
requirement of further consent by the spouse. The filing of a new
designation shall cancel all designations previously filed.
5.3. NO BENEFICIARY DESIGNATION. If any Participant fails to designate a
Beneficiary in the manner provided above, if the designation is void,
or if the Beneficiary designated by a deceased Participant dies before
the Participant or before complete distribution of the Participant's
benefits, the Participant's Beneficiary shall be the person in the
first of the following classes in which there is a survivor:
a) The Participant's surviving spouse;
b) The Participant's children in equal shares, except that if any
of the Participant's children predeceases the Participant but
leaves surviving children of their own, then such surviving
children shall take by right of representation the share the
deceased child of the Participant would have take if living;
c) The Participant's estate.
5.4. EFFECT OF PAYMENT. Payment to the Beneficiary shall completely
discharge the Employer's obligations under this plan.
ARTICLE VI - ADMINISTRATION
6.1. COMMITTEE; DUTIES. The Plan shall be administered by the Committee,
which shall be appointed by the Board. The Committee shall have the
authority to make, amend, interpret, and enforce all appropriate rules
and regulations for the administration of the Plan and decide or
resolve any and all questions, including
<PAGE> 9
interpretations of the Plan, as may arise in such administration. A
majority vote of the Committee members shall control any decision.
Members of the Committee may be Participants under this Plan.
6.2. AGENTS. The Committee may, from time to time, employ agents and
delegate to them such administrative duties as it sees fit, and may
from time to time consult with counsel who may be counsel to the
Employer.
6.3. BINDING EFFECT OF DECISIONS. The decision or action of the Committee
with respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the
rules and regulations promulgated hereunder shall be final, conclusive
and binding upon all persons having any interest in the Plan.
6.4. INDEMNITY OF COMMITTEE. The Employer shall indemnify and hold
harmless the members of the Committee against any and all claims,
loss, damage, expense or liability arising from any action or failure
to act with respect to this Plan on account of such member's service
on the Committee, except in the case of gross negligence or willful
misconduct.
ARTICLE VII - CLAIMS PROCEDURE
7.1. CLAIM. Any person or entity claiming a benefit, requesting an
interpretation or ruling under the Plan, or requesting information
under the Plan (hereinafter referred to as "Claimant") shall present
the request in writing to the Committee, which shall respond in
writing as soon as practicable.
7.2. DENIAL OF CLAIM. If the claim or request is denied, the written notice
of denial shall state:
a) The reason for denial, with specific reference to the Plan
provisions on which the denial is based;
b) A description of any additional material or information
required and an explanation of why it is necessary; and
c) An explanation of the Plan's claims review procedure.
7.3. REVIEW OF CLAIM. Any Claimant whose claim or request is denied or who
has not received a response within sixty (60) days may request a
review by notice given in writing to the Committee. Such request must
be made within sixty (60) days after receipt by the Claimant of the
written notice of denial, or in the event Claimant has not received a
response sixty (60) days after receipt by the Committee of Claimant's
claim or request. The claim or request shall be reviewed by the
Committee which may, but shall not be required to, grant the Claimant
a hearing. On review, the
<PAGE> 10
Claimant may have representation, examine pertinent documents, and
submit issues and comments in writing.
7.4. FINAL DECISION. The decision on review shall normally be made within
sixty (60) days after the Committee's receipt of Claimant's claim or
request. If an extension of time is required for a hearing or other
special circumstances, the Claimant shall be notified and the time
limit shall be one hundred twenty (120) days. The decision shall be in
writing and shall state the reason and the relevant Plan provisions.
All decisions on review shall be final and bind all parties concerned.
ARTICLE VIII - TERMINATION, SUSPENSION OR AMENDMENT
8.1. TERMINATION, SUSPENSION OR AMENDMENT OF PLAN. The Board may, in its
sole discretion, terminate or suspend the Plan at any time, in whole
or in part. The Board may amend the Plan at any time. Any amendment
may provide different benefits or amounts of benefits from those
herein set forth. However, no such termination, suspension or
amendment shall adversely affect the benefits of Participants which
have accrued prior to such action, the benefits of any Participant who
has previously retired, or the benefits of any Beneficiary of a
Participant who has previously died, except as otherwise determined by
the Board under Section 9.1 with respect to any Participant.
ARTICLE IX - MISCELLANEOUS
9.1. UNFUNDED PLAN. This Plan is an unfunded plan maintained primarily to
provide deferred compensation benefits for a select group of
"management or highly-compensated employees" within the meaning of
Sections 201, 301, and 401 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and therefore is exempt from the
provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the
Board may terminate the Plan and make no further benefit payments, or
remove certain employees as Participants if it is determined by the
United States Department of Labor, a court of competent jurisdiction,
or an opinion of counsel that the Plan constitutes an employee pension
benefit plan within the meaning of Section 3(2) of ERISA (as currently
in effect or hereafter amended) which is not so exempt.
9.2. EMPLOYER OBLIGATION. The obligation to make benefit payments to any
Participant under the Plan shall be an obligation solely of the
Employer, and shall not be an obligation of another employer.
9.3. UNSECURED GENERAL CREDITOR. Except as provided in Section 9.4,
Participants and Beneficiaries shall be unsecured general creditors,
with no secured or preferential right to any assets of Employer or any
other party for payment of benefits under this
<PAGE> 11
Plan. Any property held by Employer for the purpose of generating the
cash flow for benefit payments shall remain its general, unpledged and
unrestricted assets. Employer's obligation under the Plan shall be an
unfunded and unsecured promise to pay money in the future.
9.4. TRUST FUND. Employer shall be responsible for the payment of all
benefits provided under the Plan. At its discretion, Employer may
establish one (1) or more trusts, with such trustees as the Board may
approve, for the purpose of providing for the payment of such
benefits. Although such a trust shall be irrevocable, its assets shall
be held for payment of all Employer's general creditors in the event
of insolvency. To the extent any benefits provided under the Plan are
paid from any such trust, Employer shall have no further obligation to
pay those benefits directly to the Participant or Beneficiary. If not
paid from the trust, such benefits shall remain the obligation of
Employer.
9.5. NONASSIGNABILITY. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt the amounts, if any, payable hereunder, or
any part thereof, which are, and all rights to which are, expressly
declared to be unassignable and nontransferable. No part of the
amounts payable shall, prior to actual payment, be subject to seizure
or sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other person, nor be
transferable by operation of law in the event of a Participant's or
any other person's bankruptcy or insolvency.
9.6. NOT A CONTRACT OF EMPLOYMENT. This Plan shall not constitute a
contract of employment between Employer and the Participant. Nothing
in this Plan shall give a Participant the right to be retained in the
service of Employer or to interfere with the right of Employer to
discipline or discharge a Participant at any time.
9.7. Protective Provisions. A Participant shall cooperate with Employer by
furnishing any and all information requested by Employer in order to
facilitate the payment of benefits hereunder, and by taking such
physical examinations as Employer may deem necessary and by taking
such other action as may be requested by Employer.
9.8. GOVERNING LAW. The provisions of this Plan shall be construed and
interpreted according to the laws of the State of Maryland, except as
may be preempted by federal law.
9.9. VALIDITY. If any provision of this Plan shall be held illegal or
invalid for any reason, said illegality or invalidity shall not affect
the remaining parts hereof, but this Plan shall be construed and
enforced as if such illegal and invalid provision had never been
inserted herein.
9.10. NOTICE. Any notice or filing required or permitted under the Plan
shall be sufficient if in writing and hand delivered or sent by
registered or certified mail. Such notice shall be deemed given as of
the date of delivery or, if delivery is made by mail, as of
<PAGE> 12
the date shown on the postmark on the receipt for registration or
certification. Mailed notice to the Committee shall be directed to the
Employer's address. Mailed notice to a Participant or Beneficiary
shall be directed to the individual's last known address in Employer's
records.
9.11. SUCCESSORS. The provisions of this Plan shall bind and inure to the
benefit of Employer and its successors and assigns. The term
successors as used herein shall include any corporate or other
business entity which shall, whether by merger, consolidation,
purchase or otherwise acquire all or substantially all of the business
and assets of Employer, and successors of any such corporation or
other business entity.
COMPUTER TECHNOLOGIES ASSOCIATES, INC.
By:
------------------------------
Its:
-----------------------------
Dated:
---------------------------
<PAGE> 13
EXHIBIT I
to the
Supplemental Executive Retirement Plan
for
Computer Technologies Associates, Inc.
================================================================================
For purposes of the above mentioned Plan, the following assumptions may be used
initially to determine the "Actuarial Equivalent" as defined in the Plan:
Mortality Assumptions The 1983 Group Annuity Mortality Table (Male)
Interest Rate 7% compounded annually
Projection of account balances 7% compounded annually
Other assumptions shall be selected as needed on a reasonably consistent basis.
These assumptions shall be amended periodically as needed to reflect reasonable
assumptions as of the time that the calculation of an Actuarial Equivalent
needs to be determined.
<PAGE> 1
MEMORANDUM OF UNDERSTANDING
This Agreement, effective as of November 17, 1997 is entered into by and between
CTA INCORPORATED, a Colorado corporation having a principal place of business at
6116 Executive Boulevard, Suite 800, Rockville, Maryland 20852 (hereinafter
referred to as "CTA" or "Company") and Capitol Securities Management
Incorporated, a Virginia corporation having a principal place of business at
8301 Greensboro Drive, McLean, Virginia 22102 (hereinafter referred to as
"Capitol").
WHEREAS, CTA has filed a Registration Statement on Form S-1 under the Securities
Act of 1933 with the Securities and Exchange Commission and;
WHEREAS, CTA is trading the common stock of CTA among the shareholder universe
defined as current or former employees, consultants, and directors of CTA and;
WHEREAS, Capitol continues to provide its services as a broker/dealer for all of
CTA's stock transactions and in order to facilitate a "limited" market for CTA
common stock in the most economical fashion;
Now, therefore, in consideration of the mutual covenants and promises set forth
herein, the parties do hereby agree as follows:
ARTICLE I: RELATIONSHIP AND OBLIGATION OF THE PARTIES
1.1 CTA intends to effect a tender offer (the "Tender Offer") to repurchase up
to 200,000 shares of its common stock on November 26, 1997. This Tender Offer
will terminate on December 31, 1997, unless extended by CTA.
1.2 Capitol, as the exclusive broker and dealer for the limited market of CTA
common stock, agrees to the use of its name, Capitol Securities, by CTA in the
S-1 Registration Statement and the Schedule 13E-4 to be filed in connection with
the Tender Offer.
1.3 As broker/dealer for CTA, Capitol will provide the following services:
a) Each employee or shareholder who elects to buy or sell CTA common
stock will have an account established by Capitol;
b) On the trade day +1, a confirmation of purchases or sales will be
generated giving the price per share, number of shares, commission paid,
net dollars, transacted, and settlement date. Standard industry practice
is for settlement to occur three (3) business days after the trade date.
Cash to purchase stock or shares to be delivered for sale must be
received at Capitol by settlement day. Extensions of settlement can be
arranged, however, margin interest will be charged for late payment.
Money market interest will be paid on cash
<PAGE> 2
balances in excess of $1000 in accounts. A regular account will be
insured up to $500,000 by the SIPC. Additional insurance to
Correspondent Services Corporation limits.
c) During the internal market operation and during the period of the
Tender Offer (including any extensions thereof) Capitol will supply CTA
with special reports of activity as will be specified later.
d) In addition, Capitol agrees to provide at CTA's request, guidance and
consulting services relating to the regulations governing control,
restricted and shelf-registered stock and the filing of required reports
and forms.
e) Commissions and fees will be paid in accordance with the provisions
of Article II and will cover all costs associated with the accounts,
producing the confirmations, timely collection and disbursement of
funds, generating monthly statements and other reports to be specified.
For the one time repurchase transaction in connection with the
Tender Offer, CTA has agreed to pay all commissions; the seller shall
incur no costs/commissions.
1.4 Capitol will act as CTA's broker/dealer for all stock transactions including
the issuance of stock pursuant to the Company's existing and future stock option
programs and the replacement of lost or stolen certificates in accordance with
the by-laws of the Company. Stock issued will be in the same form as all other
CTA transactions.
1.5 CTA will close buyers indications of interest two (2) weeks following the
effective date of the S-1 Registration. In the event the effective date of the
S-1 Registration Statement changes, the above subsequent events will be adjusted
accordingly.
1.6 CTA will govern the extent to which Company employees have access to
financial advice from Capitol. In no case will CTA employees be solicited by
Capitol without prior written CTA approval for Capitol financial advice or
financial services or any other matter.
ARTICLE II: COSTS AND FEE PAYMENTS
2.1 Except as specifically identified below, each party will bear all costs,
risks and liabilities incurred by it arising out of its obligations and efforts
pursuant to this agreement.
2.2 CTA agrees to pay Capitol an annual fee of four thousand dollars, ($4000) to
cover the costs at the initial set-up of the administrative functions, guidance
and consulting advice, and special reports or filings in accordance with
paragraph 1.4. CTA agrees to pay Capitol Securities Management a one time
administrative fee of five thousand dollars ($5000) plus postage fees for
handling the Tender Offer transaction.
<PAGE> 3
2.3 Capitol is authorized to charge broker commissions of 1.5% of the value of
the transactions, to be paid by the seller except in connection with the Tender
Offer when commissions will be paid by CTA.
2.4 There will be no additional costs associated with the function of the
limited market beyond those specified in this Agreement
ARTICLE III: PROPRIETARY INFORMATION
3.1 During the term of this Agreement, the parties, to the extent of their right
to do so, and as is required for each to perform its obligations hereunder, may
exchange proprietary and confidential information.
3.2 Only that information disclosed in written form and identified by a mark
thereon as proprietary, or oral information which is identified as proprietary
at the time of disclosure and confirmed in writing within ten (10) days of its
disclosure, shall be considered proprietary and subject to this Agreement.
3.3. The exclusive points of contact with respect to the delivery and control of
proprietary information disclosed hereunder are designated by the parties as
follows:
Capitol Securities Management, Inc. CTA INCORPORATED
Attn: Joseph Jianos Attn: John Wagner
8301 Greensboro Drive, Suite 150 6116 Executive Blvd., Suite 800
McLean, Virginia 22102 Rockville, Maryland 20852
Either party may change its point of contact by written notice to the other.
3.4 Information identified and disclosed as provided in this Agreement shall be
held in confidence for a period of five (5) years from the date of receipt.
During such period, such information shall be used only for the purpose of this
Agreement and shall not be disclosed to any third party.
3.5 The parties shall have no obligation under this Agreement to hold
information in confidence which, although identified and disclosed as stated
herein, has been or is:
a. developed by the receiving party independently and without the
benefit of information disclosed hereunder by the disclosing party;
b. lawfully obtained by the receiving party from a third party without
restriction;
c. publicly available without breach of this Agreement;
d. disclosed without restriction by the disclosing party to a third
party; or
<PAGE> 4
e. known to the receiving party prior to its receipt from the disclosing
party.
3.6 Each party shall use not less than the degree of care used to prevent
disclosure of its own proprietary information to prevent disclosure of
information received in accordance with this Agreement.
3.7 All information received and identified in accordance with this Agreement
shall remain the property of the disclosing party and shall be returned upon
request.
ARTICLE IV: TERMINATION OF AGREEMENT
4.1 Except as otherwise expressly provided in Article III, "Proprietary
Information," of this agreement and unless extended by mutual written agreement
of the parties, this Agreement shall automatically expire December 31, 1998.
ARTICLE V: COMMITMENTS
5.1 Nothing in the Agreement shall grant to either party the right to make
commitments of any kind for or on behalf of the other party without prior
written consent of that party.
ARTICLE VI: PUBLICITY
6.1 Either party desiring to issue a news release, public announcement,
advertisement, or other form of publicity concerning its efforts in connection
with this Agreement shall obtain the prior written approval of the other party
before issuing any such publicity.
ARTICLE VII: WAIVER AND INVALIDITY
7.1 In the event that one party breaches this Agreement, the failure of the
other party to enforce any right under this Agreement shall not be deemed as a
waiver of any right hereunder. The rights and remedies of the parties as set
forth in this Agreement are not exclusive and are in addition to any other
rights and remedies provided by law; additionally, the invalidity in whole or in
part of any condition of this Agreement shall not affect the validity of any
other condition hereof.
ARTICLE VIII: FORCE MAJEURE
8.1 If either party is unable to perform any of its obligations under this
Agreement because of an event of Force Majeure, the party which is unable to
perform shall be excused from such performance only during the time of the
existence of such event.
<PAGE> 5
ARTICLE IX: ASSIGNMENT
9.1 Neither party shall sub-license, transfer, assign, hold in trust for
another, or otherwise dispose of any or all of its rights, obligations, or
interest under this Agreement without prior written consent of the other party.
ARTICLE X: GOVERNING LAW
10.1 This Agreement shall be construed and governed by the laws of the State of
Colorado except for its conflict or interest laws and shall be deemed executed
in said state.
ARTICLE XI: ATTORNEY'S FEES AND COSTS
11.1 Each party to this Agreement shall be responsible for its own attorney's
fees and costs should either party be required to employ the services of an
attorney to enforce any rights granted to it hereunder, or to seek damages for
the breach of any covenant contained in this Agreement.
ARTICLE XII: CAPTIONS
12.1 The captions for any Article herein are for identification purposes only
and are not a part of the substantive provisions of their respective Articles.
ARTICLE XIII: CHANGES
13.1 Changes to this Agreement shall be binding only after agreed to in writing
signed by both parties.
ARTICLE XIV: NOTICE
14.1 Should any notice be required to be given to the other party pursuant to
the terms of this Agreement, it shall be in writing and shall be given either by
personal delivery or by registered or certified mail to the parties entitled to
notice at its address identified in Paragraph 3.3 hereof, or as changed pursuant
to the provisions of Article III. Such notice shall be deemed to be given upon
personal delivery or three (3) days after posting in the United States mail.
<PAGE> 6
ARTICLE XV: ENTIRE AGREEMENT
15.1 The foregoing Articles contain the entire Agreement between the parties
which supersedes any prior oral or written agreements, commitments,
understandings, or communications with respect to the subject matter of this
agreement.
In consideration of the mutual promises contained herein, the parties have
caused this Agreement to be executed by its duly authorized representative.
CTA INCORPORATED CAPITOL SECURITIES MGMT., INC.
/s/ JOHN O. WAGNER /s/ J. NANAYAKKARA
- ------------------------------- --------------------------------
By: John Wagner By: J. Nanayakkara
- ------------------------------- --------------------------------
Title: Director Date 11/26/97 Title: Chairman Date 11/26/97
Treasury, Mgmt.
<PAGE> 1
EXHIBIT 10.10
EMPLOYEE SEPARATION
AND
NON-COMPETITION AGREEMENT
This is an agreement between Bonnie A. Claussen, II ("Claussen") and
CTA INCORPORATED ("CTA") concerning the terms of Claussen's separation from
employment with CTA ("Agreement").
WHEREAS, Claussen is a co-founder of CTA;
WHEREAS, Claussen has rendered years of valuable service to CTA, and
has made many significant contributions to CTA's growth and success throughout
his employment;
WHEREAS, Claussen and CTA desire to end Claussen's employment
relationship with CTA;
WHEREAS, Claussen and CTA desire to settle and resolve the terms of the
separation of Claussen as an employee of CTA, to formally recognize Claussen's
significant contribution to CTA's growth and success, and to fully and finally
settle all differences between them;
NOW, THEREFORE, Claussen and CTA intending to be legally bound and in
consideration of the mutual promises set forth below, hereby agree as follows:
1. Claussen and CTA agree to terminate their employee/employer
relationship on January 1, 1997 or at such time as this Agreement becomes
effective.
2. CTA will pay Claussen the sum total of $71,196.00 ("Settlement
Amount"). CTA shall withhold from the Settlement Amount all applicable Federal,
State and Local income taxes. The Settlement Amount shall be payable to Claussen
by check within thirty (30) days after the date that this Agreement becomes
effective.
3. Claussen shall retain all stock options awarded to him by CTA
and described in the letter attached as Exhibit "A", and they will remain
exercisable by Claussen until November 28, 2003 to the same extent as if
Claussen had remained an employee of CTA.
Page 1
<PAGE> 2
4. (a) For the longer of a period of five (5) years from the date
of his termination, or the term of the Consulting Agreement, Claussen will not
either directly or indirectly, or by acting in concert with others: (i) engage,
whether as an employee, lender, agent, director, officer, independent
contractor, joint venturer or otherwise, in any business, or business practices
involving satellite development or information technology services which are
competitive with CTA, anywhere in the world; (ii) solicit for employment or
advise or recommend to any other person that they solicit for employment, any
employee of CTA; (iii) solicit, influence or attempt to influence, existing
customers of CTA or any person, partnership, association or corporation who was
known to Claussen to be a customer prospect of CTA at the time of Claussen's
termination of employment to do business with any person, partnership,
association or corporation other than CTA; or (iv) knowingly divert or attempt
to divert from CTA, any business that CTA has enjoyed or solicited during the
five (5) year period preceding Claussen's termination from employment with CTA.
Notwithstanding any provision in this Agreement, Claussen will be entitled to do
anything permitted in the terms of the Consulting Agreement of this date between
CTA and Claussen. Nothing contained in the foregoing will prevent Claussen from
directly or beneficially, owning not more than one (1) percent of the shares of
stock of a publicly traded company listed on a nationally recognized exchange
which company could be deemed to engage in activities that are competitive with
CTA.
(b) Claussen acknowledges the world wide nature of the business
of the CTA; that he has received sufficient consideration for the restrictions
contained in subparagraph (a); that such restrictions are reasonable in time and
scope and are necessary for the protection of the business of CTA. Claussen also
acknowledges that monetary damages would be an inadequate remedy for a breach by
Claussen of the promises in subparagraph (a) and, if found by a court of
competent jurisdiction to have breached this Agreement consents to the entry of
an Order granting equitable relief to prevent further violation of those
restrictions. Claussen agrees that the time during which he shall not compete
with CTA as set forth in subparagraph (a)
Page 2
<PAGE> 3
shall be extended by any amount of time during which he is in violation of the
obligations set forth in subparagraph (a).
(c) In consideration of the restrictions set forth in
subparagraph (a), CTA shall pay Claussen $175,000 per year for a period of five
(5) years. The aforementioned sum shall be payable to Claussen on a quarterly
basis in advance. The first payment shall be due on January 1, 1997, and the
last payment will be due on October 1, 2001. If this Agreement becomes effective
any time after January 1, 1997, the payment dates shall be adjusted accordingly.
At the direction of Claussen, CTA will not withhold Federal, State or Local
income taxes from those payments. Claussen will assume full responsibility for
all taxes which may be imposed by any taxing authority in connection with the
payments. Claussen will indemnify and hold CTA harmless from any and all claims
or liability in connection with any tax consequences of the payments, including
taxes due, interest, penalties and attorneys' fees.
5. Claussen will agree to abide by either Rule 144 or 145 of the
Rules of the Securities and Exchange Commission if and when requested to do so
by CTA in connection with an initial public offering of stock by CTA.
6. Claussen agrees to terminate the Computer Technology
Associates, Inc. Buy-Sell Agreement to become effective simultaneously with this
Agreement. A copy of the agreement terminating the Computer Technology
Associates, Inc. Buy-Sell Agreement is attached as Exhibit "B" to this
Agreement.
7. Claussen hereby unconditionally releases, remises and forever
discharges CTA, its officers, directors, agents and employees, and all those
chargeable with liability on behalf of CTA (collectively "Releases") from any
and all claims, causes of action, suits, judgments and demands whatsoever
whether known or unknown which he has, may have or which may arise in the future
against any of them which relate, directly or indirectly, to the creation of
CTA, his role as a co-founder of CTA, his service as a member of the Board of
Directors of CTA, his employment by CTA or his termination from employment with
CTA, or any other matter or cause without
Page 3
<PAGE> 4
limitation, including, but not limited to, claims for fraud, misrepresentation,
breach of fiduciary duty, conversion, detrimental reliance, promissory estoppel,
wrongful discharge, breach of the covenant of good faith and fair dealing,
breach of contract, infliction of emotional distress, defamation, and claims of
discrimination based on sex, sexual orientation, race, national origin, handicap
or disability, or age, or any other action arising under any other federal,
state or local statute, regulation, ordinance, or common law.
8. Claussen hereby unconditionally releases, remises and forever
discharges CTA, its officer, directors, agents and employees, and all those
chargeable with liability on behalf of CTA from any and all rights or claims,
causes of action, demands, suits, or judgments, whether known or unknown, which
he has or may have against any of them which relate directly or indirectly to
his employment or termination from employment with CTA under the Age
Discrimination in Employment Act as amended, 29 U.S.C. 621 et. seq. from the
beginning of time to the date of this Agreement
9. CTA hereby unconditionally releases, remises and forever
discharges Claussen, his heirs, administrators, executors and assigns, from any
and all claims, causes of action, suits, judgments and demands whatsoever which
CTA now has or ever had against Claussen arising from Claussen's employment by
CTA or the termination of Claussen's employment with CTA or for any other cause
from the beginning of time to the date of this Agreement.
10. Claussen understands that this Agreement includes a waiver by
him of any rights or claims that he may have against CTA under the Age
Discrimination in Employment Act ("ADEA"), and that this Agreement is intended
to comply with the older Workers Benefit Protection Act, 29 U.S.C. 626(f).
Accordingly, Claussen acknowledges and represents as follows:
(a) he is waiving any rights or claims under the ADEA
knowingly and voluntarily in exchange for consideration of value to which he
would not otherwise have been entitled;
Page 4
<PAGE> 5
(b) he has been advised in writing by CTA to consult with an attorney
in connection with this Agreement and his decision to waive any rights or claims
under the ADEA;
(c) he has been given a period of at least twenty-one (21) days within
which to consider this Agreement and his decision to waive any rights or claims
under the ADEA; and
(d) he has been informed by CTA and understands that he may revoke his
acceptance of this Agreement for a period of seven (7) days after signing it,
and that this Agreement shall not become effective or enforceable until the
revocation period has expired. Should Claussen choose to revoke his acceptance
of this Agreement, he will notify CTA of such revocation in writing by certified
mail postmarked before midnight of the 7th day following the date of signing
this Agreement. Absent such revocation during the revocation period, this
Agreement will become valid and enforceable.
11. In the event that the provisions of paragraph 4 of this Agreement are
deemed to exceed the time or geographic limitations permitted by applicable law,
then such provisions shall be deemed to be reformed to the maximum time and/or
geographic limitations, permitted by law.
12. This Agreement shall be binding upon and enure to the benefit of CTA
and Claussen and their respective successors, heirs, personal representatives,
and permitted assigns. This Agreement may not be assigned by Claussen without
the written consent of CTA.
13. This Agreement contains the entire Agreement between Claussen and CTA
concerning Claussen's termination from employment with CTA, and supersedes any
and all prior agreements, understandings, or discussions, between Claussen and
CTA with respect thereto.
14. This Agreement shall be construed and interpreted in accordance with
the laws of the State of Colorado.
Page 5
<PAGE> 6
15. Claussen represents and agrees that he has carefully read and fully
understands all of the provisions of this Agreement; that he has had a
reasonable period of time to consult with an attorney of his choice with regard
to this Agreement; and that he is entering into this Agreement knowingly,
voluntarily and of his own free will.
16. The parties shall use their reasonable good faith efforts to settle
any disputes hereunder by good faith discussions without resort to a formal
dispute resolution mechanism. If a formal mechanism is necessary, all disputes
under this Agreement shall be settled before a single arbitrator through
arbitration pursuant to the then in effect rules of the American Arbitration
Associations applicable for expedited arbitrations. Arbitration may be commenced
at any time by any party hereto after giving written notice to the other party
of the dispute that such dispute has been referred to arbitration under this
Agreement. The arbitrator shall be selected by the joint agreement of the
parties, but if they do not so agree within twenty (20) days after the date of
the notice referred to above, the selection shall be made pursuant to the rules
from the panels of arbitrators maintained by such Association. The arbitrator
shall render his decision within one hundred twenty (120) days of appointment.
Any award rendered by the arbitrator shall be conclusive and binding upon the
parties hereto; provided, however, that any such award shall be accompanied by a
written opinion of the arbitrator giving the reasons for the award. This
provision for arbitration shall be specifically enforceable by the parties and
the decision of the arbitrator in accordance herewith shall be final and binding
and there shall be no right of appeal therefrom. The costs and expenses of
arbitration, including attorney's fees and expenses of the arbitrator shall be
paid by the parties as determined by the arbitrator. The arbitrator shall not be
permitted to award punitive or similar type of damages under any circumstances.
17. The parties acknowledge that CTA is currently attempting to raise
additional capital through a sale of equity or by way of a debt offering to
continue and grow Company operations. The parties agree that this Agreement will
remain
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<PAGE> 7
contingent and shall not become effective until such time as the Company
notifies Claussen in writing that it is in receipt of such additional capital.
12/11/96 /s/ Bonnie A. Claussen, II
- ------------------------- -------------------------------
Dated: Bonnie A. Claussen, II
12/11/96 /s/ Gregory H. Wagner
- ------------------------- -------------------------------
Dated: Gregory H. Wagner
Executive Vice President &
Chief Financial Officer
Page 7
<PAGE> 8
[CTA LETTERHEAD]
EXHIBIT A
December 11, 1996
Mr. Bonnie A. Claussen, II
229 Ridge Plaza
The Ridge at Castle Pine
Castle Rock, CO 80101
RE: Second Amendment to Stock Option Agreement
Dear Mr. Claussen:
This letter has reference to a certain Stock Option Agreement dated
November 27, 1989 by and between CTA INCORPORATED, a Colorado corporation
("Company"), and you, as amended on May 30, 1991 (as amended, the "Stock Option
Agreement"). You have agreed to terminate your employment with the Company
effective January 1, 1997. Additionally, you have agreed to enter into a
consulting agreement with the Company ("Consulting Agreement"). The term of the
Consulting Agreement expires on November 28, 2003. In light of the above change
in the relationship between you and the Company, we above agreed to amend and
restate Section 4 of the Stock Option Agreement.
Section 4 of the Stock Option Agreement is amended and restated and
shall read as follows:
"4. Termination of Option. The option, to the extent not previously
exercised, shall terminate, and the Employee shall have no further
rights with respect thereto, on November 28, 2003 (the expiration date
of the options and the expiration date of the Consulting Agreement). In
the event that Employee's employment with the Company terminates by
reason of death, then the option or any portion thereof which is
exercisable on the date of death may be exercised in accordance with
the terms thereof by the Employee's estate prior to the earlier of: (i)
the date which is ninety (90) days after the date on which a personal
representative is appointed to administer the Employee's estate; or
(ii) the first anniversary of the date of death."
<PAGE> 9
Mr. Bonnie A. Claussen, II
December 11, 1996
Page 2
If the foregoing represents your understanding of the agreements reached
between us, please execute and date where indicated below and return to the
undersigned.
Yours very truly,
CTA INCORPORATED
/s/ Gregory H. Wagner
Gregory H. Wagner
Executive Vice President
& Chief Financial Officer
AGREED TO AND ACCEPTED.
INTENDING TO BE LEGALLY BOUND,
THIS 11th DAY OF DECEMBER, 1996.
/s/ Bonnie A. Claussen, II
- ---------------------------------------------------------
Bonnie A. Claussen, II
96:414
[CTA INCORPORATED LETTERHEAD]
<PAGE> 10
TERMINATION AGREEMENT
This is an Agreement between Carmelo E. Velez ("Velez"), and Bonnie A.
Claussen, II ("Claussen") terminating the Computer Technology Associates, Inc.
Buy-Sell Agreement dated February 28, 1983.
WHEREAS, Velez and Claussen entered into the Computer Technology
Associates, Inc. Buy-Sell Agreement on February 28, 1983 ("The Buy-Sell
Agreement");
WHEREAS, a copy of the Buy-Sell Agreement is attached to this Agreement
as Exhibit "1";
WHEREAS, Article 12 of the Buy-Sell Agreement provides that it may be
terminated upon the agreement of both stockholder parties to the Buy-Sell
Agreement.
WHEREAS, Velez and Claussen desire to exercise their rights under
Article 12, and terminate the Buy-Sell Agreement;
NOW, THEREFORE, in consideration of the mutual agreements and promises
set forth below and for other valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
1. Velez and Claussen hereby terminate the Buy-Sell Agreement.
2. Claussen, his heirs, executors, administrators, successors, assigns
and representatives hereby unconditionally releases, remises and forever
discharges Velez, his heirs, executors, administrators, successors, assigns and
representatives, and CTA INCORPORATED, and its officers, directors, servants,
employees and agents, and all those persons chargeable with liability on behalf
of Velez and CTA INCORPORATED (collectively "Releasees") of and from any and all
manner of action, causes of action, claims, charges, demands, rights,
liabilities, and causes of action whatsoever, whether known or unknown, which
relate directly or indirectly to the Computer Technology Associates, Inc.
Buy-Sell Agreement or the termination of the Computer Technology Associates,
Inc. Buy-Sell Agreement or any other claim relating to Velez' employment
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<PAGE> 11
with CTA, the creation of CTA, his role as co-founder of CTA, or service to CTA
as a member of its Board of Directors.
3. Velez, his heirs, executors, administrators, successors, assigns
and representatives hereby unconditionally releases, remises and forever
discharges Claussen, his heirs, executors, administrators, successors, assigns
and representatives, and CTA INCORPORATED, and its officers, directors,
servants, employees and agents, and all those persons chargeable with liability
on behalf of Claussen and CTA INCORPORATED (collectively "Releasees") of and
from any and all manner of action, causes of action, claims, charges, demands,
rights, liabilities, and causes of action whatsoever, whether known or unknown,
which relate directly or indirectly to the Computer Technology Associates, Inc.
Buy-Sell Agreement or the termination of the Computer Technology Associates,
Inc. Buy-Sell Agreement or any other claim relating to Claussen's employment
with CTA, the creation of CTA, his role as co-founder of CTA, or service to CTA
as a member of its Board of Directors.
4. This Agreement shall be binding upon and/or to the benefit of Velez
and Claussen, and their respective successors, heirs, personal representatives
and permitted assigns.
5. This Agreement contains the entire Agreement among Velez, Claussen
and CTA concerning the termination of the Computer Technology Associates, Inc.
Buy-Sell Agreement and supersedes any and all prior agreements, understandings
or discussions between Velez and Claussen with respect thereto.
6. This Agreement shall be construed and interpreted in accordance with
the laws of the State of Colorado.
7. Each party to this Agreement represents that he or it has had a
reasonable opportunity to consult with an attorney of his or its choice before
signing this Agreement; that he has carefully read and fully understands all the
provisions of this
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<PAGE> 12
Agreement, and that he is entering into this Agreement knowingly, voluntarily,
and of his own free will.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement this
day of , 1996.
4/22/96 /s/ Carmelo E. Velez
- --------------------------- ---------------------------------
Date Carmelo E. Velez
12/11/96 /s/ Bonnie A. Claussen, II
- --------------------------- ---------------------------------
Date Bonnie A. Claussen, II
Page 3
<PAGE> 13
CONSULTING AGREEMENT
AGREEMENT dated as of ,1996 between Bonnie A. Claussen, II
("Consultant") and CTA INCORPORATED, a Colorado corporation (the "Corporation").
WHEREAS, the Corporation deems it advisable to retain Consultant to
provide consulting services and Consultant is willing to provide such services
to the Corporation;
IT IS, THEREFORE, AGREED:
1. Consulting Period. The "Consulting Period" shall mean the period
beginning on January 1, 1997 and ending on the earlier of (i) November 28, 2003
or (ii) the date the Consulting Period is terminated pursuant to Section 4.
2. Consulting Services and Relationship.
(a) Services. During the Consulting Period, Consultant shall provide
consulting services to the Corporation which may include the procurement of
contracts for the Corporation with respect to commercial and international
customers of CTA ("Contracts"). Consultant shall not attempt to procure any
contracts on behalf of Corporation without the advance approval of Corporation.
Consultant shall report directly to Ricardo De Bastos or his designee.
(b) Relationshop. Consultant shall be a consultant, and not an employee
of the Corporation, within the meaning of all federal, state and local laws and
regulations governing employment insurance, workers, compensation, industrial
accident, labor and taxes. Except for those which may be available through CTA
Simulation Systems, LLC, Consultant shall not, by reason of this Agreement,
acquire any benefits, privileges or rights under any benefit plan maintained by
the Corporation.
3. Compensation and Expenses.
(a) During the Consulting Period the Corporation shall pay Consultant a
fee (the "Finders Fee") equal to one (1) percent of the "Fee Bearing Revenue"
(as hereinafter defined) from each "Eligible Contract" (as hereinafter defined)
accepted by
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<PAGE> 14
CTA. An "Eligible Contract" shall mean a Contract that (1) is accepted by the
Corporation, (2) was secured primarily as a result of Consultant's efforts, and
(3) will produce Fee Bearing Revenue for the Corporation of more than $5 million
dollars over the term of such Contract. For purposes of this Agreement, "Fee
Bearing Revenue" shall mean the gross revenue paid to the Corporation in respect
of a Contract for products manufactured by it and/or services provided by it,
but excluding any amounts which are paid to the Corporation as reimbursement for
out-of-pocket costs including, without limitation, the cost of procuring
products or services which are produced or provided by third parties or
subcontractors which would be non fee bearing under such Contract. The amount of
Fee Bearing Revenue attributable to any particular Contract shall be determined
by the Corporation in accordance with generally accepted accounting principles
consistently applied. The Corporation will make its books and records regarding
the Eligible Contracts available for copying and inspection by Consultant. If
the Corporation is found to have erred in the calculation of Fee Bearing
Revenue, and underpaid the Consultant, the Corporation will pay Consultant's
costs incurred in reaching that finding and any amount found to be due to
Consultant with interest at 10% per annum from the time it was due until it is
paid in full. Similarly, if Corporation is found to have overpaid Consultant,
then Consultant shall pay corporation's costs incurred in detecting the
overpayment, and interest of 10% per annum on the amount overpaid from date of
overpayment until the date it is repaid to Corporation. Consultant agrees that
Corporation shall determine in its sole discretion whether to accept a contract
procured by Consultant.
(b) CTA agrees that the Finders Fee will be applicable without
limitation to:
(i) all Thailand space and related ground programs associated
through SAMANCO and Lt. General Montrei and Lt. General Chompaisal;
(ii) DCSC III space segment replacement as associated through
SAMANCO, and
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<PAGE> 15
(iii) any other programs as agreed and directed by Corporation
according to paragraph 3(a) (c). The Finders Fee shall be payable to Consultant
in respect of the Fee Bearing Revenue attributable to the original term of each
Eligible Contract and any options expressed therein, and shall not be payable in
respect of Fee Bearing Revenue attributable to any modifications of an Eligible
Contract, options or renewals not expressed in the Eligible Contract.
(d) The Consulting Fee shall be paid on an annual basis in arrears
within 60 days after the close of each fiscal year of the Corporation during the
Consulting Period. The amount so payable for any fiscal year shall be based on
Fee Bearing Revenue actually received by the Corporation during such fiscal
year, and shall be payable to Consultant, with respect to such fiscal year, only
if the Corporation has not terminated the Consulting Period for Cause prior to
the end of such fiscal year.
(e) The Corporation shall reimburse Consultant for reasonable travel
expenses incurred by Consultant during the Consulting Period in the performance
of his duties hereunder on a current basis in accordance with the policies of
the Corporation provided that such expenses are pre-approved by the Corporation.
Any amounts so reimbursed to Consultant shall be repaid to Corporation from any
Finders Fee ultimately paid to Consultant.
(f) In the event that the Consulting Period expires on November 28,
2003, then the Consultant (or his estate) shall continue to receive Finders Fees
in respect of Fee Bearing Revenue paid to the Corporation on then existing
Eligible Contracts, such amounts to be paid in arrears as set forth in Section
3(d) within 60 days after the end of each succeeding fiscal year for so long as
such Eligible Contracts continue (determined without regard to Contract renewals
not expressed in the eligible contract).
4. Events of Termination.
(a) Death or Disability. The Consulting Period shall terminate
automatically upon the death or permanent disability of Consultant. For this
purpose, "permanent disability" means a physical or mental disability which
renders Consultant unable to perform his duties hereunder for a period of 180
days or more.
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<PAGE> 16
(b) By Consultant. The Consulting Period may be terminated by
Consultant upon at least 30 days' written notice to the Corporation.
(c) By the Corporation. The Corporation may terminate the Consulting
Period for Cause to be effective thirty (30) days after notice. For purposes of
this Agreement, the Corporation shall have Cause to terminate the Consulting
Period upon (i) filing for bankruptcy protection by the Consultant, (ii) an act
of fraud or embezzlement by Consultant against the Corporation, (iii)
Consultant's conviction of, or pleading no contest to a felony, (iv)
Consultant's disclosure of Confidential Information in violation of paragraph 6
of this Agreement, or (v) Consultant's violation of the Non-Competition covenant
set forth in Consultant's Employee Separation Agreement with CTA.
(d) Expiration. Unless terminated sooner pursuant to Section 4(a), (b)
or (c), the Consulting Period will expire on November 28, 2003.
5. Obligations upon Termination. Except with respect to the Corporation's
continuing obligations to make certain payments to the Consultant (or his
estate) as set forth in Section 3, and the obligations of the Consultant set
forth in Sections 6 and 7, neither the Consultant nor the Corporation shall have
any further obligation to each other under this Agreement upon termination of
the Consulting Period.
6. Confidential Information. Consultant shall hold in a fiduciary
capacity for the benefit of the Corporation all secret or confidential
information, knowledge or data relating to the Corporation or any of its
subsidiaries or affiliated companies and their respective businesses which shall
have been obtained by Consultant during the Consulting Period and which is not
public knowledge or which becomes public knowledge solely by acts of Consultant
in violation of this Agreement. After expiration of the Consulting Period,
Consultant shall not, without the prior written consent of the Corporation,
communicate or divulge any such information, knowledge or data to anyone other
than the Corporation and those designated by it.
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<PAGE> 17
7. Successors.
(a) This Agreement is personal to Consultant and his estate if
applicable and shall not be assignable by Consultant without the prior written
consent of the Corporation.
(b) This Agreement shall enure to the benefit of and be binding upon
the Corporation and its successors or assigns.
8. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Colorado without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors or legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, or via facsimile, with hard copy to
follow, addressed as follows:
If to Consultant If to the Corporation
Bonnie A. Claussen, II CTA INCORPORATED
229 Ridge Plaza 6116 Executive Boulevard
The Ridge at Castle Pines Rockville, MD 20852
Castle Rock, Colorado 80104 Attn: General Counsel
or to such other address as either party shall have furnished to the other in
accordance herewith. Notices and communications shall be effective when actually
received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
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(d) The failure of the Corporation or Consultant at any time to enforce
performance by the other of any provisions of this Agreement shall in no way
affect the Corporation's or Consultant's (as applicable) rights thereafter to
enforce the same, nor shall the waiver by the Corporation or Consultant of any
breach of any provision hereof be held to be a waiver by such party of any other
breach of the same or any other provision.
(e) This Agreement contains the entire understanding of the Corporation
and Consultant with respect to the subject matter hereof, and supersedes and
renders null and void any previous agreements between them with respect thereto.
9. Disputes. The parties shall use their reasonable good faith efforts to
settle any disputes hereunder by good faith discussions without resort to a
formal dispute resolution mechanism. If a formal mechanism is necessary, all
disputes under this Agreement shall be settled through arbitration before a
single arbitrator pursuant to the then in effect rules of the American
Arbitration Association applicable for expedited arbitrations. Arbitration may
be commenced at any time by any party hereto after giving written notice to the
other party of the dispute that such dispute has been referred to arbitration
under this Agreement. The arbitrator shall be selected by the joint agreement of
the parties but if they do not so agree within twenty (20) days after the date
of the notice referred to above, the selection shall be made pursuant to the
rules from the panels of arbitrators maintained by such Association. The
arbitrator shall render his decision within one twenty (120) days of
appointment. Any award rendered by the arbitrator shall be conclusive and
binding upon the parties hereto; provided, however, that any such award shall be
accompanied by a written opinion of the arbitrator giving the reasons for the
award. This provision for arbitration shall be specifically enforceable by the
parties and the decision of the arbitrator in accordance herewith shall be final
and binding and there shall be no right of appeal therefrom. The costs and
expenses of arbitration, including attorney's fees and expenses of the
arbitrator shall be paid by the parties as determined by the arbitrator. The
arbitrator shall not be permitted to award punitive or similar type of damages
under any
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circumstances. Any disputes arising under this Agreement shall be submitted to
binding and final arbitration in accordance with the then in effect Rules of the
American Arbitration Association.
10. Condition Precedent to Agreement. The parties acknowledge that CTA
is currently attempting to raise additional capital through a sale of equity or
by way of a debt offering to continue and grow Company operations. The parties
agree that this Agreement will remain contingent and shall not become effective
until such time as the Company notifies Claussen in writing that it is in
receipt of such additional capital.
IN WITNESS WHEREOF, Consultant and the Corporation have caused this
Agreement to be duly executed as of the day and year first above written.
12/11/96 /s/ Bonnie A. Claussen, II
- --------------------- ---------------------------------
Dated Bonnie A. Claussen, II
Jan. 15, 1997 /s/ Ricardo de Bastos
- -------------------- ---------------------------------
Dated Ricardo de Bastos
President
Space & Telecommunications Systems
Page 7
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts"
and "Selected Financial Data," and to the use of our reports dated February 28,
1998, in Amendment No. 1 to the Registration Statement on Form S-1 and
related Prospectus of Computer Technology Associates, Inc. (formerly CTA
INCORPORATED) for the registration of 1,951,074 shares of its common stock.
/s/ Ernst & Young LLP
Washington, D.C.
November 3, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF LEGG MASON WOOD WALKER, INCORPORATED
We consent to the use of our report dated September 14, 1998, in Amendment No.
1 to the Registration Statement on Form S-1 and related Prospectus of Computer
Technology Associates, Inc. for the registration of 1,951,074 shares of its
common stock.
/s/ Legg Mason Wood Walker, Incorporated
Baltimore, MD
November 3, 1998
